Appendix_D_ MMAFinalTitleIFederalRegister

Friday,

January 28, 2005

Book 2 of 2 Books

Pages 4193–4742

Part II

Department of
Health and Human
Services
Centers for Medicare & Medicaid Services
42 CFR Parts 400, 403, 411, 417, and 423
Medicare Program; Medicare Prescription
Drug Benefit; Final Rule

VerDate Aug 04 2004

13:50 Jan 27, 2005

Jkt 205001

PO 00000

Frm 00001

Fmt 4717

Sfmt 4717

D:\FEDREG\28JAR2.LOC

APPS10

PsN: 28JAR2

4194

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Centers for Medicare & Medicaid
Services
42 CFR Parts 400, 403, 411, 417, and
423
[CMS–4068–F]
RIN 0938–AN08

Medicare Program; Medicare
Prescription Drug Benefit
Centers for Medicare &
Medicaid Services (CMS), HHS.
ACTION: Final rule.
AGENCY:

This final rule implements
the provisions of the Social Security Act
(the Act) establishing and regulating the
Medicare Prescription Drug Benefit. The
new voluntary prescription drug benefit
program was enacted into law on
December 8, 2003 in section 101 of Title
I of the Medicare Prescription Drug,
Improvement, and Modernization Act of
2003 (MMA) (Pub. L. 108–173).
Although this final rule specifies most
of the requirements for implementing
the new prescription drug program,
readers should note that we are also
issuing a closely related rule that
concerns Medicare Advantage
organizations, which, if they offer
coordinated care plans, must offer at
least one plan that combines medical
coverage under Parts A and B with
prescription drug coverage. Readers
should also note that separate CMS
guidance on many operational details
appears or will soon appear on the CMS
website, such as materials on formulary
review criteria, risk plan and fallback
plan solicitations, bid instructions,
solvency standards and pricing tools,
plan benefit packages.
The addition of a prescription drug
benefit to Medicare represents a
landmark change to the Medicare
program that will significantly improve
the health care coverage available to
millions of Medicare beneficiaries. The
MMA specifies that the prescription
drug benefit program will become
available to beneficiaries beginning on
January 1, 2006.
Generally, coverage for the
prescription drug benefit will be
provided under private prescription
drug plans (PDPs), which will offer only
prescription drug coverage, or through
Medicare Advantage prescription drug
plans (MA PDs), which will offer
prescription drug coverage that is
integrated with the health care coverage
they provide to Medicare beneficiaries
under Part C of Medicare. PDPs must

SUMMARY:

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

offer a basic prescription drug benefit.
MA-PDs must offer either a basic benefit
or broader coverage for no additional
cost. If this required level of coverage is
offered, MA-PDs or PDPs, but not
fallback PDPs may also offer
supplemental benefits through
enhanced alternative coverage for an
additional premium. All organizations
offering drug plans will have flexibility
in the design of the prescription drug
benefit. Consistent with the MMA, this
final rule also provides for subsidy
payments to sponsors of qualified
retiree prescription drug plans to
encourage retention of employersponsored benefits.
We are implementing the drug benefit
in a way that permits and encourages a
range of options for Medicare
beneficiaries to augment the standard
Medicare coverage. These options
include facilitating additional coverage
through employer plans, MA-PD plans
and high-option PDPs, and through
charity organizations and State
pharmaceutical assistance programs.
See sections II.C, II.J, and II.P, and II.R
of this preamble for further details on
these issues.
The proposed rule identified options
and alternatives to the provisions we
proposed and we strongly encouraged
comments and ideas on our approach
and on alternatives to help us design the
Medicare Prescription Drug Benefit
Program to operate as effectively and
efficiently as possible in meeting the
needs of Medicare beneficiaries.
DATES: These regulations are effective
on March 22, 2005.
FOR FURTHER INFORMATION CONTACT:
Lynn Orlosky (410) 786–9064 or Randy
Brauer (410)786–1618 (for issues related
to eligibility, elections, enrollment,
including auto-enrollment of dual
eligible beneficiaries, and creditable
coverage).
Melvin Sanders (410) 786–8355 (for
issues related to marketing and user
fees).
Vanessa Duran (214) 767–6435 (for
issues related to benefits and beneficiary
protections, including Part D benefit
packages, Part D covered drugs,
coordination of benefits in claims
processing and tracking of true-out-of­
pocket costs, pharmacy network access
standards, plan information
dissemination requirements, and
privacy of records).
Craig Miner, RPh. (410) 786–1889 for
issues of pharmacy benefit cost and
utilization management, formulary
development, quality assurance,
medication therapy management, and
electronic prescribing).
Mark Newsom (410) 786–3198 (for
issues of submission, review,

PO 00000

Frm 00002

Fmt 4701

Sfmt 4700

negotiation, and approval of risk and
limited risk bids for PDPs and MA-PD
plans; the calculation of the national
average bid amount; determination and
collection of enrollee premiums;
calculation and payment of direct and
reinsurance subsidies and risk-sharing;
and retroactive adjustments and
reconciliations.)
Jim Owens (410) 786–1582 (for issues
of licensing and waiver of licensure, the
assumption of financial risk for
unsubsidized coverage, and solvency
requirements for unlicensed sponsors or
sponsors who are not licensed in all
States in the region in which it wants to
offer a PDP.)
Jim Slade (410) 786–1073 (for issues
related to pre-emption of State law) and
(for issues related to solicitation, review
and approval of fallback prescription
drug plan proposals; fallback contract
requirements; and enrollee premiums
and plan payments specific to fallback
plans.)
Christine Hinds (410) 786–4578 (for
issues of coordination of Part D plans
with providers of other prescription
drug coverage including Medicare
Advantage plans, State pharmaceutical
assistance programs (SPAPs), Medicaid,
and other retiree prescription drug
plans; also for issues related to
eligibility for and payment of subsidies
for assistance with premium and costsharing amounts for Part D eligible
individuals with lower income and
resources; for rules for States on
eligibility determinations for lowincome subsidies and general State
payment provisions including the
phased-down State contribution to drug
benefit costs assumed by Medicare).
Mark Smith (410) 786–8015 (for
issues related to conditions necessary to
contract with Medicare as a PDP
sponsor, as well as contract
requirements, intermediate sanctions,
termination procedures and change of
ownership requirements.)
Jean LeMasurier (410) 786–1091 (for
issues related to employer group
waivers and options).
Frank Szeflinski (303) 844–7119 (for
issues related to cost-based HMOs and
CMPS offering Part D coverage.)
John Scott (410) 786–3636 (for issues
related to the procedures PDP sponsors
must follow with regard to grievances,
coverage determinations, and appeals.)
Mark Smith (410) 786–8015 (for
issues related to solicitation, review and
approval of fallback prescription drug
plan proposals; fallback contract
requirements; and enrollee premiums
and plan payments specific to fallback
plans.)
Jim Mayhew (410) 786–9244 (for
issues related to the alternative retiree

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
drug subsidy and other employer-based
sponsor options.)
Joanne Sinsheimer (410) 786–4620
(for issues related to physician selfreferral prohibitions.)
Brenda Hudson (410) 786–4085 (for
issues related to PACE organizations
offering Part D coverage.)
Julie Walton (410) 786–4622 or
Kathryn McCann (410) 786–7623 (for
issues related to provisions on Medicare
supplemental (Medigap) policies.)
SUPPLEMENTARY INFORMATION: Copies: To
order copies of the Federal Register
containing this document, send your
request to: New Orders, Superintendent
of Documents, P.O. Box 371954,
Pittsburgh, PA 15250–7954. Specify the
date of the issue requested and enclose
a check or money order payable to the
Superintendent of Documents, or
enclose your Visa or Master Card
number and expiration date. Credit card
orders can also be placed by calling the
order desk at (202) 512–1800 (or tollfree at 1–888–293–6498) or by faxing to
(202) 512–2250. The cost for each copy
is $10. As an alternative, you can view
and photocopy the Federal Register
document at most libraries designated
as Federal Depository Libraries and at
many other public and academic
libraries throughout the country that
receive the Federal Register.
This Federal Register document is
also available from the Federal Register
online database through GPO Access, a
service of the U.S. Government Printing
Office. The web site address is: http://
www.access.gpo.gov/fr/index.html.
Table of Contents
I. Background
A. Medicare Prescription Drug,
Improvement, and Modernization
Act of 2003
B. Codification of Regulations
C. Organizational Overview of Part
423
II. Discussion of the Provisions of the
Final Rule
A. General Provisions
1. Overview
2. Discussion of Important Concepts
and Key Definitions
B. Eligibility and Enrollment
1. Eligibility and Enrollment
2. Enrollment Process
3. Enrollment of Full Benefit Dual
Eligible Individuals
4. Disenrollment process
5. Enrollment Periods
6. Effective Dates
7. Involuntary Disenrollment by the
PDP
8. Late Enrollment Penalty
9. Information about Part D
10. Approval of Marketing Materials
and Enrollment Forms

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

PO 00000

11. Information Provided to PDP
sponsors and MA Organizations
12. Procedures to Determine and
Document Creditable Status of
Prescription Drug Coverage
C. Voluntary Prescription Benefits
and Beneficiary Protections
1. Overview and Definitions
2. Plan Formularies
3. Establishment of Prescription Drug
Plan Service Areas
4. Access to Covered Part D Drugs
5. Special Rules for Out-of-Network
Access to Covered Part D Drugs at
Pharmacies
6. Dissemination of Plan Information
7. Public Disclosure of
Pharmaceutical Prices for
Equivalent Drugs
8. Privacy, Confidentiality, and
Accuracy of Enrollee Records
D. Cost Control and Quality
Improvement Requirements for Part
D Plans
1. Overview (Scope)
2. Drug Utilization Management,
Quality Assurance, and Medication
Therapy Management Programs
(MTMPs)
3. Consumer Satisfaction Surveys
4. Electronic Prescription Program
5. Quality Improvement Organizations
(QIO) Activities
6. Treatment of Accreditation
E. RESERVED
F. Submission of Bids and Monthly
Beneficiary Premiums: Plan
Approval
1. Overview
2. Requirements for Submission of
Bids and Related Information
3. General CMS Guidelines for
Actuarial Valuation of Prescription
Drug Coverage
4. Determining Actuarial Equivalency
for Variants of Standard Coverage
and for Alternative Coverage.
5. Test for Assuring the Same
Protection against High Out-ofPocket Costs
6. Review and Negotiation of Bid and
Approval of Plans
7. National Average Monthly Bid
Amount
8. Rules Regarding Premiums
9. Collection of Monthly Beneficiary
Premiums
G. Payments to Part D Plan Sponsors
for Qualified Prescription Drug
Coverage
1. Overview
2. Definitions
3. General Payment Provisions
4. Requirement for Disclosure of
Information
5. Determination of Payment
6. Low-Income Cost-Sharing Subsidy
Interim Payments
7. Risk Sharing Arrangements

Frm 00003

Fmt 4701

Sfmt 4700

4195

8. Retroactive Adjustments and
Reconciliation
9. Reopening
10. Payment Appeals
H. RESERVED
I. Organization Compliance with State
Law and Preemption by Federal
Law.
1. Overview
2. Waiver of Certain Requirements in
Order to Expand Choice
3. Temporary Waiver for Entities
Seeking to Offer a Prescription Drug
Plan in more than One State in a
Region
4. Solvency Standards for NonLicensed Entities
5. Preemption of State Laws and
Prohibition of Premium Taxes
J. Coordination Under Part D Plans
with Other Prescription Drug
Coverage
1. Overview and Terminology
2. Application of Part D Rules to
Certain Part D Plans on and after
January 1, 2006
3. Application to PACE Plans
4. Application to Employer Groups
5. Medicare Secondary Payer
Procedures
6. Coordination of Benefits with Other
Providers of Prescription Drug
Coverage.
K. Application Procedures and
Contracts with PDP Sponsors
1. Overview
2. Definitions
3. Application Requirements
4. Evaluation and Determination
Procedures for Applications to Be
Determined Qualified to Act as a
Sponsor
5. General Provisions
6. Contract Provisions
7. Effective Date and Term of Contract
8. Nonrenewal of Contract
9. Modification or termination of
contract by mutual consent
10. Termination of Contracts by CMS
11. Termination of Contract by the
Part D Plan Sponsor
12. Minimum Enrollment
Requirements
13. Reporting Requirements
14. Prohibition of Midyear
Implementation of Significant New
Regulatory Requirements
15. Fraud, Waste and Abuse
L. Effect of Change of Ownership or
Leasing of Facilities during the
Term of Contract
1. General Provisions
2. Change of Ownership
3. Novation Agreement Requirements
M. Grievances, Coverage
Determinations, and Appeals
1. Introduction
2. General Provisions
3. Grievance Procedures

E:\FR\FM\28JAR2.SGM

28JAR2

4196

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

4. Coverage Determinations
5. Formulary Exceptions Procedures
6. Appeals
7. Effectuation of Reconsideration
Determinations
8. Federal Preemption of Grievances
and Appeals
9. Employer Sponsored Prescription
Drug Programs and Appeals
10. Miscellaneous
N. Medicare Contract Determinations
and Appeals
1. Overview
2. Provisions of the Final Rule
O. Intermediate Sanctions
1. Kinds of Sanctions
2. Basis for Imposing Sanctions
3. Procedures for Imposing Sanctions
P. Premiums and Cost-Sharing
Subsidies for Low-Income
Individuals
1. Definitions
2. Eligibility for the Low-Income
Subsidy
3. Eligibility Determinations,
Redeterminations and Applications
4. Premium Subsidy and Cost-Sharing
Subsidy
5. Administration of Subsidy Program
Q. Guaranteeing Access to a Choice of
Coverage (Fallback Prescription
Drug Plans)
1. Overview
2. Terminology
3. Assuring Access to a Choice of
Coverage
4. Submission and Approval of Bids
5. Rules Regarding Premiums
6. Contract Terms and Conditions
7. Payment to Fallback Plans
R. Payments to Sponsors of Retiree
Prescription Drug Plans
1. Introduction
2. Options for Sponsors of Retiree
Prescription Drug Programs
3. Definitions
4. Requirements for qualified retiree
prescription drug plans
5. Retiree drug subsidy amounts
6. Appeals
7. Change of Ownership
8. Construction
S. Special Rules for States-Eligibility
Determinations for Low-Income
Subsidies, and General Payment
Provisions
1. Eligibility Determinations
2. General Payment Provisions
3. Treatment of Territories
4. State Contribution to Drug Benefit
Costs Assumed by Medicare
T. Part D Provisions Affecting
Physician Self-Referral, Cost-Based
HMO, PACE, and Medigap
Requirements
1. Definition of Outpatient
Prescription Drugs for Purposes of
Physician Self-Referral Prohibition
2. Cost-Based HMOs and CMPS

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

offering Part D coverage
3. PACE Organizations Offering Part D
Coverage
4. Medicare Supplemental Policies
III. Provisions of the Final Rule
IV. Collection of Information
Requirements
V. Regulatory Impact Analysis
In addition, because of the many
organizations and terms to which we
refer by acronym in this final rule, we
are listing these acronyms and their
corresponding terms in alphabetical
order below:
ABN
ADAP
AEP
AHRQ
AI/AN
AIC
ALJ
AMA
AMCP
ANCI
AO
ASAP
ASHP
AWP
BBA
BLS
CAHP
CBI
CBO
CCIP
CCP
CFR
CHOW
CMP
CMS
COB
COBRA
CPI-PD
CPT
CY
DAB
DHS
DME
DoD
DOL
DUR
EOB
ERISA
ESRD
FAR
FDA
FEHBP
FFP
FOIA

PO 00000

Frm 00004

Advanced beneficiary notice
AIDS Drug Assistance Program
Annual coordinated election pe­
riod
Agency for Healthcare Research
and Quality
American Indians and Alaska
Natives
Amount in controversy
Administrative Law Judge
American Medical Association
Academy of Managed Care
Pharmacy
American National Standards In­
stitute
Accreditation organization
American Society of Automation
in Pharmacy
American Society of Health Sys­
tems Pharmacists
Average wholesale price
Balanced Budget Act
Bureau of Labor Statistics
Consumer Assessment of Health
Plan
Confidential business information
Congressional Budget Office
Chronic care improvement pro­
grams
Comprehensive Compliance Pro­
gram
Code of Federal Regulations
Change of ownership
competitive medical plan
Centers for Medicare & Medicaid
Services
Coordination of benefit
Consolidated Omnibus Budget
Reconciliation Act (of 1985)
Consumer Price Index for Pre­
scription Drugs and Medical
Supplies
Current Procedural Terminology
Calendar year
Departmental Appeals Board
Designated health services
Durable medical equipment
Department of Defense
Department of Labor
Drug utilization review
explanation of benefits
Employee Retirement Income
Security Act of 1974
End stage renal disease
Federal Acquisition Regulation
Food and Drug Administration
Federal Employee Health Bene­
fits Program
Federal financial participation
Freedom of Information Act

Fmt 4701

Sfmt 4700

FQHCs
FPL
FR
FSA
FY
HEDIS
HHS
HIC
HIPAA
HMO
HPMS
HRA
HRSA
HSA
ICFs/MR
IDIQ
IEP
IHS
IRE
I/T/U
JCHACO
LIS
LTC
MA
MA-PD
MAC
MAX
MCBS
MMA
MSA
MSIS
MSP
MTMP
NAIC
NCQA
NCPDP
NCVHS
NDC
NHE
NPA
NPI
OACT
OBRA
OCR
OEPI
OIG
OPM
P&T
PBA
PBMs
PBP
PDP

E:\FR\FM\28JAR2.SGM

28JAR2

Federally qualified health centers
Federal poverty level
FEDERAL REGISTER
Flexible savings account
Fiscal year
Health plan Employer Data and
Information Set
Department of Health and
Human Services
Health insurance claim
Health Insurance Portability and
Accountability Act of 1996
Health maintenance organization
Health Plan Management Sys­
tem
Health reimbursement account
Health Resources and Services
Administration
Health savings account
Intermediate care facilities for
the mentally retarded
Indefinite duration, indefinite
quantity
Initial enrollment period
Indian Health Service
Independent review entity
Indian Tribes and Tribal organi­
zations, and urban Indian or­
ganizations
Joint Commission on Accredita­
tion of Health Care Organiza­
tions
Low-income subsidy
Long term care
Medicare Advantage (formerly
Medicare+Choice)
Medicare Advantage prescription
drug plans
Medicare Appeals Council
Medicaid Analytic extract
Medicare Current Beneficiary
Survey
Medicare Prescription Drug, Im­
provement, and Modernization
Act of 2003
Medicare savings account
Medicaid Statistical Information
System
Medicare Secondary Payor
Medication Therapy Manage­
ment Program
National Association of Insur­
ance Commissioners
National Committee for Quality
Assurance
National Council for Prescription
Drug Programs
National Center for Vital and
Health Statistics
National Drug Code
National Health Expenditure
National PACE Association
National Provider Identifier
Office of the Actuary (CMS)
Omnibus Budget Reconciliation
Act
Office for Civil Rights
Open enrollment period for insti­
tutionalized individuals
Office of the Inspector General
Office of Personnel Management
Pharmaceutical and therapeutic
Pharmacy benefit administrator
Pharmacy benefit managers
Plan Benefit Package
Private prescription drug plan

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
PDSC
PFFS
PHI
PhRMA
PPO
PPV
PSO
QDWIs
QIl
QIO
QMB
REACH
RHC
SCHIP
SEP
SHIP
SLMB
SOW
SPAP
SPD
SPOC
SSA
SSI
SSRI
SSSGs
TANF
TrOOP
U&C
URAC
USP
VA
VDSA

Phased-down State contribution
Private fee-for-service plan
Protected health information
Pharmaceutical Manufacturers
and Researchers of America
Preferred provider organization
Pharmaceutical Prime Vendor
Provider-sponsored organization
Qualified disabled and working
individuals
Qualified individuals
Quality Improvement Organiza­
tion
Qualified Medicare beneficiaries
Regional Education About
Choices in Health
Rural Health Center
State Children’s Health Insur­
ance Program
Special enrollment period
State health insurance assist­
ance program
Special Low-Income Bene­
ficiaries
Scope of work
State Pharmaceutical Assistance
Program
Summary Plan Description
Single point of contact
Social Security Administration
Supplemental Security Income
Selective serotonin reuptake in­
hibitor
Similarly Sized Subscriber
Groups
Temporary assistance for needy
families
True out-of-pocket
Usual and customary
Utilization Review Accreditation
Commission
U.S. Pharmacopoeia
Department of Veterans Affairs
Voluntary data sharing agree­
ment

I. Background
A. Medicare Prescription Drug,
Improvement, and Modernization Act of
2003
Section 101 of the Medicare
Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) (Pub.
L. 108–173) amended Title XVIII of the
Social Security Act (the Act) by
establishing a new Part D: the Voluntary
Prescription Drug Benefit Program. (For
ease of reference, we will refer to the
new prescription drug benefit program
as Part D of Medicare and we will refer
to the Medicare Advantage Program
described in Part C of title XVIII of the
Act -as Part C of Medicare.)
We believe that the new Part D benefit
constitutes the most significant change
to the Medicare program since its
inception in 1965. The addition of
outpatient prescription drugs to the
Medicare program reflects the Congress’
recognition of the fundamental change
in recent years in how medical care is
delivered in the U.S. It recognizes the
vital role of prescription drugs in our

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

health care delivery system, and the
need to modernize Medicare to assure
their availability to Medicare
beneficiaries. This final rule is designed
to broaden participation in the new
benefit both by organizations that offer
prescription drug coverage and by
eligible beneficiaries. In conjunction
with complementary improvements to
the Medicare Advantage program, these
changes should significantly increase
the coverage and choices available to
Medicare beneficiaries.
Effective January 1, 2006, the new
program establishes an optional
prescription drug benefit for individuals
who are entitled to or enrolled in
Medicare benefits under Part A and Part
B. Beneficiaries who qualify for both
Medicare and Medicaid (full-benefit
dual eligibles) will automatically
receive the Medicare drug benefit unless
Medicare has identified the individual
as having other creditable coverage
through an employer-based prescription
drug plan. The statute also provides for
assistance with premiums and cost
sharing to eligible low-income
beneficiaries.
In general, coverage for the new
prescription drug benefit will be
provided through private prescription
drug plans (PDPs) that offer drug-only
coverage, or through Medicare
Advantage (MA) (formerly known as
Medicare+Choice) plans that offer
integrated prescription drug and health
care coverage (MA-PD plans). PDPs
must offer a basic drug benefit. MA-PDs
must offer either a basic benefit, or a
benefit with broader coverage than the
basic benefit, but at no additional cost
to the beneficiary. If this required level
of coverage is offered, MA-PDs or PDPs,
but not fallback plans, may also offer
supplemental benefits, called
‘‘enhanced alternative coverage,’’ for an
additional premium.
All organizations offering drug plans
will have flexibility in terms of benefit
design, including the authority to
establish a formulary to designate
specific drugs that will be available, and
the ability to have a cost-sharing
structure other than the statutorilydefined structure, subject to certain
actuarial tests. Most Part D plans also
may include supplemental drug
coverage such that the total value of the
coverage offered exceeds the value of
basic prescription drug coverage. The
specific sections of the Act that address
the prescription drug benefit program
are the following:
1860D–1
1860D–2

PO 00000

Frm 00005

Eligibility, enrollment, and in­
formation.
Prescription drug benefits.

Fmt 4701

Sfmt 4700

1860D–3
1860D–4
1860D–11
1860D–12
1860D–13
1860D–14
1860D–15
1860D–16

1860D–21

1860D–22
1860D–23
1860D–24
1860D–41
1860D–42

Sec. 102
Sec. 103
Sec. 104
Sec. 109

4197

Access to a choice of quali­
fied prescription drug cov­
erage.
Beneficiary protections for
qualified prescription drug
coverage.
PDP regions; submission of
bids; plan approval.
Requirements for and con­
tracts with prescription drug
plan (PDP) sponsors.
Premiums; late enrollment
penalty.
Premium and cost-sharing
subsidies for low-income in­
dividuals.
Subsidies for Part D eligible
individuals for qualified pre­
scription drug coverage.
Medicare Prescription Drug
Account in the Federal
Supplementary Medical In­
surance Trust Fund.
Application to Medicare Ad­
vantage program and re­
lated managed care pro­
grams.
Special rules for employersponsored programs.
State pharmaceutical assist­
ance programs.
Coordination requirements for
plans providing prescription
drug coverage.
Definitions; treatment of ref­
erences to provisions in
Part C.
Miscellaneous provisions.
Specific sections of the MMA
that also relate to the pre­
scription drug benefit pro­
gram are the following:
Medicare Advantage Con­
forming Amendments
Medicaid Amendments
Medigap
Expanding the work of Medi­
care Quality Improvement
Organizations to include
Parts C and D.

B. Codification of Regulations
The final provisions set forth here are
codified in 42 CFR Part 423–Voluntary
Medicare Prescription Drug Benefit.
Note that the regulations—
• for Medicare supplemental
policies (Medigap) will continue to be
located in 42 CFR part 403 (subpart B);
• for exclusions from Medicare and
limitations on Medicare payment (the
physician self-referral rules) will
continue to be located in 42 CFR part
411;
• for managed care organizations
that contract with us under cost
contracts will continue to be located in
42 CFR part 417, Health Maintenance
Organizations, Competitive Medical
Plans, and Health Care Prepayment
Plans;
• for PACE organizations will
continue to be located in 42 CFR part
460.

E:\FR\FM\28JAR2.SGM

28JAR2

4198

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

C. Organizational Overview of Part 423
The regulations set forth in this final
rule are codified in the new 42 CFR Part
423–Voluntary Medicare Prescription
Drug Benefit. There are a number of
places in which statutory provisions in
Part D incorporate by reference specific
sections in Part C of Medicare (the MA
program). The MA regulations appear at
42 CFR Part 422. Since the same
organizations that offer MA coordinated
care plans will also be required to offer
MA-PD plans, we believed it was
appropriate to adopt the same
organizational structure as part 422.
Wherever possible, we modeled the
prescription drug regulations on the
parallel provisions of the part 422
regulations.
The major subjects covered in each
subpart of part 423 are as follows:
Subpart A, General Provisions: Basis
and scope of the new part 423,
Definitions and discussion of important
concepts used throughout part 423, and
sponsor cost-sharing in beneficiary
education and enrollment-related costs
(user fees).
Subpart B, Eligibility, Election, and
Enrollment: Eligibility for enrollment in
the Part D benefit, enrollment periods,
disenrollment, application of the late
enrollment penalty, approval of
marketing materials and enrollment
forms, and the meaning and
documentation of creditable coverage.
(Please note that other, related topics,
are discussed in the following subparts:
Subpart P, eligibility and enrollment for
low-income individuals; Subpart S,
provisions relating to the phase-down of
State contributions for dual-eligible
drug expenditures; Subpart F,
calculation and collection of late
enrollment fees; Subpart C, plan
disclosure; Subpart Q, eligibility and
enrollment for fallback plans; and
Subpart T, the definition of a Medicare
supplemental (Medigap) policy.)
Subpart C, Benefits and Beneficiary
Protections: Prescription drug benefit
coverage, service areas, network and
out-of-network access, formulary
requirements, dissemination of plan
information to beneficiaries, and
confidentiality of enrollee records.
(Please note that actuarial valuation of
the coverage offered by plans, as well as
the submission of the bid, is discussed
in subpart F. Access to negotiated prices
is discussed in subpart C, while the
reporting of negotiated prices is
discussed in subpart G. Formularies are
discussed in subpart C, while appeals
related to formularies are discussed in
subpart M. Incurred costs toward true
out-of-pocket (TrOOP expenditures) are
discussed in subpart C, while the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

procedures for determining whether a
beneficiary’s Part D out-of-pocket costs
are actually reimbursed by insurance or
another third-party arrangement are
discussed in subpart J. Information that
plans must disseminate to beneficiaries
is discussed in subpart C, while Part D
information that CMS must disseminate
to beneficiaries is discussed in subpart
B.)
Subpart D, Cost Control and Quality
Improvement Requirements for Part D
Plans: Utilization controls, quality
assurance, and medication therapy
management, as well as rules related to
identifying enrollees for whom
medication therapy management is
appropriate, consumer satisfaction
surveys, and accreditation as a basis for
deeming compliance.
Subpart E, Reserved.
Subpart F, Submission of Bids and
Monthly Beneficiary Premiums; Plan
Approval: Bid submission, the actuarial
value of bid components, review and
approval of plans, and the calculation
and collection of Part D premiums.
Subpart G, Payments to Part D plans
for Qualified Prescription Drug
Coverage: Data submission, payments
and reconciliations for direct subsidies,
risk adjustment, reinsurance, and risksharing arrangements.
Subpart H, Reserved.
Subpart I, Organization Compliance
with State Law and Preemption by
Federal Law: Licensure, assumption of
financial risk, solvency, and State
premium taxes.
Subpart J, Coordination Under Part D
With Other Prescription Drug Coverage:
Applicability of Part D rules to the
Medicare Advantage program, waivers
available to facilitate the offering of
employer group plans, waivers of part D
provisions for PACE plans and 1876
cost plans offering qualified
prescription drug coverage, and
procedures to facilitate calculation of
true out-of-pocket (TrOOP) expenses
and coordination of benefits with State
pharmaceutical assistance programs and
other entities that provide prescription
drug coverage. (Please note that subpart
C discusses, in more detail,
coordination of benefits from the
perspective of which prescription drug
benefits are covered by Part D and the
determination of which incurred
beneficiary costs will be counted as
TrOOP expenditures. Provisions relating
to disenrollment for material
misrepresentation by a beneficiary are
discussed in subpart B.)
Subpart K, Application Procedures
and Contracts with PDP Sponsors:
Application procedures and
requirements; contract terms;

PO 00000

Frm 00006

Fmt 4701

Sfmt 4700

procedures for termination of contracts;
reporting by PDP sponsors.
Subpart L, Effect of Change of
Ownership or Leasing of Facilities
during Term of Contract: Change of
ownership of a PDP sponsor; novation
agreements; leasing of a PDP sponsor’s
facilities.
Subpart M, Grievances, Coverage
Determinations and Appeals: Coverage
determinations by sponsors, exceptions
procedures, and all levels of appeals by
beneficiaries.
Subpart N, Medicare Contract
Determinations and Appeals:
Notification by CMS about unfavorable
contracting decisions, such as
nonrenewals or terminations;
reconsiderations; appeals.
Subpart O, Sanctions: Provisions
concerning available sanctions for
participating organizations.
Subpart P, Premiums and CostSharing Subsidies for Low-Income
Individuals: Eligibility determinations
and payment calculations for lowincome subsidies.
Subpart Q, Guaranteeing Access to a
Choice of Coverage (Fallback Plans):
Definitions, access requirements,
bidding process, and contract
requirements for fallback PDPs.
Subpart R, Payments to Sponsors of
Retiree Prescription Drug Plans:
Provisions for making retiree drug
subsidy payments to sponsors of
qualified retiree prescription drug plans.
Subpart S, Special Rules for States—
Eligibility Determinations for Subsidies
and General Payment Provisions: State/
Medicaid program’s role in determining
eligibility for low-income subsidy and
other issues related to the Part D benefit.
In addition, in subpart T, this final
rule also makes changes to: part 400
relating to definitions of Parts C & D,
part 403 relating to Medicare
supplemental policies (Medigap), part
411 relating to exclusions from
Medicare and limitations on Medicare
payment (the physician self-referral
rules), part 417 relating to cost-based
health maintenance organizations
(HMOs), and part 460 relating to PACE
organizations.
II. Provisions of the Proposed Rule
We received 7,696 items of
correspondence containing comments
on the August 2004 proposed rule.
Commenters included managed care
organizations and other insurance
industry representatives, pharmacy
benefit management firms, pharmacies
and pharmacy education and practicerelated organizations, pharmaceutical
manufacturers, representatives of
physicians and other health care
professionals, beneficiary advocacy

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
groups, representatives of hospitals and
other healthcare providers, States,
employers and benefits consulting
firms, members of the Congress, Indian
Health Service, Tribal and Urban Health
Programs, American Indians and Alaska
Natives, beneficiaries, and others. We
also received many comments
expressing concerns unrelated to the
proposed rule. Some commenters
expressed concerns about Medicare
unrelated to the Prescription Drug
Benefit, while others addressed
concerns about health care and health
insurance coverage unrelated to
Medicare. Because of the volume of
comments we received in response to
the proposed rule, we will be unable to
address comments and concerns that are
unrelated to the proposed rule.
Most of the comments addressed
multiple issues, often in great detail.
Listed below are the areas of the
regulation that received the most
comments:
• Transition of Coverage for Dual
Eligibles from Medicaid to Medicare
• Access to Drugs in Long Term Care
Facilities
• Formulary Policies
• Medication Therapy Management
Requirements
• Network Access Standards
• Part B/Part D Drug Identification
and Coordination
• Dispensing Fees
In this final rule, we address
comments received on the proposed
rule. For the most part, we will address
issues according to the numerical order
of the related regulation sections.
A. General Provisions
1. Overview
Section 423.1 of subpart A specified
the general statutory authority for the
ensuing regulations and indicated that
the scope of part 423 is to establish
requirements for the Medicare
prescription drug benefit program. We
proposed key definitions at § 423.4 for
terms that appear in multiple sections of
part 423.
Consistent with the MMA statute, in
many cases we proposed procedures
that parallel those in effect under the
MA program. Our goal was to maintain
consistency between these two
programs wherever possible; thus we
evaluated the need for parallel changes
in the MA final rule when we received
comments on provisions that affect both
programs.
Comment: Many commenters urged
us to finalize regulations by early
January—and detailed business
requirements soon thereafter. Some also
recommended that we make public

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

certain key decisions and data sooner
than January in order to promote
planning.
Response: We agree that the earliest
possible release of program
requirements and final rules will
facilitate planning and implementation
of new business processes required to
offer and administer this new program.
Consequently we have made numerous
draft documents, such as the risk plan
solicitation, PDP solvency requirements,
formulary review policies, and the
actuarial bidding instructions, available
for public comment in November and
December of 2004 and have expedited
the rulemaking process to meet these
goals. In response to the lack of
specificity regarding the PDP regions in
our proposed rule, we conducted
extensive outreach in order to obtain
public input prior to the publication of
our final rule. On December 6, 2004, we
announced the establishment of 26 MA
regions and 34 PDP regions.
2. Discussion of Important Concepts and
Key Definitions (§ 423.4)
a. Introduction
For the most part, the proposed
definitions were taken directly from
section 1860D–41 of the Act. The
definitions set forth in subpart A apply
to all of part 423 unless otherwise
indicated, and are applicable only for
the purposes of part 423. For example,
‘‘insurance risk’’ applies only to
pharmacies that contract with PDP
sponsors under part 423.
Definitions that have a more limited
application have not been included in
subpart A, but instead are set forth
within the relevant subpart of the
regulations. For example, in subpart F,
we have included all the definitions
related to bids and premiums. The
detailed definitions and requirements
related to prescription drug coverage are
included in subpart C, but because of
their direct relevance to the bidding
process they are also referenced in
subpart F.
Following our discussion of important
concepts, we provide brief definitions of
terms that occur in multiple sections of
this preamble and part 423. We believe
that it is helpful to define these
frequently occurring terms to aid the
reader, but that these terms do not
require the extended discussion
necessary in our section on important
concepts.
b. Discussion of Actuarial Equivalence,
Creditable Prescription Drug Coverage,
PDP Plan Regions, Service Area, and
User Fees
• Discussion of the Meaning of
Actuarial Equivalence

PO 00000

Frm 00007

Fmt 4701

Sfmt 4700

4199

The concept of actuarial equivalence
is applied in several different contexts
in Title I of the MMA. In very general
terms, actuarial equivalence refers to a
determination that, in the aggregate, the
dollar value of drug coverage for a set
of beneficiaries under one plan can be
shown to be equal to the dollar value for
those same beneficiaries under another
plan. Given the various uses for this
term in the Part D provisions, we
proposed the following relatively
general definition: ‘‘Actuarial
equivalence’’ means a state of
equivalent values demonstrated through
the use of generally accepted actuarial
principles and in accordance with
section 1860D–11(c) of the Act and
§ 423.265(c)(3) of this part. This concept
is discussed in further detail in those
sections of this preamble, such as
section II.F, where actuarial equivalence
comes into play. We will provide
further detailed guidance on methods
required to demonstrate actuarial
equivalence.
Comment: One commenter requested
that the definition of actuarial
equivalence be refined through
examples or more descriptive language.
Response: We agree that it is critical
to disclose our requirements for
calculation of actuarial values under
Part D requirements as fully and as
expeditiously as possible to reduce
uncertainty on the part of potential plan
sponsors. To that end we made available
our draft bid preparation rules and
processes early in December 2004 for
public comment, and we will continue
to refine our guidance to bidders
through vehicles such as the annual 45­
day notice and the CMS website. We
have modified our definition to refer to
this separate guidance.
• Discussion of the Meaning of
Creditable Prescription Drug Coverage
Comments on creditable coverage are
addressed in the preamble for subparts
B and T.
• Prescription Drug Plan Regions
Prescription drug plan regions are
areas in which a contracting PDP
sponsor must provide access to covered
Part D drugs. Although we included
specifications for regions in § 423.112,
the regions themselves were not set
forth in the proposed rule. To the extent
feasible, we tried to establish PDP
regions that were consistent with MA
regions. The MMA specifically required
no fewer than 10 regions and no more
than 50 regions, not including the
territories. For a further discussion of
the PDP regions, see section II.C of this
preamble.
Comment: Many commenters
expressed concerns about the MA and
PDP region decisions. Many argued that

E:\FR\FM\28JAR2.SGM

28JAR2

4200

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

regions should closely mirror existing
State insurance markets to maximize
participation. Others representing rural
constituencies argued for larger regions
to encourage offering of coverage in
rural areas.
Response: We conducted a market
survey and analysis, including an
examination of current insurance
markets as required in the MMA. Key
factors in the survey and analysis
included payment rates; eligible
population size per region; preferred
provider organization (PPO) market
penetration; current existence of PPOs,
MA plans, or other commercial plans;
and presence of PPO providers and
primary care providers. Additional
factors were also considered, including
solvency and licensing requirements, as
well as capacity issues. Recognizing the
lack of specificity regarding the PDP
regions in our proposed rule, we
conducted extensive outreach in order
to obtain public input prior to the
publication of our final decision. On
December 6, 2004, we announced the
establishment of 26 MA regions and 34
PDP regions. For maps and fact sheets
on the regions, please see http://
www.cms.hhs.gov/medicarereform/
mmaregions/.
• Service Area
In the proposed rule we proposed that
Medicare beneficiaries would be eligible
to enroll in a PDP or an MA-PD plan
only if they reside in the PDP’s or MA­
PD plan’s ‘‘Service Area.’’ For PDPs the
service area is defined as the region or
regions for which they must provide
access. This is the Region established by
CMS either pursuant to proposed
§ 423.112, or, in the case of fallback
plans, the fallback service area pursuant
to § 423.859, within which the PDP is
responsible for providing access to the
Part D drug benefit in accordance with
the access standards in proposed
§ 423.120. Under the MA program, an
MA plan’s service area is defined in
§ 422.2. For coordinated care plans, the
definition of ‘‘service area’’ expressly
includes the condition that the service
area is an area in which access is
provided in accordance with access
standards in § 422.112.
We also proposed that for purposes of
enrolling in Part D with a PDP, or under
an MA-PD plan, the definition of
Service Area that governs eligibility to
enroll is the area within which the Part
D access standards under § 423.120 are
met. Beneficiaries in jail or prison do
not have access to pharmacies available
as required under § 423.120. Therefore,
such beneficiaries would not be
considered to be in a PDP or MA-PD
plan’s Service Area for purposes of
enrolling in Part D. Incarcerated

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

individuals accordingly would not be
assessed a late penalty when they enroll
in Part D (either with a PDP or MA-PD
plan) upon being released. The same
analysis applies with regard to a
beneficiary who lives abroad, and does
not reside within the boundaries of any
PDP Region or MA-PD Service Area. We
have modified our definition of service
area to clarify our intent as proposed.
Comment: Several commenters asked
that we waive the service area
requirement for employer group PDP
plans.
Response: We agree that we have the
authority to waive the service area
requirement for employer-sponsored
group prescription drug plans, and we
plan to do so in appropriate cases. We
will provide further details on waivers
in separate CMS guidance.
• Sponsor Cost-Sharing in Beneficiary
Education and Enrollment Related
Costs-User Fees (§ 423.6)
The last section of subpart A
proposed regulations implementing the
user fees provided for in section
1857(e)(2) of the Act, as incorporated by
section 1860D–12(b)(3)(D) of the Act.
These fees are currently required of MA
plans for the purpose of defraying part
of the ongoing costs of the national
beneficiary education campaign that
includes developing and disseminating
print materials, the 1–800–MEDICARE
telephone line, community based
outreach to support State health
insurance assistance programs (SHIPs),
and other enrollment and information
activities required under section 1851 of
the Act and counseling assistance under
section 4360 of the Omnibus Budget
Reconciliation Act of 1990 (Pub. L. 103–
66).
The MMA expands the user fee to
apply to PDP sponsors as well as MA
plans. The expansion of the application
of user fees recognizes the increased
Medicare beneficiary education
activities that we would require as part
of the new prescription drug benefit. In
2006 and beyond, user fees will help to
offset the costs of educating over 41
million beneficiaries about the drug
benefit through written materials such
as a publication describing the drug
benefit, internet sites, and other media.
The user fee provisions establish the
applicable aggregate contribution
portions for PDP sponsors and MA
organizations through two calculations.
Comment: Several commenters
supported the extension of user fees to
PDP sponsors in addition to MA plans.
One commenter emphasized the need
for Medicare to provide national
beneficiary educational materials in
accessible formats (including Braille
and other languages commonly used by

PO 00000

Frm 00008

Fmt 4701

Sfmt 4700

beneficiaries), as well as
telecommunications equipment to
support beneficiaries with hearing
impairments, in order to meet the
various needs of Medicare beneficiaries
with disabilities. Another commenter
urged us to focus beneficiary education
efforts on helping beneficiaries make a
choice, as opposed to simply describing
the array of choices. This commenter
also urged us not to overlook the M+C
population in its outreach campaign.
Response: We have a long-standing
tradition of making our beneficiary
education materials accessible in a
variety of formats to meet the needs of
people with disabilities and special
communications barriers. Beneficiary
publications on a variety of topics are
available in Braille, large print, and
audiotape versions, in addition to
conventional formats. We expect to
continue these practices when
educating beneficiaries about MMA
topics. In addition, we are finalizing a
partnership with the Social Security
Administration (SSA) that will allow
some of our educational products to be
translated into 14 languages (other than
English and Spanish) and reach a
broader audience.
We are currently planning the
development of a range of tools and
strategies that will help beneficiaries
make a choice that meets their needs.
We agree that this action is an essential
part of our education process, in
addition to building general awareness
and understanding. We will address the
needs of multiple audiences through our
outreach and education efforts,
including those with M+C (MA) plans.
c. Definitions of Frequently Occurring
Terms
The following definitions were
discussed in the preamble to our
proposed rule:
Full-benefit dual eligible beneficiary
means an individual who meets the
criteria established in § 423.772
(Subpart P), regarding coverage under
both Part D and Medicaid.
Comment: One commenter asked us
to clarify whether individuals eligible
for Medicaid at the special income level
for long term care qualify as full benefit
dual eligibles for a full subsidy.
Response: Yes, all individuals who
qualify for Medicaid, including
expansion populations and persons
eligible for Medicaid in long term care
facilities under a State’s special income
standard which does not exceed 300
percent of the supplemental security
income (SSI) payment standard will
qualify as full benefit dual eligible
beneficiaries eligible for a full subsidy.
Insurance risk means, for a
participating pharmacy, risk of the type

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
commonly assumed only by insurers
licensed by a State and does not include
payment variations designed to reflect
performance-based measures of
activities within the control of the
pharmacy, such as formulary
compliance and generic drug
substitutions, nor does it include
elements potentially in the control of
the pharmacy (for example, labor costs
or productivity).
Comment: Several commenters
supported our definition of ‘insurance
risk’, including the exclusion of
performance-based compensation as this
is not commonly viewed as insurance
risk.
Response: We will adopt the
definition as proposed.
MA means Medicare Advantage,
which refers to the program authorized
under Part C of Title XVIII of the Act.
MA-PD plan means an MA plan that
provides qualified prescription drug
coverage.
Medicare prescription drug account
means the account created within the
Federal Supplementary Medical
Insurance Trust Fund for purposes of
Medicare Part D.
Part D eligible individual means an
individual who is entitled to Medicare
benefits under Part A or enrolled in
Medicare Part B. For purposes of this
part, enrolled under Part B means
‘‘entitled to receive benefits’’ under Part
B.
Prescription drug plan or PDP means
prescription drug coverage that is
offered under a policy, contract, or plan
that has been approved as specified in
§ 423.272 and that is offered by a PDP
sponsor that has a contract with CMS
that meets the contract requirements
under subpart K or in the case of
fallback PDPs also under subpart Q.
PDP region means a prescription drug
plan region as determined by CMS
under § 423.112.
PDP sponsor means a
nongovernmental entity that is certified
under this part as meeting the
requirements and standards of this part
for that sponsor.
Comment: Several commenters noted
that the terms PDP sponsor and MA
organization offering an MA-PD plan
were not consistently used in the
proposed rule to represent distinct and
mutually exclusive entities. As a result
the proposed rule was not always clear
regarding when requirements or options
applied only to one or the other entity,
or both.
Response: We acknowledge that the
terminology regarding sponsors and
plans was inconsistently applied. We
have revised the language in the final
rule accordingly and have also

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

standardized the terms ‘Part D plan’ and
‘Part D plan sponsor’ when referring to
all plans and sponsors in general.
Consequently we have relocated these
terms from subpart C to this subpart and
clarified that references to ‘‘Part D
plans’’ in the final rule refer to any or
all of MA-PD plans, PDPs, PACE plans
and cost plans. Likewise, the term ‘‘Part
D plan sponsor’’ refers to MA
organizations offering MA-PD plans,
PDP sponsors, and sponsors of PACE
plans and cost plans.
Comment: Several commenters asked
that we be flexible in its definition of a
non-governmental entity to allow either
the creation of State-sponsored entities
as PDPs or the selection of a preferred
PDP entity for Medicaid dual eligible
and SPAP populations.
Response: While we understand and
support the goals of minimizing client
confusion and facilitating continuity of
care, we believe the requirements
imposed by sections 1860D–41(13) and
1860D–23(b)(2) of the Act do not allow
us to approve State-sponsored PDPs or
the selection of preferred PDPs for State
populations. We would note, however,
that we believe we can waive the non­
governmental requirement in section
1860D–41(23) of the Act under the
employer waiver authority for States
that seek to sponsor Part D plans on
behalf of their employees. This is
discussed in more detail in subpart J of
this rule.
d. Financial Relationships between PDP
Sponsors, Health Care Professionals and
Pharmaceutical Manufacturers
The financial relationships that exist
between or among PDP sponsors, health
care professionals (including physicians
and pharmacists), or pharmaceutical
manufacturers may be subject to the
anti-kickback statute and, if the
relationship involves a physician, the
physician self-referral statute. Nothing
in this regulation should be construed
as implying that financial relationships
described in this final rule meet the
requirements of the anti-kickback
statute or physician self-referral statute
or any other applicable Federal or State
law or regulation. All such relationships
must comply with applicable laws.
In addition to the provisions in these
regulation, under section 6(a)(1) of the
Inspector General Act of 1978, as
amended, OIG has access to all records,
reports, audits, reviews, documents,
papers and other materials to which the
Department has access that relate to
programs and operations for which the
Inspector General has responsibilities
under the Inspector General Act. The
provisions in these regulations do not
limit the Office of the Inspector
General’s (OIG) authority to fulfill the

PO 00000

Frm 00009

Fmt 4701

Sfmt 4700

4201

Inspector General’s responsibilities
under Federal law.’’
e. ERISA application and requirements
The rules contained in this
rulemaking apply for purposes of Title
I of the MMA and no inference should
be drawn from anything in this rule
regarding the applicability of title I of
ERISA. In addition, nothing in this
rulemaking should be construed as
relieving a plan administrator or other
fiduciary of obligations under title I of
ERISA.
B. Eligibility and Enrollment
We outlined the eligibility and
enrollment requirements for Part D
plans in subpart B of the August 2004
proposed rule. We received over 100
comments on this subpart. Below we
summarize the provisions of the
proposed rule and our final rule and
respond to public comments. (Please
refer to the proposed rule (69 FR 46637)
for a detailed discussion of our
proposals.)
1. Eligibility for Part D (§ 423.30)
Section 101 of the MMA established
section 1860D–1 of the Act, which
includes the eligibility criteria an
individual must meet in order to obtain
prescription drug coverage and enroll in
a Part D plan. Section 1860D–1(a)(3)(A)
of the Act defines a ‘‘Part D eligible
individual’’ as an individual who is
entitled to Medicare benefits under Part
A or enrolled in Part B. Further, in order
to be eligible to enroll in a PDP plan,
§ 423.30(a) of the proposed rule
provided that the individual must reside
in the plan’s service area, and cannot be
enrolled in an MA plan, other than a
Medicare savings account (MSA) plan or
private fee-for-service (PFFS) plan that
does not provide qualified prescription
drug coverage. In addition, § 423.4 of
the proposed rule provided the
definition of service area, which
describes that for purposes of eligibility
to enroll to receive Part D benefits,
certain access standards must be met,
hence, making certain individuals
ineligible to enroll.
Generally, a Part D eligible individual
enrolled in an MA plan that does not
provide qualified prescription drug
coverage (that is, an MA plan) may not
enroll in a PDP. There are, however,
exceptions under sections 1860D–
1(a)(1)(B)(iii) and (iv) of the Act for
individuals who are enrolled in either
an MA private fee-for-service plan (as
defined in section 1859(b)(2) of the Act)
that does not provide qualified
prescription drug coverage or an MSA
plan (as defined in section 1859(b)(3) of
the Act). We provided for these

E:\FR\FM\28JAR2.SGM

28JAR2

4202

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

exceptions in § 423.30(b) of the
proposed rule.
Except as provided above, in
accordance with section 1860D–
1(a)(1)(B)(i) of the Act, and as provided
in § 423.30(c) of the proposed rule, a
Part D eligible individual who is
enrolled in an MA-PD plan must obtain
prescription drug coverage through that
plan. In order to enroll in an MA-PD
plan, a Part D eligible individual must
also meet the eligibility and enrollment
requirements of the MA-PD plan as
provided in § 422.50 through § 422.68 of
the proposed rule establishing and
regulating the MA program (CMS–4069–
P) which was also published August
2004.
Except as otherwise provided below,
the final rule adopts the eligibility
criteria set forth in § 423.30 of the
proposed rule.
Comment: Several commenters
requested clarification of the definition
of a Part D eligible individual. One
commenter stated than a literal reading
of the proposed definition appears to
say that any individual who is eligible
for Medicare but not enrolled could get
the Part D benefit, and asks if an
individual must enroll in Part A or Part
B in order to be eligible for Part D. One
commenter indicated that it was unclear
how CMS would coordinate Part D
eligibility with any retroactive eligibility
determinations made by SSA.
Response: Section 1860D–1(a)(3)(A) of
the Act defines a ‘‘Part D eligible
individual’’ as ‘‘an individual who is
entitled to benefits under Part A or
enrolled under Part B.’’
In other context, we generally have
interpreted the concept of ‘‘entitled’’ to
benefits to mean that an individual has
met all of the necessary requirements for
a benefit (that is, is eligible for the
benefit), and has actually applied for
and been granted coverage. We believe
for purposes of applying the definition
of ‘‘Part D eligible individual’’ under
section 1860D–1(a)(3) of the Act, we
believe this interpretation of
‘‘entitlement’’ is the appropriate
interpretation. Accordingly, we will
deem an individual ‘‘entitled’’ to Part A,
and thus a Part D eligible individual, if
the individual is eligible for benefits
under Part A, and has actually applied
for and been granted coverage under
Part A. On the other hand, under our
Medicare Part B regulations at part 407,
an individual is considered to be
‘‘enrolled’’ in Part B when he or she has
applied for Part B coverage (or is
deemed to have applied). Nevertheless,
we do not believe this interpretation of
‘‘enrolled’’ in Part B is the correct
interpretation of section 1860D–
1(a)(3)(A) of the Act, and instead

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

interpret ‘‘enrolled under Part B’’ to
mean that the individual is entitled to
receive benefits under Part B.
When establishing eligibility and
enrollment rules for the MA program
upon its inception, we adopted a similar
interpretation of section 1851(a) (3) of
the Act. Section 1851(a) (3) of the Act
defined the term ‘‘Medicare+Choice
eligible individual’’ to mean an
individual who is entitled to benefits
under part A ‘‘and enrolled under part
B.’’ As we explained in our proposed
rule for the Medicare+Choice program
(see 63 FR 34979), we believe that the
Congress intended that we provide an
individual the opportunity to enroll in
the Medicare+Choice program only if
entitled to actually receive benefits
under Part B in addition to Part A. As
we explained, under some situations, an
individual may apply for or be deemed
to have applied for Part B before he or
she is actually entitled to receive
coverage. For example, if an individual
applies for Part B coverage after he or
she reaches age 65, the individual may
not actually be entitled to Part B
coverage under section 1837 of the Act
until one or several months after the
month of application and enrollment. If
we had interpreted section 1851(a) (3) of
the Act to permit individuals to enroll
in a Medicare+Choice plan when an
individual has only been enrolled in
Part B, but is not yet entitled to Part B,
he or she could be entitled to the
benefits under a Medicare+Choice plan
before actually being entitled to
Medicare Part B coverage. In order to
avoid such a result, we interpreted the
language ‘‘enrolled’’ in Part B in section
1851(a) (3) of the Act to mean ‘‘entitled’’
to Part B.
We similarly will interpret section
1860D–1(a)(3)(A) of the Act as providing
that an individuals is eligible for Part D
only if the individual is entitled to
receive benefits under Part A or Part B.
Section 1860D–1(b)(1)(B) of the Act
requires us to use rules similar to and
coordinated with certain rules for
enrollment that govern eligibility for the
MA program. Hence, we believe that the
Congress intended that we provide an
individual the opportunity to enroll in
part D only if entitled to actually receive
benefits under Part B (or Part A);
otherwise an individual would be
entitled to receive coverage of Part D
drugs under PDP before being entitled to
receive benefits under original fee-for­
service Medicare.
Our regulations at § 422.2 define an
MA eligible individual as someone who
meets the requirements of § 422.50,
which outlines the various criteria that
an individual must meet to be eligible
to elect an MA plan, including:

PO 00000

Frm 00010

Fmt 4701

Sfmt 4700

entitlement to Parts A and B, residency
in a plan’s service area, making an
enrollment election and agreeing to
abide by the rules of the MA plan. We
intend to apply a parallel approach to
the Part D program. We will amend
§ 423.4 to define a Part D eligible
individual as an individual who meets
the requirements at § 423.30, that is, the
individual is entitled to Medicare
benefits under Part A or enrolled in Part
B and lives in the service area of the Part
D plan. We clarify, however, that
‘‘enrolled’’ in Part B means that the
individual not only has applied for and
enrolled in Part B, but is also receiving
coverage for Part B services, in
accordance with part 407.
We have included in § 423.30 to be
eligible to enroll in a Part D plan, the
individual must also reside in the Part
D plan’s service area and not be enrolled
in another Part D plan.
We have clarified Part D eligibility for
those individuals for whom eligibility
determinations for Medicare Part A or B
have been made retroactively, which
results in retroactive entitlement to
these programs. The MA statute at
section 1851(f) of the Act provides that
initial elections shall take effect upon
the date the individual becomes entitled
to Part A or B, except as the Secretary
may provide ‘‘in order to prevent
retroactive coverage.’’ Under the MA
program, an individual who has
received a retroactive eligibility
determination for Medicare Part A or B
is not permitted to enroll in an MA plan
retroactively. Again, using section
1860D–1(b)(1)(B) of the Act that directs
us to establish rules similar to those in
MA, we envision individuals enrolling
in a Part D plan prospectively and have
revised § 423.30 so that individuals who
become entitled to Medicare Part A or
Part B benefits for a retroactive effective
date are deemed Part D eligible as of the
month in which notice of Medicare Part
A or Part B entitlement is provided.
Such revisions at § 423.4 and § 423.30
will clarify that an individual is eligible
for Part D at the same time an individual
is eligible to enroll in Part D.
Comment: Commenters requested
clarification on the eligibility of
incarcerated individuals. One
commenter did not believe that we had
the authority to create such exclusion.
Another requested clarification of the
ability of individuals released from
incarceration on probation or parole to
enroll in Part D.
Response: In the preamble of the
proposed rule, we explained that
individuals who are incarcerated likely
do not have access to Part D services, as
they cannot obtain their prescription
drugs from network pharmacies, yet

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
technically the jail or prison may be
located within the larger geographic
area encompassing a PDP’s service area.
As a result, the individual would be
subject to a late enrollment penalty for
not enrolling in a Part D plan. As a
result, we believe that it is appropriate
to provide in § 423.4 that a PDP’s
service area would exclude areas in
which incarcerated individuals reside
(that is, a correctional facility) and as a
result, incarcerated individuals would
be ineligible to enroll in a PDP and we
have revised the definition to clarify
this point. Upon release from
incarceration, such as for probation or
parole, individuals will be considered
eligible for Part D by living in a PDP
service area, if they meet other Part D
eligibility requirements.
Comment: One commenter suggested
that we consider individuals who are
residents of a State mental institution to
be out of the service area and therefore
ineligible for enrollment in a Part D
plan.
Response: We would not consider
individuals who are residing in a State
mental institution to be out of the
service area. Medicare beneficiaries
residing in such institutions have access
to Medicare benefits under Parts A and
B and therefore would be entitled to
enroll in a Part D plan. However, we do
recognize that individuals in a State
mental institution may be limited to the
pharmacy network contracted with the
facility. Therefore, we will provide such
individuals a Special Enrollment Period
(SEP) to enable them to join the
appropriate Part D plan based upon
their situation. We will clarify this in
guidance following publication of this
rule.
Comment: One commenter asked that
we clarify § 423.30(c) in the final rule to
indicate when an individual in an MA­
PD plan can change plans.
Response: The provisions explaining
the opportunities for individuals to
make PDP enrollment choices are fully
set forth at § 423.38 of the final rule. The
requirements for MA plans are outlined
under § 422.50 through § 422.80.
Comment: One commenter suggested
that we permit beneficiaries enrolled in
an MA plan to enroll in a PDP or
disenroll from the MA plan and enroll
in an MA-PD plan.
Response: Section 1860D–1(a)(1) of
the Act specifically prohibits an MA
plan enrollee from enrolling in a PDP
except in the case of enrollees of a MA
PFFS plan that does not provide
qualified prescription drug coverage or
enrollees of an MSA plan. All
individuals, including enrollees of MA
plans, can enroll in a Part D plan during

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

the established enrollment periods, as
described at § 423.38 of the final rule.
2. Enrollment Process (§ 423.32)
Section 1860D–1(b)(1) of the Act
requires that we establish a process for
the enrollment, disenrollment,
termination, and change of enrollment
of Part D eligible individuals in
prescription drug plans. The statute
further requires that this process use
rules similar to, and coordinated with,
the enrollment, disenrollment,
termination, and change of enrollment
rules for MA plans under certain
provisions of section 1851 of the Act.
Thus, we proposed, where possible, to
adopt the MA enrollment requirements
provided under § 422.50 through
§ 422.80.
Generally, a Part D eligible individual
who wishes to make, change, or
discontinue an enrollment during
applicable enrollment periods must file
an enrollment with the PDP directly.
However, we will allow PDPs to use
other enrollment mechanisms, as
approved by us. In addition, § 423.32 of
the final rule provides that beneficiaries
will remain enrolled in their PDP
without having to actively re-enroll in
that PDP at the beginning of each
calendar year. Except as otherwise
provided below, the final rule adopts
the enrollment rules set forth in § 423.34
of the proposed rule.
Comment: Several commenters
submitted identical comments on
various aspects of the coordination of
the enrollment process reflected at both
§ 423.34(b) and § 423.42(a).
Response: Commenters provided
similar comments about the enrollment
process at § 423.34(b)(1) of the proposed
rule and the coordination of enrollment
and disenrollment process at § 423.42(a)
of the proposed rule. After reviewing
these comments, we recognized that
these sections were duplicative and
could cause confusion. To address this
problem, we have reorganized the
following subjects in subpart B into a
more logical order: the enrollment
process at § 423.32 (previously proposed
§ 423.34); auto-enrollment process for
dual eligible individuals at § 423.34
(previously proposed § 423.34(d); the
disenrollment process at § 423.36; the
enrollment periods in § 423.38; and the
effective dates at § 423.40. We believe
that this will simplify and clarify these
provisions.
Comment: Several commenters
supported the inclusion of regulatory
provisions that would permit
enrollment through means other than
the submission of signed, hard-copy
enrollment forms in order to facilitate
flexibility for future enrollments. These

PO 00000

Frm 00011

Fmt 4701

Sfmt 4700

4203

commenters supported allowing
alternative mechanisms for enrollment,
particularly electronic enrollments, to
enable beneficiaries with access to
computers to enroll or disenroll through
secure websites established by PDP
sponsors. Another commented that we
should make the same enrollment
mechanisms that are available to
Medicare Advantage plans available to
PDP sponsors. A few commenters
requested clarification as to the ‘‘other
mechanisms’’ referenced by us in the
proposed rule, specifically what types of
enrollment are envisioned and the
populations to which these ‘‘other
mechanisms’’ would be applied. One
commenter recommended we allow
electronic enrollments through a CMShosted web site, and that we develop a
standard registration process to
authenticate the enrollments. Another
stated that processing applications via
the Internet would require significant
systems changes and that the regulation
appeared to lack requirements necessary
to process applications in such a
manner.
Response: We were pleased by the
general support for flexibility and
creativity in this important part of the
enrollment process, and we anticipate
working in collaboration with all of our
partners to develop enrollment
processes that will be convenient,
reliable and secure for all beneficiaries.
We will adopt this provision as
proposed at § 423.32(b), rather than
specify or limit the types of alternative
enrollment processes that may be used.
We will continue to assess the
technology available and provide
additional operational guidance in the
future, including specific systems
requirements and other information
necessary to implement these processes.
Comment: We received several
comments requesting clarification of
what parties are authorized to act on
behalf of a beneficiary for enrollment
purposes. One commenter noted that
the regulation does not appear to
recognize a beneficiary’s ‘‘authorized’’
or ‘‘personal’’ representative who could
be designated to make decisions for
individuals and refers to the personal
representative definition that we created
in subpart P of the proposed rule.
Another commenter was concerned that
individuals in long-term care facilities
do not have a designated surrogate
decision maker in place to make such a
decision and lack the cognitive capacity
to select a PDP. While some commenters
stated that we should allow an
individual’s personal representative to
enroll a person into a PDP, others
requested that we recognize specific
representatives who could effectuate

E:\FR\FM\28JAR2.SGM

28JAR2

4204

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

such an enrollment within the
regulatory text (for example, SPAP).
Response: In the regulation, we refer
to a Part D eligible ‘‘individual’’ who
wishes to enroll. An individual who has
been appointed as the legal
representative to execute such an
enrollment on behalf of the beneficiary,
in accord with State law, would
constitute the ‘‘individual’’ for purposes
of making the enrollment or
disenrollment. As with the Medicare
Advantage provisions, we will recognize
State laws that authorize persons to
effect an enrollment for Medicare
beneficiaries. We will include more
information on this clarification in
future operational guidance.
Comment: Several commenters asked
that we clarify that nothing would
prevent a person or entity from assisting
a beneficiary in completing and
submitting his or her application to the
PDP, as the MA program allows at
§ 422.60(c).
Response: We agree and have revised
the regulatory language at § 423.32(b) to
allow for such assistance, consistent
with the MA regulations.
Comment: One commenter suggested
that we set forth an appeals process for
beneficiaries who are denied
enrollment.
Response: Although we agree with the
commenter that we should establish a
procedure for beneficiaries to dispute
enrollment denials, we do not believe
that a formal appeals process is
necessary. Instead, we intend to address
beneficiary complaints regarding
enrollment in a similar manner as we
have done under the MA program.
Under the MA program, individuals are
advised through their notice of denial of
enrollment that if they disagree with the
decision to deny enrollment, they may
contact the MA organization. We
monitor MA organizations periodically
to ensure that they are providing this
notification. We also respond to specific
inquiries from beneficiaries and
investigate possible situations where
MA organizations have failed to notify
beneficiaries of the process or where an
organization may have incorrectly
denied a beneficiary’s enrollment. If we
discover a beneficiary was incorrectly
denied enrollment we can require the
MA organization to enroll that
individual, as provided in our manual
instructions. We believe our current
process provides adequate remedies to
beneficiaries and will therefore establish
a similar process for PDPs. We decline
to establish a separate appeals process
for these denials at this time.
Comment: One commenter requested
that we specify in the final rule that

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

PDPs must provide written notice of
enrollment decisions to each consumer.
Response: In § 423.32(d) we require
PDPs to provide all individuals prompt
notice of acceptance or denial of
enrollment in the PDP in a format and
manner specified by CMS. We will
provide specific instructions on the
format and manner of these required
notices in operational guidance and
intend to provide model language and
materials for PDPs to use as well.
Looking ahead, we believe that
beneficiaries may want to receive
documents (such as notices) in a variety
of formats, rather than just in writing.
To that end, we decline to require a
specific format in regulation, thereby
preserving the flexibility to foster
innovation and creativity to satisfy
beneficiary and industry expectations in
the future.
Comment: One commenter suggested
that individuals enrolled in PACE
should remain enrolled in the PACE
organization for purposes of Part D
coverage effective January 1, 2006.
Another commenter suggested a similar
process be established for cost plans.
Response: Section 1860D–21(f) of the
Act provides that a PACE plan may elect
to provide qualified prescription drug
coverage to its Part D eligible enrollees.
Section 1860D–21(e) of the Act
establishes a similar directive to costbased HMO or competitive medical plan
(CMP) plans. Discussion of the
application of the Part D benefit to both
PACE and cost-based HMO or CMP
plans can be found under subpart T of
the proposed rule. For PACE plans, we
stated that PACE plans generally will be
treated similar to MA local plans.
Applying the appropriate MA rules from
§ 422.66, PACE enrollees will receive
their Part D benefits through the PACE
plan if the PACE plan has elected to
provide such coverage. Beneficiaries
who are enrolled in PACE plans that
provide such coverage as of December
31, 2005 will remain enrolled in that
plan on January 1, 2006. For cost-based
HMO or CMP plans, we state that cost
contracts may offer Part D coverage only
to individuals also enrolled for
Medicare in the cost contract. As a
result of the provisions for PACE and
cost-based HMO or CMP plans, we
revised § 423.32(f) to provide that
individuals who are in PACE or costbased HMO or CMP plans that provide
prescription drug coverage on December
31, 2005 will remain enrolled in that
plan and be enrolled in the Part D
benefit offered through that plan as of
January 1, 2006.

PO 00000

Frm 00012

Fmt 4701

Sfmt 4700

3. Enroll Full-Benefit Dual Eligible
Individuals (§ 423.34)
In the proposed rule, § 423.34(d)
required that full benefit dual eligible
individuals who fail to enroll in a PDP
or MA-PD during their initial
enrollment period would be
automatically enrolled into an
appropriate Part D plan, specifically a
PDP with a Part D premium that does
not exceed the low-income premium
subsidy amount. When there is more
than one available PDP in a region, full
benefit dual eligible individuals would
be auto-enrolled on a random basis.
All beneficiaries in an MA plan with
any prescription drug coverage on
December 31, 2005 will be deemed
enrolled on January 1, 2006 in an MA­
PD plan offered by the same MA
organization in accordance with
§ 422.66(e)(2) and (e)(3) of Title II of the
final regulation even if the monthly
beneficiary premium exceeds the lowincome premium subsidy amount. For
full-benefit dual eligible individuals
only, the proposed rule provided that
those already enrolled in an MA plan
without any prescription drug coverage
would be auto-enrolled into an MA-PD
plan offered by the same organization,
and that has a monthly Part D premium
that does not exceed the low-income
premium subsidy amount. The
proposed rule clarified that those autoenrolled into a Part D plan may
affirmatively decline Part D coverage or
change Part D plans.
In a related area, § 423.36(c) of the
proposed rule provided a SEP for fullbenefit dual eligible individuals that
permits them to change Part D plans at
any time. Separately, there already
exists a SEP for full-benefit dual eligible
individuals to enroll in or disenroll
from a Medicare Advantage plan at any
time, and this will be expanded to
include MA-PD plans. This SEP is
provided in operational guidance (see
section 30.4.4–5 of Chapter 2 of the
Medicare Managed Care Manual), in
accordance with section 1851(e)(4)(D) of
the Act, which gives us the authority to
provide Special Enrollment Periods for
exceptional circumstances. Taken
together, the PDP and MA-PD plan SEPs
mean a full-benefit dual eligible
individual may switch from Original
Medicare and a PDP into an MA-PD
plan and vice versa; from one PDP to
another; and from one MA-PD plan to
another MA-PD plan at any time.
We requested comment on two areas:
whether we or States should conduct
auto-enrollment, and how to address an
inherent conflict in the statute, whereby
the statute requires auto-enrollment of
full-benefit dual eligible individuals

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
into a Part D plan with a premium that
does not exceed the low-income
premium subsidy amount, but does not
speak to those instances in which an
individual is enrolled in an MA
organization whose premium for the
available MA-PD plan(s) exceeds the
low-income premium subsidy amount.
Except as otherwise provided below,
the final rule adopts the enrollment
rules for full-benefit dual eligible
individuals set forth in § 423.34(d) of
the propose rule.
Comment: Several commenters
supported CMS performing the autoenrollment function. They viewed it as
the most appropriate entity because it is
in the best position to randomly assign
beneficiaries to MA-PD plans or PDPs in
the region, and to establish links with
each MA-PD plan or PDP in each region,
thereby more efficiently auto-enrolling
individuals. Some commenters also
suggested that we consider adding an
enrollment broker to the process for
populations with special health care
needs.
A number of other commenters
recommended that States either be
required or have the option to perform
the auto-enrollment function, as they
view the States as having more readily
available data identifying dual eligible
individuals and a vested interest in
ensuring these individuals are enrolled
in appropriate Part D plans. This option
was also viewed as advancing care
coordination and ensuring continuity of
care. It was noted that these options also
present a disincentive for States to
maximize enrollment, since the phaseddown State contribution payments are
tied to the number of Part D eligible
individuals enrolled in Part D plans.
Commenters also acknowledged that, if
we were to afford States the option of
conducting the auto-enrollment
function, we would have to develop its
own systems for auto-enrollment in
States that lack the capacity to develop
such systems. Commenters supporting
this option felt strongly that we should
reimburse States for all of their costs
related to enrollment activities they are
required to perform.
Some commenters recommended that
an independent third party coordinate
the enrollment process. Those parties
could include State and local officials
and representatives of nonprofit
organizations specializing in care for
seniors. One also suggested that the
contracted agent would need to be
compliant with the Health Insurance
Portability and Accountability Act of
1996 (HIPAA) privacy rule and should
have no financial incentives regarding a
full-benefit dual eligible individual’s

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

assignment beyond the contract between
it and CMS.
Response: We agree with those who
commented that we, or a contractor on
our behalf, should perform the autoenrollment function because we can
better ensure consistent, timely
implementation. In addition, we would
not have to develop and implement a
separate administrative structure to
oversee auto-enrollment being
performed by some or all of the States.
Finally, it would likely be more cost
effective for us to have a single entity
perform auto-enrollment, rather than
pay 51 separate entities. For these
reasons, we will modify the final
regulation to specify that we will
conduct the auto-enrollment process.
At this time, we do not envision
contracting with an enrollment broker to
provide more intensive choice
counseling for beneficiaries subject to
auto-enrollment. Because the statute
makes us ultimately responsible for the
auto-enrollment process, we will, at
least initially, conduct it ourselves.
Instead of hiring a new third party, we
believe it would be more effective to
partner with existing stakeholders to
conduct broad-based outreach and
education; provide clear and
comprehensive information to
beneficiaries; and refer individuals to
either the 1–800–MEDICARE toll-free
line or to Part D plans for additional
information. However, if we decide in
the future to contract with an
independent enrollment broker, we
agree with the commenter that the entity
would need to be free of conflicts of
interest and comply with HIPAA
privacy rules. We note that any
delegation to a third party would make
the third party a business associate of
ours for HIPAA purposes, since the
entity would be performing a function
on behalf of us.
Comment: Many commenters
recommended that we define ‘‘random’’
to include auto-enrollment based on
beneficiaries’ particular drug needs,
pharmacy affiliation, or on their
classification as a special needs
population. Many commenters
expressed concerns about how random
assignment will impact individuals who
are on drug regimens on which they
have been previously stabilized. They
were concerned that these individuals
would be auto-enrolled in a ‘‘low-cost’’
plan that may not cover the drugs they
need. Without direct access to the
coverage they need, this population
would have no real choice but to switch
medications, even though changing
medications can be difficult and lead to
adverse health outcomes, reactions, and
so on.

PO 00000

Frm 00013

Fmt 4701

Sfmt 4700

4205

Several other commenters expressed
similar concerns about individuals who
reside in long-term care facilities. In
addition, some long-term care facilities
require residents to use a pharmacy
selected and contracted by the facility.
One commenter requested that we
define ‘‘random,’’ specifically detail
how we envision the random process
would work, and seek further public
comment.
Response: We share the commenters’
concerns with ensuring access to
necessary prescription drug coverage for
vulnerable populations. For ensuring
continued access to existing drugs
prescribed for an individual, please
refer to comments on § 423.120(b) of the
final regulation. For ensuring access to
long-term care facilities’ contracted
pharmacies, please refer to comments
on § 423.120(a) of the final regulation.
The systems challenges associated
with anything other than a random
process would be significant, and
possibly result in inappropriate
assignment or delayed implementation.
For example, we have drug utilization
data for Medicaid beneficiaries, but
there is a time lag in receiving those
data. Furthermore, we do not currently
have access to information about the
pharmacies that contract with long-term
care facilities. Finally, we realize that
pharmacy affiliation and particular drug
needs are only two of the variables that
impact a beneficiary’s choice of a Part
D plan. For example, a beneficiary may
also consider cost-sharing, formulary
structure, customer service and, in the
case of MA-PD plans, whether she or he
would want to receive all of her or his
Medicare benefits from one
organization.
Given these data limitations, and the
many and varied reasons for choosing a
Part D plan, we do not believe we are
in a position to make a judgment about
what is best for individual beneficiaries,
and decline to change the proposed
regulations. However, we will make
every effort to ensure that beneficiaries
and community organizations receive
enough information in time for them to
determine the appropriate plan for the
beneficiary. The SEP provided for fullbenefit dual eligible individuals in the
statute and in our final rule at
§ 423.38(c)(4) also ensures that they can
change plans to better accommodate
their pharmaceutical needs and
pharmacy affiliations.
Comment: One commenter
recommended that we establish a bid
process whereby PDPs with an expected
enrollment by full-benefit dual eligible
individuals that is higher than the
proportion in the total Medicare eligible
population in the relevant PDP region

E:\FR\FM\28JAR2.SGM

28JAR2

4206

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

automatically qualify for inclusion in
the auto-enrollment process. The
commenter further recommended that,
if such a plan has a monthly beneficiary
premium above the low-income
premium subsidy amount, we should
permit a ‘‘waiver’’ based on a subsidy or
payment of that excess premium by
CMS or another entity in order to reduce
the premium to an amount equal to or
below the low-income premium subsidy
amount.
Response: Those plans available for
purposes of auto-enrollment are ones
that have premiums at or below the lowincome premium subsidy amount. This
includes fallback plans in areas where
they exist. It is our intent to implement
the Part D program and adhere to the
statute as closely as possible, assuming
tenable options are available to do so. In
the case of PDPs that serve a
disproportionate share of full-benefit
dual eligible individuals, and whose
premium exceeds the low-income
premium subsidy amount, we believe
there are tenable options, that is, other
PDPs with premiums at or below the
low-income premium subsidy amount.
However, we note that risk-adjustment
should correct for the higher costs
incurred by plans with larger
proportions of full-benefit dual eligible
individuals.
Comment: A few commenters
recommended that we not limit the Part
D plans available for auto-enrollment to
just those plans with premiums below
the low-income premium subsidy
amount, as this limits full-benefit dual
eligible individuals to the ‘‘lowest cost’’
plans, which may offer a less generous
benefit. The commenters suggested that,
regardless of whether these individuals
enroll on their own or are auto-enrolled,
they should be permitted to enroll in
any plan and not be charged any
additional premium. At a minimum, a
beneficiary’s medical provider could
attest that a higher premium plan will
better meet his or her medical needs and
therefore be allowed to enroll in a
higher premium plan without the added
premium.
Response: We appreciate the
commenters’ concern that full-benefit
dual eligible individuals be able to
enroll in the plan best suited for them,
not just ‘‘low cost’’ plans. We note that
a full-benefit dual eligible individual is
free to enroll in any Part D plan during
the initial enrollment period or annual
coordinated election period.
For auto-enrollment, however, section
1860D–1(b)(1)(C) of the Act only permit
us to, auto-enroll full-benefit dual
eligible individuals into those plans
with premiums at or below the lowincome premium subsidy amount. In

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

addition, those full-benefit dual eligible
individuals randomly auto-enrolled in a
particular plan may still choose another
plan pursuant to a special enrollment
period.
In addition, as we do not have the
authority under section 1860D–
14(a)(1)(A) of the Act to increase the
low-income premium subsidy amount
(as defined under section 1860D–
14(b)(2)(B) of the Act), full-benefit dual
eligible individuals who elect to enroll
in a plan with a premium exceeding the
low-income premium subsidy amount
must pay the difference in premium. We
are also precluded under sections
1860D–13(a)(1)(F) and 1854(c) of the
Act from requiring or even permitting
Part D plans from waiving any premium
in excess of the premium subsidy
amount, including allowing MA-PD
plans to use rebate dollars to reduce the
premium only for this portion of their
enrolled population.
Comment: We received numerous
comments related to the timing of the
auto-enrollment process for full-benefit
dual eligible individuals. Commenters
identified the possibility of a gap in
coverage for some of those individuals
if the auto-enrollment did not occur
until the close of the Initial Enrollment
Period on May 15, 2006, since Medicaid
coverage of Part D drugs ends several
months earlier, on January 1, 2006. They
proposed that we require autoenrollment of these individuals to be
completed prior to Medicaid coverage
ending on December 31, 2005. Some
commenters recommended that the
process be completed as early as
November 15, 2005, and one commenter
suggested starting the 2005 Initial
Enrollment Period for full-benefit dual
eligible individuals prior to November
15, 2005. Another commenter
recommended that auto-enrollment
precede Part D eligibility by 6 months,
and that Medicaid coverage of Part D
drugs be continued until autoenrollment can be done.
Response: We did not intend to
implement a process that would create
a gap in drug coverage for full-benefit
dual eligible individuals. We do not
believe that the Congress intended for
such a gap to occur. Therefore, we will
modify the final rule so that the autoenrollment of these individuals will
begin as soon as Part D plans with
premiums at or below the low-income
premium subsidy amount are known
prior to January 1, 2006. We will also
modify the final rule to provide that
those full-benefit Medicaid individuals
who become eligible for Medicare after
January 1, 2006, will be enrolled as soon
as their Medicare Part D eligibility is
determined. For the suggestion to start

PO 00000

Frm 00014

Fmt 4701

Sfmt 4700

the 2005 Initial Enrollment Period for
full-benefit dual eligible individuals
before November 15, 2005, we are
precluded from doing so, as this date is
explicitly identified in section 1860D–
1(b)(2)(A) of the Act as the date upon
which enrollment in Part D may
commence.
Comment: Many other commenters
suggested that we delay implementation
of the Part D program for full-benefit
dual eligible individuals by at least five
or six months, and some recommended
a year’s delay, although the commenters
recognized that such a delay would
require a legislative change. The
commenters’ concern was based on the
limited time to transition drug coverage
for these full-benefit dual eligible
individuals from Medicaid to Medicare.
The commenters expressed concern
about the feasibility of identifying,
educating, and enrolling the population
of full-benefit dual eligible individuals
in time for a smooth transition of drug
coverage. Some commenters highlighted
the need to ensure adequate time for
physicians and patients to navigate
administrative barriers and change
medications to comply with
formularies. One commenter suggested
Medicare beneficiaries who currently
participate in Medicaid buy-in programs
(that is, qualified Medicare beneficiaries
(QMB), special low-income beneficiaries
(SLMB), and qualified individuals (QI1))
be permitted to keep Medicaid drug
coverage after Part D starts.
A few commenters recommended
that, assuming Part D coverage begins
for full-benefit dual eligible individuals
on January 1, 2006, Medicaid coverage
of Part D drugs be extended past
December 31, 2005, and continued until
such time as full-benefit dual eligible
individuals are enrolled in Part D.
One commenter recommended that
full-benefit dual eligible individuals
who are American Indians or Alaska
Natives (AI/AN) be exempt from Part D
and continue to be eligible for Medicaid
drug coverage after January 1, 2006. The
commenter argued that this would
prevent loss of revenues to pharmacies
operated by Indian Health Services
(IHS), Tribal Clinics, and Urban Indian
Clinics, who may receive lower
payments from Part D plans than they
currently receive from Medicaid, and
eliminate barriers for this population.
Response: As the commenters
correctly point out, a delay in the
implementation of the Part D program,
including auto-enrollment for fullbenefit dual eligible individuals would
require a change to the statute.
Similarly, extending Medicaid coverage
of prescription drugs covered under Part
D would also require a legislative

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
change. Absent such changes, we cannot
delay implementation, extend Medicaid
coverage of Part D drugs, nor can we
exclude full-benefit dual eligible
individuals who are AI/AN, or
participants in Medicaid buy-in
programs from Part D.
Comment: A couple of commenters
requested clarification about the
circumstances under which a
beneficiary may affirmatively decline
participation in Part D. They expressed
concern that individuals with
diminished mental faculties may not
fully understand the impact of their
decision, and that States would likely
bear additional costs associated with
full-benefit dual eligible individuals
whose health deteriorates due to their
failure to take necessary medications.
One commenter urged that States be
able to obtain FFP to provide
prescription drug coverage in these
instances. Another commenter asserted
that permitting a full-benefit dual
eligible individual to affirmatively
decline enrollment in Part D contradicts
numerous statutory and regulatory
provisions that require this population’s
enrollment in Part D. One commenter
urged CMS to make disenrollment
contingent upon selection of another
Part D plan to ensure there is no lapse
in coverage. Finally, one commenter
suggested expanding the ability to
affirmatively decline enrollment in Part
D to Medicare beneficiaries who are not
auto-enrolled.
Response: The Congress specified that
prescription drug coverage under this
program is voluntary, and section
1860D–1(b)(1)(C) of the Act specifically
stipulates that auto-enrollment does not
prevent a full-benefit dual eligible
individual from declining or changing
such enrollment. Absent any legislative
change, we cannot intervene with an
individual’s right to decline coverage.
Nor can we adopt the suggestion to
permit Federal financial participation
(FFP) for State Medicaid agencies that
choose to provide drug coverage for fullbenefit dual eligible individuals who
affirmatively decline auto-enrollment.
Section 1935(d)(1) of the Act stipulates
that no FFP is available for any Part D
drugs or cost-sharing for Part D drugs for
full-benefit dual eligible individuals
who are eligible for Part D, even if they
are not enrolled in a Part D plan.
However, we will be making every effort
to ensure that beneficiaries and
community organizations have
sufficient information to assist
individuals in making the most
appropriate choices about participating
in Part D.
Concerning the comment that we
should make disenrollment from a Part

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

D plan contingent upon enrolling in
another Part D plan to prevent a
coverage gap for full-benefit dual
eligibles, we decline to do so in
regulation, but will continue to work
develop strategies to prevent a coverage
gap in this instance.
We decline to expand the ability to
affirmatively decline Part D enrollment
to individuals who are not auto-enrolled
or for whom we do not facilitate
enrollment into a Part D plan. This
population is comprised of those who
are not deemed or determined eligible
for the low-income subsidy. If these
individuals do not want Part D
coverage, they can simply choose not to
enroll in a Part D plan.
Comment: One commenter suggested
that there should be flexibility for CMS
to change the plan into which a
beneficiary has been auto-enrolled
should the plan no longer meet the
needs of the enrollee.
Response: We agree that it would be
prudent to retain the flexibility to enroll
an individual in subsequent years in a
different plan from the one into which
we originally enrolled the individual,
and have modified the final rule to
provide for this. We note that this will
require an exception to the maintenance
of enrollment provision in § 423.32(e),
so we have modified the final rule to
provide for one.
We envision this may only be
necessary in certain limited
circumstances. For example, we may
want to consider doing this if the plan’s
premium in a subsequent year exceeded
the low-income premium subsidy
amount. We will ensure that
beneficiaries are fully notified, and have
the option to remain in their original
plan. We will examine the need for this
as the program evolves and provide
operational guidance should we
implement it.
Comment: A number of commenters
responded to our request in the
preamble for solutions to an inherent
conflict in the statute. In this instance,
the statute requires auto-enrollment of
full-benefit dual eligible individuals
into a Part D plan with a premium at or
below the low-income premium subsidy
amount. Section 423.34(d) of the
proposed rule stipulated that those in an
MA-only plan would be auto-enrolled
into an MA-PD plan in the same
organization that has a premium that
does not exceed the low-income
premium subsidy amount. However,
there may be instances in which an
individual is enrolled in an MA-only
plan offered by an MA organization, and
all the MA-PD plans in that
organizations have premiums that

PO 00000

Frm 00015

Fmt 4701

Sfmt 4700

4207

exceed the low-income premium
subsidy amount.
We note that most MA enrollees will
be deemed to be enrolled into an MA­
PD plan in accordance with
§ 422.66(e)(2) and (e)(3). However,
deeming does not address those who
elect an MA-only plan that does not
offer any drug coverage in 2005, nor
qualified prescription drug coverage
thereafter.
Several commenters supported autoenrolling these full-benefit dual eligible
individuals into an MA-PD plan offered
by the same organization with the
lowest Part D premium, even if it was
higher than the low-income premium
subsidy amount. This would provide
seamless continuation of their Medicare
benefits through the same organization.
Commenters noted that these
individuals retain the right to decline
Part D coverage, and have a SEP that
permits them to change PDPs or MA-PD
plans at any time.
One commenter noted that excluding
full-benefit duals from auto-enrollment
in an MA-PD plan with a premium
higher than the low-income premium
subsidy amount would give those MA
plans an unfair advantage by removing
from their risk pool full-benefit dual
eligible individuals, who tend to have
higher drug utilization.
Response: We agree with commenters’
concerns about ensuring continuity of
care through the same MA organization,
if possible. However, as we discussed in
the preamble to the proposed regulation,
there is an inherent statutory conflict
that would seem to preclude using autoenrollment authority to accomplish this.
Section 1860D–1(b)(1)(C) of the Act
directs the Secretary to auto-enroll fullbenefit dual eligible individuals who do
not enroll in a PDP or MA-PD plan on
a random basis into a PDP with a
premium at or below the low-income
premium subsidy amount; it does not
identify an MA-PD plan as an entity into
which an individual could be autoenrolled.
General principles of statutory
interpretation requires us to reconcile
two seemingly conflicting statutory
provisions rather than allowing one
provision to effectively nullify the other
provision. We had proposed to resolve
this by interpreting the reference to
‘‘prescription drug plans’’ in section
1860D–1(b)(1)(C) of the Act as including
both PDPs and MA-PD plans, thereby
allowing auto-enrollment of an MA fullbenefit dual eligible individual into an
MA-PD offered by the same organization
offering his or her MA plan if the
premium for such plan did not exceed
the low-income premium subsidy
amount.

E:\FR\FM\28JAR2.SGM

28JAR2

4208

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

Upon further consideration, we
believe there continue to be legal
concerns as to whether we have the
authority to auto-enroll full-benefit dual
eligible individuals into an MA-PD
plan. Rather than rely on autoenrollment authority under section
1860D–1(b)(1)(C) of the Act to ensure
continuity of Part D coverage for fullbenefit dual eligible individuals
enrolled in MA-only plans, we instead
will rely on our general authority to
establish enrollment procedures under
section 1860D–1(b)(1)(A) of the Act to
establish a facilitated enrollment
process that substantially fulfills the
intent of ensuring no prescription drug
coverage gap for these individuals.
We will therefore facilitate enrollment
into Part D for full-benefit dual eligible
individuals enrolled in a MA plan that
does not offer qualified prescription
drug coverage by assigning them to an
MA-PD plan with the lowest premium
offered by the same MA organization,
even if the plan’s MA monthly
prescription drug beneficiary premium
exceeds the low income premium
subsidy amount. We will inform them
in advance of this assignment. If the
beneficiary fails to affirmatively elect an
alternative plan or declines enrollment
in Part D, she or he will be enrolled into
the plan into which she or he has been
assigned. In this instance, a
beneficiary’s silence would be deemed
consent to the enrollment choice we are
making on their behalf. We note that the
right to affirmatively decline in
§ 423.34(e), on affirmatively declining
Part D enrollment, and the Special
Enrollment Period in § 423.38(c)(4),
apply equally to all full-benefit dual
eligibles, whether they are auto-enrolled
or have their enrollment facilitated.
In the case of a full-benefit dual
eligible for whom we facilitate
enrollment into an MA-PD plan with a
premium higher than the low-income
premium subsidy amount, we
acknowledge that this creates a new
financial obligation for the enrollee to
pay the balance of the monthly MA
monthly prescription drug beneficiary
premium not covered by the lowincome premium subsidy amount.
However, this option best preserves
informed enrollee choice, is consistent
with statutory intent, respects the
beneficiary’s initial choice to enroll in
an MA plan, and ensures continuity of
prescription drug coverage. These
individuals will have information about
other plan choices available and retain
their right to a Special Enrollment
Period to choose another plan at any
time, as provided by section 1861D–
1(b)(3) of the Act for PDPs, and section
1851(e)(4)(D) of the Act and section

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

30.4.4–5 of Chapter 2 of the Medicare
Managed Care Manual for MA-PD plans.
Comment: A few commenters
generally supported auto-enrolling fullbenefit dual eligible individuals into an
MA-PD plan, but urged CMS to find a
solution that would ensure no
additional costs were imposed on
beneficiaries. Some of the commenters
that supported auto-enrollment into the
MA-PD plan with the lowest Part D
premium provided suggestions as to
how to minimize the financial impact
on beneficiaries. A few suggested that
for those who are institutionalized, the
excess premium should be considered
an incurred medical expense and
deducted from their monthly share of
cost to the facility. For noninstitutionalized beneficiaries, in States
with State Pharmacy Assistance
Programs (SPAPs), SPAPs should be
allowed to pay the balance. For fullbenefit dual eligible individuals who are
medically needy, the balance should be
considered an incurred medical expense
contributing towards their spend-down.
Otherwise, individuals should be
counseled about the premium
discrepancy and about the right to
disenroll from an MA plan and enroll in
Original Medicare with a PDP.
Response: We appreciate these
suggestions for minimizing the financial
impact on beneficiaries. We intend to
highlight the impact of our facilitating
enrollment into an MA-PD plan with a
premium higher than the low-income
premium subsidy amount to these
beneficiaries and advise them of their
ability to switch plans. We note that
under Medicaid, whatever portion of the
premium the individual pays would be
an incurred medical expense, including
any portion of the premium that is paid
by the SPAP. Since incurred medical
expenses are deducted from income
when determining patient liability for
an institutionalized individual, and are
deducted from income for medically
needy spend-down purposes, the
commenter’s suggestions correctly
characterize how Medicaid would treat
any premium difference paid by the
individual. The commenter is also
correct in noting that SPAPs will be
allowed to pay the balance for their
enrollees, but we note this is an option
for all enrollees of an SPAP, not just
non-institutionalized enrollees. Since
these options are already permitted
under the regulatory language in the
proposed rule, we will not modify the
regulation further to specify them.
Comment: One commenter suggested
that we permit MA-PD plans to waive
the portion of their premium above the
low-income premium subsidy amount.
The commenter suggested that explicit

PO 00000

Frm 00016

Fmt 4701

Sfmt 4700

authorization by CMS would be a
contract amendment, not an inducement
to a beneficiary to enroll, which would
ensure that the waiver of the excess
premium does not implicate the Federal
anti-kickback rules or be considered
disparate treatment.
Response: We appreciate the intent of
the commenter’s suggestion. However,
we are precluded from permitting MA­
PD plans to waive a portion of the Part
D premium for a subset of their
enrollees by section 1854(c) of the Act,
which requires uniform premiums for
all enrollees of an MA plan.
Comment: A few commenters urged
CMS to prohibit auto-enrollment of fullbenefit dual eligible individuals into
MA-PD plans. Instead, these MA
enrollees should be auto-enrolled into a
PDP for their Part D benefit. The
commenters note that these
beneficiaries could always switch to an
MA-PD plan.
Response: Section 1861D–
1(a)(1)(B)(ii) of the Act specifies that,
with limited exceptions, individuals in
an MA plan may not also enroll in a
PDP. The only exceptions are those
enrolled in a MSA plan, or in a MA
private fee-for-service plan or cost-based
HMO or CMP that does not offer
qualified prescription drug coverage,
may enroll in a PDP. Thus, autoenrolling these individuals into a PDP
would require us to also disenroll them
from their MA plan, which could be
inconsistent with our current MA
requirements § 422.66(e), which provide
that an individual who elects an MA
plan is considered to have continued to
have made that election until he or she
voluntarily changes that election, or the
plan is discontinued or no longer serves
the service area.
Comment: Finally, one commenter
suggested that if no MA-PD plan is
available, or if the Part D premium of
the available MA-PD plan exceeds the
low-income premium subsidy amount,
CMS should auto-enroll these
beneficiaries into another organization’s
MA-PD plan whose premium does not
exceed the low-income premium
subsidy amount.
Response: For the concern that no
MA-PD plan would be available, we
note that section 1860D–21(a) of the Act
requires all MA organizations to offer at
least one MA-PD plan.
Involuntarily disenrolling the
individual from his or her MA plan, and
auto-enrolling him or her into another
MA-PD plan offered by another MA
organization, is inconsistent with MA
requirements at § 422.66(e) described
above.
Comment: A few commenters urged
expanding Part D auto-enrollment in the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
case of full-benefit dual eligible
individuals who are in an organization’s
Medicaid managed care product, but
currently receive Part A and B benefits
through Original Medicare. Specifically,
the commenters recommended that
these beneficiaries be auto-enrolled into
an MA-PD plan that is offered under
common ownership and control of the
organization offering the Medicaid
managed care plan.
Response: Please refer to responses to
comments on § 422.66(d) in Title II of
the final regulation for a discussion on
this issue.
Comment: A few commenters
proposed that, where a full-benefit dual
eligible individual in Original Medicare
will be auto-enrolled into a PDP that is
affiliated with an MA Special Needs
Plan, CMS auto-enroll the individual
into the MA Special Needs Plan for their
Part A and B benefits, as a way to
promote better overall coordination of
care. To preserve the beneficiary choice,
the commenter suggested the regulation
provide an opportunity for the
individual to ‘‘opt out’’ within some
specified period of time (for example, 90
days).
Response: The statute prohibits
beneficiaries who have Part D coverage
through a PDP from getting their
Medicare A and B coverage through an
MA-only plan. As a result, we decline
to make the suggested change.
Comment: One commenter asked
CMS to clarify that, if a full-benefit dual
eligible individual is auto-enrolled into
an MA-PD plan with a premium higher
than the low-income premium subsidy
amount, that the State Medicaid
program would not be obliged to pay the
balance on behalf of the beneficiary.
Response: We confirm that the State
Medicaid agency has no obligation to
pay any Part D premium in excess of the
low-income premium subsidy amount.
Further, section 1905(a) of the Act,
which provides Federal medical
assistance for Medicare cost-sharing (as
defined in section 1905(p)(3)(A) of the
Act), does not include Part D premiums.
Comment: A few commenters
recommended that we consider
establishing a process for automatically
enrolling or at least facilitating the
enrollment into Part D plans all
individuals deemed eligible for the full
low-income subsidy. In effect, this
would expand auto-enrollment to
individuals in Medicare Savings
Programs. These are individuals for
whom State Medicaid agencies pay for
Medicare cost sharing, but who are not
eligible for comprehensive Medicaid
benefits and thus are not considered
full-benefit dual eligible individuals.
They include QMB, SLMB, and QI1. To

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

the extent that we accept this
recommendation, the commenters
suggested we also broaden the SEP
provision to cover any full subsidy
eligible individual who is auto-enrolled
in a Part D Plan.
A few commenters advocated
expanding auto-enrollment even further
to all those who receive the low-income
subsidy. This would include not only
those deemed eligible for the subsidy,
but also those who have to apply and be
determined eligible. Auto-enrollment
would ensure that these individuals are
not subject to a late enrollment penalty.
Response: We agree that there are
compelling reasons to promote Part D
enrollment of all individuals deemed or
determined eligible for the low-income
subsidy. These individuals typically are
less healthy and often face barriers to
care. Effective medication management
and prescription drug coverage can lead
to reduced inpatient hospital
expenditures, making it more costeffective to provide drug coverage.
Facilitating enrollment into Part D
would promote access to drug coverage
for these beneficiaries by ensuring that
they have drug coverage starting in
2006, while also preserving the
voluntary nature of enrollment in Part
D. Doing so would also ensure that
beneficiaries with limited means would
not be liable for a late enrollment
penalty for failing to enroll in Part D
when first eligible.
We intend to pursue many steps to
assist beneficiaries, particularly lowincome beneficiaries, in taking
advantage of the new Medicare drug
coverage. Such steps could include
facilitating enrollment into Part D for
those beneficiaries. We will provide
details in operational guidance to be
issued shortly after the publication of
the final regulation, including details on
the population for whom we will
facilitate enrollment. By facilitating
enrollment, we mean giving
beneficiaries an opportunity to choose a
Part D plan first; if they do not choose,
we would notify them that we intend to
facilitate their enrollment into a specific
plan prospectively. If the beneficiary
fails to affirmatively elect an alternative
plan or declines enrollment in Part D by
a given date, she or he would be
enrolled into the plan into which she or
he has been assigned. In this instance,
a beneficiary’s silence would be deemed
consent to the enrollment choice we are
making on their behalf. If we facilitate
enrollment in this manner, we would
likely follow rules for assigning
beneficiaries to Part D plans similar to
those for the auto-enrollment and
facilitated enrollment process for fullbenefit dual eligibles: MA enrollees

PO 00000

Frm 00017

Fmt 4701

Sfmt 4700

4209

would be enrolled into an MA-PD plan
with the lowest Part D premium;
Original Medicare beneficiaries would
be enrolled in a PDP with a Part D
premium that does not exceed the lowincome premium subsidy amount, and,
if there is more than one such PDP
available, the individual would be
randomly enrolled into one of the plans
available. In establishing a process for
this facilitated enrollment, we would
rely upon discretion afforded the
Secretary under section 1860D–
1(b)(1)(A) of the Act to establish
enrollment processes for Part D eligible
individuals. Similarly, we would extend
some of the same protections afforded
the full-benefit dual eligible population
who are auto-enrolled to those whose
enrollment we facilitate. These
protections would include a Special
Enrollment Period, the right to
affirmatively decline Part D enrollment,
and where possible, facilitating
enrollment into plans whose premiums
do not exceed the low-income premium
subsidy amount.
Comment: One commenter suggested
expanding auto-enrollment to PACE
enrollees, that is, CMS auto-enroll them
into their PACE organization for
purposes of Part D coverage effective
January 1, 2006, unless the PACE
enrollee makes another enrollment
choice. PACE organizations would
provide their enrollees an opportunity
to opt out of enrollment in Part D (and,
as a result, out of the PACE
organization).
Response: We agree that PACE
enrollees should not be required to take
any additional steps to obtain their Part
D benefit through their PACE
organization. Individuals who enroll in
a PACE organization elect to get all their
Medicaid (if eligible for Medicaid) and
Medicare benefits through the PACE
organization. As noted in response to a
similar comment on § 423.32 of the final
regulation, we will modify the final
regulation to deem individuals enrolled
in a PACE organization as of December
31, 2005 to be enrolled with that PACE
organization for their Part D benefit as
of January 1, 2006. This precludes the
need to expand auto-enrollment to
PACE enrollees, so we decline to make
that change.
Comment: One commenter noted that
no provision was made for autoenrollment of full-benefit dual eligible
individuals enrolled in Medicare costbased HMO or CMPs. The commenter
suggested that for full-benefit dual
eligible individuals enrolled in a costbased HMO or CMP, CMS auto-enroll
these individuals into the cost-based
HMO or CMP for Part D benefits if the
cost-based HMO or CMP offers Part D,

E:\FR\FM\28JAR2.SGM

28JAR2

4210

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

even if the Part D premium is higher
than the low-income premium subsidy
amount. If the cost-based HMO or CMP
does not offer Part D benefits, the
commenter recommends auto-enrolling
the beneficiary into a PDP.
Response: We agree that we should
ensure that full-benefit dual eligible
individuals, and potentially others
eligible for the low-income subsidy who
are enrollees of a cost-based HMO or
CMP obtain Part D benefits. As noted in
response to a similar comment on
§ 423.32 of the final regulation, we will
modify the final regulation to specify
that all individuals enrolled in a costbased HMO or CMP that offers any
prescription drug coverage as of
December 31, 2005, will be deemed to
be enrolled in the cost-based HMO or
CMP for Part D benefits as of January 1,
2006, if the cost-based HMO or CMP
opts to provide Part D benefits, and
regardless of whether the Part D
premium exceeds the low-income
subsidy amount.
We believe the same legal concerns
noted above for auto-enrolling fullbenefit dual eligible individuals into
MA-PD plans arise for auto-enrolling
them into a cost plan HMO or CMP. As
a result, we decline to expand autoenrollment a suggested by this
commenter. Instead, we will use a
facilitated enrollment process discussed
above to accomplish substantially the
same end. We will facilitate the
enrollment of full-benefit dual eligible
individuals enrolled in a cost plan HMO
or CMP that offers Part D benefits and
who fail to enroll in a Part D plan into
the Part D benefits offered by their cost
plan HMO or CMP. If the cost plan
HMO or CMP does not offer Part D
benefits, the individual will be enrolled
in a PDP. We may similarly facilitate the
enrollment of other cost plan enrollees
eligible for the low-income subsidy who
fail to elect a Part D plan into the Part
D benefit offered by their cost plans.
Comment: One commenter requested
clarification as to whether autoenrollment into a PDP will only occur
for Medicare beneficiaries who receive
comprehensive health care benefits (full
hospital and physician services) from

both Medicare and Medicaid, or
whether auto-enrollment also applies to
Medicare beneficiaries that receive
pharmacy-only benefits through
Medicaid.
Response: The final rule will limit
auto-enrollment to only those dual
eligible individuals who receive
comprehensive health benefits from
both Medicare and Medicaid. As noted
above, we may facilitate enrollment of
all others deemed or determined eligible
for the low-income subsidy into Part D
plans. To the extent that a Medicare
beneficiary with pharmacy-only
Medicaid benefits is in the population
whose enrollment we facilitate, we
would facilitate that individual’s
enrollment into a Part D plan.
Comment: One commenter
recommended that we explore autoenrolling residents of long term care
facilities who are not full-benefit dual
eligible individuals, and permitting
these beneficiaries to disenroll or
choose another Part D plan. The
commenter was especially concerned
about residents who lack the cognitive
capacity to select a PDP and who do not
have a designated surrogate decisionmaker in place.
Response: Generally, enrollment in
Part D is voluntary. Section 1860D–
1(b)(1)(C) of the Act provides for autoenrollment of full-benefit dual eligible
individuals. As noted above, we may
facilitate enrollment of others deemed
or otherwise determined eligible for the
low-income subsidy into Part D plans.
To the extent that a resident of a long
term care facility is in the population
whose enrollment we facilitate, we
would facilitate that individual’s
enrollment into a Part D plan.
Since the Act limits auto-enrollment
to full-benefit dual eligible individuals,
we decline to auto-enroll long-term care
residents who do not receive the lowincome subsidy. While we acknowledge
that access to prescription drug coverage
is critical for this population, we believe
they generally have the resources and
support to make timely enrollment
decisions. We will, however, continue
to explore options regarding enrollment
for all individuals in long-term care
facilities.

Population

Enrollment Rules

General Medicare Population

VerDate jul<14>2003

18:11 Jan 27, 2005

Comment: A number of commenters
urged CMS to permit SPAPs to act as
authorized representatives and enroll
some or all of the beneficiaries they
serve into the SPAP’s preferred PDP.
These beneficiaries should be permitted
to decline enrollment in the SPAP’s
preferred PDP or to change to another
Part D plan.
Response: With regard to the issue of
authorized representatives, we defer to
State law, as discussed in response to
comments on § 423.32. However, it is
important to note that SPAPs that act as
the authorized representative for the
individual must also comply with the
nondiscrimination provisions at
§ 423.464(e). Please see responses to
related comments in subpart J.
Comment: One commenter noted that
it appears that a full-benefit dual
eligible individual cannot enroll in an
MA-PD plan if the individual is not
already an MA enrollee. The commenter
urged that MA-PD plans that bid at or
below the low-income premium subsidy
amount should be an enrollment option
for all full-benefit dual eligible
individuals.
Response: During the Part D initial
enrollment period that starts November
15, 2005, full-benefit dual eligible
individuals who are in Original
Medicare are free to change to an MA­
PD plan. Further, we have established in
our operational guidance a Special
Enrollment Period (SEP) that permits
full-benefit dual eligible individuals to
enroll in and disenroll from an MA plan
at any time, and will extend this SEP to
MA-PD plans. This will ensure that MA­
PD plans are an option for all fullbenefit dual eligible individuals.
As indicated previously, any
individual enrolled in a PACE
organization as of December 31, 2005
will be deemed to be enrolled with that
organization for their Part D benefit as
of January 1, 2006.
The chart below provides a summary
of the enrollment rules for all
beneficiaries, including those with and
without the low-income subsidy, in
accordance with § 423.32, § 423.34, and
§ 422.66.

(1) A beneficiary who chooses to enroll a Part D plan must do so as fol­
lows:
Original Medicare ➜ Original Medicare with separate PDP
MA Plan without drug coverage ➜ MA-PD plan
Medical Savings Account (MSA) Plan ➜ MSA with separate PDP
PFFS with Part D ➜ PFFS with Part D
Private Fee-For-Service Plan (PFFS) without Part D ➜ PFFS with sepa­
rate PDP
Cost Plan with Part D ➜ Cost plan Part D or cost plan with separate
PDP

Jkt 205001

PO 00000

Frm 00018

Fmt 4701

Sfmt 4700

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Population

4211

Enrollment Rules
Cost Plan without Part D ➜ Cost Plan with separate PDP
(2) A beneficiary enrolled in an entity that offers any drug coverage in
2005, CMS deems him or her enrolled as follows* :
MA Plan ➜ MA-PD Plan
Cost Plan ➜ Cost Plan with Part D
PACE Organization ➜ PACE Organization
(3) On a case-by-case basis, CMS may allow an MA organization to
process ‘‘seamless’’ enrollments into the organization’s MA-PD plan if
individuals are enrolled in a health plan offered by that MA organiza­
tion that includes prescription drug coverage upon their entitlement to
Medicare.

Full-Benefit Dual Eligible Beneficiaries

(1) A beneficiary who chooses to enroll in a Part D Plan follows the
same rules as above; otherwise CMS auto-enrolls or facilitates enroll­
ment for him or her as follows:
Original Medicare ➜ PDP
MSA Plan ➜ PDP
PFFS Plan without Part D ➜ PDP
Cost Plan with Part D ➜ Cost plan with Part D
Cost Plan without Part D ➜ PDP
MA-Only Plan ➜ MA-PD Plan
(2) For a beneficiary enrolled in an entity that offers any drug coverage
in 2005, CMS deems him or her enrolled as follows:
MA Plan ➜ MA-PD Plan
Cost Plan ➜ Cost Plan with Part D
PACE Organization ➜ PACE Organization
(3) On a case-by-case basis, CMS may allow an MA organization to
process ‘‘seamless’’ enrollments into the organization’s MA-PD plan if
individuals are enrolled in a health plan offered by that MA organiza­
tion that includes prescription drug coverage upon their entitlement to
Medicare.

* Those in an MA Plan without any drug coverage in 2005 will not be deemed into an MA-PD plan, but instead must actively choose one if
they want Part D benefits.
** We may facilitate enrollment for other beneficiaries eligible for the low income subsidy; if so, we would likely follow these same rules.
For additional detail, please see discussion on:
§ 423.32—Beneficiary’s choice
§ 422.66(d)(5)—‘‘Seamless’’ enrollment on case-by-case basis
§ 422.66(e)(2)–(3)—Deemed enrollment in 2005
§ 423.34—Auto-enrollment and facilitated enrollment

4. Disenrollment process (§ 423.36)
Section 1860D–1(b)(1)(A) of the Act
authorizes us to establish a process to
allow disenrollment from prescription
drug plans. In the proposed rule, we
outlined the rules for a Part D eligible
individual who wishes to change or
discontinue an enrollment during
applicable enrollment periods,
including filing a disenrollment with
the PDP directly or enrolling in another
PDP.
While we initially envision a paper
disenrollment process, we retain the
flexibility for other secure and
convenient mechanisms that we may
approve in the future. Any such
mechanism will be available at the
option of each PDP sponsor. We believe
it is important to clarify that, as other
mechanisms are approved and
implemented, we will require all PDPs
offer a minimum standard process,
which at this time would be a paper
process, along with any optional
election mechanism available to
prospective enrollees and plan members
in conjunction with the paper process.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

In the future, as technology evolves,
another process may be a more
appropriate minimum standard. Except
as provided below, the final rule adopts
the disenrollment rules set forth at
§ 423.42 of the proposed rule.
Comment: One commenter asked that
we clarify whether an enrollment in a
different PDP would automatically
disenroll the beneficiary from his or her
previous PDP effective the first day of
enrollment in a new PDP and asked who
is responsible for that notification.
Response: We envision creating a
process similar to that created for the
MA program, under which an
individual who is eligible to enroll in
another PDP will automatically be
disenrolled from the previous PDP upon
enrollment in the new PDP. The PDP to
which the individual submits an
enrollment is required to provide a
notice of acceptance or denial, as
provided in § 423.32(d). We will notify
the previous PDP of the disenrollment
and that PDP will inform the individual
that he or she has been disenrolled. As
for the specifics of the notice

PO 00000

Frm 00019

Fmt 4701

Sfmt 4700

requirements, we will issue guidance to
PDPs following the publication of this
rule.
Comment: One commenter requested
that we clarify in the regulations that
proper beneficiary protections for
retroactive disenrollments are in place
for beneficiary requests that are made
but not properly acted upon.
Response: We will treat an
individual’s request for disenrollment
that was made but not properly acted
upon as if the disenrollment had
properly occurred. We will provide
guidance to PDPs as to how to handle
the processing of such requests,
including proper notification to the
beneficiary.
Comment: One commenter asked
CMS to address the issue for those
retirees who enroll in both a PDP and
the employer sponsored plan due to
their confusion over the variety of new
coverage options. The commenter
indicated that this not only results in
duplicative coverage and unnecessary
premium costs. In addition, the
commenter was concerned because

E:\FR\FM\28JAR2.SGM

28JAR2

4212

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

many retirees may not be aware that a
consequence of enrolling in Part D may
be the discontinuation of their employer
group benefits, often permanently
prevented from ever being able to rejoin
the group once he or she enrolls in other
coverage, such as Part D. One
commenter requested that we allow for
retroactive disenrollment from Part D
and refund of the Part D premiums for
these retirees who enrolled by mistake
into a PDP.
Response: We recognize that during
the initial enrollment period that some
retirees may be confused about how
their employer-based coverage may
coordinate with Part D coverage. While
we feel that establishing a retroactive
disenrollment process specifically for
this reason would generally be
inappropriate, we can establish a
process in which we would work with
employer group sponsors, PDPs and
MA-PDs to educate beneficiaries prior to
open enrollment and at the time of
enrollment. In addition, we intend to
establish a process for the PDPs and
MA-PDs to verify an enrollment request
for those individuals who have been
identified to CMS as having been
claimed by an employer group sponsor
to receive the employer based subsidy.
We will also include information in
beneficiary education and enrollment
materials targeted to those individuals
who already have other prescription
drug coverage to provide assistance in
determining whether enrollment in Part
D would be appropriate for that
individual. We will issue operational
guidance on this process shortly
following publication of the final rule.
5. Part D Enrollment Periods (§ 423.38)
In the proposed rule, as directed by
the MMA, we established three coverage
enrollment periods: (1) the initial
enrollment period (IEP); (2) the annual
coordinated election period (AEP); and
(3) SEPs. Generally, in accordance with
section 1860D–1(b)(2)(B) of the Act, the
IEP for Part D is the same as the initial
enrollment period established for Part B.
In addition, as part of the
implementation of the Part D program,
and in accordance with section 1860D–
1(b)(2)(A) of the Act, we have
established an initial enrollment period
for Part D from November 15, 2005 until
May 15, 2006 for those individuals who
are already eligible to enroll in a Part D
plan as of November 15, 2005.
In accordance with section 1860D–
1(b)(1)(B)(iii) of the Act, the AEP for
Part D is concurrent with the annual
coordinated election period for the MA
program under section 1851(e)(3) of the
Act. It is during this annual period in
which all PDP plans must open

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

enrollment to Medicare beneficiaries.
For coverage beginning in 2006, the
annual coordinated election period
begins on November 15, 2005 and ends
on May 15, 2006. As a result, the initial
enrollment period for individuals who
are eligible to enroll in a Part D plan as
of November 15, 2005 and the annual
coordinated election period will run
concurrently during this time frame. In
accordance with section
1851(e)(3)(B)(iv) of the Act,
§ 423.36(b)(2) of our proposed rule
provides that, for 2007 and subsequent
years, the annual coordinated election
period will be November 15 through
December 31 for coverage beginning on
January 1 of the following year.
The MMA also establishes SEPs. SEPs
allow an individual to disenroll from
one PDP and enroll in another PDP.
Similarly, the SEP rules that will apply
for individuals in an MA-PD plan will
be provided under § 422.62(b). We will
include in regulation those SEPs that
have been specifically named in the
statute. Those SEPs established for
exceptional circumstances for PDPs and
MA-PDs, as authorized by section
1860D–1(b)(3)(C) of the Act and section
1851(e)(4) for MA-PDs of the Act,
respectively, will be provided in our
manual instructions. The final rule
adopts the enrollment periods as
proposed.
Comment: We received several
comments regarding SEPs. Several
commenters supported the SEPs for
exceptional conditions we proposed to
provide through manual guidance.
Specifically, these include certain SEPs
already established in the MA program
for circumstances where a plan
terminates its contract or the individual
changes his or her permanent residence.
These commenters also supported an
SEP to enroll in a PDP for individuals
disenrolling from an MA-PD plan
during the MA Open Enrollment Period,
and for institutionalized individuals.
Other commenters suggested we
establish various other SEPs, including
the following:
• A subsidy-eligible individual who
leaves private prescription drug
coverage for any reason, including his or
her inability to pay;
• A change in a person’s health
status that makes a current plan choice
no longer suitable to his or her needs;
• Individuals eligible for the lowincome subsidy, other than full benefit
dual eligible individuals;
• If there are substantial changes to
the plan’s formulary;
• Individuals with ‘‘life-threatening
situations;’’
• Individuals whose situations are
pharmacologically complex;

PO 00000

Frm 00020

Fmt 4701

Sfmt 4700

• All individuals for the first 18
months of the program as it may be a
confusing time;
• All beneficiaries leaving MA plans
throughout the year so that they can
enroll in a PDP;
• Medicare-eligible retirees whose
plan sponsor changes their retiree drug
coverage so that it no longer meets the
criteria for creditable coverage;
• Individuals enrolled in, or desiring
to enroll in PACE, as the PACE program
has continuous enrollment and
disenrollment; and
• Full benefit dual eligibles at any
time, including every time a PDP
changes its plan in a way that directly
effects these individuals, such as
removing a drug from its formulary,
changing the co-payment tier for a drug,
or denying their appeal concerning a
non-formulary drug or an effort to
change the co-payment tier.
Response: We appreciate this
feedback. As previously mentioned, we
have historically included in regulation
only those SEPs that have been
specifically named in the statute. The
SEPs explicitly provided for in statute
include an SEP for full-benefit dual
eligible individuals, individuals who
permanently change their residence so
that they no longer reside in their PDP’s
service area, and individuals enrolled in
a PDP whose contract is terminated.
We will issue guidance regarding the
above SEPs and other additional SEPs
that we choose to establish following
publication of the regulation. We intend
to establish in this guidance an SEP for
those individuals eligible for the lowincome subsidy whose enrollment into
a Part D plan will be facilitated,
individuals in long-term care facilities,
individuals enrolled in, or desiring to
enroll, in PACE and individuals
enrolled in employer group health
plans. However, we decline to establish
SEPs for other reasons included in the
comments described above, because we
do not view these circumstances as
exceptional. However, we retain the
right to establish additional SEPs in the
future and will do so in our operational
guidance. Furthermore, we may
establish SEPs on a case-by-case basis,
where warranted by an immediate
exceptional circumstance, such as an
individual with a life-threatening
condition or illness. For the
commenter’s request that we provide an
SEP for the first 18 months of the
program, we do not believe that such an
SEP is warranted in the circumstances.
First, we are committed to ensuring all
beneficiaries have adequate information
to make informed choices about
participating in the Part D program.
Second, the statute provides for an

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
extended AEP and provides a
concurrent IEP at the beginning of this
program. These extended enrollment
periods, in conjunction with the
planned education and information
campaigns, will provide all beneficiaries
with adequate time and information to
make an enrollment decision. Therefore,
we do not believe that such an SEP is
warranted.
Comment: A few commenters
recommended that we should provide a
SEP to permit those individuals who
will receive the low-income subsidy
under subpart P but who are not fullbenefit dual eligible individuals to
change to a plan of their choosing.
Response: We strongly agree that we
should permit those individuals who
are enrolled or whose enrollment is
facilitated by CMS the opportunity to
change to a plan of their choosing. Since
we are generally limiting in regulation
those SEPs specified in statute, we will
provide for this SEP in operational
guidance.
Comment: One commenter
recommends that we change the
provision of an SEP for the involuntary
loss of creditable coverage to include
individuals who lose such coverage due
to failure to pay premiums. The
commenter believes the provision as
proposed is too restrictive and should
be modified.
Response: Section 1860D–
1(b)(3)(A)(iii) of the Act is clear that
disenrollments for failure to pay
premiums will be considered a
voluntary disenrollment action. We
therefore do not believe it appropriate to
treat this disenrollment as an
exceptional circumstance justifying an
SEP.
Comment: One commenter asked if
MA-PD plans are required to participate
in the AEP.
Response: The MA enrollment
periods are discussed in the MA
regulations at § 422.62. The AEP applies
to both PDP and MA-PD plans.
Comment: One commenter requested
clarification of how many times an
individual may use an SEP to enroll in
a PDP and encouraged CMS to limit the
number of times an SEP may be used to
enroll.
Response: The duration and
applicability of an SEP is specific to
each SEP and may vary from one
specific circumstance to another. For
example, an SEP in the MA program for
individuals affected by a plan
termination is specific to the
circumstances surrounding that specific
action and limited in duration. Other
SEPs apply more generally to
individuals, for example, full-benefit
dual eligible dual individuals. We will

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

provide detailed guidance concerning
each SEP following the publication of
this rule.
Comment: One commenter requested
clarification of proposed § 423.36(c)(3)
regarding the SEP for individuals whose
enrollment or nonenrollment in Part D
is caused by an error of a Federal
employee or any person authorized by
the Federal government to act on its
behalf. The commenter suggests that we
include all sponsors of Part D plans as
‘‘persons authorized by the Federal
Government to act on its behalf.’’
Response: We have interpreted this
statutorily required SEP to apply to
Federal government employees, staff,
and contractors hired by the Federal
government to perform government
duties. We would not consider Part D
plans to be performing enrollment
functions as a subcontractor on the
behalf of CMS; rather, Part D plans must
perform certain enrollment functions as
requirement of their direct contract with
CMS. While it is unlikely that an SEP
would be necessary, we will correct any
errors made by the plan and not hold
the individual liable for the plan’s
mistake. Thus, we may allow an SEP in
individual situations, if appropriate.
Comment: One commenter asked if
SEP enrollment in a PDP could be
retroactive in order to maintain
continuity of care.
Response: An SEP enrollment in a
PDP will generally be prospective. We
establish the effective date for SEPs and
can accommodate unusual
circumstances on a case-by-case basis.
Comment: One commenter suggested
that we establish an SEP with no late
enrollment penalty if a Medigap issuer
or other entity fails to provide adequate
or accurate notice of whether such
coverage is creditable.
Response: Section 423.38(c)(2) of the
final rule establishes an SEP for all
individuals who are not adequately
informed when their creditable
prescription drug coverage is lost or
changes so that it is no longer creditable
prescription drug coverage or that the
individual never had such creditable
coverage. We believe that these
provisions adequately protect an
individual who does not receive the
required notice from a Medigap issuer
or other entity. Regarding the late
enrollment penalty, the provision of an
SEP is not directly related to, nor does
it have a direct effect upon, the
imposition of applicable late enrollment
penalties. The late enrollment penalty is
discussed in more detail at § 423.46 and
its relationship to creditable
prescription drug coverage is discussed
at § 423.56. Specifically, at § 423.56(g) of
the final rule we describe the available

PO 00000

Frm 00021

Fmt 4701

Sfmt 4700

4213

remedy for an individual who was not
adequately informed that their
prescription drug coverage is not
creditable.
Comment: One commenter believed
the enrollment process should ensure
that residents of a long-term care facility
are enrolled in a PDP that provides
access to the pharmacy located in the
long-term care facility.
Response: We understand the issue
raised by the commenter. Individuals
who are in a long-term care facility will
be given an SEP to ensure they can
choose the PDP that is appropriate for
their situation. This will be clarified in
guidance following publication of this
rule.
6. Effective Dates of Coverage and
Change of Coverage (§ 423.40)
Section 1860D–1(b)(1)(B)(iv) of the
Act directs us to apply the effective date
requirements provided under the MA
program at section 1851(f) of the Act. As
described above, the three enrollment
periods provided under Part D are the
IEP, the AEP, and SEP. In the proposed
rule, we established the following
effective dates for these enrollment
periods:
a. Initial Enrollment Period
In accordance with section 1851(f)(1)
of the Act, as incorporated into Part D
under section 1860D–1(b)(1)(B)(iv) of
the Act, an enrollment made during the
initial enrollment period will generally
be effective the first day of the calendar
month following the month in which
the individual enrolled in Part D. An
enrollment made prior to the month of
entitlement to Part A or enrollment in
Part B is effective the first day of the
month the individual is entitled to Part
A or enrolled in Part B. Since the Part
D provisions are not effective until
January 1, 2006, we clarified that in no
case may enrollment in Part D be
effective prior to this date. We also
clarified that initial enrollments made
between November 15 and December
31, 2005 will be effective January 1,
2006. An enrollment made during or
after the month of entitlement to Part A
or enrollment in Part B is effective the
first day of the calendar month
following the month in which the
enrollment in Part D is made.
b. Annual Coordinated Election Period
In accordance with section 1851(f)(3)
of the Act, as incorporated into Part D
under section 1860D–1(b)(1)(B)(iv) of
the Act, an enrollment made during the
annual coordinated election period is
effective as of the first day of the
following calendar year, that is, January
1st. One exception to this rule occurs
during 2006 in the special annual
coordinated election period in 2006, in

E:\FR\FM\28JAR2.SGM

28JAR2

4214

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

which elections made between January
1, 2006 though May 15, 2006 will be
effective the first day of the calendar
month following the month in which
the enrollment in Part D is made.
c. Special Enrollment Period
A SEP is effective in a manner that we
determine to ensure continuity of health
benefits coverage.
The final rule adopts the effective
dates as proposed.
Comment: Three commenters
suggested that we specify a distinct
effective date for the SEPs in the final
rule (as described in § 423.38(c) of the
proposed rule) to ensure adequate
consumer protection. Two commenters
suggested adding: ‘‘but no later than the
first day of the second calendar month
following the month of the request for
the enrollment change’’ to the end of
this section. The third commenter
suggested we add: ‘‘changes made
before the 20th of the month are effective
the first day of the second month
following’’ the change.
Response: We have outlined the
specific effective date requirements for
SEPs granted in the MA program in
operational guidance and will follow
the same process for the Part D program.
We believe that in so doing, we retain
our ability to react quickly to changes or
unforeseen circumstances.
7. Involuntary Disenrollment by the PDP
(§ 423.44)
Section 1860D–1(b)(1)(B) of the Act
generally directs us to use disenrollment
rules similar to those established under
section 1851 of the Act. The proposed
disenrollment provisions for PDPs were
outlined in § 423.44 of our proposed
rule, including the basis for
disenrollment—both optional and
required—and guidance for notice
requirements.
Specifically, we proposed at
§ 423.44(b)(2) that a PDP is required to
disenroll an individual who dies, no
longer resides in the PDP’s service area,
loses entitlement or enrollment to
Medicare benefits under Part A and is
no longer enrolled in Part B, or
knowingly misrepresents to the PDP
that he or she has received or expects to
receive reimbursement for covered Part
D drugs through other third-party
coverage. The proposed rule also
required a PDP to disenroll an
individual if the PDP sponsor’s contract
is terminating.
In addition to providing requirements
for mandatory disenrollments, we also
provided under § 423.44(d) of our
proposed rule that PDPs may disenroll
individuals who do not pay monthly
premiums or whose behavior is

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

disruptive, consistent with section
1860D–1(b)(1)(B)(v) of the Act.
As with the MA program, PDP
sponsors will be required in the final
rule to provide proper notice to the
beneficiary, as outlined at proposed
§ 423.44(c), and afford him or her due
process in accordance with the
procedures outlined in our operational
instructions prior to disenrolling the
individual. For example, a PDP that
wishes to disenroll a beneficiary for
disruptive behavior must receive our
prior approval and demonstrate to our
satisfaction that it has made a good faith
effort to resolve the issue prior to
requesting the disenrollment. We will
review these requests on a case-by-case
basis, taking into account all of the facts
and circumstances of a particular case,
prior to making its decision. PDP
sponsors must apply their policies for
optional disenrollment for failure to pay
premiums and disruptive behavior
consistently among individuals enrolled
in their plans, unless we permit
otherwise, and must do so consistent
with applicable laws regarding
discrimination on the basis of disability.
Except as otherwise provided below,
the final rule adopts the involuntary
disenrollment rules set forth in § 423.44
of the proposed rule.
Comment: Several commenters urged
CMS to establish a process for
individuals to appeal disenrollment
decisions. Several commenters believed
that individuals should have access to
an outside independent review process,
especially if these individuals are
disenrolled without an SEP. Another
commenter stated that involuntary
disenrollments must be heavily
scrutinized and an appeal right be
available on an expedited basis.
Response: As we discussed under a
previous comment regarding appeals for
enrollment denials, we do not believe
that a formal appeals process is
necessary. Instead, we intend to address
beneficiary complaints regarding
disenrollment in a manner addressed
under the MA program. Under the MA
program, MA plans are required to
follow a specific process, which
includes notice of potential
disenrollment if the individual does not
address situation. We currently provide
assistance to MA organizations to
handle beneficiary inquiries and
complaints regarding disenrollment
through staff assigned to each MA
organization. We envision a similar
process being established under the PDP
program.
Comment: Several commenters
pointed out an error in the numbering
of the regulatory text for disruptive
behavior at proposed § 423.44(b)(1).

PO 00000

Frm 00022

Fmt 4701

Sfmt 4700

Response: We concur and have
corrected the numbering.
Comment: A commenter requested
that we clearly define how long an
individual would need to reside out of
the PDP service area before we would
consider the individual as no longer
residing in the service area. One
commenter did not think that it was
reasonable to apply a 6-month time
limit to PDPs; PDPs should not be
required to disenroll individuals if the
PDP can provide individuals access to
benefits out of the service area through
a PDP in another region, or the PDP’s
network of pharmacies in other regions,
or mail order pharmacies. One
commenter believed the decision should
be left to the individual as to when he
or she has permanently moved out of
the PDP service area. A few commenters
did not believe that a person’s residency
should be a factor in a plan’s basis for
disenrollment. Another commenter
stated that a PDP should not be required
to disenroll an individual if the PDP
meets licensure requirements in the
State where the individual has moved
and the PDP has a national pharmacy
network in place. Another commenter
suggested that PDP maintain members if
they are an established sponsor and
meet certain network adequacy
requirements in the region in which the
beneficiary moves.
Response: We agree that disenrolling
a beneficiary after being temporarily out
of the service area for a certain period
of time may be less appropriate for PDPs
than in the MA program. The MMA
directs us to use rules similar to (and
coordinated with) the MA residency
requirements at section 1851(b)(1)(A) of
the Act, which provides that an
individual may elect an MA plan only
if the plan serves the geographic area in
which the individual resides, except as
the Secretary may otherwise provide.
However, the MA regulation at
§ 422.74(d)(4) generally provides for
disenrollment of an individual if that
individual is out of the service area,
even temporarily, for 6 months, unless
the MA organization offers visitor or
traveler benefits that provide for
benefits while outside of the service
area. We believe that the nature of the
prescription drug benefit and the ability
for many individuals to access the
benefit through mail order or chain drug
stores provide greater flexibility in
accessing the prescription drug benefit
while temporarily being out of the PDP’s
service area. However, while an
individual has greater flexibility to be
temporarily outside the service area and
still access the PDP benefit, we maintain
that the individual must maintain his or
her permanent residence within the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
PDP’s service area to be a member of the
PDP. If the PDP learns of a change in the
individual’s permanent address, the
PDP would initiate the disenrollment
process. It is, however, an individual’s
responsibility to notify the PDP if the
individual permanently moves out of
the service area. We will provide further
guidance to PDPs on the process of
disenrollment when an individual
permanently moves out of the service
area following publication of this rule.
Comment: One commenter asked how
a PDP will learn of loss of entitlement
to Part A or Part B.
Response: We will notify the PDPs of
the loss of Part A or B benefits. We will
issue detailed operational guidance for
PDPs prior to 2006.
Comment: A few commenters
requested that we further clarify the
provision that an individual who
‘‘knowingly misrepresents to the PDP
that he or she has received or expects to
receive reimbursement for covered Part
D drugs through other third party
coverage’’ (that is, whether his or her
costs are expected to be reimbursed
through insurance or otherwise, such as
a group health plan) must be
disenrolled. These commenters also
asked how ‘‘knowingly’’ will be
determined and what entity would be
responsible for investigating such a
case. One commenter indicated that a
beneficiary should not be penalized for
unintended errors or inadvertent
omissions, and that many beneficiaries
will be confused at the outset about
their PDP coverage and how it may
coordinate with other insurance.
Response: Section 1860D–
2(b)(4)(D)(ii) of the Act provides that
‘‘material misrepresentation’’ by an
individual as to whether his or her costs
are expected to be reimbursed through
insurance or otherwise (through a group
health plan or other third party payment
arrangement) shall be grounds for
termination by the PDP. Since section
1860D–2(b)(4)(D)(ii) of the Act also
provides that a PDP sponsor may
periodically ask Part D eligible
individuals about such reimbursement,
the statute establishes a penalty for an
individual who ‘‘materially’’
misrepresents such information. This
provision is not intended to disenroll
individuals who simply make an error,
but instead apply to those individuals
who knowingly provide such false
information. We would be responsible
for reviewing and issuing the final
decision on such a case. We plan to
issue further guidance on this for PDPs
prior to 2006.
Comment: We received several
comments on the disenrollment for
nonpayment of premium provision,

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

both supporting and opposing inclusion
of such a process. Several commenters
requested that we clarify the details of
disenrollment for nonpayment of
premium, including what we view as
‘‘reasonable efforts’’ to collect the
premium. Several commenters
recommended providing a minimum
grace period for repayment before
permitting disenrollment. One
commenter requested that we waive
payment of past premiums for fullbenefit dual eligible individuals or lowincome subsidy individuals. Some
commenters believe that it is
inappropriate for us to disenroll any
individual from Part D for nonpayment
of premium. One commenter stated that
individuals enrolled in a PACE plan
should not be subject to the
disenrollment requirements under
§ 423.44 of the proposed rule.
Response: Section 1860D–1(b)(1)(B)(v)
of the Act specifically directs us to
apply rules to PDPs that are similar to
(and coordinated with) the MA
provisions at section 1851(g) of the Act
related to disenrollment for nonpayment
of premium. While some commenters
objected to disenrollment by the PDP on
those grounds, we note that such
disenrollment is at the PDP sponsor’s
option and PDP sponsors therefore have
the ability to apply this rule to their
plan enrollees. In contrast, under Part B,
individuals who fail to pay their Part B
supplementary medical insurance
premiums must be disenrolled from Part
B. While we do not review and approve
such disenrollments, we maintain that if
a PDP chooses the option to disenroll a
beneficiary for nonpayment of the
premium, we would require that the
PDP apply this policy consistently, as
we direct, amongst all its members and
could not ‘‘waive’’ the premium for a
certain group of its members. As
indicated in the preamble of subpart T
of this rule, we will issue additional
guidelines that will include a
comprehensive listing of Part D waivers
applicable to PACE organizations.
However, we agree that PACE
organizations should not be subject to
the disenrollment requirements of
§ 423.44 as they are duplicative of the
PACE disenrollment requirements
associated with § 460.164 of the PACE
regulation.
Comment: Several commenters
recommended that we permit plans to
deny reinstatement following
disenrollment for failure to pay
premiums unless the enrollee pays the
outstanding amount that is due. Other
commenters stated that PDP should not
be required, under any circumstance, to
re-enroll individuals who are

PO 00000

Frm 00023

Fmt 4701

Sfmt 4700

4215

disenrolled for nonpayment of the
premium.
Response: We have provided in the
final regulation at § 423.44(d)(1)(iii) that
a PDP may decline future enrollment to
individuals who have been disenrolled
for failure to pay premiums until past
due premiums are paid to the PDP.
However, we would not allow a PDP to
prohibit an individual from enrolling in
its plan if the individual has paid all
past due premiums to the PDP.
Comment: We received a substantial
number of comments on proposed
§ 423.44(d)(2) to allow PDP sponsors to
disenroll individuals who exhibit
disruptive behavior.
One commenter supported the
definition established in the proposed
rule, while several commenters
supported the due process safeguards
afforded by our approval of
disenrollment requests. Two
commenters suggested that we provide
guidance to PDP sponsors on the
symptoms of mental illness and
dementia and other personality
disorders to distinguish between
disruptive behavior and behavior
resulting from a medical condition.
There were other commenters who
asked us to clearly define the terms and
requirements for disenrolling a
beneficiary for disruptive behavior.
These commenters recommended that
we include in the final rule such
requirements as documentation of a PDP
sponsor’s effort to provide a reasonable
accommodation for individuals with
disabilities and sufficient notice of the
sponsor’s actions during the course of
the disenrollment process.
Numerous commenters expressed
concern that the proposed definition of
disruptive behavior does not adequately
protect individuals whose behavior is
induced by disability, mental illness,
cognitive impairment, or certain
prescribed drugs and who rely on
prescription drug therapy to stabilize
their behavior. Some commenters
recommended that we prohibit PDP
sponsors from disenrolling certain
populations for disruptive behavior,
explaining that State Medicaid programs
will not be able to claim Federal
matching funds for prescription drugs
spending on behalf of full-benefit dual
eligibles who have been disenrolled by
a PDP sponsor. Other commenters
suggested that we develop more
stringent criteria for PDP sponsors
requesting to disenroll a full-benefit
dual eligible individual. Several
commenters stated that, in cases where
an individual is unstable, disruptive
behavior could be related to
unsuccessful attempts to find the proper
medication. There were also a number

E:\FR\FM\28JAR2.SGM

28JAR2

4216

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

of commenters who asserted that we
lacked statutory authority to permit
PDPs sponsors to disenroll individuals
for disruptive behavior. Two
commenters questioned the
appropriateness of applying a policy of
involuntary disenrollment for disruptive
behavior to PDPs. One commenter
suggested that we allow an individual
who is disruptive to designate an
authorized representative to access
services on his or her behalf.
Response: In the final rule, we aim to
strike a balance between allowing PDP
sponsors to disenroll individuals who
exhibit disruptive behavior and creating
adequate protections for individuals
who face involuntary disenrollment
from a PDP. In accordance with the
statute (at section 1860D–1(b)(1)(B)(v) of
the Act), we must establish a process
that is similar to and coordinated with
the process under the MA program that
permits MA organizations to disenroll
an individual for disruptive behavior.
At the same time, we recognize the
impact of such a disenrollment on an
individual’s ability to access
prescription drug coverage under the
Medicare program, and the need for
adequate safeguards for individuals
whose disruptive behavior is due to
mental illness or a medical condition.
Continuity of care for these individuals
is essential, especially if they are taking
prescription medications that can
minimize the debilitating impact of
their illness and restore their
functioning.
Therefore, in revising our proposed
definition of disruptive behavior in
§ 423.44(d)(2)(i) of the final rule, we
focus on behavior that substantially
impairs a PDP sponsor’s ability to
arrange or provide care for the
individual or other plan members.
Behavior that is related to the use of
medical services or compliance (or non­
compliance) with medical advice is not
disruptive behavior.
We also agree with commenters that
arranging or providing care for
individuals with mental illness,
cognitive impairments such as
Alzheimer’s disease or other dementias,
and medical conditions and treatments
that may cause disruptive behavior
warrant special consideration, and
therefore revise § 423.44(d)(2)(v) to
require PDP sponsors to provide a
reasonable accommodation to
individuals in such exceptional
circumstances that we deem necessary.
Such accommodation is intended to
ensure that the individual can maintain
Medicare prescription drug coverage
and may include granting an individual
a SEP to choose another plan, or
requiring the plan to continue the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

individual’s enrollment until the
Annual Coordinated Election Period,
when the individual has an opportunity
to enroll in another plan. We will
determine the type of accommodation
necessary after a case-by-case review of
the needs of all parties involved. This
review will be conducted as part of our
review and approval of the PDP
sponsor’s request, as required in
regulations at § 423.44(d)(2)(v), and will
include expert opinion from our staff
with appropriate clinical or medical
background.
In addition, we recognize that
circumstances may arise where an
individual is only able to obtain
qualified prescription drug coverage
from a fallback prescription drug plan
operating in his or her service area. In
such instances, allowing a fallback
entity to disenroll an individual may
create substantial barriers to accessing
prescription medications under the
Medicare program. Section 1860D–
11(g)(4)(B) of the Act grants us authority
to establish additional requirements
specifically for fallback prescription
plans. Under this authority, we reserve
the right at § 423.44(d)(2)(vi) to deny a
fallback prescription drug plan’s request
to disenroll an individual for disruptive
behavior.
In the proposed rule, we established
procedures that PDP sponsors must
follow prior to requesting to disenroll a
member for disruptive behavior. Under
proposed § 423.44(c), a PDP sponsor
must give an individual timely notice of
the disenrollment, which includes an
explanation of the individual’s right to
a hearing under the PDP’s grievance
procedures. We further required at
proposed § 423.44(d)(2)(ii) a sponsor to
make a serious effort to resolve the
problems presented by the individual,
including the use or attempted use of
the organization’s grievance procedures.
Finally, we established under proposed
§ 423.44(d)(2)(iii) that a PDP sponsor
must document the individual’s
behavior, its own efforts to resolve the
problem, and the use or attempted use
of its internal grievance procedures. We
are preserving all of these requirements
in the final rule at § 423.44(c) and
§ 423.44(d)(2)(iii) and (d)(2)(iv).
We believe that the final rule achieves
the twin goals of permitting involuntary
disenrollment based on an individual’s
disruptive behavior, while also
establishing necessary protections for
individuals who are subject to our
disenrollment rules.
Comment: Several commenters
contended that allowing a PDP sponsor
to disenroll an individual for disruptive
behavior provides an opportunity for
PDP sponsors to discriminate against

PO 00000

Frm 00024

Fmt 4701

Sfmt 4700

individuals with disabilities, mental
illness, Alzheimer’s, and other cognitive
conditions.
Response: We appreciate the
commenters concern about the need to
ensure that individuals are not
discriminated against on the basis of
their disability. However, the Part D
plans are not provided the authority to
make the decision on such a
disenrollment. In addition to
establishing safeguards in the final rule
for individuals with special needs by
requiring PDP sponsors to make
reasonable accommodations where we
deem necessary, it is CMS who reviews
the request for disenrollment and makes
the decision to approve or deny the
request. In our review, we will include
our staff with the appropriate clinical or
medical expertise review the case before
a final decision is made.
Comment: Several commenters noted
that the proposed rule denies protection
to individuals who comply with
medical advice by trying an onformulary drug instead of the drug
originally prescribed and subsequently
experience an adverse reaction that
triggers the disruptive behavior. A few
commenters asked us to prohibit PDPs
from disenrolling an individual because
of his or her refusal or inability to
adhere to a treatment plan developed by
the PDP or other health care
professionals associated with the plan.
Response: We agree with the
commenters and clarify in the final rule
at § 423.44(d)(2)(i) that an individual
cannot be considered disruptive if such
behavior is related to the use of medical
services or compliance (or non­
compliance) with medical advice or
treatment.
Comment: Two commenters
supported the flexibility afforded PDP
sponsors by our allowing PDP sponsors
to limit re-enrollment for individuals
who are disenrolled for disruptive
behavior, and one of these commenters
specifically asked us to establish criteria
for re-enrolling an individual such as a
minimum waiting period and a
commitment by the individual to
discontinue such behavior. On the other
hand, there were many commenters
who opposed the ability of a PDP
sponsor to decline re-enrollment of an
individual. These commenters
contended that prohibiting an
individual from re-enrolling in a PDP
for a specified period could cause
undue harm and lapses in coverage,
especially if the individual is not able
to enroll in another PDP. One
commenter requested that we specify
the maximum period of time that a PDP
sponsor may prohibit re-enrollment of

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
an individual who has been disenrolled
for disruptive behavior.
Response: In the proposed rule, we
enabled PDP sponsors to request, at
their option, the ability to decline future
enrollment by an individual who had
been disenrolled for disruptive
behavior. While we retain this option
for PDPs in the final rule, we require
these sponsors to request future
conditions on re-enrollment as part of
their disenrollment request. At the same
time, we reserve the right in accordance
with § 423.44(d)(2)(v) to review each
request on a case-by-case basis. In the
review process, we will give due
consideration to exceptional
circumstances that may warrant
reasonable accommodations in addition
to the appropriateness of conditions on
re-enrollment.
Comment: There were several
commenters who objected to the
expedited disenrollment process. The
commenters noted that the expedited
process lacks even the minimal
standards and requirements that are in
place to protect beneficiaries in these
circumstances.
Response: It is our intent to ensure
that all individuals facing involuntary
disenrollment for disruptive behavior
have sufficient opportunity, as provided
by the notice requirements, to change
their behavior or grieve the PDP
sponsor’s decision to request
involuntary disenrollment from us. We
have therefore removed this provision
from the final regulation.
Comment: One commenter asked us
to clarify whether a full-benefit dual
eligible individual who is disenrolled
for disruptive behavior is entitled to a
SEP.
Response: In accordance with the
§ 423.38(c)(4), a full-benefit dual eligible
individual as defined under section
1935(c)(6) of the Act is entitled to a SEP.
A full benefit dual eligible individual
who is involuntarily disenrolled for
disruptive behavior remains entitled to
a Special Enrollment Period.
Comment: We received two comments
asking us to adopt an interpretation of
nonpayment of cost sharing as
disruptive behavior as we had discussed
in the preamble of the proposed rule for
MA organizations.
Response: We appreciate the feedback
provided on the consideration to
include nonpayment of cost-sharing as
disruptive for the purposes of applying
the provisions under disruptive
behavior. We will consider these
comments in developing guidance for
the disruptive behavior provisions.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

8. Late Enrollment Penalty (§ 423.46)
Section 1860D–13(b) of the Act
establishes late enrollment penalties for
beneficiaries who fail to maintain
creditable prescription drug coverage for
a period of 63 days following the last
day of an individual’s initial enrollment
period and ending on the effective date
of enrollment in a Part D plan. We
outlined this process for imposing the
penalty in the proposed rule. We also
proposed that an uncovered month is
any month in which an individual does
not have creditable coverage at any time
during that month. We also reference
the calculation of the amount of the
penalty, which was described at
§ 423.286(d)(3) of the proposed rule.
The final rule adopts the rules for late
enrollment penalties as proposed.
Comment: Several commenters
requested that we waive the late
enrollment penalty for certain
individuals, such as full-benefit dual
eligible individuals, subsidy eligible
individuals, individuals who are
eligible for a special enrollment period
and individuals who are involuntarily
disenrolled. One commenter asked that
State Medicaid programs be allowed to
request and obtain such a waiver. Other
commenters urged CMS to delay the
implementation of the late enrollment
penalty for one to two years, or be
flexible with the application of the
penalty, stating the Part D program was
new and complex. Another commenter
asked if we would provide any
exception to the penalties for
exceptional circumstances, such as
natural disaster, family death, or clinical
justification. A few commenters did not
see a late penalty appeals process in the
regulation and requested that we add an
opportunity to appeal the late penalty.
Response: There is nothing in the
statute that would provide us with the
authority to waive or delay the late
enrollment penalty at any time unless
an individual was not adequately
informed that his or her prescription
drug coverage as described at § 423.56
was not creditable. Only in this limited
situation will we be able to deem the
individual’s prescription drug coverage
as creditable, regardless of whether it
actually is creditable, so as not to
impose the late penalty. Further, it is
clear that the statute intended this
provision to apply to full-benefit dual
eligible individuals since the
application of the penalty is specifically
referenced in the definition of the full
premium subsidy under section 1860D–
14(a)(1)(A) of the Act, for which fullbenefit dual eligible individuals are
eligible. Specifically, section 1860D–
14(a)(1)(A) of the Act provides that full

PO 00000

Frm 00025

Fmt 4701

Sfmt 4700

4217

subsidy eligible individuals, including
full-benefit dual eligible individuals, are
responsible for 20 percent of any late
enrollment penalty for the first 60
months during which such penalty is
imposed. As discussed in the proposed
rule, we will develop a process for
individuals to apply to CMS for
reconsideration of the penalty. We
appreciated the feedback that
organizations provided on setting up
such a process.
Comment: Several commenters asked
CMS to clarify that those who do not
receive a notice that their prescription
drug coverage was not creditable (or
received the wrong notice) are not
subject to the late enrollment penalty.
Response: As provided in § 423.56(g)
of the final rule, an individual who is
not adequately informed that his or her
prescription drug coverage was not
creditable may apply for our review and
make a determination if this occurred. If
we determine that the individual did
not receive adequate notice or received
incorrect information, we may deem the
individual to have had creditable
coverage so that the late enrollment
penalty will not be imposed.
Comment: One commenter asked
CMS to clarify how the 63-day period
would be counted. The commenter
recommended from the end of the IEP
to the date of the application for the
low-income subsidy since individuals
may delay a decision until he or she
knows whether there will be a subsidy.
Response: The count of the 63-day
period will commence the day following
the end of the individual’s IEP or, once
the IEP has passed, the day following
the last day of creditable coverage or
Part D enrollment (in a PDP or MA-PD
plan). The application of the 63-day
period will be consistently applied to all
individuals, regardless of when an
individual may or may not apply for the
low-income subsidy.
Comment: One commenter asked how
the late enrollment penalty will be
coordinated with the late enrollment
penalty for Part B.
Response: We are currently
developing operational and system
requirements to implement the late
enrollment penalty process. Additional
guidance will be provided to PDPs and
individuals with specific information as
to how this will occur.
9. Part D Information That CMS
Provides to Beneficiaries (§ 423.48)
As provided under section 1860D–
1(c)(1) of the Act, we will conduct
activities designed to broadly
disseminate information about Part D
coverage to individuals who are either
eligible or prospectively eligible for Part

E:\FR\FM\28JAR2.SGM

28JAR2

4218

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

D benefits. In the proposed rule, we
indicated that this information will be
made available to beneficiaries at least
30 days prior to their initial enrollment
period.
Each organization offering a PDP or
MA-PD plan must provide us annually
with the information to disseminate to
individuals who are currently or
prospectively eligible for Part D
benefits. The information dissemination
activities for Part D will be similar to,
and coordinated with, the information
dissemination activities that we
currently perform for Medicare
beneficiaries under sections 1851(d) and
1804 of the Act.
As required under section 1860D–
1(c)(3) of the Act, we proposed to
include the following comparative
information for qualified prescription
drug coverage provided by PDPs and
MA-PD plans as part of our
dissemination of Part D information and
our efforts to promote informed
beneficiary decisions:
• Benefits and prescription drug
formularies;
• Monthly beneficiary premium;
• Quality and performance;
• Beneficiary cost-sharing; and
• Results of consumer satisfaction
surveys.
We also proposed to provide
information to beneficiaries regarding
the methodology we will use for
determining late enrollment penalties,
as provided in § 423.286(d) of our
proposed rule.
In carrying out the annual
dissemination of Part D information, we
will conduct a significant public
information campaign to educate
beneficiaries about the new Medicare
drug benefit and to ensure the broad
dissemination of accurate and timely
information. We will work with SSA
and the States to ensure that lowincome individuals eligible for or
currently enrolled in Part D benefits are
aware of the additional benefits
available to them and how to receive
those benefits. In order to maximize the
enrollment of Part D eligible
individuals, this public information
campaign would include outreach,
information, mailings, and enrollment
assistance with and through appropriate
State and Federal agencies, including
SHIPs, and will coordinate with other
Federal programs providing assistance
to low-income individuals. In addition,
we will undertake special outreach
efforts to disadvantaged and hard-to­
reach populations, including targeted
efforts among historically underserved
populations, and coordinate with a
broad array of public, voluntary, private
community organizations, plan sponsors

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

and stakeholders serving Medicare
beneficiaries to explain the options
available under this program. Materials
and information will be made available
in languages other than English where
appropriate.
This information will enable
beneficiaries to make informed
decisions regarding their Part D
coverage options. Organizations offering
a PDP or MA-PD plan will be required
to provide this information in a format
and to use standard terminology that we
will specify in further operational
guidance.
In the interest of broadly
disseminating information that
promotes informed decision-making
among Part D enrollees and prospective
Part D enrollees, as required under
Section 1860D–1(c) of the Act, we
would extend the price comparison
requirements to PDP sponsors and MA
organizations offering MA-PD plans and
making comparative information about
Part D plans’ negotiated prices available
to beneficiaries through
www.medicare.gov.
Since the introduction of
www.medicare.gov in 1998, we have
substantially increased the amount of
personalized information available to
Medicare beneficiaries, making it one of
the government’s most comprehensive
and customer-oriented sites available to
the public. The web site hosts twelve
separate database applications to help
individuals make their own health care
decisions. The most significant ones are:
the Medicare Personal Plan Finder
(which contains costs, benefits, quality,
satisfaction and disenrollment
measures), Nursing Home Compare
(which contains basic characteristics,
staffing information and inspection
results), the Prescription Drug and Other
Assistance Programs application (which
contains the most extensive, nationally
complete listing of the Medicareapproved discount drug cards,
including price comparisons, as well as
other government and private programs
designed to help with prescription drug
costs), and the Medicare Eligibility Tool
(which assists users in determining
when they are eligible, how to enroll
and what they need to consider when
joining Medicare). Other tools providing
customized results include: the
Participating Physician and Supplier
Directories, Home Health and Dialysis
Facility Compare, Your Medicare
Coverage, Helpful Contacts,
Publications, and Frequently Asked
Questions. By updating all information
on the web site at least once a month,
the information provided to Medicare
beneficiaries via www.medicare.gov is

PO 00000

Frm 00026

Fmt 4701

Sfmt 4700

the most reliable and consistent
information available.
Much of the information available
through www.medicare.gov is also
available via the 1–800–MEDICARE
helpline. 1–800–MEDICARE is a major
information channel for providing the
most personalized and reliable
information to people with Medicare.
The beneficiary can call 1–800–
MEDICARE to find out the most reliable
information on public and private
programs that offer discounted or free
medication, programs that provide help
with other health care costs, and
Medicare health plans that include
prescription drug coverage. The caller
can always talk to a live person at 1–
800–MEDICARE to get the facts they
need. We can also give the beneficiary
personalized brochures containing
information on their health plan
choices, nursing homes and Medicare
participating physicians in their area. 1–
800–MEDICARE is available 24 hours a
day, 7 days a week, to provide the oneon-one service that our Medicare
beneficiaries need to make appropriate
health care decisions.
The final rule adopts the information
requirements set forth in the proposed
rule.
Comment: Several commenters were
concerned that the web site should
reflect accurate information that is
presented in an appropriate context and
in a way that is useful for beneficiaries
to use. Many commenters noted that the
web site should provide beneficiaries
with the ability to compare plans on the
basis of estimating their out-of-pocket
spending, including premiums and
applicable cost sharing. Several
commenters encouraged CMS to rely not
only on price as the factor in
determining which Part D plan fits
beneficiary needs. Another commenter
urged CMS to include specific
information regarding which drugs are
covered by each plan. Other
commenters indicated that other
information that the beneficiaries would
need to consider would be the level of
coinsurance, the amount a beneficiary
would pay during any period he or she
is liable for 100 percent of the cost
sharing, whether the drug is on or off
the formulary, and other cost
management techniques that may apply,
such as step therapy and prior
authorization. Another commenter
stated that we must post prices on its
website of retail pharmacies that offer
maintenance supplies of medications.
One commenter stated that beneficiaries
need to know whether the pharmacy is
included in the plan’s network.
Response: We appreciate this
feedback and will consider this when

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
developing the requirements for the Part
D price comparison web tool.
Comment: Another commenter stated
that we need to ensure that any website
includes price comparisons about
generic drugs compared to their
innovator brands, as well as generics
compared to other brand name drugs in
a similar therapeutic class.
Response: This comment will be
considered when developing the
requirements for the Part D price
comparison web tool. As with the
current price comparison tool for the
Medicare-approved drug discount card
program, we include pricing
information for both brand and generic
drugs.
Comment: One commenter noted that
correct information may not be provided
to seniors if we require plans to post the
maximum price that could be charged,
since the maximum price is typically
the pharmacy’s usual and customary
cash price.
Response: It is our understanding that
usual and customary pricing data is not
readily accessible; therefore, we
anticipate posting the maximum
negotiated prices for prescription drugs
on the website with the understanding
that beneficiaries will pay the lower of
the negotiated or usual and customary
price at the point of sale. It is
anticipated that the prices displayed on
the website would reflect what enrollees
would expect to pay at the point of sale
for their prescriptions under the
respective plans.
Comment: One commenter asked that
we define the process for the
information sharing exchange between
PDPs and CMS.
Response: The process has not been
defined at this time. Once we have
developed the data requirements and
process for submission of data, we will
share this information with all
prospective Part D plans.
Comment: Several commenters
believe that the price comparison tool
should not be a requirement for PDP
sponsors or MA organizations offering
MA-PD plans.
Response: It is important for
beneficiaries to have access to all
information in order to make informed
choices. We are committed to providing
Medicare beneficiaries with information
about both PDPs and MA-PD plans
through the price comparison tool.
Therefore, we will keep this
requirement.
Comment: One commenter expressed
a general concern with the disclosure of
negotiated prices and the negative
impact that disclosure of such
information could have on competition.
The commenter further noted that

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

negotiated prices may be subject to
confidentiality agreements. The
commenter suggested that we disclose
only estimated or average prices and
that this information only be posted on
the specific website of the Part D plan.
Response: As mentioned previously,
it is anticipated that the prices
displayed on the website will reflect
what enrollees would expect to pay at
the point of sale for their prescriptions
under the respective plans.
Comment: A commenter stated it was
unacceptable for CMS not to provide
quality and performance information in
the first year or second year of the Part
D program.
Response: Quality data will not be
available for the first year since this is
a new program and historical data will
not be available for reporting. For year
two, the regulation simply states that if
it is impractical to obtain data or if it is
not available, it will not be reported;
this is not the same as stating that it will
not be available for the second plan
year. From the perspective of many
beneficiaries, cost and availability are
the most important quality issues.
Hence, we will be able to report timely
in response to these issues.
Comment: One commenter urged the
agency to work closely with pharmacies
to ensure that any price comparison
website is understandable and free of
errors before it is made public.
Response: Historically, we have
worked closely with beneficiaries,
stakeholders, partners, and advocacy
groups to ensure the information
disseminated meets the needs of the
Medicare population we serve. We will
continue this practice in the
development of the website for Part D
plan information.
Comment: One commenter stated that
we are silent on the notification
timeframe for beneficiaries. CMS simply
refers to the 30-day notice period. The
commenter thinks that beneficiaries will
need much more than 30 days to digest
all of the information they will receive
from CMS to enable them to make
informed choices about their Part D
coverage. The commenter urges
information to be disseminated as soon
as possible and urges CMS to plan
numerous information campaigns now
and involve numerous organizations in
developing education activities and
materials. Another commenter suggests
dissemination activities occur at least 60
days prior to the initial enrollment
period for Part D, which begins
November 15, 2005.
Response: We are planning outreach
and education activities that will occur
throughout 2005 and 2006. Detailed
information about drug plans and their

PO 00000

Frm 00027

Fmt 4701

Sfmt 4700

4219

individual benefit structures will be
released as soon as possible after this
information is approved. It is impossible
to send out plan data any sooner due to
submission dates for plan information
and the process steps needed to
translate the raw data into consumerfriendly information, as well as the print
production steps for the publication that
will house this comparative
information.
Comment: One commenter asked
what information we will provide to
SSA, SHIPs, and other groups to educate
beneficiaries about the late enrollment
penalty.
Response: We will provide important
details about the penalty associated
with late enrollment in the information
provided to SSA and SHIPs, as well as
in SHIP training materials. In addition,
we will develop materials that can be
used by employers, unions, partners,
advocacy groups and other stakeholders
to educate beneficiaries about the late
enrollment penalty.
Comment: One commenter stated that
we must give greater attention to
developing materials and education
campaigns focused on informing
beneficiaries, especially those with
special needs, about the new drug
benefit and to help them to enroll in the
best plan available.
Response: We are planning a multitiered education program to repeatedly
reach all beneficiaries. This program
will include plans for specific important
target audiences, including those with
special needs. Mailings and outreach
activities to dual eligibles are currently
being planned. Education and outreach
materials developed for beneficiaries
will be thoroughly tested with the target
audience.
Comment: Another commenter stated
that we should mail, no later than
October 15, 2005, standardized, easy-to­
understand notices to full-benefit dual
eligible individuals that, among other
things: inform them of their eligibility to
receive the low-income subsidy if they
enroll in a PDP; list of choices of health
plans, clearly denoting those that meet
the benefit premium assistance limit,
and contact information for each plan;
explain that full-benefit dual eligible
individuals will be randomly enrolled
in a prescription drug plan at a specified
date if they fail to opt out or enroll in
a plan themselves; explain how they
may change their drug plans if they
wish at any time; and inform them of
where in their community they can go
to get help with enrollment. The
commenter also recommended that
these notices should be tested for
readability by focus groups and experts.

E:\FR\FM\28JAR2.SGM

28JAR2

4220

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

Response: We plan to consumer test
beneficiary notices and send out the
information noted by the commenter
above by October 15, 2005. We are
considering using the mailing to inform
the full-benefit dual eligible individuals
about what plan they will be autoenrolled in if they fail to elect a Part D
plan by December 31, 2005 or
affirmatively opt of Part D, and that they
have a right to choose to enroll in a
different plan.
Comment: One commenter stated that
the website should be provided in
languages other than English to reflect
the language spoken in a PDP service
area.
Response: We appreciate this
feedback and will consider this when
developing the requirements for the
website.
Comment: CMS should include in the
final rule binding and enforceable
standards defining information plans
must provide to beneficiaries with
various types of disabilities. For
example, this information must be
available to individuals who are blind
or have low-vision. Further, CMS must
require PDP internet websites to be
accessible for individuals with vision
impairments.
Response: Our websites are accessible
to people with various disabilities,
including those who are blind or have
low-vision. Under our marketing
requirements in § 423.50, we require
Part D plans to demonstrate that
marketing resources are allocated to
marketing to the vulnerable
populations, as well as beneficiaries age
65 and over. It is also important to note
that Section 508 of the Rehabilitation
Act of 1973 allows individuals with
disabilities to access electronic
information.
Comment: Commenters stated that the
proposed rule focused largely on
support through Internet sources and
the 1–800 Medicare number, and argued
that both are necessary and helpful but
insufficient to meet the needs of many
duals, as well as those eligible for the
low-income subsidy.
Response: Although the basis for
information dissemination is through
publications, www.medicare.gov and 1–
800–MEDICARE, we do not plan to
solely rely on these resources to reach
the population as a whole. We will work
closely with SSA, SHIPs, Area
Associations on Aging as well as other
national stakeholders and partners, to
provide assistance to those who may
qualify for the low-income subsidy.
Through a broad network of support
from community based organizations,
we will make considerable efforts to
reach those beneficiaries who do not

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

have access to the Internet or are
uncomfortable calling 1–800–
MEDICARE.
Comment: CMS should also make
detailed information about PDPs
available electronically to others in
accessible formats that would enable
them to conduct independent analyses
about what plan would be best for a
particular individual.
Response: Because the actual plan
data underlying the price comparison
tool is considered proprietary, we do
not anticipate making the underlying
data available electronically to outside
organizations. Since nothing in the
MMA addresses disclosure of plan data,
the Freedom of Information Act (FOIA)
rules apply. FOIA Exemption 4 protects
certain confidential commercial
information that is submitted to a
Federal agency. Determinations about
the applicability of FOIA Exemption 4
to plans’ pricing data would be made on
a case-by-case basis depending on
whether the submitter of the data could
demonstrate that disclosure of this
information would likely cause
substantial competitive harm to the
submitter’s competitive position. If
FOIA Exemption 4 is found to protect
submitted price information, we cannot
disclose this information because to do
so would violate the Trade Secrets Act
(18 U.S.C. 1905).
Comment: Several commenters stated
that we should develop specific
outreach and education strategies for
vulnerable populations, including
disabled Medicare beneficiaries and
dual eligibles. Another commenter
stated that PDPs should be required to
include specific plans for encouraging
enrollment of hard-to-reach
populations, including individuals with
mental illness. Another commenter
indicated that outreach efforts must
involve community-based groups on a
collaborative basis and not just use
these groups as conduits for distributing
written materials produced by CMS
regarding the new benefit. Resources
must be provided to enable these groups
to educate beneficiaries about their
choices and help enroll them. This
collaboration with community groups
must begin as soon as possible to
establish the infrastructure needed once
Part D goes into effect.
Response: We are developing an
extensive outreach campaign for these
individuals and are working closely
with U.S. Department of Health and
Human Services’ Office of Disability to
ensure that this important audience is
reached.
Comment: One commenter strongly
urged CMS to develop a specific plan
for facilitating enrollment of

PO 00000

Frm 00028

Fmt 4701

Sfmt 4700

beneficiaries with disabilities that
incorporates collaborative partnerships
with State and local agencies and
disability advocacy organizations.
Response: In addition to working
closely with the HHS Office of
Disability to ensure we reach this group
of individuals, we plan to broaden local
partner networks though the Regional
Education About Choices in Health
(REACH) campaign to provide training,
information and planning support to
provide outreach and assistance to these
populations. REACH is a national
education and publicity campaign
implemented at the local level by our
Regional Offices and their partners. The
REACH campaign works through
partnerships to increase awareness of
the Medicare program and resources
among hard to reach populations.
Comment: A commenter suggested
that we should develop and implement
effective outreach strategies utilizing the
Medicare Beneficiary Ombudsman
authorized under section 923 of the
MMA.
Response: Section 923 of the MMA
states that, to the extent possible, the
Ombudsman shall work with SHIPs to
facilitate the provision of information to
individuals entitled to benefits under
Part A or enrolled under Part B, or both
regarding MA plans and changes to
those plans. We will ensure that SHIPs
receive sufficient training in all
aforementioned subjects so that SHIPs
can provide information and assistance
to beneficiaries referred to them by the
Ombudsman. The Ombudsman
operational design assumes that 1–800–
MEDICARE will refer callers to
appropriate sources, including SHIPs,
for resolution of complaints and appeals
and, when necessary, refer them directly
to the Ombudsman as a last resort.
Comment: We received two comments
that strongly recommended that we
clarify the SHIPs mandate to ensure that
they address the needs of individuals
with disabilities, including non-elderly
individuals.
Response: Section 4360 of the
Omnibus Budget Reconciliation Act
(OBRA) 1990, which created SHIP,
requires that SHIPs provide information,
counseling and assistance to Medicare
eligible beneficiaries, including
beneficiaries with disabilities. All CMS
SHIP grant announcements expressly
reference beneficiaries with disabilities
as intended recipients of SHIP services.
In addition, we provide training and
information on the special needs and
issues related to this population. We
agree with the commenters and will
clarify the SHIP mandate through the
methods described here to address this
need.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Comment: One commenter suggested
that we partner with and fund
community-based disability
organizations to conduct outreach,
information, and referral activities on
the new Part D benefit.
Response: While we agree to partner
with these organizations in these
activities, funding these groups are
subject to available funds in our budget.
Comment: One commenter was
concerned about beneficiaries being
inundated with marketing and outreach
materials. Since many beneficiaries will
need counseling on plan selection, this
commenter asked for clarification
regarding whether counseling will be
available, what the States’ role will be,
and whether there will be Federal
financial participation available for such
costs.
Response: States that had SPAPs on
October 1, 2003 will have Federal
assistance available to them through the
transitional grant program authorized
under section 1860D–23(d) of the Act.
These States will use the transitional
grant funds to educate SPAP enrollees
about the plans that are available to
them under part D, as well as provide
technical assistance, phone support,
counseling, and other activities the
SPAP believes will promote the
effective coordination of enrollment in
Part D. States that do not have a SPAP
operational as of October 1, 2003 will
not have these transitional funds
available to them.
In addition, we will continue to
provide grants to the States through the
SHIP. SHIP is a national program that
offers one-on-one counseling and
assistance to people with Medicare and
their families. Through grants directed
to States, SHIPs provide free counseling
and assistance via telephone and face­
to-face interactive sessions, public
education presentations and programs,
and media activities. We expect SHIP
counseling to be an important source of
information for beneficiaries about Part
D.
Comment: One commenter was
concerned that the targeted and handson outreach, education and decision
support and enrollment services,
particularly outreach to lower income,
rural and disabled beneficiaries is not
adequate.
Response: Through the REACH
campaign, we plan to broaden local
partner networks in order to provide
training, information and planning
support to provide outreach and
assistance to these populations.
Through a broad network of support
from community-based organizations as
well as national stakeholders and
partners, considerable effort will be

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

made to reach those beneficiaries who
do not have access to the Internet or
who are uncomfortable calling 1–800–
MEDICARE.
Comment: One commenter stated that
we should consider preparing
educational materials that would help
pharmacists understand the benefits and
other material that they can use to
educate beneficiaries.
Response: We are working with our
provider education staff to develop
materials for all providers, including
pharmacists, for educational use.
10. Approval of Marketing Materials and
Enrollment Forms (§ 423.50)
Section 1860D–1(b)(1)(B)(vi) of the
Act directs us to use rules similar to
those established under section 1851 of
the Act to review PDPs’ marketing
materials and application forms.
In the proposed rule, we generally
replicated the marketing provisions
established under § 422.80 for MA plans
as appropriate for PDPs. Therefore, we
proposed at § 423.50(a) guidance for our
review of marketing materials,
definition of marketing materials,
deemed approval, and standards for
PDP marketing. We do recognize that
the differences between PDPs and MA
plans will require different marketing
requirements and we requested
comments on this issue. We have
drafted the final rule to apply the
marketing requirements to all Part D
sponsors, although we may waive the
Part D provisions in deference to similar
MA, PACE and cost plan requirements.
We also proposed to add
§ 423.50(a)(3) in order to streamline the
marketing review process for all PDP
sponsors for those materials which pose
the lowest risk of confusing or
misleading beneficiaries. This aspect of
the File and Use program allows the
PDP sponsor, prior to distribution, to
submit and certify that for certain types
of marketing materials it followed all
applicable marketing guidelines, or for
certain other marketing materials that it
used, without modification, proposed
model language as specified by CMS.
Except as otherwise provided below,
the final rule adopts the marketing rules
set forth in § 423.50 of the proposed
rule. Although the following area
generally applies to Fallback plans,
subpart Q specifically addresses issues
related Fallback plans.
In addition to marketing materials and
enrollment forms, comments provided
the opportunity to respond to
enrollment issues related to SPAPs,
pharmacist and physician marketing to
beneficiaries, and organizations
marketing additional products in
conjunction with PDP services.

PO 00000

Frm 00029

Fmt 4701

Sfmt 4700

4221

Comment: We received several
comments on types and quantity of
information that should be disseminated
to beneficiaries. Many commenters
suggested that specific formulary
information needs to be provided
including specific drugs (top 25–50),
pricing and premium information,
benefit structure, pharmacy networks,
plan availability by region, medication
management services offered (and who
is eligible for them), appeals and
exception process and information on
plan performance. Most agreed that this
information should be mailed, as well as
provided on the Internet and that
comparison tables with this information
for all plans in a geographic region
should be provided so that beneficiaries
can compare plans side-by-side. One
commenter was concerned that
beneficiaries would be overwhelmed
with materials and expressed concern
about the potential for adverse selection.
It was suggested that strict and detailed
regulations on marketing be issued to
protect beneficiaries. One commenter
suggested that we need more detail in
the final rule around patient education.
Response: We agree with the
commenters that beneficiaries will need
information on the Part D plans
available in their areas. Our goals in
providing information has always been
to ensure that beneficiaries have access
to timely, accurate and reliable
information that helps them make
informed health care decisions. Our
education and outreach efforts related to
Part D are no exception. We will employ
multiple tactics, including publications,
direct mailings, the Internet
(www.medicare.gov), toll-free telephone
numbers, and localized grassroots
partnerships to help beneficiaries access
the level of detailed information that
they want and need to make their best
choice among Part D plans. Our tiered
communications approach recognizes
that different beneficiaries have varying
information needs and what might be an
overwhelming level of detail to some
individuals may only meet the baseline
needs of another. By using multiple,
integrated education and outreach
approaches and thoroughly market
testing our products and messages
during development, we are working to
strike the best balance of providing the
right information at the right time. In
addition, we are committed to making
sure plans provide clear, accurate
information on covered benefits,
including formulary, pharmacy
networks, and costs. We intend to
require such information in guidance
rather than specifying the full range of
materials in the regulations so that we

E:\FR\FM\28JAR2.SGM

28JAR2

4222

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

can modify our requirements in a timely
manner to meet beneficiary needs.
Comment: We received several
comments regarding the use of various
marketing vehicles to promote PDPs.
Several of the commenters supported
the distribution of information through
websites, 800 numbers, written
communications and telemarketing. One
commenter stated that marketing should
be limited to mail contacts only due to
concerns regarding fraud. One
commenter stated that the restrictions
on marketing need to be expanded due
to the potential for fraud. Many
commenters opposed telemarketing and
one was explicitly against email as well.
Response: Section § 1860(D)(1)(b) of
the Act allows for similar marketing
rules for the drug benefit as those for
MA. We intend to follow this guidance
and promote marketing guidelines that
are in line with those under the MA
program. The MA program supports the
use of websites, 800 numbers, mailings,
email and telemarketing for plan
marketing. By allowing plans multiple
routes for marketing, we believe that
greater numbers of beneficiaries will be
reached and thus enrolled in drug
benefit plans. We believe this is an
important goal given the penalty for late
enrollment in Part D. We understand
that this is contrary to what we allowed
in the drug discount programs. We did
not allow the drug discount card
programs to participate in telemarketing
practices because many of the drug card
sponsors were stand alone start-up
companies that did not have a previous
history of doing business. We expect
that the PDP sponsors will have
previous experience administering drug
plans, insurance or other lines of similar
business, with established reputations,
much like MA plans.
Marketing guidelines are in the
process of being established, and these
will set forth in greater detail what will
be expected of the plans. PDP sponsors
may be barred from engaging in certain
practices if abuses occur. In addition,
PDPs will be prohibited from requesting
beneficiary identification numbers over
the telephone or via email as related to
marketing activities.
Comment: One commenter stated that
the States should be able to steer its
SPAP enrollees toward the most
appropriate plan.
Response: Section 1860D–23(b)(2) of
the Act defines an SPAP as a State
program which, in determining
eligibility and the amount of assistance
to a Part D eligible individual under the
program, provides assistance to such
individuals in all Part D plans and does
not discriminate based upon the Part D
plan in which the individual is

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

enrolled. We further interpreted that
provision in the preamble of the
proposed regulation such that a SPAP
may not designate a preferred PDP, even
if the State allows beneficiaries to
choose a non-preferred plan and
provides for benefits equivalent to that
which it also provides for the preferred
plan (referred to as wrap-around
benefits). We believe that, regardless of
whether the SPAP is authorized under
State law to make enrollment decisions
on behalf of the beneficiary, we
interpret using that authority to steer
beneficiaries to a preferred PDP or MA­
PD plan would be interpreted to violate
the non-discrimination provision under
section 1860D–23(b)(2) of the Act.
Section 1860D–23(d) of the Act
provides for grants to SPAPs, in
existence as of October 1, 2003, which
were awarded in September of 2004 for
fiscal year 2005, for the purpose of
educating their members about options
to access Medicare drug benefit
coverage and about comparing options
so they can choose the best value to
them. We will reach out to SPAPs with
information to help people with
Medicare understand their drug plan
options. We will also assist SPAPs in
adapting this information to ensure that
their members understand the way that
the new Part D plans coordinate with
their SPAP benefit and supporting their
members in making informed decisions
about drug benefit plan options.
Outreach to SPAPs would also include
instruction on the educational/outreach/
assistance activities SPAPs could
pursue while not discriminating against
Part D plans.
SPAPs cannot discriminate amongst
plans; however, they may provide
beneficiaries with comparable education
on all of the available Part D plans
(PDPs, MA-PD plans, and PACE and
cost-based HMO or CMPs offering
qualified prescription drug coverage) in
terms of the following: which plans
have lower premiums after application
of any uniform SPAP premium subsidy;
which plans offer formularies that cover
the drugs utilized by the beneficiaries so
that beneficiaries can continue to use
the same drugs; which plans offer the
drugs used by the beneficiary at the
most favorable combination of
deductibles, coinsurance/co-pays, and
negotiated prices; which plans use the
same network pharmacies as the SPAP
so that beneficiaries can continue to use
the same pharmacy; and which plans (if
any) have ID cards that include an
emblem or symbol indicating its
coordination with the SPAP to facilitate
secondary payment at the point of
service.

PO 00000

Frm 00030

Fmt 4701

Sfmt 4700

In addition, SPAPs are prohibited
from recommending Part D plans based
on their financial interest in minimizing
their cost of providing coverage that
supplements (wraps-around) their
members Part D benefits. They are
required to mirror our process autoenrolling full-benefit dual eligible
individuals among PDPs on a random
basis in the event that members do not
actively select a Part D plan during their
IEP or after enroll in the SPAP.
Part D plans benefit coordination
requirements include establishing
procedures to share information with
SPAPs on enrollment files, the
processing and payment of claims,
claims reconciliation reports and
whether the beneficiary has satisfied the
out-of-pocked limit. Part D plans are
encouraged to work with all SPAPs to
co-brand the Part D benefits by
providing (in its electronic claim
response to the pharmacy) information
on payment of premiums and coverage,
and whether claims should be sent to an
SPAP for processing. Plans should also
consider including the SPAPs’ benefits
in marketing and educational materials
to beneficiaries, which includes SPAP
benefit information, eligibility criteria,
order of party payment, and a phone
number for SPAP enrollment and claims
payment information.
Comment: Two commenters were
concerned that SPAP beneficiaries will
be confused by materials and decline
enrollment if premiums, deductibles
and coverage gaps are discussed since
SPAP participants were never required
to pay these amounts. It was also stated
that marketing materials for this
population should include coordination
of benefit (COB) information.
Response: We expect that SPAPS will
provide information to beneficiaries on
their drug plan choices in their States.
We expect that plans will work
cooperatively with SPAPs to co-brand
materials, when appropriate, to ensure
that beneficiaries are provided with
comprehensive, appropriate,
coordinated information that will
facilitate education and understanding
of their benefits. Requirements for
coordination of benefits with other
providers of prescription drug coverage
are described under § 423.464 (e). We
expect Part D plans to work with SPAPs
on coordination of benefit activities to
ensure that beneficiaries are provided
seamless care that is easily
understandable.
Comment: We received multiple
comments regarding the specific
requirements for marketing materials.
Many commenters agreed that
marketing materials should be available
in Spanish and in other languages that

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
are in the plan’s service area. Two
commenters stated that marketing
materials should be developed at an
appropriate health literacy level. Two
commenters stated that the information
will need to be adapted for the blind/
low vision, those with cognitive
disabilities, in Braille, large print and on
audio or computer disks. It was also
stated that there should be a
requirement that the Internet site be
accessible for the visually impaired and
that interpreters and alternative
communication methods should be
mandated. Another commenter stated
that a subpart should be devoted to
notice requirements.
Response: We agree that there are
special needs of beneficiaries that will
need to be provided for. The regulation
currently dictates that marketing
materials need to be available in lowliteracy formats. While we do not
require materials to be available in other
languages, it is highly encouraged. In
addition, basic enrollee information
should be developed to accommodate
the visually impaired. Call centers must
be able to accommodate non-English
speaking/reading beneficiaries. Plan
sponsors should have appropriate
individuals or translation services
available to call center personnel to
answer questions that beneficiaries may
have concerning aspects of the drug
benefit. We are working on developing
guidance shortly following publication
of the final rule that is similar to the MA
requirements to ensure appropriate
information is available to beneficiaries.
Comment: Several commenters stated
that marketing materials should be
consistent with other Medicare
programs.
Response: We are currently
developing additional marketing
guidelines and expect them to be similar
to other Medicare programs (for
example, the MA and the Medicareapproved prescription drug discount
card programs), to the extent possible,
in order to reduce the administrative
burden for plans that participate in
these programs.
Comment: We received many
conflicting comments regarding whether
providers (pharmacists and physicians)
should be allowed to market to
beneficiaries. This includes the display
of materials from Part D sponsors as
well as verbally steering beneficiaries to
particular plans. Several commenters
were in support of pharmacies
marketing MA/PD and PDPs; some of
these commenters stated that equal
attention should be provided to all
plans in the particular area. In addition,
some commenters specifically

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

mentioned that they were in support of
physicians marketing Part D plans.
Other commenters were against
marketing of Part D plans in the
pharmacy setting; three specifically
mentioned the prohibition of physicians
from marketing to beneficiaries. Most
stated that the reasons for their
positions were that physicians or
pharmacists could steer a beneficiary to
inappropriate Part D plans.
Response: Both the MA and the
Medicare-approved prescription drug
discount card programs allow some
provider marketing to occur. Our
position is that it is appropriate to allow
providers and pharmacies to market to
beneficiaries. This marketing provides
beneficiaries with access to information
about the options available to them
under Part D that they may not have
received through other sources because
beneficiaries often look to their health
care professionals to provide them with
complete information regarding their
health care choices. Therefore, we
believe that providers and pharmacies
should provide prospective enrollees
with information on the full range of
options available to them under Part D.
This process is similar to the process
followed for the discount drug card
program, where pharmacies may
provide information on where
beneficiaries may get complete
information regarding all the Medicareapproved discount cards available in the
region in their service area. We would
require Part D sponsors that want their
network pharmacies to provide
marketing materials to prospective
enrollees to include in their contracts
language requiring the pharmacies Part
D eligible individuals with information
on all Part D options available in the
service area. This requirement would be
specified in the further guidance issued
by CMS. Any remuneration offered to
providers in exchange for providing to
patients information about particular
Part D plans must comply with
applicable Federal and State laws on
fraud and abuse.
Comment: Two commenters stated
that Part D sponsors should be
prohibited from using Medicare
discount card enrollee and applicant
information to provide leads for
marketing their Part D plans.
Response: We acknowledge the
importance of beneficiary privacy, and
the marketing limitations that drug
cards operate in accordance with
section 1860D–31(h)(7) of the Act. The
drug card provisions under section
1860D–31 of the Act contemplate a
transition from the drug card program to
Part D, and we are considering what
will be the specific drug card

PO 00000

Frm 00031

Fmt 4701

Sfmt 4700

4223

responsibilities of drug card sponsors
during transition. From that
understanding we will assess whether
PDP sponsors currently offering a drug
card may use of beneficiary drug card
information to market their Part D plans
and we will provide further guidance to
the drug card sponsors and Part D
sponsors at a later time. We note,
however, that the HIPAA Privacy Rules
may limit the ability of drug card
sponsors to disclose their enrollees’
information to un-affiliated Part D
sponsors.
Comment: One commenter suggested
that the File & Use program should be
delayed one year until we have more
experience with evaluating the practice
of the PDPs, and that the term
‘‘performance requirements’’ needs to be
defined.
Response: We will define the
eligibility and performance
requirements associated with the File &
Use program in further guidance.
Comment: There was concern over the
amount of time that was stated was
necessary for a review of PDP and MA­
PD marketing materials. Some
suggestions included decreasing the
time of this review from 45 days to 30
days, and instituting a 10-day review
period for resubmitted materials. In
addition, if unaltered model materials
were used, the review should be limited
to 10 days.
Response: We agree that that
timelines for reviewing marketing
materials should be shortened.
However, we intend on maintaining the
proposed timelines for Part D marketing
materials as defined in the statute. We
will work to develop a review process
that is as efficient as possible. We will
develop a range of model materials for
Part D sponsors.
Comment: We also received a
comment that the amount of materials
that must be individually approved
should be limited. There was also
concern that we may not have enough
staff to review the materials and that the
process needs to be open, fair and
constructive.
Response: We will develop a range of
model materials for Part D sponsors to
choose from to improve efficiency of the
marketing review process. Materials that
utilize ‘‘model language’’, without
modification, are subject to a
streamlined review process. We will
work to develop a review process that
is as efficient and effective as possible
utilizing standardized criteria to review
the materials.
Comment: Two commenters stated
that it is unacceptable that marketing
materials are deemed approved if we
fail to approve them within the time

E:\FR\FM\28JAR2.SGM

28JAR2

4224

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

period and materials should be
reviewed multiple times for multiple
regions.
Response: It is a statutory requirement
that we approve marketing materials
within 45 days or that they are then
deemed approved. In developing sub
regulatory marketing guidance and
processes, we will work to ensure that
our reviews are completed within the
statutory timeframe.
Comment: Commenters stated that
guidelines for CMS review under
§ 423.5(c)(i),(ii), and (iii) of the proposed
rule need to be more specific. These
sections lay out the information that
Part D plans need to provide to
beneficiaries.
Response: We will provide greater
detail in the sub regulatory guidance in
order to facilitate any necessary future
changes that would need to be made.
Comment: Many commenters gave
input as to whether additional products,
such as financial services, should be
marketed to Medicare beneficiaries in
conjunction with the Part D benefit.
Several of the organizations expressed
their concerns over the fact that
beneficiaries may be confused with
receiving additional information for
other products and services in
conjunction with information about the
Part D benefit. The major concern is that
beneficiaries would choose not to
participate in Part D because they did
not like some of the other products or
that they may mistakenly believe that
we have approved these products. One
commenter suggested that individuals
must actively agree to receive marketing
materials other than enrollment
materials. Some commenters suggested
that financial institutions should not be
encouraged to participate as PDPs, since
the potential for abuse, as in selection
of healthier beneficiaries into plans and
avoidance of financial services to less
healthy individuals, is enormous.
Some health plans commented that
they are in favor of allowing PDP
sponsors to market additional healthrelated and non-health-related products
to beneficiaries. These products could
be provided for an additional fee or at
no additional cost to the beneficiary.
The belief is that the additional tools
could help beneficiaries manage their
expenses and financial securities. One
organization also stated that if PDP
sponsors are permitted to provide these
additional products, than MA-PD plans
should be allowed to similarly provide
these additional products.
Response: We do not want to restrict
beneficiaries from receiving materials
about of health-related and non-health­
related services that may be of benefit to
them in managing their health or

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

payments for health care. All
organizations that are qualified to be a
Part D sponsor are encouraged to
participate in providing services under
Part D. In situations where plans want
to use or disclose protected health
information (PHI), for purposes of
marketing these other products or
services, for example beneficiary
enrollment information, Part D plans
must comply with the HIPAA Privacy
Rule and obtain a written authorization
from the beneficiary prior to using the
beneficiary’s PHI to market non-health­
related products and services. In other
cases where Part D plans implement
general marketing mailings that do not
use beneficiary PHI, we would not
object to plans providing such
information to beneficiaries as long as
the information is not contingent upon
PHI to do so. For example, a plan may
obtain a general mailing list from a nonrelated marketing vendor to mail
materials to all individuals over age 65
in a geographic area to promote its
products. The use of beneficiary names
and addresses obtained from a plan and
used for mailings to beneficiaries only,
would presumably use PHI.
Consequently, plans could not market
non-health-related products through
mailings using beneficiary information
absent authorization.
Comment: One commenter
recommended that any Part D sponsor
offering other health coverage to its Part
D plan enrollees be required to provide
anti-duplication notices like those that
are required under the National
Association of Insurance Commissioners
(NAIC) model regulation for Medigap
policies. The purpose of these antiduplication notices is to advise
Medicare beneficiaries as to whether
other non-Medigap types of coverage
being offered to them might duplicate
coverage they already have under
Medicare.
Response: The disclosure statements
that are required under the NAIC model
regulation for Medigap policies were
adopted by the NAIC pursuant to antiduplication provisions contained in
section 171(d) of the Social Security Act
Amendments of 1994 (SSAA’94–Pub. L.
103–432) that amended section
1882(d)(3)(A) of the Act. These
statements apply to all issuers of health
insurance coverage that is offered to
Medicare beneficiaries that is neither a
Medigap policy nor a type of coverage
that is listed as exempt from this
requirement in a Federal Register notice
that CMS [then HCFA] published on
June 12, 1995. Section 171(d) required
CMS to either publish the disclosure
statements developed by the NAIC or
publish its own. The FR notice through

PO 00000

Frm 00032

Fmt 4701

Sfmt 4700

which CMS accepted the 10 separate
disclosure statements developed by the
NAIC for the various types of coverage
commonly offered to Medicare
beneficiaries contained a list of types of
policies not requiring disclosure
statements (See 60 FR 30880).
Among the types of coverage not
requiring the use of a disclosure
statement were managed care
organizations with Medicare contracts
under section 1876 of the Act. The
notice went on to explain that these
types of policies are exempt because
‘‘these plans do not ‘duplicate’ Medicare
benefits; rather their purpose is to
actually provide all covered Medicare
benefits directly to enrolled
beneficiaries.’’ In 1995, cost and risk
managed care organizations with
contracts under section 1876 of the Act
were the primary alternative to fee-for­
service Medicare. Medicare+Choice
plans were authorized by the Balanced
Budget Act (BBA) in 1997, and the
program has now been renamed
Medicare Advantage by MMA. MMA
also provided for private prescription
drug plans (PDPs) to contract to deliver
Medicare prescription drug benefits
under Medicare Part D. Because Part D
plans will actually provide all covered
Medicare drug benefits directly to
enrolled beneficiaries, we wish to
clarify that these entities will not have
to provide anti-duplication notices for
their provision of coverage pursuant to
their Medicare Part D contracts.
However, if Part D plans choose to
market to their enrollees other (nonMedigap) health insurance products that
are not part of their contracts under Part
D, these other types of health insurance
products will have to bear the
disclosure statements required by
section 1882(d)(3)(A) (vi) of the Act and
the NAIC model regulation unless the
other coverage comes within one of the
specified exemptions.
11. Information Provided to PDP
sponsors and MA Organizations
Section 1860D–1(b)(4)(A) of the Act
authorizes us to provide information
about Part D eligible individuals to PDP
sponsors and MA organizations to
facilitate the marketing and enrollment
of beneficiaries in their PDP and MA-PD
plans. This information is intended to
ensure participation in the Part D
program, as well as to reduce costs to
those plans.
In the final rule, it is not necessary to
provide regulatory text implementing
this provision; however, we intend to
provide additional guidance shortly
following publication of this rule, as
explained below.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Comment: We received several
comments on this MMA provision.
Several of the commenters supported
the provision of such information to
organizations, with a few offering to
work with CMS to develop guidance
and ensure that the appropriate
beneficiary protections are in place.
Many who supported this initiative
believed that, at a minimum, the name,
address, and telephone number of the
individual should be provided. Another
commenter believed that the statute
permits organizations to contact
beneficiaries through written,
electronic, or phone communication.
Another commenter stated that the
individual’s dual eligible or low-income
subsidy status should also be provided.
The commenter also noted that we
should provide the information to
organizations upon request, as opposed
to being limited to only receiving such
information at certain times of the year.
The commenter also believed that the
statute would permit PDP sponsors to
obtain marketing information on lowincome and dual eligible individuals
directly from States and SPAPs.
Several commenters also opposed
such information being provided to
organizations. One commenter believed
that providing such information to Part
D competitors would generate more
problems and ‘‘incite’’ more negative
beneficiary reaction that would
outweigh any value in enhancing
beneficiary outreach. Other commenters
were concerned that such information
would be used to ‘‘cherry pick’’
healthier and less expensive
beneficiaries. Several commenters noted
that if we were to provide such
information to organizations, such
information should be limited to the
minimum amount necessary. They
stated that certain information, such as
health or financial information or
telephone numbers should not be
provided. Further, beneficiaries should
be given the option to request that we
not share their information with plans.
Several commenters did not believe that
PDPs or MA-PD plans should be able to
use the information for telemarketing
purposes. Another commenter indicated
that we should only disclose
information to the plan if the plan’s
marketing material contains formulary
and drug pricing information and is
accompanied by an application form.
Response: We decline to provide
specifics on the provision of this
information at this time but reserves the
right to provide this information to
plans in the future. We will develop
further guidance on this issue shortly
after publication of this rule.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

12. Procedures to Determine and
Document Creditable Status of
Prescription Drug Coverage (§ 423.56)
Section 1860D–13(b)(6) of the Act
identifies certain entities, which we
describe in our proposed rule that must
disclose whether the prescription drug
coverage that they provide to their
members who are Part D eligible is
creditable prescription drug coverage.
Sections 1860D–13(b)(4) (A) through
(G) of the Act lists seven forms of
potential creditable prescription drug
coverage: Coverage under a PDP or
under an MA-PD plan; Medicaid; a
group health plan (including coverage
provided by a Federal or a nonfederal
government plan and by a church plan
for its employees); a State
pharmaceutical assistance program;
veterans’ coverage of prescription drugs,
prescription drug coverage under a
Medigap policy; and military coverage
(including Tricare). Many of these terms
are defined elsewhere in Federal
regulations; some of them are under the
jurisdiction of other Federal agencies.
In addition to the forms of creditable
coverage identified in sections 1860D–
13(b)(4) (A)-(G) of the Act, section
1860D–13(b)(4)(H) of the Act provides
the Secretary with the flexibility to
identify ‘‘other coverage’’ that could be
considered to be creditable prescription
drug coverage. We proposed, at
§ 423.56, to expand the list of types of
creditable prescription drug coverage.
As discussed in § 423.46 of the
proposed rule, upon becoming eligible
for Part D, beneficiaries must decide
whether to enroll in Part D, or forego
that opportunity and face a possible
financial penalty should they later
decide to enroll. Beneficiaries who
decide not to enroll in Part D because
they have creditable prescription drug
coverage will not face such a penalty if
they later decide to enroll in Part D.
According to section 1860D–13(b)(5)
of the Act, an enrollee who would
otherwise be subject to a late enrollment
penalty may avoid the penalty if his or
her previous coverage met the standards
of ‘‘creditable prescription drug
coverage’’. Under section 1860D–
13(b)(5) of the Act, previous coverage
will only meet those standards ‘‘if the
coverage is determined (in a manner
specified by the Secretary) to provide
coverage of the cost of prescription
drugs the actuarial value of which (as
defined by the Secretary) to the
individual equals or exceeds the
actuarial value of standard prescription
drug coverage.’’
In the proposed rule, we interpreted
‘‘to the individual’’ in this case as being
to the average individual under the

PO 00000

Frm 00033

Fmt 4701

Sfmt 4700

4225

plan, as opposed to the sponsor of the
plan. For purposes of determining
creditable coverage, we proposed a
‘‘gross’’ test: will the expected plan
payout on average be at least equal to
the expected plan payout under the
standard benefit? We also proposed at
§ 423.56(c) that any entity seeking to
offer coverage of the type described in
§ 423.56 must attest to the actuarial
equivalence (or non-equivalence) of its
prescription drug coverage in their
notice to Medicare beneficiaries and in
a submission to CMS, and must
maintain documentation of the actuarial
analysis and assumptions supporting
the attestation.
In coordination with the provisions
regarding the late enrollment penalty,
we proposed at § 423.56 to establish a
process under which these entities will
disclose the creditable status of their
prescription drug coverage to us and to
each part D eligible beneficiary enrolled
in such coverage.
Section 1860D–13(b)(6)(C) of the Act,
implemented at § 423.56(g) of the
proposed rule, provides that an
individual who was not adequately
informed that his or her prescription
drug coverage was not creditable
prescription drug coverage may apply to
CMS to have such coverage treated as
creditable prescription drug coverage for
purposes of not having the late penalty
imposed.
Comment: One commenter stated that
Medicaid should not be considered
creditable prescription drug coverage,
for the purposes of Part D, because no
Medicaid benefit for Part D covered
prescription drugs is available to Part D
eligible beneficiaries.
Response: All entities listed under
§ 423.56(b), except PDPs and MA-PDs
under (b)(1) and PACE plans and costbased HMOs and CMPs offering
qualified prescription drug coverage,
must provide notice to both CMS and its
members whether the prescription drug
coverage provided is or is not creditable.
The purpose of the notice of creditable
coverage is to ensure that individuals
are aware of whether such coverage is
creditable prescription drug coverage
and its implication to the late
enrollment penalty.
Medicaid is prohibited from
providing Part D drugs to full-benefit
dual eligible individuals. However,
since there may be other individuals
who are not receiving the full range of
benefits from Medicaid but who will
continue to receive some drug coverage
from the State, these individuals must
also receive this notice providing status
of the coverage.
Comment: One commenter requested
that we include SPAP in the definition

E:\FR\FM\28JAR2.SGM

28JAR2

4226

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

of types of coverage that may be
creditable.
Response: The proposed rule at
§ 423.56(b)(4) includes SPAPs as
potentially creditable. Section 1860D–
13(b)(4)(D) of the Act specifies these
programs, as described in section
1860D–23(b) of the Act, as such. To
ensure this concept is clear, we will
revise § 423.56(b)(4) to include the
acronym ‘‘SPAP.’’
Comment: We received a comment
indicating that the value of prescription
drug coverage under PACE will likely
equal or exceed the actuarial value of
Part D standard prescription drug
coverage as a result of existing
requirements in sections § 460.90 and
§ 460.92 of the PACE regulation. The
commenter recommended incorporating
PACE into the CMS definition of
creditable prescription drug coverage
found in § 423.56(a).
Response: We agree with the
commenter and have incorporated
PACE into the definition of potentially
creditable prescription drug coverage
found in § 423.56(b). Additional
discussion of the applicability to Part D
benefits and requirements to PACE are
outlined in subpart T of the final rule.
Comment: A few commenters
inquired about the actuarial equivalence
test that the entities listed will be
required to meet, since the actuarial
equivalence reference in § 423.265 refers
to bid submissions. Commenters
supported both the concept of ‘‘gross’’
test and an ‘‘aggregate test’’ for
calculation of the actuarial equivalence
for plans, including group health plans
which offer several benefit packages to
determine if the prescription drug
coverage is creditable.
Response: The basic actuarial
equivalence value test for the
determination of creditable coverage of
alternative coverage is determined by
calculating whether the expected plan
payout on average will be at least equal
to the expected plan payout under
defined prescription drug coverage
(gross test). We believe Section 1860D–
22(a)(2) of the Act is subject to two
reasonable interpretations of calculating
the creditable coverage test (gross test).
Under the first interpretation, the
actuarial equivalence standard for
determining creditable coverage would
be applied to the alternative coverage as
a whole, and under the second
interpretation the actuarial standard
would be applied for each benefit
option (including separate cost-sharing
arrangements) within a single group
health plan. Whereas our proposed rule
required plans to apply the actuarial
equivalence standard at the aggregate
level, for the final rule we instead

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

require plans to apply the actuarial
equivalence standard to each benefit
option within its plan.
Our rationale for revising the actuarial
equivalence test is to ensure that
beneficiaries are adequately informed
that their coverage is or is not creditable
prescription drug coverage. A sponsor
may offer many different benefit options
to beneficiaries. One of those benefit
options may not pass the gross test but
be included in an overall (or
‘‘aggregate’’) text. As a result, this would
leave beneficiaries in certain benefit
options with a determination that their
coverage is creditable, when in actuality
it is not. For example, a sponsor has a
group in which richer benefits are
offered, compared to another group that
has more limited benefits. If the sponsor
would aggregate the two benefits
together, the lower benefit will end up
as ‘‘creditable’’ when the benefit
packages are averaged together.
We will issue guidance on the aspects
of actuarial equivalence shortly
following publication of the final rule.
Comment: One commenter asked if
any coverage that is less than full
pharmacy benefits could be considered
creditable prescription drug coverage,
such as coverage for maintenance or
coverage of specific disease-only drugs.
Response: We believe that the
definition of creditable prescription
drug coverage would prohibit us from
concluding that such coverage is
creditable. To be creditable prescription
drug coverage, the coverage must equal
or exceed the actuarial value of defined
standard prescription drug coverage, as
we will define in guidance referenced in
the previous response. It is likely that
coverage of a very limited scope such as
the commenter refers will not likely
meet our actuarial equivalence test.
Comment: In response to our request
for comments on other forms of
coverage that may potentially be
considered creditable, two commenters
requested that we cost-based HMOs and
CMPs authorized under section 1876 of
the Act as potential providers of
creditable prescription drug coverage.
Both commenters also suggest that we
include a provision allowing CMS to
designate other types of coverage as
potentially creditable prescription drug
coverage in the future without requiring
such an addition be accomplished
through the rule making process.
Another commenter suggested that
coverage provided by State high risk
insurance pools also be included in the
types of coverage that may be creditable.
Response: We agree with these
suggestions and have revised § 423.56(b)
to include cost-based HMOs and CMPs
and coverage offered by State high risk

PO 00000

Frm 00034

Fmt 4701

Sfmt 4700

pools, as defined under the HIPAA
regulations at § 146.113(a)(1)(vii), as
well as a provision permitting CMS to
recognize other types of coverage as
potentially creditable prescription drug
coverage, which we would do so in
separate guidance as determined
necessary.
Comment: Several commenters
supported permitting the disclosure of
the creditable prescription drug status of
coverage through the inclusion of this
information in already existing
beneficiary materials, such as Summary
Plan Descriptions (SPDs), or annual
notices. One commenter suggested that
because beneficiaries are already
familiar with these documents, they
provide a more recognizable and
familiar avenue for this important
information. On the other hand, several
commenters supported requiring all
notices of the creditable status of
coverage to ‘‘stand alone;’’ that is; to be
provided separately in a specific notice
to each individual. Some commenters
expressed concern that if this disclosure
were not highlighted in a separate
notice, the important message could go
unnoticed and inadvertently subject an
individual to the late enrollment
penalty. Another commenter suggested
that all notices be linked to ERISA
disclosure documents (that is, SPDs),
and to HIPAA or COBRA required
notices. One commenter suggested that
notice of creditable status could be
incorporated into already existing
beneficiary information materials, while
notice of non-creditable status should
stand alone. Lastly, a commenter
requested that we specify the elements
that would be required to be included
in these notices.
Response: We specifically requested
comment on the disclosure of creditable
prescription drug notice requirements
and appreciate the feedback received.
Based on the comments we received we
believe that linking the notice of
creditable status to other required
documents is an acceptable vehicle
provided it is conspicuous and includes
standard information elements. This
approach appropriately recognizes the
importance and familiarity of materials
that beneficiaries currently receive
regarding coverage they have. Further,
we believe that it is important to
encourage compliance with the
provision of these notices by
eliminating duplication and the undue
burden associated with it. To that end,
we have revised § 423.56(c) to allow
notices of creditable and non-creditable
status to be provided in the same
manner, and will provide specific
guidance following the publication of
the rule. This guidance will require that

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
a notice of creditable and non-creditable
status be provided, at minimum,
prominently with other beneficiary
information materials, and will include
model language for both types of
notices.
We may specify different
requirements for those entities
identified at § 423.56(b) that are
required to provide these notices, where
appropriate, to reduce beneficiary
confusion and minimize administrative
burden. For example, as explained in
our discussion of § 423.34 above, we
intend to notify full benefit dual eligible
individuals that they are eligible for the
low-income subsidy. This notice will
also inform individuals that Medicaid
will no longer cover those prescription
drugs covered under Part D and that any
additional prescription drug coverage
provided by Medicaid would not be
creditable coverage under Part D.
Including this information in the same
notice will avoid duplication of effort
and possible beneficiary confusion.
Comment: Several commenters felt
that requiring an attestation by group
health plans of actuarial equivalence for
creditable coverage when the sponsor of
such coverage elects not to enroll in the
retiree drug subsidy program under
subpart R was an unnecessary cost and
an administrative burden. The
commenters believed that for those
employer groups that offer prescription
drug coverage to active employees who
might be Part D eligible individuals,
such coverage should be assumed to be
‘‘creditable’’ and should only have to
provide notices to those qualified
retirees and dependents who are Part D
eligible individuals. The commenters
also suggested that notices could be
published in summary plan
descriptions, on employer website and
via e-mail.
Response: Section 1860D–13(b)(6)(B)
of the Act requires specific entities that
offer prescription drug coverage to
provide notices to all Part D eligible
individuals enrolled in their plans
regarding whether such prescription
drug coverage is creditable. This would
include sponsors (as defined under
§ 423.880) not electing the Retiree Drug
Subsidy, as described in subpart R. A
notice of creditable or non-creditable
coverage must be provided to active
Medicare eligible employees and
Medicare eligible dependents so that a
late enrollment penalty will not be
imposed when the beneficiary enrolls in
Part D coverage.
We will provide further guidance on
a simplified method of determining
creditable coverage for those sponsors
not electing the retiree drug subsidy.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

We will also provide guidance to
sponsors on the form, manner, and
timing of such notice requirements,
following publication of this final rule.
Notices may be provided, at minimum,
prominently with other plan participant
information materials (for example,
summary plan descriptions, or HIPAA
notices) that the sponsor is required to
provide as long as it is conspicuous and
includes standard information elements
as determined in our guidance. This
approach appropriately recognizes the
importance and familiarity of materials
that beneficiaries currently receive
regarding coverage they have.
Comment: Many commenters
responded to our request for comments
on the timing of the delivery of
creditable coverage status notices to Part
D eligible individuals. Several of these
commenters suggested that the initial
notice should be required to be
delivered prior to the commencement of
the AEP which begins on November 15,
2005. One commenter suggested that
notices also be issued at least 60 days
prior to the effective date of any change
to current coverage. Another commenter
suggested that entities required to
deliver these notices should do so
within 30 to 45 days of the end of Part
D enrollment periods.
Response: We appreciate the feedback
we received regarding the timing of
notices to disclose creditable
prescription drug coverage. We agree
that, in order to ensure beneficiaries are
making informed choices regarding
enrollment in Part D, notice must be
provided to all Part D eligible
individuals each year prior to the
commencement of the AEP, which
begins on November 15th. We also
believe there are three other key times
when notice must be provided: (1) prior
to the commencement of the
individual’s initial enrollment period in
Part D; (2) prior to the effective date of
enrollment in such coverage or any
change in creditable status of that
coverage; and, (3) upon request by the
beneficiary. We will revise § 423.56(f) to
require that notice be provided, at
minimum, at these 4 times.
Comment: One commenter requested
that we clarify the meaning of the words
in § 423.56(b) of the proposed rule
‘‘with the exception of PDPs and MA-PD
plans.’’ for the duty to furnish notices of
creditable coverage to beneficiaries. The
commenter also requested clarification
of the duty of Cost plans offered under
section 1876 of the Act that provide
qualified prescription drug coverage to
furnish such notice. Lastly, the
commenter asked us to clarify if the
provision at § 423.56(d) of the proposed
rule regarding the disclosure of

PO 00000

Frm 00035

Fmt 4701

Sfmt 4700

4227

creditable status to CMS applies to any
entity that is exempted from notice
requirements according to § 423.56(b).
Response: It is our view that the
practical need for disclosure of
creditable status notices is directly
related to a beneficiary’s understanding
of their options related to enrolling in
Part D and any consequences should
they choose not to, such as the late
enrollment penalty. It also provides the
beneficiary with information about how
their coverage compares to what is
available under a Part D plan.
Beneficiaries enrolled in a PDP, MA-PD
plan, PACE plan or cost plan that
provides qualified prescription drug
coverage are enrolled in Part D, and
therefore not subject to any consequence
of choosing not to enroll. Including
these types of coverage in the list of
coverage that may be considered
creditable ensures that at no time could
a beneficiary who has maintained
enrollment in a legitimate Part D plan be
subject to the late enrollment penalty for
the same time period. However, sending
notice of creditable status seems
superfluous since, as these plans are
Part D plans, the creditable status is
automatic.
The statute at 1860D–13(b)(6)(B) of
the Act exempts PDP sponsors and MA
organizations from providing notice of
creditable coverage to its members.
Since sections 1860D–21(e) and (f) of
the Act provide that we treat cost-based
HMO and CMPs and PACE
organizations that elect to provide
qualified prescription drug coverage
similar to MA-PD local plans, such costbased HMO and CMP and PACE
organizations offering qualified
prescription drug coverage will also be
excepted from this notice requirement.
We will revise the notice requirements
under § 423.56(c) to reflect that PACE
plans and 1876 Cost plans offering
qualified prescription drug coverage as
excepted entities from the notice
requirements under § 423.56(c). We also
note that PACE plans and section 1876
of the Act cost plans that do not offer
qualified prescription drug coverage
must provide notices, as required. To
ensure that Part D plan members
understand their options, we will
ensure that an explanation of the late
enrollment penalty and the concept of
creditable coverage are included in plan
documents.
Similarly, a requirement for
organizations that provide Part D
benefits to submit separate notice would
be duplicative by their nature as CMS
approved Part D plans, they are
creditable. We will revise § 423.56(e) to
clarify that all entities providing CMSapproved Part D coverage do not have

E:\FR\FM\28JAR2.SGM

28JAR2

4228

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

to disclose creditable status of Part D
coverage to us under this paragraph.
Comment: One commenter suggests
that we consider ways that entities
could provide the required notice of
creditable status to beneficiaries and
CMS via electronic means.
Response: We recognize that most
plan documents have been historically
provided to beneficiaries in hard-copy
(that is, paper) but know from the
comments received from plan sponsors
and business advocates that participants
are receiving plan information through
other electronic means, such as websites
and e-mail. Most beneficiaries are
probably accustomed to receiving
materials in one of these manners. We
feel that paper documents have better
ensured that the beneficiary receives
and understands the information. In
addition, paper documents will provide
beneficiaries a hard copy that they can
present whenever needed to show proof
of creditable coverage. Since
beneficiaries may already be choosing to
receive information electronically, we
will explore this option as we develop
operational guidance for creditable
notice requirements.
As for entities notifying us of the
creditable status of their coverage, we
will describe the form and manner in
which entities disclose this information
to us in operational guidance and will
consider various options for entities to
do so.
C. Voluntary Prescription Benefits and
Beneficiary Protections
1. Overview and Definitions (§ 423.100)
Proposed subpart C of part 423
implemented sections 1860D–2, 1860D–
4(a), 1860D–4(b), 1860D–4(i), 1860D–
4(k), 1860D 11(a), 1860D–21(a), 1860D–
21(c)(3), and 1860D 21(d)(2) of the Act.
This subpart set forth requirements
regarding—
• Definitions for terms that are
frequently used in this subpart.
• The benefits offered by Part D
sponsors.
• The establishment of prescription
drug plan service areas.
• Access standards with regard to
covered Part D drugs.
• Part D sponsor formularies.
• Information dissemination by Part
D sponsors.
• Disclosure to beneficiaries of
pricing information for generic versions
of covered Part D drugs.
• Privacy, confidentiality, and
accuracy of PDP sponsors’ beneficiary
records.
Below we summarize the provisions
of subpart C and respond to public
comments. (Please refer to the proposed

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

rule (69 FR 46646) for a detailed
discussion of our proposals.)
a. Part D Drug
The definition of a covered Part D
drug in § 423.100 of our proposed rule
closely followed the statutory definition
in section 1860D–2(e) of the Act.
According to this definition, a covered
Part D drug was available only by
prescription, approved by the Food and
Drug Administration (FDA), used and
sold in the United States, and used for
a medically accepted indication (as
defined in section 1927(k)(6) of the Act).
A covered Part D drug included
prescription drugs, biological products,
insulin as described in specified
paragraphs of section 1927(k) of the Act,
and vaccines licensed under section 351
of the Public Health Service Act. The
definition also included ‘‘medical
supplies associated with the injection of
insulin (as defined in regulations of the
Secretary).’’ We proposed to define
those medical supplies to include
syringes, needles, alcohol swabs, and
gauze.
In accordance with section 1860D–
2(e)(2) of the Act, the definition of a
covered Part D drug specifically
excluded drugs or classes of drugs, or
their medical uses, which may be
excluded from coverage or otherwise
restricted under Medicaid under section
1927(d)(2) of the Act, with the exception
of smoking cessation agents. In
accordance with section 1927(d)(2) of
the Act, the drugs or classes of drugs
that may currently be excluded or
otherwise restricted under Medicaid
include: (1) agents when used for
anorexia, weight loss, or weight gain; (2)
agents when used to promote fertility;
(3) agents when used for cosmetic
purposes or hair growth; (4) agents
when used for the symptomatic relief of
cough and colds; (5) prescription
vitamins and mineral products, except
prenatal vitamins and fluoride
preparations; (6) nonprescription drugs;
(7) outpatient drugs for which the
manufacturer seeks to require that
associated tests or monitoring services
be purchased exclusively from the
manufacturer or its designee as a
condition of sale; (8) barbiturates; and
(9) benzodiazepines.
The definition of a covered Part D
drug also excluded any drug for which,
as prescribed and dispensed or
administered to an individual, payment
would be available under Parts A or B
of Medicare for that individual (even
though a deductible may apply).
Except as otherwise provided below,
the final rule adopts the definition of
‘‘covered Part D drug’’ set forth in
§ 423.100 of the proposed rule.

PO 00000

Frm 00036

Fmt 4701

Sfmt 4700

Comment: Several commenters were
confused about the distinction between
drugs that may be covered under Part D
given the definition of the term
‘‘covered Part D drug’’ in section
1860D–2(e) of the Act and those drugs
that are actually included on a Part D
plan’s formulary.
Response: In order to clarify when we
are referring to a drug that may be
covered under Part D and one that not
only is covered by Part D but is also
included on a particular Part D plan’s
formulary, we refer to drugs that may be
covered under Part D, consistent with
the definition of the term ‘‘covered Part
D drug’’ in section 1860d–2(e) of the
Act, simply as ‘‘Part D drugs.’’ We use
the term ‘‘covered Part D drug’’ to refer
to a drug that not only is a Part D drug,
but that is included in a Part D plan’s
formulary or treated (through a coverage
determination or appeal described in
subpart M of this preamble) as being
included in a Part D plan’s formulary,
and is obtained at a network pharmacy
or at an out-of-network pharmacy in
accordance with § 423.124 of our final
rule. Both terms are defined in § 423.100
of our final rule.
Comment: One commenter
recommended that we consider
expanding the definition of ‘‘medically
accepted indication’’ beyond the FDAapproved indications to include uses in
official compendia or research. Another
commenter was concerned that the
definition of ‘‘medically accepted
indication’’ may allow Part D sponsors
to limit their payments for use of Part
D drugs solely to FDA-approved
indications even though clinical
standards allow for alternative uses.
Another commenter was concerned that
pharmacists will be penalized for
dispensing prescriptions that are
prescribed for an indication that is not
a medically accepted indication. This
commenter indicated that pharmacists
cannot be expected to contact each
physician for each prescription in
question to determine if the drug is
being prescribed for a medicallyaccepted indication.
Response: To qualify as a Part D drug,
a drug or biological must be used for a
medically accepted indication, as
defined under section 1927(k)(6) of the
Act. This definition states that a
medically accepted indication means
not only any use for a covered
outpatient drug which is FDA-approved,
but also a use which is supported by
one or more citations included or
approved for inclusion in any of the
compendia listed in section
1927(g)(1)(B)(i) of the Act-the American
Hospital Formulary Service Drug
Information, United States

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Pharmacopoeia-Drug Information, the
DRUGDEX Information System, and
American Medical Association Drug
Evaluations. We cannot extend the
meaning of ‘‘medically accepted
indication’’ to cover uses in research, as
one commenter notes, since the
definition of ‘‘medically accepted
indication’’ in section 1927(k)(6) of the
Act does not include the reference in
section 1927(g)(1)(B)(ii) of the Act to
peer-reviewed medical literature. Thus,
a ‘‘medically accepted indication’’ is
limited by statute to a use for a covered
outpatient drug which is approved by
the FDA, or the use of which is
supported by one or more citations in
the compendia listed above. It will be
Part D plans’ responsibility to ensure
that covered Part D drugs are prescribed
for a medically accepted indication;
plans may, for example, rely on
utilization management policies and
procedures (which we will review as
part of our comprehensive review of
Part D plan benefits) to ensure that
drugs are prescribed and used for
medically accepted indications. We
clarify that pharmacists will not be
required to contact each physician to
verify whether a prescription is being
used for other than a medically accepted
indication.
Comment: Some commenters
recommended including coverage for all
EPA-recommended disposal methods
and disposal solutions as part of the
definition of ‘‘medical supplies
associated with injection of insulin’’.
The commenters noted that proper
disposal of needles and lancets are
necessary to patient safety and
important to public health. Some
commenters requested that the
definition include lancets, blood
glucose test strips, glucometers,
syringes, and needles. One commenter
suggested that gauze not be included.
Response: We are interpreting the
term ‘‘medical supplies associated with
the injection of insulin’’ in section
1860D–2(e)(1)(B) of the Act as
comprising syringes, needles, alcohol
swabs, gauze, and insulin delivery
devices not otherwise covered by Part B,
such as insulin pens, pen supplies, and
needle-free syringes. Given that section
1860D–2(e)(2)(B) of the Act excludes
products covered by Part B from the
definition of a Part D drug, test strips
and lancets, which are covered under
Part B, cannot be covered under Part D.
While we recognize the importance of
needle disposal systems, we also do not
consider the systems to be directly
associated with injection. Thus, these
devices fall outside of our interpretation
of medical supplies associated with the
injection of insulin.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

We note that it is our intention to
narrowly construe further Part D plan
determinations of what constitutes
‘‘medical supplies associated with the
injection of insulin’’ in order to ensure
that such determinations are consistent
with the examples we have provided,
and that they do not lead to an
inappropriate expansion of the Part D
benefit.
Comment: Some commenters asked
for clarification on coverage of smoking
cessation products, specifically
regarding whether over-the-counter
products will be covered under Part D.
Another commenter suggested that in
order to cover smoking cessation
products, Part D plans should require
proof of smoking cessation classes.
Response: Section 1860D–2(e)(1)(A) of
the Act specifies that a Part D drug is
a drug that may be dispensed only upon
a prescription. Although section 1860D–
2(e)(1)(B) of the Act specifically allows
smoking cessation agents to be covered
under Part D, such agents must not
otherwise be excluded from coverage
under Part D. Over-the-counter smoking
cessation products (for example, gum
and most patches), by virtue of being
not being drugs that may be dispensed
only upon a prescription, therefore
cannot be considered Part D drugs, even
though they are smoking cessation
products. Smoking cessation products
that may be dispensed only upon a
prescription, however (for example,
some patches, oral inhalants, nasal
sprays, and Zyban), may be considered
Part D drugs provided they meet all
other applicable requirements under the
definition of a Part D drug in § 423.100
of the final rule. We do not have the
authority to require Part D plans to
condition coverage of permissible
smoking cessation agents on proof of
smoking cessation classes.
Comment: One commenter requested
clarification in the final rule that Part D
plans are not prohibited from providing
drugs on the exclusion list (under
section 1927(d)(2) of the Act, other than
smoking cessation drugs) if they are
provided through an enhanced benefit.
Response: As provided in
§ 423.104(f)(1)(ii)(A) of our final rule
and in accordance with section 1860D–
2(a)(2)(A)(ii) of the Act, Part D plans
may only provide coverage of drugs that
are specifically excluded as Part D drugs
under section 1860D–2(e)(2)(A) of the
Act, that is, drugs or classes of drugs, or
their medical uses, which may be
excluded from coverage or otherwise
restricted under Medicaid under section
1927(d)(2) of the Act, with the exception
of smoking cessation agents—if they do
so as supplemental benefits through
enhanced alternative coverage and if

PO 00000

Frm 00037

Fmt 4701

Sfmt 4700

4229

they would otherwise meet the
definition of a Part D drug under section
1860D–2(e)(1) of the Act, but for the
application of section 1860D–2(e)(2)(A)
of the Act.
Comment: Many commenters urged
us to remove benzodiazepines from the
exclusion list indicating the multiple
therapeutic uses of this drug. One
commenter was concerned that
excluding drugs such as these from the
Part D benefit would force health care
providers to alter how they treat
patients based on which medications
are Part D drugs. Many commenters
noted that benzodiazepines serve as
valuable therapy for anxiety disorders,
bipolar disorder, Parkinson’s disease,
seizures, and other conditions. Some
commenters noted that excluding drugs
such as benzodiazepines that are
inexpensive, first-line therapies would
require more expensive drugs to be
prescribed simply because they are
covered. Some commenters were
concerned about the dangers of
beneficiary withdrawal from
benzodiazepines if these drugs are not
covered under Part D. Some
commenters were concerned about loss
of drug coverage for benzodiazepines for
dual eligibles, especially because
benzodiazepines are covered in many
States. Many commenters also urged us
to remove barbiturates from the
exclusion list, citing similar reasons as
those listed for benzodiazepines.
Some commenters urged us to make
an exception for vitamins used under
special circumstances, specifically with
ESRD patients. Another commenter was
concerned about the exclusion of renal
vitamins under Part D and requested
that we allow the coverage of watersoluble vitamins lost during dialysis to
be covered under Part D. Another
commenter noted that prescription
vitamins are relatively inexpensive.
Some commenters requested coverage
of over-the-counter medications for
beneficiaries with certain conditions.
One commenter asked us to reconsider
excluding over-the-counter drugs that
were formerly prescription-only drugs
and now have over-the-counter status.
Another commenter recommended
including a provision allowing over-the­
counter drugs to be covered if
prescribed in the same manner as a
prescription item. Another commenter
asked us to consider over-the-counter
drugs and medications for unintended
weight loss as a covered drug under Part
D. One commenter suggested that we
amend the exclusion for ‘‘agents used
for symptomatic relief of cough or cold’’
to ‘‘non-prescription agents used for
symptomatic relief of cough or cold’’.

E:\FR\FM\28JAR2.SGM

28JAR2

4230

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

Response: Section 1860D–2(e)(2) of
the Act clearly requires us to exclude
certain drugs from the definition of a
Part D drug. According to the statute,
the definition of a Part D drug
specifically excludes certain drugs or
classes of drugs that may be excluded
from Medicaid coverage under section
1927(d)(2) of the Act, including agents
when used for anorexia, weight loss, or
gain; agents when used for cosmetic
purposes or hair growth; agents when
used for symptomatic relief of cough
and colds; prescription vitamins and
mineral products, except prenatal
vitamins and fluoride preparations;
outpatient drugs for which the
manufacturer seeks to require that
associated tests or monitoring services
be purchased exclusively from the
manufacturer or its designee as a
condition of sale; nonprescription
drugs; barbiturates; and
benzodiazepines. We have no flexibility
to allow Part D coverage of any of these
drugs, including over-the-counter drugs
used to treat certain medical conditions,
except as provided in
§ 423.104(f)(1)(ii)(A) of the final rule,
which permits Part D plans to provide
coverage of drugs that otherwise meet
the definition of a Part D drug under
section 1860D–2(e)(1) of the Act and are
not otherwise excluded under section
1860D–2(e)(2)(B) of the Act, if they do
so as supplemental benefits through
enhanced alternative coverage. We also
note that insurance or otherwise, group
health plans, or third party payment
arrangements (including States under
Medicaid and State Pharmaceutical
Assistance Programs) may, at their
discretion, provide Part D enrollees with
supplemental coverage for drugs
excluded from coverage under Part D.
Comment: One commenter said that
many of the categories of excludable
drugs in section 1927(d)(2) of the Act
refer to drugs when used for a specific
purpose and that it is inappropriate to
simply exclude these drugs when they
may be covered depending on the
specific clinical use. This commenter
recommended that that we provide
coverage for potentially excludable
drugs when they are prescribed for a
clinical use not covered by section
1927(d)(2) of the Act. Two examples
provided were ‘‘weight loss agents’’
when used not for cosmetic purposes,
but for the treatment of morbid obesity,
and decongestant combination products,
which while commonly prescribed to
treat coughs and colds, could be used
for the treatment of allergic conditions.
Response: Drugs that are excluded
from coverage under Part D when used
as agents for certain conditions may be
considered covered when used to treat

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

other conditions not specifically
excluded by section 1927(d)(2) of the
Act, provided they otherwise meet the
requirements of section 1860D–2(e)(1) of
the Act and are not otherwise excluded
under section 1860D–2(e)(2)(B) of the
Act. To the extent this is the case, and
a drug is dispensed for a ‘‘medically
accepted indication’’ as described in the
statute, weight loss agents may be
covered for the treatment of morbid
obesity, and decongestant products for
example, may be covered when used to
treat allergies. However, we clarify that
Part D plans may establish utilization
management processes in order to
ensure that such drugs are being
prescribed for medically accepted
indications that are not excluded under
section 1927(d)(2) of the Act (for
example, decongestant products when
used for ‘‘symptomatic relief of coughs
and colds’’).
Comment: One commenter suggested
excluding drugs that have non­
prescription drug alternatives available
as Part D drugs. Two commenters
supported excluding drugs that are
‘‘lifestyle’’ drugs such as Viagra, Levitra,
and Cialis.
Response: We do not have the
authority to exclude the drugs if they
meet all the criteria of a Part D drug as
provided under section 1860D–2(e)(1) of
the of the Act and are not otherwise
excluded under section 1860D–2(e)(2) of
the Act. However, we clarify that Part D
plans may subject these drugs to
utilization management processes
provided we do not find such processes
to discourage enrollment by certain Part
D enrollees as part of the benefits
package review we will conduct (and
which is discussed in detail elsewhere
in this preamble).
Comment: One commenter supports
the current statutory language regarding
the manufacturer tying arrangements
exclusion, whereas another commenter
supports expanding this prohibition but
does not specify how we should expand
it. One commenter opposes any CMS
effort to mandate the interactions
between Part D plans and
pharmaceutical manufacturers, and
another asks us to affirm that this
exclusion will not interfere with Part D
plan decisions to cover drugs/diagnostic
test combinations if manufacturers do
not require the purchase of the
combinations. Yet another commenter
points out that the tying arrangement
exclusion would exclude drugs from
Part D coverage that are tied to one
pharmacy system because of
requirements for patient monitoring.
Response: We appreciate the
clarification provided by the various
commenters. We are not expanding the

PO 00000

Frm 00038

Fmt 4701

Sfmt 4700

manufacturer tying arrangement
exclusion of coverage under Part D in
our final rule. We believe that existing
Federal fraud and abuse laws, including
the anti-kickback statute at section
1128B(b) of the Act, as well as the civil
monetary penalty provision at Section
1128A(a)(5) of the Act, provide clear
guidance regarding what are and are not
inappropriate manufacturer tying
arrangements. Manufacturers remain
responsible for ensuring that they do not
engage in any tying arrangements that
violate the anti-kickback statute or,
where applicable, the civil monetary
penalty provision prohibiting
inducements to beneficiaries.
Comment: Some commenters asked
for clarification on which vaccines are
covered under the Part D benefit and
suggested that we provide additional
guidance on how non-Part B vaccines
are to be covered under Part D,
including administrative fees. Another
commenter requested that we strongly
encourage Part D plans to include all
vaccines that are not covered under Part
B on their formularies.
Response: The definition of a Part D
drug in section 1860D–2(e) of the Act
clarifies that Part D may cover a
biological product described in sections
1927(k)(2)(B)(i) to (k)(2)(B)(iii) of the
Act—to include a vaccine licensed
under section 351 of the Public Health
Service Act. Since section 1860D–
2(e)(2)(B) of the Act excludes an
otherwise covered Part D drug from
coverage under Part D ‘‘if payment for
such drug as so prescribed and
dispensed or administered with respect
to that individual is available (or would
be available but for the application of a
deductible) under Part A or B for that
individual,’’ certain drugs and vaccines
would be covered under Part D only to
the extent they are not covered under
Part B.
In addition to excluding Part B
vaccines from coverage under Part D,
section 1860D–2(e)(3) of the Act
provides that a Part D plan may exclude
from coverage covered Part D drugs for
which payment may not be made under
section 1862(a) of the Act if applied to
Part D. Section 1862(a)(1)(A) generally
excludes from payment items and
services that are not reasonable and
necessary for the diagnosis or treatment
of illness or injury or to improve the
functioning of a malformed body
member, except those vaccines
identified in section 1862(a)(1)(B) of the
Act as covered Part B vaccines. Section
1862(a)(1)(A) of the Act, however,
excepts from this rule vaccines covered
under Part B. Therefore, if these
provisions are read literally, Part D
plans would be permitted to exclude

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
from coverage preventative vaccines
that are covered Part D drugs because
they are not ‘‘reasonable and necessary
for the diagnosis or treatment of an
illness or injury.’’
However, we argue that whereas
section 1862(a)(1)(B) of the Act requires
coverage under Part B of covered Part B
vaccines, by analogy, section
1862(a)(1)(B) of the Act as applied to
Part D should be read as requiring
coverage under Part D of vaccines that
are covered Part D drugs. This argument
is buttressed by the fact that the
Congress specifically defined Part D
drugs under section 1860D–2(e)(1) of
the Act to include vaccines. Moreover,
section 1860D–2(e)(3) of the Act
references all of section 1862(a) of the
Act, and the only way to give meaning
to the reference to section 1862(a)(1)(B)
of the Act is to extend the provision to
permit coverage of Part D vaccines. In
other words, if section 1862(a)(1)(B) of
the Act as applied to Part D were read
literally as only permitting coverage of
Part B vaccines, the reference in section
1860D–2(e)(3)(A) of the Act to section
1862(a)(1)(B) of the Act would be
rendered meaningless.
Building on the argument that by
analogy section 1862(a)(1)(B) of the Act
should be extended to Part D so as to
require coverage of non-Part B vaccines
under Part D, the standard under Part D
should reflect a standard similar to
section 1862(a)(1)(b) of the Act but
adapted to apply to preventative
vaccines. Therefore, we believe such
standard should be vaccines that are
‘‘reasonable and necessary for the
prevention of illness.’’ Plans will need
to develop explicit criteria that can be
applied on a case-by-case basis to
determine that the administration of
Part D vaccine is ‘‘reasonable and
necessary’’ and that the Part D vaccine
is therefore a covered Part D drug.
Presumably these will comply with any
widely accepted practice guidelines. If
widely accepted practice guidelines are
not available for certain vaccines, Part D
plans will need to develop criteria that
they can support with sound clinical
reasoning.
Currently, most vaccines of interest to
the Medicare population are covered
under Part B. Although Part B makes
only three exceptions (influenza,
pneumococcal, and hepatitis B vaccines
for high risk patients) to its rule
requiring injury or direct exposure,
these three exceptions probably account
for the majority of vaccinations needed
by an elderly population. Since many of
the remaining vaccines on the market
are administered during childhood, we
do not expect that Part D will cover a
large number of vaccines. However, as

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

more vaccines are developed and
practice guidelines develop, Part D
plans might face a growing burden with
supplying vaccinations to significant
numbers of their Part D patient
populations. Therefore, the ability of
Part D plans to limit payment to those
situations that are ‘‘reasonable and
necessary for the prevention of illness’’
will become more and more important.
Given the definition of dispensing
fees we have incorporated in the final
rule, the costs of Part D-covered vaccine
administration could not be covered as
part of a dispensing fee. Neither could
those costs be covered as separate
administrative fees, since as discussed
elsewhere in this preamble, other than
medication therapy management
programs (described in subpart D), we
do not expect medical or clinical
services to be included in
administrative fees.
As discussed in subpart J, Part Dcovered vaccines administered in a
physician’s office will be covered under
the out-of-network access rules at
§ 423.124 of our final rule. The costs of
vaccine administration may be included
in physician fees under Part B since Part
B pays for the medically necessary
administration of non-covered drugs
and biologicals. However, there is
currently no ready mechanism for
physicians to bill Part D plans for Part
D-covered vaccine costs. In the shortterm, we will require that a Part D
enrollee self-pay the physician for the
Part D-covered vaccine cost and submit
a paper claim for reimbursement by his
or her Part D plan. This approach is
consistent with how beneficiaries
accessing covered Part D drugs at an
out-of-network pharmacy will be
reimbursed by Part D plans for costs
associated with those drugs. Once Part
D is implemented, we will get a better
sense for the actual volume of Part Dcovered vaccines (and other covered
Part D drugs appropriately dispensed
and administered in a physician’s
office) and the need and most
appropriate mechanisms for any
automatic cross-over procedures such
that physicians could submit claims for
reimbursement of Part D-covered
vaccine ingredient costs directly to the
appropriate Part B carrier. Any such
automatic cross-over procedures would
mean that beneficiaries would not have
to submit paper claims and, instead,
physicians could submit a single claim
for reimbursement of both the Part Dcovered vaccine ingredient costs and the
administration fee directly to the
appropriate Part B carrier, which would
forward the Part D charge to the
appropriate Part D plan.

PO 00000

Frm 00039

Fmt 4701

Sfmt 4700

4231

Comment: One commenter asked that
we cover individually compounded
medications or combinations of
medications. Another commenter stated
that we should not consider
compounded drugs as meeting the
definition of a Part D drug, as it is
contrary to the definition in the MMA
and would put patients at risk.
Response: Historically,
extemporaneous compounding has
filled an important role in pharmacy
practice and continues to be an
important part of contemporary
pharmacy practice. While less than one
percent of prescriptions are
compounded, these compounded
prescriptions often provide medically
necessary drug therapies that would
otherwise be unavailable to patients.
Compounding also provides many
independent pharmacies with the
opportunity to offer services that
competitively differentiate them from
the chain industry. In addition,
compounded prescription drug products
are frequently reimbursed under
commercial prescription drug benefit
plans. Therefore, excluding
compounded prescription drug products
from Medicare Part D would be a
significant change from current
pharmacy practice.
Section 1860D–2(e)(1)(A) of the Act
defines a Part D drug as including a
drug that may be dispensed only upon
a prescription and that is described in
section 1927(k)(2)(A)(i), (A)(ii) or (A)(iii)
of the Act. As a matter of simplification,
we refer to these products as ‘‘FDA
approved prescription drug products,’’
and note that, as used in this part of the
preamble, that term incorporates the
non-FDA approved drug products
specifically described under sections
1927(k)(2)(A)(ii) and (A)(iii) of the Act.
Compounded prescription drug
products may contain: (1) all FDA
approved prescription drug products;
(2) some FDA approved prescription
drug products; or (3) all non-FDA
approved drug products. While the
strictest reading of section 1927(k)(2) of
the Act appears to indicate that nonFDA approved compounded
prescription drug products are not Part
D drugs, we believe that FDA-approved
prescription drug product components
of a non-FDA approved compounded
prescription drug product could be
considered to be Part D drugs. The
definition of a Part D drug is not based
on the final form of the drug as
dispensed to the beneficiary; rather,
section 1860D–2(e)(1)(A) of the Act
speaks to a drug ‘‘that may be
dispensed’’ only upon a prescription
and that meets the requirements of
section 1927(k)(2) of the Act. Therefore,

E:\FR\FM\28JAR2.SGM

28JAR2

4232

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

the FDA approved component can
satisfy section 1860D–2(e)(1)(A) of the
Act even if the finished product does
not. Although reimbursement must be
limited to the FDA approved
prescription drug components (that is,
no reimbursement is available for
compounded products containing only
products that are not approved by the
FDA, or otherwise described under
sections 1927(k)(2)(A)(ii) and (A)(iii) of
the Act, or only over-the-counter
products), these usually account for the
most significant drug costs and,
accordingly, current commercial
practice often limits reimbursement to
the most expensive component only. In
addition, the labor costs associated with
mixing a compounded drug product that
contains at least one FDA approved
prescription drug component can be
included in dispensing fees (as defined
in § 423.100 of our final rule).
Comment: Two commenters suggested
covering medical foods under the Part D
benefit because medical foods contain
vitamins and nutrition that are
beneficial to beneficiaries with certain
diseases such as End Stage Renal
Disease (ESRD). Another commenter
asked that we cover parenteral nutrition
therapy.
Response: It is not clear what the
commenter meant by ‘‘medical foods.’’
If ‘‘medical foods’’ refers to products
that are vitamins and mineral products,
these are excluded from the definition
of Part D drugs and are not a covered
Part D benefit. In addition, enteral
nutrients are not regulated as drugs by
the FDA and are therefore not covered
under Part D.
On the other hand, parenteral
nutrition frequently contains primary
components such as amino acids,
nitrogen products, and dextrose
mixtures that are regulated by the FDA
as drugs and therefore meets the
definition of a Part D drug if prescribed
for a medically accepted indication and
not otherwise excluded under section
1860D–2(e)(2) of the Act. Vitamins and
minerals added to parenteral nutrition
are not be considered Part D drugs, and
costs associated with these vitamins or
minerals cannot be paid for under Part
D.
Part D plans would only need to
include parenteral nutrition coverage for
reasonable and necessary medically
accepted indications that are not
covered under Parts A or B. These
situations would likely involve longterm care facility or home infusion
patients who do not qualify for Part B
coverage under the prosthetic benefit
provision for permanent dysfunction of
the alimentary tract. This could include
temporary situations in which patients

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

are unable to swallow or absorb
nutrients from the alimentary tract,
either for physical or cognitive reasons.
We are currently unable to estimate the
potential impact of such coverage on
Part D expenditures. However, Part D
plans will need to establish appropriate
policies and procedures in order to limit
Part D coverage of parenteral nutrition
to patients with medically accepted
indications that are not otherwise
covered by Parts A or B. In addition, we
note that Part D plans are not
responsible for the costs of supplies and
equipment related to parenteral
nutrition therapy.
Comment: One commenter suggested
additional supplies to consider for Part
D coverage: spacers and aerochambers
for administration of inhalation
products, devices for administration of
eye drops, and flushing supplies (for
example, saline and heparin for home
infusion therapy).
Response: Section 1860D–2(e)(1) of
the Act provides us with authority to
deem medical supplies to be Part D
drugs to the extent they are associated
with the injection of insulin. Thus, the
supplies mentioned by this commenter
cannot be covered under Part D, as they
are not associated with the injection of
insulin. We clarify that although
heparin is a Part D drug, a heparin flush
is not used to treat a patient for a
medically accepted indication, but
rather to dissolve possible blood clots
around an infusion line. Therefore,
heparin’s use in this instance is not
therapeutic but is, instead, necessary to
make durable medical equipment work.
It would therefore not be a Part D drug
when used in a heparin flush.
Comment: One commenter
recommended that Part D drugs should
include liquid, chewable, transdermal
and other special dosage forms and
delivery mechanisms to accommodate
swallowing limitations and intravenous
medications, such as antibiotics.
Response: The definition of a Part D
drug at section 1860D–2(e) of the Act
places no limitations on drug dosage
forms and delivery mechanisms
provided that a drug or biological
product is not otherwise excluded by
the statute. We expect Part D plans to
provide an adequate benefit that
includes coverage of special dosage
forms and delivery mechanisms to fit
the needs of all their enrollees.
Comment: Several commenters
supported our proposed framework for
Part D coverage wrapping around Part B
coverage at the individual level.
However, other commenters
recommended that drugs currently
covered under Part B be excluded from
coverage under Part D until the

PO 00000

Frm 00040

Fmt 4701

Sfmt 4700

mandated study on the transitioning of
Part B prescription drug coverage into
Part D is released. Another commenter
recommended that individual drugs be
paid by either Part B or Part D in all
circumstances.
Response: The statutory definition of
the term ‘‘covered Part D drug’’ would,
under section 1860D–2(e)(2)(B) of the
Act, exclude any drug for which, as
dispensed and administered to an
individual, payment would be available
under Parts A or B of Medicare for that
individual (even though a deductible
may apply). By including the language
‘‘as so prescribed and dispensed or
administered,’’ section 1860D–2(e)(2)(B)
of the Act makes a distinction between
what would be paid for under Part D as
opposed to Part B. This language
indicates that the Congress was aware
that some drugs could qualify for
payment under Part B in some
circumstances and Part D in others,
depending on the way those drugs are
dispensed or administered. Given the
statutory definition of the term ‘‘covered
Part D drug’’, we cannot preclude drugs
that may be covered under Part B under
some circumstances (for example, when
they are furnished ‘‘incident to’’ a
physician’s service), but that are not
covered under Part B under other
circumstances, from being covered
under Part D under such other
circumstances (for example, because
they are self-administered by the patient
at home). Such a policy would require
statutory changes by the Congress. The
various issues raised by the drugs
covered under Part B for the
administration of the Part D drug benefit
will be addressed in our report
mandated by section 1860D–42(c) of the
Act.
Comment: We solicited comments
concerning any drugs that may require
special guidance with regard to their
coverage under Part D, and any gaps
that may exist in the combined ‘‘Part D
& B’’ coverage package. A number of
commenters requested that we further
clarify the relationship between drugs
covered under Medicare Part B and
drugs that will be covered under Part D.
These commenters would like us to
clarify how Part D plans can recognize
Part B covered drugs since no universal
list exists, Part B coverage differs by
patient and situation, and Part B
coverage policies differ regionally. They
raise concerns about appropriately
limiting coverage of drugs under Part D
while achieving our goal of wrapping
around Medicare Part B to the greatest
extent possible.
Response: We acknowledge that there
are numerous complexities involved in
the distinction between drugs covered

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
under Parts B and D, as well as with
wrapping around existing drug coverage
under Part B. Nevertheless, section
1860D–2(e)(2)(B) of the Act states that
Part D plans must exclude any drug that
would otherwise be considered a Part D
drug for which, as so prescribed and
dispensed or administered to that
individual, payment would be available
under Parts A or B (even though a
deductible may apply). Furthermore, we
believe that the language ‘‘as so
prescribed and dispensed or
administered’’ indicates the Congress’s
awareness that the determination
regarding whether a particular drug is
covered under Part B or Part D could
differ on a case-by-case basis.
Despite the complexities, we believe
Part D plans can best wrap around
existing Part B coverage under Part D by
understanding the scope of the
definition of covered Part D drug,
becoming familiar with the general
categories of Part B covered drugs, and
planning for potential Part B
interactions that are likely to be
encountered in specific settings with
regard to some of these categories.
Part D drugs are not limited to typical
outpatient prescription drugs. The
definition includes injectable
prescription drugs (for example,
intramuscular, intravenous, and
infusible drugs, as well as vaccines).
Some Part D plans may lack experience
with covering the drugs under an
outpatient prescription drug benefit
program because they are more
commonly covered under commercial
medical benefits, as opposed to
commercial prescription drug benefits.
The implementation of the Part D
benefit does not alter coverage or
associated rules for drugs currently
covered under Part B. Part B covers
drugs in a variety of settings. In almost
all of these settings the question of
whether coverage should be provided
under Part D will not arise since the
drugs are being provided in the context
of a service or procedure. For a limited
number of categories, however,
pharmacists and infusion providers will
have to determine whether to bill Part
B or Part D, and Part D sponsors will
need to confirm whether Part D is being
billed correctly. In some cases, this
determination can be made on the basis
of the drug. For example, in the case of
oral anti-cancer drugs, there is a list of
drugs covered under Part B based on
certain statutory criteria. All other oral
anti-cancer drugs will be covered under
Part D, provided they otherwise meet
the definition of a Part D drug. In other
cases, the pharmacist or infusion
provider would need information about
the member in order to bill

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

appropriately. For example, in the case
of drugs used in immunosuppressive
therapy, Part B should be billed in the
case of a beneficiary whose transplant
has been covered by Medicare. Part D
should make payment in all other
instances. We will provide more
information and guidance on the
relation between Part B and Part D
coverage in separate guidance to Part D
plans.
Based upon the definition of the term
‘‘Part D drug’’ and the general categories
of coverage under Part B, we believe
that Part D plans could implement
utilization management strategies to
identify potential Part B drug coverage
overlap for individuals and verify
appropriate coverage accordingly. For
example, if a Part D beneficiary were
filling a retail prescription for an
antiemetic, prior authorization could be
used to ensure that the drug is not
covered by Part B. Similarly, prior
authorization could be used to flag
drugs dispensed via home infusion that
are covered under the Part B durable
medical equipment policy. Plans will
need to ensure that they do not cover
any drugs which, as prescribed and
dispensed or administered, are covered
under Part B in a specific region under
its local medical review policy (LMRP).
We clarify that MA organizations
must follow fee-for-service coverage
rules as provided in section 1852(a)(1)
of the Act in determining whether to
pay for a drug under its Part A/Part B
or Part D benefits. Payment for
injectable drugs that Medicare considers
to be usually not self-administered
should be paid under the Part A or Part
B benefits if provided in a physician’s
office, and under Part D if dispensed by
a network pharmacy. Even if an MA
plan offers coverage under Part D of an
injectable drug that Medicare considers
to be usually not self-administered (for
example, Avonex) the plan cannot deny
coverage of this drug under its Part A or
Part B benefits when furnished in a
physician’s office.
Comment: Several commenters noted
that excluding Part B drugs from
coverage under Part D regardless of
whether the consumer is enrolled in
Part B is seriously detrimental to
consumers who enroll in Part B but who
cannot effectuate their enrollment for
many months due to the Part B
enrollment timeframes. Consumers
without Part B coverage, but who intend
to enroll, could enroll in Part D in April
of 2006 but would not be able to gain
coverage for Part B drugs until 15
months later (enrollment in January
effective in July). These commenters
argue that we should make an exception
for beneficiaries in this predicament

PO 00000

Frm 00041

Fmt 4701

Sfmt 4700

4233

such that their Part D plans could cover
Part B drugs. This is especially
important for full-benefit dual eligible
individuals in this situation, since they
would be unable to fall back on
Medicaid to obtain coverage for Part Bcovered medications. They recommend
that Part D plans be required to cover
Part B medications for a consumer for
up to 15 months (the maximum amount
of time it could take to effectuate an
enrollment under Part B).
Response: Section 1860D–2(e)(2)(B) of
the Act specifies that a drug prescribed
to a Part D eligible individual that
would otherwise qualify as a Part D
drug cannot be considered a covered
Part D drug if payment for such drug ‘‘...
is available (or would be available but
for the application of a deductible)
under part A or B for that individual.’’
We interpreted this to mean that if
payment could be available under Part
A or Part B to the individual for such
drug, then it will not be covered under
Part D. Thus, for all Part D eligible
individuals, drugs covered under Parts
A and B are available if they choose to
pay the appropriate premiums.
This will be the case even if a
beneficiary has Part A, but not Part B,
or vice versa, since, as we explain in
subpart F of this preamble and at
§ 423.265(c) of the Act, Part D sponsors
must offer a uniform benefit package in
order to carry out the Congress’s intent
in section 1860D–13(a)(1)(F) of the Act.
If Part B covered drugs were included in
the Part D benefit package only for those
enrollees without Part B, but not for
others, it would not be possible for Part
D sponsors to offer uniform benefit
packages for a uniform premium to all
enrollees. In addition, we believe that
payment for a drug under Part A or B
is available to any individual who could
sign up for Parts A or B, regardless of
whether they actually enrolled or are
waiting to be enrolled, as these
commenters describe. All individuals
who are entitled to premium-free Part A
are eligible to enroll in Part B. This
includes individuals who are entitled to
Part A based on age, disability, and
ESRD. All individuals who are entitled
to Part B only are age 65 or older and,
in almost all instances, not eligible for
premium-free Part A. However, they are
eligible to buy into Part A for a
premium.
Comment: Some commenters
recommended that we introduce more
consistent coverage rules by adopting
national standards rather than relying
on local carriers for coverage and
payment decisions.
Response: Policies with regard to
coverage of infusible drugs covered as
DME supplies are uniform across the

E:\FR\FM\28JAR2.SGM

28JAR2

4234

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

country. Some differences do exist
between carriers with regard to which
injectable drugs will be covered under
Part B ‘‘incident to’’ a physician service.
These differences in coverage in a
physician’s office setting, however,
should not impact whether a Part D plan
will cover a prescription for an
injectable drug presented at a
participating pharmacy. The statute
does not exclude ‘‘all drugs’’ covered
under Medicare, but rather, drugs when
Medicare coverage under Part B is
available ‘‘as so prescribed and
dispensed or administered.’’
Comment: One commenter asked
about the interface between the hospice
benefit and Part D, specifically whether
we anticipated that Part D would
account for or impact the delivery of
hospice drugs.
Response: As provided in section
1861(dd)(1) of the Act, the hospice
benefit covers all medications related to
a beneficiary’s terminal illness. There is
no change in Medicare coverage of these
drugs. However, all other medications
provided to the beneficiary are currently
paid for either out-of-pocket or by
private insurance. These drugs could
now be covered by Part D plans on
either a primary or secondary basis
depending on the presence or nature of
other insurance. Given the life
expectancy of beneficiaries receiving
hospice benefits, we do not expect this
to be a large expense for Part D plans.
b. Dispensing Fees
The MMA does not define the term
‘‘dispensing fee,’’ although the terms
‘‘dispensing fee’’ and ‘‘dispense’’ appear
several times throughout the MMA.
Because the statute is ambiguous on the
meaning of ‘‘dispensing fee,’’ in the
proposed rule we did not propose a
specific definition of ‘‘dispensing fee,’’
but instead offered three different
options we believed would be
reasonable, permissible definitions of
the term and invited comments on
which option would be most
appropriate under Part D.
• Option 1: The dispensing fee will
include only those activities related to
the transfer of possession of the covered
Part D drug from the pharmacy to the
beneficiary, including charges
associated with mixing drugs, delivery,
and overhead. The dispensing fee will
not include any activities beyond the
point of sale (that is, pharmacy followup phone calls) or any activities for
entities other than the pharmacy.
• Option 2: The dispensing fee will
include the activities included in
Option 1, but in addition will include
amounts for the supplies and equipment
necessary for the drugs to be provided

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

in a State in which they can be
effectively administered.
• Option 3: The dispensing fee will
include the activities in Option 2, but in
addition will include activities
associated with ensuring proper ongoing
administration of the drugs, such as the
professional services of skilled nursing
visits and ongoing monitoring by a
clinical pharmacist.
We also requested comments
regarding any implications for our
proposed options for defining
dispensing fees vis-a`-vis the
administration of other drugs (for
example, vaccines and injectable longacting antipsychotic drugs).
Comment: The majority of
commenters favored Option 1 claiming
that this definition is consistent with
current industry practice regarding
dispensing fees. Several said that
professional services involved in
providing medications should more
appropriately be covered under Parts A
and B, and another commenter opined
that Options 2 and 3 were burdensome
for Part D sponsors. Another commenter
expressed concern that what is currently
covered under Part B should not be
shifted to Part D through the dispensing
fees. Other commenters stated that,
although they supported Option 1, they
believed that the definition proposed for
Option 1 was too narrow. One
commenter suggested that pharmacists
are required to provide patient
counseling for Medicaid patients under
OBRA 1990 and that they should be
reimbursed for those efforts. They also
felt that the definition of what it means
to dispense a drug should be clarified.
One commenter argued that supplies,
equipment and professional services
needed to deliver a drug should be
covered under ancillary fees negotiated
between pharmacies and Part D plans
and should not be included in
dispensing fees. Another commenter
pointed out that requiring PBMs to pay
for professional services, as
contemplated under Option 3, would
require them to renegotiate tens of
thousands of contracts with the
pharmacies in their networks.
Several commenters supported
Option 2. One commenter focused on
medication packaging and the need to
cover packaging specifically designed
for the cognitively impaired or those
with physical impairments.
Other commenters favored adoption
of Option 3. Some of these commenters
argued that the Congress meant for
home infusion to be covered and that
failure to pay for the supplies,
equipment and services involved in
delivering home infusion drugs was
tantamount to failure to cover the drug

PO 00000

Frm 00042

Fmt 4701

Sfmt 4700

itself. Since Part D specifically covers
those drugs, (antibiotics, pain
management, chemotherapy, parenteral
nutrition, immune globulin and other
infused drugs) they argued that we must
require that dispensing fees cover the
resources needed to deliver them. Other
commenters argued that new treatment
modalities were allowing patients to
remain at home, a cost-effective setting,
to receive their medications, and that
some patients might not be able to
receive their medications at home
should the definition of dispensing fee
fail to cover the service, equipment, and
supplies needed to deliver the
medications in the home setting. One
commenter specifically noted the need
to cover supplies and services
surrounding infusion of long-term antipsychotic medications in community
mental health centers. Two commenters
focused on the need to pay for physician
services involved in home infusion of
certain drugs given that many infections
and adverse events take place in this
setting. Direct physician supervision of
these services is required to mitigate
these potential problems.
Other commenters argued for Part D
plan flexibility in establishing
dispensing fees that would be
appropriate for the setting and
medication at issue, allowing each Part
D plan to define dispensing fee. One
commenter thought that Part D plans
should be allowed to use tiered
dispensing fees to encourage the use of
generic drugs. One commenter indicated
that point of sale systems in place today
already support multiple variations of
dispensing fees based on drug or
amount of effort required to prepare or
administer medication and such
systems could handle the multiple
variations for the drug benefit. Another
commenter specified that the
transmission standard should be the
National Council of Prescription Drug
Program’s Telecommunication Standard
Version 5.1.
Response: We agree with the majority
of commenters that Option 1—including
only those activities related to the
transfer of possession of the covered
Part D drug from the pharmacy to the
beneficiary, including charges
associated with mixing drugs, delivery,
and overhead is the most appropriate
definition of the term ‘‘dispensing fees’’
for Part D, and we have included a
definition of dispensing fees in
§ 423.100 of our final rule consistent
with Option 1.
Although we recognize that Options 2
or 3 would eliminate current gaps in
coverage relative to home infused drugs,
such approaches would also extend the
definition of dispensing fee beyond the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
mere transfer of possession of the drug,
and certainly beyond what we believe to
have been Congressional intent
regarding the scope of an outpatient
drug benefit. The inclusion of
professional services in the definition of
dispensing fees is also problematic
given the potential for double billing
with regard to some of the skilled
nursing costs associated with home
infusion. In many cases, these skilled
nursing costs are separately billable to
Part A, Medicaid, or supplemental
insurance, and we are concerned about
Part D supplanting these other sources
of payment.
We believe Option 1 represents the
best reading of the statute, since it will
limit dispensing fees to a transfer of
possession of the drug and will not
include any fees associated with
administering the drug. We also note
that where the Congress wished for us
to include the cost of supplies under
Part D, it specifically directed us to do
so (for example, by requiring that the
supplies associated with the injection of
insulin be included in the definition of
the term Part D drug).
Even though some commenters
suggest that the supplies, equipment,
and services associated with Options 2
and 3 could be paid for through a
separate fee or additional compensation
to home infusion and other providers,
we caution that such separate
administrative fees would not be
allowed under Part D. Other than
medication therapy management
programs, as described in section
1860D–4(c)(2) of the Act, we do not
expect medical or clinical services to be
included in administrative fees. Please
refer to the subpart G preamble
discussion of the types of costs that Part
D plans may include as administrative
costs in their bids. Thus, the costs for
professional services associated with
home infusion could not be included in
the premium bid. In addition,
professional services, including those
associated with home infusion, may not
be included in Part D plan supplemental
coverage, given that section 1860D–
2(a)(2) of the Act defines supplemental
coverage as consisting of: (1) a reduction
in the deductible, coinsurance
percentage, initial coverage limit, or any
combination thereof; or (2) coverage of
drugs that are excluded from the
definition of a ‘‘Part D drug’’ because of
the application of section 1927(d)(2) or
(3) of the Act.
Provided that Part D plans include
only those activities allowed under our
definition of dispensing fees in the
dispensing fees negotiated with network
pharmacies and offer standard
contracting terms and conditions to all

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

pharmacies, we note that Part D plans
have the flexibility to vary the actual
dispensing fee paid to pharmacies. For
example, Part D plans may need to
increase the dispensing fees paid to
rural or long-term care pharmacies in
order to obtain their participation in
networks and meet the pharmacy access
standards.
As detailed elsewhere in this
preamble, Part D plans will be required
to ensure adequate access to home
infusion services as part of their
pharmacy network access standards.
Thus, enrollees will have access to
home infusion services, though they
may have to pay for supplies,
equipment, and professional services
out-of-pocket particularly if they are
enrolled in a Part D plan and have no
source of supplemental coverage.
As we noted in the proposed rule, our
definition of dispensing fees under Part
D will not carry over to Part B of the
Medicare program. Section 1842(o)(2) of
the Act gives the Secretary discretionary
authority to pay a dispensing fee to a
licensed pharmacy that furnishes
certain covered Part B drugs and
biologicals to Medicare beneficiaries.
While the term ‘‘dispensing fee’’ is not
defined in section 1842(o)(2) of the Act,
the considerations under Medicare Part
B, a more comprehensive health
insurance product that has separate
payment mechanisms for durable
medical equipment and professional
services, are different from those under
Part D.
Comment: Some commenters did not
support a particular option for defining
the term ‘‘dispensing fees,’’ but were
more concerned about including certain
activities in the definition of dispensing
fees (for example, staff, equipment,
automation, facilities overhead, time
inputting information into a computer,
resolving problems with PBMs and
prescribing practitioners, counseling the
patient, waste disposal, turning the
medication over to the patient,
particularly when it involved home
delivery, and actually packaging the
medications). Many of these
commenters noted that pharmacists
merit a small profit and that dispensing
fees should not be specifically designed
simply to meet costs. Others felt that
terms used in the proposed options
were too vague. Specifically, they
wanted the meaning of dispensing to be
defined to include the costs they
outlined. They also wanted to account
for the level of complexity and include
clear definitions of reconstituting,
mixing and compounding drugs, which
they believe involve very different
equipment, skill and time resources.

PO 00000

Frm 00043

Fmt 4701

Sfmt 4700

4235

Response: We have defined the term
‘‘dispensing fees’’ in § 423.100 of our
final rule to include reasonable
pharmacy costs associated with
ensuring that possession of the
appropriate covered Part D drug is
transferred to a Part D enrollee. We
specify that reasonable pharmacy costs
may include costs associated with a
pharmacist’s time in checking the
computer for information about an
individual’s coverage, performing
quality assurance activities consistent
with § 423.153(c)(2) of our final rule,
measurement or mixing of the covered
Part D drug, filling the container,
physically providing the completed
prescription to the Part D enrollee,
delivery costs, special packaging costs,
and overhead costs associated with
maintaining the facility and equipment
necessary to operate the pharmacy. We
clarify that in using the term
‘‘reasonable’’ pharmacy costs, our intent
is to convey that such costs be
appropriate for the typical beneficiary in
that pharmacy setting. We believe that
our definition clarifies commenters’
concerns about the inclusion of some
overhead costs, time spent inputting
information into a computer and
resolving problems with PBMs and
prescribing practitioners, transferring
the medication to the patient, and
special packaging costs.
We clarify that reasonable delivery
costs include only those costs
appropriate for the typical beneficiary in
a particular pharmacy setting. Thus,
while it would be appropriate for Part
D plans to reimburse long-term care,
mail-order, and home infusion
pharmacies for home delivery costs via
the dispensing fee, this would not be the
case for retail pharmacies (where the
term ‘‘delivery’’ would be limited to the
transfer of a covered Part D drug from
the pharmacist to the patient at the
point of sale) because the typical retail
customer does not require home
delivery. While retail pharmacies may
offer home delivery services, Part D
plans may not reimburse those
pharmacies for these costs, and the
delivery cost must be borne by the
beneficiary.
As concerns patient counseling,
dispensing fees for covered Part D drugs
may include pharmacy costs associated
with quality assurance activities
consistent with § 423.153(c)(2) of our
final rule. Section 423.153(c)(1) of our
final rule requires Part D plans to
represent that pharmacists in their
network pharmacies comply with
minimum standards for pharmacy
practice established by the States. Since
almost all States have established
requirements for pharmacy practice

E:\FR\FM\28JAR2.SGM

28JAR2

4236

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

related to counseling, we believe that
the offer of counseling that pharmacists
currently provide their customers will
continue consistent with current
pharmacy practice in compliance with
State requirements. .Any pharmacist
counseling activities in addition to
those established by the States will have
to be negotiated and paid for separately
under Part D plans’ medication therapy
management programs (discussed in
greater detail elsewhere in this
preamble).
As provided in section 1860D–11(i) of
the Act, we cannot intervene in
negotiations between pharmacies and
Part D plans. Thus, the extent to which
Part D plans reimburse pharmacies for
their entire dispensing costs (or even in
excess of their dispensing costs) will
depend on the outcome of those
negotiations. In addition, we clarify that
we expect Part D plans and pharmacies
to account for pharmacy profit as part of
negotiated prices—either as part of
overhead costs accounted for in
dispensing fees or in the reimbursement
rates for ingredient costs negotiated
with pharmacies.
We clarify that we interpret the term
‘‘mixing’’ as used in our definition of
the term ‘‘dispensing fees’’ to
encompass reconstituting and
compounding of covered Part D drugs.
Further, we note that Part D plans have
the flexibility to pay differential
dispensing fees to pharmacies based on
higher labor costs—for example, for a
compounded product relative to a noncompounded covered Part D drug. Plans
could also used differential dispensing
fees to encourage the use of generics
over brand-name drugs as appropriate.
Comment: Another commenter
wanted dispensing fees for non-profit
entities to reflect their preferred
acquisition costs, arguing that without
this, Part D would be assisting taxexempt non-profit competitors of small
business pharmacies.
Response: As mentioned previously,
we have defined the term ‘‘dispensing
fees’’ in § 423.100 of our final rule to
include pharmacy costs associated with
ensuring that possession of the
appropriate covered Part D drug is
transferred to a Part D enrollee. Plans
may wish to consider non-profit
entities’ preferred acquisition costs in
the ingredient cost reimbursement
negotiated with those entities as part of
negotiated prices on covered Part D
drugs. However, it is unclear to us why
dispensing fees should vary among non­
profit and for-profit pharmacies based
on differences in acquisition costs.
Comment: Several commenters
emphasized the need to provide
dispensing fees tailored to long term

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

care pharmacies. They focused on the
need to reimburse long-term care
pharmacists for 24-hour care, the
specialized packaging that is required,
emergency preparation and delivery of
medications, and the distinct type of
medications typically prepared and
delivered.
Response: The definition of
dispensing fee in § 423.100 of our final
rule encompasses some of the services—
for example, specialized packaging,
delivery, and preparation of
medications (not including the actual
administration of those medications)—
typically provided by long-term care
pharmacies. Additional long-term care
pharmacy services could be reimbursed
via medication therapy management
programs established by Part D plans for
institutionalized Part D enrollees.
Comment: Some commenters
emphasized the need for the dispensing
fee to cover all of the costs involved in
providing a medication.
Response: As provided in section
1860D–11(i) of the Act, we cannot
intervene in negotiations between
pharmacies and Part D plans. Thus, the
extent to which Part D plans reimburse
pharmacies for their entire dispensing
costs will depend on the outcome of
those negotiations. Given Part D plans’
need to secure a network of providers
that meets our access standards, we
believe that Part D plans will have every
incentive to adequately reimburse
pharmacies via dispensing fees for the
costs involved with providing covered
Part D drugs to Part D enrollees.
c. Long-Term Care Facility
We requested comments regarding the
definition of the term long-term care
facility in § 423.100 of our proposed
rule, which we interpreted to mean a
skilled nursing facility (as defined in
section 1819(a) of the Act), or a nursing
facility (as defined in section 1919(a) of
the Act). We were particularly
interested to explore whether we should
include in the definition facilities other
than skilled nursing and nursing
facilities—particularly intermediate care
facilities for the mentally retarded
(ICFs/MR), described in § 440.150, and
other types of facilities in which fullbenefit dual eligible individuals may
reside and which may exclusively
contract with long-term care pharmacies
in a manner similar to current practice
in skilled nursing and nursing facilities.
Comment: We received a number of
comments urging us to expand the
definition of the term ‘‘long-term care
facility’’ in the proposed rule. Some of
the suggested additions include ICFs/
MR; assisted living facilities; other
facilities recognized by State law as
eligible for payment under Sections

PO 00000

Frm 00044

Fmt 4701

Sfmt 4700

1915(c) (Home and Community Based
waivers), 1616(e), and 1115 of the Act;
group homes for the developmentally
disabled; and other forms of congregate
living arrangements regulated by the
States. Some commenters suggested that
many of these facilities operate under
exclusive contracts with long-term care
pharmacies. Other commenters urged us
not to make the presence of exclusive
contracts with long-term care
pharmacies the only criterion for
defining congregate living arrangements
as long-term care facilities, as these
beneficiaries could benefit significantly
from subsidies for low-income
institutionalized Part D enrollees.
Response: We have expanded the
definition of the term ‘‘long-term care
facility’’ in § 423.100 of our final rule to
encompass not only skilled nursing
facilities, as defined in section 1819(a)
of the Act, but also any medical
institution or nursing facility for which
payment is made for institutionalized
individuals under Medicaid, as defined
in section 1902(q)(1)(B) of the Act. We
note that we have eliminated the
reference to nursing facilities as defined
in section 1919(a) of the Act, as such
facilities are captured as nursing
facilities for which payment is made for
institutionalized individuals under
Medicaid. Such an expansion would
include ICFs/MR and inpatient
psychiatric hospitals along with skilled
nursing and nursing facilities in the
definition of a long-term care facility,
provided those facilities meet the
requirements of a medical institution
that receives Medicaid payments for
institutionalized individuals under
section 1902(q)(1)(B) of the Act. We do
not believe that the definition of term
long-term care facility should be
expanded to include other facilities
recognized by State law but not by
Medicare or Medicaid, regardless of
whether some of these facilities contract
on an exclusive basis with long-term
care pharmacies. Furthermore, we do
not believe that our definitions of terms
associated with institutionalized Part D
enrollees should conflict. Our revised
definition of the term ‘‘long-term care
facility’’ is consistent with the
definition of ‘‘institutionalized’’ in
subpart P of this rule and will allow for
residents of a number of institutional
settings to benefit from the special rules
for access to covered Part D drugs
established for residents of long-term
care facilities. 2. Requirements Related
to Qualified Prescription Drug Coverage
(§ 423.104)
Under section 1860D–11(e)(2)(A) of
the Act, we may approve as Part D
sponsors only those entities proposing
to offer qualified prescription drug

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
coverage in accordance with our
requirements. As provided in section
1860D–2(a)(1) of the Act, qualified
prescription drug coverage may consist
of either standard prescription drug
coverage or alternative prescription drug
coverage.
a. Standard Prescription Drug Coverage
As provided under section 1860D–
2(b) of the Act, ‘‘standard prescription
drug coverage’’ consists of coverage of
covered Part D drugs subject to an
annual deductible; 25 percent
coinsurance (or an actuarially
equivalent structure) up to an initial
coverage limit; and catastrophic
coverage after an individual incurs out­
of-pocket expenses above a certain

threshold. In 2006, the annual
deductible will be $250, the initial
coverage limit will be $2,250, and the
out-of-pocket threshold will be $3,600.
Once a Part D enrollee reached the
annual out-of-pocket threshold, in 2006,
his or her nominal cost-sharing will be
equal to the greater of: (1) 5 percent
coinsurance; or (2) a copayment of $2
for a generic drug or a preferred
multiple source drug and $5 for any
other drug, or an actuarially equivalent
structure. (See Table C–1 for a summary
version of standard prescription drug
coverage benefits for 2006.)
Section 1860D–2(b) of the Act
provides that, beginning in 2007, the
annual deductible, initial coverage

4237

limit, out-of-pocket threshold, and
beneficiary cost-sharing after the out-of­
pocket threshold is met are to be
adjusted annually. In accordance with
section 1860D–2(b)(6) of the Act, these
amounts will be increased over the
previous year’s amounts by the annual
percentage increase in average per
capita aggregate expenditures for Part D
drugs for the 12-month period ending in
July of the previous year. We requested
comments regarding the methods and
data sources we might use to determine
the annual percentage increase in the
first several years of the Part D program.

TABLE C–1
STANDARD PRESCRIPTION DRUG COVERAGE BENEFITS FOR 2006
Cost-Sharing
Percentage

Beneficiary Out-ofPocket Costs

Plan Payment
Percentage

Plan Payment

Annual Deductible ($0-$250 in spending on covered Part
D drugs)

100 percent

$250

0 percent

$0

Initial Benefit ($250.01-$2,250 in spending on covered
Part D drugs)

25 percent1

$5002

75 percent1

$1,500

100 percent

$2,8503

0 percent

$0

The greater of: (1)
5 percent; or (2)
$2 for a generic or
preferred multiple
source drug/$5 for
other drugs.1

—

95 percent

—

($2,250.01-$5,1003

No coverage of costs
covered Part D drugs)

in spending on

Catastrophic Coverage (after the enrollee has incurred
out-of-pocket costs on covered Part D drugs greater
than $3,600; this is generally equivalent to $51003 in
covered Part D drug spending)

1 Entities

have the option of substituting a cost-sharing structure that is actuarially equivalent.
is the maximum out-of-pocket costs if coverage is based on 25 percent coinsurance. Under an actuarially equivalent cost-sharing struc­
ture, the maximum out-of-pocket costs and the maximum plan payment for any Part D enrollee could be higher or lower.
3 This figure may, in fact, be higher to the extent that a Part D enrollee is reimbursed for out-of-pocket costs for covered Part D drugs covered
under his or her plan by a group health plan, insurance or otherwise, or other third party arrangement.
2 $500

In our proposed rule, we interpreted
the provisions of section 1860D 2(b) of
the Act to provide for two distinct types
of standard prescription drug coverage­
‘‘defined standard coverage’’ and
‘‘actuarially equivalent standard
coverage.’’ Section 1860D–2(b)(2)(A)(ii)
of the Act provides that Part D sponsors
offering actuarially equivalent standard
prescription drug coverage will be
permitted to substitute cost-sharing
requirements (including tiered
structures tied to Part D plan
formularies and particular pharmacies
in a Part D plan’s network) for costs
above the annual deductible and up to
the initial coverage limit, provided that
those alternative cost-sharing
requirements are actuarially equivalent
to an average expected coinsurance of

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

25 percent for costs above the annual
deductible and up to the initial coverage
limit. Alternative cost-sharing
arrangements under actuarially
equivalent standard coverage could
include reducing cost-sharing to $0 for
generic or preferred covered Part D
drugs, as provided under section
1860D–2(b)(5) of the Act, as long as the
cost-sharing structure is actuarially
equivalent to an average expected
coinsurance of 25 percent for costs
above the annual deductible and up to
the initial coverage limit.
Based on our interpretation of section
1860D–2(b)(5) of the Act, we also
proposed allowing Part D plans offering
actuarially equivalent standard coverage
to establish cost-sharing of an amount
that is actuarially equivalent to the

PO 00000

Frm 00045

Fmt 4701

Sfmt 4700

expected cost-sharing above the out-of­
pocket threshold. We proposed
requiring that any alternative costsharing structure for costs in the
catastrophic range (whether under
actuarially equivalent standard coverage
or enhanced alternative coverage) be
actuarially equivalent to standard
prescription drug coverage’s structure of
the greater of 5 percent coinsurance or
$2/$5 copayments. We noted that any
such alternative cost-sharing
arrangements would be reviewed, along
with the rest of a Part D plan’s benefit
design, to ensure that they do not
discourage enrollment by certain Part D
eligible individuals.
Except as otherwise provided below,
the final rule adopts the criteria for
standard prescription drug coverage set

E:\FR\FM\28JAR2.SGM

28JAR2

4238

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

forth in § 423.104(e) of the proposed
rule.
Comment: Several commenters felt
that the benefit structure established in
our proposed regulations was too
complex and should be simplified to
minimize beneficiary confusion.
Response: We do not have the
statutory authority to simplify the
benefit further, as suggested by this
commenter. The MMA provides private
plans with a great deal of flexibility to
vary their benefit structures consistent
with Congressional intent to ensure that
Medicare beneficiaries have choices
regarding outpatient prescription drug
coverage under Part D that fit their
particular needs and minimize
beneficiary and Medicare costs.
Comment: One commenter asked how
cross-licensed drugs will be classified as
generics or as brands for the purpose of
cost-sharing. The commenter also asks
what the co-payments would be for
multiple source drugs that are ordered
‘‘dispensed as written.’’
Response: The amount of costsharing, and any variations in costsharing based on brands, generics, or
other classifications will be determined
by Part D plans.
Comment: Two commenters suggested
alternative data sources to use in
determining the annual percentage
increase in the first several years of the
Part D program. The first commenter
recommended two data sources to use
for years 2007 and 2008—the annual
estimates of prescription drug
expenditures in the CMS National
Health Accounts data (based on census
data and sample surveys of private retail
pharmacy sales) and employer retiree
health plan data (released by Pharmacy
Benefit Managers and benefit consulting
firms). Either of these sources of data
could be used as a starting point, but
should be adjusted to account for any
difference in trend for Medicare-eligible
individuals compared to the overall
prescription trend. In addition, the
trend in Part D will likely differ from
the overall prescription drug trend due
to the large volume negotiating power
which could control the trend or allow
manufacturers leeway to raise drug
prices. FEHBP experience may be useful
in accounting for such large volume
influences in Part D. This commenter
also suggested using our Office of the
Actuary (OACT) procedure in place for
Medicare Advantage to make coverage
limit adjustments the following year for
over- or under-stated trends. The
commenter also noted that the Medicare
Current Beneficiary Survey (MCBS) and
the Medicare 5 percent sample are not
available in a timely enough fashion to
be useful data sources.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Another commenter recommended
that we use the OACT spending growth
projections that will underlie the Fiscal
Year (FY) 2007 President’s Budget
Medicare baseline that will be
published in February 2006. We could
use the March 2006 OACT Medicare
baseline estimates as a reference check
on the OACT projections. OACT and the
Congressional Budget Office (CBO) are
preferred because they use the latest
available empirical data based on
MCBS, these data are the basis for the
Medicare Trustees’ Reports, and the
data are widely accepted. In addition,
this commenter recommended that
OACT use the Consumer Price Index for
Prescription Drugs and Medical
Supplies (CPI-PD), issued in a timely
fashion by the Bureau of Labor Statistics
(BLS), as the basis for projecting the
price inflation component of per capita
Part D spending growth. This
commenter thought that utilization
growth should be based primarily on the
analysis of the latest available MCBS
data.
Response: We appreciate the ideas
suggested by the commenters and will
take these recommendations into
consideration as we develop our
strategy for determining the annual
percentage increase in the first several
years of the Part D drug benefit program.
We will provide further detail regarding
the sources of data to be used and how
the annual percentage increase will be
determined via operational guidance to
Part D sponsors prior to the deadline for
bid submissions.
b. Incurred Costs/TrOOP Limit
According to section 1860D–2(b)(4)(C)
of the Act, beneficiary costs for Part D
drugs are only considered incurred (for
purposes of applicability toward
beneficiary spending against the annual
out-of-pocket limit) if they are
incurred—
(1) Against any annual deductible,
any applicable cost-sharing for costs
above the annual deductible and up to
the initial coverage limit, and any
applicable cost-sharing for costs above
the initial coverage limit and up to the
out-of-pocket threshold;
(2) By the Part D enrollee (or by
another person on behalf of that
individual); paid on behalf of a lowincome individual under the Part D
subsidy provisions described in
§ 423.782 of the proposed rule; or paid
on behalf of the enrollee under a SPAP
defined in § 423.454 of the proposed
rule; and
(3) On covered Part D drugs (in other
words, Part D drugs that are either
included in a Part D plan’s formulary or
treated as being included in a Part D
plan’s formulary as a result of a

PO 00000

Frm 00046

Fmt 4701

Sfmt 4700

coverage determination,
redetermination, or appeal under
§ 423.566, § 423.580, § 423.600,
§ 423.610, § 423.620, and § 423.630 of
our final rule).
We also proposed that beneficiary
costs incurred under the following
circumstances count as incurred costs
(with Part D plans explicitly accounting
for such price differentials in the
actuarial valuation of their coinsurance
in their bids): (1) any differential
between a network retail pharmacy’s
negotiated price and a network mailorder pharmacy’s negotiated price for an
extended (for example, 90-day) supply
of a covered Part D drug purchased at
a retail pharmacy; and (2) any
differential between an out-of-network
pharmacy’s usual and customary price
for a covered Part D drug purchased in
accordance with the out-of-network
access rules and the plan allowance for
that covered Part D drug. As further
explained below, because we have
clarified that the differential for a 90­
day supply dispensed at a retail network
pharmacy will generally be a differential
in cost-sharing and not negotiated price
(in other words, the difference in cost
sharing for the 90-day supply between
the retail and mail-order network
pharmacies), we have modified the
definition of incurred costs in § 423.100.
Section 1860D–2(b)(4)(C)(ii) of the Act
provides that any costs for which a Part
D individual is reimbursed by insurance
or otherwise, a group health plan, or
another third-party payment
arrangement do not count toward
incurred costs; only costs paid by a Part
D enrollee, or on behalf of a Part D
enrollee by another person, will count
as incurred, or TrOOP costs. This
provision thus creates a distinction
between all enrollee out-of-pocket
expenditures and those that are counted
as TrOOP expenditures.
Except as otherwise provided below,
the final rule adopts the rules applicable
to incurred costs set forth in § 423.100
of our proposed rule.
Comment: Several commenters urged
us to count all beneficiary spending on
Part D drugs whether on a Part D plan’s
formulary or not toward TrOOP.
Response: Section 1860D–2(b)(4)(C)(i)
of the Act specifically excludes from the
definition of the term ‘‘incurred costs’’
those costs incurred for Part D drugs
that are not included (or treated as being
included on a formulary as a result of
a coverage determination,
redetermination, appeal, or exception)
on a Part D plan’s formulary. Therefore,
we do not have the statutory authority
to permit the payments to count toward
a Part D enrollees’ TrOOP limit.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Comment: Many commenters
supported our proposal that beneficiary
costs incurred as a result of any
differential between a network retail
pharmacy’s negotiated price and a
network mail-order pharmacy’s
negotiated price for an extended (for
example, 90-day) supply of a covered
Part D drug purchased at a retail
pharmacy count as an incurred costs for
the purposes of TrOOP. Only one
commenter opposed allowing such
differentials to count toward TrOOP.
Many commenters supported our
proposal that beneficiary costs incurred
as a result of any differential between an
out-of-network pharmacy’s usual and
customary price for a covered Part D
drug purchased in accordance with the
out-of-network access rules and the plan
allowance for that covered Part D drug
count as an incurred costs for the
purposes of TrOOP. Only one
commenter specifically opposed our
proposal, stating that if the differential
were allowed to count toward TrOOP,
the use of retail pharmacies would not
be cost-neutral to Part D plans because
individuals who use retail pharmacies
would reach the out-of-pocket limit
sooner.
Response: We agree with the majority
of commenters that it is appropriate to
allow beneficiary payment differentials
to count toward TrOOP in cases in
which a beneficiary accesses a covered
Part D drug consistent with the out-of­
network policy in § 423.124(a) of our
final rule.
Section 423.120(a)(6) of our proposed
rule provided that a Part D enrollee who
obtained a 90-day supply of a covered
Part D drug at a network pharmacy that
is a retail pharmacy rather than a
network mail-order pharmacy would be
required to pay for any differential in
the negotiated price for the covered Part
D drug. However, consistent with
section 1860D–4(b)(1)(D) of the Act,
which requires that the Part D enrollee
pay for ‘‘any differential in charge’’
when accessing a 90-day supply of a
covered Part D drug at a network retail
pharmacy instead of a network mailorder pharmacy, we have clarified in
§ 423.120(b)(10) of our final rule that the
beneficiary is not responsible for the
difference in negotiated price but,
rather, for any higher cost-sharing
associated with purchasing the drug at
a retail pharmacy rather that a mailorder pharmacy. Any such difference in
cost-sharing would therefore
automatically count toward a
beneficiary’s TrOOP expenditures, since
the covered Part D drug in question is
being purchased at a network pharmacy.
Comment: Several commenters asked
us to define the term ‘‘person’’ such that

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

a family member can pay for enrollees’
cost-sharing on their behalf.
Response: Section 1860D–
2(B)(4)(C)(ii) of the Act specifically
mentions a family member as an
example of a person who may pay costsharing on behalf of a beneficiary. We
clarify that our proposed rule defined
the term ‘‘person’’ to include a ‘‘natural
person.’’ Such a definition of the term
‘‘person’’ thus permits other
individuals, such as family members, to
pay for covered Part D drug cost-sharing
on behalf of Part D enrollees. We have
therefore retained this definition of the
term ‘‘person’’ in § 423.100 of our final
rule.
Comments: Several commenters
supported our proposed definition of
the term ‘‘person,’’ which would allow
financial assistance for beneficiary costsharing rendered by ‘‘bona fide’’
charities to count toward enrollee’s out­
of-pocket threshold. Some commenters
requested that we clarify what
constitutes a ‘‘bona fide’’ charity.
Another commenter objected to Part D
plan member financial assistance
programs being treated differently from
third-party charities for purposes of
TrOOP.
Response: Our broad definition of the
term ‘‘person’’ captures not only ‘‘bona
fide’’ charities, but other charitable
organizations as well. We note that any
arrangement in accordance to which a
charitable organization pays a Medicare
beneficiary’s cost-sharing obligations
must comply with all applicable fraud
and abuse laws, including, where
applicable, the anti-kickback statute at
section 1128B(b) of the Act, as well as
the civil monetary penalty provision
prohibiting inducements to beneficiaries
at section 1128A(a)(5) of the Act. Thus,
even if a charity is not a bona fide
charity for purposes of Federal fraud
and abuse law, any drug payments it
makes on behalf of Part D enrollees
would count toward TrOOP unless
otherwise excluded as payments by a
group health plan, insurance or
otherwise, or similar third party
arrangement. Charities that are
established, maintained, or otherwise
controlled by an employer or union will
likely fall under our definition of
‘‘group health plan,’’ and any benefits
supplementing Part D benefits that they
provide will therefore be excluded from
TrOOP on this basis.
Comment: We noted in the proposed
rule that we were considering whether
assistance in paying enrollees’ out-of­
pocket cost-sharing obligations provided
through prescription drug patient
assistance programs sponsored by
pharmaceutical manufacturers would be
allowed under Federal fraud and abuse

PO 00000

Frm 00047

Fmt 4701

Sfmt 4700

4239

laws, including the anti-kickback
statute, section 1128B(b) of the Act, as
well as the civil monetary penalty
provision at Section 1128A(a)(5) of the
Act.
We received a number of comments
requesting clarification regarding
whether assistance in paying enrollees’
out-of-pocket cost-sharing obligations
provided through pharmaceutical
manufacturer-sponsored patient
assistance programs (PAPs) would be
permissible under Federal fraud and
abuse laws and request that we work
with the OIG to develop guidelines.
Some commenters believe that financial
assistance and product donations
provided by PAPs should be allowed to
count toward beneficiaries’ TrOOP
expenditures. Some of these
commenters recommended that product
donations be counted as incurred costs
and valued at the price beneficiaries
would have paid at a network pharmacy
(the negotiated price). One commenter
recommended that we allow
manufacturers to provide funds to Part
D plans so that Part D plans can apply
appropriate criteria and make payments
on behalf of manufacturers. Another
commenter cautions us that without a
change in the current interpretation of
Federal fraud and abuse laws preventing
PAPs from providing cost-sharing
assistance, many low-income
beneficiaries may avoid filling scripts,
resort to splitting pills, and interrupt
critical drug therapy.
Response: Regardless of whether a
manufacturer patient assistance program
is a bona fide charity for the purpose of
Federal fraud and abuse laws, any drug
payments it makes on behalf of Part D
enrollees would count toward TrOOP
unless these organizations qualify as
group health plans, insurance or
otherwise, or similar third-party
payment arrangements. However, any
arrangements pursuant to which a
charitable organization pays a Medicare
beneficiary’s cost-sharing obligations
must comply with Federal fraud and
abuse laws, where applicable, including
the anti-kickback statute at section
1128(b) of the Act, as well as the civil
monetary penalty provision prohibiting
inducements to beneficiaries at section
1128A(a)(5) of the Act.
A related issue although it is not
mentioned in the proposed rule is
whether pharmacies can waive or
reduce Part D cost-sharing obligations
given Federal fraud and abuse laws and,
if they can, whether such waived or
reduced cost-sharing should count
toward a beneficiary’s TrOOP limit.
Although we did not receive comments
on this matter, we would like to clarify
our policy. Under the new exception to

E:\FR\FM\28JAR2.SGM

28JAR2

4240

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

the anti-kickback statute added by
section 101(e) of the MMA, pharmacies
are permitted to waive or reduce costsharing amounts provided they do so in
an unadvertised, non-routine manner
after determining that the beneficiary is
financially needy or after failing to
collect the cost-sharing amount despite
reasonable efforts, as set forth in section
1128A(i)(6)(a) of the Act. In addition, a
pharmacy may waive or reduce a
beneficiary’s Part D cost-sharing without
regard to these standards for
beneficiaries enrolled in a Part D plan
eligible for the low-income subsidy
under section 1860D–14 of the Act,
provided the pharmacy has not
advertised that the waivers or
reductions of cost-sharing are available.
Depending on the circumstances,
pharmacies that waive or reduce costsharing amounts for covered Part D
drugs without following the
requirements of the pharmacy waiver
safe harbor could be subject to civil
monetary penalties and exclusion from
participating in Federal health care
programs, as well as criminal fines and
imprisonment under the anti-kickback
statute.
We will allow waivers or reductions
of Part D cost-sharing by pharmacies to
count toward TrOOP. Not allowing such
waived or reduced cost-sharing to count
toward TrOOP would make it more
burdensome for Part D plans given the
need to track down whether costsharing was actually incurred by a
beneficiary rather than a pharmacy.
Moreover, we believe this option is
consistent both with the definition of
‘‘person’’ in the proposed rule (making
waiver or reduction of cost-sharing
applicable toward an enrollee’s incurred
costs), and with Congressional intent in
amending the anti-kickback statute to
provide for a pharmacy waiver safe
harbor.
Comment: Several commenters asked
that coverage supplementing the
benefits available under Part D coverage
provided by various government
programs be allowed to count as
incurred costs for purposes of TrOOP.
These government insurers and
programs included Medicaid (using
State-only funds), Medicaid Section
1115 ‘‘Pharmacy Plus’’ waiver programs,
Federally qualified health centers
(FQHCs), the Department of Veterans
Affairs health care program, and local or
State indigent drug programs.
In addition, a substantial number of
commenters urged us to allow coverage
that supplements the benefits available
under Part D coverage that is provided
by AIDS Drug Assistance Programs
(ADAPs) funded under the Ryan White
CARE Act to count as incurred costs.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

These commenters argued that ADAPs
are an integral component of the safety
net for HIV/AIDS patients because they
fill coverage gaps in public and private
insurance for critical HIV/AIDS drug
treatments. They argue that if ADAP
supplemental coverage payments do not
count as incurred costs, ADAPs will
have little incentive to coordinate
coverage with Part D plans, particularly
if Part D plans impose user fees on
ADAPs. Many of these commenters also
urged us to define ADAPs as SPAPs so
that their supplemental coverage will be
considered incurred costs for the
purposes of TrOOP.
Several commenters also objected to
the inclusion of IHS and Indian Tribes
and Tribal organizations, and urban
Indian organizations (collectively I/T/U)
facilities in the definition of ‘‘insurance
or otherwise’’ in § 423.100 of our
proposed rule. Since IHS beneficiaries—
by custom and regulation—may not be
charged any cost-sharing, I/T/U
facilities must provide supplemental
coverage for all cost-sharing that would
have been assessed by a Part D plan. For
this reason, the commenters argue, our
proposed regulations essentially ensure
that most IHS beneficiaries will never
incur costs above the out-of-pocket
threshold and thus subject AI/AN
enrollees and the I/T/U pharmacies that
serve them to severe financial penalties
in comparison to non-AI/ANs and nonI/T/U pharmacies. I/T/U facilities will
have to continue to use their limited
appropriated funds to pay the
prescription drug costs of AI/AN
beneficiaries. Commenters further argue
that the proposed exclusion of financial
assistance for cost-sharing provided by
I/T/U facilities is not required by the
statute and is simply an interpretation
of the term ‘‘insurance or otherwise.’’
Given the Federal government’s
obligation to provide health services to
AI-ANs based on the government-to­
government relationship between the
United States and Tribes, these
commenters argue that IHS and tribal
health programs are not ‘‘insurance or
otherwise,’’ but instead ‘‘persons’’ given
that I/T/U facilities are the functional
equivalent of ‘‘family members.’’ We
were also asked to clarify why
supplemental coverage of deductible
costs counts toward a beneficiary’s
deductible limit, but supplemental
coverage of cost sharing above the
deductible and initial coverage limit,
does not count toward TrOOP.
Response: Section 1860D–24(a)(1) of
the Act extends the coordination of
benefits provisions required for SPAPs
to entities providing other prescription
drug coverage—including Medicaid
programs, Section 1115 waiver

PO 00000

Frm 00048

Fmt 4701

Sfmt 4700

demonstrations, group health plans,
Federal Employee Health Benefits
Program (FEHBP), military coverage
(including TRICARE), and ‘‘such other
health benefit plans or programs that
provide coverage or financial assistance
for the purchase or provision of
prescription drug coverage on behalf of
Part D eligible individuals as the
Secretary may specify.’’ Section 1860D–
24(b) of the Act defines includes among
these entities providing other
prescription drug coverage some
government payers, which when
coupled with section 1860D–24(a)(2) of
the Act, which specifically applies the
TrOOP provisions at 1860D–2(b)(4)(D)
of the Act to Rx plans suggests that the
Congress intended for the term
‘‘insurance or otherwise’’ to include
government benefit plans or programs
that provide health care or pay the cost
of covered Part D drugs. Although
section 1860D–24(b) of the Act does not
list all the government health care
programs we consider to be ‘‘insurance
or otherwise,’’ in the absence of a
meaningful distinction between those
entities specifically listed in section
1860D–24(b)—Medicaid, SPAPs,
TRICARE, and FEHBP—and other
government health care programs,
allowing payments from such other
programs to count toward TrOOP would
be arbitrary. Further, in giving the
Secretary the authority to identify other
entities providing other prescription
drug coverage under section 1860D–
24(b)(5) of the Act, the Congress
contemplated that its list of entities
providing other prescription drug
coverage was not exhaustive.
For additional clarification of this
issue, we have split the definition of
‘‘insurance or otherwise,’’ in our
proposed rule into two separate
definitions—‘‘insurance’’ and ‘‘or
otherwise’’—in our final rule. The term
insurance (at § 423.100 of our final rule)
refers to a health plan that provides, or
pays the cost of covered Part D drugs,
including, but not limited to health
insurance coverage, a MA plan, and a
PACE organization. We note that our
definition of ‘‘insurance’’ does not
modify the definition of ‘‘health plan’’
at 45 CFR 160.103 of the HIPAA
Administrative Simplification
Regulations, or any interpretation
thereof issued by the Department of
Health and Human Services.
We believe that the phrase ‘‘or
otherwise’’ refers to government-funded
health programs. We have defined the
term ‘‘government-funded health
programs’’ at § 423.100 of our final rule
to mean any program established,
maintained, or funded—in whole or in
part—by the Federal government, the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
governments of States or political
subdivisions of States, or any agency or
instrumentality of these governments
which uses public funds in whole or in
part to provide to, or pay on behalf of,
an individual the cost of Part D drugs.
Thus, insurance or otherwise
encompasses not just traditional health
insurance coverage that is not
considered a group health plan, but also
government programs and entities
(including the Department of Veterans
Affairs (VA), IHS, Federally Qualified
Health Centers (FQHCs), Department of
Labor (DOL) Federal Workers’
Compensation Program), government
insurers (including Medicaid, Medicaid
1115 demonstrations, and the State
Children’s Health Insurance Program
(SCHIP)), and government-sponsored
funds (including black lung benefits,
Ryan White CARE Act funds, and State
special funds that assist certain
individuals with their medical costs,
such as a special fund for AIDS
patients).
We believe we have defined these
terms consistent with the Congress’s
intent of reducing incentives for current
employers, other insurers, and
government programs to reduce their
current levels of coverage. Because costs
for covered Part D drugs paid by
insurance or otherwise on behalf of a
Part D enrollee do not, as previously
discussed, count as incurred costs, any
coverage that supplements the benefits
available under Part D coverage that are
provided to beneficiaries by Medicaid,
Medicaid Section 1115 ‘‘Pharmacy
Plus’’ waiver programs, the VA health
care program, the IHS, ADAP programs,
and local or State indigent drug
programs would not count as an
incurred cost for purposes of TrOOP.
We note, however, that to the extent that
a State provides assistance with covered
Part D costs to Part D enrollees with
State-only funds and meets the
requirements of a State Pharmaceutical
Assistance Program as specified in
§ 423.464(e)(1), such assistance does
count as an incurred cost as provided by
section 1860D–2(b)(4)(C)(ii) of the Act.
However, if an entity providing for or
paying the cost of drugs receives a
government grant none of which is used
to pay for drugs (for example, a lowincome housing grant)—such an entity
is not considered a government-funded
program. On the other hand, if an entity
pays for drugs using a mix of private
and public funds, the entity is
considered a government-funded health
program, and all of its drug spending is
excluded from TrOOP.
As mentioned above, Pharmacy Plus
program costs, including State
spending, cannot be counted towards

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

TrOOP because Pharmacy Plus
programs are funded under Medicaid
and therefore do not qualify as SPAPs.
For this reason, we believe that,
generally, States will be better off and
will realize savings if they restructure
their prescription drug programs as
SPAPs, rather than continuing their
Pharmacy Plus programs. Their savings
could be used in a variety of ways, such
as directly paying for their enrollees’
Part D premiums, wrapping around the
Part D benefit by paying for the required
cost-sharing, or paying Part D plans for
supplemental benefits.
According to IHS estimates, we
anticipate that a large proportion of AI/
ANs will be eligible for low-income
subsidies under Part D, which should
significantly limit the financial impact
on I/T/U facilities. For those AI/ANs not
eligible for the low-income subsidies
and enrolled in a Part D plan, the IHS
will still obtain some benefit from Part
D coverage because I/T/U facilities
participating in Part D plan networks
will be reimbursed for 75 percent of
spending (on average) between the
deductible and the initial coverage
limit. Moreover, AI/AN enrollees will
experience no difference in the way
they obtain their prescription drugs to
the extent that they use I/T/U
pharmacies or IHS-contracted
pharmacies.
ADAPs cannot be considered SPAPs
because these programs receive Federal
funding. As discussed in subpart J, we
have interpreted section 1860D–23(b) of
the Act, which requires SPAPs to be
State programs that provide financial
assistance for the purchase of provision
of prescription drugs, to mean that an
SPAP must provide such assistance
with State funds. Therefore, the
definition of the term SPAP excludes
any program in which program funding
is from Federal grants, awards,
contracts, entitlement programs, or
other Federal sources of funding
(though we clarify that this does not
exclude some Federal administrative
funding or incidental Federal monies).
Since ADAPs receive Federal funding,
they cannot be defined as SPAPs under
§ 423.454 of our final rule. However,
according to HRSA estimates, we
anticipate that a substantial majority of
ADAP enrollees will qualify for lowincome subsidies. For those ADAP
enrollees who do not receive a full or
partial subsidy, we estimate that the
Part D benefit would pay 75 percent, on
average, of an enrollee’s covered Part D
drug expenditures between the
deductible and initial coverage limit. To
ensure coordination of benefits for the
HIV/AIDS and population, as well as to
eliminate any barriers to enrolling in

PO 00000

Frm 00049

Fmt 4701

Sfmt 4700

4241

Part D benefits, the ADAP program may
wish to pay for their beneficiaries’
premiums to eliminate any barriers to
Part D benefits.
Per several commenters’ request, we
also wish to clarify that section 1860D–
2(b)(4)(C) of the Act defines the term
‘‘incurred costs’’ only for the out-of­
pocket threshold. Thus, the fact that
coverage that supplements the benefits
available under Part D coverage that is
provided by certain entities is excluded
from the definition of incurred costs for
purposes of TrOOP has no bearing on
counting that supplemental coverage
against the deductible. In other words,
ADAPs, IHS, and other programs
providing coverage that supplements
the benefits provided under Part D may
subsidize costs incurred against a Part D
enrollee’s deductible for those patients
unable to afford these costs. The
provision of the supplemental coverage
will not affect an enrollee’s ability to
satisfy the deductible and therefore
qualify for reduced cost-sharing
between the deductible and the initial
coverage limit. In addition, these
entities are not precluded from paying
for a Part D enrollee’s cost-sharing above
the out-of-pocket threshold once a
beneficiary has accumulated incurred
costs in excess of the out-of-pocket
threshold.
Comment: We requested comments
regarding the treatment of health
savings account (HSAs), flexible savings
arrangements (FSAs), health
reimbursement arrangements (HRAs),
and medical savings accounts (MSAs)
vis-a`-vis our definitions of ‘‘group
health plan,’’ ‘‘insurance or otherwise,’’
and ‘‘third party payment
arrangements.’’ Many commenters
suggested that HSAs, FSAs, MSAs, and
HRAs be excluded from our proposed
definition of ‘‘group health plan’’ such
that any distributions used by Part D
enrollees to pay out-of-pocket costs
associated with cost-sharing for covered
Part D drugs are allowed to count as
incurred costs. These commenters
agreed that these funds are analogous to
beneficiaries’ bank accounts. Some of
these commenters asked that we specify
that payment of out-of-pocket expenses
via these accounts count toward TrOOP
only when such accounts are bona fide
arrangements set up in accordance with
IRS rules and guidance, such funds are
not limited to paying prescription drug
expenses, and individuals have control
over how the funds from these accounts
are utilized. One commenter notes that
any exemption of HSAs, FSAs, MSAs,
and HRAs from our definition of ‘‘group
health plan’’ should be written carefully
to avoid circumvention of Medicare
Secondary Payer (MSP) laws. Another

E:\FR\FM\28JAR2.SGM

28JAR2

4242

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

commenter noted that from Part D
plans’ perspective, it makes the most
sense administratively and
operationally to allow funds from these
accounts to count toward incurred costs
because it will be difficult for them to
identify and differentiate between
different sources of enrollee funds and
carve out the payments from TrOOP
calculations. One commenter noted that
HRAs present a more difficult case,
since they are by definition employerfunded only. However, this commenter
noted that, from an administrative
perspective, it may be difficult to
distinguish between HRAs and other
types of personal health savings
vehicles.
In contrast, several commenters
disagreed that HSAs and similar
accounts should be exempted from our
definition of ‘‘group health plan.’’ Some
of these commenters believed that
contributions from one type of
employer-sponsored benefit should not
receive differential treatment than other
types, particularly when contributions
from employer-sponsored group health
coverage are not being counted as
incurred costs. One commenter thought
that we had no statutory authority to
create a special rule to exempt HSAs
from our definition of ‘‘group health
plan.’’ This commenter was concerned
about non-employer sponsored HSAs,
that these funds are not like bank
accounts given the tax breaks associated
with them, that allowing these funds to
count toward TrOOP discriminates
against retirees with employersponsored drug coverage, and that we
would create a substantial windfall and
unjustified double taxpayer subsidy.
Response: We agree with the majority
of the commenters that HSAs, FSAs,
and MSAs are essentially analogous to
a beneficiary’s bank account, and that
distributions from these personal health
savings vehicles should count as
incurred costs for the purposes of the
out-of-pocket threshold. However, as
one commenter noted, we believe that
HRAs are fundamentally different from
these personal health saving vehicles
because they are required to be solely
employer-funded. Although employers
are permitted to contribute funds to
HSAs, FSA, and MSAs and may
administer the benefits associated with
these accounts, employees are not
foreclosed from contributing to these
vehicles as they are under HRAs.
Excluding FSAs, MSAs, and HSAs from
the definitions of ‘‘insurance’’ and
‘‘group health plan’’ for purposes of
calculation of TrOOP expenditures will
further our objective of encouraging
beneficiaries to set aside their own
money for drug expenses by allowing

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

those funds to count toward enrollees’
TrOOP expenditures. In order to clarify
that distributions from HSAs, FSAs, and
MSAs can be counted toward a Part D
enrollee’s incurred costs, we have
revised the definitions in § 423.100 of
our final rule accordingly and added a
definition of ‘‘personal health savings
vehicles’’ that is limited to HSAs, FSAs,
and Archer MSAs.
We note that the term ‘‘group health
plan’’ is used in reference to TrOOP,
creditable coverage, and the retiree
subsidy in our final rule, but that we do
not define the term uniformly in our
final rule. Section 1860D–22(c) of the
Act explicitly defines ‘‘group health
plan’’ to include ERISA plans, which
may include an FSA, MSA, and, in
limited circumstances, an HSA. The
reference to ‘‘group health plan’’ under
the creditable coverage provisions in
section 1860D–13(b)(4)(C) of the Act
states that a group health plan includes
a qualified retiree prescription drug
plan as defined under section 1860D–22
of the Act, which is in turn based on the
definition of ‘‘group health plan’’ under
section 1860D–22(C) of the Act and thus
may include an MSA or, in limited
circumstances, an FSA or HSA. In
contrast, the TrOOP provisions simply
refer to a ‘‘group health plan,’’ without
specifying what this term may include.
Given that the statutory references to
‘‘group health plan’’ under the TrOOP
and creditable coverage provisions use
different language, and that the policies
underlying these issues are different, we
have adopted two different definitions
of the term ‘‘group health plan’’: one
with regard to the TrOOP provisions,
and another with regard to the
remaining provisions of Part D,
including the creditable coverage and
the retiree subsidy provisions. While the
Congress specifically enumerated two
types of coverage to be considered group
health plans with regard to creditable
coverage, the TrOOP provisions do not.
We also note that the definition of a
‘‘group health plan’’ used to implement
the Part D drug benefit will differ from
the definition of ‘‘group health plan’’
used by the Medicare Secondary Payer
(MSP) program for recovery of Medicare
payments. While both of our Part D
definitions of ‘‘group health plan’’ are
based on the ‘‘ERISA’’ definition set
forth at 29 U.S.C. 1167(1), the MSP
definition is taken from the Internal
Revenue Service (IRS) definition of
‘‘group health plan’’ at 26 U.S.C.
5000(b)(1). Therefore, the definitions of
‘‘group health plan’’ in § 423.100 and
§ 423.4 of our final rule do not permit
circumvention of the MSP laws since
they will not apply in the MSP context.

PO 00000

Frm 00050

Fmt 4701

Sfmt 4700

b. Alternative Prescription Drug
Coverage
Section 1860D–2(c) of the Act
provides that a Part D sponsor may offer
an alternative prescription drug benefit
design, provided that the Part D sponsor
applies for and receives our approval for
the proposed alternative. In order to
receive approval to offer an alternative
prescription drug benefit design, a Part
D sponsor will have to meet the
requirements related to actuarial
equivalence described in section
1860D–2(c)(1) of the Act, and must use
defined standard coverage (and not
actuarially equivalent standard
coverage) as a fixed point of
comparison.
• Basic Alternative Coverage
Beyond the required parameters for
alternative coverage discussed above,
we interpreted the provisions of section
1860D–2(c) of the Act, together with
section 1860D–2(a)(1) of the Act, as
providing for two forms of alternative
coverage—either ‘‘basic alternative
coverage’’ or ‘‘enhanced alternative
coverage.’’ Basic alternative coverage
refers to alternative coverage that is
actuarially equivalent to defined
standard prescription drug coverage.
Enhanced alternative coverage refers to
alternative coverage that exceeds
defined standard coverage by offering
supplemental benefits.
Within the parameters for alternative
prescription drug coverage described
above, a Part D sponsor with a basic
alternative prescription drug benefit
design can theoretically—by combining
features such as a reduction in the
deductible, changes in cost-sharing, and
a modification of the initial coverage
limit—still maintain an actuarial value
of coverage equal to defined standard
prescription drug coverage.
• Enhanced Alternative Coverage
Section 423.104(f) of our proposed
rule permitted Part D sponsors to
provide qualified prescription drug
coverage that includes supplemental
benefits. We referred to any Part D
benefit package that includes
supplemental benefits as ‘‘enhanced
alternative coverage.’’
Enhanced alternative coverage
includes basic prescription drug
coverage and supplemental benefits.
The requirements for the supplemental
benefits that may be included in
enhanced alternative coverage are found
in section 1860D–2(a)(2) of the Act.
These supplemental benefits will
supplement basic prescription drug
coverage, providing for a package of
benefits that exceeds the actuarial value
of defined standard coverage.
Supplemental benefits can consist of:

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
+ Reductions in cost-sharing that
increase the actuarial value of the
coverage beyond that of defined
standard coverage; or
+ Coverage of drugs that are
specifically excluded from the
definition of Part D drugs under section
1860D–2(e)(2)(A) of the Act and
§ 423.100 of our proposed rule.
Under section 1860D–2(a)(2)(B) of the
Act, a PDP sponsor would not be
permitted to offer a prescription drug
plan that provided enhanced alternative
coverage in a particular service area
unless it also offers a prescription drug
plan that provides only basic
prescription drug coverage (which we
defined as either standard prescription
drug coverage or basic alternative
coverage, with access to negotiated
prices) in that same area.
Similarly, as provided under section
1860D–21(a)(1)(A) of the Act, beginning
on January 1, 2006, an MA organization
cannot offer an MA coordinated care
plan in a service area unless that plan,
or another MA plan offered by the same
organization in the same service area,
includes required prescription drug
coverage. As defined in § 423.100 of our
proposed rule, required prescription
drug coverage, for the purposes of an
MA organization offering an MA-PD
plan, included either: (1) basic
prescription drug coverage; or (2)
enhanced alternative coverage, provided
there is no MA monthly supplemental
beneficiary premium applied under the
MA-PD plan. The enhanced alternative
coverage could be provided without a
monthly supplemental beneficiary
premium only if a MA-PD plan applied
a credit against the otherwise applicable
premium of rebate dollars available
under section 1854(b)(1)(C) of the Act.
Rebate dollars represent the dollars
available for supplemental (and other)
benefits when an MA plan’s riskadjusted non-drug bid is under the riskadjusted non-drug monthly benchmark
amount. In other words, to the extent
that an MA-PD plan chooses to provide
enhanced alternative coverage for no
additional premium through the
application of rebate dollars, the
enhanced alternative coverage would
constitute required coverage for the
purposes of meeting the requirement in
section 1860D–21(a)(1)(A) of the Act.
As provided under section 1860D–
21(a)(1)(B)(i) of the Act, an MA
organization could not offer prescription
drug coverage (other than that required
under Parts A and B of Medicare) to
enrollees of a medical savings account
(MSA) plan. Under section 1860D–
21(a)(1)(B)(ii) of the Act, an MA
organization also could not offer
prescription drug coverage (other than

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

that required under Parts A and B of
Medicare) under another type of MA
plan—including a private fee-for-service
plan—unless the drug coverage it
provided under that MA plan consisted
of qualified prescription drug coverage
and met our requirements regarding
required prescription drug coverage.
Given changes in § 417.440(b) of our
final rule (described in subpart T), we
clarify in our final rule the requirements
associated with the offering of enhanced
alternative coverage by cost plans. As
provided in § 423.104(f)(4)(i) of our final
rule, a cost plan that elects to offer
qualified prescription drug coverage
under Part D may offer enhanced
alternative coverage only as an optional
supplemental benefit (under
§ 417.440(b)(2)(ii)), and only if the cost
plan also offers basic prescription drug
coverage.
As provided in § 423.104(f)(4)(ii) of
our final rule, a cost plan that elects to
offer Part D coverage as an optional
supplemental benefit (under
§ 417.440(b)(2)(ii)) may only do so if the
coverage it offers consists of qualified
prescription drug coverage. However, a
cost plan that does not offer qualified
prescription drug coverage may provide
prescription drug coverage that is not
qualified prescription drug coverage,
and the requirements of Part D do not
apply to the coverage.
Except as otherwise provided below,
the final rule adopts the rules of
alternative coverage set forth in
§ 423.104(f) and § 423.104(g) of our
proposed rule.
Comment: One commenter
recommended that we issue regulations
encouraging basic alternative coverage
including optional drugs because it will
offer beneficiaries a more
comprehensive benefit package.
Response: We do not have the
statutory authority to allow basic
alternative coverage to include drugs
that are statutorily excluded from the
definition of Part D drugs. Coverage of
drugs otherwise excluded from the
definition of Part D drug under section
1860D–2(e)(2)(A) of the Act is
considered a supplemental benefit as
provided under section 1860D–2(a)(2) of
the Act. As specified in § 423.100 of our
proposed and final rules, basic
alternative coverage must be actuarially
equivalent to defined standard coverage
and cannot include any supplemental
benefits. The only way that Part D plans
may provide supplemental benefits, to
include coverage of drugs excluded
from the definition of Part D drugs
under section 1860–D(2)(e)(2)(A) of the
Act, is by providing enhanced
alternative coverage.

PO 00000

Frm 00051

Fmt 4701

Sfmt 4700

4243

Comment: One commenter sought
clarification as to whether alternative
coverage would be subject to the same
kind of out-of-pocket cost limits and
coverage thresholds instituted under
standard prescription drug coverage.
Response: In accordance with section
1860D–2(b)(A)(i)(I) of the Act, Part D
plans offering enhanced alternative
coverage may only reduce certain costsharing specifically, a reduction in the
deductible, a reduction in the
coinsurance percentage or copayments
applicable to covered Part D drugs
obtained between the annual
deductible, and the initial coverage
limit, or an increase in the initial
coverage limit. Section 1860D–2(A)(i)
does not permit Part D plans to offer
enhanced alternative drug coverage
consisting of a reduction of the out-of­
pocket threshold under
§ 423.104(d)(5)(iii) of our final rule.
Section 1860D–2(c)(3) of the Act also
requires that Part D plans offering
alternative prescription drug coverage
provide the same protection against
high out-of-pocket expenditures as
defined standard coverage. Thus,
enhanced alternative coverage may fill
in some of the coverage gaps in defined
standard coverage, but it cannot affect
the true out-of-pocket threshold
described in § 423.104(d)(5)(B)(iii) of
our final rule, which will be $3,600 in
2006. In other words, beneficiaries must
still incur $3,600 (in 2006) in true out­
of-pocket expenses before they can
benefit from the Medicare catastrophic
coverage cost-sharing amounts (the
greater of 5 percent coinsurance or $2/
$5 copayments), and before Part D plans
are eligible to receive reinsurance
subsidies from Medicare. As with
actuarially equivalent standard
coverage, Part D plans can provide an
actuarially equivalent version of the
coverage provided after the true out-of­
pocket threshold is met. In addition,
enhanced alternative coverage can
improve this coverage.
Comment: Several commenters
opposed the provisions of § 423.104(f) of
our proposed rule and recommended
that the final rule exclude provisions for
enhanced alternative coverage. These
commenters argue that this section
exceeds the statutory authority supplied
to the Secretary under the MMA and
that allowing such Part D plans to be
offered would make it impossible to
make a valid comparison between Part
D plans, thus making it more difficult
for beneficiaries to choose a Part D plan.
Response: We disagree with these
commenters. Section 1860D–2(a)(2) of
the Act provides that qualified
prescription drug coverage may include
supplemental prescription drug

E:\FR\FM\28JAR2.SGM

28JAR2

4244

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

coverage consisting of: (1) reductions in
cost-sharing (for example, a reduction in
the deductible, a reduction in the
coinsurance percentage or copayments
applicable to covered Part D drugs
obtained between the annual deductible
and the initial coverage limit, or an
increase in the initial coverage limit),
provided these reductions in costsharing increase the actuarial value of
the benefits provided above the
actuarial value of basic prescription
drug coverage; or (2) coverage of drugs
that are specifically excluded as Part D
drugs under section 1860D–2(e)(2)(A) of
the Act. ‘‘Enhanced alternative
coverage’’ is simply our term for
qualified prescription drug coverage
that includes these supplemental
benefits specifically permitted by the
statute. We understand commenters’
concerns about beneficiaries’ ability to
compare Part D plan features given the
benefit flexibility design accorded to
Part D plans under the MMA and will
work to ensure that our comparative
information is as standardized and user
friendly as possible.
c. Negotiated Prices
Section 1860D–2(d)(1) of the Act
requires that a Part D sponsor provide
beneficiaries with access to negotiated
prices for covered Part D drugs. As
required by section 1860D–2(d)(1)(B) of
the Act, negotiated prices will have to
take into account negotiated price
concessions for covered Part D drugs
such as discounts, direct or indirect
subsidies, rebates, and direct or indirect
remunerations, and would include any
applicable dispensing fees. Access to
negotiated prices will be provided even
when no benefits would otherwise be
payable on behalf of an enrollee due to
the application of a deductible, the
initial coverage limit, or other costsharing.
As required under section 1860D–
2(d)(1)(C) of the Act, prices negotiated
with manufacturers for covered Part D
drugs by either (1) a Part D plan, or (2)
a qualified retiree prescription drug
plan for covered Part D drugs provided
on behalf of Part D eligible individuals
will not be taken into account in making
best price determinations under the
Medicaid program.
Section § 423.104(h)(3) of our
proposed rule required that Part D
sponsors disclose to us all aggregate
negotiated price concessions including
discounts, direct or indirect subsidies,
and direct or indirect remunerations,
they obtain from each pharmaceutical
manufacturer that are passed through to
the Medicare program in the form of
lower subsidies or to beneficiaries in the
form of: (1) lower monthly beneficiary

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

premiums; or (2) lower covered Part D
drug prices at the point of sale.
As provided under section 1860D–
2(d)(2) of the Act, information on
negotiated prices reported to us for the
purposes of ascertaining the level of
pass-through will be protected under
the confidentiality provisions applicable
to Medicaid pricing data under section
1927(b)(3)(D) of the Act. However, that
these confidentiality protections did not
preclude audit and evaluation of
negotiated price concession information
by the HHS OIG.
As provided under section 1860D–
2(d)(3) of the Act and codified in
§ 423.104(h)(4) of our proposed rule, we
are authorized to conduct periodic
audits either directly or through
contracts with other organizations of the
financial statements and records of Part
D sponsors pertaining to the Part D
plans they offer. As required in section
1860D–2(d)(3) of the Act, this auditing
will be performed with the ultimate goal
of protecting the Medicare program
against fraud and abuse, as well as
ensuring proper disclosures and
accounting under Part D.
Except as otherwise provided below,
the final rule adopts the rules for
negotiated prices set forth in
§ 423.104(h) of our proposed rule.
Comment: Some commenters believed
that the phrase ‘‘take into account’’ in
our definition of negotiated prices is not
strong enough, and that we should
establish minimum requirements for the
proportion of total negotiated price
concessions passed through to
beneficiaries. Suggestions ranged from a
majority (75 to 80 percent) to 100
percent of negotiated price concessions.
Response: Section 1860D–2(d)(1)(B) of
the Act specifically requires that
negotiated prices ‘‘shall take into
account negotiated price concessions,
such as discounts, direct or indirect
subsidies, rebates, and direct or indirect
remunerations.’’ Had the Congress
intended that all negotiated price
concessions be passed through to
beneficiaries, they would have used a
phrase other than ‘‘take into account’’ in
the definition of the term ‘‘negotiated
prices.’’
In addition, section 1860D–2(d)(2) of
the Act specifically requires that Part D
plans disclose to us aggregate negotiated
price concessions that are passed
through to enrollees and to us through
lower subsidies, lower monthly
premiums, and lower prices through
pharmacies and other dispensers. In
requiring Part D plans to disclose to us
the extent to which they pass through
negotiated price concessions to
enrollees and to us, section 1860D–
2(d)(2) of the Act anticipates that Part D

PO 00000

Frm 00052

Fmt 4701

Sfmt 4700

plans might not pass through all
negotiated price concessions. Therefore,
we interpret the definition of the term
negotiated prices in section 1860D–
2(d)(1)(B) of the Act as requiring Part D
plans to pass on to enrollees some, but
not necessarily all, of these price
concessions and have clarified this
interpretation in our definition of the
term ‘‘negotiated prices’’ in § 423.100 of
our final rule. We believe that market
competition will encourage Part D plans
to pass through to enrollees a high
percentage of the negotiated price
concessions they obtain in the form of
negotiated prices at the point of sale.
Establishing minimum threshold levels
for the pass-through of negotiated price
concessions would have the effect of
undercutting market competition, as
Part D plans might cluster their
negotiated prices around that threshold.
Comment: Some commenters
recommended that we clarify how price
concessions will be passed through to
the pharmacy and to the beneficiaries.
Some of these commenters specifically
asked us to ensure that Part D plans, not
pharmacists, bear the costs of discounts.
Response: The Part D benefit was
established by the MMA as a marketbased model under which marketplace
competition ensures that enrollees
receive low prices for prescription
drugs. Given this market-based
approach envisioned by the Congress,
we are wary of regulating negotiations
between private parties particularly
regarding the specifics of price
negotiations so as to ensure that
enrollees receive competitive prices on
their covered Part D drugs. We note, as
well, that pharmacies are not required to
contract with Part D plans. To the extent
that pharmacies believe that the
discounts they are being asked to offer
are too high, they can refuse to
participate in Part D plan pharmacy
networks. Given our pharmacy access
standards at § 423.120(a)(1), we expect
that pharmacies will have some leverage
vis-a`-vis the payment provisions in Part
D plan contracts.
Comment: Two commenters stated
that they considered our requirement
that pharmacies pass through negotiated
prices during coverage gaps and for noncovered formulary drugs to be price
controls.
Response: Section 1860D–2(d)(1) of
the Act requires, as implemented under
§ 423.104(g)(1) of our final rule, that a
Part D sponsor provide enrollees with
access to negotiated prices for covered
Part D drugs even when no benefits
would otherwise be payable on behalf of
an enrollee due to the application of a
deductible, the initial coverage limit, or
other cost-sharing. We interpret the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
reference to the lack of payable benefits
due to the application of the initial
coverage limit as referring to that
portion of covered Part D drug
expenditures between the initial
coverage limit and the threshold for
catastrophic coverage. In that
expenditure range, a beneficiary
enrolled in standard prescription drug
coverage would be responsible for 100
percent cost-sharing. These are still
covered Part D drugs, and enrollees
should be able to benefit from
negotiated prices during the coverage
gap.
We clarify that negotiated prices do
not have to be made available for noncovered Part D drugs. However, as we
stated in the preamble to our proposed
rule, we are interpreting the phrase ‘‘or
other cost-sharing’’ as a reference to Part
D plan designs that include, as part of
their formulary design, access to
negotiated prices on certain drugs but at
a tier within their formulary in which
the Part D plan would pay no benefits
and the enrollee would be responsible
for 100 percent cost-sharing (in other
words, a negotiated price would be
available and the drug would be on the
Part D plan’s formulary, but the
beneficiary would always be responsible
for 100 percent of the drug’s negotiated
price). These drugs would therefore be
formulary drugs and would have to be
offered at negotiated prices. As stated
elsewhere in this preamble, however,
we note that we will review formulary
design as part of our benefit package
review to ensure that Part D plans do
not establish formulary structures
(including tiered cost-sharing) that
substantially discourage enrollment by
certain beneficiaries. To the extent that
Part D plans propose using certain costsharing tiers (including, but not limited
to, 100 percent cost-sharing tiers) in a
discriminatory fashion, they would not
be allowed.
In addition, we clarify that we
interpret the requirement that
negotiated prices always be provided to
mean that uniform negotiated prices
must be available to beneficiaries for a
particular drug when purchased from
the same pharmacy. In other words, the
negotiated price for a particular drug
will be the same, at a particular
pharmacy, regardless of whether a
beneficiary’s drug spending is between
$0 and the deductible, between the
deductible and initial coverage limit,
between the initial coverage limit and
the out-of-pocket threshold, or in excess
of the out-of-pocket threshold. We
believe that non-uniform negotiated
prices would discourage enrollment by
certain Part D eligible individuals in
violation of section 1860D–11(e)(2)(D)(i)

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

of the Act and, therefore, plans will not
be able to apply differential negotiated
prices to any drug purchased from a
given pharmacy.
Comment: Other commenters
recommended that the definition of the
term ‘‘negotiated price’’ reflect the price
to the Part D plan net of any rebates,
discounts, or other price concessions
paid to the Part D plan for a covered
Part D drug prescription obtained from
either a retail or mail-order pharmacy.
Some commenters asked that price
concessions not be allowed to
artificially lower the cost of mail order
prescriptions.
Response: Part D sponsors will
negotiate prices with pharmacies and
manufacturers, and we assume based on
current market practices that negotiated
prices will vary within a retail
pharmacy network, as well as between
retail and mail-order pharmacies. How a
Part D sponsor nets out negotiated price
concessions in its negotiated prices is at
the discretion of the Part D sponsor, but
we expect that competition will create
incentives for Part D sponsors to offer
reasonable negotiated prices.
Ultimately, however, these pricing
issues are between a Part D sponsor and
the network pharmacies and
manufacturers with whom the Part D
plan negotiates price concessions.
Comment: Some commenters
recommended that Part D plans be
required to reimburse pharmacies to
recover costs of purchasing, handling,
and dispensing products to
beneficiaries.
Response: As provided elsewhere in
this preamble, negotiated prices will
include any dispensing fees for covered
Part D drugs related to the transfer of
possession of the covered Part D drug
from the pharmacy to the beneficiary,
including charges associated with
mixing drugs, delivery, and overhead.
As provided in section 1860D–11(i) of
the Act, we cannot intervene in
negotiations between pharmacies and
Part D plans. Thus, the extent to which
Part D plans reimburse pharmacies for
their entire dispensing costs will
depend on the outcome of those
negotiations.
Comment: Two commenters noted
that our definition of the term
‘‘negotiated prices’’ appears to envision
network model Part D plans, but that
MA organizations and cost plans that
own and operate their own pharmacies
do not negotiate reimbursement rates
with contract pharmacies. One
commenter recommended that
negotiated prices for such MA
organizations and cost plans be defined
as the prescription charge established by
the organization, and that such charge

PO 00000

Frm 00053

Fmt 4701

Sfmt 4700

4245

include the acquisition cost of the drug,
dispensing, operational, capital,
overhead, and margin costs. The
commenter suggested that, in
determining whether Part D plans’
negotiated prices meet the standard of
section 1860D–2(d)(1)(B) of the Act, we
could either compare an MA
organization’s negotiated prices to
negotiated prices of network model Part
D plans in the same market or,
alternatively, require the MA
organization to demonstrate how it takes
price discounts it receives from
manufacturers into account in its
pricing methodology or formula.
Another commenter suggested that we
permit such MA organizations to
establish a pricing methodology that
reflects a good faith effort to reflect
prices analogous to those that would be
negotiated by an MA organization with
third party pharmacy providers, and
that we consult with affected MA
organizations in establishing this policy.
Response: We clarify that our
definition of the term ‘‘negotiated
prices’’ in § 423.100 of the final rule
requires that ‘‘discounts, direct or
indirect subsidies, rebates, other price
concessions, and direct or indirect
remunerations’’ be taken into account in
establishing covered Part D drug
negotiated prices. Plans do not have to
take into account pharmacy discounts to
the extent that no such discounts exist.
Moreover, we note that our definition of
the term ‘‘dispensing fees’’ in § 423.100
of the final rule indicates that, in the
case of pharmacies owned and operated
by a health plan, dispensing fees are
understood to be the equivalent of all
reasonable pharmacy costs included in
the definition (those related to the
transfer of possession of a covered Part
D drug to a Part D plan enrollee),
including the salaries of pharmacists
and other pharmacy workers as well of
the costs associated with maintaining
the pharmacy facility and equipment
necessary to operate the pharmacy. For
purposes of evaluating the validity of a
Part D plan’s bid, including its
negotiated prices for covered Part D
drugs, we will request and evaluate
disaggregated negotiated price
concession data only to the extent that
such detail is necessary in order to
justify actuarial assumptions or as part
of an audit.
Comment: One commenter asked that
we define the meaning of the terms
‘‘direct or indirect subsidies’’ and
‘‘direct or indirect remunerations.’’
Another commenter suggested that
negotiated price concessions reported to
us should include formulary placement
incentives, market share movement
incentives, administrative fees paid to

E:\FR\FM\28JAR2.SGM

28JAR2

4246

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

Part D plans, and direct and indirect
forms of remuneration. One commenter
asked that we provide clarification on
how rebates will be calculated, reflected
in negotiated prices, and reported to us.
Response: We note that Part D plans
may fulfill the requirements of section
1860D–2(d)(2) of the Act through the
data submission requirements discussed
in further detail in subpart G. In other
words, we should be able to determine
the proportion of total aggregate price
concessions passed through to either the
Medicare program or to enrollees based
on the cost data Part D plans will be
required to submit to us. Although all
negotiated price concessions be they
direct or indirect subsidies, direct or
indirect remunerations, rebates, or
discounts must be reported to us, as
provided in § 423.104(g)(3) of our final
rule, we will require that Part D plans
break out any fair market value
administrative fees pharmaceutical
manufacturers may pay Part D sponsors.
The use of the term indirect with direct
is meant to be all-inclusive. In other
words, we clarify that this means any
and all subsidies or remunerations. We
will specify in operational guidance the
format and frequency of these reports, as
well as what constitutes direct or direct
subsidies, direct or indirect
remunerations, rebates, and discounts.
Comment: We received a number of
comments regarding our aggregate
negotiated price concession disclosure
requirements. Several commenters
asked us to clarify that only aggregate
price concessions passed through to us
and to enrollees will be reported to us,
rather than the amount or proportion of
total price concessions obtained by a
Part D plan. Other commenters thought
that Part D plans should be required to
disclose all price concessions, not just
the proportion passed through to Part D
enrollees. A number of other
commenters asked that we require the
disclosure of negotiated price
concession by drug.
Response: We clarify that, as provided
under section 1860D–2(d)(2) of the Act,
and specified in § 423.104(g)(3) of our
final rule, we will require that all
aggregate negotiated price concession
data and not just the proportion passed
through to beneficiaries be reported to
us for purposes of Part D plan bids.
However, as explained in subpart G, it
may be necessary for us to receive
disaggregated negotiated price
concession data from Part D plans in
order to ensure accurate payment to Part
D plans. We will provide further
information regarding negotiated price
concession reporting in separate
guidance.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Comment: Several commenters
recommended that Part D plans share all
negotiated price concession data
reporting with SPAPs.
Response: Since nothing in the MMA
addresses disclosure of negotiated price
information to SPAPs, FOIA rules
apply. FOIA applies to requests for data
from States. FOIA Exemption 4 protects
certain confidential commercial
information that is submitted to a
Federal agency. Determinations about
the applicability of FOIA Exemption 4
to a Part D plan’s pricing data would be
made on a case-by-case basis depending
on whether the submitter of the data
could demonstrate that disclosure of
this information would likely cause
substantial competitive harm to the
submitter’s competitive position. If
FOIA Exemption 4 is found to protect
submitted price information, we cannot
disclose this information to States
because to do so would violate the
Trade Secrets Act (18 U.S.C. 1905).
Comment: One commenter stated the
‘‘best price’’ provision undermined the
original intent of section 1927 (c)(1)(C)
of the Act and would have a negative
financial impact on the Medicaid
prescription drug program.
Response: We believe the Congress
intended that there be no Federal
barriers to Part D sponsors negotiating
the lowest prices possible for their plan
members. If negotiated prices counted
towards ‘‘best price,’’ this could create
a disincentive for manufacturers to offer
discounts. Further, the purpose of ‘‘best
price’’ exemptions in section
1927(c)(1)(C) of the Act is to ensure that
manufacturers offer Medicaid programs
strong rebates that are market-driven,
without penalizing the manufacturers
indirectly for the discounts they offer by
law under other Federal drug programs.
Exempting negotiated prices under the
new Medicare prescription drug benefit
is consistent with that purpose. The
issue of effects on Medicaid best price
is discussed in the impact analysis.
Comment: One commenter asked for
further guidance regarding the ‘‘best
price’’ exemption, stating that Part D
providers should be able to negotiate
simultaneously for commercial prices,
which would count toward ‘‘best price,’’
and for Medicare/qualified retiree
prices, which would not count toward
‘‘Best Price.’’
Response: Under section 1860D–11(i)
of the Act, we have no authority to
regulate price concessions between
manufacturers and Part D plans.
Consequently, we cannot prohibit or
require Part D plans from negotiating
simultaneously for commercial prices,
which would be included in the
calculation of the Medicaid drug rebate

PO 00000

Frm 00054

Fmt 4701

Sfmt 4700

best price, and Medicare prices, which
would not be included in the
calculation of the Medicaid drug rebate
best price. If Part D plans wish to
simultaneously negotiate their
commercial and Medicare prices, they
are free to do so.
Comment: One commenter suggested
that we recommend to the Congress
alternatives to the existing ‘‘best price’’
rebate formula. The commenter
recommended a flat rebate formula to
generate savings for State Medicaid
programs, while eliminating the
negative impact of the ‘‘best price’’
formula on the prescription drug market
generally.
Response: This regulation does not
address the best price provisions of the
Medicaid drug rebate statute as we do
not have the statutory authority under
Title I of the MMA to modify the
Medicaid rebate program.
3. Establishment of Prescription Drug
Plan Service Areas (§ 423.112)
Section 1860D–11(a)(2) of the Act
provides us with the authority to
establish PDP regions, and such PDP
regions must be established in a manner
that is consistent with the establishment
of MA regions. Section 1860D–
11(a)(2)(B) of the Act stipulates that PDP
regions must be, to the extent
practicable, consistent with MA regions
as established under section 1858(a)(2)
the Act. However, we may establish PDP
regions that vary from MA regions if we
determine that access to Part D benefits
would be improved by establishing
different regions. Section 1860D–
11(a)(2)(C) of the Act stipulates that we
designate a separate PDP region (or
regions) for the U.S. territories.
Except as otherwise provided below,
the final rule adopts the requirements
related to the establishment of
prescription drug plan service areas set
forth in § 423.112 of the proposed rule.
Comment: We received a number of
comments on the establishment of PDP
regions both in response to the
provisions of our proposed rule and as
follow-up to a public meeting held in
Chicago on July 21, 2004. The majority
of commenters favored establishing 50
State-based regions or, more generally, a
larger number of smaller regions—close
to that of State-level regions. Issues
identified in support of 50 State-based
regions included the large assumption
of risk associated with the establishment
of larger regions; insufficient time for
Part D plans to negotiate and develop
networks, or to renegotiate providers’
contracts and form partnerships;
potential difficulties in meeting State
licensure and solvency requirements;
and greater ease in terms of

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
coordination between Part D plans and
SPAPs in providing coverage that
supplements the benefits available
under Part D coverage. Several
commenters recommended an
intermediate number of regions between
the 10 and 50 regions authorized by the
MMA. One commenter cautioned us to
develop an appropriate number of
regions in order to ensure that
beneficiaries particularly those in rural
areas have meaningful access to Part D
choices. Yet another commenter
recommended that we align PDP and
MA regions in order to preclude
beneficiary confusion by MA enrollees
as they try to understand their options
during the initial enrollment period for
Part D coverage.
Several other commenters specifically
recommended that a standalone region
be created for Puerto Rico separate from
the 50 States and any of the other U.S.
territories. These commenters believe it
is necessary for Puerto Rico to be placed
in its own PDP region because a multistate PDP region for Puerto Rico would
compromise the viability of Part D on
the island. They argue that Puerto Ricobased plans have years of experience
working with the local Medicare
population and its distinct linguistic
and cultural traditions and will be
disadvantaged when competing with
U.S. companies to build provider
networks outside Puerto Rico. Some
commenters also thought that
combining Puerto Rico and another
State or States (for example, Florida or
New York) will drive up premiums for
Puerto Rican enrollees. On the other
hand, one commenter argued that a
standalone region for Puerto Rico would
isolate it, and preferred to stay in the
New York region under the MA and
PDP programs.
Response: We conducted a market
survey and analysis, including an
examination of current insurance
markets as required in the MMA. Key
factors in the survey and analysis
included payment rates; eligible
population size per region; PPO market
penetration; current existence of PPOs,
MA plans, or other commercial plans;
and presence of PPO providers and
primary care providers. Additional
factors were also considered, including
solvency and licensing requirements, as
well as capacity issues. In response to
the lack of specificity regarding the PDP
regions in our proposed rule, we
conducted extensive outreach in order
to obtain public input prior to the
publication of our final rule. On
December 6, 2004, we announced the
establishment of 26 MA regions and 34
PDP regions. For maps and fact sheets
on the on the regions, please see http:/

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

/www.cms.hhs.gov/medicarereform/
mmaregions/.
4. Access to Covered Part D Drugs
(§ 423.120)
a. Pharmacy Access Standards
As required by section 1860D–
4(b)(1)(C) of the Act, Part D plans must
secure the participation in their
pharmacy networks of a sufficient
number of pharmacies that dispense
drugs directly to patients (other than by
mail order) to ensure convenient access
to covered Part D drugs by Part D plan
enrollees. To achieve that goal, we are
authorized to establish access rules that
are no less favorable to enrollees than
rules for convenient access established
in the statement of work solicitation
(#MDA906–03–R–0002) by the
Department of Defense (DOD) on March
13, 2003, for purposes of the TRICARE
Retail Pharmacy program. Consistent
with the TRICARE standards, our
proposed rule required that Part D plans
establish pharmacy networks in which:
• In urban areas, at least 90 percent
of Medicare beneficiaries in the Part D
plan’s service area, on average, live
within 2 miles of a retail pharmacy
participating in the plan’s network;
• In suburban areas, at least 90
percent of Medicare beneficiaries in the
Part D plan’s service areas, on average,
live within 5 miles of a retail pharmacy
participating in the prescription drug
plan’s or MA-PD plan’s network; and
• In rural areas, at least 70 percent
of Medicare beneficiaries in the Part D
plan’s service area, on average, live
within 15 miles of a retail pharmacy
participating in the plan’s network.
As provided under section 1860D–
21(c)(3) of the Act and codified in
§ 423.120(a)(3)(i) of our proposed rule,
we are authorized to waive the
pharmacy access standards in
§ 423.120(a)(1) in the case of an MA-PD
plan or cost plan that provides access
(other than via mail order) to qualified
prescription drug coverage through
pharmacies owned and operated by the
MA organization that offers the plan or
the cost plan. However, in order for the
pharmacy access standards to be
waived, the MA-PD plan or cost plan in
question is required to have a pharmacy
network that, per our determination,
provides comparable pharmacy access
to its enrollees as provided under
§ 422.112.
Similarly, section 1860D 21(d)(2) of
the Act provides that if a private fee-for­
service MA plan offering qualified
prescription drug coverage provides
coverage for drugs, including covered
Part D drugs, purchased from all
pharmacies regardless of whether they
are network pharmacies under contract

PO 00000

Frm 00055

Fmt 4701

Sfmt 4700

4247

with the MA plan, and provided that
beneficiaries are not charged any costsharing above and beyond what they
will be charged under standard
prescription drug coverage—the
pharmacy access requirements will also
be waived.
As provided under section 1860D–
4(b)(1)(A) of the Act, Part D sponsors
will be required to permit the
participation in their Part D plan
networks of any pharmacy that was
willing to accept the plan’s terms and
conditions. Based on section 1860D–
4(b)(1)(B) of the Act, our proposed rule
clarified that a Part D sponsor will have
the option of reducing cost-sharing for
its enrolled beneficiaries below the level
that would otherwise apply for covered
Part D drugs dispensed through network
pharmacies. We interpreted this
provision as permitting Part D sponsors
from varying cost-sharing not only
based on type of drug or formulary tier,
but also on a particular pharmacy’s
status within the Part D plan’s
pharmacy network-in essence
authorizing distinctions between
‘‘preferred’’ and ‘‘non-preferred’’
pharmacies.
As stipulated under section 1860D–
4(b)(1)(E) of the Act and
§ 423.120(a)(4)(ii) of our proposed rule,
pharmacies could not be required to
accept insurance risk as a condition of
participation in a Part D sponsor’s
pharmacy network. We defined
‘‘insurance risk’’ in relation to a network
pharmacy as referring to risk of the type
commonly assumed only by insurers
licensed by a State, but not including
payment variations designed to reflect
performance-based measures of
activities within the control of a
pharmacy, such as formulary
compliance and generic drug
substitutions, or elements potentially in
the control of the pharmacy (for
example, labor costs, and productivity).
Section 1860D–4(b)(1)(D) of the Act
requires Part D sponsors to allow their
enrollees to receive benefits at a
network retail pharmacy instead of a
network mail-order pharmacy, if they so
choose. Consistent with the statute, our
proposed rule allowed Part D plan
enrollees who choose to obtain an
extended supply of a covered Part D
drug through a network retail pharmacy
to be responsible for any differential
between the network retail pharmacy’s
and the network mail-order pharmacy’s
negotiated price for that covered Part D
drug. We sought comments on our
proposal that this price differential be
counted as an incurred cost against the
annual out-of-pocket threshold and note
that, as discussed elsewhere in this
preamble, we have modified the level

E:\FR\FM\28JAR2.SGM

28JAR2

4248

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

playing field provision at
§ 423.120(b)(10) of our final rule to
clarify that an enrollee will be
responsible for any higher cost-sharing
(and not a differential in negotiated
price) associated with purchasing a 90­
day supply of a covered Part D drug at
a network retail pharmacy, as well as
our definition of incurred costs at
§ 423.100 of the final rule.
Except as otherwise provided below,
the final rule adopts the access
standards set forth in § 423.120(a) of the
proposed rule.
Comment: In our proposed rule, we
interpreted the TRICARE access
standards such that a prescription drug
plan or regional MA-PD plan would
have been required to meet or exceed
the access standards across each region
in which it operates, and a local MA-PD
plan would have to meet or exceed the
access standards in its local service area.
Some commenters supported this
application of the TRICARE access
standards in our proposed rules
(regional for prescription drug plans and
MA-PD plans). A number of
commenters expressed concerns about
the adequacy of our proposed
application of the access standards and
urged us to apply the standards at the
local (zip-code) level. A number of other
commenters urged us to apply the
TRICARE standards at the State level.
Several other commenters
recommended that Part D plans meet
the access standards at the broadest
geographic area served by the plan (for
example, regional, multi-regional, or
national).
Response: Although section 1860D–
4(b)(1)(C)(ii) of the Act directs us to
adopt access standards no less favorable
to enrollees than those set forth in the
March 13, 2003, statement of work
solicitation (#MDA906–03–R–0002) of
the Department of Defense under the
TRICARE Retail Pharmacy Program, we
note that the statement of work does not
specify the geographic level at which to
apply the TRICARE standard. We
therefore believe that we have discretion
to apply the TRICARE standards at the
geographic level we believe to be most
appropriate.
Although we considered applying the
TRICARE standard at the local (zip code
or county) level for Part D plans, we
believe such application would make it
impossible for Part D plans to meet the
standards particularly the rural
standard—in some parts of the country.
On the other hand, we believe that
application of the access standards at
the broader, regional level would not
adequately ensure convenient access for
beneficiaries given the potential for Part
D plans to ‘‘average out’’ the access

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

standards across many urban, suburban,
and rural areas in a region—thus
meeting the access standards in the
aggregate but potentially leaving certain
parts of a region without convenient
access to retail pharmacies.
We agree with commenters who
proposed a State-level application of the
TRICARE pharmacy access standards for
regional MA-PD plans and prescription
drug plans, and have made changes to
§ 423.120(a)(1) accordingly such that a
prescription drug plan or regional MA­
PD plan will have to meet or exceed the
access standards across urban,
suburban, and rural areas, respectively,
in each State in which it operates, a
local-MA-PD plan would have to meet
or exceed the access standards across
urban, suburban, and rural areas,
respectively, in each service area
(including multi-county service areas)
in which it operates, and a cost plan
would have to meet or exceed the access
standards across urban, suburban, and
rural areas, respectively, in each
geographic area in which it operates. In
other words, a prescription drug plan or
regional MA-PD that operates in a multiregion or national service area could not
meet the access standards proposed in
§ 423.120(a)(1) by applying them across
the entire geographic area serviced by
the plan; instead, it would have to meet
the standards in each State of its multiregion or national service area. We
believe that such an interpretation is a
reasonable compromise between
application at the local level and
application at the regional or national
level, and maximizes Part D plan
flexibility while ensuring convenient
access to network pharmacies for Part D
enrollees.
Comment: Some commenters
expressed concern that TRICARE’s rural
access standard was insufficient to
provide convenient access to network
pharmacies in rural areas and urged us
to adopt a more adequate definition of
rural. Others argued for an exceptions
process for remote, isolated areas in
which it is simply not feasible to
establish pharmacy networks that
comply with our requirements.
Response: We are aware of the
difficulties faced by rural beneficiaries
in accessing medical care. We believe
that TRICARE’s definition of ‘‘rural’’ is
adequate and have not modified it in
our final rule (though we will monitor
the access standards over time to ensure
they continue to provide convenient
access to all beneficiaries). Furthermore,
we believe access in rural areas will be
improved given our revised
interpretation of the access standards,
whereby we will evaluate access at the
State (and not the regional) level.

PO 00000

Frm 00056

Fmt 4701

Sfmt 4700

However, we are aware—based on our
experience implementing the Medicare
Prescription Drug Discount Card and
Transitional Assistance Program—that
there are likely to be several States in
which meeting the rural access standard
will be impossible or impracticable
given the lack of infrastructure. We
expect to establish an exceptions
process, which we will outline in
operational guidance to Part D plans
that will account for any problem areas
and mitigate any disincentives plans
may have to avoid doing business in
parts of the country in which meeting
the pharmacy access standards would
be a challenge.
In addition, and as explained
elsewhere in this preamble, and
codified in § 423.120(a)(2) of our final
rule, we will allow Part D plans to count
certain non-retail pharmacies—
specifically, I/T/U, Federally Qualified
Health Center (FQHC), and Rural Health
Center (RHC) pharmacies—toward the
pharmacy access requirements in
§ 423.120(a)(1) of our final rule. We
believe this policy will help ensure
convenient access in rural areas.
Comment: Several commenters asked
that we ensure that national Part D
plans are created. These commenters
thought that national Part D plans
would be of benefit to beneficiaries who
travel regularly or who reside in more
than one State in a given year (for
example, ‘‘snowbirds’’), and urged that
the ramifications of choosing a local
MA-PD plan or a regional Part D plan be
made clear to beneficiaries who may not
realize the implications of such limited
geographic access when they select Part
D plan coverage.
Response: Although a Part D sponsor
may offer a Part D plan in more than one
PDP or MA region, it is not required to
do so. Therefore, we cannot require
national Part D plans, though we
certainly recognize the benefits of such
plans for some beneficiaries given the
limited applicability of our out-of­
network access policy. We note that our
pharmacy access standards would not in
any way preclude Part D sponsors from
contracting with pharmacies outside
their Part D plans’ service areas,
provided that the plans meet the
pharmacy access requirements within
their service areas. Such a feature would
be of particular use to beneficiaries who
spend significant amounts of time
outside their Part D plan’s service area
(for example, snowbirds) and could
make a particular Part D plan that
offered such benefits more attractive to
beneficiaries who travel regularly.
National Part D plans are also of interest
to employers who have retirees living
throughout the country, and the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
employer group waiver authority
discussed in subpart J could facilitate
these employer-only national Part D
plans. We also note that, as part of our
information dissemination requirements
in § 423.128(b) of the final rule, Part D
plans will be required to inform
beneficiaries about the plan’s service
area, as well as the locations of network
pharmacies.
Comment: Several commenters asked
us to make allowances for ‘‘snowbirds,’’
stating that our regulations should allow
Part D sponsors to offer ‘‘visitor/
traveler’’ benefits available under the
MA program. One commenter
specifically suggested the application of
the MA requirements, which allow an
organization to provide such benefits to
an individual who is temporarily out of
the area for up to 12 months. A few
commenters stated that we should
require prescription drug Part D plans to
offer visitor/traveler benefits. One
commenter suggested, however, that we
allow exceptions for regional Part D
plans and those with out-of-network
services. One commenter suggested that
we consider allowing Part D plans to
offer ‘‘travel’’ networks without
requiring them to contract in those
regions, suggesting that this could be an
interim approach pending evaluation of
the cost/payment experience for both
Part D plans and us.
Response: We appreciate the feedback
provided by the commenters on
applying a visitor/traveler benefit to
prescription drug plans as has been
provided to the MA program. We do not
have the authority to establish a visitor/
traveler benefit. However, as noted
above, our pharmacy access standards
would not in any way preclude Part D
sponsors from contracting with
pharmacies outside their plans’ service
areas, provided that plans meet the
pharmacy access requirements within
their service areas, and such access is
not provided outside the United States.
Comment: We interpreted the access
requirements in section 1860D–
4(b)(1)(C) of the Act as requiring Part D
plans to count only retail pharmacies as
part of their networks for the purpose of
meeting the access standards, and we
proposed defining a retail pharmacy as
any licensed pharmacy from which
covered Part D enrollees could purchase
a covered Part D drug without being
required to receive medical services
from a provider or institution affiliated
with that pharmacy. We also requested
comment regarding whether we should
allow Part D plans to count pharmacies
that are operated by the Indian Health
Service, Indian tribes and tribal
organizations, and urban Indian
organizations (I/T/U pharmacies)

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

toward their network access
requirements when the pharmacies are
under contract with the Part D plan, and
it would be impossible or impracticable
for the plan to meet the access standard
in rural areas of its service area without
the inclusion of some or all of these
pharmacies. In addition, we solicited
comments on permissible ways to
ensure enrollee access to FQHC and
rural pharmacies, since these
pharmacies could potentially provide
access to covered Part D drugs in
remote, rural areas.
Several commenters support counting
only retail pharmacies towards Part D
plans’ access requirements. Other
commenters supported allowing I/T/U
pharmacies to count toward Part D
plans’ pharmacy access requirements to
the extent that we do not require Part D
plans to offer I/T/U pharmacies a
standard contract, at a minimum.
Response: We agree that, in most
cases, only retail pharmacies, which we
define in § 423.100 of our final rule as
any licensed pharmacy from which
covered Part D enrollees could purchase
a covered Part D drug without being
required to receive medical services
from a provider or institution affiliated
with that pharmacy, should count
toward our pharmacy access standards.
Examples of non-retail pharmacies
include I/T/U, FQHC, Rural Health
Center (RHC), and hospital and other
provider-based pharmacies, as well as
Part D-owned and operated pharmacies
that serve only plan members.
However, as explained elsewhere in
this preamble, we are concerned about
access to pharmacies in rural and
underserved areas. As one way of
addressing this concern, § 423.120(a)(2)
of our final rule allows Part D plans to
count certain non-retail pharmacies—
specifically, I/T/U, FQHC, and RHC
pharmacies toward the pharmacy access
requirements in § 423.120(a)(1) of our
final rule.
FQHCs and RHCs face many of the
same barriers to inclusion in
commercial plan networks as do I/T/U
pharmacies, which we discuss in greater
detail elsewhere in this preamble.
Beneficiaries served by FQHCs and
RHCs are often served in those settings
because of their financial and
geographic circumstances. We believe
that allowing Part D plans to count these
pharmacies toward their access
requirements will incentivize plans to
make an extra effort to solicit and
include these pharmacies in their
networks. As the number of these
pharmacies is limited and, with the
exception of I/T/U pharmacies, can
generally offer services to a broad-based
population, we do not believe that this

PO 00000

Frm 00057

Fmt 4701

Sfmt 4700

4249

exception will have a significant impact
on convenient access to pharmacies in
rural areas for the general population.
However, we intend to review Part D
plans’ proposed pharmacy networks to
ensure that their inclusion of I/T/U,
FQHC, and RHC pharmacies does not
substitute for the inclusion in Part D
plan networks of retail pharmacies. We
also note that this policy should not be
interpreted as requiring broader access
to I/T/U, FQHC, and RHC pharmacies
than is currently permissible.
Comment: Several commenters
expressed concern about the inclusion
of rural and FQHC pharmacies in Part
D plan networks, with some advocating
for requiring plans to contract in some
cases, under preferential contracting
terms and conditions with these
pharmacies. Other commenters opposed
requiring Part D plans to contract with
specific kinds of pharmacies, asserting
that the any willing pharmacy and
pharmacy network access requirements
are sufficient to ensure an adequate
pharmacy network for all beneficiaries.
One commenter asked that, to the extent
we require Part D plans to contract with
certain pharmacies, plans would only be
required to offer standard terms and
conditions.
Response: With the exception of I/T/
U pharmacies, we will not require Part
D plans to contract with non-retail
pharmacies including FQHC or rural
pharmacies. We believe our access
standards for rural areas and the
Statewide application of access rules
generally will ensure adequate access in
rural areas. However, as discussed
elsewhere in this preamble, we will
allow Part D plans to count I/T/U,
FQHC, and RHC pharmacies toward
their access requirements as an
incentive for Part D plans to contract
with these pharmacies, which are
critical providers in underserved areas.
Comment: One commenter believes
we should mandate that Part D plans
solicit inner city and rural pharmacies
that meet the Small Business
Administration’s small business
standard for participation in their
pharmacy networks and should give
them access to any terms that the Part
D plan offers to a subset of pharmacies.
Response: We believe the pharmacy
access standards, as well as their
application at the State level, in
§ 423.120(a)(1) of our final rule, will
ensure adequate access to covered Part
D drugs for all Part D enrollees in urban,
suburban, and rural areas. Given the
standards, pharmacies’ bargaining
power will be strengthened in
underserved areas. Ultimately, however,
it is at Part D plans’ discretion how they
will establish pharmacy networks—

E:\FR\FM\28JAR2.SGM

28JAR2

4250

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

including the offering of contracting
terms and conditions that are different
than standard contracting terms and
conditions and the establishment of
preferred pharmacies provided they
meet our pharmacy access standards,
non-discrimination provisions, and
other applicable requirements under
Part D. We believe that the type of
market intervention requested by the
commenter is contrary to the Congress’s
intent that we not interfere in the
private negotiations between Part D
plans and pharmacies. We will therefore
not mandate that Part D plans solicit
inner city and rural retail pharmacies or
that they automatically deem them
preferred pharmacies within their
networks.
Comment: We sought public
comments regarding whether we should
consider using the authority in section
1860D–4(b)(1)(C) of the Act to require
that Part D plans contract with a
sufficient number of home infusion
pharmacies in their service area to
provide reasonable access for Part D
enrollees.
Several commenters supported
requiring Part D plans to contract with
a sufficient number of home infusion
pharmacies in their service areas to
ensure adequate access for beneficiaries.
One commenter noted that this
requirement would result in savings for
the Medicare program by reducing
expenditures under Parts A and B. In
addition, these pharmacies allow
beneficiaries to safely receive their
medications at home by providing
training and skilled support so
beneficiaries can avoid the
inconvenience of hospitals, clinics, and
doctor visits. One commenter urged us
to expand our proposed requirement to
include all specialty pharmacies, not
just home infusion pharmacies.
Other commenters recommended not
mandating Part D plans to contract with
these non-retail pharmacies but rather
encourage participation because it
would reduce negotiating leverage of
plans with these pharmacies.
One commenter urged that home
infusion pharmacies should not be
counted toward network TRICARE
standards.
Response: We agree with commenters
who believe that we should use our
authority under section 1860D–
4(b)(1)(C) of the Act to require Part D
plans to provide adequate access to
home infusion pharmacies. Given
coverage of home infusion drugs under
Part D, we do not believe it is an option
for Part D plans not to include at least
some home infusion pharmacies in their
networks in order to provide enrollees
with meaningful access to those drugs.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

This is particularly a concern with
regard to prescription drug plans which,
unlike other Part D plans, do not benefit
from reduced medical costs associated
with home infusion and may therefore
have little incentive to contract with
home infusion pharmacies. Therefore,
we have added a new provision to our
final regulations at § 423.120(a)(4)
which requires Part D plans to
demonstrate to us that they provide
adequate access to home infusion
pharmacies consistent with CMS
operational guidance to Part D plans.
We expect that Part D plans will
demonstrate adequate access based in
part on the number of enrollees in their
service areas and the geographic
distribution and capacity of home
infusion pharmacies in those service
areas. We have not included specialty
pharmacies that do not provide home
infusion services in this requirement
however, as it is unclear whether
beneficiaries will need routine access to
such pharmacies or would not be
adequately served through our out-of­
network access rules. We clarify, that
we have made a distinction between
specialty pharmacies and long-term care
pharmacies. We note that home infusion
pharmacies will not count toward Part
D plans’ pharmacy access requirements
because they are not retail pharmacies.
Comment: We requested comments
regarding the advantages and
disadvantages of using the authority
provided under section 1860D–
4(b)(1)(C)(iv) of the Act to require Part
D plans to approach some or all longterm care pharmacies in their service
areas with at least the same terms
available under their standard pharmacy
contracts, or, alternatively, to not
require (but strongly encourage) Part D
sponsors to negotiate with and include
long-term care pharmacies in their Part
D plans’ pharmacy networks. In
addition, we requested comments
regarding how to balance convenient
access to long-term care pharmacies
with appropriate payment to long-term
care pharmacies under the provisions of
the MMA.
Some commenters were adamant that
the current one-to-one relationship
between the long-term care pharmacies
and nursing homes be preserved, as it is
critical to ensuring safety and
convenient access to drugs for Medicare
beneficiaries residing in nursing homes.
One commenter suggested that Part D
plans should also provide standardized
long-term care pharmacy contracts that
recognize long-term care pharmacies’
essential role.
Some commenters recommended that
the final regulation require Part D plans
to contract with any willing long-term

PO 00000

Frm 00058

Fmt 4701

Sfmt 4700

care pharmacy. A number of
commenters would prefer that we do
not require Part D plans to contract with
any particular non-retail pharmacies
(including long-term care pharmacies)
because both our access standards and
the any willing pharmacy requirement
adequately address our objective of
ensuring access to Part D drugs for all
enrollees. One commenter notes that
Part D plans will need to include longterm care pharmacies in their networks
to meet access standards, and that this
will encourage Part D plans to contract
with long-term care pharmacies.
Another believes that we struck a
balance with the option for long-term
care pharmacies to provide benefits inor out-of-network because it gives longterm care pharmacies and Part D plans
the appropriate negotiating flexibility to
reach mutually satisfactory
arrangements for providing services to
long-term care residents. Also, one
commenter points out that some longterm care pharmacies would not be able
to meet all the operational standards
necessary to participate in Part D, and
Part D plans would have to negotiate
special reimbursement rates with these
pharmacies. Some commenters believe
that we should promote appropriate
payment methodologies (for example,
via dispensing fees or separate fee
schedules to pay for specialized
services) that would enable all longterm care pharmacies to join networks
and provide a meaningful benefit.
Another variation suggested was that a
Part D plan should be required to
include at least one long-term care
pharmacy in its network and to contract
with any long-term care pharmacy that
agrees to the Part D plan’s standard
contract.
One commenter reasoned that there
should be a balance in the contracting
requirement; for example, long-term
care pharmacies that service X percent
of beneficiaries should also be required
to contract with at least one Part D plan.
But, without this balance, the
commenter felt the Part D plans and
long-term care pharmacies should be
strongly encouraged to contract with
each other. A few commenters believed
that we should encourage, but not
require, Part D plans to contract with
long-term care pharmacies and that we
should explicitly state in regulation that
long-term care residents can access
long-term care pharmacies as out-of­
network providers when those
pharmacies do not contract with
particular Part D plans. Other
commenters believe that it is sufficient
to require that long-term care
pharmacies be offered standard

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
contracting terms and conditions by Part
D plans.
Response: Section 1860D–
4(b)(1)(C)(iv) of the Act provides that, in
establishing rules for convenient access
to network pharmacies, we may include
standards with respect to access to longterm care pharmacies for Part D
enrollees who reside in long-term care
facilities. For a variety of reasons,
including the quality aspects of Federal
nursing home regulations, it is generally
the case that long-term care facilities
have chosen to contract with a single
long-term care pharmacy. Given this
state of affairs, our proposed rule
assumed that Part D enrollees residing
in a long-term care facility could not
reasonably be expected to access their
Part D drugs at another pharmacy if
their facility’s long-term care pharmacy
is not part of their Part D plan’s
network. In the proposed rule, we
proposed that enrollees residing in longterm care facilities whose contracted
long-term care pharmacies did not
participate in their Part D plans’
networks could continue to use those
long-term care pharmacies consistent
with our proposed out-of-network
access policy. However, given the
narrow statutory authority to establish
out-of-network access rules provided by
section 1860D–4(b)(1)(C)(iii) of the Act,
we do not believe as discussed in
greater detail elsewhere in this preamble
that access to out-of-network
pharmacies on a routine basis can be
justified. Thus, beneficiaries residing in
long-term care facilities that do not
contract with a pharmacy included in
their Part D plan network will not be
able to access covered Part D drugs at
the out-of-network long-term care
pharmacy through the out-of-network
access rules in § 423.124 of our final
rule.
However, it is important to note that
we will provide a SEP for prescription
drug plan enrollment and disenrollment
for beneficiaries entering in, living in, or
leaving an institution. In addition,
individuals enrolled in an MA-PD plan
have an unlimited open enrollment
period for institutionalized individuals
(OEPI). While MA organizations may
choose individually, at the plan level,
whether or not to be open for
enrollments during this period, they
must always accept disenrollments.
Given the risk associated with
institutionalized beneficiaries, relying
on the market alone to ensure that Part
D plans include a sufficient number of
long-term care pharmacies in their
networks may not be sufficient. We note
that relying on the pharmacy access
standards in § 423.120(a)(1) of our final
rule will also not ensure sufficient

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

access to long-term care pharmacies,
since many of these pharmacies are not
retail pharmacies and therefore would
not count toward those requirements.
Absent a contracting mandate, Part D
plans may view contracting with longterm care pharmacies given the risk
associated with institutionalized
beneficiaries as too risky. To the extent
that we require Part D plans to solicit
long-term care pharmacies in their
service areas to join their networks,
plans may be forced to negotiate
preferential contracting terms and
conditions (relative to the terms they
would offer any other pharmacy willing
to participate in its network) for longterm care pharmacy-specific specialized
packaging and services with a number
of long-term care pharmacies in order to
meet our requirement. In addition,
although the statute includes an ‘‘any
willing pharmacy’’ requirement, even if
we require Part D plans to contract with
any long-term care pharmacy in a
service area, we cannot compel longterm care pharmacies to accept the
plans’ terms and conditions.
We believe it is essential to inject
competition into the long-term care
pharmacy market while preserving the
relationships and levels of service that
long-term care facilities now enjoy visa`-vis their contracted long-term care
pharmacies. To that end, we have used
our authority under section 1860D–
4(b)(1)(C)(iv) of the Act to require, in
§ 423.120(a)(5) of our final rule, that Part
D plans offer standard contracting terms
and conditions, including performance
and service criteria for long-term care
pharmacies that we will specify in
operational guidance to all long-term
care pharmacies in their service areas.
In other words, we are establishing an
‘‘any willing pharmacy’’ requirement
specifically for long-term care
pharmacies, coupled with a requirement
that Part D plans develop standard
contracting terms and conditions for
long-term care pharmacies, such that
any pharmacy in a service area could
become an eligible long-term care
pharmacy by certifying that it meets
certain performance and service criteria
for providing pharmacy services to longterm care facilities. These criteria would
be incorporated into a Part D plan’s
standard contracting terms and
conditions for long-term care
pharmacies. We will provide further
detail regarding these criteria in
operational guidance, but we expect that
they will address access to urgent and
emergency medications on a 24/7 basis,
standardized prescribing systems, and
the availability of one of several
standard delivery packaging and

PO 00000

Frm 00059

Fmt 4701

Sfmt 4700

4251

delivery systems for routine
medications. We expect to review the
reasonableness of Part D plans’ standard
contracting terms and conditions for
long-term care pharmacies. We note that
entities other than current long-term
care pharmacies (for example, retail
pharmacies) could become an eligible
long-term care pharmacy by meeting
these standards of practice, so long as
they also meet specific State law
requirements, if any, for such entities.
Plans in a region would be required to
contract with any willing long-term care
pharmacy in that region, provided those
pharmacies were able to reach
agreement with Part D plans on all
standard contract terms and conditions
including payment rates.
As provided in § 423.120(a)(5) of our
final rule, we will require Part D plans
to demonstrate that they have contracts
with a sufficient number of long-term
care pharmacies to ensure convenient
access to prescription drugs for
institutionalized beneficiaries within
the service area. We will provide more
detailed information in CMS guidance
regarding what constitutes convenient
access, but we expect that Part D plans
will demonstrate convenient access
based in part on the number of enrollees
in their service areas and the geographic
distribution, capacity, and contracting
relationships with long-term care
facilities of long-term care pharmacies
in those service areas.
We expect that each long-term care
facility will select one or more eligible
network pharmacies to provide a Part D
plan’s long-term care drug benefits to all
of its residents enrolled in a Part D plan.
In order to minimize the number of
pharmacy suppliers and maintain
patient safety, long-term care facilities
will likely select long-term care
pharmacies that meet Part D standards
and participate in the largest number of
Part D plan long-term care networks. To
maintain convenient access and
minimize out-of-pocket expenses, Part D
plan enrollees would obtain Part D
benefits from the eligible long-term care
pharmacy selected by the facility. The
SEP and OEPI available to
institutionalized beneficiaries, which
will provide beneficiaries with the
ability to change Part D plans to the
extent that their current Part D plan
does not include their facility’s longterm care pharmacy in its network, will
further incentivize long-term care
pharmacies to participate in as many
Part D plan long-term care networks as
possible.
All long-term care pharmacies in a
region will have to negotiate terms and
conditions with as many Part D plans as
possible or risk losing this business to

E:\FR\FM\28JAR2.SGM

28JAR2

4252

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

another more competitive long-term
care pharmacy. This competition will
preserve the one-to-one long-term care
pharmacy long-term care facility
relationship favored by so many
commenters, but will require a
negotiation between the long-term care
pharmacy and the Part D plan to
maintain that relationship. Given our
rules for access to Part D drugs for
institutionalized Part D enrollees, all
Part D products and services would be
removed from existing long-term care
pharmacy contracts because payments
for drugs for dual eligible individuals
under Medicaid will become obsolete.
This will likely necessitate the
renegotiation of existing long-term care
facility/long-term care pharmacy
contracts. Separating the cost of the
drug and dispensing fee from other
long-term care pharmacy specialized
services (for example, drug
administration) may provide for more
appropriate negotiation of these services
and costs between long-term care
facilities and pharmacies. We note that
Part D plan payments under medication
therapy management programs,
described in further detail elsewhere in
this preamble, may represent an
additional revenue stream to long-term
care pharmacy services for some of the
special services provided by these
pharmacies but not reimbursed through
dispensing fees.
We believe that our long-term care
pharmacy access rules will align
incentives to accomplish several goals,
including ensuring that long-term care
pharmacies come to the table in good
faith; negotiation of more competitive
pricing than currently exists in the longterm care pharmacy market; and
allowing for the one long-term care
facility-one long-term care pharmacy
relationship to remain intact, to the
extent that long-term care facilities
would like to keep it that way.
Comment: Two commenters favored
the carve-out of beneficiaries in longterm care facilities through the
establishment of a separate PDP region
in which plans could bid, at risk, to
serve this population.
Response: We understand that, given
the institutionalized population’s
special needs, a carve-out of this
population may seem logical. However,
given the risk associated with
institutionalized beneficiaries, we
believe that carving out such a high-risk
population would result in significant
adverse selection and could result in
unsustainable beneficiary premiums for
the institutionalized population. In
addition, our research related to risk
adjustment is still in progress, and until
that research is completed, we cannot be

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

certain as to whether our risk
adjustment model could adequately
mitigate the risk inherent in this
population under the highly unique
circumstances of a plan serving only a
carved-out institutionalized population.
Consequently, particularly in the first
few years after the implementation of
the Part D program, we wonder whether
potential Part D sponsors would be
willing to serve a carved-out
institutionalized population and
therefore ensure access to Part D drugs
for Part D enrollees residing in longterm care facilities. We are also
concerned that beneficiaries entering
and leaving long-term care facilities will
be forced to change Part D plans to the
extent that institutionalized
beneficiaries are carved out into a
separate PDP region. For these reasons,
we will not create a separate PDP region
for institutionalized beneficiaries and,
as discussed above, will ensure
convenient access to covered Part D
drug in long-term care facilities as
provided in § 423.120(a)(5) of our final
rule.
Comment: We requested comments
regarding whether we should use our
authority under section 1860D–
4(b)(1)(C)(iv) of the Act to require-or,
instead, strongly encourage-that Part D
sponsors approach any I/T/U
pharmacies in their Part D plan service
areas with at least the same terms
available under the plan’s standard
pharmacy contracting terms and
conditions.
Some commenters believe that we
must use our authority under section
1860D–4(b)(1)(iv) of the Act to require
Part D plans to contract with I/T/U
pharmacies because, without this
requirement, private plans will have
little or no financial incentive to
contract given the uniqueness of both
the AI/AN population and I/T/U
pharmacies. Simply encouraging
contracts will not work because of the
uniqueness and remoteness of I/T/U
facilities and the perceived cost and
time to contract with these pharmacies.
These commenters urge us to require, in
regulation, that Part D plans contract
with I/T/U pharmacies using specific
contract provisions. They urge us to
consider one of several approaches to
ensuring that I/T/U pharmacies
experience no reduction in revenue as a
result of the transition from Medicaid to
Medicare Part D: supplemental
payments from Part D plans or the
Federal government to supplement the
difference between the amount paid by
the Part D plan and the amount the I/
T/U pharmacy would have received
under Medicaid, a carve-out of AI/AN
enrollees for Part D plans willing to

PO 00000

Frm 00060

Fmt 4701

Sfmt 4700

serve only those beneficiaries through I/
T/U pharmacies, and an exemption of
dual eligibles from Part D (with
continued prescription drug coverage
under Medicaid).
Response: There are currently 235 I/
T/U pharmacies serving 107,000 senior
and disabled AI/ANs in 27 States. In
some areas, I/T/U pharmacies may be
the only facilities capable of providing
medication therapy management
services to certain AI/AN beneficiaries
due to language and cultural barriers. It
is our understanding that I/T/U
pharmacies are not currently well
integrated in commercial pharmacy
networks. We agree with the
commenters who believe that—in the
absence of a contracting requirement—
Part D plans may make assumptions
regarding the administrative costs
(whether real or perceived) of
contracting with I/T/U pharmacies and
may not actively solicit the inclusion of
these pharmacies in their networks. The
lack of I/T/U pharmacies in Part D plan
networks would render enrollment in
Part D of little use to AI/AN
beneficiaries who rely primarily on I/T/
U facilities for their health care. For this
reason, we have added a provision to
our final regulations, at § 423.120(a)(6),
requiring that Part D plans offer
contracts to all I/T/U pharmacies in
their service areas.
However, we recognize that
contracting with I/T/U pharmacies is
potentially more complex than
contracting with retail pharmacies given
that there are a number of provisions in
the standard contracts of commercial
health plans that would likely need to
be modified or deleted given statutory
or regulatory restrictions to which I/T/
U pharmacies are subject, as well as the
particular circumstances of I/T/U
pharmacies (for example, I/T/U
pharmacies purchase drugs off the
Federal Supply Schedule (FSS) or
through the 340B program; can only
serve AI/ANs; may have less experience
than retail pharmacies, or none at all,
with point-of-sale technology; are not
typically well integrated into
commercial pharmacy networks;
generally stock a more limited range of
drugs than would be required under a
Part D formulary; and always waive co­
pays). Thus, standard contracting terms
and conditions will not be sufficient for
Part D plans to obtain the participation
of I/T/U pharmacies in their networks.
We are therefore requiring Part D plans
to include a special addendum to their
standard contracting terms and
conditions in order to account for these
differences. We will work with major
stakeholders to develop a model special
addendum that will take the special

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
circumstances of I/T/U pharmacies into
account. As provided in § 423.120(a)(6)
of our final rule, we will require Part D
plans to demonstrate that they have
contracts with a sufficient number of I/
T/U pharmacies to ensure convenient
access to prescription drugs for AI/AN
enrollees within the service area. We
expect to review the reasonableness of
Part D plans’ standard contracting terms
and conditions for I/T/U pharmacies.
While we understand the Indian
Health Service’s concerns regarding
reductions in revenue resulting from the
transition of drug coverage from
Medicaid to Medicare, we clarify that
we do not have the statutory authority
to require supplemental payments from
Part D plans or the Federal government
to supplement the difference between
the amount paid by the Part D plan and
the amount the I/T/U pharmacy would
have received under Medicaid; a carveout of AI/AN enrollees for Part D plans
willing to serve only those beneficiaries
through I/T/U pharmacies; or an
exemption of dual eligibles from Part D
(with continued prescription drug
coverage under Medicaid). As we
develop the model special addendum
for I/T/U contracts, we will consider
how, within our statutory authority, we
might ensure that I/T/U pharmacies do
not experience significant revenue
losses as a result of the transitioning of
drug coverage from Medicaid to Part D
for dual eligible AI/ANs.
Comment: Several commenters noted
that many small I/T/U pharmacies and
dispensaries carry a limited stock of
drugs, and that an exemption from
formulary requirements (and the ability
to use permissible substitutes) is
necessary in order to accommodate the
fact. In addition, these commenters note
that another factor in whether I/T/U
pharmacies will stock a particular drug
is whether it is available from the
Federal Supply Schedule or 340B
program, which are the principal
sources of drugs purchased by I/T/U
pharmacies. Thus, a Part D plan may
choose one particular cholesterollowering agent on its formulary because
it is able to negotiate a greater discount
for that particular Part D drug. However,
I/T/U pharmacies may be able to access
a different medication for a similar, or
perhaps lower, price and therefore
include that drug on its formulary.
Response: We are aware that most
Tribes and Tribal Organizations
(operating under health programs
pursuant to contracts under the Indian
Self-Determination Education and
Assistance Act, Public Law 93–638) and
all IHS facilities use the Department of
Veterans Affairs Pharmaceutical Prime
Vendor (PPV) for purchasing their

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

pharmaceuticals. By ordering through
the PPV, IHS and Tribes (but not Urban
programs) are able to access FSS
Contract, National Standardization
Contract, and Blanket Purchasing
Agreement pricing for pharmaceuticals.
In addition to FSS pricing, Tribes and
Urban programs that have been
designated as Federally Qualified
Health Centers (FQHCs) and have been
approved by the Health Resources and
Services Administration (HRSA) are
eligible for HRSA 340B drug pricing.
Since I/T/U facilities have access to
different pricing than commercial health
plans, their formulary selections reflect
the drugs for which this pricing is
available. As previously mentioned, we
are requiring Part D plans to include a
special addendum to their standard
contracting terms and conditions in
order to account for the differences
between retail and I/T/U pharmacies
and therefore facilitate contracting with
these pharmacies. We will work with
major stakeholders to develop a model
special addendum that will take the
special circumstances of I/T/U
pharmacies into account, including the
limited stocking of drugs at these
facilities.
Comment: Several commenters said
that the any willing pharmacy rule
should apply to mail order as well as
retail pharmacies, and that Part D plans
should not be able to exclusively use a
plan-owned mail order facility.
Response: We agree that the any
willing pharmacy requirement at section
1860D–4(b)(1)(A) of the Act applies to
all pharmacies—including non-retail
pharmacies such as mail-order
pharmacies—notwithstanding a Part D
plan’s ability to designate certain of its
network pharmacies as preferred
pharmacies with lower cost-sharing, or
to negotiate terms better than those in
its standard terms and conditions with
certain pharmacies. We clarify that a
Part D plan could have standard terms
and conditions for retail pharmacies and
a second, separate set of standard terms
and conditions for mail order
pharmacies in light of those pharmacies’
different characteristics. For example, a
plan’s contracting terms and conditions
for mail-order pharmacies could reflect
the full cost of adding another mailorder vendor, as well as the differential
costs of strong data controls involved
with having multiple network mailorder pharmacies.
Comment: One commenter said it was
not clear how the any willing pharmacy
rule applies to facilities that are owned
and operated by a Part D plan. The
commenter said such plans should be
permitted to maintain a limited network
of contract pharmacies for purposes of

PO 00000

Frm 00061

Fmt 4701

Sfmt 4700

4253

meeting the access standard in order to
maximize cost savings.
Response: We agree with this
commenter that the any willing
pharmacy requirement makes little
sense in the context of Part D plans that
own and operate their own pharmacies
particularly since the pharmacy access
rules in § 423.120(a)(1) of our final rule
will be waived for MA-PD plans and
cost plans that can demonstrate
comparable pharmacy access under
§ 422.112. As provided in § 423.458(b)
of our final rule, we may waive any Part
D provision as applied to an MA-PD
plan if it duplicates, or is in conflict
with, provisions otherwise applicable to
the MA organization or MA-PD plan
under Part C of Medicare, or if waiver
of a Part D provision is necessary in
order to improve coordination of
benefits under Part D with those offered
under Part C. Similarly, § 423.458(d)
provides that we may waive any Part D
provision as applied to a cost plan if it
duplicates, or is in conflict with,
provisions otherwise applicable to the
cost plan under section 1876 of the Act,
or if waiver of a Part D provision is
necessary in order to improve
coordination of benefits under Part D
with those offered by the cost plans. We
will consider waiving this requirement
for Part D plans that own and operate
their own pharmacies to the extent that
they request such waiver as provided in
§ 423.458(b)(2) and § 423.458(d) of our
final rule.
Comment: We sought comment on
whether, in order to guarantee that any
pharmacy willing to meet a Part D
sponsor’s contracting terms and
conditions could participate in a Part D
plan’s pharmacy network, we should
require that a Part D sponsor make
available to all pharmacies a standard
contract for participation in their Part D
plans’ networks.
A number of commenters thought that
Part D plans should be required to have
a standard or model contract for use
with all pharmacies. Other comments
said that we should not require a
standard contract. Alternatively, several
commenters said that even with a
standard contract, Part D plans should
have maximum flexibility to vary their
contracting terms and conditions in
order to reflect local conditions. Some
questioned whether we should try to
evaluate whether pharmacy contract
terms are ‘‘reasonable and relevant,’’ as
proposed in subpart K of our proposed
rule.
Response: We concur with the
majority of commenters on this issue
and will require, under § 423.505(b)(18)
of our final rule that Part D plans offer
pharmacies reasonable and relevant

E:\FR\FM\28JAR2.SGM

28JAR2

4254

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

standard terms and conditions for
network participation. We do not intend
to define ‘‘reasonable and relevant’’ in
order to provide Part D plans with
maximum flexibility to structure their
standard terms and conditions.
However, it is unreasonable to
assume—the any willing pharmacist
requirement notwithstanding—that a
Part D plan could establish a network
using a uniform set of terms and
conditions throughout a service area
because it will likely need to modify
contracting terms and conditions to
ensure access to certain pharmacies (for
example, rural and long-term care
pharmacies). We clarify that standard
terms and conditions particularly for
payment terms may vary to
accommodate geographic areas or types
of pharmacies) and that this is
acceptable, provided that all similarly
situated pharmacies are offered the
same standard terms and conditions.
Thus, for example, provided Part D
plans offer all mail-order pharmacies in
a particular area with the same standard
terms and conditions, they may offer
separate standard terms and conditions
to mail-order pharmacies. With standard
terms and conditions as a ‘‘floor’’ of
minimum requirements that all
similarly situated pharmacies must
abide by, Part D plans may modify some
of their standard terms and conditions
to encourage participation by particular
pharmacies.
Comment: Many commenters
disagreed with our interpretation of the
‘‘any willing pharmacy’’ provision,
specifically with allowing Part D plans
to construct networks of preferred and
non-preferred pharmacies that have
different requirements for beneficiary
cost sharing. These commenters argued
that allowing preferred networks
undermines the any willing pharmacy
rule and runs counter to Congressional
intent. Many said that allowing Part D
plans to steer beneficiaries to preferred
pharmacies would impede pharmacy
access and disrupt existing relationships
between pharmacists and patients.
Some argued that our interpretation
would disadvantage small, independent,
and rural pharmacies. Others said that
a designation of ‘‘non-preferred’’ would
carry a negative connotation about the
pharmacy’s quality of service.
Several other commenters concurred
with the any willing pharmacy policy in
our proposed rule. One commenter said
that State any willing pharmacy laws
should be expressly preempted, while
another commenter said we should
clarify that State any willing provider
laws continue to apply to Part D plans’
non-Medicare business. One commenter
asked us to clarify the extent to which

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

we will allow Part D plans to vary their
cost sharing for preferred networks.
Response: We believe that we have
correctly interpreted the two related
provisions in sections 1860D–4(b)(1)(A)
and (B) of the Act, which require Part
D plans to allow any willing pharmacy
to participate in their pharmacy
networks, while also allowing Part D
plans to reduce cost-sharing
differentially for network pharmacies.
General principles of statutory
interpretation require us to reconcile
two seemingly conflicting statutory
provisions whenever possible, rather
than allowing one provision to
effectively nullify the other provision.
Consequently, when a statutory
provision may reasonably be interpreted
in two ways, we have an obligation to
adopt the interpretation that gives full
effect to competing provisions of the
statute. We believe that our policy of
permitting cost-sharing discounts for
preferred pharmacies, as codified in
§ 423.120(a)(9), strikes an appropriate
balance between the need for broad
pharmacy access and the need for Part
D plans to have appropriate contracting
tools to lower costs.
We note, however, that while these
within network distinctions are
allowed, the statute also requires that
such tiered cost-sharing arrangements in
no way increase our payments to Part D
sponsors. Therefore, tiered cost-sharing
arrangements based on within-network
distinctions could be included in Part D
plans’ benefits subject to the same
actuarial tests that apply to formularybased tiered cost-sharing structures.
Thus, a reduction in cost sharing for
preferred pharmacies in a Part D plan
network could be offered through higher
cost sharing for non-preferred
pharmacies (or as alternative
prescription drug coverage). We also
note that differential cost-sharing in the
context of preferred and non-preferred
pharmacies does not raise the costsharing obligation of low-income
subsidy eligible enrollees above the
levels specified in sections 1860D–
14(a)(1) and (2) of the Act.
We recognize the possibility that Part
D plans could effectively limit access in
portions of their service areas by using
the flexibility provided in
§ 423.120(a)(9) of our final rule to create
a within-network subset of preferred
pharmacies. In other words, in
designing its network, a Part D plan
could establish a differential between
cost-sharing at preferred versus nonpreferred pharmacies—while still
meeting the access standards in
§ 423.120(a)(1) of our proposed rule—
that is so significant as to discourage
enrollees in certain areas (rural areas or

PO 00000

Frm 00062

Fmt 4701

Sfmt 4700

inner cities, for example) from enrolling
in that Part D plan. We emphasize that
such a network design has the potential
to substantially discourage enrollment
by certain Part D enrollees, and that we
have the authority under section
1860D–11(e)(2)(D) of the Act to disallow
benefit designs that are discriminatory.
We clarify that State any willing
pharmacist laws would be preempted as
applicable to plans’ Part D business.
This is consistent with section 1860D–
12(g) of the Act, which extends the State
preemption provisions under section
1856(b)(3) of the Act to Part D plans.
Comment: Several commenters
thought that Part D plans should only be
allowed to have differential cost sharing
for preferred pharmacies if they exceed
the TRICARE access standard.
Response: We see no statutory basis
for such a rule. Moreover, it would be
difficult to construct and operationalize
such a policy.
Comment: Several commenters wrote
that special needs enrollees should be
exempted from higher cost sharing at
non-preferred pharmacies.
Response: We see no statutory basis
for such a rule, and we believe that Part
D plans will provide sufficient access
for all Part D enrollees under our access
standards in § 423.120(a)(1). As noted in
our proposed rule, we will use the
authority provided under section
1860D–11(e)(2)(D) of the Act to review,
as part of the bid negotiation process,
how Part D plan networks make
preferred and non-preferred distinctions
among their network pharmacies and
disallow them if such proposed network
designs would substantially discourage
enrollment by certain beneficiaries in
any part of a Part D plan’s service area.
We believe that special needs enrollees
will be sufficiently protected by this
review. To the extent that special needs
enrollees are also eligible for lowincome subsidies, as indicated above,
differential cost-sharing based on
preferred pharmacy status does not raise
the cost-sharing obligation of lowincome subsidy eligible enrollees above
the levels specified in the Act.
Comment: Several commenters
suggested that the TRICARE access
standards be applied to Part D plans’
‘‘preferred’’ networks rather than its
general network. Several other
commenters concurred with the
regulation as drafted in the proposed
rule.
Response: Section 1860D–4(b)(1)(B) of
the Act clarifies that a Part D sponsor
has the option of reducing cost-sharing
for covered Part D drugs dispensed
through network pharmacies below the
level that would have otherwise
applied. Because the statute provides

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
that such distinctions can be made
within a network, we do not believe that
only preferred pharmacies constitute a
Part D plan’s network for the purposes
of meeting the access standards in
§ 423.120(a)(1) of our final rule. Rather,
both preferred and non-preferred
pharmacies form part of a Part D plan
network, and plans may count both of
these types of network pharmacies
toward their access standards.
Comment: Several commenters
recommended that beneficiaries be able
to get an extended supply of drugs,
greater than a 30-day supply, from
network retail pharmacies and mailorder pharmacies.
Response: We clarify that section
1860D–4(b)(1)(D) of the Act, and
§ 423.120(a)(10) of our final rule, require
Part D plans to permit enrollees to
receive extended supplies (for example,
90-day supplies) of covered Part D drugs
through a network retail pharmacy.
Comment: Some commenters noted
that our proposed regulations would
unfairly allow Part D plans to charge
beneficiaries more when they obtain
their prescriptions at a community
pharmacy than when they use mail
order. One commenter notes that seniors
benefit from face-to-face interaction
with a pharmacist more than other age
groups, which would be precluded
under mail order and would limit
enrollees’ ability to use the pharmacy
and pharmacist of their choice.
Many commenters recommended that
we specifically prohibit Part D plans
from using economic incentives for
beneficiaries to use mail order that
could create significant differences in
cost sharing for mail order versus retail
pharmacy prescription, or that plans
make such difference minimal. One
commenter recommended that Part D
plans use the same average wholesale
price (AWP) basis to determine the
reimbursement rate for mail order and
retail pharmacies. Another commenter
noted that there is substantial evidence
that seniors, particularly low-income
seniors, are victims of theft from their
mailboxes, undermining the financial
incentive of mail order. This commenter
recommended that we allow
beneficiaries to pay the mail order price
at a retail pharmacy when they can
demonstrate their mailbox is not secure.
Response: As provided in section
1860D–11(i) of the Act, we have no
authority to interfere with the
negotiations between Part D plans and
pharmacies and therefore cannot
mandate that Part D plans negotiate the
same, or similar, reimbursement rates
with all pharmacies. Provided Part D
plans offer all pharmacies standard
terms and conditions, they may modify

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

their contracting terms—including
payment provisions as necessary, as
long as all similarly situated pharmacies
are subject to the same minimum terms
and conditions. Moreover, section
1860D–4(b)(1)(B) of the Act provides
Part D plans with the authority to
designate some network pharmacies,
including mail-order pharmacies, as
preferred pharmacies offering plan
enrollees lower cost sharing.
Comment: One commenter noted that
MA organizations that own and operate
their own pharmacies usually have
internal systems for providing
prescription services by mail that are
fully integrated with the overall
pharmacy operation. As a result, it is
difficult to provide an incentive to
beneficiaries to use less costly mail
services. The commenter said we should
permit these organizations to establish
differential benefit levels for mail
delivery as opposed to in-facility
pickup.
Response: As noted above, Part D
plans have the flexibility to establish
different cost-sharing requirements for
the pharmacies in their networks
consistent with section 1860D–
4(b)(1)(B) of the Act. Accordingly, Part
D plans have the flexibility to establish
differential cost-sharing requirements
for mail delivery and in-facility pickup.
Comment: One commenter
recommended that we require Part D
plans to contract with pharmacies that
offer home delivery service, noting that
same-day or next day need for
medications makes mail-order an
impracticable option.
Response: We do not believe there is
a compelling rationale to require Part D
plans to contract with pharmacies that
offer home delivery service. As
discussed elsewhere in this preamble,
we have defined the term ‘‘dispensing
fees’’ in § 423.100 of our final rule to
include reasonable pharmacy costs,
including delivery costs, associated
with ensuring that possession of the
appropriate covered Part D drug is
transferred to a Part D enrollee. We
clarify that reasonable delivery costs
include only those costs appropriate for
the typical beneficiary in a particular
pharmacy setting. Thus, while it would
be appropriate for Part D plans to
reimburse long-term care, mail-order,
and home infusion pharmacies for home
delivery costs via the dispensing fee,
this would not be the case for retail
pharmacies (where the term ‘‘delivery’’
would be limited to the transfer of a
covered Part D drug from the pharmacist
to the patient at the point of sale)
because the typical retail customer does
not require home delivery. While retail
pharmacies may offer home delivery

PO 00000

Frm 00063

Fmt 4701

Sfmt 4700

4255

services, Part D plans may not
reimburse those pharmacies for these
costs, and the delivery cost must be
borne by the beneficiary.
Comment: Two commenters
expressed their support for our
interpretation of the term ‘‘insurance
risk’’ and asked that we include in our
regulations a statement that the
prohibition against the assumption of
risk by Part D plans’ network
pharmacies not preclude performancebased measures of activities within the
control of a pharmacy (for example,
formulary compliance and generic drug
substitution).
Response: We clarify that our
definition of the term ‘‘insurance risk’’
in § 423.4 of the final rule specifically
excludes ‘‘payment variations designed
to reflect performance-based measures
of activities within the control of a
pharmacy, such as formulary
compliance and generic drug
substitutions.’’
b. Formulary Requirements
1. P&T Committee Requirements
To the extent that a Part D sponsor
uses a formulary to provide qualified
prescription drug coverage to Part D
enrollees, it will be required to meet the
requirements of section 1860D–
4(b)(3)(A) of the Act to use a
pharmaceutical and therapeutic (P&T)
committee to develop and review that
formulary.
The majority of members comprising
the P&T committee will be required to
be practicing physicians or practicing
pharmacists. In addition, at least one
practicing pharmacist and one
practicing physician member will have
to be experts in the care of elderly and
disabled individuals. Section
§ 423.120(b)(1)(ii) of the proposed rule
also provided that at least one practicing
pharmacist and one practicing
physician members on a Part D plan’s
P&T committee be independent experts.
When developing and reviewing the
formulary, the P&T committee will be
required, in accordance with section
1860D–4(b)(3)(B) of the Act, to base
clinical decisions on the strength of
scientific evidence and standards of
practice, including assessing peerreviewed medical literature. Section
§ 423.120(b)(1)(viii) of our proposed rule
required that any decisions made by the
P&T committee regarding development
or revision of a Part D plan’s formulary
be documented in writing.
Except as otherwise provided below,
the final rule adopts the requirements
related to P&T committees set forth in
§ 423.120(b)(1) of our proposed rule.
Comment: Many commenters thought
that P&T committee decisions regarding

E:\FR\FM\28JAR2.SGM

28JAR2

4256

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

a Part D plan’s formulary should be
binding on a plan. Other commenters
thought that P&T committee
recommendations should be advisory,
and not binding. Several others believed
that only clinical decisions should be
binding on the Part D plan and that the
ultimate responsibility for overall
formulary design should reside with the
plan and ultimately involved business
leaders and technical experts. One
commenter stated that it was not likely
that a P&T committee comprised of nonemployee clinicians would be able to
make coverage determination in the Part
D plan’s and enrollees’ best interests,
particularly since many benefit design
decisions have a financial, as well as a
clinical, component.
Response: We agree with commenters
who sought to draw a distinction
between clinical and overall formulary
design issues. We believe that the
function of a P&T committee is to
provide expertise on clinical issues, and
not financial or benefit design issues.
We interpret the requirement in section
1860D–4(b)(3)(A) of the Act and
§ 423.120(b)(1) of our final rule that Part
D plan formularies be developed and
reviewed by a P&T committee to mean
that committee recommendations
regarding which drugs are placed on a
plan’s formulary be binding on the Part
D plan. Although § 423.120(b)(vi) and
(b)(vii) of our final rule envision a role
for the P&T committee in reviewing
policies that guide exceptions and other
utilization management processes
including drug utilization review,
generic substitution, quantity limits,
and therapeutic interchange and in
evaluating and analyzing treatment
protocols and procedures related to the
Part D plan’s formulary at least
annually, P&T committee
recommendations in these areas should
be considered advisory and not binding.
We clarify, for example, that while the
P&T committee may be involved in
providing clinical recommendations
regarding the placement of a particular
Part D drug on a formulary cost-sharing
tier, the ultimate decision on such
formulary design issues is the Part D
plan’s, and that decision weighs both
clinical and non-clinical factors. Thus, a
P&T committee’s role in formulary costsharing tiers, while important, would be
advisory and not binding.
Comment: Many commenters
recommended that we strengthen the
statutory requirement in section 1860D–
4(b)(3)(A)(ii) of the Act and require that
more than just one practicing physician
and one practicing pharmacist are
independent and free of conflict.
Suggestions for new requirements
included that all, a majority, two-thirds,

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

one-half, 40 percent, and at least four (at
least two practicing physicians and two
practicing pharmacists) members of a
Part D plan’s P&T committee be
independent and free of conflict in
order to ensure that formulary
development is in line with beneficiary
and not plan or pharmaceutical
manufacturer interests. One commenter
supported our current requirement
requiring that at least one practicing
physician and one practicing
pharmacist on the committee be
independent and free of conflict
Response: We appreciate commenters’
suggestions and agree that maintaining
the impartiality and objectivity of P&T
committee members is an important
goal. We have retained the proposed
rule requirement that at least one
practicing pharmacist and one
practicing physician on the P&T
committee be independent and free of
conflict—in § 423.120(b)(1)(ii) of our
final rule, though Part D plans should
view this requirement as a floor which
we encourage them to exceed. To
balance concerns about conflicts of
interest with regard to P&T committee
members, and as proposed in the draft
benefit design review criteria we
recently issued for public comment, we
would require all P&T committee
members to sign a conflict of interest
statement revealing economic or other
relationships with entities that could
influence pharmaceutical decisions, and
to disclose such conflicts to other
committee members. If P&T committee
discussions center around a drug that
presents a conflict of interest issue for
a particular committee member, he or
she would recuse himself or herself
from any discussions or votes associated
with that drug. We believe this
requirement is necessary to ensure that
the P&T committee’s clinical decisions
regarding development and review of
the formulary are based on the strength
of scientific evidence and standards of
practice, safety and efficacy
considerations, and other such
appropriate information and
considerations in accordance with
section 1860D–4(b)(3)(B) of the Act. In
addition, this requirement is consistent
with best practices in pharmacy benefit
management, and we expect that Part D
plans will implement disclosure of
conflicts and recusal procedures
consistent with standard industry
practice.
Comment: Many commenters
requested clarification regarding our
definition of the term ‘‘independent and
free of conflict’’ with respect to a Part
D sponsor and a Part D plan. Several
commenters asked to clarify that our
regulations regarding independence and

PO 00000

Frm 00064

Fmt 4701

Sfmt 4700

freedom from conflict not preclude
individuals from serving on a P&T
committee simply because they are
members of a Part D plan’s provider
network.
Response: In our proposed rule, we
interpreted the language at section
1860D–4(b)(3)(A)(ii) of the Act requiring
certain members of the P&T committee
to be ‘‘independent and free of conflict’’
to mean that such P&T committee
members could have no stake, financial
or otherwise, in formulary
determinations. We believe this
interpretation is still appropriate, but
clarify that we believe a P&T committee
member not to be free of conflict of
interest if he or she has any direct or
indirect financial interest in any
entity—including Part D plans and
pharmaceutical manufacturers—that
would benefit from decisions regarding
plan formularies.
Thus, Part D plan network providers
may be considered to be independent
and free of conflict, provided they are
not plan employees or contract workers
and do not otherwise have any conflicts
of interests that would compromise
their independence. In cases of staff
model HMOs, panel providers may be
determined to be independent and free
of conflict to the extent that any
remuneration received from a Part D
plan is limited to his or her clinical
responsibilities for the care of plan
enrollees.
Comment: In our proposed rule, we
interpreted the language at section
1860D–4(b)(3)(A)(ii) of the Act requiring
certain members of the P&T committee
to be ‘‘independent and free of conflict’’
to mean that such P&T committee
members would be required to be
independent and free of conflict not
only with respect to a Part D sponsor
and its Part D plan, but also for
pharmaceutical manufacturers. Some
commenters supported such a
requirement. A few commenters
opposed such a requirement, however,
claiming that our interpretation imposes
a more stringent requirement than is
permitted under the MMA. A number of
other commenters cautioned us that our
interpretation could exclude a
significant number of individuals who
are engaged in pharmaceutical and
clinical research funded by
pharmaceutical manufacturers.
Response: Section 1860D–
4(b)(3)(A)(ii)(I) of the Act requires that
at least one practicing physician and at
least one practicing pharmacist on a Part
D plan’s P&T committee be independent
and free of conflict only with respect to
a Part D sponsor and its Part D plan.
However, given the requirement in
section 1860D–4(b)(3)(B) of the Act that

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
the P&T committee base clinical
decisions on the strength of scientific
evidence and standards of practice, and
taking into account therapeutic
advantages in terms of safety and
efficacy, we believe it is necessary for
those committee members who are
‘‘independent and free of conflict’’ to be
so with respect to pharmaceutical
manufacturers as well. We agree that
P&T committee members could have
certain non-employee relationships with
pharmaceutical manufacturers (for
example, consulting, advisory, or
research relationships) and still be
considered independent and free of
conflict, provided those relationships do
not constitute significant sources of
their income and they do not otherwise
have any conflicts of interests that
would compromise their independence.
As already mentioned, our draft benefit
review criteria (recently issued for
public comment) would require all P&T
committee members to sign a conflict of
interest statement revealing economic or
other relationships with entities that
could influence pharmaceutical
decisions. This requirement is
consistent with best practices in
pharmacy benefit management, and we
expect that it will be met consistent
with industry standards for conflict of
interest disclosures.
Comment: Several commenters
supported requiring that a plurality of
P&T committee members be experts in
the care of elderly and disabled patients.
Some commenters recommended that
use of the certified geriatric pharmacist
credential would be an appropriate way
to ensure that at least one pharmacist on
the P&T committee has expertise in care
of the elderly. One commenter opposed
requiring that at least one practicing
physician and one practicing
pharmacist be experts in the care of
elderly and disabled patients. Another
commenter thought that at least one
member of Part D plans’ P&T
committees should be a State Medicaid
representative.
Response: As provided in
§ 423.120(b)(1)(iii) of our final rule, we
are retaining the requirement that at
least one practicing physician and one
practicing pharmacist on a P&T
committee have expertise in the care of
elderly or disabled persons, though
plans should view this requirement as a
floor which they can certainly exceed.
As proposed in the draft benefit design
review criteria we recently issued for
public comment, we would require P&T
committee members to represent various
clinical specialties. This requirement is
consistent with best practices in
pharmacy benefit management and will
ensure that appropriate expertise—

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

including in the areas of care of disabled
and elderly populations—is included on
Part D plans’ P&T committees and that
their clinical decisions are based on the
strength of scientific evidence and
standards of practice, and safety and
efficacy considerations. We expect that
P&T committee members will represent
a mix of clinical specialties in order to
ensure that P&T committees have the
breadth of expertise necessary to
adequately evaluate scientific evidence,
standards of practice, and other
information.
Comment: A number of commenters
suggested that we should require that
P&T committees include experts in
certain clinical specialties (for example,
nephrology, oncology, rheumatology,
dermatology, mental health, long-term
care, and many others) or, at the very
least, that such experts serve as
consultants to P&T committees.
Response: We agree that P&T
committee members should represent
various clinical specialties in order to
provide the depth of expertise needed to
develop an adequate formulary and
utilization management processes for
the Medicare population. As proposed
in the draft benefit design review
criteria we recently issued for public
comment, we would require P&T
committee members to represent various
clinical specialties. This requirement is
consistent with best practices in
pharmacy benefit management. In
addition, we note that, since committee
members must base clinical decisions
on the strength of scientific evidence
and standards of practice, it is not
essential that every specialty be
represented—either as a P&T committee
member or as a consultant. For some
issues, the use of peer-reviewed medical
literature—including randomized
clinical trials, pharmacoeconomic
studies, outcomes research data, and
other such information—may be
sufficient.
Comment: We received a number of
comments regarding our requirements
for the basis of clinical decisions by Part
D plan P&T committees. One
commenter supported our
characterization of the appropriate role
of quality and cost considerations in
Part D plan formulary development.
Some commenters emphasized that cost
considerations should be secondary to
clinical issues in formulary
development and review. One
commenter suggested segregating cost
and clinical reviews to preserve
objectivity. Several commenters
specifically suggested that we require
Part D plan P&T committees to use
classes of data that are included in the
Academy of Managed Care Pharmacy

PO 00000

Frm 00065

Fmt 4701

Sfmt 4700

4257

(AMCP) format for Formulary
Submissions—including clinical trials,
health outcomes studies, and economic
and budget impact models—as well as
clinical guidelines issued by medical
specialty societies. Several other
commenters encouraged us to require
Part D plans to consider data addressing
total health care costs, if available,
rather than pharmacy costs, in any cost
considerations used for clinical
decision-making.
Response: As required in section
1860D–4(b)(3)(B) of the Act, P&T
committees will be required to base
clinical decisions on the strength of
scientific evidence and standards of
practice, including assessing peerreviewed medical literature (for
example, randomized clinical trials,
pharmacoeconomic studies, outcomes
research data, and other such
information as the committee
determines appropriate). In addition, a
P&T committee must take into account
whether including a particular Part D
drug on the Part D plan’s formulary (or
on a particular formulary tier) has any
therapeutic advantages in terms of
safety and efficacy. Where applicable,
therapeutic advantage should be
considered in relation to the interaction
of a drug therapy regimen and the use
of other health care services.
We agree with commenters who urged
that Part D plans consider data
addressing total health care costs, if
available, rather than pharmacy costs, in
any cost considerations used for clinical
decision-making. Since Part D sponsors
have discretion with regard to the actual
information their P&T committees use,
we cannot mandate that all Part D plans
use pharmacoeconomic studies, for
example. However, in our subsequent
guidance we intend to make clear that
to the extent that the Part D plan
considers costs in making its decision,
it will take into account total health care
costs rather than just drug costs. For
example, to the extent that a particular
drug has been shown to be more
effective in preventing the need for
hospital care or better at controlling
acute flare-ups requiring the use of other
services, we expect P&T committees to
take these things into account in their
determinations of drug efficacy. Given
these requirements for evidence-based
decision-making, it is our expectation
that committee members will balance
any relevant cost considerations with
clinical considerations.
Comment: Some commenters
supported a role for P&T committees in
designing formulary tiers and any other
clinical program implemented to
encourage the use of preferred drugs.
One commenter supported such a role,

E:\FR\FM\28JAR2.SGM

28JAR2

4258

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

provided that P&T committees are not
required to be engaged in other benefit
design issues.
However, several commenters
believed that P&T committees should
have no involvement in the
development of utilization management
programs including development of
cost-containment tools, medication
therapy management programs, and
quality assurance programs, as well as
more specific benefit design issues such
as the development of cost-sharing tiers
and should instead be limited to
providing Part D plans with clinical
recommendations on formularies. Other
commenters thought that we should
provide Part D plans with flexibility to
determine how utilization management
programs are designed and
administered.
Response: We believe that the
requirement in section 1860D–3(c)(1) of
the Act that Part D sponsors establish an
appropriate cost-effective drug
utilization management program
supports a role for P&T committees in
the development of formulary
management practices and policies—
including prior authorization, step
therapy, generic substitution, quantity
limits, and other drug utilization
management activities that affect access
to covered Part D drugs. Furthermore,
section 1860D–4(b)(3)(F) of the Act and
§ 423.120(b)(1)(vii) of our final rule
require Part D plans to periodically
evaluate and analyze treatment
protocols and procedures. Clinical input
is critical in the development of these
policies in order to ensure that
formulary management decisions
balance economic and clinical factors to
achieve appropriate, safe, and costeffective policies. The review by P&T
committees of Part D plan policies that
guide exceptions and other utilization
management processes is not only an
important component in ensuring that
plans adopt appropriate utilization
management activities consistent with
the statutory requirements, but also is
consistent with best practices in
pharmacy management policy.
However, as previously stated, we
believe that the primary function of a
P&T committee is to provide clinical
and not financial or benefit design—
expertise.
Comment: Some commenters
suggested that P&T committees review
formularies regularly, with some
suggesting a quarterly review and others
an annual review
Response: As proposed in the draft
benefit design review criteria we
recently issued for public comment, we
expect that P&T committees will meet
on a regular basis, but not less

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

frequently than on a quarterly basis.
This standard is consistent with best
practices in pharmacy management
policy.
Comment: One commenter urged us
to specify minimum timeframes for
periodic evaluation of Part D plan
treatment protocols and formularyrelated procedures under § 423.120(b)(4)
of our proposed rule. A number of
commenters recommended that protocol
reviews be conducted on an ongoing
basis at least quarterly, whereas some
specified that such reviews be
conducted at least annually.
Response: As specified in
§ 423.120(b)(1)(vii) of our final rule, Part
D plan P&T committees will be required
to evaluate and analyze treatment
protocols and procedures related to the
plan’s formulary at least annually.
Comment: A number of commenters
also asked us to require that P&T
committees have processes for making
formulary revisions between regularly
scheduled meetings when new clinical
information becomes available or the
FDA approves new medications.
Response: As proposed in the draft
benefit design review criteria we
recently issued for public comment, we
expect that P&T committees will review
new Part D drugs, or drugs for which
new clinical information is made
available by the Food and Drug
Administration, within 90 days of the
availability of new information. This
will allow for appropriate formulary
changes to be made with all due speed
and ensure that a Part D plan’s
formulary is based on the most recently
available scientific evidence, standards
of practice, and drugs’ relative
therapeutic advantages in terms of
safety and efficacy. However, we expect
that drugs pulled from the market by the
FDA or manufacturers will be removed
from Part D plan formularies
immediately.
Comment: Many commenters
suggested additional requirements for
ensuring P&T committee accountability,
including requiring Part D plans to have
a P&T committee regardless of whether
they have a formulary or not; including
a patient advocate on the committee to
represent interests of patients;
developing an oversight mechanism
similar to local Medicare carrier
advisory committees; requiring P&T
committee meetings to be held publicly
in order for consumers and stakeholders
to have an opportunity to hear
committee deliberations; requiring Part
D plans to include a charge ensuring
that the interests of beneficiaries are
protected by their benefit design
decisions; requiring thorough
documentation of the rationale for P&T

PO 00000

Frm 00066

Fmt 4701

Sfmt 4700

committee decisions; and requiring P&T
committee decisions to be issued to the
public upon request within a reasonable
period of time.
Response: These requirements are not
consistent with standard practice in
pharmacy benefit management. We
believe that our requirements in
§ 423.120(b)(1) of the final rule, as well
as our formulary review which will
consider the structure and utilization of
an organizations P&T committee will
sufficiently ensure that P&T committees
function as a forum for evidence-based
formulary review. As an added
safeguard, and as provided in
§ 423.120(b)(1)(viii) of our final rule, we
will require Part D plan P&T committees
to document in writing the basis of their
decisions regarding formulary
development and revision and
utilization management activities.
2. Plan Formularies
As provided under section 1860D–
4(b)(3)(C)(ii) of the Act, we requested
that the U.S. Pharmacopoeia (USP)
develop a model set of guidelines that
consists of a list of drug categories and
classes that may be used by Part D
sponsors to develop formularies for
their qualified prescription drug
coverage, including their therapeutic
categories and classes. For more
information about the USP model
guidelines and the model guidelines
themselves, please consult http://
www.usp.org/drugInformation/mmg/.
Section 1860D–4(b)(3)(C) of the Act
provides, and § 423.120(b)(2) of our
proposed rule required, the inclusion of
drugs in each therapeutic category and
class of Part D drugs in a Part D plan’s
formulary, although not necessarily all
drugs within such categories and
classes. As discussed in the proposed
rule, we interpreted this provision to
require coverage of at least two Part D
drugs within each therapeutic category
and class of Part D drugs, unless only
one Part D drug existed in a particular
therapeutic category and class of Part D
drugs.
We sought comments on ways to
balance Part D plans’ flexibility to use
utilization management mechanisms to
maximize covered Part D drug discounts
and lower enrollee premiums with the
needs of certain special populations of
Part D enrollees, including Part D
enrollees residing in long-term care
facilities.
In accordance with section 1860D–
4(b)(3)(C)(iii) of the Act, Part D sponsors
cannot change therapeutic categories
and classes in a formulary other than at
the beginning of a Part D plan year,
except as we would permit to take into
account new therapeutic uses and

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
newly approved Part D drugs. Section
423.120(b)(4) of our proposed rule
specified that, in accordance with
section 1860D–4(b)(3)(F) of the Act, Part
D sponsors will periodically be required
to evaluate and analyze treatment
protocols and procedures related to
their formularies to ensure that their
Part D plan members were receiving the
best possible care for conditions related
to their use of covered Part D drugs.
In addition, section 1860D–4(b)(3)(E)
of the Act requires that Part D sponsors
provide ‘‘appropriate notice’’ to us,
affected enrollees, authorized
prescribers, pharmacists, and
pharmacies regarding any decision to
either: (1) remove a drug from its
formulary; or (2) make any change in the
preferred or tiered cost-sharing status of
a drug. Section 423.120(b)(5) of our
proposed rule implemented this
requirement by defining appropriate
notice as at least 30 days prior to such
change taking effect during a given
contract year.
As provided under § 423.120(b)(6) of
our proposed rule, we proposed that
Part D sponsors be prohibited from
removing a covered Part D drug or from
changing the preferred or tiered costsharing status of a covered Part D drug
between the beginning of the annual
coordinated election period described in
§ 423.38(b) and 30 days subsequent to
the beginning of the contract year
associated with that annual coordinated
election period.
Each Part D sponsor will also be
required to establish policies and
procedures to educate and inform health
care providers and enrollees about its
formulary, according to the provisions
of section 1860D–4(b)(3)(D) of the Act.
As required under section 1860D–
4(b)(3) of the Act, the requirements
regarding the development and
application of formularies discussed in
this preamble section may be met by a
Part D sponsor directly, or through
contracts or other arrangements between
a Part D sponsor and another entity or
entities.
Except as otherwise provided below,
the final rule adopts the rules for Part
D plan formularies set forth in
§ 423.120(b) of the proposed rule.
Comment: We received a significant
number of comments that directly and
indirectly relate to the USP draft model
guidelines issued for public comment in
August 2004. In general, the USP related
comments can be grouped into two
categories. On one side, many
comments claim that the current draft
model guidelines lack the necessary
detail to ensure that beneficiaries will
have access to a comprehensive drug
benefit, often citing specific examples of

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

medications that are necessary for the
treatment of the most frail and
vulnerable populations and could be
excluded from Part D plan formularies
that comply with the model guidelines.
On the other hand, many comments
recommended that the USP model
guidelines allow Part D plans the
flexibility they need to develop
clinically sound formularies that offer a
prescription drug benefit at the lowest
possible cost. Most of these commenters
believe that the draft model guidelines,
while in need of some specific
modifications, are closer to reasonable
than unreasonable. However, these
commenters claim that the minimum
‘‘drugs’’ requirements for each category
and class could significantly increase
benefit costs if the categories and classes
increase to a level of detail that
interferes with Part D plans’ ability to
negotiate with manufacturers.
Response: We believe that the USP
model guidelines identify a reasonable
number of categories and classes that
balance the need for a comprehensive
Part D benefit with the need to allow
Part D plans flexibility to develop their
own formularies and manage costs.
These model guidelines will provide us
with a useful, standard format as a
starting point for our review of Part D
plan benefit packages, since we expect
many plans will adopt the model
guidelines as the basis for their
formulary classifications and
submissions.
The model guidelines, while
important in creating a template for a
formulary classification system, are not
the only determinant of an adequate
formulary. Plans will be required to
include the types of drugs most
commonly needed by Part D enrollees,
as recognized in national treatment
guidelines, in their formularies.
Regardless of whether a Part D plan
chooses to use the model guidelines or
not, we will review the drugs chosen to
populate plan formularies under our
authority in section 1860D–11(e)(2)(D)
of the Act to ensure that plan benefit
design does not discourage enrollment
by certain classes of Part D eligible
individuals. However, formulary
structure—including tiered cost-sharing
structures -utilization management
processes, P&T committee utilization
and structure, and exceptions and
appeals processes are just as important
in ensuring a comprehensive benefit,
and we intend to review these benefit
design features as part of our
comprehensive benefit package review.
We discuss our benefit design review
criteria in greater detail elsewhere in
this preamble.

PO 00000

Frm 00067

Fmt 4701

Sfmt 4700

4259

Comment: Several commenters
disagreed with our interpretation of the
statutory term ‘‘drugs’’ as requiring
coverage of at least two Part D drugs
within each therapeutic category and
class of Part D drugs (unless only one
Part D drug existed in a particular
therapeutic category and class of Part D
drugs), arguing that such an
interpretation was too expansive, and
requiring coverage of too many drugs in
too many categories would diminish
Part D plans’ negotiating leverage. These
commenters provided examples of drug
categories for which a blanket
requirement of two drugs is not
appropriate, and an exception should be
granted. One commenter recommended
that we should allow an exception from
this rule for categories and classes that
only include two drugs, and allow
enrollees to obtain the non-formulary
drug in such categories via the
exceptions process only.
In contrast, several commenters
believed that requiring Part D plans to
include two drugs in each therapeutic
category and class of Part D drugs was
not sufficient to ensure enrollee access
to necessary medications. They were
concerned that for some categories—
including cancer treatments, rare
diseases, mental illness, chronic pain,
and other conditions—requiring only
two drugs per drug category and class
would be inadequate for Part D plans in
terms of the statutory requirement that
plan design not discourage enrollment.
Several commenters urged us to
clarify that this minimum two-drug
requirement must be met through drugs
or biologicals offered on an unrestricted
basis (for example, not subject to
utilization management processes, such
as prior authorization or step therapy,
non-preferred cost-sharing tiers, or other
such restrictions on access to necessary
therapies), with some specifically urging
us to impose restrictions on step therapy
by Part D plans. Some asked us to
specify that the two drugs must be
distinct chemical entities. One
commenter recommended that we do
not allow any Part B-covered drugs to
count toward the two-drug-per-category
requirement.
Response: Section 1860D–4(b)(3)(C) of
the Act requires that Part D plans’
formularies include ‘‘drugs within each
therapeutic category and class of Part D
drugs, although not necessarily all drugs
within such categories and classes.’’ We
believe that our interpretation of
‘‘drugs’’ as ‘‘at least two drugs’’ is
consistent with Congressional intent,
and that it strikes an appropriate
balance between providing Part D plans
with the necessary leverage to negotiate
with manufacturers for significant

E:\FR\FM\28JAR2.SGM

28JAR2

4260

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

discounts on covered Part D drugs and
ensuring sufficient drug choice for
beneficiaries. We have therefore
retained the two-drug minimum
requirement in § 423.120(b)(2)(i) of our
final rule.
However, we recognize that Part D
categories and classes may exist for
which there are only two Part D drugs,
and that including both of those drugs
on a formulary may be problematic if
the two drugs are vastly different in
their clinical effectiveness. Given that
section 1860D–4(b)(3)(C) of the Act
requires that Part D plan formularies
include ‘‘drugs within each therapeutic
category and class of Part D drugs,
although not necessarily all drugs
within such categories and classes,’’ we
will allow plans to request exceptions to
the requirement in § 423.120(b)(2)(i) of
our final rule to the extent they can
demonstrate that there are only two Part
D drugs available for a particular Part D
drug category or class and that one of
those drugs is clinically superior to the
other. We have incorporated this
provision at § 423.120(b)(2)(ii) of our
final rule.
In response to comments that our
proposed requirement is insufficient to
provide adequate access to medically
necessary treatments for Part D
enrollees, we clarify that we will require
Part D plans to adopt policies that
ensure that beneficiaries have
reasonable access to medically
necessary drugs. Although Part D plans
will not be required to include every
Part D drug on their formularies, we
will—as codified in § 423.120(b)(2)(iii)
of our final rule—require that plans
include adequate access to the types of
drugs most commonly needed by Part D
enrollees, as recognized in national
treatment guidelines, on plan
formularies. We are establishing this
requirement consistent with section
1860D–11(d)(2)(B) of the Act, which
provides us with authority similar to
that provided to the Director of the
Office of Personnel Management for
setting ‘‘reasonable minimum
standards’’ for health benefits plans. We
are looking to existing national
standards to inform our review at the
drug level, and Part D plans will be
expected to accommodate national
guidelines and offer complete treatment
options for a variety of medical
conditions, including (but not limited
to) asthma, diabetes, depression, lipid
disorders, hypertension, and HIV. This
is necessary in order to ensure that Part
D plans do not substantially discourage
enrollment by certain Part D eligible
individuals based on exclusions of
certain classes of drugs from their
formularies. In addition to examining

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

specific drugs on Part D plan
formularies, and as discussed in greater
detail elsewhere in this preamble, we
will review other aspects of plan benefit
designs—including tiered cost-sharing
formulary structures, P&T committee
structure and utilization, utilization
management policies and processes, and
exceptions and appeals processes—to
ensure that Part D plans generally meet
the requirements under Part D,
including the provision of an adequate
benefit.
We do not agree with comments
asking that the two-drug requirement be
met through drugs offered on an
unrestricted basis. We recognize that
Part D plans may establish utilization
management processes in such a way as
to substantially discourage enrollment
by certain beneficiaries. On the other
hand, utilization management
restrictions may be entirely appropriate
for specific drugs or categories of drugs.
Furthermore, the statute specifically
allows plans to utilize tiered costsharing structures provided they meet
certain actuarial equivalence tests. As
previously mentioned, part of our
benefit design review will focus not
only on the specific drugs included on
a Part D plan’s formulary, but also on a
plan’s utilization management policies
and procedures, to ensure that plans do
not discriminate against certain
enrollees.
In addition, while drugs covered
under Part B cannot be covered under
Part D, as provided in section 1860D–
2(e)(2)(B) of the Act, this exception to
Part D coverage is limited to the drugs
‘‘as so prescribed and administered’’
under Part B. Thus, the fact that a
beneficiary can have a particular drug
covered under Part B ‘‘incident to’’ a
physician service or as part of a hospital
outpatient procedure does not mean that
a prescription for the same drug should
be denied by a Part D plan. We will
provide more guidance on this issue,
but we clarify that the number of drugs
that may be denied coverage under Part
D on the basis of the drug itself is
limited. One category of drugs that can
clearly never be covered under Part D is
the list of oral cancer drugs covered
under Part B. Such drugs and limited
number of others may not be counted
toward the two-drug minimum.
Finally, we clarify that our two-drug
minimum requirement must be met
through the provision of two chemically
distinct drugs. In other words, Part D
plans may not include two dosage forms
or strengths of the same drug, or a
brand-name drug and a generic
equivalent, in a particular category or
class and meet the requirement in
§ 423.120(b)(2)(i) of our final rule.

PO 00000

Frm 00068

Fmt 4701

Sfmt 4700

Comment: One commenter
recommended that Part D plans’
formularies include a wide variety of
available dosage forms to the extent that
was feasible. Another commenter asked
us to clarify that we would not allow
Part D plans to count different dosages
of the same active ingredient as two
separate drugs for the purposes of our
two drug requirement. A third
commenter asked us to clarify that it is
acceptable for Part D plans to favor
some dosages over others on their
formularies.
Response: We stated in our proposed
rule that it was our expectation that the
drugs included in each therapeutic
category or class would include a
variety of strengths and dosage forms,
and we stand by that expectation in our
final rule. However, we clarify that Part
D plans will not have to provide equal
access to all strengths and dosage forms
of a particular Part D drug, although
beneficiaries will have the right to
pursue coverage of additional strengths
and dosage forms through the appeals
process. We have clarified in
§ 423.120(b)(2)(i) of our final rule that
Part D plans must include two
chemically distinct Part D drugs in each
therapeutic category and class of drugs,
with different strengths and doses
available for each of those drugs. Thus,
Part D plans may not meet this
requirement by only including two or
more different dosages of the same Part
D drug in a particular drug category or
class.
Comment: Many commenters were
concerned that our regulations will
create barriers to physicians prescribing
the best medication for their patients,
including off-label uses of medications,
which are common for many conditions
and are the norm for some conditions.
In actuality, off-label use is critically
important and may be the mainstay of
medical practice for successfully
managing certain conditions, such as
mental illnesses, chronic pain, chronic
heart failure, arthritis, Parkinson’s, HIV/
AIDS and dementia. The FDA
recognizes that ‘‘off-label use of drugs
by prescribers is often appropriate and
may represent the standard of practice.’’
A number of commenters opposed our
position that the USP model guidelines
should not be required to include
classes of drugs if there is no FDA
approved drug with an on-label
indication for each class, even though
there are FDA-approved drugs with
commonly accepted off-label uses that
would fall within a class. One
commenter noted that any action taken
by us regarding off-label use of
medications would have a ripple effect
on other public and private programs.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Some commenters requested that we
clarify the formulary requirements in
our final rule to require Part D plans to
cover medically accepted off-label use
of prescription drugs. They believe this
is consistent with Congressional intent
and past practice under the Medicare
and Medicaid programs. In addition,
one commenter is concerned that by
assigning a drug to a specific class for
formulary purposes, a Part D plan may
not cover it for other medically accepted
indications. One commenter suggested
formularies should be required to
include off-label uses for drugs for the
prevention and treatment recommended
in clinical guidelines issued by
government agencies and medical
societies, whether on-label or off-label.
Another commenter said that off-label
use must be accessible through a Part D
plan’s exceptions process for nonformulary drugs.
Response: We recognize the value of
off label prescribing, particularly with
regard to certain medical conditions. As
mentioned in the proposed rule, we
expect that the model categories and
classes developed by USP will be
defined so that each includes at least
one drug that is approved by the FDA
for the indication(s) in the category or
class. That is, no category or class will
be created for which there is no FDA
approved drug and which would
therefore have to include a drug based
on its ‘‘off label’’ indication. We expect
Part D plans using alternative drug
classification systems to include at least
one drug that is approved by the FDA
for the indication(s) in each drug
category or class. However, this would
not preclude physicians and other
prescribers from prescribing drugs for
off label indications, provided the drug
is prescribed for a ‘‘medically accepted
indication,’’ as defined in section
1927(k)(6) of the Act. Further, we clarify
that the USP model guidelines would
not preclude Part D sponsors from
assigning an FDA approved drug to a
category or class based on an off label
use for that drug, provided the FDA has
not made a determination that the drug
is unsafe for that use.
We do not have the authority to
require that Part D plans cover the offlabel use of certain Part D drugs.
However, as discussed in greater detail
elsewhere in this preamble, we will
thoroughly evaluate plan benefit design
to ensure that Part D plans provide an
adequate benefit and do not
discriminate against certain classes of
Part D enrollees—including a review of
plan utilization management policies
and processes, formulary structure, and
plan exceptions and appeals processes.
We believe that these safeguards will

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

ensure Part D enrollee access to Part D
drugs dispensed for medically
appropriate off label indications.
Comment: Multiple commenters were
concerned that it is inappropriate for
physicians to be given the new burden
to ‘‘document and justify’’ off-label use
in their Part D enrollees’ clinical records
due to the administrative burden and
the interference with the practice of
medicine by physicians. Many
commenters mentioned that the FDA
has recognized the right of physicians to
use approved drugs and devices as they
believe appropriate and never suggested
there is a need to document such use.
One commenter noted this
documentation requirement is
unprecedented and steps beyond wellestablished boundaries by inserting us
into an individual physician’s
professional decision-making. If
documentation is required, one
commenter asked us to clarify what
constitutes sufficient documentation.
One commenter, however, noted the
need for documentation on
prescriptions for off label use to enable
pharmacists to conduct drug utilization
review. Another commenter
recommended regular reviews by us and
by P&T committees through drug
utilization and provider interviews as is
customary in commercial plans.
Many commenters urged us to
mandate that Part D plans give
deference and flexibility to physicians
when making coverage determinations
since a patient’s physician has clinical
expertise and intimate knowledge of
patients’ medical needs. One
commenter suggested that we specify
that Part D plans may not prohibit
providers from prescribing drugs for
discretionary use if such use is
supported by one or more standard
reference compendia or by one or more
scientific studies published in peerreviewed medical journals or by
generally accepted standards of clinical
care. One commenter suggested that
MMA regulations should restrict the
ability of Part D plans to limit physician
prescribing for off-label purposes unless
there is objective medical evidence that
such prescribing is inefficacious or
harmful to the individual patient.
Commenters noted that onerous
administrative hurdles associated with
medically necessary off-label use could
result in barriers to patient access to
essential therapies. Without specific
guidance, Part D plans could simply
minimize financial risk through delay
tactics disguised as Federal
documentation requirements. One
commenter recommended that at a
minimum, we should clarify that there
is nothing to prevent a Part D plan from

PO 00000

Frm 00069

Fmt 4701

Sfmt 4700

4261

covering an off-label use that does not
meet the statutory definition of
‘‘medically accepted indication’’ if,
based on expert advice, the plan
determines that such use is appropriate.
Multiple commenters suggested that the
final rule guidance for Part D drugs
should be at least as flexible as the
current coverage policies for drugs
covered under Medicare Part B. Under
Part B, the definition of a ‘‘medically
accepted indication’’ includes
indications published in peer-reviewed
literature; current Part B coverage policy
regarding off-label drug use is also
consistent with these norms.
Response: By stating in the proposed
rule preamble that we strongly
encouraged physicians and other
prescribers to clearly document and
justify off-label use in their Part D
enrollees’ clinical records, we did not
intend to establish a new
documentation requirement for
prescribers. We agree with commenters
that physicians must have sufficient
latitude to prescribe drugs as necessary
based on their patients’ particular
medical needs and consistent with
medical standards of practice, and our
statement should not be interpreted as
imposing new and onerous reporting
requirements on prescribers. As
previously mentioned, we will
thoroughly review plan benefit designs
to ensure that Part D plans meet all
applicable requirements under Part D
including the provision of an adequate
benefit. We expect that onerous
documentation requirements for offlabel prescribing could potentially be
cause for finding that a Part D plan’s
proposed benefit structure does not
meet Part D requirements.
We note that a drug is considered to
be a Part D drug only if prescribed for
a ‘‘medically accepted indication’’ as
defined under section 1927(k)(6) of the
Act. Drugs may not be covered under
Part D even if they are not prescribed for
a medically accepted indication.
Coverage for other than a medically
accepted indication is not permitted
under the statute, since such drugs
would not be considered Part D drugs.
Plans have the flexibility to decide how
to monitor whether a drug is prescribed
for a medically accepted indication, as
well as to determine whether the
statutory definition of ‘‘medically
accepted indication’’ is met with regard
to the particular use of a drug.
Comment: We received numerous
comments regarding our authority under
section 1860D–11(e)(2)(D)(i) of the Act
to review Part D plan benefit designs
including any formulary or tiered
formulary structure to ensure that plans
do not discriminate against certain Part

E:\FR\FM\28JAR2.SGM

28JAR2

4262

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

D eligible individuals. Many
commenters urged us to use this
authority to thoroughly,
comprehensively, and judiciously
review Part D plan design and benefits
including formulary structure to prevent
discriminatory practices. Some of these
commenters were adamant that such a
review not be limited only to the
particular drugs included on a
formulary list, but also to tiered costsharing (including the use of 100
percent cost-sharing tiers), and
utilization management requirements
(for example, appeals, prior
authorization, and step therapy
requirements).
Several other comments cautioned us
not to be overly prescriptive in our
formulary review criteria and avoid
unintentionally limiting the ability of
Part D plans to manage the costs of the
Part D benefit. One commenter
suggested that our formulary review
standards should provide substantial
deference to P&T committees including
on cost-sharing, step-therapy, and prior
authorization processes, and that we
should not establish our own
requirements in these areas.
Other commenters asked that greater
specificity regarding our criteria for
formulary review, as well as practices
that would be considered
discriminatory, be provided either in
regulation or in separate guidance, or
both. Several commenters urged us to
use defined performance metrics to
make formulary discrimination
assessments. Several commenters
encouraged us to establish a flexible and
readily accessible process for dialogue
with a variety of stakeholders to create
appropriate formulary review criteria,
and one commenter urged us to actually
involve States in the review process.
Several commenters thought our
formulary review process should be
performed annually and that contract
renewal should be contingent upon
passing our review. Others thought that
Part D plan formularies should be
reviewed more often given plans’ ability
to make formulary changes mid-year.
Response: We will comprehensively
review Part D plans’ proposed benefit
structure to ensure that they generally
comply with all applicable standards
under Part D. We intend to conduct a
reasonable review, providing guidelines
that Part D plans can use in building
formularies and structuring their bids.
We recently shared with the public a
first draft of our benefit package review
criteria and, based on public comments
received on that document, will finalize
and make available publicly our final
review criteria in early 2005.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Consistent with the authority
provided under section 1860D–
11(e)(2)(D)(i) of the Act, we will review
Part D plan formularies to ensure that
plans do not discriminate against
certain classes of Part D eligible
individuals by adopting a benefit design
(including any formulary or tiered
formulary structure) that would
substantially discourage enrollment by
certain beneficiaries. Nothing in the
statute would foreclose us from
concluding that a Part D plan’s
formulary substantially discourages
enrollment even if the plan’s classes and
categories are considered non­
discriminatory (for example, because
the plan uses the USP model guidelines
to structure its formulary). Although
Part D plans will not be required to
include every Part D drug on their
formularies, we will require Part D
plans to offer an adequate benefit. For
example, we have the discretion to find
that failure to include a specific drug
would substantially discourage
enrollment by beneficiaries with a
condition that may only be treated by
that drug. We are looking to existing
national standards to inform our review
at the drug level, and Part D plans will
be expected to accommodate these
national guidelines.
We believe that other aspects of Part
D plan benefit design including
formulary structure (including tiered
cost-sharing structures), the structure
and utilization of a plan’s P&T
committee, a plan’s utilization
management policies and procedures
(for example, prior authorization, step
therapy, and generic substitution), and a
plan’s exceptions and appeals processes
are as important as a plan’s formulary
list of drugs in ensuring that
beneficiaries are offered an adequate
benefit that generally complies with all
applicable standards under Part D.
Therefore, we intend to review these
plan features as part of our
comprehensive review of Part D plan
benefit designs.
We will review tiered cost-sharing
arrangements to ascertain that the cost
sharing associated with certain drugs or
classes of drugs does not discourage
enrollment by certain beneficiaries for
example, those with certain diseases or
medical conditions. We will also review
a Part D plan’s P&T committee structure
and processes to ensure that plans
comply with the requirements of section
1860D–4(b)(3)(B) of the Act, which
creates standards designed to ensure
impartial, clinically-based decisionmaking by P&T committees.
A Part D plan’s utilization
management policies and processes
must ensure that beneficiaries have

PO 00000

Frm 00070

Fmt 4701

Sfmt 4700

continuous, timely, and appropriate
access to Part D drugs, and that such
policies are structured on evidencebased criteria that are reviewed by a Part
D plan’s P&T committee. Section
1860D–4(c)(1)(A) of the Act requires
Part D plans to establish cost-effective
drug utilization management programs
(including incentives to reduce costs
when medically appropriate). Our
review of plan utilization management
policies and processes will ensure that
those policies and processes are
medically appropriate and do not
discriminate against certain
beneficiaries.
We clarify that a non-formulary drug
is not necessarily a non-covered Part D
drug. The MMA provides for an
exceptions process whereby enrollees
and prescribers can request Part D
coverage at more favorable cost sharing
than for non-preferred drugs, as well as
access to non-formulary drugs at
formulary cost-sharing levels. As
discussed elsewhere in this preamble,
we interpret section 1860D–4(h)(2) of
the Act as requiring Part D plans to
cover a non-formulary drug on appeal
when, upon review, a physician
determination of medical necessity is
upheld. Thus, while Part D plans are not
required to approve a non-formulary
Part D drug in the first instance at the
point of sale, plans are required to
provide access to Part D drugs, both
formulary and non-formulary, on
appeal, where there is a legitimate
medical need. We will review Part D
plans’ exceptions and appeals processes
to ensure that evidence-based criteria
are used to ensure medically
appropriate access to all Part D drugs,
including those drugs that are not
favorably placed on a plan’s formulary
or not on the formulary at all.
Section 1860D–11(d)(2)(B) of the Act
provides us with authority similar to
that provided to the Director of the
Office of Personnel Management with
respect to health benefits plans; this
includes setting ‘‘reasonable minimum
standards’’ for plans. As we finalize our
guidelines, we will look to existing
national standards and guidelines, such
as those established by the Utilization
Review Accreditation Commission
(URAC), the National Committee for
Quality Assurance (NCQA), the
American Society of Health Systems
Pharmacists (ASHP), and the Academy
of Managed Care Pharmacy (AMCP) to
develop a framework for formulary
management. The principles embodied
in these standards and guidelines
represent commercial best practice, and
we believe Part D enrollees should be
granted the same rights and protections
under their Part D plan as generally

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
available to those enrolled in
commercial plans.
Comment: Many commenters
supported establishing rules for special
treatment, to include alternative or open
formularies and other special provisions
and exemptions, for certain classes of
enrollees. Commenters suggested a
number of classes of beneficiaries that
we may want to consider ‘‘special
populations’’ for the purpose of offering
such special rules, including dual
eligibles, institutionalized beneficiaries,
individuals with certain diseases or
medical conditions, and minority
populations. Other commenters
opposed any requirement that special
populations be subject to special rules.
Instead, they argued that we should
provide Part D plans the flexibility to
manage and design benefits consistent
with their enrollees’ needs. They felt
that prescriptive guidance was not
necessary and that our review for
discrimination should be sufficient to
ensure adequate access to all medically
necessary drugs.
Response: We share commenters’
concerns about access to all medically
necessary Part D drugs by vulnerable
Part D enrollees. However, after much
consideration, we disagree with
commenters who advocated for specific
requirements in regulation that would
create special rules applicable only to
certain classes of Part D enrollees. We
believe commenters’ concerns regarding
access to Part D drugs for vulnerable
populations will be addressed via our
review of Part D plan benefit packages.
As discussed in great detail elsewhere
in this preamble, we will
comprehensively review Part D plans’
proposed benefit structure to ensure that
they generally comply with all
applicable standards under Part D—
including the provision of a benefit that
provides for adequate coverage of the
types of drugs most commonly needed
by Part D enrollees, as recognized in
national treatment guidelines. We
intend to conduct a reasonable review,
providing guidelines that Part D plans
can use in building formularies and
structuring their bids. We recently
shared with the public a first draft of
our benefit package review criteria and,
based on public comments received on
that document, will finalize and make
available publicly our final review
criteria in early 2005.
Comment: A number of commenters
urged us to place strict limits on Part D
plans’ ability to remove drugs or
increase the cost sharing associated with
certain formulary drugs mid-year. One
commenter suggested we allow for
changes only at the beginning of a
contract year so that changes are

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

announced to current and prospective
enrollees prior to the open enrollment
period and Part D plans are able to
market their new formulary for the
upcoming plan year. Another
commenter recommended that we allow
formulary changes only from October 1st
to November 14th of a given year.
Several commenters suggested that
Part D plans be required to provide
justification for any decision to remove
a drug from the formulary. Another
commenter stated that Part D plans
should be required to document any
decision to remove a drug from the
formulary based on detailed scientific
and clinical evidence. This commenter
noted that reasons for discontinuing
coverage could include new clinical
evidence that a drug is unsafe,
contraindicated for particular
indications, or a manufacturer’s
withdrawal from the market. Other
commenters noted that Part D plans
should only be allowed to remove drugs
from their formulary when new
information about a drug’s safety
becomes available.
Response: The goal of the MMA was
to encourage private sector
organizations who meet the law’s
requirements to offer a range of Part D
plan options for Medicare beneficiaries
by providing flexibility in plan design
and management. This flexibility is
modeled after the way consumers in the
private sector receive drug benefits.
Although the statute requires us to limit
changes in the therapeutic categories
and classes of a Part D plan’s formulary
to the beginning of each plan year
(except as we permit to take into
account new therapeutic uses and
newly approved Part D drugs), it does
not give us similar authority to preclude
mid-year changes to a Part D plan’s
formulary list. However, as provided in
section 1860D–4(b)(3)(E) of the Act,
codified in § 423.120(b)(5) of our final
rule, and discussed in greater detail
elsewhere in this preamble, Part D plans
must provide appropriate notice to
affected enrollees, among others, prior
to removing a drug from their formulary
or changing the preferred or tier status
of a formulary drug. Such notice will
provide beneficiaries with ample time to
transition to a covered Part D drug that
meets the enrollee’s needs, or to request
a coverage exception.
Comment: We received a number of
comments urging us to consider
requirements related to the
‘‘grandfathering,’’ on the same terms as
previously available, of covered Part D
drugs that are either removed from Part
D plan formularies, or whose costsharing tier or preferred status changes,
mid-year. One commenter stated that

PO 00000

Frm 00071

Fmt 4701

Sfmt 4700

4263

patients with chronic diseases who are
stabilized by a plan-covered drug at the
beginning of the year should not
experience a higher copayment or be
denied coverage of a drug based on a
formulary change.
Other commenters thought the
grandfathering should apply more
broadly. Some commenters said that
Part D plans should be required to
grandfather a drug for anyone taking the
medication prior to its removal from
their formulary (unless removed due to
FDA safety concerns). One commenter
recommended that we require Part D
plans to grandfather coverage of chronic
medications until the next open
enrollment period. Other commenters
noted that, if we do not include rules
placing strict limits on formulary
changes during the year, Part D plans
should be required to continue coverage
of the discontinued drug for the
remainder of year, at the same price, for
all individuals taking the drug as part of
an ongoing treatment regimen. One
commenter suggested that Part D plans
be required to provide patients with a
72-hour supply of a drug if it has been
removed from the formulary. However,
some commenters also clarified that
such a requirement should not be meant
to prohibit a Part D plan from asking
physicians to voluntarily switch
patients to less costly drugs through a
therapeutic substitution initiative.
Response: Although the MMA does
not preclude mid-year formulary
changes by Part D plans, it does require
that plans provide appropriate advance
notice to affected enrollees of any
removal of a covered Part D drug from
a formulary, or any change in the
preferred or tiered cost-sharing status of
a covered Part D drug. As detailed
elsewhere in this preamble, we have
interpreted ‘‘appropriate notice’’ to
mean at least 60 days prior to such
change taking effect. We believe that 60
days, which is consistent with National
Association of Insurance Commissioners
(NAIC) model guidelines, provides
affected enrollees with ample time to
either switch to a therapeutically
appropriate alternative medication, or
obtain a redetermination by the Part D
plan, reconsideration by the
independent review entity, and request
an administrative law judge hearing
before the change becomes effective. To
the extent that Part D plans do not
provide such 60-day advance notice,
they will be required to provide such
notice and a 60-day supply of the drug
at the same terms covered previously
when affected enrollees request refills of
their prescriptions. Once notice is
provided, enrollees will have a 60-day
window to either switch to a

E:\FR\FM\28JAR2.SGM

28JAR2

4264

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

therapeutically appropriate alternative
medication, or obtain a redetermination
by the Part D plan, reconsideration by
the independent review entity, and
request an administrative law judge
hearing before the 60-day supply is
exhausted.
Comment: A number of commenters
voiced support for some kind of
transition period for beneficiaries,
particularly full-benefit dual eligibles,
transitioning to Medicare Part D from
other drug coverage. These commenters
argue that, under Medicaid, many
beneficiaries—especially those with
certain conditions (HIV/AIDS and
mental illness, for example, as well as
those residing in long-term care
facilities)—may experience relatively
unfettered access to medically necessary
drugs. This may not be the case when
these enrollees transition their drug
coverage from Medicaid to Part D, since
different Part D plans will have different
formularies, cost-sharing tiers, and
utilization management requirements.
Commenters are concerned that
vulnerable beneficiaries may elect, or
may be auto-enrolled in, a Part D plan
that does not cover the drugs these
beneficiaries need. More generally,
several commenters noted that many
beneficiaries—and not just those who
are considered vulnerable or special
populations—could face a significant
loss of continuity of care if Part D plans’
formularies are substantively different
from each other or from commercial
plans. They advocate for an additional
coverage clause for patients
transitioning into or changing Part D
plans in order to avoid disruptions in
care.
Response: We agree with commenters
that Part D plans should have processes
in place to transition current enrollees
from their old coverage to their new Part
D plan coverage, particularly in cases
where new enrollees are currently
taking Part D drugs that are not included
on the Part D plan’s formulary at the
time of enrollment. However, we
envision that the need for such a
transition period will be limited for
several reasons.
In reviewing a Part D plan’s benefit
package, we have the discretion to find
that failure to include a specific drug on
the formulary would substantially
discourage enrollment by beneficiaries
with a condition that may only be
treated with that drug. For example, we
expect that ensuring that beneficiaries
with certain conditions, such as HIV/
AIDS, are not as a group substantially
discouraged from enrolling in a Part D
plan will require that all or substantially
all drugs in a particular therapeutic
class be covered. In addition, in our

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

review of plan benefit packages and our
general oversight to ensure that Part D
plans comply with all applicable
requirements, we will examine not only
the inclusion of particular drugs on a
formulary, but also the structure and
utilization of a plan’s P&T committee,
formulary structure (including tiered
cost-sharing structures), a plan’s
utilization management policies and
procedures (for example, prior
authorization, step therapy, and generic
substitution), and exceptions and
appeals processes and how such
processes guide access to both
formulary and non-formulary drugs.
Given such a review of the overall
benefit package, we would expect that
the majority of transition concerns visa`-vis special populations will be
obviated prior to beneficiary enrollment,
as Part D plans will know our benefit
package review criteria in advance of
the bidding process. In addition, and as
described in detail elsewhere in the
section of this preamble discussing
exceptions and appeals, we are adopting
a substantive rule requiring coverage of
non-formulary drugs on appeal
provided that a medical necessity
determination is upheld upon review.
To address the needs of new Part D
plan enrollees who are transitioning to
Part D from other prescription drug
coverage, and whose current drug
therapies may not be included in their
Part D plan’s formulary despite the
safeguards noted above, we are
requiring—in § 423.120(b)(3) of our final
rule—that Part D plans establish an
appropriate transition process for new
enrollees which we would review as
part of our benefit package review
process. Section 1860D–11(d)(2)(B) of
the Act provides us with authority
similar to that provided to the Director
of the Office of Personnel Management
(OPM) with respect to health benefits
plans; as provided in 5 U.S.C. 8902(e),
this includes the authority to ‘‘prescribe
reasonable minimum standards for
health benefits plans.’’ It is our
understanding that OPM, in its contract
negotiations with FEHBP plans, requires
a transition policy. Furthermore, many
commercial plans include transition
processes for new enrollees. Failure to
appropriately transition certain
beneficiaries could result in aggravation
of certain medical conditions including,
in some cases, hospitalization which
could ultimately increase costs to
Medicare under Parts A and B. Thus,
requiring Part D plans to establish
appropriate transition policies for new
enrollees appears to be consistent with
our authority to prescribe reasonable
minimum standards for Part D plans.

PO 00000

Frm 00072

Fmt 4701

Sfmt 4700

We believe that a requirement for an
appropriate transition process for new
enrollees prescribed Part D drugs that
are not on the Part D plan’s formulary
appropriately balances the protection of
certain vulnerable populations with
flexibility for Part D plans to develop a
transition process that dovetails with
plans’ specific benefit designs. We will
provide additional guidance regarding
transition process requirements as part
of our benefit package review criteria.
However, we expect that a Part D plan’s
transition process would address
procedures for medical review of nonformulary drug requests and, when
appropriate, a process for switching new
Part D plan enrollees to therapeutically
appropriate formulary alternatives
failing an affirmative medical necessity
determination. Such a policy should
also focus on particularly vulnerable
populations, including dual eligibles
and individuals with certain medical
conditions (for example, enrollees with
HIV/AIDS, mental illness, and those
with other cognitive disorders).
Comment: Some commenters
requested that we establish a standard
process for making formulary changes
that Part D plans are required to follow,
including standard policies and
procedures for communicating changes
to beneficiaries, pharmacists, and
physicians. Another commenter
suggested that we develop a standard
formulary change form.
Response: As provided in section
1860D–4(b)(3)(E) of the Act, and
codified in § 423.120(b)(5)(i) of our final
rule, we will require that Part D plans
provide appropriate notice regarding
any removal of a covered Part D drug
from their formulary or any change in
the preferred or tiered cost-sharing
status of a drug to affected enrollees and
other parties. We believe that Part D
plans should have the flexibility to
develop formulary change notices that
meet their particular needs, provided
they include the information elements
we specify at § 423.120(b)(5)(ii) of our
final rule and discussed in greater detail
elsewhere in this preamble.
Comment: One commenter suggested
that notice not be required when the
enrollees’ cost sharing is being reduced.
This commenter also suggested that
notice not be required when generic
competitors have dropped out of the
market, leaving only one supplier, and
the generic drug as a result becomes
effectively treated as a single-source
‘‘brand name’’ drug. Another
commenter noted that the requirement
for written notice should extend beyond
changes in covered medication and
should also be sent when the Part D
plan changes procedures for accessing a

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
particular medicine. Some commenters
suggested we define ‘‘appropriate
notice’’ differently for the expansion of
a formulary versus the removal of a drug
from the formulary to be consistent with
the private market.
Response: Section 1860D–4(b)(3)(E) of
the Act requires Part D plans to provide
notice before making ‘‘any change in the
preferred or tiered cost-sharing status of
a drug.’’ Plans must therefore provide
notice regarding any cost-sharing
changes be they increases or reductions,
consistent with the requirements of
§ 423.120(b)(5) of our final rule. The
previously cited statutory language
limits the provision of notice of
formulary changes to the removal of a
drug from a formulary or any change in
the preferred or tier status of a drug,
meaning that Part D plans will not be
required to provide notice regarding a
change in utilization management
processes associated with a particular
drug. However, we encourage Part D
plans to do so to the extent practicable.
We agree with the commenter who asks
that we make a distinction between
drugs added to and removed from a
formulary. As provided in
§ 423.120(b)(5)(i) of our final rule, Part
D plans will only be required to provide
advance notice of formulary changes to
affected beneficiaries when drugs are
removed from a formulary; at their
option, Part D plans may also wish to
notify enrollees of new additions to
their formularies.
Comment: Some commenters support
the 30-day notice provision in our
proposed regulation. Other comments
specifically noted that there should be
exceptions to the 30-day requirement in
cases where there has been an FDA
directive to remove a drug from the
market.
However, many commenters were
concerned that the 30-day notice
provision in the proposed regulation
would not provide the adequate time
frame for enrollees to make the
necessary changes in their drug
treatment and ensure continuity of care
particularly for enrollees with chronic
conditions. Many commenters suggested
a 90-day notice requirement. Several
commenters suggested that beneficiaries
be notified directly in writing at least 60
days before any change, and one
commenter noted that NAIC model
regulations for drug benefit changes
require a 60-day notice.
Response: We appreciate the feedback
on our interpretation of ‘‘appropriate
notice’’ in the proposed rule as
consisting of advance notice of at least
30 days. To ensure that Part D enrollees
are provided with sufficient time either
to switch to a therapeutically

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

appropriate alternative medication, or
obtain a redetermination by the Part D
plan, reconsideration by the
independent review entity, and request
an administrative law judge hearing, we
have defined appropriate notice as at
least 60 days in § 423.120(b)(5)(i)(A) of
our final rule. In addition to affording
enrollees more time to manage the
consequences of mid-year formulary
changes, a 60-day requirement is
consistent with the NAIC model
guidelines for drug benefit changes. As
provided in § 423.120(b)(5)(i)(B) of our
final rule, Part D plans also have the
option to the extent that they are not
able to provide a 60-day advance notice
to provide the notice and provide 60
days’ coverage of the Part D drug, under
the same terms as previously available
under the Part D plan, at the time the
enrollee fills his or her prescription.
Once notice is provided, enrollees will
have a 60-day window to either switch
to a therapeutically appropriate
alternative medication, or obtain a
redetermination by the Part D plan,
reconsideration by the independent
review entity, and request an
administrative law judge hearing before
the 60-day supply is exhausted.
We note that, in order for the
requirement regarding plan changes
during the beginning of a contract year
in § 423.120(b)(6) of our final rule to be
consistent with the 60-day advance
notice requirement in
§ 423.120(b)(5)(i)(A) of the final rule, we
have changed the requirement in the
proposed rule such that a Part D sponsor
may not remove a covered Part D drug
from its Part D plan’s formulary, or
make any change in the preferred or
tiered cost-sharing status of a covered
Part D drug on its plan’s formulary,
between the beginning of the annual
coordinated election period and 60 days
after the beginning of the contract year
associated with that AEP. As previously
mentioned, we had proposed a period of
30 days in § 423.120(b)(6) of our
proposed rule.
We note that, in cases in which the
FDA requires the removal of a covered
Part D drugs from the market or a
manufacturer pulls the drug from the
market for safety reasons, 60-day
advance notice will not be required, as
provided in § 423.120(b)(5)(iii) of our
final rule. However, Part D plans will be
required to provide notice to affected
enrollees (as well as to SPAPs, entities
providing other prescription drug
coverage, authorized prescribers,
network pharmacies, pharmacists, and
us) about the removal of a such a
covered Part D drug from their
formularies as quickly as possible after
the drug is actually removed from the

PO 00000

Frm 00073

Fmt 4701

Sfmt 4700

4265

formulary. This notification must
comply with our notification
requirements in § 423.120(b)(5)(ii)(A)
through (b)(5)(ii)(D).
Comment: Some commenters asked
for clarification on what is considered
as ‘‘appropriate notice’’. Many
commenters urged us to require Part D
plans provide notice in writing and mail
directly to each enrollee who is affected
by the change. The commenters noted
that without specifying that the notice
must be provided in writing, Part D
plans may believe they satisfy
requirement by posting this information
on their plan websites. Several
commenters noted that website
notification is inadequate. One
commenter asked that Part D plans be
allowed to give notice electronically if
the enrollee opts for that
communication method.
Another commenter asked that Part D
plans, primarily MA plans, receive more
flexibility in giving notice to enrollees.
One commenter noted that Part D plans
should be allowed to convey certain
types of formulary changes through preand post-enrollment materials such as
sales brochures, enrollment forms,
evidence of coverage, or summaries of
benefits.
Response: We agree that Part D plans
must provide any formulary change
notice in writing, and deliver it directly
to affected enrollees. This requirement
is reflected in § 423.120(b)(5)(i)(A) of
our final rule. As provided in
§ 423.128(d)(2)(iii) of the final rule, Part
D sponsors must also provide this notice
to all current and prospective Part D
enrollees via their plan websites.
However, we agree with commenters
who assert that website notification, on
its own, is an inadequate means of
providing specific information to the
enrollees who most need it. Website
notification will simply be an additional
way in which Part D plans may provide
notice of formulary changes to affected
enrollees. We therefore require Part D
plans to provide this notice directly to
affected beneficiaries. As an alternative
to providing this notice to affected
beneficiaries via U.S. mail, to the extent
that plan enrollees affirmatively elect to
receive such notice electronically rather
than in writing, via U.S. mail, Part D
plans may provide notice electronically
only.
We do not believe that the formulary
change notice requirements should
apply any differently to MA-PD plans
(or to cost plans offering qualified
prescription drug coverage) than they do
to prescription drug plans. In order to
ensure that enrollees receive and
process information about formulary
changes in a timely way, we believe that

E:\FR\FM\28JAR2.SGM

28JAR2

4266

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

a notice of formulary changes is the
most efficient way to do so, and that
other materials (including pre- and postenrollment materials such as sales
brochures, enrollment forms, evidence
of coverage, or summaries of benefits)
are not the most appropriate
mechanisms to convey such
information.
Comment: Many commenters
recommended requiring Part D plans to
include information about enrollees’
rights to request an appeal or exception
with their formulary change
notification. One commenter urged that
if the notice of the change in formulary
involves the addition of a medication,
the notice should also explain how the
medication will be classed, if the Part D
plan uses a tiered co-pay system or step
therapy system. The notice should also
indicate expected cost to the
beneficiary. If a medication is being
removed from the formulary, the notice
should indicate what medication is
available for individuals who were
prescribed the medication being
removed.
Response: In response to the helpful
public comments received on what
‘‘appropriate notice’’ of formulary
changes should comprise,
§ 423.120(b)(5)(ii) of our final rule
requires that Part D plans include the
following information on their
formulary changes notices: (1) the name
of the affected covered Part D drug; (2)
whether the plan is removing such
covered Part D drug from the formulary,
or changing its preferred or tiered costsharing status; (3) the reason why the
plan is removing such covered Part D
drug from the formulary, or changing its
preferred or tiered cost-sharing status;
(4) alternative drugs in the same
therapeutic category or class or costsharing tier and expected cost-sharing
for those drugs; and (5) the means by
which enrollees may obtain a coverage
determination under § 423.566 or
exception under § 423.578 of our final
rule. These required information
elements will provide enrollees with the
information they need to request an
independent review or to switch to an
alternative formulary drug.
Comment: Several commenters noted
that advance notice of formulary
changes should only be required for
enrollees currently using a particular
drug, per our proposal in our notice of
proposed rulemaking. One commenter
asked that our interpretation of the term
‘‘affected enrollee’’ be further expanded
to include an enrollee who has been
dispensed a drug that has been
removed, or whose status has changed,
within the last 90 days. Other
commenters urged us to require Part D

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

plans to provide all enrollees (not just
those taking the affected drug) with
advance notice of formulary changes.
Response: We interpret the statutory
term ‘‘affected enrollee’’ as referring to
a Part D enrollee who is currently taking
a covered Part D drug that is either
being removed from a Part D plan’s
formulary, or whose preferred or tiered
cost-sharing status is changing. In other
words, Part D plans will not be required
to notify all enrollees regarding
formulary changes during a contract
year only those directly affected by
changes with respect to a particular
covered Part D drug. This will minimize
Part D plan administrative costs while
getting information to those individuals
who need it. We have incorporated this
definition of the term ‘‘affected
enrollee’’ in § 423.100 of our final rule.
Comment: Several commenters
recommended that Part D plans notify
prescribers, pharmacists and
pharmacies through information posted
on plans’ websites or through routine
communication to prescribers and
pharmacists rather than contacting all
prescribers and pharmacies directly.
More than one commenter stated that
sending a mailed notification to all
beneficiaries, affected physicians, and
pharmacists would be an enormous
undertaking and expense. This
commenter believes that it is
appropriate to mail notifications to
those taking the medication and provide
it electronically to physicians,
pharmacists, and other beneficiaries via
the Part D plan website and upon
request.
Response: We agree with commenters
that we should provide greater
flexibility in terms of the mechanism by
which they provide notice to parties
other than affected enrollees to whom
they are required to provide advance
notice of formulary changes (including
authorized prescribers, pharmacists,
pharmacies, and us). As provided in
§ 423.120(b)(5)(i) of our final rule, we do
not specify that written notice is
required to be provided to these parties.
Thus, Part D plans can determine the
most effective means by which to
communicate formulary change
information to these parties, including
electronic means.
Comment: Several commenters
suggested Part D plans also notify
SPAPs, State retiree plans, and State
Medicaid programs of formulary
changes, and another commenter
suggested State Medicaid offices as well.
Response: Section 1860D–4(b)(3)(E) of
the Act requires that ‘‘appropriate
notice’’ of formulary changes be made
specifically to the Secretary, affected
enrollees, physicians, pharmacies, and

PO 00000

Frm 00074

Fmt 4701

Sfmt 4700

pharmacists. However, we expect Part D
plans to coordinate with SPAPs and
other plans providing benefits that
supplement the benefits available under
Part D coverage to Part D enrollees.
Provision of formulary change
information to these health plans and
programs will be important in ensuring
effective coordination. Given that
section 1860D–24(a)(2)(F) of the Act
provides us with flexibility to establish
coordination of benefits requirements
regarding other administrative processes
not specified in section 1860D–24(a)(2)
of the Act, we believe it is reasonable to
require Part D plans to notify SPAPs and
other health plans and programs (as
defined in § 423.454(f)(1) of our final
rule) regarding formulary deletions or
changes to the tiered cost-sharing status
of a drug. We have incorporated this
requirement into § 423.120(b)(5) of our
final rule.
Comment: One commenter
recommended that Part D sponsors
should include in their formulary notice
to us a certification that they are still
meeting the statutory formulary
requirements.
Response: We note that,
notwithstanding any formulary changes
Part D plans make mid-year, plans will
still be required to meet all the
formulary requirements in § 423.120(b)
of our final rule, and we will review all
formulary changes to ensure that this is
the case.
c. Use of Standardized Technology
In accordance with the requirements
of section 1860D 4(b)(2)(A) of the Act,
Part D sponsors must issue (and reissue,
as appropriate) a card or other
technology that enrollees could use to
access negotiated prices for covered part
D drugs. Section 1860D–4(b)(2)(B)(i) of
the Act mandates that we develop,
adopt, or recognize standards relating to
a standardized format for a card or other
technology for accessing negotiated
prices to covered Part D drugs. Section
1860D 4(b)(2)(B)(ii) of the Act requires
us to consult with the National Council
for Prescription Drug Programs (NCPDP)
and other standard setting
organizations, as appropriate, to develop
these standards.
Except as otherwise provided below,
the final rule adopts the rules regarding
use of standardized technology set forth
in § 423.120(c) of the proposed rule.
Comment: A number of commenters
support our using a standardized
identification card using NCPDP
standards. These commenters note that
a standardized card using the NCPDP
format will create increased efficiencies
such as reduced waiting times for
dispensing medications that will benefit
pharmacy providers and beneficiaries. A

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
few commenters suggested that we
provide MA organizations with the
flexibility to integrate their drug card
with their medical benefits card rather
than issuing a separate card if the MA
organization chooses to do so and others
requested clarification that MA
organizations could issue a single card
for both their medical and drug benefits.
One commenter expressed concern
about using an identification number
other than the beneficiaries’ Medicare
Identification Number because this
number is familiar and known by the
beneficiaries. In certain situations, if the
card were lost or stolen, beneficiaries
could easily remember their drug card
number.
Response: As provided under section
1860D 4(b)(2)(B)(ii) of the Act, we will
consult with the National Council for
Prescription Drug Programs (NCPDP)
and other standard setting
organizations, as appropriate, to develop
these standards. Given that NCPDP is
recognized as the industry standard for
current prescription drug programs, and
we relied on its standards in developing
requirements for discount card
sponsors’ cards under the Medicare
Prescription Drug Discount Card and
Transitional Assistance Program, we
expect to base our card standards on
NCPDP’s ‘‘Pharmacy ID Card Standard.’’
This standard is based on the American
National Standards Institute ANSI
INCITS 284–1997 standard titled
Identification Card—Health Care
Identification Cards, which may be
ordered through the Internet at http://
www.ansi.org. We will provide further
operational guidance regarding our
standards for a card (or other
technology) to entities wishing to
become Part D sponsors in time for
these entities to use the standards (and
have their cards approved for use by us)
beginning January 1, 2006. We
understand that Part D sponsors would
like flexibility to integrate their medical
and drug benefit cards and will provide
Part D sponsors with that flexibility
consistent with our approach under the
Medicare Prescription Drug Discount
Card and Transitional Assistance
Program. It is our intent, however, that
these standards require that Part D plans
use something other than an enrollee’s
social security number (SSN) as an
identifier on their cards given rising
concern over the increasing number of
cases regarding identity fraud using an
individual SSNs and privacy concerns.
We understand that this number is the
most familiar and known to the
beneficiaries but we will work to make
the drug card identification number and

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

process easy and convenient for
beneficiaries.
5. Special Rules for Out-of-Network
Access to Covered Part D Drugs at
Pharmacies (§ 423.124)
Section 1860D–4(b)(1)(C)(iii) of the
Act requires us to establish pharmacy
access standards that include rules for
adequate emergency access to covered
Part D drugs by Part D enrollees. Given
the inherent difficulties in establishing
emergency access standards for covered
Part D drugs, we proposed to meet the
requirements of section 1860D
4(b)(1)(C)(iii) of the Act by establishing
a broader out-of-network access
requirement. We proposed requiring
that Part D sponsors ensure that their
enrollees had adequate access to drugs
dispensed at out-of-network pharmacies
when they could not reasonably be
expected to obtain covered Part D drugs
at a network pharmacy. In the proposed
rule, we stated that we expected out-of­
network access to be guaranteed under
at least the following four scenarios:
• In cases in which a Part D enrollee
meets all of the following: is traveling
outside his or her Part D plan’s service
area; runs out of or loses his or her
covered Part D drug(s) or becomes ill
and needs a covered Part D drug; and
cannot access a network pharmacy;
• In cases in which a Part D enrollee
cannot obtain a covered Part D drug in
a timely manner within his or her
service area because, for example, there
is no network pharmacy within a
reasonable driving distance that
provides 24-hour-a-day/7-day-per-week
service;
• In cases in which a Part D enrollee
resides in a long-term care facility and
the contracted long-term care pharmacy
does not participate in his or her Part D
plan’s pharmacy network; and
• In cases in which a Part D enrollee
must fill a prescription for a covered
Part D drug, and that particular covered
Part D drug (for example, an orphan
drug or other specialty pharmaceutical
typically shipped directly from
manufacturers or special vendors) is not
regularly stocked at accessible network
retail or mail-order pharmacies. Both
the enrollee and his or her Part D plan
would have been financially responsible
for covered Part D drugs obtained at an
out-of-network pharmacy as described.
In the proposed rule, we specified that
such cost-sharing would have been
applied relative to the plan allowance
for that covered Part D drug. We
requested comments on how to further
define the term ‘‘plan allowance.’’
In addition to this cost-sharing, and as
provided under proposed
§ 423.124(b)(2), the enrollee would have

PO 00000

Frm 00075

Fmt 4701

Sfmt 4700

4267

been responsible for any difference in
price between the out-of-network
pharmacy’s usual and customary (U&C)
price and the plan allowance for that
covered Part D drug. We requested
public comments regarding our
definition of usual and customary price.
We also sought comments regarding our
proposal that the price differential
between out-of-network pharmacies’
U&C costs and the plan allowance be
counted as an incurred cost against the
out-of-pocket threshold consistent with
the definition of ‘‘incurred cost’’ in
§ 423.100 of the proposed rule. Finally,
we requested general comments
regarding our proposed payment rules
for covered Part D drugs obtained at out­
of-network pharmacies when enrollees
cannot reasonably obtain those drugs at
a network pharmacy.
Except as otherwise provided below,
the final rule adopts the out-of-network
access rules set forth in § 423.124 of the
proposed rule.
Comment: Many commenters
generally supported our proposed out­
of-network pharmacy proposal and said
beneficiaries—particularly those in rural
areas—should not be penalized for
going out-of-network when necessary.
However, some commenters felt the
proposal’s list of situations in which
access to out-of-network pharmacies
would be allowed was overly broad and
recommended limiting such access to
emergency situations only. Some
commenters expressed support for plans
having the discretion to establish out-of­
network access requirements, but not
being given a specific list of
requirements. Some expressed concern
that the message to beneficiaries might
be that they can go to out-of-network
pharmacies at will, resulting in
increased costs.
A number of commenters stated that
as proposed, allowing access to out-of­
network pharmacies is impractical
because these pharmacies cannot
determine if beneficiaries have met their
deductibles, are in the coverage gap, or
the amount their Part D plan would pay
had they gone to a participating
pharmacy. Out-of-network pharmacies
do not have access to data needed to
calculate payment rates other than their
own usual and customary price. These
commenters asked that we clarify that
out-of-network pharmacies may charge
beneficiaries their usual and customary
price that beneficiaries must be
responsible for submitting claims for
out-of-network medications they
purchase to their Part D plans, and that
plans must accept claims submitted to
them by beneficiaries once such a
purchase is made. One commenter
recommended Part D plans be given

E:\FR\FM\28JAR2.SGM

28JAR2

4268

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

time to retroactively modify claims
databases to accommodate paper claims
tracking, suggesting that we minimize
these requirements and be specific in
the timeline under which these
modifications are required (for example,
60 days).
Some commenters stated that the
proposal is inadequate for emergency
situations and should require Part D
plans to cover a temporary supply of
drugs. One commenter recommended
that we require Part D plans to establish
a mechanism to guarantee payment for
at least a 72-hour supply of any
medically necessary, covered Part D
drug obtained out-of-network. One
commenter disagreed with the proposal
entirely, stating that if the TRICARE
access standards were met by a Part D
plan, this should be a sufficient
guarantee of adequate network access.
Response: We expect that, given our
pharmacy access standards, Part D
enrollees will have adequate access to
network pharmacies. However, section
1860D–4(b)(1)(C)(iii) of the Act requires
us to establish pharmacy access
standards that include rules for
adequate emergency access to covered
Part D drugs by Part D enrollees. Given
the inherent difficulties in establishing
what constitutes an ‘‘emergency,’’ we
believe it is most appropriate to
establish a broader out-of-network
access requirement. Section
423.124(a)(1) of our final rule clarifies
that Part D plans are required to ensure
that their enrollees have adequate access
to drugs dispensed at out-of-network
pharmacies when they cannot
reasonably be expected to obtain
covered Part D drugs at a network
pharmacy. Provided that such access to
out-of-network pharmacies is not
routine, we expect that Part D plans
would guarantee out-of-network access
in cases in which an enrollee: (1) is
traveling outside his or her plan’s
service area, runs out of or loses his or
her covered Part D drugs or becomes ill
and needs a covered Part D drug, and
cannot access a network pharmacy; (2)
cannot obtain a covered Part D drug in
a timely manner within his or her
service area because, for example, there
is no network pharmacy within a
reasonable driving distance that
provides 24/7 service; (3) must fill a
prescription for a covered Part D drug,
and that particular drug (for example, an
orphan drug or other specialty
pharmaceutical) is not regularly stocked
at accessible network retail or mailorder pharmacies;; and (4) is provided
covered Part D drugs dispensed by an
out-of-network institution-based
pharmacy while a patient is in an
emergency department, provider-based

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

clinic, outpatient surgery, or other
outpatient setting. We are not
incorporating these scenarios into our
final regulations but will closely
monitor out-of-network access to ensure
that Part D plans are adequately meeting
beneficiaries’ out-of-network access
needs. In addition, plans must provide
coverage of drugs in physician’s offices
in cases in which a beneficiary is
administered a vaccine covered by Part
D (or another covered Part D drug that
is appropriately dispensed and
administered in a physician’s office).
We understand commenters’ concerns
that routine access to out-of-network
pharmacies could undermine a Part D
plan’s ability to achieve cost-savings for
both beneficiaries and the Medicare
program. For this reason, we would like
to clarify that § 423.124(c) of our final
rules requires Part D plans to establish
reasonable rules to ensure that enrollees
use out-of-network pharmacies in an
appropriate manner—provided they
ensure adequate access to out-of­
network pharmacies on a non-routine
basis when enrollees cannot reasonably
access network pharmacies. For
example, Part D plans may wish to limit
the amount of covered Part D drugs
dispensed at an out-of-network
pharmacy, require that a beneficiary
purchase maintenance medications via
mail-order for extended out-of-area
travel, or require a plan notification or
authorization process for individuals
who fill their prescriptions at out-of­
network pharmacies. Plans will be
required to disseminate information to
enrollees about their out-of-network
access policies as provided in
§ 423.128(b)(6) of our final rule.
We wish to clarify that enrollees
obtaining covered Part D drugs at out­
of-network pharmacies, which by virtue
of not being under contract with an
enrollee’s Part D plan will not have
access to the data needed to calculate
Part D plan payment rates, will have to
pay the pharmacy’s U&C price at the
point-of-sale, submit a paper claim to
their Part D plan, and wait for
reimbursement from the plan. Out-of­
network pharmacies will therefore be
made whole, relative to their U&C price
for a covered Part D drug, at the point
of sale.
Comment: One commenter stated that
patients in emergency departments,
provider-based clinics, outpatient
surgery, or under observation are often
administered drugs (self-administered
drugs or insulin, for example) under
physician order for medically necessary
conditions. These drugs are not covered
under Part A or Part B and are billed to
patients as a patient liability. For safety
and quality of care reasons, patients

PO 00000

Frm 00076

Fmt 4701

Sfmt 4700

often cannot bring their own
medications into hospitals or outpatient
settings when they are being treated for
other conditions. This commenter asked
for clarification regarding whether Part
D plans will cover self-administered
prescription drugs dispensed by
hospital pharmacies; if so, how
beneficiaries will avail themselves of
their Part D benefits; and, if not,
whether hospitals will have to provide
drug coding and other detail on billing
statements for beneficiaries so they can
submit those statements to their Part D
plans for reimbursement.
Response: As provided elsewhere in
this preamble, Part D plans may include
institutional pharmacies, including
hospital-based pharmacies, in their
networks, although these pharmacies
will not count toward the access
requirements Part D plans must meet
under § 423.120(a)(1) of our final rule.
To the extent hospital pharmacies are
included in Part D plan networks, Part
D enrollees who are furnished covered
Part D drugs by those pharmacies, the
situations noted by the commenter will
not be an issue. However, we recognize
that enrollees who are provided covered
Part D drugs by hospital and other
institution—based pharmacies under
the circumstances described by this
commenter cannot reasonably be
expected to obtain needed covered Part
D drugs at a network pharmacy. We
therefore clarify that we expect that Part
D plans guarantee out-of-network access
to covered Part D drugs in cases in
which an enrollee is provided covered
Part D drugs dispensed by an out-of­
network institution-based pharmacy
while a patient in an emergency
department, provider-based clinic,
outpatient surgery, or other outpatient
setting.
Comment: Two commenters
recommended that Part D plan enrollees
who live in different States during the
year should be allowed access to out-of­
network pharmacies, as with the other
four instances we proposed. One
commenter further argued that
restricting pharmacy access to mail
order during long absences from or trips
out of a Part D plan’s service area
violates the prohibition on exclusive use
of mail order pharmacies.
Response: The statutory authority for
our proposed out-of-network access
policy derives from the requirement, in
section 1860D–4(b)(1)(C)(iii) of the Act,
that our network access rules include
provisions for adequate emergency
access for Part D enrollees. Given that
narrow statutory authority, we do not
believe that access to out-of-network
pharmacies on a routine basis can be
justified under our out-of-network

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
access rules. Through our educational
efforts, we will encourage enrollees who
live in different States during a year
(snowbirds, for example) to enroll in
national or regional Part D plans that
will provide coverage in multiple areas,
or in Part D plans that include out-of­
area pharmacies in their networks.
However, to the extent that a beneficiary
is enrolled in a Part D plan that does not
provide such access, plans may not
allow routine out-of-network access
consistent with § 423.124(a)(2) of our
final rule.
Comment: Two commenters
emphasized the need to allow out-of­
network access for specialty
medications, such as orphan drugs, that
are not typically stocked in a retail
pharmacy. Their argument was echoed
by commenters who emphasized the
need to allow for out-of-network access
to home infusion therapy.
Response: We expect that Part D plans
will provide out-of-network access to
specialty pharmacies in cases in which
specialty medications, such as orphan
drugs, are not available at a network
pharmacy, as this is a case in which
enrollees could not reasonably be
expected to access their medications at
a network pharmacy. However, given
that out-of-network access to covered
Part D drugs may not be provided
routinely, consistent with
§ 423.124(a)(2) of our final rule, Part D
cannot not provide access to out-of­
network access to a specialty pharmacy
on an ongoing basis. As discussed
elsewhere in this preamble, our final
rule requires that Part D plans provide
adequate access to home infusion
pharmacies. We established this access
requirement to mitigate the need for
routine out-of-network access to home
infusion drugs. However, in cases in
which an enrollee cannot reasonably
access a home infusion pharmacy in his
or her Part D plan’s network, we expect
that plans will provide access to an out­
of-network home infusion pharmacy
consistent with § 423.124(a) of our final
rule.
Comment: Some commenters stated
that the final rule should clarify that
beneficiaries residing in a long-term
care facility should be allowed access to
long term care pharmacies as out-of­
network pharmacies, should the
pharmacy contracting with the longterm care facility in which they reside
not participate with their chosen Part D
plan. Another commenter thought that
our proposed policy vis-a`-vis
beneficiaries residing in long-term care
facilities is inappropriate given that our
authority for establishing such
requirements is based on emergency
access only.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Response: As noted previously, we
agree with the commenter who
questioned our authority for allowing
access to out-of-network long-term care
pharmacies on a routine basis. The
statutory authority for our proposed out­
of-network access policy derives from
the requirement, in section 1860D–
4(b)(1)(C)(iii) of the Act, that our
network access rules include provisions
for adequate emergency access for Part
D enrollees. Given that narrow statutory
authority, we do not believe that access
to out-of-network pharmacies on a
routine basis including in cases where
a beneficiary resides in a long-term care
facility whose contracted long-term care
pharmacy is not in his or her Part D
plan’s network can be justified under
our out-of-network access rules.
Comment: One commenter said that
physician offices should be considered
out-of-network pharmacies insofar as
they supply covered Part D drugs.
Response: We note that vaccines (and
other covered Part D drugs that are
appropriately dispensed and
administered in a physician’s office)
administered in a physician’s office will
be covered under our out-of-network
access rules at § 423.124(a)(2) of our
final rule, since Part D plan networks
are defined as pharmacy networks only.
A scenario under which a Part D
enrollee must obtain a Part D-covered
vaccine in a physician’s office
constitutes a situation in which out-of­
network access would be permitted
because a beneficiary could not
reasonably be expected to obtain that
vaccine at a network pharmacy. We
expect that the application of this
requirement will be limited to vaccines
and a handful of drugs (for example,
some injectable long-acting antipsychotics) that are appropriately
dispensed and administered in a
physician’s office and are not covered
under Part B, and that plans may
establish utilization management
policies and procedures to ensure that
out-of-network coverage is limited to
such covered Part D drugs. Enrollees
will be required to self-pay the
physician for the cost of the vaccine (or
other covered Part D drug appropriately
dispensed and administered in a
physician’s office) and submit a paper
claim for reimbursement by their Part D
plan.
Comment: Commenters generally
recommended the beneficiary pay the
difference between the network price
applicable to that beneficiary and the
maximum price charged to any Part D
plan with which the pharmacy
participates. However, they argue,
determining that amount would be
difficult because out-of-network

PO 00000

Frm 00077

Fmt 4701

Sfmt 4700

4269

pharmacies do not have access to the
data necessary to calculate that amount.
Some commenters specified that
beneficiaries purchasing drugs from an
out-of-network pharmacy in an
emergency situation should not be
charged anything more than the network
amount. Several commenters urged us
to exempt low-income beneficiaries
from any differential costs incurred for
visiting an out-of-network pharmacy.
One noted that we should monitor usage
of out-of-network pharmacies by lowincome beneficiaries.
Response: As provided in § 423.124(b)
of our final rule, if a Part D plan offers
coverage other than defined standard
coverage, it may require enrollees to not
only be responsible for any cost-sharing,
including a deductible, that would have
otherwise applied had the covered Part
D drug been purchased at a network
pharmacy, but also any differential
between the out-of-network pharmacy’s
(or provider’s) usual and customary
(U&C) price and the enrollee’s costsharing. However, given the cost-sharing
requirements for defined standard
coverage in § 423.104(d)(2)(A) of our
final rule, under which the cost-sharing
between the deductible and initial
coverage limit must be 25 percent of the
actual cost of a drug at the point of sale,
Part D plans offering defined standard
coverage may not offer such an out-of­
network differential. Instead, a Part D
plan offering defined standard coverage
must simply require its enrollees to pay
any deductible or cost-sharing, relative
to the out-of-network pharmacy’s (or
provider’s) usual and customary price.
The Part D plan will pay the difference
between the out-of-network pharmacy’s
(or provider’s) U&C price and the
enrollee’s cost-sharing.
In either case, enrollees will likely be
required to pay more for a covered Part
D drug purchased out-of-network than
one purchased at a network pharmacy,
though, as explained below, any such
differential will count toward an
enrollee’s TrOOP limit. In order to curb
unnecessary out-of-network use and
preserve Part D plans’ ability to achieve
cost-savings based on network
pharmacy use, we believe it is
appropriate that beneficiaries pay more
for out-of-network access to covered
Part D drugs.
As explained below, we will pay any
out-of-network differential for
appropriate non-routine use of out-of­
network pharmacies (or providers) for
full and other subsidy-eligible
individuals as part of our low-income
subsidy under subpart P of the final
rule.
Comment: Some commenters asked us
to clarify whether subsidy eligible

E:\FR\FM\28JAR2.SGM

28JAR2

4270

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

individuals who reside in long-term
care facilities will have to pay any out­
of-network differentials when obtaining
drugs from an out-of-network long-term
care pharmacy. Many recommended
that we pay the out-of-network
differential for institutionalized
enrollees who are subsidy eligible.
Response: We agree that for full and
other subsidy-eligible individuals—
whether they are institutionalized or
not—we should pay any out-of-network
differential for appropriate non-routine
use of out-of-network pharmacies. As
provided in § 423.104(d)(2) of our final
rule, we define enrollee cost sharing in
relation to the total cost of the drug to
the Part D plan and the beneficiary
(actual costs). Therefore, in cases where
the total payment is not limited by the
plan allowable because a drug is
obtained out-of-network, the cost
sharing can be defined as the total paid
by beneficiary, or in the case of a
subsidy eligible individual, as the total
cost sharing paid by both the beneficiary
and by us. This approach reconciles the
need to charge the OON differential and
to hold the subsidy eligible individual
liable for only the statutorily allowed
copayment amounts ($1/$3, $2/$5, or $0
in the case of institutionalized full
subsidy individuals who are full-benefit
dual eligible individuals).
Comment: A few commenters argued
that enrollees accessing covered Part D
drugs at out-of-network FQHC, rural and
I/T/U pharmacies should also be exempt
from any out-of-network differentials.
Response: We do not believe there
exists a compelling rationale to exempt
beneficiaries who access their drugs at
FQHC, rural, or I/T/U pharmacies.
However, to the extent such individuals
qualify as full or partial subsidy eligible
individuals, they will be responsible
only for the cost-sharing amounts
required in subpart P.
Comment: Comments on the
definition of ‘‘U&C price’’ fell into three
groups. Some commenters felt that the
U&C price should be defined as that
amount charged to cash paying
customers, excluding sales tax. Others
argued that the U&C price should be the
amount typically charged to senior
groups or other cash customers who are
directly given some sort of discount as
an inducement to make a purchase from
a given supplier. A third group of
commenters felt that the U&C price
should be the maximum the pharmacy
charges any customer covered by a Part
D plan. Several commenters noted that
we should not allow pharmacies to
manipulate their U&C prices and should
check them periodically to be sure they
were less than or equal to the average
wholesale price.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Response: We appreciate commenters’
suggestions. We believe our proposed
definition of the term ‘‘usual and
customary price’’ the price that a
pharmacy (or provider) charges a
customer who does not have any form
of prescription drug coverage is
adequate and are retaining it in
§ 423.100 of our final rule. We note, in
response to several commenters’
suggestions, that we do not have the
authority to require out-of-network
pharmacies to accept a particular price
(for example, the maximum price a
pharmacy charges any of its customers
enrolled in Part D plans) as their U&C
price. We believe that Part D plans, not
CMS, should be responsible for
monitoring of U&C prices for covered
Part D drugs at out-of-network
pharmacies, since, given that any price
differential paid by a beneficiary would
count toward the TrOOP threshold, they
ultimately have a vested interest in
limiting the costs associated with out-of­
network use.
Comment: With regard to the
definition of ‘‘plan allowance,’’ several
commenters recommended that it be
defined as ‘‘the lowest of contractual
discounts offered in a standard contract
or U&C price.’’ One commenter
recommended defining the term in CMS
guidance to permit consultation with
affected parties. One commenter pressed
for Part D plan flexibility so that they
could ensure the lowest prices for their
members.
Response: We have retained our
proposed definition of ‘‘plan allowance’’
in § 423.100 of our final rule in order to
provide Part D plans with maximum
flexibility to establish the most
appropriate plan allowance for drugs
obtained out-of-network.
Comment: One commenter asked for
clarification of the appeals process
relating to adverse coverage decisions
for out-of-network drugs.
Response: As provided under
§ 423.566(b)(1) of our final rule, a Part
D plan’s failure to pay for a covered Part
D drug furnished by an out-of-network
pharmacy is an action that is a coverage
determination.
Comment: Another commenter
wanted to be sure that out-of-network
pharmacies did not advertise their
services as Medicare covered so that
beneficiaries would not be confused.
Response: We believe that
beneficiaries should always receive
accurate and clear information about
their pharmacy benefits, and we believe
pharmacies must ensure that out-of­
network beneficiaries are not misled.
However, we have no authority under
the MMA to regulate pharmacies’
marketing activities. Marketing

PO 00000

Frm 00078

Fmt 4701

Sfmt 4700

activities of pharmacies may implicate
other Federal or State laws, however,
including, but not limited to, consumer
protection laws. Pharmacies may also be
subject to sanction under section 1140
of the Social Security Act if they
misrepresent an affiliation with, or
endorsement by the Medicare program.
6. Dissemination of Plan Information
(§ 423.128)
Our proposed rule established
beneficiary protection requirements
concerning the dissemination of Part D
information by Part D sponsors to
enrollees in, and individuals eligible to
enroll in, a Part D plan. Part D
information disseminated by Part D
sponsors to current or prospective Part
D enrollees will constitute marketing
materials and must be approved by us.
With the exception of the drugspecific information dissemination
requirements, many of the proposed
requirements duplicated information
dissemination requirements contained
in § 422.111 of our proposed MA rule
that are applicable to all MA plans,
including MA-PD plans. We proposed
applying the requirements of section
1860D–4(a) of the Act to other Part D
plans to ensure that all Part D eligible
enrollees have access to comparable
drug-specific information about Part D
plans.
a. Content of Plan Description
Proposed § 423.128(a) and (b)
complied with the stipulation in section
1860D–4(a)(1) of the Act that
requirements for the dissemination of
Part D information be similar to the
information dissemination requirements
for MA organizations under section
1852(c)(1) of the Act and as interpreted
in § 422.111(b).
In order to ensure that individuals
who are either eligible for, or enrolled
in, a Part D plan receive the information
they need to make informed choices
about their Part D coverage options, Part
D sponsors would be required to
disclose, to each enrollee in a Part D
plan offering qualified prescription drug
coverage, a detailed description of that
plan. This description must be provided
in a clear, accurate, and standardized
form at the time of enrollment and
annually, at a minimum, after
enrollment. The information provided
will be similar to the information MA
plans must disclose to their enrollees.
Except as otherwise provided below,
the final rule adopts the requirements
pertaining to plan content description
set forth in § 423.128(b) of the proposed
rule.
Comment: One commenter sought
clarification regarding what we mean by
‘‘standardized’’ in our requirement that

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Part D plans provide information to
enrollees in a ‘‘clear, accurate, and
standardized form.’’
Response: We expect Part D plans to
provide information about their benefit
packages in a manner that is consistent
with marketing guidelines that we will
make available to plans.
Comment: Several commenters
requested that we allow Part D plans the
flexibility to make plan information
available through the Internet. For the
convenience of beneficiaries as well as
to control costs, these commenters
recommend that we encourage the use
of more efficient information
distribution channels (for example,
Internet and email) to disseminate
detailed Part D plan information and
thus limit the distribution of paper
materials to situations in which that
makes sense. Another commenter
recommended that we clarify that, with
the express consent of the enrollee, Part
D plans may waive enrollees’ right to
request and receive any required
information in writing and allow for the
enrollee to obtain that information via a
plan website or email.
Response: We agree that some
beneficiaries may prefer to receive Part
D plan information electronically and
that the provision of plan information
through electronic means has the
potential to significantly reduce Part D
plans’ costs. However, a number of
Medicare beneficiaries still do not have
access to the Internet or prefer to receive
their information in written formats. We
have modified § 423.128(a) of our final
rule to note that we may specify the
manner in which plan information must
be disseminated to beneficiaries. We
clarify that information disseminated by
Part D plans as part of a plan
description under § 423.128(b), as well
as information disclosed upon enrollee
request under § 423.128(c), must be
provided in a written format and
delivered to beneficiaries via U.S. mail
unless a beneficiary explicitly
consents—by actively opting in—to
receive information electronically or via
telephone rather than by mail. The
electronic provision of Part D plan
information should simply be one
additional mechanism for Part D plans
to communicate with enrollees and
potential enrollees.
Comment: One commenter
recommended that Part D plans provide
information regarding any prior
authorization processes required for
certain drugs as part of their information
dissemination efforts regarding
formularies.
Response: We agree with this
commenter and have modified that
language at § 423.128(b)(4) to clarify that

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Part D plans must disclose information
about any utilization management
procedures they may use as part of the
formulary information they must
disseminate to beneficiaries.
Comment: One commenter
recommended that Part D plans be
required to provide a list of pharmacies
in their networks since the proposed
rule requires information only about the
types of pharmacies in plans’ networks.
Response: We believe the commenter
misinterpreted the provision at
§ 423.128(b)(5) of our proposed rule.
This provision, which we have retained
in our final rule, requires Part D
sponsors to disseminate information
about ‘‘the number, mix, and
distribution (addresses) of network
pharmacies.’’ We believe that requiring
Part D plans to disseminate information
about the addresses of network
pharmacy at which an enrollee may
reasonably be expected to obtain
covered Part D drugs is, in fact,
tantamount to requiring plans to
provide a list of network pharmacies
serving enrollees’ service areas. We
therefore clarify that Part D plans will
be expected to provide enrollees with a
list of network pharmacies, including
addresses, as well as information about
the number and mix of network
pharmacies available.
Comment: One commenter requested
greater detail regarding the contents of
the description of quality assurance
policies and procedures that Part D
plans must provide under
§ 423.128(b)(8) of our proposed rule.
Another commenter states that, as
written, the provision requiring Part D
plans to describe their quality assurance
policies and procedures did not indicate
a clear CMS-directed oversight and
enforcement structure. This commenter
argues that compliance monitoring and
enforcement would at best be indirect,
leaving us reliant on the results of
deemed status arrangements as set forth
in our proposed § 423.165.
Response: We expect plans to provide
descriptions of their policies and
procedures for concurrent drug
utilization review, retrospective drug
utilization review, and internal
medication error identification and
reduction systems. We also expect plans
to provide descriptions of their
medication therapy management
programs, including information
describing which enrollees are eligible
for such services. With respect to CMSdirected oversight and enforcement, we
have added reporting requirements to
§ 423.153(c) and § 423.153(d) of our
final rule, and we will specify the
details of these reporting requirements
in separate guidance.

PO 00000

Frm 00079

Fmt 4701

Sfmt 4700

4271

Comment: One commenter was
concerned that the transition of fullbenefit dual eligible individuals from
Medicaid to Medicare Part D on January
1, 2006 will likely lead full-benefit dual
eligible individuals to contact Medicaid
agencies for more information regarding
their new pharmacy benefits. This
commenter recommended that we
require Part D plans to include
information in their enrollee materials
that clarifies that State Medicaid
agencies are no longer the primary
providers of pharmacy benefits and
cannot answer questions about the
Medicare benefit, except as pertains to
limited supplemental coverage that
Medicaid may provide.
Response: Our education and
outreach efforts will ensure that
beneficiaries receive detailed
information regarding their transition
from Medicaid to Medicare for
prescription drug coverage. Therefore,
we do not believe it is necessary to
require Part D plans to include this
information in their materials.
b. Disclosure of Information upon
Request
In addition, in accordance with
section 1860D–4(a)(2) of the Act, the
proposed rule at § 423.128(c) provided
that a beneficiary who is eligible to
enroll in a Part D sponsor’s Part D plan
will have the right to obtain, upon
request, more detailed plan information.
Except as otherwise provided below, the
final rule adopts the standards set forth
in § 423.128(c) of the proposed rule.
Comment: A number of commenters
are supportive of the provision in the
proposed rule that required Part D plans
to make available information about
how to obtain information about the
formulary, but thought that this
requirement was insufficient given that
beneficiaries will need precise and
detailed formulary information to make
informed choices about enrollment.
These commenters recommend
requiring Part D plan descriptions to
include a detailed formulary listing not
only the drugs on the formulary, but
also any formulary tiers and
corresponding copayment amounts.
Response: We agree that it will be
critically important for Part D enrollees
and prospective enrollees to have access
to complete formulary information in
order to make the best possible Part D
plan selection for their particular
medical and prescription drug needs.
For this reason, we have modified the
formulary information requirements
under § 423.128(b)(4) such that Part D
plans will be required to include not
only information about the manner in
which the formulary functions
(including tiering structures and any

E:\FR\FM\28JAR2.SGM

28JAR2

4272

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

utilization management procedures
used), a process for obtaining an
exception to a Part D plan’s tiered costsharing structure or formulary, and a
description of how an enrollee may
obtain additional information on the
formulary, but also an actual list of
drugs included on the Part D plan’s
formulary. For each drug, this list must
indicate any cost-sharing tier
information applicable to that drug and
whether utilization management
programs apply.
Comment: Several commenters urged
us to expand the requirement that Part
D plans disclose, upon request,
information about the number of
disputes and their disposition in the
aggregate to include exceptions.
Another commenter noted that we
appeared to have made a mistake in
terms of our references to the provisions
on grievances and reconsiderations in
§ 423.128(c)(3) of our proposed rule.
Response: We agree with these
commenters. We have corrected the
reference errors in § 423.128(c)(3) of our
final rule and have expanded this
requirement such that Part D plans must
disclose, upon request, information
about the number of exceptions and
their disposition in the aggregate. We
did not originally include a reference to
exceptions in our proposed because
section 1852(C)(2) of the Act, on which
the requirements in our proposed
§ 423.128 were based, did not envision
an exceptions process for the MA
program.
Comment: Several commenters noted
that § 423.128(c)(1)(iii) of our proposed
rule required Part D plans to inform
enrollees about the potential for contract
termination, but only upon request.
However, these commenters felt
strongly that this information needed to
be included in all plan descriptions and
marketing materials, and not just if
requested by an enrollee or prospective
enrollee, particularly in light of
previous experience with volatility in
the Medicare+Choice market.
Response: We agree with these
commenters and have moved the
requirement that Part D plans disclose
information about the potential for
contract termination upon request only,
to § 423.128(b)(10), under which plans
will be required to disclose this
information as part of the plan
description provided at the time of
enrollment and at least annually
thereafter.
c. Provision of Specific Information
As required under section 1860D–
4(a)(3) of the Act and proposed at
§ 423.128(d) of our proposed rule, Part
D sponsors will be required to have in
place a mechanism for providing, on a

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

timely basis, specific information to
current and prospective enrollees upon
request. Such mechanisms will include:
• A toll-free customer call center;
• An Internet website; and
• Responses in writing upon
beneficiary request.
As proposed at § 423.128(d)(1)(i) and
(d)(1)(ii), Part D plans’ customer call
centers will be required to be open
during usual business hours and
provide customer telephone service,
including to pharmacists, in accordance
with standard business practices. We
strongly recommended, however, that
Part D plans provide some sort of 24­
hour-a-day/7 day-a-week access to their
toll-free customer call centers in order
to provide timely responses to timesensitive questions. In addition, we
proposed requiring that Part D plans
maintain websites as one means of
disseminating information to current
and prospective Part D enrollees that
would include the detailed plan
description information described in
§ 423.128(b) of our proposed rule.
Finally, Part D plans would be required
to respond to beneficiary requests for
specific information in writing, upon
request. This requirement was codified
in § 423.128(d)(3) of our proposed rule.
Except as otherwise provided below,
the final rule adopts the specific
information disclosure standards set
forth in § 423.128(d) of the proposed
rule.
Comment: Several commenters
recommended against requiring a 24­
hour/7-day-a-week call center because
of the high costs associated with
operating a call center during off-hours.
These commenters support operating a
call center during normal business
hours as required in the proposed
regulations. One commenter suggested
Part D plans consider developing a
website and IVR system that allows
beneficiaries to access their accounts to
determine their TrOOP balance.
Other commenters recommended
requiring Part D plans to operate 24/7
call centers, stating that the need for
prescription drugs may arise outside of
normal business hours and would
necessitate timely assistance and
resolution of coverage issues. These
commenters noted that the implications
of delayed access are potentially very
serious. One commenter stated that
advice hotlines should be available 24­
hour/7-days a week to assist enrollees
and pharmacies in understanding Part D
plan formularies. Another commenter
urged requiring extended service hours
especially during the initial enrollment
period and also ensuring that language
specialists are available.

PO 00000

Frm 00080

Fmt 4701

Sfmt 4700

Response: We have retained our
proposed requirement (in
§ 423.128(d)(1) of our final rule) that
Part D plans maintain a toll-free
customer call center that is open during
usual business hours and provides
customer telephone service, including
to pharmacists, in accordance with
standard business practices. However,
Part D plans should view this
requirement as a floor which they can
exceed—particularly at times such as
annual open enrollment periods. Access
to bilingual customer service
representatives may also be appropriate
in certain parts of the country. Given the
need for Part D plans to provide timely
information on certain time-sensitive
issues, however, we strongly
recommend that Part D plans also
provide access to 24/7 clinical advice
hotlines as is customary for many health
plans.
Comment: One commenter
recommended that we require formulary
updates to plans’ websites only when
actual changes are made, but no more
than once per month.
Response: We agree with this
commenter. We recognize the need for
formulary information to be kept as
current as possible to allow enrollees
and prospective enrollees to make the
best possible decisions regarding
coverage of their particular Part D drugs.
However, P&T committees typically
meet quarterly, and we expect that most
formulary changes recommended by a
P&T committee will be implemented
following regular committee meetings.
We have therefore changed the
requirement in § 423.128(d)(2)(ii) of our
proposed rule, which required weekly
updates of formulary information on
Part D plan websites, to require monthly
updates instead. This requirement is
codified at § 423.128(d)(2)(ii) of our
final rule.
Comment: One commenter asked us
to clarify that formulary information
will be made available through means
other than plan websites.
Response: As previously stated,
enrollees and prospective enrollees will
be able to obtain specific Part D plan
information, including formulary
information, upon request via telephone
and in writing. In addition, we have
revised our final rule at § 423.128(b)(4)
to require Part D plans to provide
enrollees with an actual list of drugs
included on the plan’s formulary.
Comment: One commenter requested
clarification that our requirement that
formulary information be posted on a
Part D plan website be limited to
including only a list of formulary drugs
and not the full range of clinical
information associated with those drugs.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Response: Plans will only be required
to include a list of drugs included on
their formularies—and not the clinical
information associated with those
drugs—under our information
dissemination requirements.
d. Claims Information
In accordance with the requirements
of section 1860D-(4)(a)(4) of the Act,
§ 423.128(e) of the proposed rule
required Part D sponsors to furnish to
enrollees who receive covered Part D
drugs an explanation of benefits (EOB).
EOBs will be required to be written in
a form easily understandable to
beneficiaries. In § 423.128(e)(6) of our
proposed rule, we proposed that an EOB
be provided at least monthly for those
utilizing their prescription drug benefits
in a given month.
We also proposed in § 423.128(e)(1)­
(5) that Part D plans’ EOBs include:
• A listing of the item or service for
which payment was made, as well as
the amount of such payment for each
item or service;
• A notice of the individual’s right to
request an itemized statement;
• Information regarding the
cumulative, year-to-date amount of
benefits provided relative to the
deductible, the initial coverage limit,
and the annual out-of-pocket threshold
for that year;
• A beneficiary’s cumulative, year­
to-date total of incurred costs (to the
extent practicable); and
• Information about any applicable
formulary changes.
Except as otherwise provided below,
the final rule adopts the EOB standards
set forth in § 423.128(e) of the proposed
rule.
Comment: Some commenters
supported the requirement to mail
enrollees an EOB each month that the
drug benefits are provided, as stated in
the proposed regulations. Some
commenters recommended
dissemination of the EOBs quarterly and
upon request of the enrollees rather than
monthly when prescription drug
benefits are provided.
Several commenters urged us to allow
Part D plans the flexibility to provide an
EOB to enrollees through means other
than mail, such via a plan website,
electronically through email, or by
telephone inquiry. One commenter
noted that it is not current practice for
health plans to mail enrollees an EOB
monthly and that this would raise
administrative costs. Some commenters
expressed their objection to providing
an EOB at pharmacies, stating this
would be far beyond pharmacies’
technological capabilities, and that
provision of the EOB via mail or

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

electronically should be plans’
responsibility.
Some commenters expressed that the
EOBs should also include information
about appeals right and processes,
information about formulary
information and plan terminations, and
information regarding whether the
deductible and out-of-pocket thresholds
have been met. Another commenter
stated that the EOB should be modified
to be applicable to beneficiaries who are
subsidy eligible individuals due to the
differences in the deductibles and
cumulative spending limits for these
individuals.
Response: We appreciate commenters’
feedback regarding our proposed EOB
requirements. As provided in
§ 423.128(e)(6) of our final rule, we are
retaining our proposed requirement that
an EOB be provided at least monthly for
those enrollees utilizing their
prescription drug benefits in a given
month. This requirement is consistent
with our policy regarding the Medicare
Summary Notice, which is provided
monthly for beneficiaries with Part A or
Part B utilization.
We believe it is most appropriate for
enrollees to receive a written EOB, via
U.S. mail, and have provided for this
under § 423.128(e) of our final rule.
Plans may offer additional mechanisms
for the provision of such information—
for example, via a website or call center.
Plans may provide the EOB through
alternative means electronically via
email, for example only to the extent
that enrollees affirmatively elect to
receive their EOBs in such a manner. In
the preamble, we suggested that Part D
plans might explore provision of EOBs
at the point-of-sale, but that statement
was in no way intended to impose a
requirement on pharmacies to provide
Part D plan information in the absence
of the technological capacity to do so.
We do not believe that the EOB is the
most appropriate mechanism for
provision of information about appeals
rights and processes or information
about plan terminations; this
information will be provided through
other mechanisms. We clarify, however,
that EOBs will be required to include
information regarding the cumulative,
year-to-date amount of benefits
provided relative to the deductible, the
initial coverage limit, and the annual
out-of-pocket threshold for that year, as
well as information about any upcoming
formulary changes. For low-income
beneficiaries, the information about the
cumulative, year-to-date total of
incurred costs provided by the Part D
plan in the EOB will include CMS
subsidy amounts that count toward
incurred costs.

PO 00000

Frm 00081

Fmt 4701

Sfmt 4700

4273

7. Public Disclosure of Pharmaceutical
Prices for Equivalent Drugs (§ 423.132)
Under section 1860D–4(k)(1) of the
Act, Part D sponsors will be required to
ensure that pharmacies inform enrollees
of any differential between the price of
a covered Part D drug to an enrollee and
the price of the lowest priced generic
version of that drug and available under
the Part D plan at that pharmacy. As
stipulated in our proposed rule, this
information will have to be provided at
the time the plan enrollee purchases the
drug, or in the case of drugs purchased
by mail order, at the time of delivery of
that drug. Disclosure of this information
will not be necessary, however, if the
particular covered Part D drug
purchased by an enrollee was the
lowest-priced generic version of that
drug available at a particular pharmacy.
As provided under section 1860D–
4(k)(2)(B) of the Act, we are permitted
to waive the requirement that
information on differential prices
between a covered Part D drug and
generic equivalent covered Part D drugs
be made available to Part D plan
enrollees at the point of sale (or at the
time of delivery of a drug purchased
through a mail-order pharmacy).
Accordingly, we proposed waiving the
requirement that information on lowestpriced generic drug equivalents be
provided to enrollees for covered Part D
drugs purchased by Part D plan
enrollees when those covered Part D
drugs are purchased at:
• Any pharmacy, when the
individual is enrolled in an MA private
fee-for-service plan that offers qualified
prescription drug coverage and provides
plan enrollees with access to covered
Part D drugs dispensed at all
pharmacies, without regard to whether
they are contracted network pharmacies,
and does not charge additional costsharing for access to covered Part D
drugs dispensed at all pharmacies;
• Out-of-network pharmacies;
• I/T/U network pharmacies; and
• Network pharmacies located in
any of the U.S. territories (American
Samoa, the Commonwealth of the
Northern Mariana Islands, Guam, Puerto
Rico, and the Virgin Islands). We
requested comments on the
appropriateness of the circumstances we
proposed for waiver of the requirements
in § 423.132(c) of our proposed rule, as
well as any additional circumstances we
may wish to consider.
We also proposed waiving the
requirement that information on
differential prices between a covered
Part D drug and generic equivalent
covered Part D drugs be made available
to Part D plan enrollees at the point of

E:\FR\FM\28JAR2.SGM

28JAR2

4274

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

sale when Part D plan enrollees obtain
covered Part D drugs in long-term care
pharmacies. We requested comments
regarding appropriate standards with
regard to the timing of disclosure of
generic price differentials to
institutionalized Part D enrollees.
Except as otherwise provided below,
the final rule adopts the standards for
public disclosure of pharmaceutical
prices for equivalent drugs set forth in
§ 423.132 of the proposed rule.
Comment: One commenter was
concerned about the administrative
burden the disclosure requirement
would impose at the community
pharmacy level and believed it was
essential for us to develop appropriate
guidance to minimize potential
problems. The commenter noted that
the administrative burden required to
calculate cost-sharing differences
should cause us to consider compliance
with the requirements to be
impracticable in all pharmacy settings
because while many community
pharmacies’ prescription processing
systems currently compare retail prices
for brand-name and generic
medications, the systems are not
equipped to compare the discount price
calculated by a Part D plan with the
potential discount price by a plan for a
generic drug. According to this
commenter, obtaining this discounted
generic price would require the
pharmacy to process and submit a
second prescription transaction for the
generic, and then require the pharmacy
to calculate the difference between the
two prescriptions; the need to compare
the enrollee’s cost-sharing under the
two scenarios would add more
challenges. Other commenters assured
us that this requirement is not
burdensome for retail pharmacies.
Response: As provided in section
1860D–4(k) of the Act, Part D plans
must provide that each pharmacy in
their networks with the exceptions that
we note in § 423.132(c) of our final rule
complies with the requirement to
disclose to beneficiaries information
about less expensive therapeutically
equivalent and bioequivalent covered
Part D drugs. Given this statutory
requirement, we cannot waive it
wholesale for all community
pharmacies. We do not expect this
requirement will be burdensome for
community pharmacists since, given
that, under § 423.132(b) of our final rule,
we are requiring disclosure of generic
differential information after a claim has
been adjudicated and for informational
purposes only. We clarify that we do not
expect pharmacies to become involved
in substituting a generic equivalent in
order for Part D plans to comply with

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

the disclosure requirement in
§ 423.132(a) of our final rule. We expect
that Part D plans will work with their
network pharmacies to operationalize
this requirement, but we do not expect
that it will be burdensome to the
pharmacy industry given the prevalence
of generic substitution and information
programs established by private plans in
the market today.
Comment: One commenter asked that
we define ‘‘lowest price’’ as determined
by the Part D plan at the point of sale.
Another commenter asked that we
clarify that ‘‘price’’ is defined as what
the enrollee would pay at the pharmacy
subject to the applicable cost sharing.
Two commenters recommended that
pricing comparison should be between
the brand name drug and the Maximum
Allowable Cost (MAC) established by
the Part D plan for the generic
equivalent to the branded drug. Another
commenter suggested allowing an
estimated price differential between
brand and non-MAC generics to be
made available to enrollees rather than
the exact cost differential between the
price of a covered Part D drug and the
lowest priced generic version because of
the technical limitations of plans (for
example, plans do not have a record of
generics in stock at all network
pharmacies). This commenter claims
that, otherwise, this requirement would
involve enormous administrative efforts
and costs for Part D plans. This
commenter suggested a reasonable
alternative would be allowing plans to
utilize historical dispensing patterns
and costs to have available relative price
information in the form of an estimate
of the price differential transmitted to
pharmacies in the electronic claim
response when a prescription is filled,
and that Part D plans would
contractually require pharmacies to
share this information at the point-of­
sale.
Response: Under section 1860D–4(k)
of the Act, Part D plans must provide
that each pharmacy in their networks
complies with the requirement to
disclose to beneficiaries information
about less expensive therapeutically
equivalent and bioequivalent covered
Part D drugs. Specifically, Part D plans
must provide information about the
differential between the price of the
covered Part D drug to the enrollee
(factoring in any applicable costsharing) and the price of the lowestpriced therapeutically equivalent and
bioequivalent drug available at that
pharmacy. We expect that Part D plans
will work with their network
pharmacies to operationalize this
requirement in the most efficient way
possible, and in a manner that complies

PO 00000

Frm 00082

Fmt 4701

Sfmt 4700

with our requirements under § 423.132
of our final rule.
Comment: One commenter
recommended that disclosure of the
generic drug price be the lowest priced
generic available at that pharmacy
because most pharmacies do not carry
multiple generic drug options for the
same generic entity.
Response: We agree with the
commenter and clarify that § 423.132(a)
requires pharmacies to disclose the
differential between the price of a
covered Part D drug and the price of the
lowest-priced generic version of that
drug available at that pharmacy,
consistent with section 1860D–4(k)(1) of
the Act.
Comment: One commenter
recommended only requiring
pharmacists to inform patients of price
differentials if they are dispensing a
high cost version of a ‘‘multiple source’’
drug that is available at that pharmacy.
This commenter noted that in many
cases these off-patent innovator brands,
also known as ‘‘multiple source’’ drugs,
are less costly than their generic
counterparts (for example, some brand
name version antibiotics are often equal
or lower in price than their generic
counterparts). Without this technical
correction, these drugs may not be
considered by some Part D plans as
generics and the pharmacists would not
inform the beneficiary that these lower
cost ‘‘multiple source’’ drugs are
available. Another commenter stated
that generics should be further defined
to include ‘‘multiple source’’ brand
name drugs.
Response: Section 1860D–4(k) of the
Act requires that each pharmacy that
‘‘dispenses a covered Part D drug shall
inform an enrollee of any differential
between the price of the drug to the
enrollee and the price of the lowest
priced generic covered part D drug
under the plan that is therapeutically
equivalent and bioequivalent and
available at such pharmacy.’’ While we
appreciate the commenter’s point that
off-patent innovator drugs may also be
available to enrollees at low prices, and
that this information should be
disclosed at the point of sale, the statute
very specifically applies the
requirement to the lowest priced generic
covered Part D drug available at that
pharmacy. Our definition of ‘‘generic
drug’’ at § 423.4 of the final rule does
not encompass an off-patent innovator
drug, however. In addition, given that
section 1860D–2(b)(4)(A)(i)(I) of the Act
specifically distinguishes between a
‘‘generic drug’’ and a ‘‘preferred drug
that is a multiple source drug,’’ we do
not believe it is appropriate to define a
generic drug to include a ‘‘multiple

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
source’’ brand-name version of a drug.
However, nothing in the statute would
prohibit Part D plans from requiring
their network pharmacies to provide
pricing information about lower priced
off-patent innovator drugs, and we
encourage Part D plans to do so in the
interest of ensuring Part D enrollees get
the best prices available for their
covered Part D drugs.
Comment: One commenter concerned
with the burden on pharmacies to
disclose pricing information stated that
the disclosure requirement should be
limited to cases in which an enrollee
asks for this information at the
pharmacy.
Response: As provided in section
1860D–4(k) of the Act, Part D plans
must require network pharmacies,
except for those which we have
specifically exempted from the
requirement, to disclose information
about price differentials. We cannot
limit this requirement to circumstances
in which an enrollee specifically asks
for the information. Furthermore, we
believe such disclosure will provide
enrollees—many of whom may not
know that less expensive generic
equivalents are available—with valuable
information that will save money for
beneficiaries, Part D plans, and
Medicare.
Comment: One commenter
recommended disclosure only when a
brand name drug is prescribed and the
prescriber has not stated ‘‘Do Not
Substitute.’’
Response: As provided in section
1860D–4(k) of the Act, Part D plans
must require network pharmacies,
except for those which we have
specifically exempted from the
requirement, to disclose information
about price differentials. We cannot
limit this requirement to circumstances
in which a prescriber has written a
prescription for a brand name drug and
has not specifically stated that the
pharmacy must not substitute the brand
name drug for a generic drug. We
believe such disclosure will provide
enrollees many of whom may not know
that less expensive generic equivalents
are available with valuable information
that will save money for beneficiaries,
Part D plans, and Medicare.
Comment: Two commenters suggested
that we clarify that the lowest price
generic version that is ‘‘therapeutically
equivalent and bioequivalent’’ is an ABrated generic equivalent, as AB rated
drugs have been proved to be
bioequivalent (rather than presumed to
be bioequivalent). Another commenter
suggested that we limit disclosure
requirements to products with ‘‘A’’

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

code, as specified in the FDA Orange
Book.
Response: We agree with these
commenters and clarify that the
disclosure requirement in § 423.132(a)
of our final rule applies only with
respect to AB-rated alternatives that are
therapeutically equivalent and
bioequivalent to the covered Part D drug
in question.
Comment: A number of commenters
recommended requiring mail-order
pharmacies to provide price
differentials before the prescription is
filled and delivered rather than at the
time of delivery. The commenters noted
that notification by the time of delivery
may be too late for beneficiaries to
receive possible savings, especially
since mail-order pharmacies provide a
90-day supply and generally have lower
dispensing rates than retail pharmacies.
Response: We do not believe it is
practicable to require a mail-order
pharmacy to contact an enrollee with
price differential information prior to
filling and delivering their prescription.
We believe such a requirement will
delay the delivery of needed drugs and
could potentially compromise
beneficiaries’ privacy given attempts by
mail-order pharmacies to contact plan
enrollees. In addition, such a
requirement would be inconsistent with
the requirement for retail pharmacies in
§ 423.132(b) of our final rule, which
does not require that Part D plans
provide price differential information
before the drug is purchased. We have
therefore retained our requirement, in
§ 423.132(b) of our final rule, that
disclosure must occur at the time of
delivery of the drug when a drug is
dispensed by a mail-order pharmacy.
Comment: One commenter
recommended that we not waive the
public disclosure requirement for
private fee-for-service plans offering
qualified prescription drug coverage
because there are many opportunities
for generic savings that might not be
realized in the absence of this
requirement.
Response: Section 1860D–12(d)(2) of
the Act specifically requires us to waive
the public disclosure requirement for
private fee-for-service MA plans that
offer qualified prescription drug
coverage and provide plan enrollees
with access without charging additional
cost-sharing for covered Part D drugs
dispensed at all pharmacies.
Commenter: One commenter strongly
urged that we waive the public
disclosure requirement for I/T/U
pharmacies because these pharmacies
bear beneficiaries’ out-of-pocket costs
for covered Part D drugs, obviating the
need for AI/AN Part D enrollees

PO 00000

Frm 00083

Fmt 4701

Sfmt 4700

4275

obtaining covered Part D drugs at these
pharmacies to have this price
comparison information.
Response: As provided both in our
proposed rule and in our final rule at
§ 423.132(c)(3), we will waive the public
disclosure requirement for I/T/U
pharmacies.
Comment: One commenter requested
that MA-PD plans be allowed to request
a waiver of the public disclosure
requirement.
Response: As provided in
§ 423.132(c)(5), we will consider
waiving the public disclosure
requirement under circumstances other
than those specified in § 423.132(c)(1)­
(4) to the extent that we deem such
compliance to be impossible or
impracticable. MA-PD plans seeking a
waiver of the public disclosure
requirement for any of their network
pharmacies will therefore have to
demonstrate to us that compliance with
the public disclosure requirement in
§ 423.132(a) is impossible or
impracticable. In addition we note that,
as provided in section 1860D–21(c), we
will waive any Part D requirement for
an MA-PD plan that conflicts with or
duplicates a requirement under Part C,
or the waiver of which is necessary to
promote coordination between benefits
provided under Parts C and D.
Comment: Another commenter
suggested that we specifically waive the
disclosure requirement for MA-PD plans
that own and operate their own
pharmacies because these pharmacies
may carry only one version of any
particular generic drug at any one time
(except when transitioning from one
manufacturer’s product to another).
Response: We do not believe the
commenter has provided us with
sufficient information to determine that
the public disclosure requirement is
impossible or impracticable for Part D
plans that own and operate their own
pharmacies and should therefore be
waived in regulation. However, we note
that MA-PD plans may also wish to
consider seeking a waiver of the public
disclosure requirement if, as provided
in section 1860D–21(c) of the Act, they
can demonstrate that this requirement
conflicts with or duplicates a
requirement under Part C, or that such
waiver is necessary to promote
coordination between benefits provided
under Parts C and D.
Comment: Several commenters
supported the applicability of disclosure
requirements to long-term care
pharmacies because many long-term
care facility residents and their families
would be interested to know if
additional savings are possible. Two
commenters opposed requiring price

E:\FR\FM\28JAR2.SGM

28JAR2

4276

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

disclosure at long-term care pharmacies
because most long-term care
beneficiaries do not have a choice
regarding long-term care pharmacies
and will likely qualify for low-income
subsidies for institutionalized Part D
enrollees who are full-benefit dual
eligible individuals (which means they
will have no out-of-pocket costs for
covered Part D drugs). Thus, this
information will have little effect on the
drugs used by this population and will
increase administrative burden for longterm care pharmacies.
Response: We agree with commenters
who thought long-term care residents
and their families would be interested to
know if additional covered Part D drug
savings are possible through the use of
generic drugs, particularly since not all
long-term care patients will qualify as
full subsidy eligible individuals. We are
therefore retaining the requirement we
proposed at § 423.132(d)(1) of our
proposed rule, but clarify—in
§ 423.132(d)(1) of our final rule—that
long-term care pharmacies will have to
provide information about differential
price information required under
§ 423.132(a) of our final rule to Part D
plans, which will, in turn, provide that
information to their institutionalized
enrollees via the explanation of benefits
required under § 423.128(e) of our final
rule.
8. Privacy, Confidentiality, and
Accuracy of Enrollee Records
(§ 423.136)
To the extent that the prescription
drug plan offered by a PDP sponsor
maintains medical records or other
health information regarding Part D
enrollees, § 423.136 of our proposed
rule required the PDP sponsor to meet
the same requirements regarding
confidentiality and accuracy of enrollee
records as MA organizations offering
MA plans must currently meet under 42
CFR 422.118, according to the
stipulations of section 1860D 4(i) of the
Act. We clarify that the requirements of
§ 423.136 do not apply to PACE
organizations and cost plans offering
qualified prescription drug coverage,
since these plans are subject to similar
requirements under § 460.200(e) and
§ 460.210, and § 417.486, respectively.
PDP sponsors will be required to—
• Abide by all Federal and State
laws regarding confidentiality and
disclosure of medical records or other
health and enrollment information,
including the Health Insurance
Portability and Accountability Act
(HIPAA) of 1996 and the privacy rule
promulgated under HIPAA;

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

• Ensure that medical information is
released only in accordance with
applicable Federal or State law;
• Maintain the records and
information in an accurate and timely
manner; and
• Ensure timely access by enrollees
to records and information pertaining to
them.
Prescription drug plans will be
covered entities under the HIPAA
Privacy Rule because they meet the
definition of ‘‘health plan,’’ as defined
in 45 CFR 160.103. The HHS Office for
Civil Rights (OCR) is responsible for
implementing and enforcing the HIPAA
Privacy Rule. OCR has authority to
investigate complaints, to conduct
compliance reviews, and to impose civil
money penalties for HIPAA Privacy
Rule violations. Thus, any violations by
PDP sponsor for its obligations under
the Privacy Rule as a covered entity are
subject to such enforcement by OCR.
OCR maintains a website with
frequently asked questions and other
compliance guidance at http://hhs.gov/
ocr/hipaa.
Comment: One commenter thought
that we should detail the confidentiality
and disclosure requirements set forth in
§ 423.136 of our proposed rule in the
final rule, instead of simply referencing
the requirements in § 422.118. This
commenter believes that because of the
importance of privacy protections, it is
necessary that required protections are
reiterated in our final rule and that PDP
sponsors adequately understand their
responsibilities to safeguard the health
information of Medicare beneficiaries.
Without privacy safeguards built
directly in the regulation, beneficiaries
could be vulnerable to another
amendment.
Response: We agree with this
commenter and have incorporated the
provisions of § 422.118 directly into
§ 423.136 of our final rule rather than
only referencing the provisions of
§ 422.118.
Comment: One commenter
recommends that we make privacy
provisions stronger for PDP sponsors,
not only reiterating the protections
under § 422.118, but also including
specific rules regarding uses and
disclosures of beneficiary information
that both incorporate the provisions of
important laws (such as the notice and
authorization provisions of the HIPAA
privacy rule) and strengthen the
provisions of those laws to better protect
the health information of Medicare
beneficiaries.
Response: The requirements in
§ 423.136 of our final rule make clear
that PDP sponsors must abide by all
Federal and State laws regarding

PO 00000

Frm 00084

Fmt 4701

Sfmt 4700

confidentiality and disclosure of
medical records, or other health and
enrollment information. This obligation
includes compliance with the
provisions of the HIPAA privacy rule
and its specific rules regarding uses and
disclosures of beneficiary information.
Because section 1860d–4(i) of the Act
stipulates that the privacy provisions
under section 1852(h) apply to
prescription drug plans in the ‘‘same’’
manner as they apply to MA plans
under Medicare Part C, we do not have
the statutory authority to expand upon
those provisions as the commenter
suggests.
Comment: One commenter
recommends that we permit MA
organizations and PDP sponsors to
prevent pharmacies in their networks
and out-of-network pharmacies from
releasing prescriber data to third parties.
Some MA organizations are concerned
that providing data to drug
manufacturers will have the negative
effect of assisting manufacturers in
targeting their marketing of
unnecessary, expensive drugs in a more
effective manner.
Response: Pharmacies that engage in
electronic transactions are covered
entities under HIPAA and are thus
required to comply with the HIPAA
Privacy Rule. As provided in 45 CFR
164.508, such pharmacies, as covered
entities, would be prohibited from
releasing individually identifiable
health information to drug
manufacturers for the purpose of the
manufacturers’ marketing unless a
patient specifically authorizes the
disclosure of his or her information for
this purpose. However, the Privacy Rule
protects patient information only, and is
therefore not implicated regarding the
sharing of information about
prescribers.
D. Cost Control and Quality
Improvement Requirements for Part D
Plans
1. Overview (Scope) (§ 423.150)
Subpart D of part 423 implements
provisions included in sections 1860D
4(c), 1860D–4(d), 1860D–4(e), 1860D–
4(j), and 1860D–21(d)(3) of the Act and
sections 102(b) and 109 of Title I of the
MMA. This subpart sets forth the
requirements related to the following:
• Drug utilization management
programs, Quality assurance measures
and systems, and Medication Therapy
Management programs (MTMP) for Part
D sponsors;
• Consumer satisfaction surveys of
Part D plans;
• Electronic prescription program;

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
• Quality Improvement Organization
(QIO) activities;
• Compliance deemed on the basis
of accreditation;
• Accreditation organizations;
• Procedures for the approval of
accreditation as a basis for deeming
compliance.
Below we summarize the proposed
provisions and respond to comments.
(For a detailed discussion of our
proposals, please refer to the proposed
rule (69 FR 46666)).
2. Drug Utilization Management,
Quality Assurance, and Medication
Therapy Management Programs
(MTMPs) (§ 423.153)
Proposed § 423.153(a) required each
Part D sponsor to establish a drug
utilization management program,
quality assurance measures and
systems, and a MTMP.
We combined these requirements into
one section of the regulation because
each of these requirements will impact
the quality and cost of care provided to
beneficiaries. We stated that our intent
was to ensure that the prescription drug
benefit was provided using state of the
art cost management and quality
assurance systems. We stated that we
also understood the overlapping nature
of these requirements and that
provisions under one requirement might
complement another requirement.
We also explained in the proposed
rule that although these requirements
were similar in their underlying goals,
they could also be quite different, and
that while we understood that some
members of the industry use various
quality assurance measures and systems
for controlling utilization and reducing
medication errors, less information was
available regarding MTMPs.
After receiving many comments on
our proposals, our final policy,
generally stated, is that cost control and
quality improvement requirements
describe minimum standards for drug
utilization management, quality
assurance, and MTMP so as to provide
plans with flexibility to develop,
implement, and update their programs
and systems to reflect changing best
practices and to continue to provide
beneficiaries with the best quality
prescription drug benefit at the lowest
possible cost. We expect plans to
continuously monitor their programs
and processes, identify opportunities for
improvement, and develop
improvement plans and strategies.
As we stated in the proposed rule, we
believe that the different program and
system requirements in this subpart
frequently overlap and therefore, plans
need flexibility to coordinate among the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

different requirements. Moreover,
flexibility is required to ensure that
plans can support forthcoming
electronic prescribing standards that we
envision will dramatically affect the
utilization management and quality
assurance landscape. Nevertheless,
despite the lack of specificity in our
requirements, we expect plans to
continually pursue innovative
improvements for their programs and
systems, and maximize technological
advances when appropriate.
Ultimately, the evaluation of these
programs and systems needs to be based
upon their impact on therapeutic
outcomes. As part of our commitment to
improving therapeutic outcomes
through the Medicare Prescription Drug
Benefit, we intend to work with
industry and other stakeholders to
develop a comprehensive strategy for
evaluating plan performance that
collectively considers multiple
standards and services affecting the cost
and quality of drug therapy. As industry
practices evolve, including the expected
expansion of electronic prescribing, we
believe meaningful performance
measures can be identified that will
validate best practices and provide
benchmarks that will spur further
program and system improvements.
Accordingly, we will work with
industry to identify new standards for
quality and performance that could
eventually become plan requirements.
Our goal is to ensure that the Medicare
Prescription Drug Benefit will always
provide beneficiaries with the highest
quality prescription drug benefits at the
lowest possible cost.
In addition to our efforts to work with
industry and stakeholders to develop
future performance measures and
standards for Part D plans, we also
intend to implement a plan for utilizing
Medicare prescription drug data to
improve the evidence on risks, benefits,
and overall costs of drug therapies for
the chronically ill and other Medicare
beneficiaries. This plan will be
developed through a public process and
implemented in a manner that preserves
the confidentiality of beneficiary
information.
a. Drug Utilization Management
Proposed § 423.153(b) provided
flexibility to Part D sponsors in their
design of drug utilization management,
and included minimum requirements
for drug utilization management
programs. These requirements were: (1)
that plans maintain a program that
includes incentives to reduce costs
where medically appropriate; and (2)
that plans maintain policies and
systems to assist in preventing overutilization and under-utilization of

PO 00000

Frm 00085

Fmt 4701

Sfmt 4700

4277

prescribed medications. The proposed
rule also stated that Part D sponsors
must inform enrollees of program
requirements, such as those involving
allowable refill timeframes, in order to
prevent unintended interruption in drug
therapy.
In addition, the proposed rule
contained a discussion about whether
drug utilization management techniques
should be under the direction and
oversight of a P&T Committee to ensure
an appropriate balance between clinical
efficacy and cost effectiveness. The
discussion on P&T Committees and
their oversight of drug utilization
management is contained in subpart C
of this final rule.
We invited comments on whether
there are industry standards for drug
utilization management and whether we
should adopt any of these standards.
Comment: We received numerous
comments on our proposed standards,
with several commenters supporting the
flexibility we proposed and stating that
there are no current, widely-accepted
standards in the area of drug utilization
management. Others supported
additional detail in the regulations and
suggested that we should further specify
drug utilization management program
standards. Some expressed concern that
plans could use drug utilization
management programs to restrict
utilization inappropriately. In addition,
several commenters recommended that
we require plans to focus equally on
over-utilization and under-utilization to
ensure appropriate utilization by
enrollees and to monitor plan
performance in these areas.
Response: Based on a literature
review by Booz-Allen-Hamilton3, and
the public comments received on this
topic, we are not adopting further
specifications for drug utilization
management requirements in the final
rule. While drug utilization
management is common practice, plans
appropriately employ a number of
different approaches (for example,
formularies, step therapy, tiered cost
sharing, prior authorization) and
different combinations of those
approaches, and therefore, while we
will consider additional standards in
the future, we are adopting the
flexibility we proposed in the proposed
rule. As we stated in the proposed rule,
we believe the competitive bidding and
premium setting processes, combined
with the requirements for transparency
and information availability, will
provide powerful incentives for plans to
3 Booz-Allen-Hamilton. Final Report for
Technical Support for the Implementation of Part
D. September 15, 2004.

E:\FR\FM\28JAR2.SGM

28JAR2

4278

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

innovate and adopt the best techniques
available.
Nevertheless, our requirement for
inclusion of incentives to reduce costs
when medically appropriate must be
interpreted broadly to mean that all
drug utilization management techniques
must be medically appropriate, and
§ 423.153(b) requires the utilization
management program established by
plans to be ‘‘reasonable and
appropriate.’’ As outlined in the
formulary guidance that will follow this
final rule, we will review plans’ drug
utilization management requirements to
ensure that beneficiaries are given
appropriate access to medically
necessary drugs in a timely manner. In
order to ensure that plans appropriately
employ drug utilization management
techniques, and to develop or adopt
further drug utilization management
performance measures, we agree with
commenters who recommended we
track plan performance in this area.
Therefore, we are adding a reporting
requirement at § 423.153(b)(3) and we
will specify the information that we will
require in separate guidance.
Comment: One commenter stated that
there are no standard measures for drug
utilization management and
recommended that we investigate using
HEDIS (Health plan Employer Data and
Information Set) measures as well as a
number of other specific measures.
Another commenter suggested that we
use total health care costs as a measure.
Response: As discussed in the
previous response, we intend to develop
or adopt further drug utilization
management performance measures in
the future. While we agree that no
universally accepted performance
measures currently exist, and are
therefore not prepared to specify further
requirements in regulation, we also
understand that there are some
performance measures being utilized
today and that these could provide
valuable information. We intend to
evaluate existing measures, such as
HEDIS, and could include these or
similar performance measures in our
formulary guidance or drug utilization
management reporting guidelines that
will follow publication of this rule. In
general, we expect drug utilization
management programs to ensure that
beneficiaries have appropriate access to
medically necessary drugs in a timely
manner.
b. Quality Assurance
As with the proposed regulations for
drug utilization management programs,
the proposed rule for quality assurance
measures and systems provided
minimum standards for quality
assurance measures and systems, while

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

for the most part giving plans flexibility
to design such measures and systems.
Proposed § 423.153(c) required Part D
sponsors to include quality assurance
measures and systems for: (1) reducing
medication errors; (2) reducing adverse
drug interactions; and, (3) improving
medication use. It also proposed to
require plans to establish requirements
for: (1) drug utilization review (DUR);
(2) patient counseling; and, (3) patient
information record-keeping.
In the proposed rule, we stated that
the DUR, patient counseling and patient
information record-keeping
requirements would generally need to
comply with section 4401 of the
Omnibus Reconciliation Act of 1990 as
codified in § 456.705 and section
1927(g)(2)(A) of the Act, and we stated
that we were considering such specific
requirements for the final rule.
Although those regulations were written
specifically for the Medicaid
population, we stated that we
understood that they describe currently
accepted standards for contemporary
pharmacy practice, and our intent was
to require plans to continue to comply
with contemporary standards. We
solicited comment on whether the
Medicaid standards were in fact
industry standards, whether they are
appropriate standards for part D, and if
they are, how they should be adapted
for use in Part D. We also stated our
understanding that some members of
industry use additional quality
assurance measures and systems. We
invited comments on whether there
were additional industry standards that
we might adopt. Furthermore, we
proposed that Part D sponsors will be
required to have systems and measures
established to ensure that network
pharmacy providers are complying with
the plans’ quality assurance
requirements. We requested comments
on the costs and challenges associated
with these systems and measures.
Comment: Most commenters agreed
that the relevant parts of OBRA 90 for
DUR, patient counseling and patient
information record-keeping describe
widely accepted standards for pharmacy
practice. While no other suggestions for
widely accepted standards of pharmacy
practice were offered, one commenter
indicated that these requirements will
not adequately cover appropriate
standards for home infusion
pharmacies, which the commenter
recommended should also require
patient interviews and clinical
assessments. Alternatively, several
commenters recommended that we
defer to State laws and State board of
pharmacy regulations regarding
pharmacy practice standards instead of

PO 00000

Frm 00086

Fmt 4701

Sfmt 4700

creating a redundant Federal standard
for pharmacy practice.
Response: The overwhelming majority
of comments confirmed our
understanding that the relevant parts of
OBRA90 for DUR, patient counseling,
and patient information record-keeping
generally describe widely accepted
standards of pharmacy practice for both
Medicaid and Non-Medicaid patients.
We find that almost all of the State
boards of pharmacy have adopted
regulations for pharmacy practice that,
at a minimum, generally reflect these
relevant parts of the OBRA 90
requirements. However, upon
reconsideration, since our intent was to
ensure that plans provided access to
network providers that are required to
comply with contemporary pharmacy
practice standards, and not to create a
new Federal standard for pharmacy
practice, we agree with commenters that
recommended that we defer to existing
authority for regulating pharmacy
practice. In fact, this is consistent with
the Department of Health and Human
Service’s (HHS) general position of
deferring to States for regulating the
practice of pharmacy. Therefore, our
requirement at § 423.153(c)(1) in the
final rule states that plans must provide
us with representation that their
network providers are required to
comply with minimum standards for
pharmacy practice established by the
States.
While we understand that additional
quality standards might apply to
specific pharmacy practice-settings such
as home infusion pharmacy, specialty
pharmacy and long-term care pharmacy
practice, we are not prepared to adopt
additional, practice-setting specific
Federal standards at this time. We
believe that current pharmacy practice
standards established by the States,
whether or not a State has additional
standards for specific pharmacy
practice-settings, still provide
applicable minimum standards for all
pharmacy practice-settings.
Nevertheless, we encourage plans and
their network pharmacy providers to
establish and agree upon additional
quality assurance standards as
necessary, including those required for
accreditation by recognized accrediting
organizations.
Comment: Several commenters stated
that concurrent and retrospective drug
utilization review (DUR) systems
illustrate successful examples of
industry practices that help prevent
inappropriate drug therapy. Concurrent
DUR systems are used to identify
potential inappropriate drug therapy
before a patient receives a prescription
while retrospective DUR systems can

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
often identify patterns of potential
inappropriate prescribing and drug
utilization based upon drug claim
history.
Response: Based upon these
comments as well as similar information
provided in the Booz-Allen-Hamilton
report, we agree that concurrent and
retrospective DUR must be components
of the quality assurance systems and
measures to be implemented by Part D
plans. Accordingly, we have specified
requirements for concurrent and
retrospective DUR systems, policies,
and procedures at § 423.153(c)(2) and
§ 423.153(c)(3), respectively.
In the proposed rule, we stated that
elements we viewed as desirable for
quality assurance systems were: (1)
electronic prescribing; (2) clinical
decision support systems; (3)
educational interventions; (4) bar codes;
(5) adverse event reporting systems;
and, (6) provider and patient education.
While we did not expect Part D plans
to adopt all of these elements, we stated
that we expected substantial innovation
and rapid development of improved
quality assurance systems in the new
competitive and transparent market
being created by the new Part D benefit.
We invited comments on which, if
any, elements of a quality assurance
system should be contained in our
program requirements. We were
particularly interested in best practices
in quality assurance, costs and benefits
associated with each element, the
challenges involved in implementing
quality assurance measures and
systems, types of data useful for
reducing medication errors, associated
costs and challenges with collecting this
data, and how these data could best be
communicated to providers and
beneficiaries to improve medication use.
We noted that the MMA does not
define or explain the term ‘‘medication
error.’’ Nevertheless, we stated that we
believe a common definition was
important. Therefore, we cited the
following definition as one that we
might use initially in interpretive
guidance, which was previously
adopted by the FDA in its proposed rule
requiring bar codes on human drug
products:
‘‘Any preventable event that may cause or
lead to inappropriate medication use or
patient harm while the medication is in the
control of the healthcare professional,
patient, or consumer. Such events may be
related to professional practice; healthcare
products, procedures, and systems, including
prescribing; order communication; product
labeling, packaging, and nomenclature;
compounding; dispensing; distribution;
administration; education; monitoring; and
use.’’ (See 68 FR 12500 (March 14, 2003)).

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

We indicated that in the future we
may require quality measures that
include error reports and stated that we
could use this information to evaluate
plans. In addition, we indicated that we
may publish this information for
enrollees to use when comparing and
choosing their individual plans.
Therefore, we invited specific
comments on how we could evaluate
Part D plans based on the types of
quality assurance measures and systems
they have in place, on this proposed
definition of ‘‘medication error’’, on
how error rates can be used to compare
and evaluate plans, and on how such
information could best be provided to
beneficiaries to assist them in making
their choices among plans.
Comment: A number of commenters
recommended we include all elements
discussed in the proposed rule
including decision support, electronic
prescribing, bar codes, adverse event
reports, and provider and patient
education. Most of them recommended
that we require adverse event and
medication error tracking systems.
However, many commenters
recommended that these tracking
systems be used internally and that
reports not be sent to CMS or made
public. These commenters argued that
there is too much inconsistency in the
definitions used in the field and that an
external reporting requirement would
actually be counter productive for
quality improvement. While several
commenters generally thought our
proposed definition for ‘‘medication
error’’ was accurate, these same
commenters stated that such a
definition would need to be narrowed to
prove useful for consistent reporting
among the plans.
Response: As to all the elements that
we listed in the preamble, we agree with
the many industry organizations that
there are no well accepted industry
standards to make these mandatory
requirements. The Booz-Allen-Hamilton
report4 supports this finding. We
continue to believe that these are
desirable goals and have found that
many organizations are already using
them. We expect that electronic
prescribing will greatly increase the
availability of clinical decision support.
We intend to work with various
stakeholders to further develop these
and other quality assurance systems
enhancements.
We agree with commenters that there
are inconsistencies associated with the
reporting of adverse events and
medication errors. Moreover, we are not
convinced, based upon many of the

PO 00000

4Ibid.

Frm 00087

Fmt 4701

Sfmt 4700

4279

comments received, that an external
reporting requirement for medication
errors, even if we provided a more
specific and narrow definition of
‘‘medication error’’, will lead to
improved quality of care. Therefore,
instead of requiring plans to report
medication errors to us, we require
plans to implement internal medication
error identification and reduction
systems, and we have added this
requirement at § 423.153(c)(4). We are
also requiring plans to provide us with
information concerning their quality
assurance measures and systems, in
accordance with guidelines published
by us. In addition, we encourage plans
to utilize the FDA Medwatch form for
reporting adverse events, as well as
educating prescribers and pharmacy
providers about its availability. Finally,
although we will not require external
medication error reporting at this time,
we maintain that our proposed
definition of ‘‘medication error’’ can
still serve as appropriate guidance for
internal medication error identification
and reduction systems.
c. Medication Therapy Management
Programs (MTMPs)
Proposed § 423.153(d) required Part D
sponsors to establish an MTMP
described in section 1860D–4(c)(2) of
the Act that is designed to optimize
therapeutic outcomes for targeted
beneficiaries by improving medication
use and reducing adverse drug events,
including adverse drug interactions, that
may be furnished by a pharmacist, and
that may distinguish between services
in ambulatory and institutional settings.
We stated that MTMPs may include
elements designed to promote (for
targeted beneficiaries):
• Enhanced enrollee
understanding—through beneficiary
education counseling, and other means
that promotes the appropriate use of
medications and reduces the risk of
potentially adverse events associated
with the use of medications.
• Increased enrollee adherence to
prescription medication regimens (for
example, through medication refill
reminders, special packaging,
compliance programs, and other
appropriate means).
• Detection of adverse drug events
and patterns of over-use and under-use
of prescription drugs.
We proposed that in order to promote
these elements and optimize therapeutic
outcomes for targeted beneficiaries, we
envision MTMPs potentially spanning a
range of services, from simple to
complex. In addition to those
mentioned in the statute, services could
include, but may not be limited to,
performing patient health status

E:\FR\FM\28JAR2.SGM

28JAR2

4280

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

assessments, formulating prescription
drug treatment plans, managing high
cost specialty medications, evaluating
and monitoring patient response to drug
therapy, providing education and
training, coordinating medication
therapy with other care management
services, and participating in Statepermitted collaborative drug therapy
management.
We specifically sought comment on
MTMP best practices, essential
components of successful MTMPs,
appropriate MTMP providers, service
level requirements, quality assurance
requirements for MTMPs, information
on effective MTMP services that could
be publicized and used by beneficiaries,
and other effective steps to make
valuable, proven MTMP services
available to beneficiaries.
Comment: Numerous commenters
recommended that we specifically
define a minimum package of services
that all plans must offer for MTMPs,
because plans will not have the
economic incentives to offer adequate
MTMP services otherwise, or because
different plans will offer such different
services that the quality of services
provided will vary significantly.
Although comments suggested a wide
variety of possible MTMP services,
common elements identified in several
best practice examples provided in the
comments included: (1) Initial
assessment/patient interview; (2)
Development of a drug plan identifying
goals for therapy; and, (3) Monitoring
and evaluation of therapy. Nevertheless,
a number of commenters recommended
that we maintain the level of specificity
contained in the proposed rule. These
commenters stated that no widely
accepted MTMP standards exist and
plans need flexibility to develop and
implement MTMPs that can best meet
the needs of their specific patient
populations and therefore, achieve the
best outcomes.
Response: After reviewing extensive
comments and conducting additional
research, we believe that insufficient
standards and performance measures
exist to support further specification for
MTMP services and service level
requirements, and therefore we are
adopting the flexibility proposed in the
proposed rule. Although best practice
examples identified some common
elements, neither the Booz-AllenHamilton report, nor any comments
submitted to us, showed that these
MTMPs reflected widely accepted
standards of practice. In fact, until the
Pharmacist Provider Coalition’s recent
publication of their definition of MTMP,
no widely agreed upon definition of
MTMP existed, let alone standards and

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

measures. While we understand the
concern with potential disincentives for
part D plans to develop robust MTMPs,
we are not adopting additional
regulatory requirements at this time
because it us unclear which specific,
additional requirements would enhance
MTMPs, and ultimately improve
therapeutic outcomes for part D
beneficiaries.
We continue to believe that MTMPs
can and must offer appropriate services
for targeted beneficiaries. However, we
are concerned that further premature
regulatory requirements at this time
might not only fail to improve MTMPs,
but could negatively impact their
development. Requiring a universal set
of minimum services and service levels,
without fully understanding how they
could effectively be implemented on a
much larger platform than illustrated in
best practice examples, could result in
MTMPs becoming perfunctory services
offered just to satisfy regulatory
requirements as opposed to patient
focused services aimed at improving
therapeutic outcomes. For example,
several of the best practice examples
stressed the importance of collaboration
with prescribers to ensure that MTMP is
successful. However, simply requiring
specific services and service delivery
mechanisms will not do anything to
ensure successful collaboration.
Therefore, we believe that at the outset
of the Medicare Prescription Drug
Benefit, plans must have maximum
flexibility to develop MTMPs that can
achieve the statutory goal of improving
therapeutic outcomes.
Notwithstanding the lack of current
MTMP standards and performance
measures, we believe that MTMP must
evolve and become a cornerstone of the
Medicare Prescription Drug Benefit.
With an understanding that the
introduction of MTMP requirements can
significantly impact the current practice
of pharmacy, we intend to utilize the
Medicare Prescription Drug Benefit as a
platform for driving the quality
improvement of prescription drug
therapy. We require plans to report
details on their respective MTMPs, and
we intend to collaborate further with
industry to develop measures that can
be used to evaluate programs and
establish appropriate standards. Our
goal is to evaluate MTMPs within the
context of an overall strategy that
evaluates not only MTMP, but also other
quality of care programs, standards, and
services, such as drug utilization
management, drug utilization review,
chronic care improvement programs,
and the role of QIOs. In so doing, we
believe that we will identify best
practices that will evolve into industry

PO 00000

Frm 00088

Fmt 4701

Sfmt 4700

practice standards and could eventually
be adopted as our standards.
Comment: Several commenters
recommended that we require plans to
allow beneficiaries to receive MTMP
services from their network/non­
network provider of choice. In addition,
several commenters recommend that we
require plans to offer MTMPs that favor
face-to-face consultations over other
forms of intervention.
Response: Consistent with our overall
approach to MTMPs, at this time we
believe plans need the discretion to
decide on which methods and which
providers are best for providing MTMP
services available under their specific
MTMP. We assume that such providers
will include some network pharmacy
providers, but plans are not obligated to
use any specific providers as long as
those providing services for the plan are
qualified to provide such services.
Furthermore, although we indicated in
the proposed rule that we believe
pharmacists will be the primary
providers of these services, and that we
believe beneficiary choice and on-going
beneficiary-provider relationships
should play a role in determining the
appropriate providers, we recognize that
such determinations must be made in
the context of the specific, overall
program design. Moreover, while we
understand that face-to-face
consultations can offer advantages over
other methods of service delivery, it is
still but one component of a successful
MTMP. Successful MTMPs will need to
consider and coordinate not only the
method of communication and the
providers of services, but also other
components such as the content of the
service, the qualifications of the
providers, the identification of targeted
beneficiaries, and the documentation
requirements associated with services
performed. Because plans are
responsible for designing the programs
to improve therapeutic outcomes, plans
will be in position to make the
determinations that will maximize
overall MTMP effectiveness, taking into
account all factors that influence
successful MTMP.
In addition, while section1860D–
4(b)(1)(C)(iii) of the Act requires us to
establish pharmacy access standards
that include rules for adequate
emergency access to covered part D
drugs, we do not believe the same
authority applies to out of network
access for MTMP services. Unlike
situations when patients face an urgent
need for covered Part D drugs but do not
have access to a network provider, we
do not believe this urgent need rationale
reasonably applies to MTMP. In
addition, the Congress clearly knows

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
how to require out-of-network access
and did so specifically for Part D drugs
in emergency situations. Accordingly,
we can not require plans to offer MTMP
services through out-of-network
pharmacies.
Comment: One commenter noted that
MTMP services will fall under the
consideration of State boards of
pharmacy and how States have defined
the practice of pharmacy and scope of
services which pharmacists are legally
able to provide to patients. Therefore,
this commenter requested that we work
with States and their boards of
pharmacy to prevent conflicts between
MTMP under the Medicare Prescription
Drug Benefit and State definitions of
pharmacy practice and scope of
allowable pharmacist activities.
Response: Generally, unless there is a
conflict with Federal law, we will defer
to State laws and regulations pertaining
to the practice of pharmacy. We do not
believe our current MTMP requirements
pose any conflicts with State laws and
therefore, plans need to develop MTMPs
that comply with State laws and
regulations.
Comment: Several commenters
recommended that we clarify that
providers can offer MTMP to nontargeted beneficiaries and bill the
beneficiaries for these services.
Response: We agree that providers can
offer MTMP services to non-targeted
beneficiaries because MTMP in these
circumstances is not part of the
Medicare Prescription Drug Benefit.
Providers need to notify beneficiaries
receiving these services that the services
are not offered as part of the Medicare
Prescription Drug Benefit and therefore,
the beneficiary is responsible for all of
the cost of the MTMP.
Similarly, if plans choose to offer
MTMP to non-targeted beneficiaries,
beneficiaries must be notified that they
are responsible for 100 percent of the
cost. Moreover, the costs for these
services fall entirely outside the Part D
cost sharing structure and do not count
for purposes of tracking beneficiaries’
total costs, out-of-pocket costs, or for
purposes of reinsurance and risk sharing
with Medicare.
Comment: Several commenters
recommended that we prohibit plans
from implementing MTMPs as a
utilization management tool geared
towards shifting market share as
opposed to improving therapeutic
outcomes.
Response: We agree that MTMPs are
more than utilization management
programs focused on shifting marketshare. Part D plans must implement
MTMPs designed to optimize
therapeutic outcomes by improving

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

medication use and reducing the risk of
adverse drug events, including adverse
drug interactions. Plan sponsors will
need to coordinate their MTMPs and
utilization management strategies to
improve therapeutic outcomes at the
lowest possible costs.
In the proposed rule, we proposed
that MTMP fees be treated as
administrative fees and incorporated
into the premium, rather than being
billed to the beneficiary on a case-by­
case basis. We noted that while section
1860D–4(c)(2)(E) of the Act specifies
that the time and resources necessary to
implement the MTMPs must be taken
into account when establishing fees, it
does not specify how these fees should
be paid. We stated our belief that fees
associated with provision of MTMP
services are separate and distinct from
dispensing fees discussed in § 423.100.
Although section 1860D–4(c)(2)(E) of
the Act states that Part D sponsors must
disclose to the Secretary the amount of
‘‘any such management or dispensing
fees’’, it merely governs disclosure and
does not require that MTMP be included
in the dispensing fee (indeed the Act
distinguishes management fees from
dispensing fees that are part of
individual prescriptions).
Comment: Most commenters agreed
with our interpretation that MTMP
should be considered an administrative
cost as opposed to a benefit, thereby
preventing direct beneficiary cost
sharing for MTMP services.
Response: We agree that direct
beneficiary cost sharing for MTMP
services could negatively impact
targeted beneficiary participation and
therefore, our final policy is to consider
MTMP as an administrative cost
(included in the plan bid), incident to
appropriate drug therapy, and not an
additional benefit.
Comment: Many commenters
recommended that we include reporting
requirements in the final regulation,
specifying, for example, that plans
provide detailed policies and
procedures for implementing their
MTMPs and associated performance
measures for evaluating the impact on
therapeutic outcomes.
Response: We agree with these
commenters that we must include a
reporting requirement for MTMPs. As
we work with industry and other
stakeholders to improve the therapeutic
outcomes by optimizing prescription
drug therapy, we will need detailed
information about each MTMP.
Therefore, we are adding a reporting
requirement at § 423.153(d)(6) and we
will specify the information that we will
require in separate guidance.

PO 00000

Frm 00089

Fmt 4701

Sfmt 4700

4281

Comment: Several commenters
suggested that we specifically involve
QIOs with the collecting and analyzing
of data from MTMPs and establish a
mechanism for QIOs to secure
information from medical claims to
identify targets.
Response: We believe that QIOs could
play a significant role with MTMPs and
this will be reflected in our contracts
with the QIOs. Specific technical
assistance could include collecting and
analyzing MTMP data.
Comment: Several commenters
responded to our request for incentives
that would help drive the creation and
evolution of significant MTMPs by
suggesting pay-for-performance
incentives and minimum renewal
criteria, both based upon mutually
agreed upon thresholds of patient care.
Response: We have a more complete
discussion of pay-for-performance in the
quality improvement section of the
preamble to the final Title II rule. We
are conducting several demonstrations
to test this approach and we are very
interested in studying this direction for
plans. Plans are free to develop such
arrangements with their providers, and
we encourage them to do so. Such
arrangements have existed for a number
of years in the Medicare Advantage
program. Plans will need to be mindful
of any restrictions imposed by the antikickback statute, and those needing
further clarification may want to use the
OIG’s advisory opinion process to
obtain guidance relating to specific
transactions and arrangements.
Comment: CMS should clarify that
MTMP services are voluntary and that
targeted beneficiaries are under no
obligation to participate with programs
in order to receive prescription drug
benefits.
Response: We agree that beneficiaries
must not be obligated to participate in
MTMPs. While we hope that
beneficiaries will participate to improve
their therapeutic outcomes,
beneficiaries must not be denied access
to prescription drugs based upon failure
to participate in MTMPs.
Comment: One commenter
recommended that we require Part D
plans to separate MTMP services
agreements with providers from
standard network provider contracts to
reduce potential conflict of interest.
Response: Since we do not know who
will be providing MTMP services, it is
premature for us to require specific
terms and conditions for such contracts.
While MTMP service providers will
likely include some network pharmacy
providers, Part D plans will need to
specify, in their applications, their
approach to determining MTMP fees

E:\FR\FM\28JAR2.SGM

28JAR2

4282

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

which accounts for the time and
resources necessary to perform the
services. In addition, plans need to
comply with any restrictions imposed
by the anti-kickback statute.
Comment: One commenter
recommended that we change the
language at § 423.153(d)(1)(i) from
‘‘must assure’’ to ‘‘must have processes
in place so that.’’
Response: Upon review of the
proposed language, we agree that
§ 423.153(d)(1)(i) must be changed. We
have changed ‘‘must assure’’ to ‘‘is
designed to ensure.’’ We believe this
language does not impact the intent but
better reflects what is required of
MTMPs.
Section 1860D–4(c)(2)(A)(ii) of the
Act describes targeted beneficiaries as
Part D individuals who: (1) have
multiple chronic diseases (such as
diabetes, asthma, hypertension,
hyperlipidemia, and congestive heart
failure); (2) are taking multiple covered
part D drugs; and (3) are identified as
likely to incur annual costs for covered
Part D drugs that exceed a level
specified by the Secretary, and we
codified this requirement at proposed
§ 423.153(d)(2).
We invited comment on further
defining ‘‘multiple chronic diseases’’
and ‘‘multiple covered Part D drugs,’’
and whether we should add further
specifications or leave such
determinations to the plans.
Furthermore, we invited comment on
whether we should set the cost
threshold for determining targeted
beneficiaries or if this determination
could also be left up to the plans.
Generally, we invited comment on
disease, drug and cost issues that we
should consider in further refining the
definition of targeted beneficiary.
Comment: Many commenters
recommended that we specify which
chronic diseases, the number of chronic
diseases, and the number of covered
part D drugs that will qualify a
beneficiary for MTMP services.
Moreover, several commenters
suggested that specific patient
populations, such as beneficiaries in
long term care, should automatically be
considered eligible for MTMP services
in all plans. Alternatively, many
commenters suggested that such
determinations are best left to the
individual plans for designing their plan
specific MTMPs.
Response: At this time, we believe
these determinations must be left to the
plans. Although we are not adding
further specific requirements for chronic
disease and multiple drugs, we do
recommend that plans take notice of the
statutory examples of chronic diseases

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

when developing MTMPs. We plan to
monitor the programs developed by the
plans to learn from them as to whether
or not further guidance is desirable.
Comment: Many commenters
provided recommendations on the level
of annual costs for Part D drugs likely
to be incurred by a beneficiary that
should be used as a threshold for MTMP
eligibility. Some commenters argued
that any cost threshold is inappropriate
because it does not indicate those that
could benefit from MTMP and in fact,
could exclude beneficiaries that would
benefit most. Others recommended
various cost thresholds including
specific dollar amounts and percentage
based thresholds (for example, top 5
percent). Most comments suggested that
we should make this determination and
not delegate it to the plans.
Response: Despite our discussion in
the proposed rule about leaving this
determination to the plans, we do not
believe we have the authority to
delegate the cost threshold
determination to plans and therefore,
we will set a cost threshold. While cost
might not the be best proxy for
identifying patients that could benefit
most from MTMP, the statute requires
us to set a threshold and our goal is to
identify a manageable target population
so that plans offer truly valuable
services to beneficiaries that will benefit
from such services. Factors we will
consider include typical costs
associated with the most common
chronic diseases and co-morbidities for
Medicare beneficiaries, the relationship
between cost and the number of
medications a beneficiary is taking, the
impact specific cost thresholds have on
the size of the target population, and the
alignment of incentives for providing
MTMP services within the standard part
D benefit structure. We intend to
provide the specific cost threshold in
separate guidance.
Comment: Several commenters
recommended that we should require
plans to allow providers and
beneficiaries (self-referral) to identify
appropriate MTMP targets in addition to
plans utilizing system edits to identify
eligible MTMP targets.
Response: The identification of
targeted beneficiaries will be
determined by individual plan policies.
Therefore, plans will decide if and how
providers and beneficiaries can
participate with identifying targets.
Once again, we believe that successful
MTMPs must be coordinated and that
plans need to develop appropriate
mechanisms for notifying and
identifying targeted beneficiaries that
are eligible for MTMP services.

PO 00000

Frm 00090

Fmt 4701

Sfmt 4700

Section 1860D–4(c)(2)(C) of the Act
requires Part D sponsors to develop
their MTMPs in cooperation with
licensed and practicing pharmacists and
physicians, and we codified this
requirement at § 423.153(d)(3).
Comment: Several commenters
recommended that we specify that
practicing pharmacists and physicians
must be licensed in the United States.
Response: Part D sponsors must
comply with State licensure
requirements for pharmacy practice, and
therefore, we believe further specific
licensure requirements are not
warranted.
Section 1860D–4(c)(2)(D) of the Act
requires us to establish guidelines for
the coordination of MTMPs with
chronic care improvement programs
established under section 1807 of the
Act for targeted beneficiaries, and we
codified this requirement at
§ 423.153(d)(4).
The Chronic Care Improvement
Program (CCIP) is a new program
established by section 721 of the MMA,
which added a new section, section
1807, to the Act. The new section 1807
creates a method for us to assist
beneficiaries with multiple chronic
conditions in managing their care. The
program is targeted only to beneficiaries
in original fee-for-service Medicare not
beneficiaries enrolled in MA plans.
We invited comment on how services
provided through CCIP could be
effectively coordinated with MTMP
services provided by PDPs. We also
sought comment on how to integrate
MTMP services and financial incentives
into the CCIP under section 721 of the
Act.
Comment: Several commenters
recommended that we share CCIP
enrollment information with PDPs so
that these individuals will be excluded
from MTMP services. In addition,
several other commenters recommended
that we require PDPs to share their drug
data with CCIPs.
Response: We agree that Part D plans
need to share drug data with CCIPs and
have specified this requirement in our
regulation text at § 423.153(d)(4). CCIPs
need this valuable data in order to
provide the comprehensive care
management that is intended under the
CCIP. However, plans must determine,
in conjunction with CCIPs, whether or
not it is desirable to offer MTMP
services to persons participating in
CCIPs. We note that in sharing the data,
both the CCIP and the Part D sponsor
will need to abide by the HIPAA privacy
rules including transmitting only the
minimum data necessary. We strongly
encourage Part D plans to consult with
their privacy counsel to ensure that the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
transmission of data complied with all
aspects of the HIPAA privacy rules.
In the proposed rule we also
discussed the requirement in section
1860D–4(c)(2)(E) of the Act specifying
that the time and resources necessary to
implement MTMP be taken into account
when establishing fees for pharmacists
or others providing MTMP services
under the plan. We stated that to
implement this section, in evaluating
the administrative component of a Part
D plan’s bid, we will ask a Part D
sponsor to disclose the fees it pays to
pharmacists or others, including an
explanation of those fees attributable to
MTMP services. The fee information
provided to us under this authority will
be protected under the confidentiality
provisions of section 1927(b)(3)(D) of
the Act. Under those provisions, we are
prohibited from disclosing the specific
fees in a manner that links the fees to
the particular pharmacy or other
provider providing the MTMP services
except to the extent necessary to
administer the Part D program, to permit
the Comptroller General to review the
information, or to permit the Director of
the CBO to review the information. If we
were to discover situations in which
plans systematically did not pay the fees
described in their applications-and, if
those errors were not corrected upon
notification, we might, at our discretion,
employ the broad ranges of intermediate
sanctions or termination provisions
available under subparts K and O of the
regulations.
We stated, however, that while we
expected to perform the due diligence
described above through application
review and potentially following up on
any complaints, we did not believe we
have the authority to mandate that Part
D sponsors pay pharmacists or other
providers a certain amount for MTMP
services. We also stated that we will not
adjudicate any specific disputes
between Part D and pharmacists or other
providers regarding the specific fees due
for MTMP services.
Comment: Many commenters
recommended that we provide further
requirements for MTMP fees, including
establishing a fee schedule, identifying
a particular documentation and billing
mechanism, and requiring plans to
reimburse for MTMP services provided
by out of network providers.
Response: These details are up to the
plans and their arrangements with
pharmacists and other providers. We do
not believe the MMA provides us with
the authority to establish fee schedules
or interfere with the contracts between
plans and providers. While we are
familiar with the recommendation and
accompanying efforts to pursue a CPT

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

coding mechanism for MTMP services,
which would provide for common
billing and documentation procedures,
the American Medical Association’s
(AMA) Current Procedural Terminology
(CPT) Editorial Panel will make that
determination and it does not directly
involve us. Therefore, in the final rule,
we are adopting our proposed policy to
require sponsors to discuss their MTMP
fees in their applications, but neither to
mandate any specific MTMP fees nor
become involved in payment disputes
regarding MTMP between pharmacies
and sponsors.
Section 423.153(e) in the proposed
rule discussed fraud, waste and abuse
programs required by section 1860D–
4(c)(1)(D) of the Act. In an effort to
consolidate, the requirements and
preamble discussion pertaining to fraud,
waste and abuse programs, we moved
§ 423.504(b)(4)(vi)(H) to subpart K, and
included as a component of a Part D
sponsor’s general compliance plan.
d. Exception for Private Fee for Service
Plans
Proposed § 423.153(f) implemented
section 1860D–21(d)(3) of the Act by
exempting private fee for-service MA
plans that offer qualified prescription
drug coverage from the requirement to
establish a drug utilization management
program and a MTMP; however, these
private fee-for-service MA plans are still
required to establish quality assurance
measures and systems and a program to
control fraud, waste and abuse as
described in § 423.153(c) and
§ 423.504(b)(4)(vi)(H), respectively.
We did not receive any comments on
these provisions and they have been
adopted in the final rule at § 423.153(e).
3. Consumer Satisfaction Surveys
(§ 423.156)
As proposed under § 423.156, we will
conduct consumer satisfaction surveys
of enrollees of Part D plans in order to
provide comparative information about
qualified prescription drug coverage to
enrollees as part of our information
dissemination efforts. Section 1860D
4(d) of the Act specifies that these
surveys be conducted in a manner
similar to how they are conducted
under § 422.152(b) for MA plans by
using the Consumer Assessment of
Health Plans (CAHPs).
In the proposed rule, we stated that
we believed a CAHPs-like instrument
(or perhaps a modification of CAHPs for
MA organizations offering MA-PD
plans) will most likely be the vehicle
used to collect this information. In
addition, we stated that we anticipated
working with the Agency for Healthcare
Research and Quality (AHRQ) to
develop a survey measuring the

PO 00000

Frm 00091

Fmt 4701

Sfmt 4700

4283

experience of beneficiaries with their
qualified prescription drug coverage, a
sampling strategy, and an
implementation strategy. We also
indicated that we will provide further
information regarding this survey as it is
developed.
Comment: Commenters had several
suggestions and questions regarding the
design and implementation of the
survey, including the following: CMS
and CAHPs should provide draft models
of the survey instruments to the Part D
plans for input prior to final draft and
distribution; CAHPs/AHRQ should
differentiate satisfaction with the benefit
versus the service provided by the
network pharmacy; if all plans are
actuarially equivalent as approved by
CMS, how will we differentiate
consumer satisfaction; the first surveys
should be conducted starting in 2006
with the results available before the fall
open season; consumers must be
included in the survey design process;
and, surveys should be sent and the
results analyzed by CMS, prior to the
annual May notification to plans about
whether or not their contracts will be
renewed.
Response: We plan to have a public
comment process in the development of
the survey, and solicit input from key
stakeholders. We expect that consumers
will be included in the design process
through focus groups, cognitive
interviews and testing of the instrument.
The purpose of the satisfaction survey is
to provide information in a timely
manner for purposes of beneficiary plan
choice which occurs during the fall of
the year. We are still determining the
timing for survey administration. One
major constraint is pilot testing of the
survey cannot begin until early in 2006.
Since the purpose of the survey is to
help consumers choose among the plan
options, during the development
process we will try our best to focus on
things that may vary across plans versus
satisfaction with the overall benefit.
Although the plans are actuarially
equivalent, there will be differences in
formularies, customer service,
informational materials, etc.
Comment: Additional comments
focused on the fact that fully integrated
MA organizations, unlike other MA
organizations and PDP sponsors, own
and operate their own pharmacies. As a
result, survey instruments may be
confusing to beneficiaries enrolled in
these organizations if the instrument is
designed only for network model plans.
In addition, to the extent that survey
instruments do not reflect satisfaction
ratings with retail pharmacies under
contract to network model plans,
comparisons between network plans

E:\FR\FM\28JAR2.SGM

28JAR2

4284

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

and integrated organizations will be
unlikely to result in apples-to-apples
comparisons. In addition, consumer
satisfaction ratings in health care are
notoriously suspect to regional
variation. In reporting satisfaction
levels, we should attempt to adjust for
these variations.
Response: We agree that making
appropriate comparisons and
adjustments will be essential to take
into account certain factors that may
impact satisfaction but are not under the
control of the Part D plans. In the
development work, we will be exploring
what are the appropriate adjusters for
this survey.
4. Electronic Prescription Program
(§ 423.159)
Section 1860D–4(e) of the Act
contains provisions for electronic
prescription programs. The statute
contains specific provisions on when
voluntary initial standards may be
adopted (not later than September 1,
2005), and when final standards must be
published (not later than April 1, 2008)
and then effective (not later than 1 year
after the date of promulgation of final
standards).
While we included a fairly long
discussion of electronic prescribing in
the proposed rule, shortly we will issue
another proposed rule devoted to the
standards that will be used for
electronic prescribing and have reserved
§ 423.159(a) and § 423.159(b) of this
final rule for such electronic prescribing
standards. Therefore, the proposals we
made for such standards are not being
addressed in this final rule. Moreover,
comments received in response to such
proposals may be considered in the
electronic prescribing-specific proposed
rule. In addition, commenters who wish
to provide additional comments on
electronic prescribing will be permitted
to do so after publication of the
electronic prescribing proposed rule.
One standard we are finalizing is the
requirement that Part D sponsors have
the capacity to support electronic
prescribing, once final standards are in
effect, including any standards that are
established before the drug benefit
begins in 2006. We proposed such
language at § 423.159(a) of the proposed
rule. Since Part D sponsors will in fact
have to support electronic prescribing,
once standards are in place, we have
modified the language in § 423.159(c) to
make clear that Part D sponsors must
not just have the capacity to support
electronic prescribing but will actually
have to support it. We received no
comments on this proposal and are
adopting it at § 423.159(c).

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

We also proposed at § 423.159(b) to
allow an MA-PD plan to provide a
separate or differential payment to a
participating physician who prescribes
covered Part D drugs in accordance with
electronic prescription standards. (Note
that this provision only applies to MA­
PD plans and not to PDPs) Section
102(b) of the MMA makes it clear that
this differential payment may occur
when a participating physician
prescribes drugs in accordance with an
electronic prescription program that
meets standards established under
section 1860D–4(e) of the Act. We
solicited comments on the differential
payments provision described in
§ 423.159(b) of the proposed rule as it
relates to the application of various legal
authorities including ‘‘the physician
self-referral prohibition at § 1877 of the
Act’’ and the Federal anti-kickback
provisions at section 1128B(b) of the
Act. In order to facilitate electronic
prescribing by a Part D sponsor, we also
invited public comment on additional
steps to spur adoption of electronic
prescribing, overcome implementation
challenges, and improve Medicare
operations.
Comment: Many commenters
supported the provision of a separate or
differential payment to a participating
physician that prescribes covered Part D
drugs in accordance with electronic
prescription standards.
Response: We agree that participating
physicians have a substantial role in
electronic prescribing and will have
upfront and on-going costs of
implementation. For this reason, the
regulation permits an MA organization
offering an MA-PD to provide a separate
or differential payment to a
participating physician that prescribes
covered Part D drugs in accordance with
electronic prescription standards,
including both voluntary standards
promulgated by HHS and final
standards established by HHS once final
standards are effective.
Comment: Many commenters also
encouraged us to allow MA-PD plans to
make similar incentive payments to
participating pharmacies and
pharmacists.
Response: We agree that pharmacies
and pharmacists have a substantial role
in electronic prescribing and will have
upfront and on-going costs of
implementation. The MMA statute
provided for such incentives directly to
physicians; however MA plans could in
compliance with the Federal antikickback and Stark self-referral statutes
offer incentives to pharmacies and
pharmacists through individual plan
contract agreements. HHS may consider

PO 00000

Frm 00092

Fmt 4701

Sfmt 4700

this issue when developing the pilot
programs.
Comment: One comment stated that
differential payments should also be
permissible by PDPs. While ‘‘PDPs
sponsors will not have network
contracts with physicians in the way
that MA organizations will, PDPs may
have service contracts with physicians
to provide MTMP services.’’ The
commenter noted that we have the
authority to permit such payments
under section 1860D–4(c)(1)(B) of the
Act as part of a quality assurance
program.
Response: We disagree. The MMA
statute was specific in the use of
incentives by MA-PD plans to
participating physicians that prescribe
covered Part D drugs in accordance with
an electronic prescription program that
meet the standards established under
section 1860D–4(e) of the Act.
Comment: Many commenters
expressed concern that separate or
differential payments should not
inappropriately influence physician
prescribing behavior or restrict provider
choice or decision making. Many also
suggested that we provide guidance to
plans to guarantee that such incentives
do not impact prescribing judgment and
that any incentives utilized in eprescribing programs focus on
rewarding improvements in patient
safety and quality.
Response: We agree with the
commenters that incentives must not
inappropriately influence physician
prescribing patterns. We will be
providing guidance to plans on
physician incentives.
Comment: Many commenters agreed
that any differential payments provision
must be in compliance with other
Federal and State laws including the
physician self-referral prohibition at
section 1877 of the Act and the Federal
anti-kickback provisions at section
1128B(b) of the Act. They urged the
Secretary to consider extending the
applicability of the safe harbor
provisions beyond Part D programs and
to include monetary and non-monetary
remuneration.
Response: As outlined in the
preamble in the proposed rule, we are
sharing any comments regarding the
anti-kickback statute with the OIG.
Additionally, in response to comments
we have added language at § 423.159(d)
that such payments be subject to
compliance with applicable Federal and
State laws and regulations related to
fraud and abuse.
In the proposed rule, we also sought
comment on measures of MA-PD plan
quality related to the use of electronic
prescribing and other MA-PD quality

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
measures that reflect effective electronic
prescribing systems.
We invited comments on the
challenges and on possible Federal
activities that will promote the effective
use of electronic prescribing by
providers, including publishing best
practices, and making technical
information on electronic prescribing
products available. In addition,
receptivity to the use of electronic
prescribing by consumers is not well
understood especially among the elderly
and disadvantaged populations. We
requested additional information on
how those populations may view
electronic prescribing and what steps
may be taken to get them to use this
modality and, thus, take advantage of
the safety and quality benefits it offers.
We also invited comments on how to
promote the use of electronic
prescribing by providers, health plans
and pharmacies and other entities
involved in the provision and payment
of health care to Medicare beneficiaries.
Beyond the differential payments
authorized in § 423.159, we invited
comments on what incentives could be
used to spur more widespread adoption,
especially for early implementers. We
also invited comments on what
educational efforts or data analyses
might be undertaken to help health
practitioners understand, or empirically
confirm, and ultimately realize, the
benefits of electronic prescribing. Lastly,
we sought public input on the ways
electronic prescribing can further
reduce costs to the Medicare program
and promote quality of care to
beneficiaries.
We received numerous comments in
response to our requests.
Comment: HHS received universal
support from all those who commented
on § 423.159 regarding the
establishment of electronic prescribing
standards and its potential for improved
quality of care through reduced
medication errors, better therapeutic
compliance and better process and cost
efficiencies.
Response: We agree with the
commenters that electronic prescribing
has great potential to improve the health
of Medicare beneficiaries and reduce
medication errors.
Comment: Many commenters
suggested that HHS should evaluate
how electronic prescribing may improve
patient compliance, clinical outcomes
and patient safety and facilitate other
electronic prescribing processes.
Additionally commenters provided a
variety of areas to focus educational
efforts and data analyses.
Response: We agree with the
commenters that MA-PD plan quality,

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

related to electronic prescribing, must
be evaluated to further promote quality
of care for beneficiaries. We will take
these suggested areas under
consideration as we develop quality
measures for MA-PD plans.
Furthermore, for quality improvement
purposes, we will make any plan
information on electronic prescribing
available to our QIOs either directly
from the Part D plans or through us.
Comment: Many commenters stated
that HHS should publish best practices
and make technical information on
electronic prescribing products
available so that providers can make
informed comparisons. Many agreed
that these efforts will also spur effective
adoption and use of electronic
prescribing.
Response: HHS appreciates these
thoughtful comments and will take
them into consideration as we
implement electronic prescribing.
Comment: A few commenters
responded that electronic prescribing
will result in procedural and behavioral
changes by beneficiaries. They
suggested that HHS work to ensure
patients are aware of and comfortable
with the new prescribing method and
should disseminate information and
educate enrollees on the changes
resulting from electronic prescribing.
Response: We agree that electronic
prescribing will result in procedural and
behavioral changes in our beneficiaries.
We will consider these suggestions as
we work with the Part D sponsors on
information dissemination and
outreach.
Comment: One commenter stated that
HHS should work with National Center
for Vital and Health Statistics (NCVHS)
to study the use of reduced malpractice
insurance premiums as a financial
incentive to promote the adoption of
electronic prescribing.
Response: HHS will share this
comment with the NCVHS.
Comment: Many commenters
provided a variety of areas to focus
educational efforts and data analyses to
spur more widespread adoption.
Response: We will take these
suggested areas for data analyses under
consideration as we develop our
educational efforts and quality
improvement strategies by making such
information on electronic prescribing
available to our QIOs either directly
from the Part D plans or through us.
Comment: Many commenters stated
that developing standards for electronic
prescribing will reduce costs to the
Medicare program. Many commenters
stated that the primary benefits of
electronic prescribing are increased
quality of care, reductions in the use of

PO 00000

Frm 00093

Fmt 4701

Sfmt 4700

4285

medical resources, and improved
patient safety, specifically in the areas
of reduced adverse events. Additionally,
many stated that electronic prescribing
improves the efficiency of processing
prescriptions.
Response: We agree with the
commenters that these electronic
prescribing areas have great potential to
reduce costs to the Medicare program.
5. Quality Improvement Organizations
(QIO) Activities (§ 423.162)
Section 109 of the MMA expands the
work of QIOs to include Part C and Part
D. This provision explicitly covers the
full range of Part C organizations. QIOs
are required to offer providers,
practitioners, and Part D sponsors
quality improvement assistance
pertaining to health care services,
including those related to prescription
drug therapy.
In the proposed rule, we stated the
QIOs will need access to data from
transactions between pharmacies and
Part D plans. We offered examples of the
types of data that would likely be
required by QIOs and also discussed our
role in potentially aggregating and
distributing the data. Finally, we
proposed that any information collected
by the QIOs will be subject to
confidentiality requirements in part 480
of our regulations. For purposes of
applying these confidentiality
regulations, we also proposed that Part
D sponsors fall within the definition of
health care facilities and that part 480
would apply in the same manner as that
Part applies to institutions.
As the QIOs activities under Part D
are developed within the 8th Scope of
Work, and basic decisions are made
about the collection, storage and use of
Part D claims data, CMS will work with
QIOs and Part D plans to develop a
strategy to provide QIOs with data
necessary to accomplish their task and
safeguard patient confidentiality.
Comment: One commenter believes
that PDPs may need additional data to
identify enrollees to be targeted for
MTMP services. They believe QIOs
could provide that data to plans using
information from medical claims
submissions.
Response: QIOs cannot share with
Part D plans beneficiary-specific
identifiable data that it has acquired as
part of its function as a QIO, but we
could provide the data necessary to
identify enrollees to be targeted for
MTMP services to the Part D plans if
appropriate. QIOs can provide other
types of technical assistance to Part D
plans.
Comment: One commenter
recommends that serious evaluations be

E:\FR\FM\28JAR2.SGM

28JAR2

4286

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

designed to compare the effectiveness of
different MTMP services, delivery, and
payment methodologies. Another
commenter wrote that QIOs could
potentially perform a valuable role in
collecting and analyzing the data to be
made available to plans for use in
establishing or revising their MTMP
services.
Response: Once Title I has been
implemented, we expect that outcome
measures will be developed to allow the
QIOs to assess the effectiveness of the
MTMP services. We expect that both
plans and pharmacies will be able to
request technical assistance from QIOs
to improve their MTMPs.
Comment: One commenter
recommended that the last sentence of
§ 423.162(b) be deleted. [‘‘PDP sponsors
and MA plans offering MA-PD plans are
required to provide specified
information to CMS for distribution to
the QIOs as well as directly to QIOs’’]
They support the voluntary nature in
terms of whether a Part D plan must
contract with a QIO. They are concerned
about the submission of undefined
information to CMS for passing through
to QIOs as well as directly to QIOs
regardless as to whether a Part D plan
works with a QIO. In addition, it is
unclear to which QIO such information
will be provided, particularly since
some drug plans may serve more than
one State. Another commenter stated
QIOs must have access to pharmacy and
medical claims for quality improvement
projects and oversight of the PDPs.
Response: We do not believe that the
last sentence of § 423.162(b) must be
deleted. QIOs need, and have the
authority under section 1154 of the Act
and section 109 of the MMA, to access
specified data from the transactions
between pharmacies and Part D plans
providing the Part D benefit. However,
the determination of what actual data, if
any, that will be made available to QIOs
will be made in subsequent guidance
after QIOs activities under Part D are
developed within the 8th Scope of Work,
and basic decisions are made about the
collection, storage and use of Part D
claims data. We could provide specific
data to QIOs to use for quality
monitoring and extract these data from
data already required by us for other
administrative functions of the Title I
program, thus not increasing the Part D
plans’ burden. We could also make data
available to a QIO from plans that do
not contract with the QIO but are
directly related to the QIO’s
responsibilities as negotiated with us
under its 8th scope of work. QIOs may
also have access to additional data
provided by plans working directly with
a QIO.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Other QIO Activities
Comment: While PBMs have
processes in place to monitor pharmacy
dispensing and alert a pharmacy in
cases where dispensing a medication
may not be safe for a particular patient,
it is critical the PBM or drug plan not
be held accountable or responsible for
activities that are beyond its control.
Drug plans can be evaluated for having
such process measures in place but
should not be held accountable for
problems outside their control, such as
physician, pharmacist or manufacturer
errors.
Response: We expect that the QIOs
will work with physicians, pharmacists,
and plans to improve the quality of
beneficiaries’ medication therapies. The
QIOs’ goal is to improve quality of care,
not to assign blame. They can assist
each of these players to design systems
to facilitate the delivery of quality of
care.
Comment: One commenter stated that
QIOs should establish educational
programs to assist drug plans and
prescribers in the implementation of
best practice guidelines through
treatment algorithms.
Response: The QIOs’ scope of work is
being described in their contracts rather
than in the regulation. The contracting
mechanism allows flexibility to adjust
the QIOs’ tasks to be responsive for the
need for quality improvement. The
QIOs’ activities will address quality
improvement for both prescribers and
plans.
Comment: The confidentiality of
information collected by QIOs should be
protected, as CMS has proposed.
Response: The QIOs will protect the
confidentiality of the collected
information, as specified in part 480.
We have clarified § 423.162(c) in this
final rule to make clear that the
provisions of part 480 apply in the same
manner as they apply to institutions.
Comment: There were several
commenters who expressed concern
regarding how QIOs will handle
beneficiaries’ complaints about the
quality of care in Part D. The final rule
in § 423.153(c) needs to state clearly that
the QIOs will review quality of care
complaints and lack of access
complaints to requested services, as
well as to clarify how this traditional
QIO function will be carried out in the
unique environment of Part D plans.
Response: Section 423.564(c), not
§ 423.153(c), states that QIOs must
review enrollees’ written complaints
about the quality of services they have
received under the Medicare program,
as specified in section 1154(a)(14) of the
Act. For any complaint submitted to a
QIO, the Part D sponsor must cooperate

PO 00000

Frm 00094

Fmt 4701

Sfmt 4700

with the QIO in resolving the complaint.
For further discussion, please refer to
the preamble to subpart M.
Comment: The final regulation should
reflect the information contained in the
summary of the 8th scope of work
(SOW) for QIOs. The commenter added
the regulation should specify that
quality improvement projects will be
performed by the QIO or by a third party
(independent of the Part D plan)
contracted by the QIO.
Response: This information is
typically conveyed in the SOW of the
contract between each QIO and us
rather than in the regulation because a
contract allows us the flexibility to
modify the QIOs’ activities without
modifying the regulation. The contract
is an effective way to ensure that these
important tasks are accomplished.
Comment: Educational interventions
are best done by QIOs or a third party
independent of the Part D plan
contracted by the QIO.
Response: QIOs will likely do
educational interventions either with
their own staff or with subcontractors,
but we do not want to exclude other
entities from also providing objective,
evidence-based educational
interventions.
Comment: Oversight of formulary
decisions and subsequent review of Part
D sponsors’ formulary decisions could
be key components necessary for QIO’s
to assess quality, especially in the dualeligible long term care patients.
Response: We believe that decisions
concerning which medications are on a
plan’s formulary are administrative
decisions of the plan. These do not fall
within the quality review functions of
the QIO. The QIO will review
beneficiary complaints that the plan’s
rules were not executed correctly. We
will conduct reviews of plans’
applications to ensure that formularies
are not discriminatory, as well as review
through program monitoring.
Comment: MA organizations
delivering benefits through their owned
and operated pharmacies are likely to
rely on specialized pharmacy
information systems that differ from the
systems designed for PDP sponsors to
communicate with their contract
network pharmacies. As a result, it is
possible that pharmacy data may be
misinterpreted by a QIO. If QIOs will be
using data from integrated MA
organizations to assess quality, it will be
important to work closely with the
organizations to understand the data, or
to develop more efficient methods to
achieve the same result-an appropriate
assessment of quality performance.
Response: We expect that QIOs will
work cooperatively with plans. Because

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
QIOs work with identified
organizations, they will have the
opportunity to understand the context
of the data they are analyzing.
Comment: One commenter suggests
that QIOs examine the prescription drug
claims submitted to the plan,
specifically looking at the number of
claims that are rejected and appealed.
Response: QIOs’ activities focus on
quality improvement. The number of
claims rejected is an administrative
function, and we do not expect the QIOs
to be active in this area. It is likely the
administrative performance of plans
will be assessed by our program
monitoring.
6. Treatment of Accreditation
(§ 423.165, § 423.168, and § 423.171)
Section 1860D–4(j) of the Act requires
that the provisions of section 1852(e)(4)
of the Act relating to the treatment of
accreditation will apply to Part D
sponsors for:
• Access to covered Part D drugs
including the pharmacy access
requirements and the use of
standardized technology and formulary
requirements;
• Drug utilization management,
Quality assurance, Medication Therapy
Management, and a program to control
fraud, waste and abuse as described in
subpart K § 423.504(b)(4)(vi)(H);
• Confidentiality and accuracy of
enrollee records.
Thus, the requirements in § 423.165,
§ 423.168, and § 423.171 are similar to
the requirements found in § 422.156,
§ 422.157, and § 422.158 for the MA
program, except for subject areas that
are deemed.
Proposed § 423.165 provided the
conditions under which a Part D
sponsor may be deemed to meet our
requirements permitted under
paragraph (b) of that section. We stated
that the first condition will be that the
plan be fully accredited (and
periodically reaccredited) by a private,
national accreditation organization (AO)
that we approve. The second condition
will be that the plan be accredited using
the standards that we approved for the
purposes of assessing compliance with
Medicare requirements.
Consistent with our approach in the
MA program, in the proposed rule we
proposed that we will analyze on a
standard-by-standard basis whether an
AO applies and enforces requirements
that are no less stringent than those in
part 423 for the standard at issue. We
proposed that we will determine the
scope of the AO’s approval (and, thus,
the extent to which Part D plans
accredited by the organization are
deemed to meet our requirements) based

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

on a comparison of the AO’s standards
and its procedures for assessing
compliance with our deemable
requirements and our own decisionmaking standards. We stated that we
will make those determinations on the
basis of the application materials
submitted by AOs seeking our approval
in accordance with § 423.168. We also
proposed to conduct surveys to validate
the AO’s enforcement on a standard-by­
standard basis.
Proposed § 423.165(d) established the
obligations of deemed Part D sponsors.
A Part D sponsor will be required to
submit to our surveys. We stated that
the proposed surveys were intended to
validate an AO’s process and authorize
the AO to release to us a copy of its most
current accreditation survey, together
with any information related to the
survey that we may require (including
corrective action plans and summaries
of our unmet requirements). We stated
that such activities will be part of our
ongoing oversight strategy for ensuring
that the AO applies and enforces its
accreditation standards in a manner
comparable to ours.
Proposed § 423.165(e) addressed
removal of deemed status and proposed
§ 423.165(f) explained that we retain the
authority to initiate enforcement action
against any Part D sponsor that we
determine, on the basis of our own
survey or the results of the accreditation
survey, no longer meets the Medicare
requirements for which deemed status
was granted. We stated that we expected
the AO to have a system in place for
enforcing compliance with our
standards (such as sanctions for
motivating correction of deficiencies),
but we also stated that we could not
delegate to the AO the authority to
impose the intermediate sanctions
established by section 1860D–12 of the
Act or termination of the contract.
In the proposed rule, we
acknowledged that deeming applies
only to our enforcement of this
regulation, and neither our enforcement
of this regulation nor accreditation by
an accrediting body undercuts the
Office for Civil Rights enforcement of
the HIPAA privacy rule.
Proposed § 423.168 discussed the
three conditions for our approval of an
AO if the organization applies and
enforces standards for Part D sponsors
that are at least as stringent as Medicare
requirements and, if the organization
complies with the application and
reapplication procedures proposed in
§ 423.171.
Proposed § 423.168(c) established
ongoing AO responsibilities. These
responsibilities largely parallel those
currently imposed upon accreditors

PO 00000

Frm 00095

Fmt 4701

Sfmt 4700

4287

under original Medicare. One exception
was the proposed requirement that an
AO notify us in writing within three
days of identifying, for an accredited
Part D sponsor, a deficiency that poses
immediate jeopardy to the Part D
sponsor’s enrollees or to the general
public.
Proposed § 423.168(d) established
specific criteria and procedures for
continuing oversight and for
withdrawing approval of an AO.
Oversight consists of equivalency
review, validation review, and onsite
observation.
In the proposed rule, we stated that
we could withdraw our approval of an
AO at any time if we determine that
deeming based on accreditation no
longer guarantees that the Part D plan
meets the Medicare requirements, that
failure to meet those requirements could
jeopardize the health or safety of
Medicare enrollees or constitute a
significant hazard to the public health,
or that the AO has failed to meet its
obligations under § 423.165 through
§ 423.171.
Proposed § 423.171 addressed the
procedures for approval of accreditation
as a basis for deeming compliance. As
mentioned, the process that we stated
will be used to deem compliance with
Part D requirements is virtually
identical to the process that is being
used for deeming compliance with feefor-service requirements. One
requirement proposed in § 423.171, and
which also appeared in regulations
governing MA plans at § 422.158(a)(11),
but did not appear in regulations
governing original Medicare, is the
requirement that an AO applying for
approval of deeming authority submit
the name and address of each person
with an ownership or control interest in
the AO. We proposed that we will use
this information to determine whether
the AO is controlled by the
organizations it accredits for the
purposes of § 423.168. Section 423.171
further provided for reconsideration of
adverse determinations of accreditation
applications.
Comment: Several consumer groups
oppose deeming because they believe it
will diminish beneficiary protections.
Several different types of organizations,
such as pharmacy organizations, and
others want to have input into the
process, and asked who will be the AOs,
how will they operate, and what
standards will be used. They also
commented that AOs will not be in
place prior to the initiation of the
program.
Response: Section 1860D–4(j) of Act
provides for accreditation. We have

E:\FR\FM\28JAR2.SGM

28JAR2

4288

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

successfully administered accreditation
programs in:
• Hospital settings, for example,
JCAHCO;
• Home health, for example,
JCAHCO, NLN; and
• Nursing homes and managed care,
for example, NCQA, JCAHCO.
The advantages of AOs is that they
eliminate duplication of efforts between
us and AOs, since many private
purchasers require AOs. Furthermore, it
reduces the burden on government
oversight.
AOs must demonstrate that their
standards are at least as stringent as
those in part 423 of our final
regulations. Given that the regulations
can only be finalized upon publication
of this final rule, we agree with the
commenters that AOs cannot be in place
before the bids and contract
applications for 2006 are due. Thus, at
least in the first year of the program,
applicants will have to determine on
their own that they meet all of our
standards. Once these rules are in effect,
we can begin to consider applications
for AOs; however, other program
priorities will influence when we will
be able to issue a public notice
requesting applications. Currently, we
do not believe that any AOs can meet
our standards. Furthermore, it must be
noted that in the Medicare Advantage
program, it was several years before any
AOs were accredited.
As to giving stakeholders a chance to
comment, our regulation at § 423.168(b)
provides that we publish a notice in the
Federal Register whenever we are
considering an AO’s application. The
public then has 30 days to comment.
We will be glad to meet with
stakeholders to discuss these issues. The
AOs must meet or exceed each of our
standards. They can pass one or all
standards, but will only be allowed to
administer those standards for which
they are approved.
The final rule has adopted the
proposed rules on accreditation.

submission, review, negotiation, and
approval of bids for prescription drug
plans and MA-PD plans; the calculation
of the national average bid amount; and
determination and collection of enrollee
premiums. References to 42 CFR part
422 of our regulations are to the new
MA rules. See Subpart T for additional
information on PACE. Bidding is to be
distinguished from the application
process discussed in subpart K.
Although in this preamble we use the
terminology, prescription drug plans
and MA-PD plans, the regulations
extend to all Part D sponsors (including
PACE organizations and cost-based
HMOs and CMPs) as these entities—just
like PDP sponsors—will be required to
submit bids for the prescription drug
coverage they plan to offer. Therefore,
we have changed the accompanying
regulation text to use the terminology,
‘‘Part D sponsor,’’ throughout. We have
also indicated in the regulation where
separate rules would apply to fallback
entities.
As discussed in subpart C, the statute
provides a framework for the provision
of subsidized prescription drug
coverage. Within this framework, PDP
sponsors and MA organizations have
some flexibility to design coverage that
is different from defined standard
coverage to meet the needs of Part Deligible Medicare beneficiaries. This
framework plays a critical role in bid
submissions, and the actuarial
evaluation and approval of bids.
As part of our discussion we specify
the actuarial equivalency tests plan
sponsors will have to meet when
offering coverage other than defined
standard coverage. Please note that the
coverage definitions are discussed in
detail in subpart C of the preamble. In
order to determine actuarial
equivalency, plan sponsors will
compare their plans to the defined
standard coverage baseline to assess the
various tests of actuarial equivalency
that we discuss in detail in the sections
below.

F. Submission of Bids and Monthly
Beneficiary Premiums: Plan Approved

2. Requirements for Submission of Bids
and Related Information
As provided under section 1860D–
11(b) of the Act, each applicant to
become a PDP sponsor or MA
organization will be required to submit
a bid for prescription drug coverage for
each plan it intends to offer. Most bids
will be expected to represent full risk
plans, meaning that the prescription
drug plan is not a limited risk plan or
a fallback prescription drug plan, and is
not asking for any modification of the
statutory risk sharing arrangements. A
bid from a full risk plan may be referred
to as a full risk bid. PDP sponsors may

1. Overview
Subpart F will implement most of the
provisions in sections 1860D–11 and
1860D–13 of the Act, as well as sections
1860D–12(b)(2)(on limitation on entities
offering fallback plans), 1860D–
15(c)(2)(on geographic adjustment of the
national average monthly bid amount),
1860D–21(d) (on special rules for
private fee-for-service (PFFS) plans),
1860D–21 (e)(3) (on cost contractors),
and 1860D–21 (f)(3)(on PACE) of the
Act. In this section we address

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

PO 00000

Frm 00096

Fmt 4701

Sfmt 4700

choose to participate as limited risk
plans, meaning that they provide basic
prescription drug coverage and request
a modification of risk level (as described
in § 423.265(d)) in its bid submitted for
the plan. A bid with a modified level of
risk is referred to as a limited risk bid.
This term does not include a fallback
prescription drug plan. Bids will be due
to us no later than the first Monday in
June for each plan to be offered in the
subsequent calendar year. This date
stems from the requirement in section
1860D–11(b) of the Act that bid data
from potential PDP sponsors be
submitted at the same time and in a
similar manner as the information
described in section 1854(a)(6) of the
Act for MA plans. Since section
1854(a)(1) of the Act requires initial data
to be submitted on the first Monday of
June of each year after 2004, we have
also incorporated this date into our
regulations. In the case of MA-PD plans,
the prescription drug bid will be a
component of the unified MA bid
described in § 422.254(b)(1) with
benefits beyond basic coverage (if any)
incorporated into the supplemental
benefits portion of the prescription drug
benefit bid.
We are clarifying that this bid will
represent the expected monthly average
cost (including reasonable
administrative costs) to be incurred by
the plan applicant for qualified
prescription drug coverage in the
applicable area for a Part D eligible
individual with a national average risk
profile for the factors described in
section 1860D 15(c)(1)(A) of the Act and
in § 423.329(b)(1) of this rule. We plan
to develop and publish the risk
adjustment factors and identify the
characteristics of an average individual
no later than the date of the 45-day
notice for the announcement of 2006
rates, which is February 18, 2005. Any
modifications to these characteristics for
subsequent years will be announced by
the date of the annual 45-day notice.
(For further discussion of prescription
drug risk adjustment, see subpart G of
this preamble.) In the August 2004
proposed rule we solicited comment on
the nature of any additional information
needed to prepare bids and suggestions
for any other methods that the bid
submission process could be structured
to provide for later pricing data
submission.
The costs represented in each plan
bid must be those for which the plan
will actually be responsible. Given the
structure of qualified prescription drug
coverage, these costs will not include
payments made by the enrollee for
deductible, coinsurance (including 100
percent coinsurance between the initial

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
coverage limit and the out of-pocket
threshold), copayments, or payments for
the difference between a plan’s
allowance and an out-of-network
pharmacy’s usual and customary charge
(as discussed in § 423.124(b). It also
does not include costs reimbursed by us
through the reinsurance subsidy.
However, we require the separate
identification, calculation, and reporting
of costs assumed to be reimbursed by us
through reinsurance. For standard
coverage, defined or actuarial
equivalent, these costs will include the
plan’s share of costs above the
deductible and up to the initial coverage
limit, as well as the plan’s share of costs
above the annual out of pocket limit. If
enhanced alternative coverage is
provided, the plan costs for
supplemental benefits will be
distinguished from those for basic
coverage. The costs attributable only to
basic coverage, once approved, are
known as the standardized bid amount.
In § 423.265(c) we will require that,
with the exception of potential
employer group waivers under section
1860D–22(b) of the Act and section
1857(i) of the Act, late enrollment
penalties and low-income premium and
cost sharing subsidies, the bid
represents a uniform benefit package
based upon a uniform level of premium
and cost sharing among all beneficiaries
enrolled in the plan. This means that all
enrollees in a given PDP or MA-PD plan
will be subject to the same cost sharing
structure and will be charged the same
premium for benefits the PDP sponsor
or MA organization chose to offer.
We note that while benefits are
required to be uniform for all enrollees
under the drug benefit, this is not the
case for enrollees under a prescription
drug discount card program. To avoid
any confusion between these related
programs, we would like to make this
distinction clear. Because of the limited
low-income assistance under the card
program, card sponsors have been
permitted to negotiate lower prices for
low-income members. Also, in some
cases there may be reduced cost sharing
sponsored by manufacturers for lowincome members after the $600 in
transitional assistance is used that does
not apply to other card members. Under
the Part D prescription drug program,
however, both the negotiated prices and
the benefit structure will be the same for
all enrollees in a given PDP or MA PD
plan. While the low-income subsidies
will result in low-income beneficiaries’
actual out of pocket costs being lower
than for beneficiaries who do not
qualify for this assistance, the benefit
structure to which the subsidies apply
is the same for all enrollees in a plan.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Comment: Two commenters suggested
that we assist bidders by making
accessible relevant drug utilization data
from sources such as Tricare, PBMs, the
National Association of Chain Drug
Stores and current Medicare Advantage
plans with drug benefits.
Response: We either does not have
access to such data or does not have the
authority for public release. Most of the
data suggested by the commenters
would be considered proprietary. There
are other data sets that are being used
to meet industry’s requests that we
share information from public data sets
that could help potential drug plan
bidders to better understand or estimate
the eligible Medicare beneficiary
population’s utilization of prescription
drugs. They include: 1) data for Federal
retirees 65+, enrolled in the Federal
Employee Health Benefit national Blue
Cross Blue Shield plan; 2) data from the
Medicare Current Beneficiary Survey;
and 3) Medicaid Pharmacy Benefit Use
and Reimbursement in 1999 Statistical
Compendium. The latter is prepared
from Medicaid Analytic eXtract (MAX)
files for calendar year 1999. For more
information, or to download these data
see http://www.cms.hhs.gov/pdps/
default.asp.
Comment: Several comments urged
that bids be rejected from PDPs that are
owned or financially controlled by a
drug manufacturer or group of
manufactures.
Response: We note the concern that
many stakeholders have had over
manufacturer acquisition of PBMs in the
1990’s. However, the Federal Trade
Commission’s response by imposing
restrictions on manufacturers acquiring
PBMs (for example, offer open
formularies, include drugs that compete
with the parent company’s products,
etc) has generally led manufacturers to
divest from PBMs, or to alter their
behaviors in order to prevent antitrust
enforcement actions (see Christopher
Sroka’s November, 2000 report
‘‘Pharmacy benefit managers’’ for the
Congressional Research Service and
Regina Johnson’s 2002 piece ‘‘PBMs:
Ripe for regulation’’ in Volume 57, Issue
2 of the Food and Drug Law Journal).
Regardless of future industry activity in
this area, the statute does not give us the
authority to implement a ban as
suggested by the commenters.
Comment: One commenter indicated
that Part D plans are required to submit
bids no later than the first Monday in
June to be offered in the subsequent
calendar year. This is not sufficient time
for SPAPs that need to coordinate
benefits. SPAPs will need to know by
June of 2005 what plans will be

PO 00000

Frm 00097

Fmt 4701

Sfmt 4700

4289

qualified sponsors and operating in
their States.
Response: Section 1854 of the Act
amended by the MMA sets the bid
submission date as no later than the first
Monday of June. PDP sponsors and MA
organizations with MA-PDs need the
maximum amount of time to put
together a bid. PDPs and MA-PDs will
need to keep SPAPs informed in order
to complete the bid process, so
communication between these entities
should not be an issue.
Comment: One commenter suggested
that plans should be required to provide
for coverage of services to residents of
Long Term Care facilities that are
required by OBRA 1987 and under
OBRA 1990. They recommended that
this be added to the included costs in
§ 423.265(b)(1) under submission of
bids. The commenter went on to state
that Part D plans should not be exempt
from providing the same services
required under Medicare Part A or
Medicaid to nursing facility residents
and recommended that we require plans
to incorporate the costs of paying for
such services into their bid submissions,
and that plans state clearly how they
intend to pay qualified pharmacists for
providing such services.
Response: Part D plans are only
obligated to pay the negotiated price for
covered part D drugs, which consists of
the ingredient cost of the drug and a
‘‘dispensing fee’’ and that take into
account any discounts, direct or indirect
subsidies, rebates or other price
concessions received by the Part D
plan). The fee will include only those
activities related to the transfer of
possession of the covered Part D drug
from the pharmacy to the beneficiary,
including charges associated with
mixing drugs, delivery, and overhead.
The dispensing fee will not include any
activities beyond the point of sale (that
is, pharmacy follow-up phone calls) or
any activities for entities other than the
pharmacy. The dispensing fee does not
include any charges associated with
administering the drug once the drug
has already been transferred to the
beneficiary. This means that the
pharmaceutical services listed under
1819(b)(4)(A)(iii) are included within
the negotiated prices for covered part D
drugs only if the term ‘‘dispensing fee’’
as defined in § 423.100 captures such
services.
Comment: Several commenters asked
for guidance regarding the costs that we
view as administrative.
Response: Administrative costs are
not clinical services unless part of a
Medication Therapy Management
Program. Administrative costs include
such costs as: 1) crossover fees paid to

E:\FR\FM\28JAR2.SGM

28JAR2

4290

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

obtain information from other payors in
order to calculate TROOP (True Out-ofPocket); 2) Medication Therapy
Management Program expenses; 3)
Marketing & Sales; 4) Direct
Administration (for example, customer
service, billing and claims
administration); 5) Indirect
Administration (for example, corporate
services, such as accounting operations,
actuarial, legal and human resources); 6)
Net Cost of Private Reinsurance (that is,
reinsurance premium less projected
reinsurance recoveries); 7) Medicare
User Fees; 8)Uncollected Enrollee
Premium; and 9) return on investment.
Additional guidance on administrative
costs will be given with the release of
the bid submission tool. Instructions for
the tool will include more detail
defining administrative costs and
guidance on how they are to be
indicated in the bid submission.
Comment: One comment urged us to
modify the timeline to permit bidders to
submit a bid for approval before June 6,
2005.
Response: While bids can be
submitted before the first Monday in
June (June 6 in 2005), they cannot be
approved before that date because they
are reviewed collectively.
Comment: Several commenters urged
that the bid submission process use
electronic methods and be parsimonious
for data requirements.
Response: We agree with the
commenters that electronic methods are
preferable. Accordingly, bid submitters
will upload an electronic Plan Benefit
Package (PBP) and bid submission
pricing tool to the Health Plan
Management System (HPMS). The bid is
to represent the expected monthly
average cost to be incurred by a plan
applicant providing qualified
prescription drug coverage in an
applicable area for a Part D eligible
beneficiary with a national average risk
profile. We are cognizant of plan burden
and therefore required submission data
will be limited to what is absolutely
necessary for us to fulfill its bid review,
payment, and negotiation obligations.
Comment: One commenter asked if
plans will get the rebates from
manufacturers for drugs covered by
SPAP wrap around.
Response: CMS does not have the
authority to dictate how manufacturers
pay rebates to plans. However, we
would expect that drugs covered by
secondary payers would still be subject
to rebates.
3. General CMS Guidelines for Actuarial
Valuation of Prescription Drug Coverage
As directed by section 1860D–11(c) of
the Act, we will develop processes and

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

methods using generally accepted
actuarial principles and methodologies
for determining the actuarial valuation
of prescription drug coverage. Although
we plan to provide additional
information in the future in the form of
interpretive guidance on these
processes, we intend on using the
following processes and methods for
calculating ‘‘actuarial valuation’’ and
‘‘actuarial equivalence’’ in the context of
risk bids:
• Sponsors offering standard
coverage with cost-sharing variants
either to the 25 percent coinsurance
(before the initial coverage limit) or the
greater of 5 percent coinsurance or $2
generic/preferred/$5 any other drug
(after the out-of-pocket threshold is met)
will be required to demonstrate the
actuarial equivalence of their variations.
• Sponsors offering basic or
enhanced alternative prescription drug
coverage will be required to
demonstrate that—
+ The actuarial value of total or
gross plan coverage of their alternative
is at least equal to the actuarial value of
total or gross coverage of the defined
standard benefit.
+ The actuarial value of
unsubsidized coverage of their
alternative is at least equal to the
actuarial value of the unsubsidized
portion of defined standard coverage;
and
+ The plan payout at the dollar
value of the initial coverage limit under
standard coverage, for individuals
whose total spending exceeds that limit,
is at least equal to that provided under
defined standard coverage.
• All sponsors will determine the
actuarial value of the defined standard
benefit, either because it is—
+ Offered to the beneficiaries;
+ Used as a comparison for either
of the following:
• Standard coverage with
actuarially equivalent cost-sharing
variants.
• Alternative coverage; or
+ Used to determine the basic
component in enhanced alternative
coverage.
• Sponsors that offer enhanced
alternative coverage will also be
required to determine the actuarial
value of coverage beyond basic
coverage.
• We will further specify in
additional guidelines the data sources,
methodologies, assumptions, and other
techniques in accordance with generally
accepted actuarial principles as either
recommended or required in further
guidance. We will also specify the data
elements (including format) to be sent to
us for evaluation. We will then evaluate

PO 00000

Frm 00098

Fmt 4701

Sfmt 4700

the analysis and assumptions for
compliance and reasonableness. For
example, we will evaluate the source,
size, and timeframe of data on which
assumptions are based, the demographic
characteristics of enrollees, the
distribution of risk levels, the average
costs in each cost-sharing tier, and the
update factors used, among other
considerations.
• We will also require the separate
identification of administrative costs.
Since the level of the bid will directly
affect the premium paid by the
beneficiary and the attractiveness of the
plan, we expect that plans will have a
strong incentive to keep administrative
costs and return on investment at
reasonable levels. Any review of
administrative costs will likely focus
primarily on outliers from the
competitive range identified in the bids
received. All proposals will contain a
description of how certain costs are
included in the calculations. Processes
and methods for determining actuarial
valuation will take into account the
effect that providing actuarially
equivalent standard coverage or
alternative prescription drug coverage
(rather than defined standard coverage)
has on drug utilization. This includes
utilization effects attributable to
different benefit structures, such as from
tiered cost sharing, as well as those
attributable to supplemental benefits.
The utilization effect of supplemental
benefits on basic benefits will have to be
loaded into the supplemental portion of
the bid. In other words, since the
existence of supplemental coverage will
increase total average per capita
spending, that increase over the average
spending (if coverage were limited to
basic coverage) will be included in the
portion of the bid attributable to
supplemental coverage. Section 1860D–
11(c)(1)(D) of the Act specifies ‘‘the use
of generally accepted actuarial
principles and methodologies.’’ We are
interpreting this to require that a
qualified actuary certify the plan’s
actuarial valuation (which may be
prepared by others under his or her
direction or review). Actuarial
certification will give better assurance
that the actuarial values in the bid were
prepared in conformance with actuarial
standards and methodologies.
• Section 1860D–11(c)(3)(B) of the
Act specifies that PDP sponsors or MA
organizations offering MA-PD plans may
use qualified independent actuaries in
certifying the actuarial values in their
bids. (The actuarial valuation may be
prepared by others under the direction
or review of a qualified actuary). We
interpret this provision as requiring PDP
sponsors and MA organizations that do

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
not employ qualified actuaries, to use
outside actuaries in their processes. We
proposed in the August proposed rule to
specify that a qualified actuary is an
individual who is a member of the
American Academy of Actuaries
because members of the Academy must
meet not only educational and
experience requirements, but also a
code of professional conduct and
standards of practice. These standards
create a common ground for actuarial
analysis. Furthermore, a member of the
Academy is subject to its disciplinary
action for violations of the code and
standards. This same requirement is
specified in the SCHIP legislation at
section 2103(c)(4)(A) of the Act.
Moreover, the National Association of
Insurance Commissioners (NAIC)
imposes significantly stricter
requirements on actuaries preparing the
financial statements of insurance
companies.
Comment: Several commenters asked
for flexibility in the actuarial standards.
One commenter specifically asked for
flexibility in the use of methods and
actuarial assumptions by permitting the
use of internal data or normative claims
databases.
Response: Section 1860D–11(c)(1) of
the Act instructs the Secretary to
‘‘establish processes and methods for
determining the actuarial valuation of
prescription drug coverage
including.the use of generally accepted
actuarial principles and
methodologies’’. To the extent it is
possible under this paradigm to be
flexible, we will be. Use of internal data
or normative claims databases is not
only acceptable, but encouraged. We
will however, review the assumptions
and results of your analysis for
reasonableness and appropriateness.
Comment: One commenter asserted
that being a member of the American
Academy of Actuaries should be a
requirement, but should not be
sufficient by itself.
Response: Our policy position is to
require that an actuary have the skills
and experience to perform the actuarial
certification required. Accordingly, in
§ 423.265(c)(3) we state that a ‘‘qualified
actuary must certify the plan’s actuarial
valuation, and must be a member of the
American Academy of Actuaries to be
deemed qualified.’’ By requiring
membership in the American Academy
of Actuaries we are both requiring a
minimal standard, and providing an
additional assurance that the actuary
will be qualified. For the latter
comment, the Code of Professional
Conduct for Actuaries states ‘‘an
Actuary shall perform Actuarial
Services only when the Actuary is

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

qualified to do so on the basis of basic
and continuing education and
experience.’’
Comment: Two commenters
expressed that there could be problems
with the proposal that the costs
associated with any increased
utilization in the Part D basic benefit
arising from enhanced alternative
coverage would be included in the
supplemental benefit portion of the bid.
They assert that the application of this
policy as it applies to the Part D
program could be problematic because
in many instances an enrollee will have
supplemental coverage arising from
another source that would not be part of
enhanced alternative coverage of the
sponsor or organization. One
commenter gave the example of a
beneficiary who may elect basic
prescription drug coverage under a PDP
or MA-PD plan and may also receive
coverage under an employer/union
group plan that wraps around the Part
D benefit. They argue that in this case,
if no supplemental benefits were
included in the MA-PD plan or PDP,
there would be no way to take into
account in the bid the impact of any
increased utilization unless it can be
reflected in the bid for the basic benefit.
This problem could be greater for
special needs plans serving dually
eligible beneficiaries who are eligible for
substantial subsidies under the Part D
program. In this instance, if no
supplemental benefits are included in
the MA-PD or PDP plan, the only
avenue for taking increased utilization
the may result from the subsidy into
account would be the bid for the basic
benefit. However, this could result in a
bid above the benchmark that would
produce a premium higher than the lowincome premium subsidy resulting in an
increase in the premium obligation for
dual eligible enrollees. This situation
could threaten the viability of a special
needs plan.
Response: Plan bids will take into
account the anticipated impact of
induced utilization due to the structure
of the plan benefit, other insurance
coverage, and the low income subsidy.
The impact of induced utilization will
be addressed directly in the bid for
enhanced alternative coverage. Note that
this is for Part D only and is different
from what is discussed for Part C in the
Title II regulation. There are three major
mechanisms for adjusting payment to
account for the utilization of the actual
enrolled population in any given plan,
these are risk adjustment, reinsurance,
and risk corridors. One intention of risk
adjustment is to take into account the
utilization of dual eligibles and adjust
payment appropriately for the level of

PO 00000

Frm 00099

Fmt 4701

Sfmt 4700

4291

utilization in this population. For all
bids, the anticipated impact of other
insurance coverage on the bid and its
effect on reinsurance will be taken into
account. Risk corridors will serve to
decrease the exposure of plans where
allowed costs exceed plan payments for
the basic Part D benefit.
4. Determining Actuarial Equivalency
for Variants of Standard Coverage and
for Alternative Coverage.
When considering the specific
requirements for actuarial equivalence
and valuation in the Act, we are aware
that there is no official definition of
actuarial equivalence. Moreover, the
concept of actuarial equivalence is
applied in multiple contexts. We must
address actuarial equivalence
requirements regarding cost sharing,
expected benefits, and bid submissions.
Thus, we are using interpretive
guidance to further explain the process
and methodology for determining
actuarial equivalence and valuation.
The processes and methods for
determining actuarial equivalence and
valuation would be in keeping with
generally accepted actuarial principles.
We would require prospective PDP
sponsors and MA organizations wishing
to offer MA-PD plans to include all of
the requirements discussed in the
following sections in the information
submitted with the bid, when
applicable. The MMA contains some
specific requirements for actuarial
equivalence or valuation. These
actuarial equivalence tests are discussed
below.
a. Actuarial Equivalence as Applied to
Actuarially Equivalent Standard
Coverage-Cost-Sharing
As required in section 1860D–
2(b)(2)(A) of the Act, standard
prescription drug coverage must have
‘‘coinsurance for costs above the annual
deductible . . . and up to the initial
coverage limit that is equal to 25
percent; or is actuarially equivalent . .
. to an average expected payment of 25
percent of such costs.’’ We interpret this
to mean that sponsors would be
required to demonstrate that the
actuarial value of their alternative costsharing as a percent of the actuarial
value of both cost-sharing and plan
payments for claims up to the initial
coverage limit is the same percentage as
for 25 percent coinsurance under
defined standard coverage. In
calculating these percentages, sponsors
would reflect the utilization impacts of
the two structures, but hold constant
formulary (drug list), drug pricing
(except to the extent that the plan
incorporated differential pricing and
cost sharing based on participation

E:\FR\FM\28JAR2.SGM

28JAR2

4292

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

status within the plan’s network), and
the group whose utilization is modeled.
This would allow plans to have variable
co-payments or coinsurance, including
tiered structures for preferred and nonpreferred drugs, in the initial coverage
interval as long as the actuarial
equivalence test is met. As a simple
example, a plan could have a tiered
coinsurance benefit with coinsurance
higher than 25 percent for brand name
drugs and lower than 25 percent for
generics. Some beneficiaries with
expenses between the deductible and
the initial coverage limit would be
expected to pay more than 25 percent,
and others to pay less, depending on
their usage of brand versus generic
drugs. Overall, however, the total
coinsurance would have to be
actuarially equivalent to an average of
25 percent for all beneficiaries with
expenses in this interval, even if the
total expenditures beneath the initial
coverage limit ($2,250 in 2006) are
lower than would be expected under
defined standard coverage (due to
increased use of generics, for example).
If sponsors wanted to provide a
variant on defined standard cost sharing
after the out-of-pocket threshold is met,
an actuarial test similar to that
described above for variants on the 25
percent coinsurance would apply. In
this case, based on the group of
individuals projected to exceed the out­
of-pocket threshold, the sponsor would
compute total cost sharing once the true
out-of-pocket (TROOP) threshold has
been met as a percentage of the sum of
that cost sharing plus the comparable
plan payout. This percentage would
have to equal the percentage computed
in the same manner using the defined
standard benefit (that is, the greater of
$2/$5 or 5 percent). We note that any
variant in cost sharing could not lead to
discrimination against certain
beneficiaries, for example, by increasing
the cost sharing of a drug used for a
particular illness well above the cost
sharing for other drugs.
b. Tests for Alternative Coverage
As required by section 1860D–2(c) of
the Act, sponsors offering alternative
coverage, that is, benefit structures
different from standard coverage, must
satisfy five tests (three of the five are
actuarial equivalency tests). As
discussed in subpart C, alternative
coverage would include coverage
actuarially equivalent to defined
standard coverage (basic alternative
coverage) or coverage that would
include supplemental coverage
(enhanced alternative coverage). All
alternative coverage would have to meet
all five of the coverage standards or tests
discussed in section b.1–5 of this

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

preamble. Tests one through three were
established by the Congress to ensure
that alternative coverage would be at
least actuarially equivalent to standard
coverage. Tests four and five are
additional tests imposed by the
Congress through section 1860D–2(c) of
the Act.
(1) Test for Assuring at Least Equivalent
Value of Total Coverage
As required in section 1860D–
2(c)(1)(A) of the Act, a plan could offer
alternative prescription drug coverage as
long as the actuarial value of total or
gross coverage is at least equal to total
or gross coverage provided under
standard coverage. Based on a typical
distribution of enrollee utilization, the
average plan payout (including costs
reimbursed by Medicare through the
reinsurance subsidy) would have to be
at least equal to the sponsor’s estimate
of the payout under defined standard
coverage (holding various factors
constant as described above under
section 4.a.).
Alternative benefit structures, such as
a decrease in the deductible with an
increase in coinsurance below the initial
coverage limit, or a lower initial
coverage limit with a corresponding
decrease in coinsurance, or a lower
initial coverage limit with a
corresponding decrease in deductible,
could be accommodated as basic
alternative coverage as long as the
actuarial value of this coverage equaled
that of defined standard coverage.
Alternative structures could not
increase the deductible or provide less
than the protection offered against high
out-of-pocket expenditures described in
section 1860D–2(b)(4) of the Act. To the
extent that the alternative coverage
exceeds the value of defined standard
coverage, the plan would be offering
enhanced alternative coverage, that is,
alternative coverage that includes
supplemental benefits (as discussed in
subpart C).
(2) Test for Assuring Equivalent
Unsubsidized Value of Coverage
In section 1860D–2(c)(1)(B) of Act, a
plan could offer alternative coverage as
long as the unsubsidized value of
coverage (the value of the coverage
exceeding subsidy payments) is at least
equal to the sponsor’s estimate of
unsubsidized value under defined
standard coverage (holding various
factors constant as described above
section 4.a.). We interpret the
unsubsidized value of coverage to mean
the value of the benefit attributable to
the beneficiary share of the premium.
There is a basic question about how
this test could be applied during the
plan review and approval process. In
order to determine the unsubsidized

PO 00000

Frm 00100

Fmt 4701

Sfmt 4700

value of coverage, one would have to
know the projected reinsurance
payments, and the value of the direct
subsidy. While the projected
reinsurance payments would be known
at the time of the submission (since the
actuarial value of the benefit is reduced
by projected reinsurance payments to
produce the bid), the value of the direct
subsidy would not be known (since it
would require computing the national
weighted average bid and bids have not
yet been approved). In the face of this
problem, one approach could be to
remove reinsurance payments as
estimated by the sponsor and to use an
estimate of the direct subsidy that we
would provide. For instance, in the first
year we might provide the estimate used
for budgeting purposes, and in
subsequent years, an estimate based on
prior years’ actual experience updated
for trend. Additional guidance will be
released concerning this matter.
Comment: Two commenters suggested
that we should waive the second test of
actuarial equivalence because if a plan
meets all of the other tests the second
test would be redundant, and without
knowing the true value of direct subsidy
the second test would be difficult to
conduct.
Response: The second actuarial
equivalence test for alternative coverage
ensures the equivalent unsubsidized
value of coverage. As we are defining
this test, the beneficiary premium for
alternative coverage must be greater
than or equal to the beneficiary
premium for standard coverage. Since
beneficiary premiums will not be
determinable until after all bids have
submitted and applied against the
national average bid, we interpret the
application of this provision to be that
the total Part D bid for alternative
coverage must be greater than or equal
to the sponsor’s bid for defined standard
coverage. We note that the first test of
actuarial equivalence guarantees that
the total value (including reinsurance)
of coverage for the basic alternative
benefit must be equal to the total value
of coverage of the standard benefit. The
second test then precludes a basic
alternative benefit structure that
increases government reinsurance costs
relative to define standard coverage. We
note that the test imposes no additional
burden beyond the first test (that is, if
you constructed a bid and shown that
you meet test #1, you would already
have all the information available to
show whether you meet test #2). Given
that the program is just beginning and
we have no practical experience to show
that the second test adds no value
beyond the first test, we see no basis for
waiving this test at this time.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
(3) Test for Assuring Standard Payment
for Costs at Initial Coverage Limit
Under section 1860D–2(c)(1)(C) of the
Act, sponsors are to determine the
average payout ‘‘for costs incurred that
are equal to the initial coverage limit’’
for ‘‘an actuarially representative
pattern of utilization.’’ This projected
payout is compared to a dollar amount
that is equal to what defined standard
coverage would pay for someone with
costs equal to the initial coverage limit.
Given the comparison, this raises the
question of what represents ‘‘an
actuarially representative pattern of
utilization.’’ As with the other tests, we
believe that it would be reasonable for
plans to use either anticipated plan
utilization or a typical utilization
pattern based on the Medicare
population. However, given the implicit
comparison to payout under defined
standard for someone with costs equal
to the initial coverage limit, it would not
be valid to include individuals with
expenses below the value of the initial
coverage limit. After excluding
individuals with total expenses below
the value of the initial coverage limit,
the plan would compute the actuarial
value of plan payout at the point where
total expenses are equal to the initial
coverage limit under standard coverage.
Under this interpretation, a plan could
offer alternative coverage as long as the
coverage is designed to provide an
actuarial value of plan payout that is
equal to at least 75 percent of costs
between the standard deductible and
initial coverage limit ($1,500 in 2006).
In other words, considering only plan
enrollees with expected expenses
greater than or equal to the dollar value
of the standard initial coverage limit,
the plan would have to demonstrate that
the expected plan payout associated
with expenses equal to that dollar value
would be at least 75 percent of benefit
costs between the deductible and initial
coverage limit (75 percent of $2,000 per
beneficiary in CY 2006) including taking
into account their expected behavioral
response to the different benefit
structure. This test, combined with the
prohibition on increasing the deductible
under alternative coverage (described
below), would ensure that the benefit
below the dollar level of the standard
initial coverage limit is always
actuarially equivalent to standard
coverage. As a result, it is not
permissible to trade off benefits above
the initial coverage limit for benefits
below.
(4) Test for Assuring the Deductible
Does not Exceed the Standard
Deductible
In keeping with the requirements of
section 1860D 2(c)(2) of the Act,

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

alternative coverage could not be
structured so that the deductible is any
higher than what it is in standard
coverage ($250 in 2006).
(5) Test for Assuring the Same
Protection Against High Out of-Pocket
Costs
As specified by section 1860D–2(c)(3)
of the Act, any alternative coverage
must provide ‘‘the coverage’’ specified
for costs above the catastrophic limit in
standard coverage. We interpret this to
mean that both enhanced and basic
alternative coverage would have to offer
at least the coverage available above the
catastrophic limit through defined
standard coverage. We would apply this
test in the same way that we do for
standard coverage with a variant of cost
sharing above the catastrophic limit.
That is, examining the group of
individuals the sponsor projects would
exceed the out-of-pocket threshold, total
cost sharing once TROOP has been met,
as a percentage of the sum of such cost
sharing plus comparable plan payout,
must be less than or equal to the
percentage computed using the defined
standard benefit (that is, the greater of
$2/$5 or 5 percent). Again, we note that
any variant in cost sharing could not
lead to discrimination against certain
beneficiaries, for example, by increasing
the cost sharing of a drug used for a
particular illness well above the cost
sharing for other drugs.
c. Value of Qualified Coverage
In accordance with section 1860D–
11(b)(2)(B) of the Act, with the bid, each
PDP sponsor and MA organization
offering an MA-PD plan must submit the
actuarial value of qualified coverage in
the region for the Part D eligible
individual with a national average risk
profile for the factors described in
section 1860D–15(c)(1)(A) of the Act.
We interpret this to mean that the
weighted average of the plan’s expected
risk-standardized costs will represent
the plan’s cost for the theoretical
national average-risk Part D individual.
Any increase in costs attributable to
increased utilization as the result of
enhanced alternative coverage must be
excluded from this calculation. Any
alternative coverage that does not
include supplemental coverage would
be, by definition, actuarially equivalent
to standard coverage. Any utilization
effect that supplemental coverage has on
the basic benefit should be priced into
the supplemental portion of the bid.
Comment: One commenter wants to
ensure that they have the ability to
establish flat copayments rather than the
25 percent coinsurance of the standard
design. We should permit Part D
providers to round flat copayments to
the nearest $5 dollar level, as these are

PO 00000

Frm 00101

Fmt 4701

Sfmt 4700

4293

the benefit designs commonly offered in
the market place.
Response: Any copayment structure
must meet the test for either actuarially
equivalent standard coverage or for
alternative coverage. These tests are
available to allow for flexibility in
benefit design including use of copays
rather than coinsurance. While we
would anticipate that some rounding
would be consistent with these tests,
rounding to the nearest $5 dollar level
may create too great a difference
between rounded and unrounded
values.
Comment: One commenter stated that
the regulation text should allow for the
value of any enhanced benefit design to
reflect both the potential impact of
utilization changes and mix shifts to
less expensive drugs. Any test of benefit
value should also take into account the
impact of utilization management,
which may increase utilization, but
have a favorable impact on total costs.
Response: To the extent that a benefit
design other than that of defined
standard coverage will have a projected
impact on the mix of drugs, this impact
will be included in the pricing of that
proposed design. We anticipate that
utilization management will be held
constant in the pricing of defined
standard and the proposed design, as
well as the population modeled; drug
formulary; and drug pricing (except to
the extent that the proposed design
incorporates differential pricing and
cost sharing based on participation
status within the plan’s network). These
issues will be fully discussed in our
guidance on ‘‘processes and methods
using generally accepted actuarial
principles and methodologies’’.
5. Information Included with the Bid
a. Bid Format
The exact format for the bid
submission is detailed in separate CMS
guidelines with the bid submission tool.
Section 1860D–11(c)(1)(D) of the Act
specifies ‘‘the use of generally accepted
actuarial principles and
methodologies.’’ We require that an
actuary (a member of the American
Academy of Actuaries) certify the
actuarial valuation, which may be
prepared by others under his or her
direction or review. Actuarial
certification would give better assurance
that the actuarial values in the bid were
prepared in conformance with actuarial
standards and methodologies. Section
1860D 11(c)(3)(B) of the Act permits use
of outside qualified independent
actuaries. We expect that plans would
use outside actuaries, especially if they
did not have qualified in-house
actuaries.

E:\FR\FM\28JAR2.SGM

28JAR2

4294

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

As provided in section 1860D 11(b)(3)
of the Act, we have developed (see Draft
PDP Bid Instructions and Pricing Tool
http://www.cms.hhs.gov/pdps/) the bid
submission format to facilitate the
submission of bids for multiple regions
and in all regions, and we have taken
this into account in process
development. This approach would
need to ensure that separate bids were
provided for each region in order to
calculate the national average monthly
bid amount and any geographic
adjustment required. Our overall
approach would be to increase our
flexibility to develop appropriate
methodologies in response to program
changes, while minimizing burden,
rather than codifying these processes in
regulation. We believe that we would
have the authority to develop these
methodologies through interpretive
guidance because our regulations state
that sponsors provide the actuarial
value of their plans in accordance with
generally accepted actuarial principles
and methodologies.
In most cases the information
included with the bid would be
sufficient for our review of the
acceptability of a proposed plan based
on actuarial principles and for
negotiation of terms and conditions of
an entity’s participation in the provision
of Part D benefits. However, we may
require additional information during
the review to support the assumptions
and methods accompanying the bid. As
provided in section 1860D–11(b)(2) of
Act and § 423.265(d) of this rule, the
information that would accompany the
bid submission would, at a minimum,
include the following:
• Information on the prescription
drug coverage to be provided, including
the structure of the benefit, including
deductibles, coinsurance (including any
tiers), initial (or subsequent) coverage
limits at which coinsurance levels
change, and out-of-pocket thresholds.
This would also include the plan’s
formulary, utilization management
techniques, and any drugs, or types of
drugs, excluded from coverage, and all
documents provided to beneficiaries
explaining the benefit, including the
Evidence of Coverage, and would be
certified by an officer of the plan. We
solicit comments on the best way to
obtain clear information on what drugs
are included in the formulary.
• The actuarial value of the qualified
prescription drug coverage in the region
for a beneficiary with a national average
risk profile certified by a qualified
actuary.
• The portion of the bid attributable
to basic benefits.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

• The portion of the bid attributable
to supplemental benefits, if applicable.
• The actuarial basis for the portion
of the bid attributable to basic coverage
and to supplemental benefits, if
applicable, certified by a qualified
actuary.
• The assumptions regarding
reinsurance subsidy payments.
• The assumptions regarding
administrative expenses.
• The plan’s service area and the
plan’s network of pharmacies serving
that service area.
• (For PDP sponsors only) the level
of risk assumed in the bid, including
whether the sponsor requires a
modification of risk level (see
discussion below) and, if so, the extent
of the modification. Although our
procedures may subsequently seek this
information, we may only review it to
the extent that the initial submission of
bids does not yield the statutory
minimum number of full risk bidders in
each region and area. Our goal in
designing the bidding process will be to
maximize the level of risk borne by
contracting plans and to minimize the
need for fallback plans; and
• Any other information that we
would require.
Response to public comment
Comment: Several comments were
received concerning privacy protections
for information submitted during the
bidding process. Two manufacturers
urged adoption of the ‘‘restriction on
use of information’’ standard in
§ 423.322(b) for bidding information.
Moreover, they believe that the Trade
Secrets Act (18 USC § 1905) should
apply and be inserted into the
regulation to cover manufacturer pricing
information. Three additional comments
were received suggesting that we should
limit our requests concerning specific
pricing and cost information. These
commenters while not referring to the
Trade Secrets Act, did seek protection of
any information submitted.
Additionally, one pharmacy benefits
manager and one health insurer
expressed concern that bidding
information will not be protected from
disclosure under the Freedom of
Information Act (FOIA).
Response: We believe that
information submitted with the bid that
is used to pay plans (such as estimations
of reinsurance or administrative costs)
would be protected under § 423.322(b)
and sections 1860D–15(d)(2)(B) and
1860D–15(f)(2) of the Act. These
sections protect information that is
submitted to us for the purposes of
carrying out section 1860D–15 of the
Act. Because the direct subsidy in
section 1860D–15(a) of the Act is based

PO 00000

Frm 00102

Fmt 4701

Sfmt 4700

upon the plan’s standardized bid
amount, we believe that the portion of
the standardized bid which is used in
calculating that subsidy would be
protected. On the other hand,
information submitted with the bid that
is not used in calculating the direct
subsidy (such as the structure of the
formulary or the utilization management
techniques to be used by the applicant)
would not be protected under sections
1860D–15(d)(2)(B) and 1860D–15(f)(2)
of the Act. However, bidders can always
seek to protect their information under
the Freedom of Information Act and
label truly proprietary information
‘‘confidential’’ or ‘‘proprietary.’’ When
information is so labeled, the bidder is
required to explain the applicability of
the FOIA exemption they are claiming.
When there is a request for information
that is designated by the submitter as
confidential or that could reasonably be
considered exempt under Exemption 4,
the Department is required by its FOIA
regulation at 45 C.F.R. § 5.65(d) and by
Executive Order 12,600 to give the
submitter notice before the information
is disclosed. To determine whether the
submitter’s information is protected by
Exemption 4, the submitter must show
that- (1) disclosure of the information is
likely to impair the government’s ability
to obtain necessary information in the
future; (2) disclosure of the information
is likely to cause substantial harm to the
competitive position of the submitter; or
(3) the records are considered valuable
commodities in the marketplace which,
once released through the FOIA, would
result in a substantial loss of their
market value. Consistent with our
approach under the Part C program, we
would not release information under the
Part D program that would be
considered proprietary in nature or that
would tend to stifle the availability of
discounts or rebates from
pharmaceutical manufacturers
negotiated by Part D plans.
Bidders may identify trade secrets and
confidential business information (CBI)
with their submission. However, if they
have not we will give them another
chance when a FOIA request has been
made on their records. In this case we
will notify the business submitters that
we are in receipt of FOIA requests for
their records. We will then provide the
business submitters with instructions
and ask them to identify any trade secret
or CBI in order to justify our application
of Exemption 4. We will then review
their justifications and highlighted
information against FOIA case law to
see if we can support their requested
redactions. Under Executive Order
12600, if the business submitters

E:\FR\FM\28JAR2.SGM

28JAR2

4295

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
generally be limited to the aggregate
level. However, per § 423.272 more
detailed information may be reviewed if
necessary to ensure the reasonableness
and appropriateness of the bid. Uniform
requirements for detailed rebate
information would unnecessarily
increase the burden of the bidder.
Detailed rebate information will be
collected for reasons other than the bid.
b. Risk Adjustment of Supplemental
Premium
The portion of the bid attributable to
supplemental benefits (part of enhanced
alternative coverage defined in
§ 423.104(g)) represents the

disagree with our Exemption 4 analysis
(which includes their justification) of
their identified trade secret or CBI, they
are provided the opportunity to seek a
restraining order or injunction in
Federal court prohibiting us from
releasing their records under FOIA.
Comment: One commenter suggested
that Pharmacy Benefit Managers be
required to disclose all rebate
arrangements with manufacturers.
Response: It is unclear to whom the
commenter wants rebate disclosed to
and in what context. The comment was
made in reference to bidding and in this
case information on rebates will

supplemental premium for a beneficiary
with a national average risk profile. The
payment process provided in section
1860D–15 of the Act will only address
risk adjustment of the basic portion of
the bid, and there are no other
provisions for risk adjusting the
supplemental benefit portion of the bid.
If not addressed, this would result in
plans with average risk scores above 1.0
being under-compensated by enrollees
for supplemental benefits, and plans
with average risk scores below 1.0 being
over-compensated, as illustrated below.

TABLE F–1
SUPPLEMENTAL PREMIUM RISK ADJUSTMENT
Plan A

Plan B

Plan C

Plan Average Risk Profile

0.80

1.00

1.10

1.0 Supplemental Premium

100

100

100

80

100

110

$20.00

$0.00

$(10.00)

Supplemental Premium if Risk-Adjusted

Over or (under) compensation

Table F–1 illustrates the case of three
equally efficient plans that each
estimate the cost of the same
supplemental benefits at $100. Plan B
has an average risk profile, that is, the
arithmetic average of the risk scores of
all of its enrollees is equal to 1.0. Plan
A and Plan C, however, have healthier
and sicker than average risk pools, with
enrollee risk scores averaging .80 and
1.10, respectively. Plan A only needs an
average risk-adjusted premium of $80 to
meet the revenue requirements of
providing those supplemental benefits
to its healthier enrollees, but would
receive $20 more on average from
enrollees if it collects the whole $100
unadjusted premium. In contrast, Plan C
needs to collect $10 more than it would
receive from the unadjusted (1.0)
premium to fully fund the expected
needs of its sicker enrollees.
Consequently, we will require
additional information on the projected
risk profiles of projected enrollees for
accurate valuation of the supplemental
portion of the bid with the bid
submission. We intend, through the
negotiation process, to reach agreement
on a supplemental premium based on
the bid submission that would account
for the risk profile of enrollees and,
thus, meet the plan’s revenue

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

requirements. Our goal is to maintain a
level playing field that would facilitate
the fair competition envisioned in the
MMA. Review and approval of this
information is discussed in section F.3.
of this preamble.
c. Modification of Risk in PDP Bids
As provided under section 1860D–
11(b)(2)(E) of Act and in § 423.265(d)(4),
PDP sponsors may request a
modification of certain risk sharing
arrangements provided under section
1860D–15(e) of the Act, thus, becoming
a limited risk plan. Modification of risk
could include an increase in the Federal
percentage assumed in the risk corridors
or a decrease in the size of the risk
corridors. Any modification of risk will
have to apply to all PDP plans offered
by a PDP sponsor in a region.
Section 1860D–11(b)(2)(E)(i) of the
Act states that modification of risk will
not be available to MA-PD plans.
Therefore, in discussing the possibility
of including in the bid a request for a
modification of risk, we include only
PDP sponsors. Limited risk plans will
only be accepted if the access
requirements in section 1860D–3(a) of
the Act could not otherwise be met
through the approval of a sufficient
number of full risk plans. These
requirements call for at least two

PO 00000

Frm 00103

Fmt 4701

Sfmt 4700

qualifying plans offered by different
entities, one of which must be a stand­
alone prescription drug plan. If other
bidders meet these requirements, a bid
from a limited risk plan could not be
approved and might not be reviewed.
Comment: The proposed rule offers
no guidance as to what we view as
‘‘minimal risk.’’
Response: While the statute allows
‘‘limited risk’’ arrangements to be
accepted in order to ensure that the
access requirements are met, such
arrangements must provide for more
than a ‘‘de minimis’’ level of risk. We
would generally consider anything
below 10 percent risk as ‘‘de minimis’’.
Any proposal for a level of risk above
the ‘‘de minimis’’ but less than the
standard full risk contract will be
considered if there was a need to accept
a ‘‘limited risk’’ arrangement.’’
Comment: One commenter suggested
that we should allow PDPs who wish to
enroll low income subsidy beneficiaries
to apply for limited risk, but be treated
as a full risk plan.
Response: While it is unclear what the
commenter meant by being ‘‘treated as
a full risk plan,’’ while being limited
risk, full risk plans get priority and we
will only approve limited risk plans
when there are not a sufficient number

E:\FR\FM\28JAR2.SGM

28JAR2

4296

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

of full risk plans to meet the access
requirements of section 1860D–3(a).
Also, per section 1860D–11(f)(1),
approval of a limited risk plan is
conditioned on not being able to meet
the access requirements but for the
approval of such a limited risk plan.
Thus, if there are sufficient full risk
plans, we will not approve limited risk
plans regardless of whether the PDP
wishes to specifically enroll low income
subsidy beneficiaries.
Comment: One commenter expressed
confusion over how the low-income cost
sharing amounts enter into the bid
‘‘calculation’’ since these amounts help
to satisfy revenue needs already
identified by the plans as part of the bid.
The commenter went on to state that
during the early years of the program it
will be difficult for plans to estimate the
number of low-income beneficiaries
expected to enroll and the amounts that
would be paid on their behalf. They
requested that we recognize that these
estimates are likely to be subject to error
and include statement in the preamble
to the final rules that a good faith
standard will apply to these estimates.
Response: The commenter is correct
that the low-income subsidy is not part
of the bid since it represents a subsidy
for enrollee cost-sharing liability rather
than plan liability. We ask for PDP
sponsors’ or MA-PD plans’ estimate of
their low-income subsidy to assist us in
determining an interim payment for this
subsidy, which is separate from the
direct and reinsurance subsidies. Their
actual low-income subsidy payment
will be based on the actual experience
for this group. Estimates will be
reviewed for reasonableness and
appropriateness using ‘‘generally
accepted actuarial principles and
methodologies’’ as instructed by 1860D–
11(c)(1)(D) of the Act.
Comment: One commenter urged that
bids include information on how plans
will coordinate with SPAPs for Part D
wraparounds at the point of sale.
Response: Specific information
elements included in the bid
submission tool are not part of the
regulatory text and will be released in
separate additional guidance on the
bidding process.
Comment: One commenter urged us
to specify that bids must include
information on specific drugs in each
formulary tier and their corresponding
co-pays, in addition to any prior
authorization requirements.
Response: Specific details concerning
the response fields will be released with
the guidance materials accompanying
the bid pricing tool and the Plan Benefit
Package; however, formulary tiering
structures and prior authorizations

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

requirements will be information that
we will review.
Comment: One comment stated that
we should provide a sample actuarial
pricing form that illustrates the type of
information desired.
Response: Additional guidance on
actuarial pricing will be made available
in a timely manner.
6. Review and Negotiation of Bid and
Approval of Plans
a. Authority to Review Bids
We will review the information filed
by the PDP sponsor or MA organization
in order to conduct negotiations on the
terms and conditions proposed in the
bid. In addition to general authority to
negotiate terms and conditions of the
proposed bid submitted and other terms
and conditions of a proposed plan, the
MMA grants use of the authority to
negotiate bids and benefits ‘‘similar to’’
the statutory authority given the Office
of Personnel Management (OPM) in
negotiating health benefits plans under
the FEHBP program. We believe that the
Congress used ‘‘similar to’’ in the statute
because of the differences between the
two programs. For example, while the
OPM authority applies to level of
benefits, standard Part D drug coverage
is defined. With regard to rates, in some
cases the context for FEHBP
negotiations is not applicable to Part D.
For example, the rates for communityrated plans under FEHBP are related to
the rate the entity provides to similarly
sized groups, and there is no
comparable concept in Part D. Arguably
the degree of competition among plans,
and price signaling through premium
and benefits, might be significantly
greater in Part D than in FEHBP.
Although these differences do exist
there are also similarities. OPM is
concerned about trend factors used to
establish the premium for experiencerated plans, and we will have similar
concerns about the reasonableness of a
sponsor’s trend assumptions. OPM is
concerned about cost-sharing changes
proposed by plans, and we will have
similar concerns with regard to
supplemental benefits. OPM wants to
maintain high member satisfaction and
ensure top quality service by plans, and
we will have similar interests.
Chapter 89 of title 5 USC gives OPM
broad discretion to negotiate prices and
levels of benefits. For example, 5 USC
8902(i) states that OPM may negotiate
with carriers if it believes the rates
charged do not ‘‘reasonably and
equitably’’ reflect the cost of the benefits
provided. In addition, OPM has broad
authority to negotiate the level of
benefits, including the ability to
prescribe ‘‘reasonable minimum

PO 00000

Frm 00104

Fmt 4701

Sfmt 4700

standards for health benefits plans.’’
(See 5 USC 8902(e).) Notwithstanding
our broad negotiating authority and our
negotiating authority ‘‘similar to’’ that of
OPM, to the maximum extent feasible
and consistent with the appropriate
discharge of our responsibilities, we
prefer to rely on competition rather than
negotiation.
We note that the bid requirements
will be negotiated and a denial of a
contract based on a failure to come to
an agreement on the bid will not be
appealable under the administrative
procedures for appealing a contract
denial beginning with reconsideration
in § 423.645. Only the application
requirements, which are separate and
distinct from bid negotiation, can be
appealed as detailed in subpart N.
Comment: One commenter urged that
we conduct a thorough review of Part D
providers’ estimates of reinsurance to
ensure a ‘‘level playing field.’’
Response: We will review estimates of
reinsurance. Per section 1860D–11(c)(1)
of the Act ‘‘an actuarial valuation of the
reinsurance subsidy payments’’ will be
conducted. Moreover, section 1860D–
11(d) and (e) require a review of the
entire bid including the estimates of
reinsurance. Additional detail for this
review will be released in
documentation supporting the bid
submission process.
b. Bid and Benefit Package Review
We have the authority to negotiate in
four broad areas: (1) administrative
costs; (2) aggregate costs; (3) benefit
structure; and, (4) plan management, if
dissatisfied with some or all aspects of
bid submissions. We will evaluate
administrative costs for reasonableness
in comparison to other bidders and in
comparison to a PDP sponsor’s other
lines of business. We will examine
aggregate costs to determine whether the
revenue requirements for qualified
prescription drug coverage are
reasonable and equitable. We will be
interested in steps that the sponsor is
taking to control costs, such as through
various programs to encourage use of
generic drugs. We will examine and
discuss any proposed benefit changes.
Finally, we will discuss indicators and
any identified issues with regard to plan
management, such as customer service.
In addition to the negotiation process,
we will ensure that bids and plan
designs meet statutory and regulatory
requirements. In general, we will
examine bids to determine whether the
bid meets the standard of providing
qualified prescription drug coverage, as
described in § 423.104(b) of this rule
and in subpart C of this preamble. We
will examine the actuarial analysis
accompanying the bid to ensure that it

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
has been prepared in accordance with
our actuarial guidelines and properly
certified. We will examine bids to
determine whether the revenue
requirements for qualified prescription
drug coverage are accurate and
reasonable, and that the requirements
relating to actuarial determinations are
met. We note that section 1860D–
11(e)(2)(c) of the Act requires that the
portion of the bid attributable to basic
prescription drug coverage must be
supported by the actuarial basis and
reasonably and equitably reflect revenue
requirements for benefits provided
under the plan, less the sum of the
actuarial value of reinsurance payments.
We will also review the structure of
premiums, deductibles, copayments,
and coinsurance charged to
beneficiaries and other features of the
benefit plan design to ensure that it is
not discriminatory. We will review cost
sharing both above and below the out­
of-pocket threshold with regard to its
impact on groups of beneficiaries. We
will also look to see that there is no
differential impact on groups of
beneficiaries by geographical location
within the plan’s region or service area
attributable to different levels of cost
sharing between preferred and nonpreferred network providers.
As required under section 1860D–
11(e)(2)(D)(i) of the Act and in
§ 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
eligible enrollee on the basis of health
status, including medical condition
(related to mental as well as physical
illness), claims experience, receipt of
health care, medical history, genetic
information, evidence of insurability,
and disability. In general, this means
that we will review benefit plans for
features that, when applied, have
differential impacts on beneficiaries
with particular medical conditions.
Factors we will consider in determining
whether a benefit structure is
discriminatory include, but are not
limited to: (1) the benefit design—
including the initial coverage limit, the
tiered cost-sharing, the use of categories
and classes in a formulary, and the
choice of drugs provided in each
category. (For example, if the tiered
cost-sharing for drugs used to treat HIV
is much higher than the cost-sharing for
other types of drugs, we will view this
benefit structure to be discriminatory);
(2) the use of any discriminatory limits
such as 90-day limits or requirements
for pre authorization; and (3)
supplemental benefits such as

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

supplemental coverage of drugs that
will encourage a healthier population to
join the PDP. As provided in section
1860D–11(e)(2)(D)(ii) of the Act, plans
using formulary designs based on
categories and classes that are consistent
with the guidelines established by the
U.S.P. as discussed in subpart C, will be
recognized as satisfying the non­
discrimination design related to
formulary structure as it pertains to
categories and classes. However,
adopting the USP model categories and
classes will not prohibit us from
reviewing other aspects, including the
use of any limits or tiers, as discussed
above.
c. Approval of the Supplemental
Premium
As provided under section 1860D–
11(e)(2)(C)(ii) of the Act, we will
determine that the portion of the bid
attributable to supplemental benefits
reasonably and equitably reflects the
revenue requirements for that coverage
under the plan. Unless the
supplemental portion of the bid (which
is paid by the enrollee in the form of the
supplemental premium) is risk adjusted
for the average level of risk among
enrollees, plans with average risk scores
above or below 1.0 will be over
compensated or under compensated by
enrollees for supplemental benefits.
Therefore, on the basis of this authority,
we will require additional information,
consisting of estimates of the projected
risk scores of the plan’s enrollees in the
subsequent year, to be submitted by
each plan for purposes of negotiating
the appropriate risk adjustment of the
supplemental portion of the bid. We
will review and negotiate that
information, and will approve a uniform
supplemental premium reflecting the
average risk factor for the plan’s
expected enrollment.
d. Rebate Reallocation for MA-PD plans
The negotiation process for MA-PD
plans could include the resubmission of
modified benefit structures (other than
changes in that portion of their
supplemental benefits related to drugs)
once we know the outcome of the
national average monthly bid
calculation and its impact on
beneficiary premiums. Part D drug
benefits, including benefits offered
through supplemental Part D coverage)
could not be changed during this
process because any changes will have
an impact on government reinsurance
payments and, therefore, on the portion
of the bid related to basic drug benefits.
The MMA requires that all MA bid and
benefit package submissions be
provided to us no later than the first
Monday in June. In the prescription
drug program enrollee premiums must

PO 00000

Frm 00105

Fmt 4701

Sfmt 4700

4297

be based on a percentage of the national
average monthly bid amount that can
only be calculated once all bids have
been received, if not actually approved.
(While the enrollment weights are
determined from the previous year’s
reference month, the bid amounts are
not.) Therefore, the prescription drug
portion of benefit packages submitted by
MA-PD plans will be based on estimates
of monthly beneficiary premiums. Some
of these MA-PD plans will have
allocated portions of their Part C rebates
to buy-down of the Part D premium.
Once the final national average monthly
bid amount and the base beneficiary
premium have been calculated, some of
these rebate allocations in the bids
could be either excessive or insufficient
to achieve the desired premium level.
Excessive rebate allocation will result
in a portion of the rebate that is not
provided to the beneficiary as required
by law, since a premium of less than
zero is not permitted. Compliance with
the statute will require a reallocation of
the excessive portion of the rebate credit
back to other allowed uses of the Part
C rebate, that is, to supplemental
benefits (including reduced cost sharing
other than cost sharing for Part D drugs)
or to credits to the Part B or
supplemental premiums. On the other
hand, insufficient rebate allocation may
result in minimal premiums that may be
seen as burdensome by plans, enrollees,
and the financial institutions managing
electronic funds transfer.
The statute does not address this
situation, but section 1860D–11 of the
Act does grant us broad authority to
negotiate the terms and conditions of
the proposed bids and benefit plans.
Our regulatory approach will be to
allow the negotiation process for MA-PD
plans to include the resubmission of
modified benefit structures once the
outcome of the premium finalization
process is known. MA PD plans will be
able to redistribute their Part C rebates
to correct for the difference between the
projected and final national average
monthly bid amounts and to achieve the
previously proposed level of Part D
premiums. Under no circumstances
could plans submit modified bids.
For example, an MA-PD organization
submitted its bid and benefit package
based on the assumption that the levels
of the national average monthly bid
amount and its prescription drug
standardized bid will result in a $35.00
monthly beneficiary premium for basic
coverage, and that it will use $35.00 of
its Part C rebate to completely buy down
the Part D premium. If the national
average monthly bid amount is
determined to be higher than expected,
the plan’s bid will end up below the

E:\FR\FM\28JAR2.SGM

28JAR2

4298

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

benchmark and its base beneficiary
premium will be adjusted by subtracting
the difference between the bid and
national average monthly bid amount.
Therefore, the plan’s monthly
beneficiary premium will be less than
the projected premium, for instance,
$34.00, and the $35.00 amount allocated
from the Part C rebate for Part D
premium buy-down will be excessive.
In that case, we will require the MA
organization to amend its benefit
package to reallocate the excessive $1.00
of the Part C rebate credit to additional
supplemental benefits (other than for
Part D drugs) or to Part B or
supplemental premium credits. These
adjustments will be mandatory in order
to ensure that the entire amount of the
rebate was provided to the beneficiary
in some form.
Under an alternative scenario, the
national average monthly bid amount is
determined to be lower than expected
and the plan’s bid ends up above the
benchmark. In this case, the plan’s base
beneficiary premium will be adjusted by
adding the difference between the bid
and national average monthly bid
amount. Therefore, the plan’s monthly
beneficiary premium will be higher than
projected, for instance $36.00, and the
$35.00 amount allocated from the Part C
rebate for Part D premium buy-down
will no longer be sufficient to eliminate
the Part D premium as planned. In that
case, we will allow the MA organization
to amend its benefit package to
reallocate an additional $1.00 of the Part
C rebate credit from additional
supplemental benefits (other than for
Part D drugs) or from Part B or
supplemental premium credits to
eliminate the Part D premium. These
adjustments will be optional since the
Part C rebate has already been provided
to the enrollee. We will not permit an
MA organization to simply eliminate a
minimal premium instead of
reallocating the rebate because doing so
will mean that the cost of providing the
prescription drug benefit had been
overstated. However, the MA
organization could elect to charge the
new increased premium and to amend
its benefit package submission
accordingly.
Comment: One comment suggested
that we should also allow reallocation of
rebate dollars to round off premiums
and to support to support the
availability of MA-PD plans to dual
eligibles.
Response: Title II MA-PD rebate
dollars (note this is to be distinguished
from manufacturer rebates) could
certainly be used to round off premiums
(§ 422.266(b)(2)), and as stated our
regulatory approach will be to have a

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

negotiation process for MA-PD plans to
include the resubmission of modified
benefit structures once the outcome of
the premium finalization process is
known. Such a reduction in the Part D
premium will, however, have to be
uniform for all plan enrollees.
e. Private Sector Price Negotiation and
Formulary Design
The Act envisions that most price
negotiation including discounts, rebates,
or other direct or indirect subsidies or
remunerations will take place between
PDP sponsors or MA organizations (or
their subcontractors) and pharmacies
and pharmaceutical manufacturers. We
believe the Congress used the terms
direct and indirect to be all inclusive in
defining subsidies. Section 1860D–11(i)
of the Act precludes us from interfering
with negotiations between drug
manufacturers and pharmacies, or PDP
sponsors, or requiring a particular
formulary or pricing structure. In other
words, price negotiation with
manufacturers will be conducted by the
private drug benefit managers and plans
that are already familiar with
negotiating prices of prescription drugs
on a local, regional or national basis.
Moreover, we expect that providing
information on discounted drug prices
to beneficiaries will encourage further
competition on lower prices. Because
beneficiaries will choose a drug plan
based on drug prices and formulary
coverage, the plans have strong
incentives to negotiate lower prices on
drugs that beneficiaries use just as
private benefit managers currently do on
behalf of the Federal government, State
governments, and employer and retiree
plans. We expect that in addition to
price levels for drugs, these negotiations
will also include such terms as
prohibitions on substitutions of drugs if
the net result will be higher costs for
patients or the plans. The nature of the
negotiations that we will conduct with
bidders is discussed later for full-risk
and limited-risk bids, and in subpart Q
of this preamble for fallback plans.
We expect that the private
negotiations between PDP sponsors and
drug manufacturers will achieve
comparable or better savings than direct
negotiation between the government
and manufacturers, as well as coverage
options that better reflect beneficiary
preferences. This expectation reflects
the strong incentives to obtain low
prices and pass on the savings to
beneficiaries resulting from
competition, relevant price and quality
information, Medicare oversight, and
beneficiary assistance in choosing a
drug plan that meets their needs. This
is similar to the conclusion of other
analyses, for example, CBO’s recent

PO 00000

Frm 00106

Fmt 4701

Sfmt 4700

statement that ‘‘Most single-source
drugs face competition from other drugs
that are therapeutic alternatives. CBO
believes that there is little, if any,
potential savings from negotiations
involving those single-source drugs. We
expect that risk-bearing private plans
will have strong incentives to negotiate
price discounts for such drugs and that
the Secretary would not be able to
negotiate prices that further reduce
Federal spending to a significant degree.
‘‘In accordance with the Medicaid best
price exemption provided under section
1860D–2(d)(1)(c) of the Act and codified
in § 423.104(h)(2) of our rule, drug plans
may even be able to negotiate better
prices than those paid under Medicaid.
It also reflects Medicare’s recent
experience with drug price regulation
for currently-covered drugs, in which
regulated prices for many drugs have
significantly exceeded market averages.
By not allowing us to require any
particular formulary, the statute ensures
that the Pharmacy and Therapeutics
committees of prescription drug plans
and MA PD plans have the flexibility to
make changes in their classifications
and lists of preferred drugs based on the
most current evidence-based
information (subject to the limitations of
§ 423.120(b)). Additional CMS
guidelines on formulary review will be
made available. However, in summary
we will evaluate plan formulary
categories and classes in comparison to
the model guidelines developed by
U.S.P. In addition to evaluating any
discriminatory features, as discussed
above, we have the authority to develop
minimum standards and to negotiate the
terms and conditions of the bid under
section 1860D–11(d) of the Act. We also
have the authority to promulgate
additional contract terms (section
1860D–12(b)(3)(D) of the Act). Finally,
we believe the structure of the Part D
benefit, as laid out in section 1860D–2
of the Act, with a requirement for
catastrophic coverage, anticipates a
structure where beneficiaries receive
coverage for medically necessary drugs.
Therefore, we will evaluate the number
of categories in formularies that do not
meet the model guidelines and the
choice of drugs available in those
categories for meeting the needs of the
Medicare population. After the initial
year of the program, we will also review
the history of plan formulary appeals to
identify issues with the plan’s
formulary. We will conduct additional
research on evaluating formularies and
drug benefit designs and we would
welcome comments on evaluation. As
noted previously, we may also review
plan cost sharing (that is, tiers). Our

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
formulary review will follow four
important principles:
1. Rely On Existing Best Practices:
Our review will rely on widely
recognized best practices for existing
drug benefits serving millions of seniors
and people with disabilities to ensure
non-discriminating, appropriate access;
2. Provide Access to Medically
Necessary Drugs: We will require that
drug plans provide access to medically
necessary treatments for all and do not
discriminate against any particular
types of beneficiaries based on their
expected drug costs;
3. Flexibility: We will allow plans to
be flexible in their benefit designs to
promote real beneficiary choice while
protecting beneficiaries from
discrimination; and
4. Administrative Efficiency: We will
set up a process to conduct effective
reviews of plan offerings within a
compressed period of time.
Comment: Several comments were
made regarding formulary structures
that are likely to substantially
discourage enrollment, with the
majority merely expressing support for
our regulatory text. Ten comments were
received expressing concern over the
definition of ‘‘substantially discourage’’,
three of which called for dropping the
word ‘‘substantially’’ from the
regulation. One commenter specifically
argued that step therapy for
psychopharmacology should be
considered as substantially
discouraging. Another commenter
simply stated that step therapy should
be reviewed for discriminatory impact.
Response: The term ‘‘substantially’’
comes directly from the statute in
section 1860D–11(e)(2)(D)(i) of the Act
and therefore we do not believe it
should be eliminated as some
commenters recommended. According
to research conducted for the Agency by
Booz Allen Hamilton (‘‘Drug Utilization
Management and Quality Assurance
Best Practices and Standards’’), step
therapy is one method of benefit design
currently used by industry for the
purpose of managing costs by requiring
more cost effective drugs to be used
before more expensive options are
prescribed. Other research indicated the
widespread use of this technique. For
example, in its June 2004 ‘‘Drug Trend
Report,’’ Express Scripts, a large
pharmacy benefits manager, stated that
the use of step therapy had risen from
4.5 million to 9.8 million lives between
2002 and 2004 for their members.
Moreover, they report that step therapy
with psychotropics, in particular
antidepressants, is common among
these members. Step therapy is also
common among State Medicaid

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

programs. Indeed, a 2003 report by the
Georgetown University Health Policy
Institute on behalf of the Kaiser
Commission on Medicaid and the
Uninsured found that 28 Medicaid
agencies in 2003 used step therapy in
their drug programs. The review process
will examine the use of step therapy as
a utilization control, but a categorical
ban would be inconsistent with
Congressional intent in Section 1860D–
4(c)(1(A) of the Act, which calls on
PDPs to have ‘‘a cost-effective drug
utilization management program,
including incentives to reduce costs
when medically appropriate.’’ As we
have outlined, step therapy is one
common method of drug utilization
management. The Congress was aware
that utilization management included
step therapy, and they were also aware
of that some stakeholders have
objections to it as evidenced by the
testimony given during the
Subcommittee on Health of the
Committee on Energy and Commerce
hearing ‘‘Designing a Twenty-First
Century Medicare Prescription Drug
Benefit’’ on April 8, 2003. We will
review step therapy and other formulary
structures to ensure that they are not
substantially discouraging. Accordingly,
we will rigorously review formularies in
a number of ways as part of the bid
negotiation process. This review will
include, but not be limited to: (1)
reviewing the classes and categories in
relation to the USP model; (2) reviewing
the formulary to make sure that all
appropriate treatments are available for
certain complex diseases such as HIV;
(3) where possible and appropriate,
comparing the formularies and
utilization management programs
(including step therapies) to applicable
treatment guidelines to make sure they
support current treatment standards;
and (4) comparing formularies between
plans to identify outlier practices,
which will include comparing plans for
amount and specific drugs that they are
including in step therapy, quantity
limits and prior authorization.
Comment: One commenter indicated
concern that SPAPs will incur
significant costs if PDP sponsors’
formularies are inadequate. We should
establish a formulary evaluation
criterion that would trigger a detailed
evaluation of the adequacy for the
formulary.
Response: Formularies will be
evaluated according to the provisions of
the statute. Regardless of the impact of
specific plan formularies, we have
estimated that Part D will save SPAPs
approximately $3 billion between
2006—2010 (see the regulatory impact
statement for more detail).

PO 00000

Frm 00107

Fmt 4701

Sfmt 4700

4299

f. Bid Level Negotiation
The FEHBP standard in 5 USC 8902(i)
requires us to ascertain that the bid
‘‘reasonably and equitably reflects the
costs of benefits provided.’’ In addition,
we note that section 1860D–11(e)(2)(c)
of the Act requires that the portion of
the bid attributable to basic prescription
drug coverage must ‘‘reasonably and
equitably’’ reflect revenue requirements
. . . for benefits provided under that
plan, less the sum ... of the actuarial
value of reinsurance payments.’’
Analogous to the manner in which
FEHBP views its management
responsibilities, we see this requirement
as imposing the fiduciary responsibility
to evaluate the appropriateness of the
overall bid amount.
In general, we will evaluate the
reasonableness of bids submitted by atrisk plans by means of the actuarial
valuation analysis. This would require
evaluating the plan’s assumptions
regarding the expected distribution of
costs, including average utilization and
cost by drug coverage tier, for example,
in the case of standard coverage: (1)
those with no claims; (2) those with
claims up to deductible; (3) those with
claims between the deductible and the
initial coverage limit; (4) those with
claims between the initial coverage limit
and the catastrophic limit; and (5) those
with claims in excess of the catastrophic
limit. We could test these assumptions
for reasonableness through actuarial
analysis and comparison to industry
standards and other comparable bids.
Bid negotiation could take the form of
negotiating changes upward or
downward in the utilization and cost
per script assumptions underlying the
bid’s actuarial basis.
Arguably, appropriate assurance that
plan bids reasonably and equitably
reflect the revenue requirements
associated with providing the Part D
benefit requires knowing the final drug
price levels the plans are paying that are
implicit in their bids. Consequently, in
addition to looking at final aggregate
prices, if we found that a plan’s data
differed significantly from its peers
without any indication as to the factors
accounting for this result, we could also
ask bidders to provide information
about rebates and discounts they are
receiving from manufacturers and
others, in order to ensure that they are
negotiating as vigorously as possible.
Section 1860D 11(b)(1)(C) of the Act
allows us to ask for necessary
‘‘information on the bid’’. In other
words, we will be able to inquire as to
the ‘‘net cost’’ of drugs since this is the
key dollar value we will need to make
accurate ‘‘apples to apples’’
comparisons on drug prices between

E:\FR\FM\28JAR2.SGM

28JAR2

4300

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

PDPs. Under this approach, if the
particular bids appear to be unusually
high (or low), we could go back to the
bidders and request that they explain
their pricing structure, the nature of
their arrangements with manufacturers,
and we might ask further questions and
take further action to perform due
diligence to ensure that there is no
conflict of interest leading to higher
bids. For instance, we will look at
certain indicators, such as unit costs or
growth rates in the bid amounts to see
if they are in keeping with private
market experience to the extent feasible
for a comparable population (for
example, retirees). (In this case, we will
be using the authority in 5 USC section
8902(i) to negotiate bids that are
‘‘consistent with the group health
benefit plans issued to large
employers’’.) If the overall bids were
unjustifiably high, we will have the
authority to negotiate the bids down to
a level that is more in keeping with bids
from other sponsors. We could exercise
our authority to deny a bid if we do not
believe that the bid and its underlying
drug prices reflect market rates. Our
strong expectation, however, is that we
will be able to rely on the incentives
provided by competitive bidding, and
we will use our authority under this
part only on the rare occasion we find
that a plan’s data differs significantly
from its peers without any indication as
to the factors accounting for this result.
Comment: Several comments were
received on the MMA provision of
‘‘authority similar to the authority of the
Director of the Office of Personnel
Management’’ for the Federal Employee
Health Benefits Program (FEHBP) when
negotiating bids for Part D. One
commenter referenced that in the
preamble of the proposed rule, we
stated that we were considering
regulations similar to those used by
Office of Personnel Management (OPM)
in 48 CFR Chapter 16, which they note
is comprised of 24 distinct parts and
due to the lack of clarity with regard to
the provisions of the OPM regulations
were referring to they would be unable
to comment. One health insurer asked
that we clarify how our intended
oversight would differ from the
Similarly Sized Subscriber Groups
(SSSGs) requirements in the FEHBP.
Another commenter asserted that OPM
negotiates an annual dollar cap on
administrative expenditures that can be
funded through premiums and that
similar negotiations with MA plans
would not be appropriate given that the
MMA works on a competitive model.
Two commenters suggested that broad
use of the OPM authority would violate

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

the noninterference clause in the MMA
and that we should not review every
plan during the bidding process in
detail on pricing structure and the
nature of arrangements with
manufacturers. One commenter agreed
with the Agency’s interpretation of this
authority in the proposed rule noting
that nothing in our interpretation would
‘‘set the price for any individual drug or
even plans if aggregate price levels for
groups of drugs were higher than prices
observed among peer plans’’.
Response: The section 1860D–
11(d)(2)(B) of the Act authority will be
used to review bids and negotiate
changes consistent with the statute and
regulation. Specifically, we intend to
evaluate the reasonableness and
appropriateness of the actuarial
assumptions made in the bid. We will
examine bids to determine whether the
revenue requirements for qualified
prescription drug coverage are accurate
and reasonable. We also will examine
administrative costs for reasonableness.
We will review profit for reasonableness
and appropriateness. We also will
review the structure of the benefit plan
design in terms of such features as
premiums, deductibles, co-payments,
and coinsurance charged to
beneficiaries to ensure that it is not
discriminatory.
There appears to have been confusion
caused by our request for comments on
48 CFR Chapter 16. These OPM
regulations assume applicability of the
Federal Acquisition Regulation, which
is not applicable to at-risk or limited
risk Part D plans. Therefore we are not
adopting any of the OPM regulations at
this time. We will note however that our
negotiating authority ‘‘similar to the
authority...of the Office of Personnel
Management’’ (section 1860D–
11(d)(2)(B) of the Act) is in addition to
our general authority to ‘‘negotiate the
terms and conditions of the proposed
bid submitted and other terms and
conditions of a proposed plan’’ (Section
1860D–11(d)(2)A) of the Act). We have
clarified the regulations to reflect these
two separate authorities.
With regard to the application of a
SSSG concept to Part D, we will note
that the Part D program generally relies
on competition to ensure reasonable
bids. There is no authority to tie a
sponsor’s rate methodology to that used
for a SSSG as applied under FEHBP
with regard to community-rated plans.
Therefore, we do not believe that this
type of cross product line comparison
will be appropriate at this time.
One comment correctly pointed out
that there is no cap on administrative
costs under Part C or Part D similar to
the cap in effect in FEHBP experience

PO 00000

Frm 00108

Fmt 4701

Sfmt 4700

rated plans. It is assumed that
competition among plans will generally
ensure reasonable bids. The Congress,
however, did not leave the
determination of rates entirely to market
forces. We are required to determine
that the reasonable and equitable test is
met and is given negotiating authority to
ensure this result. The initial review
will focus in part on low and high cost
outliers, and on bids in areas with little
competition. It must be noted however,
that bid outliers are not necessarily
inappropriate, nor are bids within the
measure of central tendency
automatically correct. Indeed, an outlier
bid may be reasonable and appropriate
after additional review and explanation
while an ‘‘average’’ bid could be based
on incorrect actuarial assumptions. In
summary, all bids will be reviewed for
their reasonableness whether an outlier
or not.
Two commenters seemed to suggest
that they believe that the bid review
authority will be used as a back door
price control mechanism in direct
violation of the non-interference
provision of section 1860D–11(i) of the
Act, which directs the Secretary to not
interfere with the negotiations between
drug manufacturers and pharmacies and
PDP sponsors; and to not require a
particular formulary or institute a price
structure for the reimbursement of
covered part D drugs. In the proposed
rule we interpreted the non-interference
provision as prohibiting us from setting
the price of any particular drug or from
requiring an average discount in the
aggregate on any group of drugs (such as
single-source brand-name drugs,
multiple-source brand name drugs, or
generic drugs), but allowing us to
require justification of aggregate price
levels. In addition, although we are
prohibited from negotiating the price
levels of drugs, it is authorized to
negotiate the level of the overall bid. We
will evaluate the reasonableness of costs
submitted by at-risk plans bids through
actuarial valuation analysis, and noted
that this might require information
regarding the plan’s assumptions about
expected distribution of costs, including
average utilization and price by drug
coverage tier, for: (1) those with no
claims; (2) those with claims up to
deductible; (3) those with claims
between the deductible and the initial
coverage limit; (4) those with claims
between the initial coverage limit and
the catastrophic limit and 5) those with
claims in excess of the catastrophic
limit. Through actuarial analysis, these
assumptions will be tested for
reasonableness, and compared to
industry standards and other

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
comparable bids. We also want to clarify
that we do not intend on universally
requiring plans to submit detailed
information on pricing structure and the
nature of arrangements with
manufacturers. Requests for additional
and more detailed information will only
be triggered questions involving the
initial bid submission. We are confident
that additional bid submission guidance
will limit such occurrences from
happening. We believe that this
interpretation ensures that we fulfill our
duty to review bids for reasonableness
while avoiding any direct interference
in the negotiations between
manufacturers, pharmacies, and PDP
sponsors.
Under the previous Medicare+Choice
program, we permitted
Medicare+Choice organizations to waive
premiums or to offer mid-year benefit
enhancements to their benefit packages.
However, in order to maintain the
integrity of the bidding process, we
believe that it is no longer appropriate
to allow either MA organizations or PDP
sponsors to waive premiums or offer
mid-year enhancements as they will be
de facto adjustments to benefit packages
for which bids were submitted earlier in
the year.
These adjustments would be de facto
acknowledgement that the revenue
requirements submitted by the plan
were overstated. Allowing premium
waivers or mid year benefit
enhancements would render the bid
meaningless. Excessive amounts
included in the bid will be subject to
recovery by the government in the risk
corridor calculations following the
coverage year.
Consequently, we interpret the
statutory provisions on competitive
price negotiation as prohibiting us from
setting a regulated price of any
particular drug or imposing by
regulation an average discount in the
aggregate on any group of drugs (such as
single-source brand-name drugs,
multiple-source brand name drugs, or
generic drugs), but as allowing
justification of aggregate price levels for
groups of drugs. In addition, we could,
under the specific circumstances
previously discussed, negotiate
regarding the level of the overall risk
bid. This approach will allow us to
exercise the authority similar to FEHBP
as visualized in the MMA to ensure that
per capita rates charged reasonably and
equitably reflect the cost of the benefits
provided, and that beneficiaries receive
the full benefits of vigorous price
negotiation by their drug plans.
g. Approval of Plans
After negotiations on the terms and
conditions of the bid, we must approve

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

or disapprove the bid. After
negotiations, we will approve a plan
only if—
• The plan is found to be in
compliance with requirements specified
in this regulation;
• The plan meets the actuarial
valuation requirements; and
• The plan design does not
discourage enrollment by certain
eligible beneficiaries.
In § 423.272(c), we approve limited
risk plans only if fewer than two
qualifying prescription drug plans
offered by different entities, one of
which must be offered by a stand-alone
PDP sponsor, were submitted and
approved in a region. We will approve
only the minimum number of limited
risk plans needed to meet these access
requirements and will give priority to
plans bearing the highest levels of risk;
however, we may take into account the
level of the bids submitted by these
plans. Except as authorized under
section 1860D–11(g) of the Act and in
§ 423.863 with regard to fallback plans,
we will not, under any circumstances,
approve a plan that elected to bear no
risk or a de minimis level of risk.
Comment: One comment urged that
we should reject bids that result in only
one PBM operating as a subcontractor to
all the plans in a given region.
Response: The statute does not give us
the authority to do this. The statute
mandates that beneficiaries have the
choice of at least one PDP in an area in
addition to whatever MA-PD options are
available. The number of PBMs that
contract with the PDP sponsors and MA
organizations has no bearing on the
access requirements.
h. Special Rules for PFFS Plans
As provided in section 1860D–21(d)
of the Act, and codified in § 423.272(d),
PFFS plans that offer prescription drug
coverage are exempt from review and
negotiation (under sections 1860D–11(d)
and (e)(2)(C) of the Act) of their
prescription drug bids and premium
amounts but are otherwise subject to all
other requirements under this part, with
the following exceptions. While we will
not negotiate PFFS bids, those bids must
meet the actuarial valuation
requirements applicable to all risk bids.
These plans are not required to
negotiate discounted prices for
prescription drugs. If they do negotiate,
the requirements under § 423.104(h)
related to negotiated prices will apply.
If the plan provides coverage for drugs
purchased from all pharmacies, without
charging additional cost sharing, and
without regard to whether they are
participating pharmacies, § 423.120(a)
and § 423.132 of this rule (requiring
certain network access standards and

PO 00000

Frm 00109

Fmt 4701

Sfmt 4700

4301

the disclosure of the availability of
lower cost bioequivalent generic drugs)
will not apply to the plan. PFFS plans
are also exempt from drug utilization
management program and medication
therapy management program
requirements.
Finally, we note that section 1860D–
21(d)(7) of the Act provides that costs
incurred for off-formulary drugs will not
be excluded in determining whether a
beneficiary has reached the out-of­
pocket threshold if a PFFS plan does not
use a formulary. We believe that section
1860D 21(d)(7) of the Act is a tautology
and simply states that PFFS plans
without formularies, by definition,
cannot have non formulary drugs to
exclude from the out-of-pocket
threshold calculation.
7. National Average Monthly Bid
Amount
In § 423.279, we outline the
calculation of the national average
monthly bid amount. For each year,
beginning in 2006, we will compute a
national average bid based on approved
bids in order to calculate the national
base beneficiary premium. As a
practical matter, we realize that we
might need to calculate and announce
the national average monthly bid
amount before negotiations on all bids
were completed in order to allow time
for finalization of premiums and benefit
packages. Therefore, we anticipate that
we will identify a date by which the
national average monthly bid amount
will be published, and we will use the
bids that had passed a certain level of
approval as of that date as the basis for
the calculation.
As provided in section 1860D
13(a)(4)(A) of the Act, in computing the
national average monthly bid amount,
we will exclude bids submitted for MA
private fee-for-service (PFFS) plans,
specialized MA plans for special needs
individuals, PACE programs under
section 1894 of the Act (pursuant to
section 1860D–21(f) of the Act) and
reasonable cost reimbursement contracts
under section 1876(h) of the Act
(according to section 1860D–21(e) of the
Act). The exclusion from the calculation
of bids of PFFS, cost plans, specialized
MA plans, and PACE suggests that they
are different from, and not comparable
to, the average bid in some way. We
interpret this difference to be based
solely on price levels because the
legislation—
• Does not define any other basis for
determining these bids;
• Continues to compare these bids to
the national average bid amount to
determine adjustments to enrollee
premiums; and

E:\FR\FM\28JAR2.SGM

28JAR2

4302

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

• Generally, provides for payments
to such plans (including risk
adjustment) in the same manner as to
non-excluded plan types—except that
PFFS plans receive reinsurance
payments according to estimates—and
not actual costs and are not eligible for
risk corridor payments.
Therefore, these excluded plan types
will still submit bids on the same basis
as all other plans, that is, the 1.0 risk
prescription drug plan beneficiary, even
though these bids are not included in
the national average bid amount at this
time.
The national average bid amount will
be equal to the weighted average of the
standardized bid amounts for each PDP
and for each MA-PD plan described in
section 1851(a)(2)(A)(1) of the Act. The
national average monthly bid amount
will be a weighted average, with the
weights being equal to the proportion of
Part D eligible individuals enrolled in
each respective plan in the reference
month (as defined in § 422.258(c)(1)).
For calendar year (CY) 2006, we will
determine the enrollment weights on
the basis of assumptions that we will
develop. In the August 2004 proposed
rule we outlined that one possible
approach would be to use the following
procedure to assign weights to
individual bids for PDPs and MA-PD
plans for CY 2006:
• Obtain total Medicare enrollment
by region, and enrollment in each (local)
MA plan that offers a drug benefit by
region. These enrollments will be as of
a specific date, for example, March 31,
2005.
• Assign each (local) MA-PD plan in
each region a weight equal to its MA
enrollment.
• Subtract the MA enrollment from
the total Medicare enrollment for each
region to arrive at the PDP-eligible
enrollment.
• Divide the PDP-eligible enrollment
for each region by the number of
companies offering PDPs in each region
to arrive at the weight for each company
in each region.
• For each company in a region,
divide the company weight by the
number of plans offered by that
company to arrive at the PDP weight.
• The regional average monthly bid
amount will be calculated by weighting
each plan’s bid by its assigned weight.
• The national average monthly bid
amount will be calculated by weighting
each regional average monthly bid
amount by the region’s proportion of
Part D eligible individuals (Medicare
enrollment) and summing these
products.
Using this methodology, after
subtracting MA enrollments, each

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

company offering PDP(s) in a region gets
equal weight. An exception might occur
based on capacity limits indicated by
MA-PD plans. This assumes that
beneficiaries will select a company, and
then select a plan from that company. It
also dilutes the effect of any potential
artificially high bids designed solely to
increase the national average monthly
bid amount. If a company offers
multiple plans in a region, each plan
gets an equal allocated share of its
company’s assigned weight.
New MA-PDs will get a zero weight.
This treatment is consistent with the
weight assignment specified in the
statute for subsequent years. Starting
with the second year, all new plans will
get zero weight because they have no
prior year enrollment. We request
comments on the ‘‘unequal’’ inclusion
of plans in the calculation of the
national average monthly bid. We note
that many MA PDs will operate in small
geographic areas with small potential
enrollment, and so we believe that the
impact of this approach for new local
MA-PDs is likely limited. We recognize,
however, that this approach is perhaps
more problematic related to the
treatment of the new regional MA-PD
plans, as these plans in a given region
are likely to have larger enrollment than
local MA-PD plans. This particular
approach implicitly assigns persons in
new MA PD plans (both local and
regional) to the PDP weights, hence
giving potentially too much weight to
the PDPs.
Alternatively, assigning equal weights
to PDPs and new MA PD plans (even if
limited to just the regional MA-PDs)
could likely assign too much weight to
the new regional MA PD plans, which
at least in 2006 are expected to have
lower enrollment. Another possible
alternative would be to base weights on
regional MA-PD plan projections of
enrollment, subject to our assessment of
reasonableness of the estimates. In this
approach we would use the proportion
of projected enrollment for each plan as
weights. However, particularly in the
first year or so, projections may be quite
inaccurate, leading to a distorted and
unrepresentative benchmark. In the
proposed rule we requested comments
on these and other alternative
approaches for how to weight bids in
2006.
Note that in this methodology the
assigned weights are price inelastic, that
is, the recommended weight assignment
methodology implies that price is not a
factor in plan selection. We recognize
that in reality this is not the case, but
in the absence of data on which to base
the relationship between price and plan
choice in this population for this benefit

PO 00000

Frm 00110

Fmt 4701

Sfmt 4700

we cannot model the effect of price
variations on demand. We believe that
the fairest method that is feasible for
2006 is simply to assume an equal
weight for each plan.
In subsequent years, the weights for
the weighted average would be
calculated as a percentage with the
numerator equal to the number of Part
D eligible individuals enrolled in the
plan in the reference month and the
denominator equal to the total number
of Part D eligible individuals enrolled in
all plans (except for those plans whose
bids are not include in the national
average bid amount, as described above)
in the reference month. It represents the
proportion of the Part D eligible
enrolled individuals in the plan. We
would multiply the portion of each plan
bid attributable to basic benefits by its
proportion of total Part D enrolled
individuals and sum each product to
arrive at the national average monthly
bid. In § 423.279(c), we would also
establish an appropriate methodology
for adjusting the national average
monthly bid amount to take into
account any significant differences in
prices for covered Part D drugs among
PDP regions. As part of carrying out the
Congress’ requirement that our
geographic adjustment methodology be
‘‘appropriate,’’ we believe the method
would first require gathering data from
PDPs and MA-PDs on regional drug
prices. Therefore, we may not
implement a geographic adjuster for the
first few years of the program unless we
have acquired sufficient information on
pricing to accurately characterize that
variation. If we were to determine that
there is significant geographic variation
in prices, we anticipate that we would
announce the adjustment factors in
advance of the bidding process for any
year in which geographic adjustment
would be applied to bids in the
calculation. This would be subject to
notice and comment like any other
change in payment methodology and
therefore would be announced in the
45-day notice in advance of the bidding
process for that year. If we were to
determine that there is only minimal
price variation, we would not
implement a geographic adjuster for the
national average monthly bid
calculation. Additionally, we would
implement any geographic adjuster in a
budget neutral manner to avoid a
change in aggregate payments from the
total amount that would have been paid
if we had not applied an adjustment.
Comment: We received five comments
on the proposed weighting methodology
for the first year. One health insurer
suggested that any of the CMS proposals
would be acceptable. Another

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
commenter focused on the PDP portion
of the first approach, supporting the
equal weighting of PDP sponsors.
Another health insurer urged that all
MA plans be counted, reasoning that
virtually all MA plans would offer Part
D. They also stated their support for
giving no weight to new MA-PDs. An
industry association suggested that new
MA plans, including regional PPOs and
PDPs, should be weighted based on
their projected enrollment as suggested
in the final alternative proposed in the
proposed rule. Another health insurer
urged that we assign MA-PD weights
based on projected enrollment, but they
did not comment on weighting for PDPs.
Response: Although none of the
approaches outlined in the proposed
rule, or by commenters, are perfect we
have decided that using MA enrollment
from a reference month for MA-PDs
(new MA-PDs are assigned a zero
weight) and assigning equal weighting
to each sponsor (other than fallback
entities) for the PDP-eligible enrollment
in the region is the superior choice. This
option most closely mimics how the
enrollment weighting will be calculated
in the future given that it uses reference
month data for MA-PDs and assigns new
MA-PDs a zero weight. The PDP portion
of the method is the fairest method for
2006, given that we cannot know
enrollment prior to the launch of the
drug benefit program. Alternative
weighting methodologies using
projected enrollment are fraught with
problems. How would the validity of
such projections be assessed? What if
the aggregate plan projections exceeded
the total number of Part D eligibles in
the region? No commenter offered any
suggestions for dealing with such
dilemmas. We note these comments
suggested the need to clarify that the
weighted average does not work unless
restricted to Part D plans that submit
bids and are included in the national
average bid amount. Accordingly, we
modified § 423.279 to clarify that the
denominator does not include Part D
eligible individuals enrolled in
fallbacks, MA private fee-for-service
plans, specialized MA plans for special
needs individuals, PACE programs
under section 1894 of the Act, and
contracts under reasonable cost
reimbursement contracts under section
1876(h) of the Act.
Comment: One commenter believes
that MA-PDs would consistently have
lower bids and including them in the
benchmark would disadvantage PDPs.
They suggest that MA-PDs and PDPs
have separate benchmarks.
Response: Section 1860D–13(a)(4)(A)
of the Act instructs the Secretary to

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

‘‘compute a national average monthly
bid amount equal to the average of the
standardized bid amounts (as defined in
paragraph (5)) for each prescription drug
plan and for each MA-PD plan
described in section 1851(a)(2)(A)(i) of
the Act.’’ Therefore we cannot have
separate benchmarks for MA-PDs and
PDPs.
Comment: One commenter stated that
we should calculate a unique
benchmark for Specialized Needs Plans
in recognition of the higher prescription
drug costs these plans will have in
providing coverage to the high-risk
population that they serve.
Response: In § 423.279(a) we state that
bids from specialized MA plans for
special needs individuals will not be
included in the national average
monthly bid amount or benchmark.
However, the payments to the special
needs plans as with all plans will be
risk adjusted to take into account the
differences in enrolled populations.
Comment: Several comments were
received concerning geographic
adjustment. Three health insurers urged
that geographic adjustment be
implemented immediately. Another
health insurer suggested that geographic
adjustment not be implemented until
we have acquired sufficient information
on pricing to accurately characterize any
variation. One commenter urged us to
explore other unit price data beyond the
Federal Employee Health Benefits
Program data from Blue Cross Blue
Shield because using a single data
source may misstate actual regional
variations. One health insurer urged that
adjustments be made both within and
between regions. Another health insurer
asked that regional variations in
prescription drug costs be examined
based on utilization, not price.
Response: Section 1860D–15(c)(2)(A)
of the Act directs the Secretary to
establish an appropriate methodology
for adjusting the national average
monthly bid amount (computed under
section 1860D–13(a)(4) of the Act) to
take into account differences in prices
for covered Part D drugs among PDP
regions.’’ To meet the appropriateness
standard we will not implement a
geographic adjustment until we have
acquired sufficient information on
pricing to accurately characterize any
variation. We reiterate that we will
announce the adjustment factors in
advance of the bidding process for any
year in which geographic adjustment
would be applied to bids in the
calculation. We would also note that our
authority for geographic adjustment is
based on differences in price not
utilization. Section 107(a) of the MMA

PO 00000

Frm 00111

Fmt 4701

Sfmt 4700

4303

requires a report and recommendations
on adjusting for geographic differences
in both price and utilization (not
explained by the risk-adjuster). This
report is due not later than January 1,
2009.
8. Rules Regarding Premiums
In § 423.286, the monthly beneficiary
premium will be the result of the
calculation of a national base
beneficiary premium subject to certain
adjustments. Congressional intent was
to arrive at an average monthly
beneficiary premium in CY 2006
representing a certain percentage of the
average total estimated benefit provided
by the drug plans on a national basis
(including benefits subject to Federal
reinsurance subsidies). Taking into
account that projected reinsurance
subsidies are excluded from plan bids,
the applicable percentage becomes
approximately 34 percent, which is
applied to the national average monthly
bid amount.
To determine the uniform plan
premium, in § 423.286(d), we will adjust
the base beneficiary premium for certain
plan characteristics including whether
the plan’s bid will be above or below the
national average bid, and whether the
plan offers supplemental benefits.
(Since the bid has to be approved and
premiums established for the entire
year, we are interpreting the phrase ‘‘if
for a month’’ in section 1860D–
13(a)(1)(B)(i) of the Act and 1860D–
13(a)(1)(B) (ii) of the Act as referring to
the beneficiary premium as a monthly
amount.) The base premium is adjusted
to reflect the full difference between the
plan’s standardized bid amount and the
national average monthly bid amount
(which may be adjusted for regional
price differences if evidence for such
differences exists as determined in
§ 423.279(c)). To the extent that the
plan’s standardized bid amount is below
the national average monthly bid
amount, the base premium is adjusted
downward by the difference. To the
extent that the plan’s standardized bid
amount is above the national average
monthly bid amount, the base premium
is adjusted upward by the difference.
The base premium will also be adjusted
by adding the premium amount
approved after negotiations for risk
adjustment of the supplemental
benefits, if any (as discussed above).
Table F–2 illustrates a calculation of the
base beneficiary premium and the
adjustment for the difference between
the bid and the national average
monthly bid amount.

E:\FR\FM\28JAR2.SGM

28JAR2

4304

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
TABLE F–2

PREMIUM ILLUSTRATION

Benchmark

Plans in Region

Bids

National Average Monthly Bid
Amount1

Plans

Approved Plan Bid

109

Beneficiary Premium

14.00

0.00

$51

Plan 2

109

0.00

0.00

$37

Plan 3

99

0.00

(10.00)

$27

25.80

(Assumed )

0.3437

Base Beneficiary Premium =

(25.5 /(100–25.80)
(109 * .3437 )2

37.00

no geographic adjustment

to nearest dollar

The sum of the base beneficiary
premium, the adjustment for difference
between the bid and the national
average bid, and the supplemental
benefit premium will be the monthly
beneficiary premium. The monthly
beneficiary premium (except for any
supplemental premium) will be
eliminated or reduced for low-income
subsidy-eligible individuals, as
described in section 1860D–14 of the
Act and § 423.780. (This adjustment
reflects the fact that the government will
pay all or a portion of the monthly
beneficiary premium for subsidyeligible individuals.)
In § 423.286(d)(3), the monthly
beneficiary premium will be increased
for enrollees subject to the late
enrollment penalty. The penalty amount
for a Part D eligible individual for a
continuous period of eligibility (as
described in § 423.46) will be the greater
of an amount that we determine is
actuarially sound for each uncovered
month in the same continuous period of
eligibility; or 1 percent of the base
beneficiary premium for each uncovered
month in that period. The beneficiary
premium amount is cumulative which
means that each month the beneficiary
is subject to a penalty, the penalty
accumulates. Once the beneficiary
enrolls in Part D, that accumulated
penalty will be added to their premium
amount each month. So for example, if
the penalty amount is 1 percent of the
estimated base beneficiary premium
above, or $0.37 per month in 2004, and

VerDate jul<14>2003

Applicable Percent
of Nat’l Premium
+/- Difference

123

Applicable Percent =

2 Rounded

Amount by which Bid
is Below Benchmark

Plan 1

Est. Reinsurance Percentage

1 Assumes

Amount by which
Bid Exceeds
Benchmark

18:11 Jan 27, 2005

Jkt 205001

is subject to 12 months of this penalty,
the beneficiary would pay an additional
$0.37 * 12 or $4.44 per month for as
long as they are enrolled in Part D.
During the first several years of the
program, we currently expect that we
would specify the penalty amount
would be 1 percent of the base
beneficiary premium per month. Once
we have sufficient data on experience
under the program for individuals who
enroll after their Initial Enrollment
Periods, we would be able to determine
the appropriate penalty amount, that is,
either one percent or a greater amount
to be adopted.
We note that achieving very high
(indeed, virtually universal) access to
prescription drug coverage for
beneficiaries who participate in Part D
was a key Congressional consideration
in enacting MMA.
Except as provided with regard to any
enrollment penalty, low-income
assistance, or employer group waivers
under section 1857(i) of the Act and
section 1860D–22(b) of the Act and
§ 423.458(c) (as discussed in subpart J of
the preamble to our rule), the monthly
beneficiary premium for a prescription
drug plan or MA-PD in a PDP region
must be the same for all Part D eligible
individuals enrolled in the plan. The
monthly beneficiary premium charged
under a fallback plan is discussed in
§ 423.867 of our rules and in subpart Q
of this preamble.
Comment: Section 1860D–13(a)(1) of
the Act establishes that the monthly
beneficiary premium is the base

PO 00000

Frm 00112

Fmt 4701

Sfmt 4700

beneficiary premium adjusted to reflect
the differences between the plan’s bid
and the national average bid. Two
commenters argued that the statute
anticipated that Part D providers may
bid so far below the national average bid
as to have a negative premium. Both
commenters assert that we were wrong
to interpret in the August 2004
proposed rule that negative premiums
were not allowable by statute. Both
proposed that it would be a greater
benefit to beneficiaries if CMS were to
require a Part D provider with such a
low bid ‘‘to return the value of the
savings’’ to the beneficiary in the form
of an enhanced benefit that would be
covered by the enhanced direct subsidy.
Response: We agree with the
commenters’ textual interpretation of
the formula in the statute. Factoring out
the impact of risk adjustment, the direct
subsidy in absolute dollars is uniform to
all plans. For the negative premium
plans, the proposed rule would have
offered such plans less than everyone
else. We agree with the commenters that
highly efficient plans that bid below the
benchmark should not receive less.
However, it is clear that the statute did
not necessarily envisage negative
premiums for there are no clear
directives on how the negative premium
dollars should be treated. We believe
that direct rebates to beneficiaries might
run into Federal anti-kickback law
issues, although a definitive opinion
from the Office of Inspector General has
not been issued. There are other

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
potential issues with a direct rebate. For
example, it is likely that some
significant portion of the plan enrollees
will lose the rebate check or never cash
it, thus resulting in an overpayment to
the plan sponsor. Direct deposit of the
rebate in the enrollee’s bank would
address this problem, but would
generate significant administrative
costs. Nevertheless, neither of the
commenters argued for beneficiary
remuneration. Indeed, both expressed a
desire for the negative premium dollars
to be allocated to supplemental benefits,
a position we agree with. This would
require allowing a ‘‘renegotiation’’ of the
benefit package once the national
average bid (and the negative premium)
are known, to incorporate the negative
premium as supplemental benefits for
which there would be no additional
enrollee premium. Any marginal effects
in the basic bid would be negotiated at
the same time. As supplemental
benefits, the dollars must be accounted
for in the benefit package, and there will
be no risk sharing on the amount. The
review and negotiation of bid and
approval of plans submitted by potential
PDP sponsors or MA organizations
planning to offer MA-PD plans
(§ 423.272) and the rules regarding
premiums (§ 423.286) in this subpart
have been amended to reflect this
change.
9. Collection of Monthly Beneficiary
Premiums
a. Means of Collection
In § 423.293(a), the beneficiary will
have the same options on the method
for premium payments as under Part C.
Section 1860D–13(c)(1) of the Act
applies the provisions of section 1854(d)
of the Act (as amended by the MMA) to
Part D premium collection. The
beneficiary will have the option of
having the amount withheld from his or
her Social Security benefit check similar
to the way Part B premiums are
withheld. Beneficiary premium
payments could also be paid directly to
the PDP sponsor or MA organization
through an electronic funds transfer
mechanism (for example, an automatic
charge of an account at a financial
institution or a credit or debit card
account). We could specify other means
of payment, including payment by an
employer or under employer-based
retiree health coverage (as defined in
section 1860D 22(c)(1) of the Act) on
behalf of an employee or former
employee (or dependent). All premium
payments withheld from Social Security
checks will be credited to the
appropriate Trust Fund (or Account)
and will be paid by us to the PDP
sponsor or MA organization involved.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Premiums from beneficiaries enrolled in
fallback plans will not be collected by
the plan. Instead, these premiums will
be withheld from Social Security checks
(or from other benefits as permitted
under section 1840 of the Act).
Beneficiaries who do not receive Social
Security checks or otherwise have
premiums deducted from other benefits
or annuities will pay us directly. Failure
to make premium payments could result
in disenrollment as provided under
section 1854(d)(1) of the Act and
§ 423.44(d) of our regulations.
b. Collection of Late Enrollment
Penalties
Concerning collection of the late
enrollment penalty calculated under
§ 423.286(d)(3), after the early years of
the program we will estimate and
specify the portion of the penalty that
will be attributable to increased
actuarial costs assumed by the PDP
sponsor or MA organization (and not
taken into account through risk
adjustment provided under
§ 423.329(b)(1) or through reinsurance
payments under § 423.329(c)) as a result
of that late enrollment. When the
premium is withheld from social
security benefits, we will pay only the
portion of the late enrollment penalty
attributable to the increased actuarial
costs to the PDP sponsor or MA
organization. When the premium is paid
directly to the plan, we will reduce
payments otherwise made to the PDP
sponsor or MA organization by an
amount equal to the amount of the
enrollment penalty not attributable to
increased actuarial cost. (Fallback plans
will not receive any enrollment
penalties applicable to their enrollees
because they are not at risk.)
At least in the initial years of the
program we do not anticipate paying
plans additional funds related to late
enrollment individuals. In the initial
years there will not be a significant
number of people who can have delayed
enrollment for a significant period of
time. Moreover, in the initial years of
the program the risk corridors are more
generous and afford more protection.
Consequently we do not think it is
necessary to provide a portion of the
enrollment penalty to plans until
experience indicates that actual risk has
increased.
Comment: Several States urged that
§ 423.293(a) include State Pharmacy
Assistance Programs (SPAPs) as a
payment option for premiums.
Response: Section 423.293(a)
references paragraph (c) of the section,
which in turn references § 422.262(f)(1).
Beneficiary premiums in § 422.262(f)(1)
allow premiums to be paid by the
beneficiary through Social Security

PO 00000

Frm 00113

Fmt 4701

Sfmt 4700

4305

withholding, electronic funds transfer;
or by an employer, employment-based
retiree health coverage or by other third
parties such as a State, which will
include SPAPs. This rule is being
adopted as final in the MA final rule,
and will therefore have final effect for
the Part D rule as well. Therefore,
SPAPs will be able to pay premiums on
behalf of enrollees.
Comment: One advocacy group asked
that credit cards not be allowed to pay
Part D premiums. It is their position that
funds transfer mechanisms are error
prone.
Response: Section 1860D–13(c)(1) of
the Act states that the provisions of
section 1854(d) of the Act apply to PDP
sponsors in the same manner as they
apply to MA organizations and
beneficiary premiums under Part C.
Section 1854(d)(2)(B) of the Act states
that an MA organization ‘‘shall permit
each enrollee ... to make payment of
premiums ... through an electronic
funds transfer mechanism (such as
automatic charges of an account at a
financial institution or a credit or debit
card account).’’ Given that the Congress
specifically stated electronic funds
transfer will include credit or debit card
accounts, we cannot prohibit their use.
Comment: One commenter asked if
cost plans could be allowed to have
their premiums deducted from SSA
checks.
Response: An enrollee of a cost plan
with Part D may pay their Part D
premiums through reduction of their
SSA check. The statute however, does
not give us the authority to mandate an
SSA check payment option on the Part
C side, but we are capable of permitting
withholding if acceptable to concerned
parties.
Comment: We received several
comments concerning the late
enrollment penalty. While there was
universal support for having a late
enrollment penalty, there were
disagreements regarding the amount of
the penalty. Four commenters suggested
that 1 percent of the base beneficiary
premium may not be sufficient to
control for adverse selection, but none
had a recommendation for a higher
amount. By contrast, another
commenter suggested that beneficiaries
will likely enroll late due to confusion.
They therefore concluded that the late
enrollment penalty should be less than
1 percent of the base beneficiary
premium. One commenter urged us to
collect data as quickly as possible to
calculate a penalty amount that fairly
reflects any higher costs associated with
beneficiaries who delay their
enrollment.

E:\FR\FM\28JAR2.SGM

28JAR2

4306

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

Response: Although, Part D
enrollment is voluntary it is sound
policy to try limiting adverse selection,
or the tendency for persons with high
utilization or risk to enroll in health
insurance while healthy persons with
no or low utilization do not, thus
creating an unbalanced or biased
population. To provide an incentive to
enroll, the Congress created a late
enrollment penalty in Section 1860D–
13(b) of the Act, which is the greater of
‘‘an amount that the Secretary
determines is actuarially sound for each
uncovered month’’ or is ‘‘1 percent of
the base beneficiary premium’’.
There is a paucity of relevant research
in this area. Our only potentially
relevant experience comes from the Part
B late enrollment penalty, which is 10
percent per 12-month period. On
average about 5 to 6 percent of Medicare
Part A enrollees are not enrolled in Part
B. It should be noted however, that a
significant proportion of eligibles not
enrolled in Part B are either working
aged or are living overseas.
Additionally, the utilization patterns
and risks for Part B services and Part D
drugs are different. Therefore, the Part B
experience may not predict beneficiary
behavior for Part D. Accordingly, we
will set the late enrollment penalty at 1
percent of the base beneficiary premium
and revisit the issue when appropriate
data are available.
G. Payments to Part D Plan Sponsors
For Qualified Prescription Drug
Coverage
1. Overview (§ 423.301)
Subpart G of part 423 implements
section 1860D–15 of the Act and the
deductible and cost sharing provisions
of section 1860D–14(a) of the Act. This
section sets forth rules for the
calculation and payment of our direct
and reinsurance subsidies for Part D
plans; the application of risk corridors
and risk-sharing adjustments to
payments; and retroactive adjustments
and reconciliations to actual enrollment
and interim payments. References to
§ 422 of our regulations are to the new
MA rules. In general, the payment rules
in this subpart do not apply to fallback
plans—which are discussed in subpart
Q
2. Definitions
We proposed definitions of a number
of terms used in the computation of
payments under this subpart, such as
‘‘allowable reinsurance costs’’, ‘‘actually
paid’’ and ‘‘coverage year’’ in § 423.308
of our regulations, but discussed these
separately in the appropriate sections of
this preamble. We did this because

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

these terms are complex and are best
clarified in the context of the discussion
of the pertinent provisions. We wish to
clarify that a covered Part D drug for
gross prescription drug costs means a
Part D drug, as defined in § 423.100, that
is included in a prescription drug plan’s
or MA-PD plan’s formulary, or treated as
being included in a plan’s formulary as
a result of a coverage determination or
appeal under § 423.566, § 423.580, and
§ 423.600 of our rule.
3. General Payment Provisions
(§ 423.315)
The payment provisions required by
section 1860D–15 of the Act include the
following four different payment
mechanisms: 1) the direct subsidy; 2)
reinsurance subsidies; 3) risk corridor
payment adjustments; and 4) payments
to cover certain premium, cost-sharing,
and extended coverage subsidies for
low-income subsidy eligible
individuals.
The first payment mechanism
involves monthly payments that (along
with reinsurance subsidies) subsidize
on average 74.5 percent of the value of
the basic prescription drug benefit,
thereby maintaining beneficiary
premiums for basic coverage on average
at 25.5 percent. The direct subsidy is
determined based on a national bidding
process. Sponsors who wish to offer
plans submit bids on a standardized
basis. After our review and approval,
these bids become the basis for the
direct subsidy that is equal to the plan’s
standardized bid, risk adjusted for
health status as provided in
§ 423.329(b), minus the base beneficiary
premium (as determined in § 423.286(c)
and as adjusted for any difference
between the standardized plan bid and
the national average monthly bid
amount (as described under
§ 423.286(d)(1))). The risk adjustment
applied to the bid compensates the plan
for individual enrollee differences in
health status from the average
beneficiary and thus reduces the impact
from any adverse risk selection. Further
adjustments to the direct subsidy
payments will be made to account for
actual enrollment and updated health
status information.
The second and third payment
mechanisms will substantially reduce
the uncertainty and risk of participating
in this new program. Since the Medicare
prescription drug benefit is new, there
is uncertainty surrounding the
utilization, costs, and risk profiles
(participation rates and characteristics)
of potential enrollees. Federal
reinsurance subsidies and risk corridor
payment adjustments work along with
the risk adjustment included in the

PO 00000

Frm 00114

Fmt 4701

Sfmt 4700

direct subsidy to substantially reduce
the uncertainty and risk of participating
in this new program. Through
reinsurance subsidies, in which we act
as the re insurer, we will subsidize a
large portion of any catastrophic
expenses (defined as expenses over an
individual’s out-of-pocket limit) through
a reinsurance subsidy. Through risk
corridor arrangements, exposure to
unexpected non-catastrophic expenses
will be limited. These risk sharing
arrangements are structured by the
statute as symmetrical risk corridors,
that is, agreements to share a portion of
the losses or profits resulting from
expenses above or below expected
levels, respectively.
Finally, according to section 1860D–
14 of the Act, PDP sponsors and MA
organizations will receive payments to
cover certain premium, cost-sharing,
and extended coverage subsidies for
low-income subsidy eligible
individuals. With the exception of
interim estimated payments of costsharing subsidies, these payments are
discussed separately in subpart P of this
preamble and in § 423.780 of our
regulations.
Certain payments will be exceptions
to these general payment provisions.
Under private fee-for-service (PFFS)
plans, reinsurance will be calculated
differently and risk sharing will not be
available. Reinsurance subsidies and
risk sharing will not be available for
fallback plans, which are paid in
accordance with contractual terms
related to actual costs and management
fees tied to performance measures.
Comment: One commenter responded
with support for immediate
implementation of a reinsurance
demonstration that would increase
opportunities to fill in the donut hole in
the Part D benefit and allow for a more
predictable revenue flow that would
support enhanced benefits for
beneficiaries.
Response: The Conference Committee
noted, ‘‘the conditions under which the
government provides reinsurance
subsidies may create significant
disincentives for private sector plans to
provide supplemental prescription drug
coverage. To address this concern, the
conference agreement suggested use of
the Secretary’s current Medicare
demonstration to ‘‘allow private sector
plans maximum flexibility to design
alternative prescription drug coverage.’’
CMS’s authority to conduct Medicare
demonstrations is provided in section
402 of the Social Security Amendments
of 1967 (42 U.S.C. § 1395b–1). Under
section 402(b), the Secretary is
authorized to waive requirements in
title XVIII that relate to reimbursement

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
and payment. The conferees specifically
stated that CMS should demonstrate the
effect of filling in the gap in coverage by
reimbursing participating plans a
capitated payment that is actuarially
equivalent to the amount that plans
would otherwise receive from the
government in the form of specific
reinsurance when an individual plan
enrollee reaches the catastrophic
attachment point ($3,600). They
clarified that CMS would not be
permitted to waive the minimum
benefits provided by the plans. In the
August proposed rule we stated in the
executive summary that we were
considering establishing a
demonstration to evaluate possible ways
of achieving extended coverage.
We intend to conduct a reinsurance
demonstration that represents an
alternative payment approach. We are
working on the design of the budget
neutral demonstration and issue
separate guidance in the near future.
4. Requirement for Disclosure of
Information (§ 423.322)
a. Data Submission.
As provided under sections 1860D
15(c)(1)(C), 1860D–15(d)(2) and 1860D–
15(f) of the Act and in § 423.322 of our
regulations, we will condition program
participation and payment upon the
disclosure and provision of information
needed to carry out the payment
provisions. Such information will
encompass the quantity, type, and costs
of pharmaceutical prescriptions filled
by enrollees that can be linked to
individual enrollee data in our systems;
that is, linked to the Medicare
beneficiary identification number
(HIC#). In the August proposed rule we
asked for comments on the content,
format and optimal frequency of data
feeds. We stated that more frequent
feeds (that is monthly or quarterly)
would allow us to identify and resolve
data issues and assist the various
payment processes.
We have evaluated our minimum data
requirements with regard to prescription
drug claims. Our goal is to have the least
burdensome data submission
requirements necessary to acquire the
data needed for purposes of accurate
payment and appropriate program
oversight. Our view is that we will need
at least the following data categories for
100 percent of prescription drug claims
for the processes discussed below:
• Beneficiary identification (for
example, HIC#, date of birth, gender,
name)
• Prescription identification
information (for example, RX
identification number, NDC, quantity
dispensed, fill number, date of service)

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

• Cost information (for example,
ingredient cost, dispensing fee, sales
tax, total gross cost)
• Payment information (beneficiary
amount paid, low income cost sharing
subsidy amount, secondary/other payer
amount, supplemental amount)
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, but do not reflect
subsequent price concessions from
manufacturers, such as rebates. We will
need these data on prescription drug
claims for appropriate risk adjustment,
reconciliation of reinsurance and lowincome subsidies, calculation of risk
sharing payments or savings, and
program auditing. Data will also be
required for assessing and improving
quality of care. We asked for comments
on the nature and format of data
submission requirements based on the
following requirements:
• The risk adjustment process will
require 100 percent of drug claims in
order to develop and calibrate the
weights for the model for this new
benefit. Consequently, PDP sponsors
and MA organizations offering MA-PD
plans will be required to submit 100
percent of prescription drug claims for
Part D enrollees for the coverage year.
Risk adjustment will require the
submission of prescription drug agent
identifying information, such as NDC
codes and quantity, in order to allow the
standardized pricing of benefits in the
model. Because we will use
standardized pricing in the model, cost
data on each prescription is not a
requirement for risk adjustment,
although it is needed for other purposes.
• The reinsurance subsidy payment
process will require 100 percent of
claims for each enrollee for whom the
plan claimed allowable reinsurance
costs. (Although reconciliation of the
reinsurance subsidy does not require
NDC codes or quantities, it does require
member, cost and date of service data.)
All claims for enrollees with expenses
in excess of the out-of-pocket limit will
be necessary to verify that the costs are
allowable because the totality and order
in which the claims are incurred will
define which claims will be eligible for
reinsurance payments. While the start of
reinsurance payments begins with
claims after the out-of-pocket threshold
has been reached, which is $5,100 in
total spending (2006) for defined
standard coverage, it may be associated
with a higher dollar total spending
amount under alternative coverage.
Whatever the level, we will need to
receive all claims by date of service

PO 00000

Frm 00115

Fmt 4701

Sfmt 4700

4307

including the amount of beneficiary cost
sharing in order to determine the
occurrence of the out-of-pocket
threshold. Any plan-incurred costs for
claims for supplemental benefits cannot
be included in determining whether the
out-of-pocket threshold has been met.
• The risk sharing process will
require 100 percent of claims for all
enrollees for the calculation of total
allowable risk corridor costs. The plan
will need to segregate costs attributable
to supplemental benefits from those
attributable to basic benefits since
supplemental benefit costs are not
subject to the risk corridor provisions.
Again, all claims will be necessary to
verify that the costs are allowable
because the order in which the claims
were incurred will help determine
whether the claims were solely for basic
coverage. For instance, a claim
processed between a beneficiary’s
deductible and initial coverage limit (in
standard coverage) will count towards
risk sharing, but another claim
(processed identically but immediately
after the initial coverage limit has been
reached) will not. Unlike the
reinsurance subsidy, which is limited to
individuals with expenses in excess of
the out-of-pocket threshold, risk sharing
involves costs (net of discounts,
chargebacks and rebates, and
administrative costs) for all enrollees for
basic coverage, but only those costs that
are actually paid by the sponsor or
organization. Because all plans
participate in risk sharing, potentially
all claims for all Part D enrollees in all
plans must be reviewed. Like the
reinsurance reconciliation, risk sharing
does not require NDC codes or
quantities, but does require member,
cost, and date of service data.
• The program audit process will
require at least a statistically valid
random sample of all Part D drug
claims. We believe that several points of
reference including HIC#, cost, date of
service, and NDC code will be required
for unique identification of individual
claims in any random sample drawn
from the population. If we receive 100
percent claims to support the payment
processes, this sample could be drawn
from our records. We believe it will be
useful to obtain the prescribing
physician’s National Provider Identifier
(NPI) number, as required by the
administrative simplification provisions
of HIPAA, in the elements of collected
data for purposes of fraud control once
it is available. (Nothing in this data
collection discussion should be
construed as limiting OIG authority to
conduct any audits and evaluations
necessary for carrying out our
regulations.)

E:\FR\FM\28JAR2.SGM

28JAR2

4308

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

Comment: One commenter urged us
to ensure that prescription transaction
data, be made available to the QIOs.
Without this information the commenter
contends, it will be extremely difficult
for QIOs to execute the direction of the
Congress in section 109 of the MMA, to
offer assistance to practitioners and
plans for the purpose of improving the
quality of pharmacotherapy received by
older and disabled Americans enrolled
in the Medicare outpatient drug benefit.
Response: Additional guidelines will
be released dealing with QIO access to
Part D data. QIOs do, however, have
their own independent authority to
collect claims data. Therefore, as we
stated in the proposed rule, we believe
we would have the authority to share
claims data with QIOs if necessary.
Comment: One commenter stated that
claims creation and submission for the
pharmacy claims as proposed would
probably be even more expensive, given
the volume of data and the number of
data elements. They encouraged us to be
parsimonious in collecting data, with
the understanding that plans would
retain full data for audits.
Response: We will endeavor to reduce
burden to the maximum extent possible.
We will require only the data elements
necessary to carry out the operations of
the Part D program.
Comment: For the timeframe for data
submissions, one commenter stated that
unless all plans can provide information
electronically, weekly data cycles would
be too burdensome. Monthly or
quarterly data cycles are more in line
with other plan financial processes.
Another commenter suggested that
annual submission would be adequate
with additional data submitted on a
quarterly basis. A PBM commented that
they have the capability of submitting
drug utilization data to us on a monthly
basis in any format required. They also
noted that all of the data elements listed
as proposed requirements in the
proposed rule are available in their
point-of-sale system. Two commenters
recommended that data transmission
use either the NCPDP or the American
Society of Automation in Pharmacy
(ASAP) standard formats. They
reasoned that such standards are
commonly used today and would have
minimal impact on existing software
applications.
Response: We agree that data
submissions should be based on an
established standardized format, and
will be requiring data submissions in
the NCPDP format. The data required
will be from both incoming claims and
the remittances to those claims. Some of
the paid amounts that need to be
reported are not on the NCPDP format

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(for example, the low income costsharing subsidy). Therefore, plans will
be responsible for calculating and
retaining these amounts while
calculating appropriate payments and
cost-sharing for each claim. We will
require that the data related to drug
claims be submitted no less frequently
than monthly. Further details on data
submission will be issued in separate
guidance.
b. Allowable Costs
Section 1860D–15(b)(2) and 1860D–
15(e)(1)(B) of the Act and § 423.308 of
our regulations, specify that to
determine ‘‘allowable costs’’ for
purposes of both the reinsurance and
risk corridor payments, only the net
costs actually paid after discounts,
chargebacks, and average percentage
rebates, as well as administrative costs,
are to be counted. In the proposed rule
we discussed requiring average
percentage rebates, which upon
reflection would represent only a rough
estimate on the part of a Part D plan. We
wish to clarify that in order to carry out
our responsibilities we will require
reporting of aggregate (as opposed to at
the beneficiary or claim level) rebates at
the product level on a quarterly basis.
Adequate lead time will be provided.
Additional information will be provided
through our payment guidelines.
In the proposed rule we noted, also
for rebates, that we understand that
much of the rebate accounting is not
applied in the context of point of sale
claims data, but rather in periodic
accounting adjustments, and that
rebates are frequently reported along
with administrative fees paid by the
manufacturer. We wish to clarify that
we will expect reporting of all rebate
dollars with no allowance for separate
administration fees in order to prevent
inaccuracies in reporting. We note that
plans must require and keep accurate
records on all price concessions. All
cost reporting will be subject to
inspection and audit (including periodic
audits) by us and the OIG. Part D plans
sponsors seeking to limit access to
rebate information under this provision
to Part D business only are advised to
seek out separate contracts with
manufacturers for their Part D and other
lines of business. To the extent either
we or the OIG discover that a sponsor
has been overpaid for reinsurance or
risk sharing (that is, the records do not
support the payments made, or there is
insufficient documentation to determine
whether the payments are correct), we
may recoup the overpayments. The
reopening and overpayment provisions
are discussed at the end of this part G.
We also wish to clarify our
interpretation of allowable costs in the

PO 00000

Frm 00116

Fmt 4701

Sfmt 4700

context of repackaged drugs. AWP is
commonly used as the basis through
which a plan sponsor or fallback plan
calculates payments to pharmacies, and
is used to when sponsors provide
competitive bids for the Medicare Part
D prescription program. AWP is
typically published based on the NDC
for a particular product, and is specific
to the drug, strength, distributor and
package size. However, AWP can vary
between differing packages sizes of a
drug and strength from a single
distributor, as well as between multiple
distributors that product a common
drug, as in the case of generic products.
AWP may not be published for some
products that are repacked for a specific
buyer, such as a mail-order pharmacy or
a pharmacy chain. Furthermore, if a
pharmacy benefit manager or managed
care organization owns a pharmacy
(including a mail-order, specialty, or
clinic facility) and refers members to
that facility, it essentially purchases
product from itself. In these cases,
special care must be taken to ensure that
payment is made for a prescription
ingredient cost that is an accurate
reflection of the product that the facility
purchases in terms of manufacturer,
strength, and acquisition price.
The Department of Health and Human
Services’ Office of Inspector General
issued the April 2003 report
‘‘Compliance Program Guidance for
Pharmaceutical Manufacturers’’ that
addresses AWP. The guidance report
states that: ‘‘... it is illegal for a
manufacturer knowingly to establish or
inappropriately maintain a particular
AWP if one purpose is to manipulate
the ‘‘spread’’ to induce customers to
purchase its product.’’ We believe that
the same principle of non-manipulation
of AWP applies to sponsors of the Part
D benefit. Any repricing or restatement
of price of a pharmaceutical product is
subject to audit, and potentially
constitutes fraudulent behavior if the
repricing or price restatement is done
with the intent of increasing the profits
of that sponsor or mail order facility by
increasing the reimbursement due by
the Federal government.
Comment: One commenter believes
that administrative fees for
administering rebates should not be
included in the assessment of rebate
fees.
Response: We disagree with the
commenter. As stated in the proposed
rule such accounting will be
incompatible with the need to report all
price concessions for purposes of
determining allowable reinsurance and
risk corridor costs. In the preamble to
the proposed rule, we said that to the
extent the administrative fees paid to

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Part D plans (or their subcontractors,
such as PBMs) are above the fair market
value of the services rendered, this
differential will be considered a price
concession. Similarly, to the extent a
Part D plans pays manufacturers or
others administrative fees, and these
fees are below fair market value, this
would also be considered a price
concession. In sum, as fiduciaries of the
Medicare trust fund, we have a
responsibility to ensure that price
concessions are not masked as
administrative fees, and therefore, we
continue to believe that administrative
fees are important in determining the
reinsurance and risk-sharing payments.
Comment: One comment urged
clarification of definition of ‘‘allowable
costs’’ so to exclude manufacturersponsored compliance and appropriate
use programs.
Response: Allowable costs are
prescription drug costs excluding
administrative costs, but including
dispensing fees costs related to the
dispensing of covered Part D drugs that
are actually paid by the PDP sponsor.
Thus any service, such as a compliance
program, that is paid for in conjunction
with drug costs as an administrative
component of managing the drug benefit
is not be considered an allowable cost
for the PDP sponsor.
Comment: One commenter asked for
clarification on how fair market value is
to be determined.
Response: The fair market value of
administrative fees paid to a Part D plan
will typically be evaluated in relation to
the values reported by other Part D
plans. In other words, the fair market
value will be the average or normal
value of administrative fees within this
market. However, this may not be an
exclusive methodology. For example, if
administrative fees paid to all plans
were found to be improperly inflated
they would not reflect fair market value
and we would devise an alternative
methodology.
Comment: One commenter requested
that we require plans to attest to the
accuracy of information submitted to
manufacturers in order to ensure that
rebates and discounts are based on
accurate claims.
Response: We strongly encourage
plans to attest to the accuracy of
information submitted to manufacturers.
However, we do not have the authority
to require an attestation as the
commenter suggests.
Comment: One commenter
recommended the second approach to
rebate accounting in the proposed rule
whereby a plan would calculate a ratio
of total rebate amounts to total spending
and reinsurance-related spending to

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

total spending to derive the share of
rebates to be allocated to reinsurance.
The commenter believes this option is
administratively straightforward and
would result in a reasonably accurate
estimate of these discounts,
chargebacks, and rebates.
Response: We will require reporting
of actual rebates requested and paid
down to the product level on a quarterly
basis. Additional guidance will be
released subsequent to publication of
the final rule that specifically deals with
rebate accounting rules.
c. Coverage Year
In § 423.308 the term ‘‘coverage year’’
is defined as a calendar year in which
covered Part D drugs are dispensed if
the claim for such drugs (and payment
on such claim) is made not later than 3
months after the end of the year. In
other words, drug claims paid past the
close of the 3-month period will not be
considered part of that coverage year (or
the next), and will not be used to
calculate that year’s payments or in
reconciling risk adjustment payments
for the year.
This limit will be imposed in order to
provide timely closure for payment
determination processes such as
reinsurance, risk corridors and
employer subsidies. While the period of
3 months will be significantly less than
the fee-for-service Medicare medical
claims standard of 18 months, we
believe that a shorter period is
warranted due to the highly automated
and point of sale nature of prescription
drug claim processing. We understand
that the vast majority of prescriptions
are not filled without the claim being
simultaneously processed and therefore,
there is a much shorter claims lag to be
considered. We believe that the number
and value of drug claims that will
potentially be missed will be
immaterial, consisting primarily of
paper claims. The 3-month close-out
window will not limit the liability of the
plan or its claims processing contractor
for reimbursing any lagging claims, but
will simply establish a timely cut-off for
finalizing payments. We note that
rebates for the coverage year must be
credited against that coverage year’s
costs. Although we are closing the year
for claims purposes after 3 months, the
plan must account for and report to us
all rebates that occur throughout the
coverage year and send us all the data
within 6 months after the end of the
coverage year.
A shorter period for claims will allow
for payment processes that are
dependent on the knowledge of total
allowable costs for each coverage year to
be concluded on approximately the
same schedule as other reconciliations

PO 00000

Frm 00117

Fmt 4701

Sfmt 4700

4309

involving enrollment or risk adjustment
data. On this schedule, calculations of
risk sharing could begin as soon as six
months after the close of the payment
year. If the claims submission standard
were a longer period, final
reconciliations will be significantly
delayed. We requested comments on
this timetable, specifically whether we
should adopt a shorter or longer period
than 3 months, and including data with
which to estimate the proportion and
value of drug claims that could be
excluded with a 3-month close-out
window.
Comment: Two commenters argued
that the definition of the coverage year
in § 423.308, being three months after
the end of the year, would not be
enough time for certain drug claims,
such as those from out-of-network
providers or those submitted by paper.
They went on to say that claims made
after the 3-month closeout should be
appropriately accounted for. Another
commenter stated that the majority of
claims are submitted and paid within
the 90 day window described in the
rule. They went on to say that from a
processor standpoint no more time is
needed and based on observed claims
patterns at least 98 percent of the drug
claims are paid within 3 months. One
industry association expressed support
for the proposal to define coverage year
to encompass drugs dispensed within a
calendar year and for which claims have
been paid no later than three months
after the end of the calendar year. The
commenter believes establishing finality
in this manner is absolutely essential to
promote financial stability by allowing
timely determination of risk sharing
amounts.
Response: According to Booz Allen
Hamilton’s August 2004 report
‘‘Determination of Allowable Costs’’ the
industry standard is for claims to
typically be submitted within a three
month window period. We agree with
the two latter comments that the
definition of the coverage year is both
logistically feasible and promotes timely
payment. We also note that the coverage
year is 3 months for claims run-out
(§ 423.308), but plans have 6 months to
submit data (§ 423.343). This gives plans
the extra time necessary to compile the
data necessary for retroactive
reconciliation. We will adopt the
definition of coverage year as proposed.
5. Determination of Payment (§ 423.329)
a. Direct Subsidies
As directed in section 1860D–15(a)(1)
of the Act and codified in § 423.329(a),
we will provide direct subsidies to PDP
sponsors and MA organizations offering
MA-PD plans. These subsidies will be in

E:\FR\FM\28JAR2.SGM

28JAR2

4310

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

the form of advance monthly payments.
Payments will be equal to the plan’s
standardized bid, risk adjusted for
health status as provided in
§ 423.329(b), minus the base beneficiary
premium (as determined in § 423.286(c)
and adjusted for any difference between
the standardized plan bid and the
national average monthly bid amount
(as described under § 423.286(d)(1))).
The standardized bid will be the portion
of the plan’s bid attributable to basic
coverage. This portion will be risk
adjusted by multiplying by our
prescription drug risk score attributable
to each enrollee. Between the
government direct subsidy and the
adjusted base beneficiary premium, the
plan will receive its entire risk-adjusted
standardized bid in advance each
month. Payment for supplemental
benefits will come from enrollees in the
form of additional premium. By statute,
the sponsor must bear all risk for such
supplemental benefits. In the proposed
rule we said ‘‘We would note that a
plan’s total per capita payment could
never exceed its bid, risk-adjusted for
the beneficiary’s health status. This
would be the case even if the difference
between the plan’s bid and the national
average monthly bid amount were
greater than the beneficiary monthly
premium, mathematically resulting in a
‘‘negative premium’’ amount. We do not
believe that the statute envisions plan
payments in excess of negotiated costs,
since this would violate the revenue
requirements provisions discussed in
the subpart F of this preamble’’. As
outlined in detail in subpart F of this
final rule, we have changed our policy.
We now state that if the standardized
bid amount is less than the national
average monthly bid by an amount so
great that it is in excess of the base
beneficiary premium, the direct subsidy
payment calculated above will be
increased by the amount of the negative
premium. We, therefore, have modified
§ 423.329(a)(1) to indicate that the direct
subsidy payment may be increased by
the excess amount of a negative
premium as described in
§ 423.286(d)(1), if applicable.
b. Risk Adjustment
In section 1860D–15(c)(1) of the Act,
we are directed to develop and publish
a prescription drug risk adjustment
methodology taking into account the
similar methodologies under
§ 422.308(c)(1) to adjust payments to
MA organizations for benefits under
Part C on the basis of costs incurred
under original Medicare. In § 423.329(c)
we establish this risk adjustment
methodology. We will develop and
publish this risk adjustment
methodology in the 45-day notice for

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

the announcement of 2006 Medicare
Advantage rates. Section 1860D–
15(c)(1)(D) of the Act requires us to
publish the risk adjustment for Part D at
the same time we publish risk
adjustment factors under section
1853(b)(1)(B)(i)(II) of the Act. Because
these risk adjustment factors under
subpart C can only be published after
45-day advance notice under section
1853(b)(2) of the Act, in general we will
use the same notice procedures we use
under Part C for risk adjustment. We
believe this will promote consistency
and uniformity in the process, and,
especially for MA-PD plans, allow
entities to review notices published on
the same day for purposes of
commenting on or learning about risk
adjustment. As usual, the 45-day notice
will solicit public comment on any
change in proposed payment
methodologies. We are expecting that
this new prescription drug risk
adjustment methodology will initially
be based on the relationship of
prescription drug utilization within the
entire Medicare population to medical
diagnoses, and that it will be applied at
the individual beneficiary level. Our
longer-term plan would be to refine the
risk adjustment model to account for
predictable risk based on both medical
and drug claim data.
Section 1860D–15(c)(1)(C) of the Act
and § 423.329(b)(3) of this rule authorize
us to specify and require the submission
of data from PDP sponsors regarding
drug claims that can be linked at the
individual level to part A and part B
data in a form and manner similar to the
Medicare Advantage process provided
in § 422.310 and such other information
as we determine necessary. Similarly,
MA organizations that offer MA-PD
plans must submit data regarding drug
claims that can be linked at the
individual level to other data that these
organizations are required to submit to
us. A primary requirement, therefore, is
receiving claims linked to the Medicare
beneficiary HIC#. Other data submission
elements are discussed in section 4(a) of
this part of the preamble. We expect to
link these data at the plan level and will
then require the inclusion of the PDP or
Medicare Advantage contract identifier
(H#) as well as the plan benefit package
identifier. We will use this data to
further refine our prescription drug risk
adjustment factors and methodology in
order to make payments that accurately
reflect plan risk.
As we noted in the August proposed
rule, any risk adjustment methodology
we adopt must adequately account for
low-income subsidy (LIS) individuals
(and whether such individuals incur
higher or lower-than average drug

PO 00000

Frm 00118

Fmt 4701

Sfmt 4700

costs). We stated that our risk
adjustment methodology should provide
neither an incentive nor a disincentive
to enrolling LIS individuals, and we
requested comments on this concern
and suggestions on how we might
address this issue. Our particular
concern has been that a risk adjustment
methodology, coupled with the
statutory limitation restricting LIS
payments for premiums to amounts at or
below the average, could systematically
underpay plans with many LIS enrollees
(assuming LIS enrollees have higher
costs than average enrollees). As noted
in the proposed rule, the initial risk
adjustment system, which will be
budget neutral across all Part D
enrollees, must not under compensate
plans for enrolling LIS beneficiaries. In
fact, to the extent that an initial risk
adjustor might at the margin tend to
overcompensate for LIS beneficiaries,
plans would have a strong incentive to
disproportionately attract such
beneficiaries. Plans could attract LIS
beneficiaries both by designing features
that are attractive to such beneficiaries
and also by bidding low.
Comment: We received several
comments generically expressing
concern over the risk of insuring the
low-income subsidy population
exacerbated by the induced demand
likely to be created by the low income
subsidy itself. Several commenters
specifically agreed with our proposal to
deal with this issue via risk adjustment.
No commenters rejected the proposal.
All the commenters noted that it is
critical for the risk adjustment
methodology to pay fairly and
appropriately for all enrollees, including
income subsidy individuals.
Commenters requested additional
details about the risk adjustment
methodology.
Response: We agree that the Part D
risk adjuster must accurately predict the
drug expenditures for various
population subgroups, including low
income beneficiaries. The best way to
achieve this goal is to calibrate the risk
adjustment model on a sample of
beneficiaries that includes low income
beneficiaries, which we intend on
doing. We have experience in dealing
with an analogous situation with the
Part C risk adjustment model, where
beneficiaries in long term care
institutions are known to have
significantly higher expenditures than
community enrollees before health
status is accounted for. In order to
accurately risk adjust for this
population, we have generated a version
of the risk adjustment model that
explicitly accounts both for these higher
expenditures and for the different

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
relative costs of diseases for the long
term institutionalized population
compared to the community population.
For induced demand, we have Federal
Employee Health Benefit Program and
State Medicaid program data that will
permit us to model this effect. One
commenter familiar with these data
noted that ‘‘it seems reasonable that the
risk adjustment process be used to
correct any underpayments due to LIS
induced demand.’’ Additional details
will be provided with the guidance
accompanying the release of the risk
adjustment factors.
Comment: We also received
comments concerning specific elements
of the risk adjustment model. One
health insurer asserted that medical
diagnoses may not adequately predict
drug utilization. A PBM commented
that some drugs are a very good marker
of disease, while other drugs can be
used to treat a variety of conditions. A
manufacturer suggested that we should
use data on prior medication
expenditures and include demographics
and diagnoses.
Response: Work by Wrobel and
colleagues (Health Care Financing
Review Winter 2003–2004) using data
from the Medicare Current Beneficiary
Survey and Medicare claims data found
a diagnostic based risk adjustment
model was a powerful predictor of drug
expenditures. Our current risk
adjustment model does not use drugs as
a marker of disease but use diseases to
predict drug spending (see
www.cms.hhs.gov/pdps/riskad.zip). A
more detailed description of the
elements of the Part D risk adjustment
model will be provided in the Advance
Notice of Payment Methodology.
However, anyone interested in
understanding how risk adjustment
works can read ‘‘Risk Adjustment of
Medicare Capitation Payments Using
the CMS-HCC Model’’ in the Health
Care Financing Review, Volume 25,
Number 4 (Summer 2004). These
articles are publicly available online at
www.cms.hhs.gov/review/default.asp.
The Part D risk adjustment model will
use demographics and diagnoses. As
Part D program data becomes available
we will incorporate other indicators to
enhance the predictive power of the
model. This may include, if appropriate,
indicators of prior use of medication.
We will provide the usual opportunities
for public comment on subsequent
iterations.
c. Risk Adjustment Budget Neutrality
In accordance with section 1860D–
15(c)(1)(A) of the Act and
§ 423.329(b)(1), our risk adjustment
methodology will be implemented in a
budget-neutral manner. A requirement

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

for budget neutrality assumes that there
is a known budget. We interpret the
statute to require that the risk
adjustment methodology must not result
in a change in aggregate amounts
payable in section 1860D–15(a)(1) of the
Act, that is, the risk adjustment
methodology must be ‘‘budget neutral’’
to some aggregate of direct subsidy
payments made before risk adjustment.
(Since direct subsidy payments are
made only to full-risk or limited risk
plans, this budget by definition will not
include payments to fallback plans.)
For comparison, in the current MA
program the budget for risk-adjustment
budget neutrality is defined to be the
aggregate government payments made to
plans under the 100 percent
demographic payment system. Since the
health-status-risk-adjustment
methodology currently results in lower
aggregate payments than the
demographic methodology, MA budget
neutrality distributes among
participating plans the difference
between total payments under the 2
methodologies via a factor that allocated
the difference in the same proportion as
the allocation of risk-adjusted payments.
However, there is no corresponding
predetermined limit to aggregate
payments in Title I, that is, to the
aggregate government direct subsidy
payments made before risk adjustment,
so there is no amount to use as a basis
for comparison in determining budget
neutrality.
In the MA program, the reason for the
difference between the total payments
under the demographic methodology
and total payments under health status
risk adjustment is that the average
health status of enrollees in MA is
different than the average health status
for the program as a whole (that is, MA
plus original Medicare). In Part D, there
is no equivalent to original Medicare
since beneficiary access subsidized
coverage through enrollment in private
plans. The Part D risk adjustment
system will be based on these enrollees.
Since there is no group of beneficiaries
outside the system like there is under
Part C, total payments with and without
risk adjustment are always equal or
budget neutral. Therefore, we believe
that risk adjustment as applied to Part
D benefits must be budget neutral to the
risk of the individuals who actually
enroll without any additional
adjustment. We did not receive any
specific comments on this, and therefore
will adopt as proposed.
d. Reinsurance Subsidies
• Allowable Reinsurance Costs
As provided in section 1860D–15(e) of
the Act and § 423.329(c), we will reduce
the risk of participating in this new

PO 00000

Frm 00119

Fmt 4701

Sfmt 4700

4311

program by providing reinsurance
subsidies. Subsidies will be limited to
80 percent of allowable reinsurance
costs for drug costs incurred after an
enrollee has reached the annual out-of­
pocket threshold. The annual out-of­
pocket threshold will be $3,600 in 2006.
Under standard coverage this
corresponds to total gross covered
prescription drug costs of $5,100, and
will be increased annually as provided
in section 1860D–2(b)(4)(B)(i)(II) of the
Act and 1860D–2(b)(4)(B)(ii) (with
regard to rounding).
In meeting the various actuarial tests
required of alternative coverage, there
could be instances where a sponsor
wanting to provide basic alternative
coverage will have to enhance plan
benefits in order to meet the test of
equal total actuarial value relative to
defined standard coverage. This could
occur with the use of a tiered co-pay
benefit structure that could shift
utilization to a cheaper set of drugs,
thus allowing plans to lower cost
sharing to achieve the same total dollar
value as defined standard coverage. In
these instances, since cost sharing is
reduced relative to defined standard
coverage, the out of pocket threshold
will be associated with a higher total
drug costs than the $5,100 under
standard coverage in 2006. For sponsors
offering enhanced alternative coverage,
the out-of-pocket threshold will also be
associated with higher total drug
spending. In this instance, however, it
will be due to fact that the plan’s
supplemental benefits will be displacing
part of the cost sharing that enrollees
will otherwise have incurred.
Allowable reinsurance costs are a
subset of gross covered prescription
drug costs. Gross covered prescription
drug costs are those costs incurred
under the plan, excluding
administrative costs, but including costs
related to the dispensing of covered Part
D drugs during the year and costs
relating to the deductible. These costs
are determined whether paid by the
individual or under the plan, and
regardless of whether the coverage
under the plan exceeds basic
prescription drug coverage. Allowable
reinsurance costs, on the other hand, are
the subset of these costs that are
attributable solely to basic or standard
benefits and that are actually paid by
the sponsor or organization or by (or on
behalf of) an enrollee under the plan.
Actually paid means that these costs
must be net of any discounts,
chargebacks, and average percentage
rebates, and will exclude any amounts
not actually incurred by the sponsor.
The reinsurance payments are then
calculated by determining the portion of

E:\FR\FM\28JAR2.SGM

28JAR2

4312

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

allowable reinsurance costs that are
incurred after the enrollee has reached
the out-of-pocket threshold ($3,600 out
of pocket in 2006). The reinsurance
subsidy will provide 80 percent of such
excess amount.
• Payment of Reinsurance Subsidy
Since allowable reinsurance costs (the
subset of gross covered drug costs that
are attributable to basic coverage only
and are actually paid by the sponsor or
plan) can only be fully known after all
costs have been incurred for the
payment year, we proposed to make
payments on an incurred basis to assist
PDP sponsors and MA organizations
with cash flow. We also proposed that
we would consider payments of
reinsurance amounts on a monthly
prospective basis based on the
reinsurance assumptions submitted and
negotiated with each plan’s approved
bid. In the August proposed rule we also
stated that regardless of which process
we used for making reinsurance
payments, as discussed below, if, at the
end of the year, the data demonstrates
the sponsor was overpaid through the
interim payments—or if there is
insufficient evidence to support the
reinsurance payments claimed—we
would recover the overpayments either
through a lump sum recovery or by
reducing future payments during the
coverage year. Similarly, if the data
demonstrates that the sponsor was
underpaid, we would pay the sponsor.
Comment: Numerous comments were
received on the methodology of
reinsurance payments. There was a
general consensus supporting
prospective monthly payments, with
some commenters suggesting that the
payment be at 1/12th of the net present
value of estimated allowable
reinsurance costs in each month of the
coverage year. One commenter urged
that plans should be able to choose
between incurred and prospective
payment. One commenter suggested that
plans should invoice daily for
reinsurance costs rather than have
prospective monthly retrospective
payments. Another commenter
supported claims payments on an
incurred rather than prospective or
retrospective basis, and reimbursement
on a monthly basis as proposed. Only
one comment was received supporting
determining payment with either a planspecific or averaging approach
Response: Based on public comment,
as well as on considerations of our
current systems capabilities, our initial
methodology will entail making
monthly prospective payments of
estimated allowable reinsurance costs
submitted with the bid. We will
establish and calculate these payments

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

at the plan level so that reinsurance
estimates reflect individual plan risk
and the impact of plan supplemental
benefits (if any) on when catastrophic
benefits and reinsurance payments are
triggered. At the end of each calendar
year, we will reconcile plans’ allowable
incurred reinsurance costs for the year
with the year’s prospective plan
payments; we will then reimburse plans
for any underestimation of costs or
recover any agency overpayments. More
details will be made available in CMS
additional guidelines on the payment
methodology. We have modified
§ 423.343(d)(1) to clarify that CMS data
requirements for reconciliation will be
specified in separate guidance. We note
that two commenters suggested that
payments should be made on an
incurred basis. We believe that
advancements in information systems
could make this logistically feasible. We
wish to clarify that we reserve the right
to alter the payment methodology. Any
future changes would be announced
through the Advance Notice of
Methodological Changes and be subject
to public comment.
• Adjustments to Reflect the True Out­
of-Pocket Threshold
The statute provides that the
reinsurance subsidy would be paid only
for the plan’s share of individual
expenses in excess of an enrollee’s
TrOOP threshold. As indicated above, if
the PDP sponsor offers enhanced
alternative coverage or an MA-PD plan
offers benefits beyond basic coverage as
part of its supplemental benefits, the
plan’s spending for these benefits would
not count toward the TrOOP threshold.
Since benefits beyond basic coverage
reduce cost sharing that would
otherwise be incurred, they shift the
effective prescription drug catastrophic
limit beyond the associated total
spending under the standard benefit
($5,100 in 2006) and raise the effective
reinsurance attachment point at the
same time.
In addition, to the extent that plan
cost sharing is paid or reimbursed by
secondary insurance coverage or
otherwise, that cost sharing does not
count toward the out-of-pocket
threshold. Beneficiaries are required to
report the existence of secondary
coverage or other types of coverage we
identify and plans must identify these
payments and ensure that true out-of­
pocket spending is accounted for
accurately in claims processing. This is
more fully discussed in subpart C and
subpart J of this preamble.
Comment: One commenter noted that
claims covered under supplemental
coverage do not count towards TrOOP.
The commenter believes that

PO 00000

Frm 00120

Fmt 4701

Sfmt 4700

reinsurance should be triggered at the
point that each enrollee hits $5,100
rather than $3,600 in out-of-pocket
because there will otherwise be a strong
disincentive to offer plans with
enhanced coverage.
Response: We agree that the delayed
reinsurance attachment point that
results from the provision of
supplemental benefits is one issue that
must be considered by Part D plan
sponsors. However, section 1860D–
15(b)(2) of the Act defines allowable
reinsurance costs to be ‘‘no more than
the part of such costs that would have
been paid under the plan if the
prescription drug coverage under the
plan were basic prescription drug
coverage, or, in the case of a plan
providing supplemental prescription
drug coverage, if such coverage were
standard prescription drug coverage.’’
Therefore, by statute, claims for
supplemental benefits cannot be
counted toward allowable reinsurance
costs and we have no discretionary
authority in this area.
• Adjustments for the Insurance Effect
of Supplemental Coverage
In the proposed rule we stated that
supplemental benefits increase the level
of total drug spending after which
reinsurance payments begin
(reinsurance attachment point).
Assuming 2 identical groups of
enrollees for utilization, one enrolled in
enhanced alternative coverage and one
in defined standard coverage, the total
allowable reinsurance costs for the
group with standard coverage would be
greater than for the group with
enhanced alternative coverage. Thus,
one might hold that the differences in
benefit packages are accounted for
without the need for further adjustment.
If one would examine average total
spending for both groups, however, one
would find that the average spending
under enhanced alternative coverage
would be greater than the average under
defined standard coverage because of
the impact of the insurance effect (or
‘‘moral hazard’’, that is, the tendency of
increased coverage resulting in
increased utilization due to decreased
financial stake in the costs associated
with utilization). All other things being
equal, this higher total spending would
result in higher allowable reinsurance
costs than would otherwise occur if the
total spending under enhanced
alternative coverage were comparable to
that under standard coverage. We
therefore proposed requiring (in the
definition of allowable reinsurance
costs) that allowable reinsurance costs
be adjusted to reflect the impact of this
induced utilization. We would make
this adjustment to comply with the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
requirement in section 1860D–15(b)(2)
of the Act that in no case shall the
allowable reinsurance costs exceed the
costs ‘‘that would have been paid under
the plan if the ... coverage ... were
standard prescription drug coverage’’.
Comment: One commenter responded
that they were not clear that an
adjustment for the insurance effect of
supplemental coverage would be
needed. They recommended that we
consider allowing time to study this
issue, both to determine if an
adjustment is appropriate at all and if it
is what the adjustment should be.
Another commenter stated that this
issue is very complex and offered to
discuss it further with us. Another
health insurer noted that if a health plan
develops rates for a commercial group,
the rate for supplemental benefits
developed for that group will include
the revenue needs for the supplemental
benefits as well as the plan’s increased
revenue needs to the extent that the
expected costs of providing the basic
benefit are expected to increase as a
result of the supplemental coverage.
They inquired as to how this practice
would be applied to Part D.
Response: We continue to believe that
an adjustment for the insurance effect of
supplemental coverage is necessary. The
effect of reduced cost sharing resulting
in increased demand for medical
services (including drugs) is firmly
established in the economics literature
and has been discussed for decades (see
Charles Phelps and Joseph Newhouse’s
seminal review in the August 1974 issue
of The Review of Economics and
Statistics and more recently Phelps’
1997 text ‘‘Health Economics’’). Specific
to the Medicare population, Margaret
Artz and colleagues report in the August
2002 issue of the American Journal of
Public Health that regardless of
insurance type per capita prescription
drug expenditures increased as
generosity of coverage increased in their
analysis of data from the Medicare
Current Beneficiary Survey.
Accordingly, plans that offer
supplemental benefits will be required
to provide an induced utilization
estimate with their bid, and we have
adopted this provision without
modification. Additional CMS
guidelines will be provided on
estimating the induced utilization.
• Reinsurance Subsidies to Private
Fee-For-Service Plans
As provided under section 1860D–
21(d)(4) of the Act and in
§ 423.329(c)(3), we will base reinsurance
payments for PFFS plans on an
alternative methodology. Rather than
negotiating reinsurance assumptions
submitted with the PFFS plan bid or

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

otherwise adjusting for potential price
level differences between PFFS and
other MA organization bids, we will
estimate the amount of reinsurance
payments that will be payable if the
plan were an MA-PD plan described in
section 1851(a)(2)(A)(i) of the Act. In
doing so we will take into account the
average reinsurance payments made
under § 423.329(c)(2) for basic benefits
for populations of similar risk under
such MA-PD plans. Estimated payments
will not be subject to any reconciliation
process to compare the amounts paid to
the actual allowable reinsurance
expenses, and will not allow for
payment recoveries in the event that
actual allowable reinsurance costs
exceed payments.
6. Low-Income Cost-Sharing Subsidy
Interim Payments
As provided under section 1860D–14
of the Act and in § 423.780 of the
regulations, we will provide additional
assistance for certain low-income
beneficiaries in the form of premium,
deductible and cost-sharing subsidies.
Since actual expenses incurred by these
low income beneficiaries can only be
fully known after all costs have been
incurred for the payment year, we
proposed to make estimated payments
on an interim basis to assist PDP
sponsors and MA organizations with
cash flow. Under § 423.329(d)(2)(i), we
proposed to provide for interim
payments of low-income deductible and
cost-sharing amounts on a monthly
prospective basis based on estimates of
low-income cost sharing submitted and
negotiated with each plan’s approved
bid.
We also noted in the August proposed
rule that low-income cost sharing would
not necessarily be incurred evenly
throughout the coverage year and that
we were considering the most
appropriate methodology for
distributing interim payments. Since
equal payments would be most
compatible with our systems, in the first
two years of the program (and for the
first two years of new plans thereafter)
we said in the proposed rule that we
were considering an approach paying 1/
12th of the net present value of
estimated low-income cost sharing in
each month of the coverage year. This
net present value would be calculated
on the basis of all estimated costs due
at the end of the year and discounted by
the most recently available rate for oneyear Treasury bills. An alternative
approach outlined in the proposed rule
would have required the submission of
a schedule of the estimated timing of
incurred low-income cost sharing along
with the plan bid. For example, we

PO 00000

Frm 00121

Fmt 4701

Sfmt 4700

4313

might take schedules from each plan or
we could propose an incremental
schedule (X percent of the total in
January, Y percent in February, etc.). We
also noted that the prospective payment
of estimated costs might create an
incentive to overstate low-income cost
sharing, and that we are interested in
ensuring that our interim payments are
not excessive. We stated in the proposed
rule that we would welcome comments
on these approaches and on the
appropriate treatment of interest in any
methodology.
Again, we proposed that any
reconciliation at the end of the year
would need to be based on the sponsor
providing adequate information in order
to determine the subsidy amounts for
the year. If the sponsor could not
provide such information, interim
payments would be recovered. In
addition, the low-income payments
would be subject to the same inspection
and audit provisions applying to the
other payments made under section
1860D 15 of the Act.
Comment: Several commenters
supported prospective monthly
payments for the low-income subsidy
based on estimates provided in the
accepted bid submissions. Two
commenters suggested that low-income
subsidies should be paid to plan
sponsors on an incurred basis.
Response: We will make low-income
cost sharing subsidy payments on a
prospective basis using estimates
submitted and negotiated with the
approved bid and will reconcile these
payments after the end of the coverage
year with claims data. We agree with the
majority of commenters that this
method best protects plans from cash
flow problems. More information will
be provided with CMS guidelines on
payment methodology. We have
modified § 423.343(d)(1) to clarify that
our data requirements for reconciliation
will be specified in separate guidance.
Comment: One PBM urged that PDPs
should be compensated for premium
underpayment if the low-income
subsidy amount does not meet or exceed
their premium.
Response: The PDP will get paid its
full premium. In cases where the lowincome subsidy amount is less that the
plan’s premium, any low-income
beneficiary enrolling in the plan is
responsible for making up the difference
between the low-income premium
subsidy and the plan’s premium.
Comment: Two commenters stated
that some SPAPs would want to
supplement the premium subsidy so
that their beneficiaries do not have to
pay first and be reimbursed by the
SPAP. They suggested that Section

E:\FR\FM\28JAR2.SGM

28JAR2

4314

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

423.329 should include a requirement
for plans to implement a process,
similar to the Medicare Part B buy-in
process, which will allow States to pay
Medicare Part D premiums on behalf of
SPAP beneficiaries.
Response: Such authority already
exists. Collection of monthly premiums
are covered in § 423.292. Section
1860D–13(c) of the Act instructs that the
provisions of 1854(d) shall apply to PDP
sponsors and premiums under this part
be paid in the same manner as they
apply to MA under part C. Payment
options under § 422.262(f)(3) include
any ‘‘other third parties such as a State’’.
Moreover, we are required to establish
standards for effective coordination
between Part D plans and SPAPs for
payment of premiums and coverage, as
well as payment for supplemental
prescription drug benefits. Further
information on these standards will be
issued in separate guidance.
Comment: One commenter urged us
to share all low-income subsidy
payment data under § 423.315(d)
directly with the SPAPs.
Response: Since nothing in the MMA
addresses disclosure of data to SPAPs,
we believe that FOIA rules apply to
these data. Therefore, it is possible that
we cannot disclose this data under
exception 4 of FOIA, but such a
determination would be done on a caseby-case basis following standard FOIA
procedure.
7. Risk Sharing Arrangements
a. Risk Sharing Methodology and the
Target Amount
As provided under section 1860D–
15(e) of the Act and in § 423.336, we
would establish risk corridors. Risksharing payments would limit exposure
to unexpected expenses not already
included in the reinsurance subsidy or
taken into account through risk
adjustment. These would be structured
as symmetrical risk corridors that are
agreements to share a portion of the
losses or profits resulting from expenses
for basic benefits either above or below
expected levels, respectively. However,
plans would always be at full financial
risk for all spending on supplemental
drug coverage. In addition, in
accordance with section 1860D–21(d)(5)
of the Act and section 1860D 15(g) of
the Act, the risk sharing provisions are
not available to PFFS and fallback
plans.
The expected level of expenses for
basic benefits included in the
standardized bid is known as the ‘‘target
amount’’. The target amount for any
plan would be equal to the total amount
of direct subsidy payments from us, and
premium payments from enrollees to

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

that plan for the year based upon the
risk-adjusted standardized bid amount,
less the administrative expenses and
return on investment assumed in the
standardized bid. Since the
standardized bid is the portion of the
accepted bid amount attributable to
basic prescription drug coverage, the
target amount can be thought of as
‘‘prepayments’’ of prescription drug
expense for basic benefits. The
standardized bid has also taken into
account (and excludes) any utilization
effects of offering supplemental
coverage. The objective of risk sharing
would be to compare total actual
incurred prescription drug expenses to
the prepayments, to compute the
difference, and to reimburse or recover
a portion of the difference.
In § 423.336(a)(2)(A), we establish risk
corridors, defined as specified risk
percentages above and below the target
amount. For instance, in
§ 423.336(a)(2)(ii), for 2006 and 2007,
the first risk corridor is defined as 2.5
percent above the target amount and the
second as 5 percent above the target
amount. This means that, for 2006 and
2007, the first risk corridor is between
100 percent and 102.5 percent of the
target amount and the second risk
corridor is between 102.5 percent and
105 percent of the target amount. A
third risk corridor is above 105 percent
of the target amount.
The term, symmetrical risk
corridors—means that the same size
corridors exist below the target amount
as above it. The actual upper or lower
limits of each corridor equal the target
amount plus or minus the product of the
risk percentage times the target amount.
b. Allowable Risk Corridor Costs
The costs applicable to the
computation of risk sharing are known
as allowable risk corridor costs. These
costs are defined in section 1860D–
15(e)(1)(B) of the Act and in § 423.308
as the part of costs for covered Part D
drugs that are only attributable to basic
benefits. Allowable risk corridor costs
cannot include costs attributable to
benefits outside the basic benefit. We
interpret this as both the actual
differences in benefits structure and the
insurance effect of supplemental
coverage on basic coverage. In section
1860D–15(e)(1)(B) of the Act, reference
is made to section 1860D–11(c)(2) of the
Act that provides for a utilization
adjustment using as its reference point
standard prescription drug coverage. We
are interpreting this to mean the
statutorily defined standard prescription
drug coverage described in subpart C.
Also, allowable risk corridor costs must
actually be paid by the sponsor or
organization under the plan and must be

PO 00000

Frm 00122

Fmt 4701

Sfmt 4700

net of any chargebacks, discounts or
average percentage rebates. The
allowable risk corridor costs also do not
include any administrative expenses
(including return on investment) of the
sponsor or organization. (Administrative
expenses would not include costs
directly related to dispensing of Part D
drugs during the year.) Note that unlike
allowable reinsurance costs, allowable
risk corridor costs do not include any
amount paid by the enrollee. In
§ 423.336(a)(1), we state that allowable
risk corridor costs must be adjusted in
accordance with section 1860D–
15(e)(1)(A) of the Act, by subtracting
expenses reimbursed through other
separate payments. Thus, reinsurance
payments made under § 423.329(c)(2)
and the non-premium low-income
subsidy payments made under § 423.782
in subpart P of these regulations to the
sponsor of the plan for the year must be
subtracted. The PDP sponsor or MA
organization would already have
received compensation for these costs,
and thus they do not fall within the
construct of risk corridors that are
directed at limiting exposure to
unexpected expenses.
If adjusted allowable risk corridor
costs exceed the prepayments by a
certain amount, we would reimburse a
percentage of the difference to help
plans with a portion of the
unanticipated expenses associated with
their drug coverage. On the other hand,
if prepayments exceed adjusted
allowable risk corridor costs, we would
reduce future payments or otherwise
recover a percentage of the difference to
reduce the impact on the Trust Fund of
excessive bids.
• In order to arrive at a value for actual
risk corridor costs that can be
appropriately compared to the target
amount, allowable risk corridor costs
would be adjusted to remove expenses
reimbursed through total reinsurance
payments and non-premium low
income subsidy payments. The statute
indicates that allowable risk corridor
costs must be reduced by reinsurance
payments and by the subsidy payments
for low income individuals. The subsidy
payments for low-income individuals
under section 1860D–14 of the Act
include subsidies for both premium and
for cost sharing. We interpret ‘‘the total
subsidy payments made under section
1860D–14’’ under section
1860D15(e)(1)(A)(ii)(II) of the Act in the
context of ‘‘costs incurred by the
sponsor or organization’’ in the
definition of allowable risk corridor
costs. Since premiums are not a cost, we
limit our interpretation of ‘‘the total
subsidy payments’’ to payments related
to cost sharing.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
We note that when adjusted allowable
risk corridor costs are calculated by
subtracting only non-premium subsidies
the results are the same as for an
identical plan without any subsidyeligible individuals. However, if the
adjusted allowable risk corridor costs
are calculated by subtracting total lowincome subsidies (that is, for premiums,
cost sharing and coverage above the
initial coverage limit), the risk sharing
calculation results in lower recouped
costs on the part of the plan and a
different outcome from that in a plan
without subsidy eligible individuals.
Since there must be no difference in
these amounts, the calculation
subtracting only non-premium subsidies
must be the appropriate one. We believe
that to do otherwise would result in a
major disincentive for PDP and MA-PD
plans to enroll individuals eligible for
the low-income subsidies, and we do
not believe that this would be the
logical outcome that was intended by
the statute. We are adopting this
provision as proposed.
c. Changes in Risk Corridor Limits and
Percentages (§ 423.336(a) and
(§ 423.336(b))
The risk corridors and the percentage
of risk to be shared would be set at
certain levels for 2006 and 2007 with
flexibility for us to increase the risk
sharing percentage if bids, and therefore
target amounts, are off during the early
years of the program by a certain
percentage set by the statute in section
1860D 15(e)(2)(B)(iii) of the Act. During
2006 and 2007, plans would be at full
risk for adjusted allowable risk corridor
costs within 2.5 percent above or below
the target. Plans with adjusted allowable
costs above 102.5 percent of the target
would receive increased payments. If
their costs were between 102.5 percent
of the target (1st threshold upper limit)
and at or below 105 percent of the target
(2nd threshold upper limit), they would
be at risk for 25 percent of the increased
amount; that is, their additional
payments would equal 75 percent of
adjusted allowable costs for spending in
this range. If their costs were above 105
percent of the target they would be at
risk for 25 percent of the costs between
the first and second threshold upper
limits and 20 percent of the costs above
that amount. That is, their additional
payments would equal 75 percent of the
difference between the first and second
threshold upper limits and 80 percent of
the adjusted allowable costs over the
second threshold upper limit.
Conversely, if plan spending fell below
the 97.5 percent of target, plans would
share the savings with the government.
They would have to refund 75 percent
of the savings for any costs less than

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

97.5 percent of the target amount but at
or above 95 percent of the target level,
and 80 percent of any savings below 95
percent of the target.
In § 423.336(b)(2)(iii) the program will
cover a higher percentage of the risk for
costs between the 1st and 2nd upper
threshold limits would apply in 2006
and 2007 if we were to determine that:
(1) 60 percent of Part D plans have
adjusted allowable costs that are more
than the first threshold upper limit for
the year; and (2) these plans represent
at least 60 percent of beneficiaries
enrolled in such plans. In this case,
additional payments to plans would
increase from 75 percent to 90 percent
of adjusted allowable costs between the
first and second upper threshold limits.
Conversely, there would be no change
in savings shared with the government
if costs fell below 97.5 percent of the
target level.
For 2008 to 2011, the risk corridors
and the percentage of risk to be shared
would be modified so that PDP and MA
PD sponsors would assume an increased
level of risk. Plans would be at full risk
for drug spending within 5 percent
above or below the target level. Plans
would be at risk for 50 percent of
spending exceeding 105 percent and at
or below 110 percent of the target level.
Additionally, they would be at risk for
20 percent of any spending exceeding
110 percent of the target level. Payments
would be increased by 50 percent of
adjusted allowable costs exceeding the
first threshold upper limit and up to the
second threshold upper limit and 80
percent for any additional costs
exceeding the second threshold upper
limit. Conversely, if plan spending fell
below the target, plans would share the
savings with the government. They
would have to refund 50 percent of the
savings if costs fell between 95 percent
and 90 percent of the target level, and
80 percent of any amounts below 90
percent of the target.
For years after 2011, we would
establish the risk threshold percentage
as deemed necessary to create
incentives for plans to enter the market.
The only required parameters would be
that the first threshold risk percentage
could not be less than 5 percent and the
second threshold risk percentage could
not be less than 10 percent of the target
amount.
d. Risk Sharing Payments or Recoveries
In § 423.336(c), we will make
payments or recover savings after a
coverage year after obtaining all of the
information necessary to determine the
amount of payment. In § 423.336(c)(1),
the PDP sponsor or MA organization
offering a MA-PD plan would provide
us with the information necessary to

PO 00000

Frm 00123

Fmt 4701

Sfmt 4700

4315

calculate the risk sharing as discussed
in section 3(a) of this part of the
preamble within six months. This
would include prior final reconciliation
of reinsurance and low-income
subsidies since allowable risk corridor
costs must be reduced by the total
reinsurance payments and nonpremium low-income subsidies for the
year. Once this information has been
received, under § 423.336(c)(2) we
would either make lump-sum payments
or adjust monthly payments in the
following payment year based on the
relationship of the plan’s adjusted
allowable risk corridor costs to the
predetermined risk corridor thresholds
in the coverage year. We would not
make payment if we did not receive the
necessary information from the PDP
sponsor or MA organization. In
addition, as stated, below, we are
considering certain corrective actions to
recoup risk-sharing payments, in the
event of lack of information.
Comment: One State suggested that
any savings accrued to the government
via risk sharing should be shared with
the States.
Response: Risk sharing is
symmetrical, meaning that if it were
permissible to share cost savings, the
States would also have to assume
responsibility for the portion of the cost
for specified risk percentages above the
target amount. Nevertheless, the
Congress intended for risk sharing to be
between the Federal Government and
the plans with no State involvement
whatsoever.
8. Retroactive Adjustments and
Reconciliation (§ 423.343)
In § 423.343(a) and § 423.343(b)
retroactive adjustments are made to the
aggregate monthly payments to a PDP or
MA-PD for any difference between the
actual number and characteristics,
including health status, of enrollees and
the number and characteristics on
which we had based the organization’s
advance monthly payments.
Reconciliation of actual payments made
would be done as needed. In order for
total payments to be properly accounted
for in all steps, the order of
reconciliation processes would be first,
enrollment; second, risk adjustment;
third, low-income cost sharing; fourth,
reinsurance; and finally, risk sharing.
Under § 423.343(c) and (d), we
provide for a final reconciliation process
to compare the payments for
reinsurance subsidies and low-income
cost-sharing subsidies made during the
coverage year to actual allowable
reinsurance expenses and low-income
cost sharing and to make additional
payments or payment recoveries

E:\FR\FM\28JAR2.SGM

28JAR2

4316

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

accordingly. The form and manner in
which actual allowable reinsurance
costs would be submitted for
reconciliation will be discussed in
additional CMS guidelines on payment
methodology. PDP sponsors and MA
organizations offering a MA-PD plan
would provide us with the information
necessary to finalize reinsurance
payments as discussed in section 3(a) of
this part of the preamble within six
months of the end of a coverage year.
Once complete data were received for a
coverage year, we would compare 80
percent of the allowable reinsurance
costs attributable to that portion of gross
covered prescription drug costs incurred
in the coverage year after an individual
has incurred costs that exceed the
annual out-of-pocket threshold to the
monthly reinsurance payments and
compute the difference. We would then
either make lump-sum payments or
adjust monthly payments throughout
the remainder of the payment year
following the coverage year to pay out
or recover this difference.
If an entity did not provide us with
sufficient documentation for us to
reconcile payments, we would reconcile
by recovering payments for which the
entity lacked documentation. For
example, if we make interim payments
during the year for the low-income
subsidy, but at the end of the year, the
PDP sponsor or MA organization cannot
provide documentation demonstrating
the amounts of beneficiary cost-sharing,
the reconciliation process would
involve recouping the interim payments
for such subsidy. The need to provide
sufficient documentation to support
final payment determinations applies
even in the event of a change of
ownership. Thus, new owners of a PDP
sponsor or MA organization would be
responsible for obtaining the
documentation necessary to support
payment, and the reconciliation process
would be used to recover any payments
for which the new owner lacked
documentation. We believe this
authority stems from the direction of the
Congress that each PDP sponsor and
MA-PD organization ‘‘provide the
Secretary with such information as the
Secretary determines is necessary to
carry out this section,’’ (section 1860D–
15(f)(1)(A) of the Act) and that
‘‘payments under this section . . . are
conditioned upon the furnishing to the
Secretary in a form and manner
specified by the Secretary, of such
information as may be required to carry
out this section,’’ (section 1860D–
15(d)(2)(A) of the Act)).
In the proposed rule we discussed
potential remedies that should be
imposed in the event a PDP sponsor or

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

MA organization offering an MA-PD
plan fails to provide us with adequate
information regarding risk-sharing
arrangements. In the case of risk
corridor costs, the organization or
sponsor may owe the government
money if, for example, prepayments
exceed adjusted allowable risk corridor
costs. In this case, failure to provide
information could result in a shortfall to
the government, since the entity would
not have the information necessary for
the Secretary to establish the proper
amount owed. Therefore, we will
assume that the sponsor’s or
organization’s adjusted allowable risk
corridor costs are 50 percent of the
target amount. We will use a 50 percent
threshold because we believe this
threshold would constitute a lower
limit; and it would be unlikely for any
organization or sponsor to have costs
lower than 50 percent of their total
payments. Additional guidelines will
detail our methodology for
reconciliation for these payments.
9. Reopening (423.346)
We believe that the provision in
1860D 15(f)(1) of the Act providing the
Secretary with the right to inspect and
audit any books and records of a PDP
sponsor or MA organization regarding
costs provided to the Secretary would
not be meaningful, if upon finding
mistakes pursuant to such audits, the
Secretary were not able to reopen final
determinations made on payment. In
addition, we believe that sections 1870
and 1871 of the Act provide us with the
authority to reopen final determinations
of payment to PDP sponsors and MA
organizations. Therefore, our reopening
provisions patterned after those used in
Medicare claims reopening, found in
Part 405 of the regulations, subparts G
and H. Including reopening provisions
will allow us to ensure that the
discovery of any overpayments or
underpayments could be rectified.
Under our provisions, reopening could
occur for any reason within one year of
the final determination of payment,
within four years for good cause, or at
any time when there is fraud or similar
fault. We could initiate a reopening on
its own, or a sponsor or organization
could request reopening, but such
reopenings will be at our discretion. The
Supreme Court has determined that in
the context of reopening cost reports, a
fiscal intermediary’s decision not to
reopen a final determination is not
subject to judicial review, see Your
Home Visiting Nurse Services, Inc. v.
Shalala, 525 U.S. 449, 456 (1999), and
we believe the same reasoning would
apply in the context of Part D.

PO 00000

Frm 00124

Fmt 4701

Sfmt 4700

Good cause will be interpreted in the
same manner as in Part 405 (see
Medicare Carriers Manual section
12100). Thus, good cause will exist, if
(a) new and material evidence, not
readily available at the time of the
determination, is furnished; (b) There is
an error on the face of the evidence on
which such determination or decision is
based; or, (c) There is a clerical error in
determination. In order to meet the
standard under (a) the evidence could
not have been available at the time the
determination was made. A clerical
error constitutes such errors as
computational mistakes or inaccurate
coding. An error on the face of the
evidence exists if it is clear based upon
the evidence that was before us when it
reached its initial determination that the
initial determination is erroneous. Thus,
for example, good cause would exist in
cases where it is clear from the files that
rebates or administrative costs were not
appropriately accounted for, where
computation errors had been made,
where a sponsor or organization
included non-Part D drugs in their
calculations, where individuals not
enrolled in the plan were included in
calculating payment, and in similar
situations. Reopening could occur at
any time in cases of fraud or similar
fault, such as in cases where the sponsor
or organization knew or should have
known that they were claiming
erroneous Medicare payment amounts.
Comment: One commenter asked for
clarification on the criteria that we
intend to follow in evaluating whether
to reopen a determination during the
first year under § 423.346.
Response: The criteria for reopening
under § 423.346 is no different in the
first year. Reopening could occur for
any reason within one year of the final
determination of payment, within four
years for good cause, or at any time
when there is fraud or similar fault. We
could initiate a reopening on its own, or
a sponsor or organization could request
reopening, but such reopenings will be
at our discretion. Good cause will exist,
if: (1) new and material evidence, not
readily available at the time of the
determination, is furnished; (2) there is
an error on the face of the evidence on
which such determination or decision is
based; or, (c) there is a clerical error in
determination.
10. Payment appeals (§ 423.350)
Several commenters were concerned
with resolving payment accuracy issues.
Section 1860D–15(d)(1) of the Act gives
broad authority to the Secretary to
develop payment methods and we
intend on using this authority to
establish a payment appeals process to

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
help allay the aforementioned concerns.
Accordingly, we have added § 423.350
to establish a payment appeals process
whereby payment determinations
involving the following may be subject
to appeals:
• the reconciled health status risk
adjustment of the direct subsidy as
provided in § 423.343(b);
• the reconciled reinsurance
payments under § 423.343(c);
• the reconciled final payments
made for low-income cost sharing
subsidies provided in § 423.343(d); or
• the final risk-sharing payments
made under § 423.336.
We wish to clarify that the payment
appeals process only applies to
perceived errors in the application of
the payment methodology described in
this subpart and subsequent CMS
guidelines. Under no circumstances
may this process be used to submit new
payment information after the
established deadline. Part D plans are
expected to submit payment
information correctly and within the
timelines we established.
I. Organization Compliance with State
Law and Preemption by Federal Law.
1. Overview
In our proposed regulation at
§ 423.401 we implemented the
requirements of section 1860D–12(a) of
the Act that address licensing, the
assumption of financial risk for
unsubsidized coverage, and solvency
and capital adequacy requirements for
unlicensed sponsors or sponsors who
are not licensed in all States in the
region in which it wants to offer a PDP.
The provisions of this section
specified the following:
• A sponsor must be organized and
licensed under State law as a risk
bearing entity eligible to offer health
insurance or health benefits coverage in
each State that it offers a PDP.
• There can be a waiver of the State
licensure requirement for the reasons
and under the conditions set forth under
section 1860D 12(c) of the Act.
• To the extent an entity is at risk,
it must assume financial risk on a
prospective basis for covered benefits
that are not covered by reinsurance. The
PDP sponsor could obtain insurance or
make other arrangements for the cost of
coverage provided to enrollees to the
extent that the sponsor is at risk for
providing the coverage.
Below we summarize some of the
proposals outlined in the August 2004
proposed rule, respond to public
comment, and indicate any changes we
have made to the final rule. For a full
explanation of the proposals we refer

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

readers to the August 2004 proposed
rule.
a. Overview
We proposed at § 423.410 to
implement the provisions of section
1860D–12(c) of the Act that address
waiver of certain requirements to
expand choice. Generally, section
1860D–12(c) of the Act specifies that in
order to expand access to prescription
drug plans, we may waive the State
licensure requirement using many of the
same standards that are permitted under
Part C for provider-sponsored
organizations (PSOs). The MMA also
added some special rules for PDPs that
are in addition to the PSO waivers
available under Part C. Finally, the
MMA allows for regional plan waivers
under circumstances similar to those
permitted under Part C for regional
plans. We proposed requirements for
regional plan waivers in § 423.115.
b. Waivers Incorporated from 1855(a)(2)
Section 1860D–12(c) of the Act
provides that a prospective PDP sponsor
may request a waiver from State
licensure requirements from us under
the waiver provisions at sections
1855(a)(2)(B), 1855(a)(2)(C) and
1855(a)(2)(D) of the Act. Because the
Congress directed us to use many of the
same grounds for approving waivers
used in accordance to sections
1855(a)(2)(B), 1855(a)(2)(C), and
1855(a)(2)(D), we proposed adopting the
regulatory provisions in § 422.372.
These provisions allow a waiver when
the State has failed to complete action
on a licensing application within 90
days of receipt of a substantially
complete application. This rule was
adopted in proposed § 423.410(c)(1).
Proposed § 423.410(c)(2) included the
standard of § 422.372(b)(2) (Denial
based on discriminatory treatment).
Under this proposed regulation, a
waiver could be granted if a
determination by CMS were made that:
(1) the State denied an application
based on requirements that are not
generally applicable to PDP sponsors or
other entities engaged in a similar
business; or (2) the State required as a
condition of licensure that the PDP
sponsor offer any product or plan other
than a prescription drug plan.
Proposed § 423.410(c)(3) incorporated
the standard of § 422.372(b)(3) and
stated that a waiver may be granted if
the State denied an application on the
basis of procedures or standards relating
to solvency that are different from the
solvency requirements established by
us. In § 423.420, we proposed that we
would use an application process in
which the waiver applicant would be
required to submit certain documents
that indicate that the State is imposing

PO 00000

Frm 00125

Fmt 4701

Sfmt 4700

4317

procedures or standards relating to
solvency that are different from CMS
standards.
c. Additional Waivers Available under
1860D–12 of the Act.
In addition to the waivers available to
PSOs under 1855(a)(2)(B), (C) and (D) of
the Act, the MMA also created
additional waiver opportunities for
PDPs. The first of these was included in
proposed § 423.410(c)(4) (implementing
section 1860D–12(c)(2)(A)(ii) of the
Act), which provides that we may grant
a waiver when a State imposes
requirements other than those required
under Federal law.
The second and third of these
(implementing section 1860D–
12(c)(2)(B) of the Act) were included in
proposed § 423.410(d) and (e). We
proposed granting a waiver in the
following scenarios:
• When a State does not have any
licensing process for PDP sponsors.
• If a State does have a licensing
process for years beginning before
January 1, 2008, a waiver will be
granted if the PDP sponsor merely
submits its completed application for
licensure to the State.
• We also proposed regional plan
waivers at § 423.410(b).
d. Other Sections of the Proposed Rule.
The proposed rule also included
§ 423.420 (solvency standards for all
entities receiving a waiver of State
licensure); § 423.425 which proposed
that an approved waiver does not deem
the sponsor to meet other requirements
for a sponsor under Part 423 of the
regulations, and § 423.440, which
proposed prohibiting State imposition
of premium taxes and included the rules
for Federal preemption of State law.
2. Waiver of Certain Requirements in
Order to Expand Clhoice
The statute requires, at section
1860D–12(c)(3) of the Act, that the
waivers granted under the provisions of
section 1855 of the Act, as well as under
section 1860D–12(c)(2)(B) of the Act,
must also meet the conditions of
approval established at section
1855(a)(2)(E), 1855(a)(2)(F) and
1855(a)(2)(G) of the Act. Accordingly,
we implemented the procedures for
approving a waiver in regulations at
§ 423.410(f). Please see our final
regulations at § 423.415 and our
discussion in section 2b of this
preamble for requirements specific to
entities wishing to offer a prescription
drug plan in more than one State.
In proposed § 423.410(f)(1), we
established that except in States without
a licensing process for PDP sponsors
and in the case of regional plan waivers
described in proposed § 423.410(b)

E:\FR\FM\28JAR2.SGM

28JAR2

4318

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

(§ 423.415 in the final rule), a waiver
applies only to a specific State and is
effective for 36 months and cannot be
renewed. In the final regulation we have
made clarifying changes by adding new
§ 423.415 which is specific to regional
plan waivers. As was proposed in
§ 423.410., in § 423.415(d) of the final
rule we indicated that regional waivers
are valid until the State has completed
processing the application, but in no
case can a regional plan waiver extend
beyond the end of the calendar year for
which it is received. We proposed
implementing section 1855(a)(2)(F) of
the Act at § 423.410(f)(2) by specifying
that (except for regional plan waivers)
we would grant or deny a waiver
application under this section within 60
days after we determine that a
substantially complete waiver
application has been filed. We proposed
that a substantially complete
application would have to clearly
demonstrate and document an
applicant’s eligibility for waiver. We
also proposed, at § 423.410(f)(3) to
implement 1860D–12(c)(3) by
establishing that if we determine that a
State does not have a licensing process
for PDP sponsors, we will approve a
waiver for a PDP sponsor that meets our
solvency and capital adequacy
standards and that this waiver would
not be time limited
Comments and our responses to these
waiver requirements follow.
We received several comments
questioning, in general, the requirement
allowing State licensure to be waived
when the State applies grounds for
licensure other than those required by
Federal law. Below, in the comment and
responses section we discuss the
specific bases of these comments
concerning preemption by Federal law,
as well as other comments we received
on the proposed requirements.
Comments: Several commenters
supported limiting our interpretation of
the preemption authority under State
licensure requirements. One of these,
from a State insurance department,
stated that only non-profit organizations
were eligible to apply under its State
HMO licensure law. The commenter
expressed concern that State licensure
waivers could interfere with this State
licensure requirement, since for-profit
entities might be able to receive
licensure waivers from CMS. Another
commenter from a State insurance
department expressed its hope that
Federal waiver authority of State
licensure would not stop a State from
devising its own State approach to
funding and financial management of
PDPs within its jurisdiction.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Response: In the issues raised by
these commenters concerning general
licensing requirements we would need
to evaluate a licensure waiver request
using the standards specified in
§ 423.410 and § 423.415 of the
regulations. If an applicant met one of
these standards for waiver, we would
grant the waiver, as the Congress
required. This could mean, for example,
that a for-profit entity, operating under
a Federal waiver, does business in a
State that offer HMO licenses only to
non-profit entities. We believe allowing
qualified plans to participate in a State
or States is essential for establishing the
new program and, among other things,
ensuring access for beneficiaries to
benefits and other requirements central
to the prescription drug benefit.
Concerning the comment about State
solvency standards, our regulations at
§ 423.410(b)(3)(i) and (b)(3)(ii) allow a
waiver of State solvency and
information requirements if the State
requirements concerning these go
beyond those specified by Federal law.
We are finalizing our language from the
proposed rule concerning these
requirements as we believe that the
intent of the statute is to ensure that
entities wishing to offer prescription
drug program in a State or States not be
subjected to requirements beyond those
required by Federal law.
Comment: Another organization
requested that we specifically identify
those PDP sponsors which are State
licensed and those which have received
a Federal waiver.
Response: We concur with the
comment in principle that an
organization that is not State licensed
but under a Federal waiver be identified
as such. As we develop additional
guidance for the requirements of Part D,
we will consider how best to convey
such an identification. We do not
believe, however, that it is necessary to
include the identification in the
requirements of this final rule.
Comment: A PBM requested that we
clarify the rules for States without PDP
licensure processes. The PBM proposed
that if a State does not have a specific
insurance license for prescription drugonly insurance plans, then this should
be sufficient grounds for approval of the
waiver by us.
Response: The approach that we have
in adopted in § 422.372(b)(4) requires
that the State licensing authority give
the organization written notice that it
will not accept its licensure application.
Following this standard, we would
require an organization to approach the
State licensing authority for review and
receive their decision prior to filing a

PO 00000

Frm 00126

Fmt 4701

Sfmt 4700

request for waiver of State licensure
under the provisions of this section.
Comment: A managed care
organization and an alliance of cost
contractors requested that we apply the
licensure waiver rules to Medicare cost
plans as well as to PDPs.
Response: Section 1860D–12(c) of the
Act specifically addresses the waivers
for prescription drug plans. We believe
it would exceed our authority to extend
these waivers to cost plans, which are
not mentioned in section 1860D–12(c)
of the Act. In addition, cost plans are
governed by the licensure requirements
in Part C and in part 422 of the
regulations. This final rule is primarily
addressed to the regulations in the new
part 423 of 42 CFR. Therefore, we do not
believe this final rule would be an
appropriate place to adopt rules that
affect part 422 and not part 423 of the
regulations.
Comment: A Native American council
requested that State licensure not be
imposed upon a PDP that might be
sponsored by the Indian Health Service
or a tribal health program.
Response: We do not have the
authority to add to the waivers included
in section 1860D–12(c) of the Act. If a
PDP sponsored by an Indian Health
Service or tribal health program meets
one of the waiver requirements in
§ 423.410, the PDP applicant should
receive a waiver.
With the clarifying language noted we
are, then, adopting our regulations
concerning eligibility for waivers largely
as proposed for § 423.401 and § 423.410.
3. Temporary Waiver for Entities
Seeking to Offer a Prescription Drug
Plan in more than One State in a Region
§ 423.115.
We implemented the regional plan
waiver rule provided at section 1860D–
12(c)(1)(B) of the Act in the regulations
at proposed § 423.410. (In this final rule,
we have created a new § 423.415 to
clarify that the regional plan waivers are
distinct from the single-State waivers,
and often subject to different standards
(for example, they endure only until the
end of the contract period and not for
36 months). As we stated, this would
allow us to use the proposed waiver
authority at section 1858(d) of the Act
and the temporary waiver would be
available in the event a prospective PDP
sponsor proposed that its prescription
drug plan would cover a multi-State
region, but was not yet licensed in all
of the States. (Under those
circumstances, we stated we could
waive the State licensure requirement
until the State had completed
processing of the application.) In the
interim, the PDP sponsor would be

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
required to comply with the solvency
standards established by us. In the event
the State ultimately denied the
application, we stated that we could
extend the waiver through the contract
year as we deemed appropriate to
provide for transition.
In the final rule we have clarified,
with the addition the distinctions
between the temporary waiver (for
regional plans) and the waiver for
entities seeking to offer a plan in a
single State, the timeline for processing
the application for the waiver and the
length of the waiver itself. Thus in new
§ 423.415(c) we clarify that Secretary
will determine the time period
appropriate for the processing of the
application and in new § 423.415(d), we
repeat the policy of the proposed rule
that in no case will the temporary
waiver extend beyond the end of the
calendar year.
4. Solvency Standards for Non-Licensed
Entities (§ 423.420)
In proposed § 423.420, we specified
that sponsors that have been granted a
waiver by us must maintain reasonable
financial solvency and capital adequacy.
Solvency standards have been
developed after statutorily required
consultation with the National
Association of Insurance
Commissioners. These standards are
undergoing internal CMS review. We
anticipate that these standards, which
are required to be published by January
1, 2005 will be published on the CMS
website in the near future in
conjunction with the initial application
forms for PDP organizations. These
solvency standards will include such
items as required minimum net worth
and liquidity requirements as well as
reporting requirements for future PDPs
who have received waiver of State
licensure. We are adopting the policy
we proposed for reasonable financial
solvency and capital adequacy in this
final rule.
5. Preemption of State Laws and
Prohibition of Premium Taxes
(§ 423.440)
In the August 4, 2004 proposed rule,
we stated that we would implement
section 1860D–12(g) of the Act at
proposed § 423.440(a), by specifying
that to the extent there are Federal
standards, those standards supersede
any State Law.
We proposed that for purposes of Part
D, with the exceptions of State licensing
laws or State laws related to plan
solvency, State laws would not apply to
prescription drug plans and PDP
sponsors.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

The proposed rule for the Medicare
Advantage program also discussed
preemption of State laws, and because
Part D and Part C incorporate the same
preemption laws at section 1856(b)(3) of
the Act, we believe it is necessary to
summarize those discussions in this
final rule.
In the Medicare Advantage proposed
rule, we noted that prior to enactment
of the MMA, section 1856(b)(3) of the
Act provided for two types of
preemption: general and specific. The
presumption was that a State law was
not preempted if it did not conflict with
an M+C requirement, and did not fall
into one of the four specified categories
where preemption was presumed.
(These four categories were: benefit
requirements, including cost-sharing
rules; requirements relating to the
inclusion or treatment of providers;
requirements concerning coverage
determinations and related appeals and
grievance processes; and requirements
relating to marketing materials and
summaries and schedules of benefits
concerning M+C plans.)
We concluded that the MMA reversed
this presumption and provided that
State laws are presumed to be
preempted unless they relate to
licensure or solvency. We also
referenced the Congress’ intent that the
MA program, as a Federal program,
operate under Federal rules, and
referred to the Conference Report of the
MMA as making clear the Congress’
intent to broaden the scope of
preemption through its change to
section 1856(b)(3) of the Act. See 69 FR
46866, 46904. We believe that because
the Congress incorporated the same
preemption standard into the Part D
program, and because the Congress
required the preemption rules to apply
consistently in Parts C and D, this same
reasoning would apply to Part D.
In addition, in the proposed rule for
Part D, we stated that although the
Congress included broad preemption
rules in section 1856(b)(3) of the Act, we
did not believe that the Congress
intended for each and every State
requirement applying to PDP sponsors
to become null and void. Specifically,
we stated:
In areas where we have neither the
expertise nor the authority to regulate, we do
not believe that State laws would be
superseded or preempted. For example, State
environmental laws, laws governing private
contracting relationships, tort law, labor law,
civil rights laws, and similar areas of law
would, we believe, continue in effect and
PDP sponsors in such States would continue
to be subject to such State laws. Rather, our
Federal standards would merely preempt the
State laws in the areas where the Congress
intended us to regulate—such as the rules

PO 00000

Frm 00127

Fmt 4701

Sfmt 4700

4319

governing pharmacy access, formulary
requirements for prescription drug plans, and
marketing standards governing the
information disseminated to beneficiaries by
PDP sponsors. We believe this interpretation
of our preemption authority is in keeping
with principles of Federalism, and Executive
Order 13132 on Federalism, which requires
us to construe preemption statutes narrowly.
(69 FR 46696.)

We also recognized that while the
Congress specifically stated that State
licensure and solvency laws would not
be preempted, this did not mean that
States could condition licensure on a
sponsor meeting requirements unrelated
to what we would consider licensure
requirements. We also addressed this
issue in the Medicare Advantage
proposed rule, explaining:
We believe that the exception for State
laws that relate to ‘‘State licensing’’ must be
limited to State requirements for becoming
State licensed, and would not extend to any
requirement that the State might impose on
licensed health plans that-absent Federal
preemption-must be met as a condition for
keeping a State license. If a State requirement
could be considered to relate to State
licensing simply because the State could
revoke a health plan’s license for a failure to
meet the requirement, this would mean that
States could impose virtually any
requirement they wished to impose without
the requirement being preempted. ... Because
we believe that it is clear that the Congress
intended to broaden the scope of Federal
preemption, not to narrow it, we also believe
that the exception for laws relating to State
licensing must be limited to requirements for
becoming State licensed (such as filing
articles of incorporation with the appropriate
State agency, or satisfying State governance
requirements), and not extended to rules that
apply to State licensed health plans. (69 FR
46904.)

We are adopting these preemption
interpretations as our final policy. We
also note that in the accompanying
regulation text we have replaced PDP
sponsor with Part D sponsor, as we
believe that the preemption of State law
and the prohibition against imposition
of premium taxes should operate
uniformly for all Part D sponsors. We
note that licensure requirements in this
Part continue to apply only to PDP
sponsors, as other Part D sponsors (such
as MA organizations and cost-based
HMOs and CMPs) are subject to their
own licensing laws.
Comment: One large insurer felt that
our narrow interpretation of the
statutory preemption authority was
contrary to the language of section
1856(b)(3) of the Act. This insurer
requested that CMS consider making
clear that all State laws and regulations
(with the exception of State licensing
and solvency laws) are preempted with
respect to MA and Part D plans.
Response: As noted in the proposed
rule, we do not believe that either the

E:\FR\FM\28JAR2.SGM

28JAR2

4320

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

principles of Federalism or the statute
justify such a broad preemption
interpretation. We do not believe, for
example, we could preempt all State
environmental or civil rights laws, nor
do we believe it was the Congress’
intent to do so. The preemption in
section 1860D–12(g) of the Act is a
preemption that operates only when
CMS actually creates standards in the
area regulated. To the extent we do not
create any standards whatsoever in a
particular area, we do not believe
preemption would be warranted.
Comment: A pharmaceutical
manufacturer and a pharmaceutical
manufacturing association requested
clarification from us that it is not our
intent to preempt any State pharmacy
laws dealing with the practice of
therapeutic substitution.
Response: In general, we do not think
we have the authority to preempt State
pharmacy licensing laws dealing with
the practice of therapeutic substitution
and we do not intend to establish
standards in this area. However, it
should be noted that the forthcoming
electronic prescription standards do
have the potential to impact State
pharmacy practices and such standards
could preempt State pharmacy practice
laws and regulations that conflict with
them.
We are adopting the requirements of
the proposed rule with the technical
and clarifying changes noted throughout
this preamble. We are also adopting the
premium tax prohibition included in
the proposed without modification.
Both rules are found at § 423.440
J. Coordination Under Part D Plans with
Other Prescription Drug Coverage
Proposed subpart J set forth the
application of Medicare Part D rules to
Medicare Part C plans; established
waivers for employer-sponsored group
prescription drug plans, MA-PD plans,
cost plans, and PACE organizations; and
established requirements for
coordination of benefits with State
Pharmaceutical Assistance Programs
(SPAPs) and other providers of
prescription drug coverage.
Below we summarize the proposed
provisions of subpart J and respond to
public comments. (Please refer to the
August 2004 proposed rule (69 FR
46696) for a detailed discussion of our
proposals.)
1. Overview and Terminology
(§ 423.454)
Subpart J implemented sections
1860D–2(a)(4), 1860D–2(b)(4)(D),
1860D–11(j), 1860D–21(c), 1860D–22(b),
1860D–23(a), 1860D 3(b), 1860D–23(c),
1860D–24(a), 1860D–24(b), and 1860D–

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

24(c) of the Act, as added to the Act by
section 101(a) of the MMA. We
proposed that, in general, the
requirements of Part D generally apply
under Part C for prescription drug
coverage offered by MA-PD plans,
although certain waivers are available.
In addition, we implemented section
1860D–22(b) of the Act at proposed
§ 423.458(c) providing us the authority
to waive the requirements of this part
for employer-sponsored group
prescription drug plans.
a. Part D Plans
Unless otherwise indicated,
references to ‘‘Part D plans’’ in the
proposed rule referred to any or all of
MA-PD plans, prescription drug plans
(PDPs) and fallback prescription drug
plans. Likewise, the term ‘‘Part D plan
sponsor’’ referred to MA organizations
offering MA-PD plans, PDP sponsors,
and eligible fallback entities offering
fallback plans. We have moved the
definition of ‘‘Part D plan’’ to § 423.4 of
our final rule and expanded the
definition such that it includes cost
plans and PACE organizations offering
qualified prescription drug coverage.
Similarly, we have revised the
definition of ‘‘Part D sponsor’’ under
§ 423.4 of our final rule to include cost
plans and PACE organizations offering
qualified prescription drug coverage.
b. Employer-sponsored Group
Prescription Drug Plan
We used the term ‘‘employer­
sponsored group prescription drug
plan’’ to mean a prescription drug plan
under a contract between a PDP sponsor
or MA organization offering an MA-PD
plan and employers, labor
organizations, or the trustees of funds
established by one or more employers or
labor organizations (or combination
thereof) to furnish prescription drug
benefits under employment-based
retiree health coverage.
c. State Pharmaceutical Assistance
Program (SPAP)
We defined an SPAP, for purposes of
this part, as a program operated by or
under contract with a State if it:
(1) Provides financial assistance for
the purchase or provision of
supplemental prescription drug
coverage or benefits on behalf of Part D
eligible individuals;
(2) Provides assistance to Part D
eligible individuals in all Part D plans
without discriminating based upon the
Part D plan in which an individual
enrolls;
(3) Meets the benefit coordination
requirements specified in this part; and
(4) Does not change or affect the
primary payer status of a Part D plan.
Comment: Although one commenter
supported our proposed definition of

PO 00000

Frm 00128

Fmt 4701

Sfmt 4700

the term ‘‘SPAP,’’ several commenters
urged us to allow SPAPs to endorse one
or more Part D plans for SPAP enrollees.
They believe that the non­
discrimination criteria contained in the
definition of the term SPAP should be
designed to maximize the efficiency and
effectiveness of offering benefits that
supplement the benefits available under
Part D coverage to enrollees. Some of
these commenters believe that a
preferred plan approach, if
accomplished via a competitive bid
process, supports the competitive,
market-based model that the Congress
envisioned. One commenter stated that
such an approach would help it to
‘‘ratchet down’’ administrative costs.
Another commenter asserted that the
statute does not prohibit a State from
providing consumer advice to its SPAP
enrollees regarding which Part D plan
might work best with an SPAP or offer
the best value.
Commenters believe that this
interpretation is consistent with the
intent to establish an effective
coordination mechanism between
SPAPs and Part D plans. Defining non­
discrimination in a way that prohibits
SPAPs from designating preferred Part D
plans and prohibiting auto-enrollment
of SPAP beneficiaries into preferred
plans would not facilitate enrollment in
Part D plans and would further
complicate, rather than promote,
coordination between Part D plans and
SPAPs.
Response: Section 1860D–23(b)(2) of
the Act defines an SPAP, in part, as a
program that ‘‘in determining eligibility
and the amount of assistance to Part D
enrollees, provides assistance to such
individuals in all Part D plans and does
not discriminate based upon the Part D
plan in which the individual is
enrolled.’’ We are interpreting the non­
discrimination language in section
1860D–23(b)(2) of the Act and
§ 423.464(e)(1)(ii) of our final rule to
mean that SPAPs, if they offer premium
assistance or supplemental assistance
for Part D cost sharing, must not only
offer equal assistance to beneficiaries
enrolled in all Part D plans available in
the State, but also may not steer
beneficiaries to one plan or another
through benefit design or otherwise. We
believe that the law intends that all Part
D plans in a State be given comparable
opportunities. Requiring States to
coordinate with all Part D plans,
without discrimination, levels the
playing field for Part D plans that want
to provide benefits in a particular State.
We further interpret section 1860D–
23(b)(2) of the Act as prohibiting SPAPs
from automatically enrolling (‘‘auto­
enrolling’’) beneficiaries into a preferred

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
plan because this would, in effect, allow
the SPAP to choose a Part D plan for the
beneficiary. The non-discrimination
provision is part of the definition of an
SPAP. Thus, even if under State law a
State is the authorized representative of
its SPAP enrollees for purposes of
enrolling them in a Part D plan elected
by the State, if it auto-enrolls
beneficiaries into a select plan, the State
program will no longer meet the
statutory definition of SPAP under
section 1860D–23(b) of the Act.
This will jeopardize the program’s
special status with respect to true out­
of-pocket (TrOOP) costs. That is, if a
State does not meet the definition of an
SPAP, its contributions to beneficiary
cost sharing under a Part D plan do not
count toward the TrOOP limit, after
which a beneficiary is eligible for
catastrophic coverage.
Section 1860D–23(d) of the Act
provides for grants to SPAPs for the
purpose of educating their members
who are Part D eligible individuals
about the options available to them
under the Medicare drug benefit,
including information comparing Part D
plans in the State so that SPAP enrollees
they can choose the Part D plan that
provides them with the best value. We
will reach out to SPAPs and provide
them with information they can use to
help their enrollees who are Part D
eligible individuals better understand
their Part D plan options. We will also
assist SPAPs in their efforts to ensure
that their members understand the
manner in which the Part D plans in
their State coordinate with their SPAP
benefit. Our outreach to SPAPs will also
include guidance on the various
educational, outreach, and assistance
activities SPAPs may undertake in a
manner that will not discriminate
among Part D plans, for example: (1)
SPAPs can provide beneficiaries with
objective and comparative education on
all available Part D plans offered in the
State; and (2) SPAPs can advise
members on:
• which plans have lower
beneficiary premiums than others (after
application of any low-income premium
subsidy under 423.782 of our final rule
or premium subsidy offered by the
SPAP, which must be applied uniformly
without respect to which Part D plan an
individual enrolls in),
• which plan formularies include
the drugs currently utilized by the
beneficiary,
• which plans offer the beneficiary
the most favorable combination of
deductibles, coinsurance, and
negotiated prices for the drugs currently
utilized by the beneficiary, and

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

• which plans’ network pharmacies
include the same pharmacies
participating in the SPAP, and which
plans (if any) include an emblem or
symbol on their ID cards indicating their
coordination with the SPAP to facilitate
secondary payment at the point of
service.
The nondiscrimination requirement
also bars SPAPs from recommending
Part D plans based on the SPAP’s
financial interest in minimizing the cost
of providing benefits under the SPAP
that supplement the benefits available
under Part D coverage. In addition, to
the extent an SPAP assists the
enrollment into Part D of its members
who fail to elect a Part D plan during
their initial enrollment period or upon
joining the SPAP, we encourage SPAPs
to mirror our procedures for autoenrollment of full-benefit dual eligible
individuals into Part D plans, which
will be done on a random basis.
Comment: One commenter asked us
to clarify whether a hybrid SPAP with
multiple components, some of which
meet our definition of SPAP, and some
of which do not, would render an entire
SPAP ‘‘unqualified’’ under our
definition.
Response: We agree that components
of State programs that provide
pharmaceutical assistance, provided
they meet the definition of the term
‘‘SPAP’’ in § 423.454(e)(1) of our final
rule, may provide benefits that
supplement the benefits available under
Part D coverage, and that such
supplemental assistance for covered
Part D drugs will count toward Part D
enrollees’ TrOOP limit (as defined in
§ 423.104(d)(5)(iii) of our final rule).
Thus, for example, if an SPAP receives
Federal program funding for certain
enrollees (for example, HIV/AIDS
patients) or for certain drugs (for
example, vaccines or HIV/AIDS drugs),
while the State covers drug costs for
other SPAP enrollees or for other drugs,
only those components of the SPAP
program that receive no Federal
program funds may be considered an
SPAP. We do not see any reason why
the existence of both qualified and nonqualified components of a SPAP would
interfere with our ability to count the
spending of the qualified SPAP toward
TrOOP, as long as operations and
funding are appropriately segregated.
Comment: Several commenters asked
for clarification regarding whether State
Kidney Programs, which are structurally
similar to SPAPs, can be defined as
SPAPs so that their benefits
supplementing the benefits available
under Part D coverage count toward
their enrollees’ TrOOP limit.

PO 00000

Frm 00129

Fmt 4701

Sfmt 4700

4321

Response: Section 1860D–23(b) of the
Act provides that an SPAP is a State
program that provides financial
assistance for the purchase or provision
of prescription drugs, and we interpret
this to mean that it provides assistance
with State funds. Therefore, to the
extent that all sources of program
funding for a State Kidney Program’s
financial assistance for the purchase or
provision of supplemental prescription
drug coverage or benefits on behalf of
Part D enrollees are 100 percent nonFederal and provided a program that
meets the other criteria included in the
description of an SPAP in
§ 423.464(e)(1) of our final rule, the
program will be considered an SPAP.
Any benefits provided by such a
program that supplement the benefits
available under Part D coverage would
therefore count as an incurred cost
toward the calculation of a beneficiary’s
TrOOP threshold.
Comment: One commenter asked us
to clarify that a State can use any source
of funds available to it (other than
Federal funds) to finance any form of
assistance to SPAP enrollees.
Response: We have clarified in
§ 423.464(e)(1) of our final rule that the
term ‘‘SPAP’’ excludes any program
under which program funding is from
Federal grants, awards, contracts,
entitlement programs, or other Federal
sources of funding. However, the
statutory definition of the term SPAP
does not address program funding
sources. We believe that a State program
may still be considered an SPAP if some
or all of its program funding is from
private sources (for example, from
charities or independent foundations).
We also clarify that the exclusion of
Federal program funding does not
exclude some Federal administrative
funding or incidental Federal monies
(for example, the Federal grants to
SPAPs provided for in section 1860D–
23(d) of the Act).
In addition, to ensure SPAPs are
funded in a manner consistent with the
Congress’ intent in the statute, we
clarify that a ‘‘State program’’ under
§ 423.454 of our final rule must provide
assistance based on financial need, age,
or medical condition, and cannot do so
based on current or former employment
status. Under section 1860D–23(b) of the
MMA, an ‘‘SPAP’’ is defined as a State
program which provides financial
‘‘assistance’’ for supplemental drug
coverage or benefits. The term
‘‘assistance’’ is defined in Webster’s II
dictionary as ‘‘help’’ or ‘‘aid.’’ We
therefore interpret the word
‘‘assistance’’ to mean financial help or
aid provided to any individual in need
of such support—specifically,

E:\FR\FM\28JAR2.SGM

28JAR2

4322

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

individuals in financial need, the aged,
or those with certain medical
conditions. Thus, as provided in
§ 423.454 of our final rule, a ‘‘State
program’’ is one that provides financial
assistance for supplemental drug
coverage to individuals based on
financial need, age, or medical
condition, but not based on current or
former employment status.
Comment: One commenter suggested
that our interpretation of the MMA
should allow for the continuation and
renewal at State discretion of the
Pharmacy Plus waivers.
Response: Pharmacy Plus programs
can continue with Federal match after
January 1, 2006, under certain
circumstances. Any State that operates a
Pharmacy Plus demonstration program
must determine whether it is feasible to
continue that Pharmacy Plus program
by submitting a revised budget
neutrality calculation for the
demonstration. As required in section III
(10) of the terms and conditions of
approval for Pharmacy Plus programs,
this calculation must account for the
reduction in Medicaid drug costs and a
lesser diversion of dual eligible
beneficiaries into the Medicaid program
due to the implementation of Part D. We
will review the revised budget
neutrality calculation and approve or
disapprove the continuation of the
demonstration for the period after Part
D is implemented.
2. Application of Part D Rules to Certain
Part D Plans on and after January 1,
2006 (§ 423.458)
In accordance with section 1860D–
21(c)(1) of the Act, and proposed at
§ 423.458(a) of our notice of proposed
rulemaking, the provisions of Part D
pertaining to the provision of qualified
prescription drug coverage apply under
Part C to prescription drug coverage
provided by an MA-PD plan in lieu of
other Part C provisions that would
apply to such coverage, unless
otherwise provided. Thus, Part D
requirements not related to the
provision of drug coverage (for example,
licensing requirements) do not apply to
MA-PD plans.
We indicated that we would waive
Part D provisions to the extent that we
determine that they duplicate, or
conflict with, provisions under Part C,
or as necessary in order to improve
coordination of Part D benefits with the
Part C program. In addition, we
indicated that we would apply our
waiver authority to cost plans and PACE
organizations as proposed at
§ 423.458(d).
Except as otherwise provided below,
the final rule adopts the provisions

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

related to the application of Part D rules
to MA-PD plans, as well as waivers of
Part D requirements for MA-PD plans
and cost plans, set forth in § 423.458(a),
(b), and (d) of the proposed rule.
Comment: Two commenters suggested
that waivers of Part D rules related to
formulary requirements and pharmacy
and therapeutic (P&T) committee
requirements should not be allowed for
MA-PD plans under the waiver
authority provided in section 1860D–
21(c)(2) of the Act, since there are no
comparable provisions under Part C
with which the Part D rules could
conflict. Another commenter believed
that waivers of Part D rules regarding
coverage determinations and appeals
should not be allowed under the waiver
authority provided in section 1860D–
21(c)(2) of the Act. Another commenter
said that Part D appeals and grievances
requirements should be waived for MA­
PD plans to the extent they are not
identical with Part C appeals and
grievances requirements.
Response: Section 1860D–21(c)(2) of
the Act requires the Secretary to waive
requirements under Part D to the extent
the Secretary determines they duplicate
or are in conflict with provisions
otherwise applicable under Part C, or
they are necessary to waive in order to
promote coordination of Part C and Part
D benefits. In our proposed rule, we
proposed implementing this authority
in § 423.458(b). The clear intent of this
provision was to recognize that the
delivery of health care services covered
under the original Medicare program
under Part C takes precedence over the
delivery of a drug benefit under Part D.
Although the Part D drug benefit will
become a vital part of the health care
services offered by an MA-PD plan, to
the extent that the Part D rules make it
impossible for an MA-PD plan to
effectively deliver Part C benefits, we
will exercise Part D waiver authority to
ensure that Part C benefits continue to
be effectively delivered under
§ 423.458(b) of the final rule. We agree
with the commenter that the three
waivers specifically mentioned related
to formulary requirements, P&T
committee requirements, and the Part D
appeals process will not be waived for
MA-PD plans insofar as there are no
conflicting provisions or rules under
Part C that will make these Part D
requirements impossible for an MA-PD
plan to implement.
Comment: One commenter requested
two specific waivers related to the Part
D benefit offered by MA-PD plans.
Specifically, the commenter requested a
waiver of the pharmacy access
standards in § 423.120(a)(1) of our
proposed rule under similar conditions

PO 00000

Frm 00130

Fmt 4701

Sfmt 4700

to the waivers we have permitted for
MA plans related to the Medicare
Prescription Drug Discount Card and
Transitional Assistance Program. The
commenter also requested a waiver of
the requirement that MA organizations
post their negotiated prices on our
website, again saying that we had
approved a similar waiver for MA plans
that are exclusive card sponsors under
the drug discount card program.
Response: In our proposed rule, we
signaled our intention to waive
pharmacy network access requirements
described at § 423.120(a)(3) in the case
of an MA-PD plan that provides access
(other than through mail order
pharmacies) to qualified prescription
drug coverage through pharmacies
owned and operated by the MA
organization to the extent we determine
that the network is sufficient to provide
comparable access for enrollees of the
MA-PD plan. In the subpart B preamble
of our proposed rule, we discussed the
information resources available through
the Internet at www.medicare.gov.
Although we discussed information
available to Medicare-approved
discount drug cards in that section of
the preamble, we did not specifically
signal our intention to provide identical
information related to Part D plans.
Therefore, it remains unclear that the
second waiver would be necessary.
More importantly, to the extent we
discuss the required written waiver
process in § 423.458(b)(2), (c)(1) and
(d)(2) of our final rule, it is more
appropriate at this time to direct the
commenter to those sections of the rule
than it is to speculate as to what waivers
would, and would not, theoretically be
allowed, if they were requested by an
appropriate party.
3. Application to PACE Organizations
Section 1860D–21(f) of the Act
indicates that Part D provisions shall
apply to PACE organizations electing to
offer qualified prescription drug
coverage in a manner that is similar to
those of an MA-PD local plan and that
a PACE organization may be deemed to
be an MA-PD local plan. As discussed
in detail in subpart T, PACE
organizations will not be deemed as
MA-PD local plans, but will be treated
in a manner that is similar to MA-PD
local plans for Part D requirements
applicable to the offering of qualified
prescription drug coverage. Proposed
§ 423.458(d) established regulatory
authority for us to waive Part D
provisions for PACE organizations to the
extent the provisions duplicate or
conflict with a requirement under
PACE, or the waiver is necessary to
promote coordination of benefits under

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
PACE and Part D, and indicates that
PACE organizations may request
waivers from us.
The final rule adopts the rules
regarding waivers of Part D
requirements for PACE organizations set
forth in § 423.458(d) of the proposed
rule.
Comment: We received various
comments regarding waivers of Part D
requirements for PACE organizations.
Response: Please refer to subpart T of
this preamble for a detailed discussion
of these comments and our responses to
them.
4. Application to Employer Groups
Section 1860D–22(b) of the Act
extends the waiver authority that is
provided for MA organizations related
to Part C under section 1857(i) of the
Act and implemented at § 422.106(c) of
our proposed MA rule to prescription
drug plans. This waiver authority is
intended to provide employment-based
retiree health coverage an opportunity
to furnish prescription drug benefits to
its participants or beneficiaries through
Part D in the most efficient and effective
manner possible.
We invited comment on the process
we proposed for authorizing waivers for
employer-sponsored group prescription
drug plans. We also asked for comment
on the manner in which additional
waivers should be permitted and what
additional waivers, if any, we should
not allow.
Except as otherwise provided below,
the final rule adopts the provisions
related waivers of Part D requirements
for employer-sponsored group
prescription drug plans set forth in
§ 423.458(c) of the proposed rule.
Comment: Most commenters
indicated a strong desire to obtain clear
non-regulatory guidance addressing key
issues in the waiver process prior to the
final regulations being published.
Commenters also urged us to adopt a
process for employer waivers that gives
employers maximum flexibility while
minimizing administrative burden.
Several commenters stressed the
importance of providing waivers to
facilitate employers becoming their own
PDP or MA-PD plan for their retiree
population. Several employers
commented that under ERISA, State
licensure requirements would not
apply. Commenters also suggested
waivers for the areas of network access,
service area, marketing, disclosure, and
enrollment.
Response: We are adopting a
streamlined approach for implementing
employer group waivers that allows
maximum flexibility for employers to
retain retiree prescription drug

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

coverage. Details on waivers that we
will and will not consider will be
included in separate guidance.
Additional waiver requests will be
addressed on a flow basis.
Comment: One commenter requested
clarification as to whether we will
extend to cost plans (as defined under
section 1876 of the Act) its waiver
authority under section 1860D–22(b) of
the Act.
Response: Section 1860D–21(e)(1) of
the Act provides that only those
provisions of Part D (and related
provisions of Part C) pertaining to the
offering of qualified prescription drug
coverage by a MA-PD local plan would
apply to the offering of the coverage by
a cost plan. Because the employer
waiver authority under section 1860D–
22(b) of the Act pertains to the offering
of qualified prescription drug coverage,
we believe section 1860D–21(e) of the
Act extends this waiver authority to cost
plans. This will facilitate the retention
of employer sponsored retiree
prescription drug coverage under cost
plans. However, the provisions of Part C
and D that do not relate to the offering
of qualified prescription drug coverage
by cost plans, including the employer
waiver authority under section 1857(i)
of the Act, would not apply to benefits
offered under a cost plan other than any
qualified prescription drug coverage.
Accordingly, we do not interpret these
statutory provisions as permitting us to
apply our waiver authority for
employer-sponsored group coverage to
Part A and B benefits offered under cost
plans.
Comment: One commenter stated that
a PBM or other third party administrator
supporting an employer should be able
to elect to solely serve employer groups
without also being required to open
enrollment to beneficiaries also in the
service area but unaffiliated with the
employer.
Response: We will include details in
separate guidance on waivers that we
will and will not consider. Section
423.458(c) of our proposed rule did not
propose interpreting section 1857(i)(2)
of the Act as permitting entities other
than PDP sponsors and MA
organizations from requesting employer
group waivers, or contracting with us to
offer an employer-sponsored group
prescription drug plan. However, given
the commenter’s request for
clarification, we note that § 423.458(c)
of our final rule provides that any entity
seeking to offer, sponsor, or administer
an employer-sponsored group
prescription drug plan may request a
waiver or modification of Part D
requirements. We will provide separate
guidance regarding what entities we

PO 00000

Frm 00131

Fmt 4701

Sfmt 4700

4323

will contract with, as well as how we
will contract with them.
5. Medicare Secondary Payer
Procedures (§ 423.462)
Section 1860D–2(a)(4) of the Act
extends the Medicare secondary payer
(MSP) procedures applicable to MA
organizations under section 1852(a)(4)
of the Act and 42 CFR 422.108 to Part
D sponsors and their provision of
qualified prescription drug coverage.
Section 1852(a)(4) of the Act provides
that an MA organization may charge or
authorize a provider to seek
reimbursement for services from a
beneficiary or third parties to the extent
that Medicare is made a secondary
payer under section 1862(b)(2) of the
Act. Accordingly, we proposed at
§ 423.462 of our proposed rule that Part
D sponsors are required to follow the
same rules as MA organizations
regarding:
• Their responsibilities under MSP
procedures;
• Collection of payment from
insurers, group health plans and large
group health plans, the enrollee, or
other entities for covered Part D drugs;
and
• The interaction of MSP rules with
State laws.
Comment: One commenter notes that
MSP rules will apply to Part D and that
section 1860D–12(g) of the Act extends
State law preemption to Part D
sponsors. This commenter believes that
the MSP provisions extended to Part D
sponsors should also apply to cost plans
offering qualified prescription drug
coverage. They argue that Part D is a
Federal program and should be
implemented by all Part D plans in
accord with the same Federal rules and
without regard to any State laws except
those governing licensure and solvency.
Response: Section 1860D–21(e)(1) of
the Act provides that those provisions of
Part D (and related provisions of Part C)
pertaining to the offering of qualified
prescription drug coverage by a MA-PD
local plan would apply to the offering
of such coverage by a cost plan.
Accordingly, the MSP provisions under
section 1860D–2(a)(4) of the Act and the
preemption provisions under section
1860D–12(g) of the Act are extended to
cost plans for offering of qualified
prescription drug coverage under the
plans. However, the MSP and
preemption provisions of both Parts C
and D would not apply to benefits
offered under a cost plan providing
other than any qualified prescription
drug coverage. Accordingly, we do not
interpret these statutory provisions as
permitting us to apply these provisions
to Part A and B benefits offered under

E:\FR\FM\28JAR2.SGM

28JAR2

4324

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

cost plans. Cost plans are thus still
subject to the MSP and State law
preemption provisions under § 411.172
for their Part A and B benefits.
6. Coordination of Benefits with Other
Providers of Prescription Drug Coverage.
(§ 423.464)
Section 1860D–23(a) of the Act
authorizes us to establish procedures
and requirements to promote the
effective coordination of benefits
between a Part D plan and an SPAP
with respect to payment of premiums
and coverage, and payment for
supplemental prescription drug
benefits. The elements to be coordinated
include enrollment file sharing, claims
processing, payment of premiums for
both basic and supplemental drug
benefits, third-party reimbursement of
out-of-pocket costs, application of
protection against high out-of-pocket
expenditures (defined in section 1860D–
2(b)(4) of the Act), and other
administrative processes and
requirements that we specify.
We will establish procedures and
requirements for Part D plans no later
than July 1, 2005, to ensure effective
coordination. In addition, as specified at
section 1860D–24(a) of the Act, we will
apply the requirements for coordination
of benefits with SPAPs to Part D plans
when they coordinate with entities
providing other prescription drug
coverage, including Medicaid (including
a plan operating under a waiver under
section 1115 of the Act), insurers, group
health plans, the Federal Employees
Health Benefits Program (FEHBP),
military coverage (including TRICARE),
and other coverage that we specify.
Section 1860D–24(a)(3) of the Act
permits us to impose user fees to defray
the costs of Part D coordination of
benefits, but not on SPAPs under any
method of operation, for the transmittal
of benefit coordination information
under Part D. We are also provided
authority to retain a portion of these
user fees to offset costs we incur for
determining whether enrollee out-of­
pocket costs are being reimbursed by
third parties and for alerting Part D
plans when, in fact, they are being
reimbursed. In the proposed rule, we
noted that any user fees, if collected,
would not be assessed until the
implementation of the Part D benefit in
2006. We requested comments regarding
the method we should use to impose
user fees, especially concerning whether
it would be advisable to impose user
fees on a monthly or quarterly basis
based on the volume of data exchanged
and whether we should require
electronic payment of user fees.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

As provided in section 1860D–
24(c)(1) of the Act, Part D plans may
continue to use cost management tools
(such as tiered or differential cost
sharing) even if an SPAP or other drug
plan provides benefits that supplement
the benefits available under Part D
coverage for individuals enrolled in the
Part D plan. In the proposed rule, we
requested comments on how we could
ensure that supplemental benefits
offered by SPAPs and plans providing
other prescription drug coverage would
not undermine or eliminate the cost
management tools established by Part D
plans. We also solicited comments on
the most effective way to administer this
provision without creating undue
administrative burden on either Part D
plans or other prescription drug
coverage that supplements Part D
benefits.
Except as otherwise provided below,
the final rule adopts the coordination of
benefit provisions set forth in § 423.464
of the proposed rule.
Comment: One commenter indicated
that our policies regarding coordination
of benefits should ensure that this
process is as administratively simple as
possible, and that coordination of
benefits rules are structured in a way
that does not create incentives for
beneficiaries to switch Part D plans mid­
year in order to obtain better basic
benefits.
Response: We agree and will keep this
in mind as we work to develop
requirements for coordination of
benefits between Part D plans and
SPAPs and entities providing other
prescription drug coverage. We note, as
well, that Part D enrollees may only
switch Part D plans mid-year under the
limited circumstances triggering a
Special Election Period (SEP) in
accordance with § 423.38(c) of our final
rule.
Comment: One commenter indicated
that while section 1860D–23 of the Act
requires us to establish requirements for
coordination of benefits beyond the
tracking of TrOOP expenditures and
claims payment (for example, for
premium payment with SPAPs), they
believe that coordination of benefits
responsibilities should be limited for
now to the tracking of TrOOP
expenditures and claims payment. This
commenter believed that an incremental
approach is in the best interests of all
parties, particularly since it is still
unclear how many entities will choose
to participate in or provide
supplemental coverage to Part D.
Response: Section 1860D–23(a)(2) of
the Act requires that benefit
coordination elements include, at a
minimum, enrollment file sharing,

PO 00000

Frm 00132

Fmt 4701

Sfmt 4700

processing of claims, claims payment,
claims reconciliation reports, and
application of the protection against
high out of pocket expenditures. We
must comply with these statutory
requirements in establishing our
coordination requirements for SPAPs
and other providers of prescription drug
coverage, and it is in the best interests
of Part D enrollees and plans that
coordination activities begin as soon as
possible. We do not believe that an
incremental approach will be necessary,
and we will be issuing further
information on our coordination
requirements and processes soon.
Comment: One commenter
recommended that we establish a
technical advisory group with
representatives from the industry,
including pharmacy software vendors
and switching services, to develop
coordination of benefits requirements
for Part D plans to ensure effective
coordination with SPAPs and other
providers of prescription drug coverage.
Another commenter recommended that
relevant stakeholders, including
pharmaceutical benefit managers, be
consulted as we develop our
requirements.
Response: As discussed in our
proposed rule, section 1823(a)(4) of the
Act requires us to consult with SPAPs,
MA organizations, States,
pharmaceutical benefit managers,
employers, representatives of Part D
eligible individuals, data processing
experts, pharmacists, pharmaceutical
manufacturers, and other experts in
establishing our coordination of benefits
requirements. To date, we have not only
encouraged comments on this issue in
our proposed rule, but we have also
held many consultation sessions with
these various stakeholders and an Open
Door Forum on TrOOP and coordination
of benefits. We will continue to meet
with these parties as we develop our
coordination requirements and
processes.
Comment: One commenter stated that
an unintended consequence of requiring
Part D plans to collect information on
incurred costs for purposes of tracking
of TrOOP expenditures is that
confidential negotiated pricing
information will be released. This
commenter thought that we should
require Part D plans to collect SPAP
payment information on ‘‘incurred
costs’’ on a monthly or other periodic
basis, in an aggregate form broken out
per beneficiary, or require SPAPs to
report the utilization information for
enrollees for whom the SPAPs make
payments for benefits that supplement
the benefits available under Part D
coverage, and for the Part D plans to

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
apply the price that would have
prevailed had the plan been responsible
for payment.
Response: While we acknowledge the
commenter’s concern regarding
disclosure of negotiated pricing in the
sharing of claims data, we must point
out that we will require Part D plans to
submit point-of-sale pricing data to us
for display on a Part D version of Price
Compare, so this data will become
publicly available information anyway.
However, we emphasize that the cost
and price concession information
submitted on true acquisition costs in
the allowable cost reconciliation
processes will not be disclosed, and that
cost and price concession information
submitted as part of the bid submission
process will be protected to the extent
it is confidential commercial
information.
We wish to clarify that given that
section 1860D–2(b)(4)(C)(ii) of the Act
allows SPAP assistance for covered Part
D drugs to count toward TrOOP, we do
not expect that SPAPs will need to
report paid claims data. TrOOP
calculation will work by counting all
amounts not paid by the Part D plan,
unless such amounts are paid through
group health plans, insurance or
otherwise, or third party payment
arrangements. Financial assistance with
covered Part D drug costs provided by
SPAPs on behalf of beneficiaries is
assumed to be equivalent to payments
made by the beneficiary and
automatically counts toward TrOOP.
For calculation of a beneficiary’s
TrOOP expenditures, the Part D plan
will count the full amount left over after
it pays a claim until it receives notice
through the TrOOP/coordination of
benefits process that some amount
should not count (for example, because
it was paid by a group health plan,
insurance or otherwise, or a third party
payment arrangement). The plan will
then subtract that amount from the
TrOOP total. Thus, for example, if a
beneficiary with spending between the
deductible and the initial coverage limit
has a prescription for a covered Part D
drug that costs $100, a Part D plan that
offers defined standard coverage will
pay $75 and count $25 toward the
beneficiary’s TrOOP total. If the
beneficiary has insurance coverage that
pays $20, the Part D plan will receive
the information through the
coordination of benefits process and
subtract $20 from the TrOOP total.
However, financial assistance provided
by SPAPs will be treated as though the
beneficiary paid that amount, so the Part
D plan will not need to distinguish
between how much an SPAP and the
beneficiary paid, respectively. Thus, the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

entire $25 copay (even though the SPAP
paid a portion of it) counts toward
TrOOP, and it is not necessary for the
Part D plan to know how much of it the
SPAP paid.
Comment: Multiple commenters
asked that we not charge user fees for
Part D coordination of benefits. Their
arguments were that supplemental
payers, particularly employers, would
be more likely to drop benefits that
supplement the benefits available under
Part D coverage because we would be
imposing burdensome administrative
costs on them. One commenter also
added that Part D coordination of
benefits, in particular the tracking of
TrOOP expenditures, is a feature
designed to lower costs to Medicare,
and so the government (that is, the
ultimate benefactor of the coordination
of benefits) should bear the
administrative cost of coordination of
benefits under Part D.
Commenters varied in their responses
to the methods for imposing user fees.
One commenter noted that if we were to
procure a TrOOP facilitation contractor
but could not have it running beginning
in 2006, we could charge higher user
fees to offset our higher administrative
costs until the contractor was up and
running and then switch to a lower fee
thereafter. Another commenter
proposed that a flat fee be used instead
of a transmission volume fee because if
volume were the basis of fee amounts,
the fees would be too variable and
would be too complicated to audit
properly.
Commenters had different ideas about
how frequently user fees should be
levied if indeed we charge them. One
commenter said that because most
health insurance fees are collected
monthly, we should continue this trend
and also collect its fees monthly.
Another commentator preferred a
quarterly collection in order to reduce
overhead associated with the payment
process.
Response: We appreciate all the
feedback provided by commenters
regarding whether, and how, to assess
user fees. We believe that while thirdparty payers of drug claims, pharmacies,
and Part D plans will all benefit from
the use of a coordination of benefits
system that supports the tracking of
TrOOP expenditures, Part D plans are
the ultimate benefactors of the TrOOP
process. Therefore, we expect that we
will charge a user fee of no more than
$1 per beneficiary per year to Part D
plans, and we may be able to charge
considerably less. We will issue further
guidance regarding the method we will
employ for assessing such user fees on
Part D plans in separate guidance.

PO 00000

Frm 00133

Fmt 4701

Sfmt 4700

4325

Comment: One commenter argued
that we should interpret the language in
section 1860D–11(j) of the Act to mean
that Part D plans may not impose
unnecessary or unreasonable user fees
on SPAPs even when the fees are related
to coordination of benefits. This
commenter added that plans should
factor coordination of benefits costs into
their bids and that we should bear these
costs. The commenter wanted us to
establish a ‘‘nationwide baseline
requirement of coordination’’ and only
make States bear coordination costs if
the costs were ‘‘extraordinary,’’ beyond
the baseline, and ‘‘related to the State’s
unique situation.’’ The commenter
asked that in such situations we
negotiate such costs with the SPAP in
question before a contract with a Part D
sponsor is executed.
One commenter wanted us to clarify
whether the provision at section 1860D–
24(a)(3)(B) of the Act—which specifies
that the Secretary may not impose
coordination of benefits user fees on
SPAPs—meant that only we are
prohibited from charging such fees, or if
the prohibition extended to Part D plans
as well. If Part D plans are allowed to
charge coordination of benefits user fees
under this provision, the commenter
asked for clarification regarding the
basis upon which we would allow plans
to charge the fees. They specifically
mentioned cost-based fees, enrollmentbased fees, and flat fees. The commenter
also wanted to know whether the SPAPs
would be allowed to verify or audit the
imposition of such fees. Another
commenter asked if we would monitor
Part D plans to ensure that the user fees
they imposed on SPAPs were reasonable
and accurate. One commenter argued
that Part D plans should be required to
substantiate their actual costs in
determining what to charge, in order to
avoid unreasonable charges. The
commenter argued that Part D plans
should not be able to impose
unrestricted fees on SPAPs.
Response: Section 1860D–24(a)(3)(B)
of the Act prohibits us from imposing
user fees on SPAPs for the transmittal of
third party reimbursement information
necessary for the tracking of TrOOP
expenditures. However, section 1860D–
11(j) of the Act specifies that a Part D
sponsor offering a Part D plan must
allow SPAPs and other prescription
drug coverage (described in sections
1860D–23 and 1860D–24, respectively)
to coordinate benefits with the Part D
plan. In connection with such
coordination, Part D sponsors cannot
impose any user fees that are unrelated
to the cost of coordination on SPAPs or
entities providing other prescription
drug coverage. We interpret this

E:\FR\FM\28JAR2.SGM

28JAR2

4326

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

language to mean that Part D plans may
charge user fees to SPAPs and entities
providing other prescription drug
coverage, but only for costs that are
related to coordination of benefits
between Part D plans and SPAPs or
entities providing other prescription
drug coverage. Any user fees imposed
must be reasonable and related only to
the Part D sponsor’s actual coordination
of benefits costs.
Comment: One commenter states that
we should prevent entities providing
coverage that supplements Part D
benefits from removing enrollee
incentives to choose cost-effective
options under their Part D coverage. The
commenter further stated that we
should prohibit coverage that
supplements the benefits available
under Part D coverage from eliminating
cost-sharing or otherwise reducing these
to the extent that they lack any force to
deter unnecessary drug expenditures.
The commenter also thought that the
supplemental benefits should also not
be allowed to change or eliminate the
tiering of drugs on a formulary.
Another commenter thought that
unless we interpret section 1860D–
24(c)(1) of the Act narrowly, plans could
be allowed to veto many forms of costsharing assistance and benefits that
supplement the benefits available under
Part D coverage that employers, SPAPs,
or others might want to provide for
enrollees in order to ensure that they
have at least as good drug coverage as
they have today. They asked that we
tightly define ‘‘prohibited’’ practices
that might impair cost-management
tools and make clear that plans are
required to coordinate with SPAPs and
other prescription drug coverage unless
they utilize these prohibited practices as
identified by us.
Response: Section 1860D–24(c)(1) of
the Act provides that the coordination
of benefits requirements contained in
section 1860D–23 shall not impair a Part
D plan’s application of costmanagement tools (such as tiered or
differential cost sharing, prior
authorization, step therapy, and generic
substitution), even if an SPAP or other
drug plan provides benefits that
supplement the benefits available under
Part D coverage for individuals enrolled
in the Part D plan. We do not believe
that section 1860D–24(c)(1) of the Act
gives us the authority to override Part D
enrollees’ benefit rights under SPAPs
and other prescription drug coverage.
For example, we do not have the
authority to override an employer’s
contractual obligation to provide its
retirees generous supplemental drug
benefits. Thus, while Part D plans may
freely apply their cost-management

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

tools, we cannot require these
supplemental payers to modify their
cost-sharing and other coverage rules in
order to maximize the effectiveness of
the Part D plan’s cost management tools.
However, we expect that supplemental
payers may have some interest in
applying utilization management tools
as well.
a. Coordination with SPAPs
The statute envisions close
coordination of benefits between SPAPs
and Part D plans. SPAPs have filled a
significant gap in prescription drug
coverage for many Medicare
beneficiaries in the absence of a
Medicare drug benefit. With many
States currently providing prescription
drug coverage to a large number of
Medicare beneficiaries, it is important to
ensure that coordination between Part D
plans and SPAPs occurs as efficiently
and effectively as possible. However,
section 1860D–23(c)(5) of the Act
provides that nothing in the statute shall
be construed to require that an SPAP
coordinate with or provide financial
assistance to beneficiaries enrolled in
Part D plans.
We assume that some SPAPs will pay
Part D plans’ premiums on behalf of
their SPAP enrollees. For SPAPs that
choose to simply supplement the
coverage provided under a Part D plan,
and to forego subsidizing their
enrollees’ monthly beneficiary
premiums, we expect to include SPAP
enrollment information in the
coordination of benefits system. In this
way, pharmacies will know that a claim
should be sent to the SPAP following
adjudication by the Part D plan. We
requested comment on this proposed
approach, including the feasibility of
the approach for SPAPs and the ease of
administration for pharmacies. We also
requested comment on whether or not
SPAPs that choose to coordinate
benefits on a wrap-around basis should
be required to provide feedback on how
much of the remainder of the claim they
have actually paid.
Comment: Several commenters
suggested that the information that Part
D plans will be required to share with
SPAPs as part of their coordination
requirements needs to be specifically
incorporated in our final regulations. In
particular, several commenters asked for
clarification regarding how we will
assist States with receiving timely data
exchanges from commercial insurance
plans, employer-sponsored plans, Part D
plans, and MA programs for costavoidance and recovery. Some
commenters believe this information
should include, among other things, the
exchange of eligibility files, the
exchange of claims payment files, and

PO 00000

Frm 00134

Fmt 4701

Sfmt 4700

information concerning which drugs are
on the plan formularies. Furthermore,
they believed such information should
be provided through a real-time point­
of-sale process. One commenter
provided extensive recommendations
regarding the data and methods by
which Part D plans should provide
information to SPAPs.
Response: We appreciate the
extensive number of comments we
received on this issue. As specified in
section 1860D–23(a)(1) of the Act, we
will issue requirements by July 1, 2005,
for Part D plans to ensure the effective
coordination between the Part D plans
and SPAPs and other entities providing
prescription drug coverage for payment
of premiums and coverage and payment
for supplemental prescription drug
benefits. These requirements will
specify the specific coordination
elements that Part D plans must share
with SPAPs and other prescription drug
coverage.
We note that, from a practical
perspective, there may not be much
need for coordination between Part D
plans and SPAPs, since Part D plans
will need information about
supplemental payments that do not
count toward TrOOP rather than those
that do count toward TrOOP (for
example, those made by SPAPs). To the
extent that SPAPs are free-standing
supplemental plans, there may not be
much need for coordination activities
that a Part D plan could charge for, since
claims will be adjudicated at the point
of sale. As we note elsewhere in this
preamble, Part D enrollees will be
required to provide their Part D plan
with information about third-party
coverage so that the Part D plan is aware
that any supplemental coverage a
beneficiary is receiving is from an SPAP
and not, for example, from a group
health plan, insurance or otherwise, or
other third party payment arrangements.
However, we acknowledge that SPAPs
and States have an interest in acquiring
timely access to paid claims data on
SPAP enrollees who are also enrollees
of State medical assistance programs in
order to use information on prescription
drug utilization in their medical and
case management activities. We are
continuing to work on means to
practically expedite the required data
sharing with SPAPs. In addition,
although we do not have the authority
to require data exchanges between Part
D plans and the States, we strongly
encourage Part D plans to
independently share data on these
shared enrollees with State Medicaid
plans, provided such disclosure is
consistent with the HIPAA Privacy Rule
provisions for the sharing of protected

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
health information with another covered
entity. To the extent consistent with the
applicable provisions of Title XIX, if
there were a cost to the State for access
to this data, we would match as an
administrative cost at 50 percent.
Comment: One commenter believes
that we should provide States with
flexibility to provide benefits that
supplement the benefits available under
Part D coverage so as to ensure that
SPAP beneficiaries have continuous
access to covered Part D drugs, even
during the coverage gap.
Response: As provided in § 423.464(a)
of our final rule, Medicare Part D plans
may coordinate with SPAPs in a number
of ways, including coordinating on a
claim-specific basis when Part D plan
pays first and the SPAP is the secondary
payer, and this may include providing
assistance after the initial coverage
limit. As provided in section 1860D–
2(b)(4)(C)(ii) of the Act, SPAP payments
for benefits that supplement the benefits
available under Part D coverage will
count toward an enrollee’s TrOOP limit,
which we believe provides SPAPs with
an incentive to supplement Part D
benefits on behalf of Part D enrollees,
including paying part of a beneficiary’s
drug costs after the beneficiary has met
the initial coverage limit (as defined at
§ 423.104(d)(3) of our final rule) under
their Part D plan.
Comment: Several commenters were
concerned that the coordination of
prescription drug coverage between Part
D plans and SPAPs and other
prescription drug coverage will fall onto
pharmacists. Pharmacists would have to
file multiple claims to bill both the
primary and secondary payers. They
urged us to address these concerns
when developing the coordination of
benefits system.
Response: In consultation sessions we
held with various groups, including
pharmacies and companies that run
pharmacies, they expressed a
willingness to perform multiple
transactions in order to bill both the
primary and any secondary payers as
necessary in order to get billing and
payment right the first time.
Furthermore, if the pharmacy does not
perform a secondary transaction with
the SPAP, the beneficiary must pay
everything left after the Part D plan
pays. Beneficiaries who qualify for
SPAP coverage generally do so because
they are low-income; thus, being
required to pay up front themselves and
bill the SPAP for later reimbursement is
likely to be a heavy financial burden
that may make it impossible for some of
these enrollees to purchase their
prescription drugs.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

b. Coordination with Other Prescription
Drug Coverage
As provided under section 1860D–
24(a)(1) of the Act, Part D plans must
also coordinate with the following
entities providing other prescription
drug coverage: (1) Medicaid programs
(including a State plan operated under
a waiver under section 1115 of the Act,
such as a Pharmacy Plus waiver); (2)
group health plans, as defined in 29
U.S.C. 1167(1); (3) the Federal Employee
Health Benefits Program (FEHBP) under
chapter 89 of title 5 of the United States
Code, (4) Military Coverage (including
TRICARE) under chapter 55 of title 10
of the United States Code; and (5) other
prescription drug coverage as we
specify.
In the proposed rule, we requested
comments regarding situations that
might involve coordination of benefits
between States and Part D plans (other
than situations in which a State is acting
as an employer). We also invited
comments on the other administrative
processes and requirements that we
might identify in order to facilitate
coordination of benefits between Part D
plans and entities offering other
prescription drug coverage.
Comment: Two commenters requested
that we clarify that States are prohibited
from requiring pharmaceutical
manufacturers to pay rebates on
medications delivered to beneficiaries
through Part D plans. Several other
commenters thought that States should
continue to be able to benefit from drug
rebates related to drugs purchased by
the SPAP as a supplemental benefit to
SPAP enrollees enrolled in Part D plans.
Response: Given that the Medicaid
rebate program does not apply to
SPAPs, we do not have the authority
under the MMA to regulate or impose
prohibitions on drug rebate or drug
pricing negotiations between SPAPs and
manufacturers.
c. Coordination of Benefits
Sections 1860D–23(a)(1) and 1860D–
24(a)(1) of the Act require that by July
1, 2005, we establish requirements for
coordination of benefits between Part D
plans and SPAPs and other insurers
providing prescription drug coverage.
The elements that are to be coordinated
must include: enrollment file sharing;
claims processing and payment; claims
reconciliation reports; application of the
protection against high out-of-pocket
expenditures (by tracking TrOOP
expenditures); and other processes we
specify.
We considered whether a drug denied
Part B coverage because the beneficiary
fills the prescription at a pharmacy that
does not have a Medicare supplier
number should be considered a Part D

PO 00000

Frm 00135

Fmt 4701

Sfmt 4700

4327

drug (provided such drug otherwise
meets the definition of a Part D drug),
and requested comments on the relative
likelihood of such an occurrence and on
alternative means of addressing such
circumstances.
For drugs potentially covered by Part
B that are dispensed by a pharmacy that
is not a Medicare supplier, we
considered the development of
automatic cross-over procedures.
(Similar cross-over procedures are used
today in connection with dual-eligible
individuals entitled to both Medicare
and Medicaid and related to
coordination between Medicare and
supplemental insurers.) We also
mentioned a potential need for similar
cross-over procedures for any physicianadministered drugs that may be covered
under Part B or Part D. Our proposed
rule invited comments on both these
issues.
Comment: Several commenters
suggested that we allow drugs and
biologicals that would otherwise be
covered under Part B to be covered
under Part D when a beneficiary obtains
the drug at a pharmacy that has no
Medicare supplier number. One
commenter believed that our failure to
do so could greatly hinder enrollee
access to therapies for which Part D
benefits should be available. In
addition, allowing coverage of such
drugs under Part D would facilitate the
coordination of benefits process we
have proposed. Another commenter
asserted that these drugs and supplies
are necessary for vulnerable populations
at high risk. One commenter believed it
would circumvent the Medicare statute
to cover drugs only under Part B or Part
D and would also impose a penalty in
the form of higher out-of-pocket
expenses on beneficiaries.
Response: While we understand the
impact this could have on some
beneficiaries, we do not believe that
commenters have provided a
compelling rationale for automatically
covering drugs under Part D that are
denied coverage under Part B because a
beneficiary fills the prescription at the
wrong pharmacy. Under section 1860D–
2(e)(2)(B) of the Act, a drug is excluded
from coverage under Part D to the extent
that coverage for that drug is available
to an individual under Parts A or B. In
this case, coverage would have been
available under Part B had the enrollee
obtained the drug at a participating
Medicare pharmacy.
To reduce the risk that beneficiaries
do not lose Part B coverage by filling a
prescription at a pharmacy that does not
have a Medicare supplier number, we
will: (1) encourage Part D plans to enroll
pharmacies with Medicare supplier

E:\FR\FM\28JAR2.SGM

28JAR2

4328

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

numbers in their networks; (2)
encourage Part D plans to inform
beneficiaries whether their network
pharmacies have a Medicare supplier
number, and explain why this is
important when filling prescriptions for
drugs potentially covered by Part B; and
(3) develop educational materials
reminding pharmacies without
Medicare supplier numbers that they
must refund any payments collected
from beneficiaries enrolled in Part B for
Part B drugs unless they first notify the
beneficiary (through an advanced
beneficiary notice (ABN)) that Medicare
likely will deny the claim.
Statutory ‘‘refund requirements’’
apply to claims for ‘‘medical equipment
and supplies’’ that Medicare denies
because the supplier lacked a supplier
number (unless the beneficiary signed
an ABN notifying him or her that
Medicare will deny payment, and
agreed to be personally responsible for
payment), or the supplier did not know
and could not reasonably have known
that Medicare would deny payment. For
this purpose, coverage of medical
equipment and supplies includes
durable medical equipment (DME),
certain drugs and other supplies
necessary for use of an infusion pump,
oral immunosuppressive drugs and anti
cancer drugs, and ‘‘such other items as
the Secretary may determine.’’ (See the
Medicare Claims Processing Manual,
Chapter 30, sections 150.1.3 and
150.1.5.) Suppliers are presumed to
know that Medicare will not pay for
medical equipment and supplies
furnished by a supplier that lacks a
supplier number. (See section § 150.5.4
of Chapter 30 of the Medicare Claims
Processing Manual.)
Comment: Several commenters urged
us to provide guidance regarding how
vaccines not covered under Part B will
be covered under Part D, including
reimbursement for their administration.
One commenter encouraged us to
arrange for Part B carriers to serve as the
point of contact with physicians for
purpose of payment by Part D plans for
vaccine administration.
Response: As discussed in subpart C,
vaccines (and other covered Part D
drugs that are appropriately dispensed
and administered in a physician’s
office) administered in a physician’s
office will be covered under our out-of­
network access rules at § 423.124(a)(2)
of our final rule, since Part D plan
networks are defined as pharmacy
networks only. A scenario under which
a Part D enrollee must obtain a Part Dcovered vaccine in a physician’s office
constitutes a situation in which out-of­
network access would be permitted
because a beneficiary could not

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

reasonably be expected to obtain that
vaccine at a network pharmacy.
Below, we use vaccines as an example
of how out-of-network access to covered
Part D drugs dispensed and
administered in physician offices will
work under Part D. However, it is worth
noting that other covered Part D drugs
that are appropriately dispensed and
administered in a physician’s office will
be subject to the same treatment under
our out-of-network access rules. As
mentioned in subpart C, we expect the
application of our out-of-network access
rules to covered Part D drugs dispensed
and administered in physician offices to
be limited.
Costs directly related to vaccine
administration may be included in the
physician fees under Part B, since Part
B pays for the medically necessary
administration of non-Part B covered
drugs and biologicals. However, there is
currently no ready mechanism for
physicians to bill Part D plans for
vaccine costs. Requiring physicians who
administer such Part D-covered vaccines
to submit a claim to the appropriate Part
B carrier would involve developing
automatic cross-over procedures such
that, if the carrier denies the claim
under Part B, it would submit the claim
to the TrOOP facilitation contractor,
discussed elsewhere in this preamble,
which would in turn create an
electronic claim that it would send
automatically to the Part D plan (or its
claims processing agent) through which
the enrollee has Part D coverage. The
Part D plan would then pay the
physician for the plan allowance for that
vaccine.
While it is possible that we could
eventually develop automatic cross-over
procedures, we are concerned that
establishing the cross-over procedures
by January 1, 2006, will be onerous
given many other systems and
implementation challenges that must be
addressed by then. Therefore, we
believe that a two-step approach is the
most appropriate policy. In the shortterm, a Part D enrollee may self-pay the
physician for the vaccine cost and
submit a paper claim for reimbursement
to his or her Part D plan. We note that
this will not be necessary for enrollees
of MA-PD plans, since medical and
pharmacy benefits will be integrated.
This approach is consistent with how
beneficiaries accessing covered Part D
drugs at an out-of-network pharmacy
will be reimbursed by Part D plans for
costs associated with those drugs. Once
Part D is implemented, we will get a
better sense for the actual volume of
Part D-covered vaccines and other
physician-dispensed and administered
Part D drugs, and the need and most

PO 00000

Frm 00136

Fmt 4701

Sfmt 4700

appropriate mechanisms for such
automatic cross-over procedures.
We note that, to the extent that the
amount charged by a physician for a
Part D-covered vaccine and the plan’s
allowable cost for that vaccine vary, a
beneficiary may be responsible
(depending on the plan’s out-of-network
payment policy) for any out-of-network
differential, as is the case with other
covered Part D drugs obtained out-of­
network.
d. Collection of Data on Third Party
Coverage
Section 1860D–2(b)(4)(D)(ii) of the
Act permits Part D plans to request
information on third party insurance
from beneficiaries. We expect Part D
plans to update Medicare records based
on the information provided by
beneficiaries to reflect changes in
coverage, including the primary or
secondary status of the coverage relative
to Medicare. Beneficiaries who
materially misrepresent information
about third party coverage may be
disenrolled from any Part D plan for a
period specified by us and may also be
subject to late enrollment penalties
upon subsequent enrollment in another
Part D plan.
Section 1860D–2(b)(4)(D)(i) of the Act
authorizes us to establish procedures for
determining if costs for Part D enrollees
are reimbursed by other payers, and for
alerting Part D plans about such
arrangements. In our proposed rule, we
also considered mandating that
beneficiaries enrolling in Part D plans
provide third-party payment
information and consent for release of
data held by third parties as part of their
enrollment application and which could
be validated through a HIPAAcompliant beneficiary ‘‘release’’ or
authorization. We clarify, however, that
a HIPAA authorization to disclose
protected health information to Part D
plans for purposes of coordination of
benefits related to reimbursement for
health care for an individual is not
required for third party payers that are
covered entities under HIPAA, since
such disclosures are considered
‘‘payment’’ disclosures under the
HIPAA Privacy Rule.
Comment: One commenter believes
that we should impose mandatory
reporting requirements on third-party
payers regarding the payment of out-of­
pocket costs and that, as an incentive,
the user fees charged to third-party
payers could be adjusted depending on
their degree of cooperation in providing
TrOOP cost data. This commenter also
thought we should require enrollees to
provide third-party payment
information in a standardized way as
part of the enrollment process. Another

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
commenter suggested that the collection
of third party enrollment data be
incorporated into the application
process as it is with the Medicaid
eligibility determination, which requires
a mandatory release of information by
the beneficiary. One commenter agreed
that beneficiaries must provide thirdparty payment information and consent
to release of data held by third parties,
which could be validated through a
HIPAA-compliant beneficiary release or
authorization.
Response: The Act does not give us an
enforcement mechanism in the statute
to impose mandatory reporting by thirdparty payers. However, as provided in
§ 423.32(b)(ii) of our final rule, we will
require beneficiaries enrolling in or
enrolled in a Part D plan to provide, in
a form and manner that we will specify
in separate guidance, third-party
coverage information. Part D enrollees
must also consent to the release of such
information collected or obtained from
other sources. Failure of beneficiaries to
provide such information may be cause
for termination of Part D coverage, as
discussed in greater detail in subpart B.
We would like to clarify that in the
event that a beneficiary does not
disclose alternative coverage payments
to the Part D plan, that plan has the
authority to recover any payments made
in error on the basis of incorrect
assumptions about the level of TrOOP
expenditures. The plan may recover
these payments directly from the
beneficiary on whose behalf the
payments were made. We have modified
§ 423.464(f)(2) of our final rule and
added paragraph (f)(4) to clarify this
authority.
e. Tracking True Out-of-Pocket (TrOOP)
Costs
In the proposed rule we considered a
number of options for facilitating the
exchange of data needed in order for
Part D plans to track a beneficiary’s
TrOOP costs, and discussed alternatives
around both mandatory versus
voluntary reporting of claims and out­
of-pocket costs, and centralized versus
distributed responsibility for tracking
the information in the. We considered
two options for operationalizing the
data exchange related to the Part D
coordination of benefits system and
TROOP accounting:
Option 1: The Part D plans will be
solely responsible for tracking TrOOP
costs.
Option 2: We will procure a TrOOP
facilitation contractor to establish a
single point of contact between payers,
primary or secondary.
Additionally, to foster proper billing
and coordination of benefits we also
considered the establishment of the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Medicare beneficiary eligibility and
other coverage query system using the
HIPAA 270/271 eligibility query and
requested comments concerning the
development of this system.
Comment: An overwhelming majority
of commenters on the issue of tracking
TrOOP costs supported Option 2—
having us procure a TrOOP facilitation
contractor to establish a single point of
contact between primary and secondary
payers. Generally, commenters thought
that a single point of contact option
would lead to standardization and
compatible formats among payers, as
well as a cost-efficient and effective
means for providing accurate,
consistently interpreted, and timely
information to all parties involved in
operationalizing Part D. One commenter
stated that PBMs do not calculate this
data and would therefore be forced to
build a new system for performing
coordination of benefits functions and
tracking multiple payers. One
commenter thought that exchange of
data between payers and us must be
administered efficiently and timely, and
using technology and standard
processing already well established in
the pharmacy industry to promote
online pharmacy benefit management.
This commenter also urged us to require
Part D plans to routinely provide
enrollment updates to the TrOOP
facilitator, including all data needed by
payers to coordinate benefits, as well as
to develop an oversight task force
consisting of all parties involved in
developing user requirements for the
data system. Another commenter urged
us to include community retail
pharmacies in its single point of contact
system, thereby considerably increasing
the efficiency and effectiveness of this
option for tracking TrOOP expenditures.
One commenter supported our
establishing a central clearinghouse
similar to that used for Medicare Parts
A and B, and another recommended that
we streamline current coordination of
benefits procedures so that they can be
accommodated in a new TrOOP/
coordination of benefits system.
Several commenters thought that
tracking TrOOP expenditures in real
time might not be feasible immediately
after implementation of the Part D but
should be a long or medium-range goal.
One commenter thought we should
limit our coordination of benefits
responsibilities to tracking TrOOP and
claims payment and reevaluate our
options at a later date when it becomes
clearer how different parties will
participate in or interact with Part D.
Another commenter urged us to
establish interim rules that are
administratively workable and do not

PO 00000

Frm 00137

Fmt 4701

Sfmt 4700

4329

impose compliance burdens or risks.
Only one commenter thought that we
should rely on Part D plans to track and
report TrOOP amounts rather than
involve an intermediary or TrOOP
facilitation contractor.
Response: PDP and MA/PDs will be
responsible for calculating TrOOP for all
individuals enrolled in their plan. When
a beneficiary has no supplemental
coverage, TrOOP can be easily
calculated. This is because the plan has
all the necessary data within the claims
it processes to calculate TrOOP. TrOOP
is more complicated to compute when
the supplemental coverage is through a
‘‘free standing’’ plan that wraps around
Part D.
The overwhelming majority of
responders felt that CMS must have
some facilitation role in terms of
TrOOP. We are considering facilitating
the tracking of TrOOP in many ways,
including: through the establishment of
a TrOOP facilitation contractor,
contractors, or blends of other suggested
methods. Our goal is to facilitate the
tracking of TrOOP by leveraging the
existing coordination of benefit
processes for Part D COB and TrOOP.
This will include the collection of other
payer information that can be used by
Part D plans as part of the ongoing
Medicare Secondary Payer processes.
This process will be modified to include
information as to whether these
alternative payers that are primary to
Medicare include coverage for
prescription drugs. We will also expand
the existing trading partner processes
for Parts A and B supplemental wrap­
around agreements to provide for the
collection of supplemental drug plan
information. In situations where an
employer retiree wrap-around plan is
currently wrapping around Medicare
Part Parts A and B, this will require that
a small amount of additional
information be collected as part of the
trading partner agreement to ensure
coordination with the primary Part D
plan. Under this strategy only one
enrollment file would be required.
(Employers, plans or payers may choose
to submit separate enrollment files for
Parts A and B crossover and Part D.)
Only one file is required because this
data will be maintained in the CMS
Medicare beneficiary database.
SPAPs can choose this method of
enrollment file sharing as well. Under
this strategy an SPAP or employer will
not have to create a separate enrollment
file for each Part D plan. Data collected
through these processes will be shared
with the Part D plans. In addition to our
data collection efforts, the Part D plan
will also request information from
beneficiaries on the presence of other

E:\FR\FM\28JAR2.SGM

28JAR2

4330

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

coverage that is primary or secondary to
Part D, and will then have the ability to
add, change, or delete information about
other coverage in plan and CMS files.
We will also work with pharmacy
providers, payers, PBMs and other
affected parties to create an acceptable
solution to facilitate situations where
the pharmacy is lacking information in
order to bill the appropriate payer. It is
our hope that our solution will include,
among other capabilities, an online
eligibility file query function so the
pharmacy may obtain information
sufficient to direct a claim to the payer
responsible for payment of a
beneficiaries’ claim.
We continue to work with industry on
a solution to facilitate the TrOOP
tracking process. A final decision on
how best to address TrOOP process
challenges will be released well before
the July 1, 2005 statutory deadline. We
are looking for a solution that will allow
TrOOP to be calculated in as close to
real time as possible.
Comment: One commenter
recommended that we establish a
standard for the transmission of TrOOP
information since there is currently no
HIPAA standard for the transmission of
coordination of benefits information
between payers in connection with
pharmacy transactions. In addition, this
commenter recommends that we
establish a national identifier for payers
and, with the help of the Congress, for
patients as soon as possible in order for
coordination of benefits to function
most effectively.
Response: We intend to establish an
efficient and effective process for
handling coordination of benefits and
tracking of TrOOP expenditures by the
Part D plans in accordance with Federal
laws and CMS guidelines.
Comment: Several commenters
thought that Part D sponsors should be
responsible for tracking TrOOP and that
enrollees should not be held
accountable to the extent that another
plan providing prescription drug
coverage does not act. Another
commenter suggested that in
circumstances in which the information
maintained by the TrOOP facilitation
contractor is not consistent with what
an enrollee claims to be the case at a
pharmacy, benefits should be
administered based on data in the
system at that time. The Part D plan
should correct the errors afterwards, as
it is the plan’s ultimate responsibility to
administer the benefit. The Part D plan
could, for example, create a flag in the
system noting that the enrollee believes
his or her payment obligation is in error
because of incorrect data; this flag
would result in notification to a plan so

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

that the potential error can be
investigated and resolved. Another
commenter thought that Part D plans
should not be responsible for tracking
TrOOP costs when the plan is not aware
of a third party payer.
Response: Part D plans will always be
responsible for correctly calculating
TrOOP for their Part D enrollees. In the
event that enrollees fail to provide
information about other prescription
drug coverage to their Part D plans, and
the Part D plan later discovers that
payments were made by a third-party
payer, it must recalculate TrOOP and, if
necessary, recover overpayments. We
agree that, at the point-of-sale, the Part
D plan’s current information will always
be the basis for its payment; a
beneficiary’s disagreement with such
information can only be resolved by
contacting the plan. At the pharmacy,
the beneficiary must either pay the
amount specified or decline to purchase
the prescription until after the dispute
is resolved. We note that in the course
of normal operations, the status of
beneficiary liability will fluctuate due to
events such as failure to pick up
prescriptions or corrected transactions,
and that current pharmacy benefit
management systems will automatically
recalculate beneficiary liability after the
updating of information in their
systems. Consequently, any over- or
under calculation of TrOOP will
automatically be adjusted on the next
claim once correct information has been
received.
K. Application Procedures and
Contracts with Part D Sponsors
1. Overview
Subpart K of part 423 implements
section 1860D 12(b) of the Act. This
subpart sets forth requirements for
contracts with Part D plans, including
application procedures, contract terms,
procedures for termination of contracts,
and reporting. We note that while
Medicare Advantage (MA) organizations
offering Part D plans are Part D plans,
they follow the requirements of part 422
for MA organizations, except in cases
where the requirements for the qualified
prescription drug coverage involve
additional requirements (for example,
the fraud and abuse requirements
specified in § 423.504(b)(4)(vi)(H) and
the certification requirements in
§ 423.505(k). Although in the proposed
rule we included the requirements of
section 1860D–12(b)(2) prohibiting a
fallback from acting as a PDP sponsor or
a subcontractor to a PDP sponsor in
subpart F of the regulations, we believe
these requirements are more
appropriately viewed as contract

PO 00000

Frm 00138

Fmt 4701

Sfmt 4700

requirements, and not as bid
requirements; therefore, we have moved
those regulations to this subpart.
As in the proposed rule, this subpart
sets forth the conditions necessary for
an applicant to be considered qualified
to contract with Medicare as a Part D
sponsor, as well as contract
requirements and termination
procedures that would apply to
Medicare-contracting Part D sponsors.
The final rule specifies those procedures
and requirements. Additionally, as we
stated in the proposed rule, the
applicable requirements and standards
included in Part D of Title XVIII of the
Act and our provisions under part 423,
as well as the terms and conditions for
payments described in regulation and in
the statute, also apply to ‘‘fallback
plans’’ found under subpart Q.
In this final rule, we clarify that any
entity offering a Part D plan under the
Medicare program is considered a Part
D plan sponsor for the purposes of this
subpart. In addition to PDPs that offer
fallback plans, Part D plan sponsors can
also include MA organizations that offer
MA-PD plans, cost plans, and
competitive medical plans (CMPs), as
well as PACE organizations that offer
Part D plans.
We clarify that entities offering Part D
plans under Medicare must follow the
provisions of this subpart unless
requirements specifically pertaining to
these entities in this final regulation
include or allow for a waiver of these
requirements. Similarly, we also clarify,
as is the case with MA organizations
and cost plans offering prescription
drug plans, that these organizations
follow the requirements of part 422 for
MA organizations except when there are
additional requirements in part 423
related solely to the prescription drug
benefit component of the MA plan (In
these cases, MA organizations offering
the prescription drug benefit are
directed by part 422 to any additional
requirements in part 423.).
As further clarification of the
exceptions to, or waiver of,
requirements of this subpart, please
note, for example, that PACE programs,
though subject to part 423 if offering a
prescription drug benefit, may waive
several of the contract requirements
under part 423. PACE programs are
unique in that they have a Medicaid
component and have been offering a
prescription drug benefit for some time.
As a result, some of the part 423
requirements are duplicative or not
applicable. (Please see subpart T for
discussion of the PACE program and the
prescription drug benefit under Part D.)
In our definitions section at § 423.4
we include, as clarification, the entities

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
identified above in our definition of
‘‘Part D plan sponsor.’’
The proposed rule discussed at
§ 423.153(e) requirements for a program
to control fraud, waste and abuse as
required by Section 1860D–4(c)(1)(D) of
the Act. In an effort to consolidate the
requirements, we are moving them to
this subpart at § 423.504(b)(4)(vi)(H) as
a component of a Part D sponsor’s or
MA organization offering a MA-PD
plan’s overall compliance plan. In the
preamble to this subpart, we will
discuss our final provisions and the
comments we received on the proposed
requirements concerning fraud, waste,
and abuse. For easier reference, we
discuss this section at the conclusion of
this preamble.
Further, as stated in the proposed
rule, the MMA requires that the MA
contracting provisions incorporated
through section 1860D–12(b)(3) of the
Act be applied to contracts with PDP
sponsors in the same manner as those
provisions apply to contracts with MA
organizations under Part C of Title XVIII
of the Act. Our overarching intent in the
proposed rule, and our intent in the
final rule, is to achieve a high degree of
uniformity in the contract and
application processes for both Part C
and Part D. The maintenance of a single
application and evaluation procedure,
and a single set of contract requirements
for both the Part C and Part D programs,
brings simplicity, consistency, and
reduced administrative burden for those
entities managing both programs.
Towards that end, the requirements
under § 423.501 through § 423.516 are
similar to the requirements in § 422.500
through § 422.524. We made every effort
to keep the requirements in this subpart
the same as those requirements for MA
organizations; this effort was received
without objection by any of the
commenters; however, we did receive
some comments asking us to clarify if
certain sections were exclusive to PDP
sponsors and inclusive of MA plans. In
this preamble we address those and
other comments.
2. Definitions (§ 423.501)
We proposed that the definitions
pertaining to PDP sponsors and MA
organizations offering MA-PD plans
would be the same as those found in
§ 422.500, except in cases where the
Part C definition is inapplicable (for
example, in definitions that reference
hospitals or hospital services). In
addition, as mentioned above, we have
added the definition of ‘‘Part D plan
sponsor’’ to § 423.4 to clarify that we
consider any entity offering a Part D
benefit to be a Part D sponsor and, with
the exception of requirements that may

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

be waived. We have made nomenclature
changes throughout the regulations text
for this subpart as well, revising ‘‘PDP
sponsors’’ in most cases to ‘‘Part D plan
sponsors’’ to bring this language into
line with our definition at § 423.4 and
to indicate more clearly that a Part D
sponsor includes any entity offering a
Part D plan.
The majority of the subpart K
regulations would also apply to fallback
entities, since fallback entities are
included in the definition of Part D
sponsor. In addition, under § 423.871(a),
fallback contracts are required to
include the same terms of conditions as
risk contracts, except as appropriate to
carry out the provisions of subpart Q.
We have also clarified the provisions
that would not apply to fallback entities.
For example, because fallback entities
do not renew their 3-year contracts on
a yearly basis, we have clarified that the
renewal and non-renewal provisions
would not apply to fallback entities.
Fallback entities are also not required to
be risk-bearing entities, and at this time
we are not requiring that the licensure
or solvency requirements of subparts I
and K apply to fallback entities,
although we may reconsider this issue
in the future and we may use holding
applicable licenses as a preferred, but
not required selection criterion. We
have clarified these provisions in the
accompanying regulation text in
§ 423.504(b)(2).
We did not receive any comments
regarding the proposed definitions for
this subpart and will be adopting the
policies proposed in the proposed rule.
3. Application Requirements (§ 423.502)
We proposed application procedures
based on those included for the Part C
program. Interested applicants would
need to complete and submit a certified
application in the form and manner
required by CMS. In addition, we
proposed that applicants must: (1)
submit documentation of appropriate
State licensure; (2) submit
documentation of State certification that
the entity is able to offer health
insurance or health benefits coverage
that meets State specified standards as
discussed in the proposed subpart I; or
(3) submit a Federal waiver as described
in the proposed subpart I of the
proposed rule. An individual authorized
to act on behalf of the entity applying
to become a Part D sponsor must
describe thoroughly how the entity
meets the requirements of the rule. We
will determine if the applicant is
qualified to contract with CMS as a Part
D sponsor and if that entity meets the
requirements of part 423. Also, we
proposed that, as in the Part C program,

PO 00000

Frm 00139

Fmt 4701

Sfmt 4700

4331

an applicant submitting material that
the applicant believes would be
protected from disclosure under the
Freedom of Information Act (FOIA) (5
U.S.C. § 522), or because of exceptions
provided in 45 CFR Part 5 (the
Department’s regulations providing
exceptions to disclosure), would have to
label the material ‘‘privileged’’ and
include an explanation of the
applicability of an exception described
in 45 CFR Part 5.
Comment: We received one comment
stating that we were silent on the
transition application requirements for
current MA organizations wishing to
add a prescription drug component to
their MA plans.
Response: The application
requirements for current MA
organizations, and potential MA
organizations wishing to offer MA-PD
plans, will basically mirror those listed
here for other Part D sponsors. In other
words, MA organizations offering MA­
PD plans and other entities offering Part
D plans will, subject to any specified
exceptions, follow the same
requirements. Technically, MA
organizations are following these
requirements as specified at part 422,
while other Part D plans are following
these requirements at part 423. One
difference between the requirements at
part 422 and those at part 423 is the
provisions for fraud and abuse which
apply only to entities offering Part D
benefits. In this case, the MA
organization offering Part D benefits is
directed at part 422 to follow the
additional requirements specified in
part 423 regarding its prescription drug
benefits. In general, however, the
application and contracting provisions
in part 422 and part 423 are identical.
Thus, while the MA-PD contract is
separate from the PDP contract under
Part 423, the requirements of this part
will be incorporated, with any
exceptions specified, into the contract of
the MA organization offering an MA-PD
plan. Specific transition guideline
procedures will appear on the CMS Web
site and through other CMS guidance to
ensure that the transition to the
prescription drug benefit under Part D
works as smoothly as possible. Similar
guidance will given to M+C
organizations wishing to make the
transitions to MA organizations.
To clarify further the transition to the
MA-PD plan, for organizations
interested in offering a MA-PD plan, we
are, whenever practicable, keeping the
contracting application and process the
same for PDP sponsors and MA
organizations. Medicare Advantage
contractors will be required to apply for
qualification to offer a Part D plan as

E:\FR\FM\28JAR2.SGM

28JAR2

4332

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

part of their MA application if their
organization is a new participant in the
MA program. If the MA organization is
transitioning from a previous Medicare
managed care contract, the Part D
application will simply be a stand-alone
submittal. MA organizations can expect
the Part D portion of the MA application
to be an abbreviated version of the PDP
sponsor application, as the regulation
and the Act at section 1860D–21(c)(2) of
the Act, allow CMS to waive provisions
that are duplicative of, or in conflict
with, MA requirements or where a
waiver would be necessary to improve
coordination of Part C and Part D
benefits.
Comments: In the application process
under § 423.502(d), we proposed that a
PDP sponsor applicant may request to
have submitted material protected from
public view under the Disclosure of
Application Information under the
Freedom of Information Act. A
commenter recommended that we make
it clear that an entire application of a
potential PDP sponsor may not be
protected in this manner. Also, the
commenter requested that we set
standards for when and why
exemptions would be approved or
provide a list of what is, and is not,
protected from disclosure.
Response: The final rule, while not
specifying ‘how little’ or ‘how much’ of
an application may be protected, does
require the applicant submitting
material under FOIA to include an
explanation of the applicability of an
exemption specified in 45 CFR Part 5.
The exemptions specified here serve as
the standard for ‘when’ and ‘why’ an
application in part, or whole, would be
protected. Price and cost information
provided by the bidders marked as
‘‘confidential’’ or ‘‘proprietary’’ will
generally be protected by the Trade
Secrets Act. However, FOIA requires the
agency to disclose data to a requester if
the information does not fall within any
of the FOIA’s exemptions. We would
need to consider whether the pricing
and cost data are covered by FOIA
Exemption 4, which protects trade
secrets and commercial or financial
information obtained from a person that
is privileged or confidential. See 5
U.S.C. § 552(b)(4). To facilitate this
process, submitters of information to the
Department may designate part or all of
the information as exempt under FOIA
Exemption 4 at the time the records are
submitted or within a reasonable time
thereafter. See 45 CFR 5.65(c). When
there is a request for information that is
designated by the submitter as
confidential or that could reasonably be
considered exempt under Exemption 4,
the Department is required by its FOIA

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

regulation at 45 CFR 5.65(d) and by
Executive Order 12,600 to give the
submitter notice before the information
is disclosed. When notice is given, in
order to determine whether a
submitter’s information is protected by
Exemption 4, the submitter must show
that: (1) disclosure of the information is
likely to impair the government’s ability
to obtain necessary information in the
future; (2) disclosure of the information
is likely to cause substantial harm to the
competitive position of the submitter;
or, (3) the records are considered
valuable commodities in the
marketplace which, once released
through the FOIA, would result in a
substantial loss of their market value.
(This is the general Exemption 4 legal
standard used for required submissions
to the government.) A submission may
be ‘‘required’’ if it is necessary to get the
benefits of a voluntary program (for
example, applying to be a Part D plan
sponsor).
4. Evaluation and Determination
Procedures for Applications to Be
Determined Qualified to Act as a
Sponsor (§ 423.503)
Under proposed § 423.503, we
established procedures to evaluate and
determine an entity’s application for a
contract as a Part D plan sponsor. These
provisions mostly mirrored the
provisions applicable to MA specified at
§ 422.502 of our proposed requirements
for MA organizations. We stated that the
evaluation and determination of the
application would be done on the basis
of information contained in the
application itself, as well as any
additional information we obtained
through on-site visits, publicly available
information, and any other appropriate
procedures. We also proposed rules
regarding the timing of the application
process, as well as the window for
applicants to cure an incomplete or
faulty application. See 69 FR 46709.
Comments on these provisions are
discussed below.
Comment: Several comments were
received asking us to produce the final
regulations as early as possible in
January 2005 and to streamline our
application process in a way that that
does not increase administrative burden
for MA organizations wishing to apply
to offer MA-PD plans or for other Part
D plan sponsor applicants. A
commenter stated that the timing of the
contracting (and bidding) and appeal
process would afford too short a time
frame for applicants to make the June 6
bidding deadline specified in subpart F.
One commenter pointed out that the
timelines for appeals by other Part D
sponsors and MA organizations (that is,

PO 00000

Frm 00140

Fmt 4701

Sfmt 4700

the timelines specified in parts 422 and
423) varied widely, and would cause
unnecessary confusion and
administrative burden. Two comments
were received asking that we allow the
contract determination process and the
bid application process to run
concurrently.
Response: We thank commenters for
these comments and, in response, we
are specifying in the final rule that we
will be allowing applicants to enter into
the bid process without an executed
contract, and that the application and
bid processes will run concurrently.
Note that the bid application process
will include both new bids to initially
participate as a sponsor, as well as
renewal bids. The contract will be prequalified and left unsigned until a
successful bid negotiation has been
approved by CMS. We will not award a
Part D contract to an applicant until the
applicant’s bid is approved.
The contract application process and
the bidding process as detailed under
subpart F are separate but dependent
processes. We view the bid application
process as a negotiation and the contract
process as a determination of an entity’s
qualifications to provide the Part D
benefit. We have revised this final rule
to make clear that the application
process under subpart K determines
only whether an applicant is qualified
to contract as a Part D plan sponsor.
However, actually signing the contract
will require a successful bid negotiation
as described under subpart F. Thus,
although an entity may be pre-qualified
to enter into a contract, a contract may
not be signed if CMS and the entity
cannot reach agreement on the bid.
We believe distinguishing between
the bidding and the contract application
processes carries out the intent of the
Congress in section 1860D–11(d)(2) of
the Act, under which the Congress
provided the Secretary with the
authority to ‘‘negotiate the terms and
conditions of the proposed bid . . . and
other terms and conditions of a
proposed plan’’ and to exercise
authority similar to that provided to the
Office of Personnel Management under
5 U.S.C. Chapter 89. The bid negotiation
will focus on the aspects of the bid and
the benefit package to be provided by
the Part D plan sponsor, while the
contract application process will
determine whether the entity offering
the benefit package has the capability to
contract with us under Part D. In
addition, because the bid process is
envisioned as a negotiation, only the
contracting process under subpart K
will be subject to the determinations
and appeals process described in
subpart N of these regulations. In order

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
to clarify the language concerning this
distinction, we have revised our
proposed rule to include new
§ 423.503(c)(2). Whether or not the
entity and CMS are able to reach
agreement on the bid and the benefit
package will not be subject to subpart N.
Indeed, we do not believe that the
Congress intended for the bid to be
appealable under these administrative
provisions, because subjecting the bid to
these appeals would frustrate our ability
to calculate a national average premium
in time for the annual enrollment period
starting November 15 of each year. (We
expect to have calculated the national
average premium by at least August so
that the beneficiary premiums, which
are based on the national benchmark,
can be published in time for open
enrollment.)
Furthermore, taking bid negotiations
out of the subpart N reconsideration
process encourages plans to negotiate in
good faith, as plans will realize that
failure to negotiate will not lead to an
opportunity to appeal, thereby
maintaining the integrity of the
negotiation process. We believe these
changes to the contracting application
and determination process will allow
qualified candidates more time to
prepare for CY 2006.
Additionally, we will be making the
various timelines for appeals of
determinations under subpart N of part
422 (Part C) and subpart N of part 423
(Part D) equivalent to eliminate any
confusion and to shorten the contract
application process.
Comment: In the proposed rule, we
asked for comment on allowing 10 days
for an incomplete application to be
cured by an applicant from the date of
the incomplete notice, and noted that
the MA provision in § 422.502(a)(2))
currently provides a 30-day window for
the MA program to furnish missing
information. We also proposed a 10-day
time frame for responding to an intent
to deny. We received comments
suggesting that the differing timelines
between the Part D plan and MA
organization appeal timelines (that is,
the requirements specified in parts 422
and 423) were confusing in general and
expressing concern with the relatively
short timeline for the contract
application process.
Response: We remain committed to
providing successful applicants a
reasonable time to be prepared to begin
operations by the first of the year in
their selected service area(s). However,
we also wish to ensure all potential
applicants are given every chance to
contract with CMS.
In the event that we determine that an
application is incomplete, we afford a

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

means for the applicant to cure the
contract application. However, the
bidding process required under the
MMA makes the use of the ‘rolling
application’ system previously used
under the Medicare Advantage and
Medicare+Choice programs
impracticable. As a result of the new bid
calculation requirements for Part C and
Part D, we need to process all final bids
by a certain deadline each year.
Therefore, we needed to apply a similar
deadline to the application review
process.
In order to respond to concerns that
the determination application process as
it was proposed could compromise a
Part D plan sponsor’s ability to
effectively prepare for the beginning of
a contract period, we are making the
following modifications: We are no
longer considering § 423.503(a)(2) as a
separate and distinct step in the review
process. If an applicant’s contract is
submitted and found to be both
incomplete, as well as unqualified,
(resulting in an intent to deny notice)
the period to remedy the application
will be 10 days from the date of the
notice. Additionally, if after the initial
review of applications, we determine
that an application is missing
information necessary for us to make a
determination, we will make all
reasonable efforts to notify the applicant
that this is the case. This is not a
requirement, however, and we are
stating in the final rule that our
procedural rule will be that applicants
receiving notification that their
application is incomplete, but who have
not yet received an intent to deny
notice, respond back to CMS with a
cured application within two days of
receiving the notice (instead of the ten
days originally proposed). The two days
are, thus, a guide; however, we are
ultimately constrained by the total
amount of time it will have to review
applications. As a result, an applicant
that takes longer than two days to
remedy its incomplete application risks
our issuing a notice of intent to deny
before the Applicant submits the
requested information. In cases where
an Intent to deny notice has been
issued, either as a result of missing
information, information that would
lead us to deny the application, or both,
the applicant has ten days from the date
of the notice to remedy the application.
We believe that the amount of time
given to applicants to furnish
information is a procedural rule that is
not subject to notice and comment. In
addition, applicants will still receive the
same 10 days included in the proposed
rule to revise their applications if they

PO 00000

Frm 00141

Fmt 4701

Sfmt 4700

4333

fail to respond within 2 days, and then
receive an intent to deny notice from us.
These changes to the application
timelines mirror the changes we have
included in the final rule for MA
organizations. We believe that
maintaining a single application and
evaluation procedure and a single set of
contract requirements for both the Part
C and Part D programs brings simplicity,
consistency, and reduced administrative
burden for those entities that are
managing both programs.
5. General Provisions (§ 423.504)
In the proposed rule, we stated that
the requirements of § 423.504 would
specify the general provisions that apply
to Part D sponsor contracts. For more
details on those proposals please see 69
FR 46709–11. For the most part, we
stated that we planned to adopt the
provisions that already applied to MA
organizations through the Part 422
regulations. As part of these general
provisions, we proposed mandatory
self-reporting requirements and asked
for comments on the provisions. Finally,
we noted that we would annually audit
the financial records (including, but not
limited to, Medicare utilization, costs,
reinsurance cost, low-income subsidy
payments, and risk corridor costs) of at
least one-third of the Part D plan
sponsors, including fallback plans. We
asked for comments on the best
approach to audit fallback plans and
whether they would require more
frequent auditing because of their
different payment arrangements. In the
proposed rule, we also specified that we
would use the authority of section
1857(c)(5) of the Act (incorporated
through section 1860D–12(b)(3)(B) of
the Act) to enter into Part D plan
sponsor contracts without regard to the
Federal and Departmental acquisition
regulations set forth in title 48 of the
CFR. We did not receive any comments
regarding fallback plans audit methods,
but did receive some comments on
auditing in general, which are discussed
in more detail below.
Comment: One commenter thought
that PBMs should be prohibited from
charging pharmacists a fee for
submitting claims, as this has become
customary in the private sector, and
some PBMs have increased their fees for
claims submission substantially. Some
commenters said plans should not be
allowed to tie Medicare business to
other commercial business through an
existing ‘‘all products’’ clause or
passively enroll pharmacies in Medicare
drug plan networks; rather, plans
should be required to sign a Medicarespecific contract with each pharmacy, or
at least get a written response from each

E:\FR\FM\28JAR2.SGM

28JAR2

4334

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

pharmacy confirming its participation.
One commenter suggested that plans be
allowed to set a limited sign-up period
in which pharmacies can take advantage
of the standard contract.
Response: Concerning the comment
that PBMs not be allowed to charge
pharmacists a fee for submitting claims,
we believe that the intent of the statute
is to let market forces prevail within the
regulatory provisions outlined in the
MMA and this final rule. In other
words, if a PBM charges a relatively
high fee to participating pharmacies to
process claims, then it follows that a
PBM would have difficulty securing
contractual arrangements with a
sufficient number of pharmacies to meet
‘‘access’’ requirements under Part D.
As to the comments concerning
Medicare-specific contracts, our primary
goal is to ensure access to Part D drugs
for Medicare beneficiaries. To the extent
a contract is reasonably construed by
both parties to ensure access to Part D
by Medicare beneficiaries, the contract
is deemed sufficient.
Comment: As noted in the proposed
rule, we proposed changing the
compliance program requirements for
MA organizations at
§ 422.501(b)(3)(vi)(G) to include
provisions that would require MA
organizations to report misconduct it
believes may violate various criminal,
civil or administrative authorities. We
based the compliance program
requirements for Part D plan sponsors
on these new and recently proposed MA
requirements. Numerous comments,
both for and against, were received
regarding these requirements of
mandatory self-reporting of misconduct.
The very large majority of the
comments, however, objected that the
rule as written was vague and broad,
with no basis in statute. Other
comments directed us to eliminate the
proposal, stating that current
compliance requirements were
sufficient.
Response: In response to these
comments, we are eliminating from this
regulation an explicit requirement that
Part D plan sponsors report to CMS
violations of law, regulation, or other
wrongdoing on the part of the
organization or its employees/officers.
While we are not requiring Part D plan
sponsors to engage in mandatory selfreporting, we continue to believe that
self-reporting of fraud and abuse is a
critical element to an effective
compliance plan; and we strongly
encourage Part D plan sponsors to alert
CMS, the OIG, or law enforcement of
any potential fraud or misconduct
relating to the Part D program. If after
reasonable inquiry, the Part D plan

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

sponsor has determined that the
misconduct has violated or may violate
criminal, civil or administrative law, the
Part D plan sponsor should report the
existence of the misconduct to the
appropriate Government authority
within a reasonable period, that is,
within 60 days after the determination
that a violation may have occurred.
The failure to disclose such conduct
may result in adverse consequences for
PDP sponsors, including criminal
prosecution. For example, Title 42
U.S.C. Section 1320a–7b(a)(3) punishes
as a felony the knowing failure to
disclose an event affecting the initial or
continued right to a benefit or payment
under the Medicare program. The
Federal civil False Claims Act, 31 U.S.C.
Section 3729(a)(7) states that any person
who knowingly makes, uses, or causes
to be made or used, a false record or
statement to conceal, avoid, or decrease
an obligation to pay or transmit money
or property to the Government, is liable
to the United States for a civil penalty
plus trebled restitution for the damages
sustained by the government. In
addition, both DOJ and the OIG have
longstanding policies favoring selfdisclosure.
In summary, we have elected to
recommend reporting fraud and abuse
as part of the compliance plan required
as a condition of contracting as a Part D
plan sponsor. Plans that self-report
violations will continue to receive the
benefits of voluntary self-reporting
found in the False Claims Act and
Federal sentencing guidelines. In the
future, we will examine mandatory selfreporting of health care fraud and abuse
across all Medicare providers and
contractors.
Comment: A commenter questioned
the need for proposed § 423.505(h),
which would require Part D plan
sponsors to comply with certain specific
Federal laws and rules, other laws
applicable to recipients of Federal
funds, and all other applicable laws and
rules. The commenter argued that these
requirements were on their face
seemingly inconsistent with our
regulatory provisions exempting Federal
plans from procurement standards and
preempting State laws other than those
relating to licensure. Furthermore,
nothing suggests a rationale for naming
some laws and not others. The
commenter also suggested that the
provisions might more appropriately be
replaced with one focused on plans
committing themselves to compliance
with Federal standards aimed at
preventing or ameliorating waste, fraud,
and abuse.
Response: We agree that our efforts
are best focused on requirements to

PO 00000

Frm 00142

Fmt 4701

Sfmt 4700

prevent fraud, waste, and abuse in the
Part D program and on issues for which
we are responsible to enforce (for
example, the HIPAA Administrative
Simplification rules).. We have,
therefore, made the suggested changes
to reflect this focus. These changes are
in no way meant to imply that Part D
plan sponsors need not comply with
other Federal laws and regulations as
applicable, but rather only that the
enforcement of these Federal laws and
regulations is the responsibility of
Federal agencies other than CMS. We
have made a similar change in the
Medicare Advantage regulation.
Comments: We received four
comments asking that we add an annual
audit to proposed § 423.504(d)
(protection against fraud and beneficiary
protections). Commenters requested
stronger language to clarify that we will
perform an annual audit as part
standard oversight procedures. One
commenter referred to a $1.1 million
penalty imposed on a company found to
be switching patients from lower priced
generics to more expensive brands. Two
comments requested that we add
language to the final rule that reads:
‘‘CMS must audit annually...’’ (as
opposed to reading ‘‘CMS may audit
annually.’’). (emphasis added), not
‘may.’’’
Response: Section 1860D–12(b)(3)(C)
of the Act requires CMS to implement
the provisions of section 1857(d) in the
same manner as those provisions that
apply to contracts under Part C of the
Medicare program. Section 1857(d)(1) of
the Act specifies that the Secretary will
audit ‘‘at least one-third’’ of
organizations. Therefore, in this final
rule, we will continue to adopt the
regulations used in the MA program
under which we would expect to audit
one-third of contracted plans each year.
If additional audits are necessary, we
would have the discretionary authority
to perform them as well under
§ 423.505(e)(2)(iii).
Comment: A commenter asked that
we require plans to contract with, and
provide service through, long-term care
pharmacies and Indian Health Service,
Tribal or Urban Indian pharmacies.
Additionally, we should carefully
monitor and report on access to drugs
for nursing home residents and ensure
equal access to prescription drugs for
those residents.
Response: We are including this issue
here because some readers might look
for clarification in this subpart.
However, we believe that this issue is
more appropriately discussed in the
context of pharmacy networks and
therefore refer interested readers to a

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
discussion of this comment in subpart C
of this final regulation.
Other than the above changes, we are
adopting the substance of proposed
§ 423.504.
6. Contract Provisions (§ 423.505)
In the proposed rule we stated that,
for the most part, we would be adopting
the additional contract provisions for
the MA program with modifications as
necessary to accommodate differences
between the MA program and the
prescription drug program. For a full
discussion of our proposals, please see
69 FR 46711–713. We noted that
elsewhere in the proposed rule, we
identified additional contract terms that
would apply uniformly to MA
organizations offering MA-PD plans and
other Part D plan sponsors (for example,
the requirement to support eprescribing). These rules continue to be
included in the final rule at subpart D.
Comments: In § 423.505(d), we
proposed requiring record maintenance
and retention for six years, stating that
records should be kept ‘‘for the current
year and 6 prior years.’’ This
requirement mirrored the record
retention requirements from the MA
program. A commenter stated that this
should be changed to read, ‘‘6 prior
contract periods,’’ stating that this
would better clarify that the retention
requirements do not precede the
execution of the contract. An additional
request was made to clarify whether the
retention periods also refer to MA-PD
plans. Another commenter asked that
we clarify our retention of records to
include all pertinent documents
(whether in paper or electronic form).
That commenter also asked that our
records retention policy parallel the
statute of limitations that applies to
False Claims Act (that is, a maximum of
10 years from the time of the violation).
Response: We agree with the
commenter that our retention
requirements should more closely
follow the statute of limitations that
applies to the False Claims Act. As a
result, in the final rule at
§ 423.505(e)(4), we are requiring that
records be maintained for 10 years from
the last contracting period or audit,
whichever is latest, to conform to the
statute of limitations for the discovery of
violations under the False Claims Act.
We recognize that 10 years is the
upper limit under the False Claims Act,
but we believe that this period will best
enable us to have access to pertinent
records should this be necessary. Also,
the 10-year retention policy is in line
with requirements concerning the
prescription drug rebates under the
Medicaid program (§ 447.534(h)). We

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

believe, as is the case with the Medicaid
rule, that in order to ensure that we
have the proper oversight for
investigating the complex payment and
other relationships associated with the
delivery of prescription drugs under a
program like Part D, the 10-year
retention requirement is necessary. In
order to maintain uniformity between
requirements for MA organizations and
other Part D sponsors, we are making a
similar change to the final MA
regulations.
We do not agree with the commenter,
however, that we specify the particular
medium of records (paper or electronic,
for example)that must be retained.
Specifying the type of record could lead
to a requirement that is unnecessary,
lengthy, and confusing with CMS
attempting to list every type of medium
(past, present, and future) that could
contain any information. We do believe,
however, that all pertinent information
should be maintained, including any
and all electronic records.
In response to the comment
requesting that ‘‘6 prior contract
periods’’ be specifically identified as
opposed to ‘‘6 years’’ for the record
retention requirement, we continue to
specify years in this final rule (though
10 years, now, to parallel the statute of
limitation for the False Claims Act) as
we believe there may be occasions when
a Part D sponsor during a prior period
was under contract with us, ceased
operation, and, at a later time,
contracted again with Medicare.
Specifying contract periods in these
cases could make for a partial record of
information and prevent us from having
full access to the information over the
period in question.
Comment: In § 423.505(l), we
proposed six certifications that would
be required of PDP sponsors. Although
we refer readers to the regulations for a
full discussion of these certifications,
generally stated, they include certifying
that—
(1) All data related to payment is
accurate, complete and true;
(2) Each enrollee is validly enrolled in
the prescription drug plan;
(3) The claims data submitted is
accurate, complete and truthful;
(4) The information in the bid
submission and assumptions related to
projected reinsurance and the low
income subsidy is accurate, complete,
truthful, and conforms with the
regulations;
(5) The information provided for
purposes of supporting allowable costs
for purposes of calculating risk corridor
and reinsurance payments is accurate,
complete, truthful, and fully conforms
to the regulations; and

PO 00000

Frm 00143

Fmt 4701

Sfmt 4700

4335

(6) The data submitted for price
comparison is accurate, complete, and
truthful. These certifications were based
on the certifications required under the
MA program, but were modified to
reflect the different payment
mechanisms under the Part D program.
A commenter requested that we revise
these six certifications and provide
general authority for requiring the
certifications. The commenter requested
that we remove the specific language
related to the content of the
certifications in order to provide CMS
with flexibility in the start-up phase of
MMA, and to make it easier to integrate
the Part D certifications with the Part C
certifications.
Response: As we have done
elsewhere, we largely based the
certification process for Part D on the
Part C requirements for MA
organizations. We do this because of the
similarity in scope of both programs, as
well as the familiarity many will have
with the MA process. However, the Part
D program differs in some payment
respects from the Part C program. Thus,
while the MA regulations currently
require a certification of data included
in the ACR, the Part D regulations
similarly require a certification of the
information included in the bid
submission. Also, because there are
additional payment mechanisms under
Part D (for example, risk corridors and
reinsurance) that do not exist for Part C,
we believe it is appropriate to require
certifications for these separate types of
payment. If at the time it is found that
additional, or alternate, certifications
are required we have the discretion to
change them through notice and
comment rulemaking. The final rule
requires that the CEO or CFO of a Part
D sponsor, or an authorized individual,
request payment of claims on a
document that certifies (based on best
knowledge information and belief) the
accuracy, completeness and truthfulness
of all data related to payment. We
highly recommend that Part D sponsors
collect certification from their
downstream partners as well. Further, if
claim data is generated by a related
entity, contractor, or subcontractor of a
PDP sponsor, the entity, contractor, or
subcontractor would be required to
similarly certify (based on best
knowledge, information, and belief) that
the information provided for purposes
of supporting allowable costs, as
defined in § 423.308, is accurate,
complete and truthful, and fully
conforms to the requirements in
§ 423.336(c) and § 423.343(c).
Comment: A commenter
recommended that we explicitly state
that the certification provisions of

E:\FR\FM\28JAR2.SGM

28JAR2

4336

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

§ 423.505(l) apply not exclusively to
PDPs, but also to MA organizations
offering MA-PD plans as well.
Response: We note that the
certification provisions under
§ 423.505(l) apply to all Part D plan
sponsors as defined earlier in this
section and in the definitions section at
§ 423.4.
In § 423.505(f)(2)(vii) we have added
examples of other matters where CMS
may require statistical data and
information from PDP sponsors to
further clarify these ‘‘other matters that
CMS may require.’’ For an effective
oversight program, for example, CMS
may require PDP sponsors to submit
statistics and information regarding
performance of operations in the
following areas:
(a) Experience and capabilities.
(b) Licensure and solvency.
(c) Business integrity.
(d) Benefit design.
(e) Service area and regions.
(f) Pharmacy network.
(g) Enrollment and eligibility.
(h) Exceptions, appeals, and
grievances.
(i) Quality assurance and utilization
management.
(j) Medication Therapy Management
Programs.
(k) HIPAA.
(l) Customer service and satisfaction.
(m) Coordination of Benefits (COB).
(n) Tracking Out-of-Pocket Costs
(TrOOP).
(o) Marketing and beneficiary
communications.
(p) Provider communications.
(q) Control of fraud, abuse, and waste.
(r) Claims processing.
(s) Other performance measures as
specified in guidelines provided by
CMS.
7. Effective Date and Term of Contract
(§ 423.506)
In the proposed rule, we specified the
term of non-fallback contracts (12
months) and specified that contracts
could be renewed from year to year, but
only in the event that we inform the Part
D plan sponsor that a renewal is
authorized, and only if the Part D plan
sponsor does not provide us with a
notice of intent not to renew. We stated
that we would not require an
application process for renewals, and
that because of the need to establish a
national average monthly bid amount
from the approved bids, PDP contracts
could not be effective at any time other
than the first of the year. We received
no comments on these provisions and
are adopting the policies as stated in the
proposed rule on this section. We have
changed the regulations to clarify the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

distinction between the bidding and the
application processes. As discussed
previously in this subpart, the revisions
indicate that the renewal process leads
only to a determination that a sponsor
is qualified to renew its contract and
that the actual renewal of the contract
will depend upon whether CMS and the
sponsor are able to reach agreement on
the bid.
8. Nonrenewal of Contract (§ 423.507)
In the proposed rule, we indicated
provisions concerning the non-renewal
of a Part D plan sponsor’s contract.
Under proposed § 423.507, we required
that a Part D plan sponsor not renewing
its contract provide us with notification
in writing by the first Monday of June
in the year in which the contract ends.
The Part D plan sponsor would also
have to notify each Medicare enrollee at
least 90 days before the date on which
the nonrenewal is effective. This notice
would have to include a written
description of alternatives available for
obtaining Medicare prescription drug
services within the PDP region,
including MA-PD plans, and other Part
D plans, and would have to receive our
approval. The general public would also
have to be notified at least 90 days
before the end of the current calendar
year 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.
We proposed that if a Part D plan
sponsor chose to non-renew a contract
as described in § 423.507(a)(3), we
would not enter into a contract with the
organization for 2 years unless
circumstances warranted special
consideration, as determined by CMS.
For purposes of this section, we stated
that we may elect not to authorize
renewal of a contract for any of the
reasons listed in § 423.509(a)(conditions
for terminating a contract) or in subpart
O (including § 423.752 (bases for
imposing intermediate sanctions or civil
money penalties.))
We proposed providing notice of our
decision whether to authorize renewal
of the contract to the PDP sponsor by
May 1 of the contract year. In the event
we found after May 1st that a plan for
whatever reason should not be renewed
the following year, we stated that we
retained the right to terminate the Part
D plan sponsor contract at any time
based on any of the reasons stated in
§ 423.509, regardless of whether we
renewed a Part D plan sponsor contract.
If we decided not to authorize a renewal
of the contract, we stated we would
provide notice to the Part D plan
sponsor’s Medicare enrollees by mail at
least 90 days before the end of the

PO 00000

Frm 00144

Fmt 4701

Sfmt 4700

current calendar year. We also stated we
would notify the general public at least
90 days before the end of the current
calendar year by publishing a notice in
one or more newspapers of general
circulation in each community or
county located in the PDP sponsor’s
service area. We stated that we would
give the Part D plan sponsor written
notice of its right to appeal the decision
that it was not qualified to renew its
contract in accordance with proposed
§ 423.642(b).
We received a few comments on this
section which we discuss below. In the
final rule we are adopting the provisions
of the proposed rule with some minor
modifications (in particular to clarify
that a decision to non-renew a contract
constitutes a determination that a
contractor is not qualified to renew its
contract).
Comment: One commenter indicated
that allowing for only four months
(January 1st—May 1st) for us to decide
whether or not to renew a Part D plan
contract provides an inadequate amount
of time for us to make an informed
decision.
Response: We must make the
determination that a contractor is not
qualified to renew its contract by May
so that we can know if an organization
will be entering a bid, and also so that
we may calculate the benchmarks for
that particular area. If, after the deadline
for CMS non-renewal passes, we
uncover additional information causing
us to question the qualifications of the
contractor to continue serving as a Part
D plan sponsor, we have a range of
options available under this subpart, as
well as under subpart O. (For example,
we could impose an enrollment freeze,
a termination of marketing, or terminate
the contract if necessary.) In addition,
even if we determine an entity is
qualified to renew its contract, this does
not mean the contract will necessarily
be renewed. If we and the contractor
cannot reach agreement on the terms of
the bid, then the contract will not be
renewed.
Comment: Concern was expressed by
a commenter that it was unclear how a
Part D plan sponsor not renewing its
contract could fulfill the requirement to
inform consumers of other Part D plan
options in the same service area,
especially if other plans are changing or
leaving the area at the same time.
Response: The plan is also required to
notify the public 90 days before the end
of the current calendar year. If 90 days
is October 1, at that point, the plan
should know (or should be able to find
out from CMS) what plans are likely to
offer prescription drug coverage for the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
upcoming annual enrollment period in
the service area.
9. Modification or termination of
contract by mutual consent (§ 423.508).
In proposed § 423.508, we specified
that a contract could be modified or
terminated at any time by written
mutual consent. If the contract were
terminated by mutual consent, the PDP
sponsor would have to provide notice to
its Medicare enrollees and the general
public using a timeframe we determine
is appropriate. If the contract were
modified by mutual consent, the PDP
sponsor would be required to notify its
Medicare enrollees of any changes that
we determine are appropriate for
notification within timeframes specified
by CMS. We received two comments
concerning this section on the proposed
rule.
Comment: A Part D plan sponsor not
intending to renew its contract with
CMS is required to provide notice by the
first Monday in June in the year in
which the contract ends. Several
commenters believed that this was not
enough lead-time to ensure a complete
transfer of files. They suggested that, as
a condition of participating in the Part
D program or recovery of surety bonds,
Part D sponsors be required to cooperate
in a timely manner with regard to all file
and data transfers, including in cases
where the Part D sponsor is leaving the
market.
Response: We agree with the
commenters that we should specify that
data and files must be transferred timely
and are adding language at
§ 423.507(a)(4), § 423.508(d),
§ 423.509(b)(1)(iv), and § 423.510(f) to
clarify that these transfers must take
place in cases of non-renewal, as well as
in cases where the plan is ended for
other reasons..
10. Termination of Contracts by CMS
(§ 423.509)
This section discusses reasons for
termination by CMS of a Part D sponsor.
In the proposed rule, we asked for
comments on § 423.509(a)(14), which
allows us to immediately terminate a
plan’s contract without making
corrective action available. This
authority would be used if we have
credible evidence of false, fraudulent, or
abusive activities affecting the Medicare
program. For the remainder of our
proposals under this section, please see
69 FR 46714–715. We received one
comment on this section as discussed
below and are adopting the proposed
policies in this final rule.
Comment: A commenter stated that
our requirements allowing plans to
cease operations 90 days after a CMS

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

termination decision, and then requiring
that the terminated Part D sponsor
notify enrollees at least 30 days before
the termination, is an unacceptable 60­
day delay in notifying beneficiaries, and
may cause gaps in coverage.
Additionally, the commenter asked that
the regulations stipulate that plans be
immediately barred from any further
marketing as soon as they are notified
by CMS of their termination.
Response: We must allow some time
between when a termination notice is
given to an entity and when enrollees
are notified of the termination so that
we can alert other plans in the same
service area that they are going to have
to be open for enrollment and so that we
can determine which plans have the
capacity to accept new enrollees. In the
event that only one other plan is in the
area, we must make every effort in a
short amount of time to contract with a
qualified Part D sponsor to preserve
beneficiary choice.
Regarding the comment about ending
marketing immediately upon
termination, sponsors are afforded
appeal rights. Terminated sponsors have
15 days to file a notice of appeal.
11. Termination of Contract by the Part
D Plan Sponsor (§ 423.510)
The proposed requirements for
termination of a contract by a Part D
plan sponsor were discussed at 69 FR
46715. These proposed requirements
were unchanged from the MA program.
We received one comment on notifying
the States of PDP sponsors that have
their contract terminated. We expect to
adopt this suggestion in other guidance.
In this final rule, we are adopting the
provisions of the proposed rule.
12. Minimum Enrollment Requirements
(§ 423.512)
We discussed the minimum
enrollment requirements for potential
Part D plan sponsors at 69 FR 46715 in
the preamble of the proposed rule. We
asked for comments on whether we
should retain the minimum enrollment
requirements from the MA program. We
received one comment, discussed
below, addressing that proposal. In this
final rule, we are adopting the policies
of the proposed rule.
Comment: Three commenters asked
that we raise the minimum enrollment
amounts from the current levels of at
least 5,000 individuals enrolled for the
purpose of receiving prescription drug
benefits, and at least 1,500 enrollees for
those plans serving rural areas. Their
rationale was that at these low levels, a
Part D plan sponsor could not be
expected to negotiate and receive
adequate prescription drug discounts or

PO 00000

Frm 00145

Fmt 4701

Sfmt 4700

4337

provide quality customer services to its
beneficiaries.
Response: Although we have the
authority under section 1860D–
12(b)(3)(A)(i) of the Act to increase the
minimum number of enrollees for PDP
sponsors, given that we are in the first
phase of the new drug benefit, we
believe it would be reasonable to
maintain the minimum enrollment
numbers that were proposed. We may,
in the future, need to adjust these
thresholds based on our early
experience. For now, however, we
believe it would be prudent to adopt the
minimum enrollment thresholds already
used in the MA context, as we have
greater experience with that program.
Given that MA organizations offer a
broader range of services than will be
offered by PDP sponsors, and given that
the minimum enrollment requirements
have not seemed to stifle negotiation in
that context, we believe it is reasonable
to maintain these minimum enrollment
numbers for potential PDP sponsors.
Additionally, it should be noted that
during the first contract year for a PDP
sponsor in a region, the minimum
enrollment requirements are waived. In
addition, our intention for the final rule
is to attract as many plans as possible
to contract with us, thereby ensuring
beneficiary choice and price
competition. If, in the future, we find
that the minimum enrollment numbers
are too low for plans to garner high
enough discounts or to provide quality
customer service, we may increase the
number through another round of
rulemaking.
13. Reporting Requirements (§ 423.514)
Proposed reporting requirements were
discussed at pages 46715 and 46716 of
the proposed rule. We received no
comments on this section and will be
adopting the policies proposed.
14. Prohibition of midyear
implementation of significant new
regulatory requirements. (§ 423.516)
Under proposed § 423.516, we stated
that we could not implement, other than
at the beginning of a calendar year,
provisions under this section that would
impose new, significant regulatory
requirements on a Part D plan sponsor
or a prescription drug plan. We did not
receive any comments on the provision,
and the policy will be adopted in the
final rule.
15. Fraud, Waste and Abuse.
Section 423.153(e) of the proposed
rule discussed requirements for a
program to control fraud, waste and
abuse as required by Section 1860D–
4(c)(1)(D) of the Act. In an effort to

E:\FR\FM\28JAR2.SGM

28JAR2

4338

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

consolidate the various compliance
requirements in the rule, the
requirements (and preamble discussion)
pertaining to fraud, waste, and abuse
programs have been moved from
subpart D to subpart K, and included at
§ 423.504(b)(4)(vi)(H) as a component of
a Part D plan sponsor’s overall
compliance plan.
Fraud and abuse compliance plans
(referred to in this subpart as fraud and
abuse programs) have been a part of
private business practices since the
early 1990’s with the implementation of
the Federal Sentencing Guidelines for
Organizations of 1991. The Guidelines
provide that a corporation can mitigate
its sentencing when convicted of a
Federal crime if its compliance plan is
effective. Additionally, prosecutors may
use their discretion in pursuing
potential criminal conduct for those
organizations that have an effective
compliance plan. The Guidelines
require an organization to exercise due
diligence to detect and prevent
violations of law (not just criminal law),
and to promote an organizational
culture that encourages compliance.
They also require that businesses
periodically assess the risk that criminal
conduct might occur notwithstanding
the organization’s compliance and
ethics program.
With these Guidelines in mind, we
developed a set of elements for Part D
plans to consider including in the fraud
and abuse program component of their
Compliance Plan so that they may
benefit from an effective plan. These
elements are similar to what many
companies are doing in the private
industry, including what is being done
in the Federal Employee Health Benefits
Program (FEHBP).
The Office of Personnel Management
(OPM) requires the FEHBP plans to have
a fraud and abuse program that contains
at a minimum these components: an
anti-fraud policy statement, written plan
and procedures, formal training, fraud
hotlines, education, use of technology to
combat fraud and abuse, security
safeguards to protect member and
provider information, and a mechanism
to address fraud and abuse practices
that become patient safety issues.
States are also beginning to develop
standards that pharmaceutical
companies must follow before doing
business in their State. For example, on
September 29, 2004 Governor Arnold
Schwarzenegger of California signed a
new law that requires pharmaceutical
companies to implement a
Comprehensive Compliance Program
(CCP). This CCP requires companies
that sell pharmaceuticals in the State of
California to comply with the tenets of

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

the Code on Interactions with Health
Care Professionals of the Pharmaceutical
Manufacturers and Researchers of
America (PhRMA) and the HHS Office
of Inspector General’s Compliance
Program Guidelines for Pharmaceutical
Manufacturers. In addition, the
companies must declare in writing
compliance with the plan, make its CCP
and written attestation accessible to the
public on its Web site, and provide a
toll-free number where copies of the
CCP and written attestation may be
obtained.
Similarly, the current M+C
organizations, under § 422.501(b)(3)(vi),
must have a compliance plan that
consists of the following:
• Written policies, procedures, and
standards of conduct that articulate the
organization’s commitment to comply
with all applicable Federal and State
standards related to fraud and abuse.
• The designation of a compliance
officer and compliance committee who
are accountable to senior management.
• Effective training and education
between the compliance officer and
organization employees.
• Effective lines of communication
between the compliance officer and the
organization’s employees.
• Enforcement of standards through
well-publicized disciplinary guidelines.
• Provision for internal monitoring
and auditing.
• Procedures for ensuring prompt
response to detected offenses and
development of corrective action
initiatives relating to the organization’s
M+C contract.
With the emergence of organized
criminal groups that have become
involved in healthcare fraud across the
country, the defrauding of Medicare and
Medicaid has increased program
vulnerabilities for CMS. For example,
prescription drug expenditures
constitute one of the fastest growing
components of all Medicaid programs
and amount to more than $1 billion a
year in Medicaid expenditures on
pharmaceuticals. Preventing
inappropriate expenditures from
occurring is preferable to recouping
inappropriately paid claims. States have
been very aggressive in responding to
many of the fraud schemes used by
individuals and groups to defraud
Medicaid programs. States have
addressed fraud and abuse by
developing systems, processes, and
procedures to identify and prevent
fraudulent providers from entering their
programs, thus avoiding patterns of
payment and recovery.
As the Medicare Prescription Drug
Benefit is implemented, it is crucial to
the success of the Medicare program to

PO 00000

Frm 00146

Fmt 4701

Sfmt 4700

have a fraud detection and prevention
model in place. The identification and
analysis of inappropriate activities that
are essential aspects of the model will
help Medicare to proactively combat
fraudulent drug schemes.
After researching best practices
currently utilized in the industry, we
recommend that Part D plan sponsors
consider adopting a program similar to
the one used in FEHBP by including in
the fraud, waste and abuse component
of their overall compliance plan the
following elements:
1) Written policies and procedures for
detecting and preventing fraud, waste,
and abuse among Part D plan sponsors,
any Pharmacy Benefit Managers,
pharmacies, drug manufacturers and
physicians and providers with whom
the sponsors and MA organizations do
business. In developing these policies
and procedures, sponsors and MA-PDs
may also consider requiring pharmacies
to adhere to the Code of Ethics of the
American Pharmaceutical Association
as a best practice for its standard of
conduct.
2) Designation of a compliance officer
and compliance committee with
responsibility for developing, operating,
and monitoring the Fraud and Abuse
program and with authority to report
directly to the board of directors, the
president, or the CEO. The Part D plan
sponsor or MA-PD should consider the
compliance officer’s scope of
responsibilities, the organization’s size
and resources, and the complexity of the
task in determining whether this
compliance officer needs to be a
different individual than the one
required in the overall compliance plan.
3) Effective training and education on
fraud, waste, and abuse, which would
address pertinent laws related to fraud
and abuse (for example, anti-kickback
provisions and False Claims Act
provisions) and include training for Part
D plan sponsor staff and contracted
entities on common fraudulent schemes
in the pharmaceutical industry,
identified by CMS, the Office of
Inspector General or Department of
Justice.
4) Effective lines of communication
between the sponsor and the following
entities: CMS and its contractors; law
enforcement; Pharmaceutical Benefit
Managers; pharmacies; and physicians
and providers with whom the Part D
plan sponsors do business, including an
effective line of communication
between the Part D plan’s compliance
officer and all employees using a
process (for example, a hotline or other
reporting system) to receive complaints
or questions. There should also be
procedures in place to protect the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
anonymity of complainants and protect
whistleblowers from retaliation.
5) Internal monitoring and auditing to
protect the Medicare Trust Fund from
Part D fraud and abuse, including
regular monitoring and auditing by the
Part D plan to ensure that they are in
fact taking the steps necessary to
comply with all Federal and State
regulations related to fraud and abuse
and are following their compliance plan
to mitigate the potential for fraud,
waste, and abuse within their
organization.
6) Enforcement of standards through
guidelines that are widely disseminated
to employees, contractors, agents, and
directors.
7) Procedures to ensure prompt
responses to detected problems and to
undertaking corrective action. We
recommend these procedures include:
(a)referral of any abusive or potentially
fraudulent conduct or inappropriate
utilization activities, once identified via
proactive data analysis or other
processes, for further investigation to
CMS or its contractors; (b) procedures to
cooperate with law enforcement; (c)
reporting of potential violations of
Federal law to the HHS Office of
Inspector General or, alternatively, to
appropriate law enforcement
authorities; and (d) the conduct of
appropriate corrective actions,
including repayment of any
overpayments due to the fraud or abuse
and disciplinary actions against
responsible employees.
The guidelines discussed above will
help ensure that the Medicare Trust
Fund is protected against fraud, waste,
and abuse in the Part D program. These
guidelines should not be misconstrued
to mean that Part D plans should
undertake law enforcement activities.
Rather, Part D plan sponsors should
implement effective fraud and abuse
programs, consistent with industry
standards, to detect problems, make
referrals to CMS or the appropriate
program integrity contractor for further
investigation and follow-up, and
undertake corrective action. These
provisions are crucial to the success of
the Medicare Part D program and to the
millions of beneficiaries who rely on
these benefits.
As noted in the proposed rule, we
proposed changing the compliance
program requirements for MA
organizations at § 422.503(b)(4)(vi)(G) to
include provisions that would require a
MA organization to report misconduct it
believes may violate various criminal,
civil, or administrative authorities. We
also proposed basing the compliance
program requirements for Part D plan
sponsors on these proposed new MA

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

requirements. Numerous comments,
both for and against, were received
regarding these mandatory self-reporting
of misconduct requirements. The very
large majority of the comments,
however, objected that the rule as
written was vague and overbroad, with
no basis in statute. Other comments
mentioned that imposing a selfreporting requirement on only specific
health providers contracting with
Medicare was patently unfair, and other
comments directed us to eliminate the
proposal, stating that current
compliance requirements were
sufficient.
In response to these comments, we
have eliminated the mandatory selfreporting requirements that were
proposed, but we expect all Part D plan
sponsors to comply with the
requirement for a comprehensive fraud
and abuse plan as found under
§ 423.504(b)(4)(vi)(H). We continue to
believe that self-reporting of fraud and
abuse is a critical element to an effective
compliance plan, and that organizations
contracting with CMS will find it in
their best interests to alert CMS, the
OIG, or law enforcement to any
potential financial fraud or misconduct.
Part D plan sponsors must continue to
have a compliance plan as found under
§ 423.504(b)(4)(vi).
The potential for fraud, waste, and
abuse exists not only in Part D plan
sponsors offering prescription drug
coverage, but also in the PBMs,
pharmacies, physicians, and other
providers with whom Part D sponsors
do business. Therefore, we recommend
that, as part of their ongoing screening
for abusive or fraudulent activity, one of
the many fraud and abuse activities that
Part D sponsors should screen for is the
illegal prescribing of narcotics by
physicians.
We recognize that there are many
possible approaches to implementing a
successful waste, fraud, and abuse
program, and we have given Part D
plans sponsors discretion in developing
this program as part of their overall
compliance plan. In developing its fraud
and abuse program, we recommend that
Part D plan sponsors consider the
previously outlined set of elements as
well as other industry best practice (for
example, compliance guidelines
published by the Office of the Inspector
General).
Comment: Commenters cautioned
CMS against imposing additional
administrative requirements (for
example, periodic reports summarizing
data analysis activities or reports on
illegal prescribing practices) unless it
has been proven effective in reducing
fraud and abuse.

PO 00000

Frm 00147

Fmt 4701

Sfmt 4700

4339

Response: Based on the comments
received, respondents felt that these
additional reports would be too
burdensome to submit. We will not be
imposing these additional reporting
requirements at this time. However,
while we expect that Part D plan
sponsors will have policies and
procedures in place to effectively screen
for wasteful, fraudulent, and abusive
activity, they should also be expected to
produce evidence (for example, a
summary of data analysis activities,
tools used, resources employed, or trend
analyses performed) of this activity
upon CMS request.
Comment: Commenters expressed
concern that we were expecting plans to
be law enforcement-like entities who
would take decisive action if fraud was
identified. Commenters did not believe
that plans or their contracted entities
were in a position to take enforcement
action regarding physician or patient
abuse, and that they did not have the
medical information necessary to track
physician or patient abuse. Commenters
did not believe that plans or PBMs
should be tasked with taking, or judged
for failing to take, enforcement actions
against providers or patients.
Response: We recognize that Part D
plan sponsors are not law enforcement
entities and will not expect these
entities to pursue fraudulent activity in
the same manner that law enforcement
would. However, just as other
contractors who administer Medicare
benefits are responsible for monitoring
for wasteful, abusive, and fraudulent
activities in their organizations, we have
the same expectations for Part D plan
sponsors. We therefore recommend that
Part D plan sponsors offering
prescription drug plans detect and
prevent potentially fraudulent or
abusive activity. For assistance in
identifying what constitutes abusive or
fraudulent activity, Part D plan sponsors
may consult a variety of sources
including relevant statutes, regulations,
and case law, as well as media reports,
DOJ litigation history, HHS-OIG
published guidance and CMS policy
manuals. Once identified, we encourage
referrals be made to CMS or appropriate
CMS contractors. CMS and its
contractors will investigate all cases
referred as potentially fraudulent and
then refer them to the appropriate law
enforcement agency as warranted.
Likewise, we encourage Part D sponsors
offering prescription drug plans to fully
cooperate in any investigation that we
or our law enforcement partners pursue
related to fraud identified in a particular
plan’s area.
Comment: We give no assurance that
the proposed rule provides those giving

E:\FR\FM\28JAR2.SGM

28JAR2

4340

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

price concessions protection from
liability under fraud and abuse laws.
CMS should strongly endorse the
offering of price concessions as entirely
consistent with the anti-kickback statute
for all manufacturers or providers who:
(1) identify the price concessions as
such in the applicable contract; (2) do
not interfere with the reporting
obligations of Part D plans; and (3)
contractually obligate the plan at issue
to accurately report all price
concessions provided.
Response: The anti-kickback statute is
enforced by the OIG and the Department
of Justice. Therefore we cannot respond
directly to this comment. Interested
entities may wish to submit a request to
the OIG for an advisory opinion on
these kinds of questions.
Comment: We should make clear in
the final rule that Part D plan sponsors
that engage in illegal practices may be
subject to sanction under the False
Claims Act and certify on an annual
basis that sponsors will meet all of the
requirements imposed.
Response: Part D plan sponsors
should devise their compliance
programs so that their policies and
procedures are consistent with the False
Claims Act. With regard to the issue of
annual certification, we are not
requiring Part D plan sponsors at this
time to certify that they are in
compliance with their fraud and abuse
programs.
Comment: In responding to the
proposed rule, commenters questioned
whether we would develop uniform
standards for all Part D plan sponsors or
if each Part D plan sponsor would
develop its own criteria. Additionally,
commenters wanted to know whether
these compliance programs would be
compared against one another.
Response: Understanding that there
are many approaches to a successful
fraud, waste, and abuse program, we
have developed a set of suggested
elements for Part D plan sponsors to
consider as they develop a plan for
identifying and reporting fraud and
abuse activity within the overall
compliance plan. We will not compare
fraud and abuse plans to each other, but
expect Part D plan sponsors to follow
through with the monitoring and
compliance initiatives that are
identified in their own fraud and abuse
control plans.
In addition to plan efforts to control
waste, fraud and abuse, we will work to
develop program level performance
measures using our oversight data
related to costs, benefit structure, and
other factors to make comparisons with
the non-Medicare prescription drug
benefit market and with Medicare

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

prescription drug baseline data. We will
review these comparisons as part of our
normal, continual review of the Part D
program. When divergent trends
between the Medicare and nonMedicare markets are identified, we will
take appropriate action, as necessary. In
this way, we can work to ensure that the
Medicare continues to reflect private
sector best practices in the efficient
delivery of drug benefits and that we
can remove unnecessary barriers to
efficient care delivery.’’
Comment: Commenters expressed
concern that the proposed rule
identified illicit prescribing of narcotics
by physicians as a primary
responsibility for Part D plan sponsors.
Response: Illegal narcotic prescribing
is one of many ongoing vulnerabilities
we recommend that Part D sponsors
should screen for in implementing a
successful fraud and abuse program. As
noted in the suggested guidance on
developing a fraud and abuse plan, we
recommend Part D plan sponsors have
in place procedures to detect and
prevent abusive or fraudulent activity in
their organization.
Comment: Several respondents were
concerned with the illegal switching of
medications and drug substitution for
financial gain. For instance, switching
from brand to generic may be
appropriate, but switching brands, for
example, Lipitor to Zocor, may not be
appropriate without consultation with
the prescribing physician.
Response: We agree that the potential
for fraud and abuse surrounding drug
substitutions programs is of grave
concern. We have no intention of
restricting or targeting providers who
are acting in the genuine best interests
of the patient, but rather are concerned
that such switching practices could be
abused for financial gain. Therefore, we
recommend that Part D plan sponsors
monitor for aberrant or abusive behavior
related to drug switching both within its
own organization (through its fraud and
abuse component of its compliance
program) and with its pharmacy
network (through proactive data
analysis and trending capability).
Comment: Several commenters asked
CMS how they should forecast fraud
and abuse detection and prevention into
their solicitation proposal to be a Part D
plan sponsor.
Response: Part D plan sponsors
should bid these costs in the same way
they cost-out their current compliance
and utilization control activity, as fraud
and abuse is inherently a utilization
control.
Comment: Some commenters asked
that safe harbors be developed for Part

PO 00000

Frm 00148

Fmt 4701

Sfmt 4700

D plans under the Anti-kickback and
physician self-referral laws.
Response: The anti-kickback statute is
enforced by the OIG and the Department
of Justice. Therefore, we cannot respond
with specific guidance to comments
asking for exceptions to the antikickback laws. While the physician selfreferral rules are under CMS
jurisdiction, this final rule does not
create any exceptions to these rules at
this time, as nothing on this topic was
proposed. However, law concerning
physician self-referral is generally not
implicated in many arrangements
involving PDPs and MA organizations,
unless the arrangement involves a
referring physician.
Comment: Some commenters were
concerned about unfair extrapolation
policies in the Part D plan auditing
process of pharmacies. It was
recommended that the same standard
required for Part D auditors be required
of CMS; that is, ‘‘a statistically valid
random sample.’’
Response: We recommend that Part D
plan sponsors utilize ‘‘a statistically
valid random sample’’ when auditing
pharmacies; however, Part D plan
sponsors and pharmacies should agree
on auditing procedures in their network
contracts.
Comment: Several commenters
expressed concern about unfair ‘‘bounty
hunting’’ practices in the Part D plan
auditing process of pharmacies. It is
recommended that Part D plan sponsors
be prohibited from paying auditors
based on the denial of reimbursement
claims. Instead, they should be paid
based on an objective analysis of
reimbursement claims.
Response: We do not expect Part D
plan sponsors to pay auditors based on
the number of reimbursement claims
that auditors deny; rather, Part D
auditing processes should be based on
an objective analysis of reimbursement
claims. Specific instructions regarding
Part D auditing practices will be
outlined in subsequent policy guidance.
Comment: One commenter
recommended that the Agency utilize
the regular auditing of plans and
pharmacy benefit managers (PBMs) to
help control fraud, waste, and abuse.
Response: As a part of our mandated
oversight responsibilities, we will
regularly audit all drug sponsors
involved in the Part D program as stated
under § 423.504(d).
Comment: Commenters wanted to
ensure that providers and pharmacies
who were on State sanction lists could
not participate in Part D.
Response: Part D entities such as
providers, pharmacies, PBMs, and plans
may be excluded from participating in

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Part D under certain circumstances. The
Office of the Inspector General
maintains the authority to exclude
individuals and entities from
participating in Federal health care
programs, including Medicare.
Therefore, we cannot respond with
specific guidance to comments asking
under what circumstances providers
might be excluded from participating in
Part D.
Comment: The provider community
indicated that they wanted to review
proposed fraud and abuse plan to
ensure the consistent use of fraud and
abuse tools to mitigate illegal actions.
Response: Compliance plans are the
property of the Part D plan sponsors and
for their internal use; consequently, we
do not expect plans to publish these
documents for public access.
Compliance plans will only be available
to government and oversight entities
upon request. However, CMS manuals
that outline program integrity
expectations are available for public
access. As for the consistent application
of fraud and abuse processes and
procedures, we have suggested in the
final rule a set of elements for a fraud
and abuse control plan for Part D
sponsors to consider in developing the
fraud, waste and abuse component of
their overall compliance plans. Any
requirements in addition to this set of
elements are encouraged by CMS and
are at the discretion of the Part D plan
sponsors.
L. Effect of Change of Ownership or
Leasing of Facilities During the Term of
Contract
Subpart L of part 423 describes the
impact that a change of ownership
(CHOW) or the lease of facilities during
the term of a PDP sponsor’s contract
would have on the status of the
organization’s contractual relationship
with us, as well as the procedures the
Prescription Drug Plan sponsor is
required to follow when a CHOW
occurs. The provisions of this subpart
apply to PDP sponsor organizations and
are almost identical to the provisions
that apply to MA organizations at
subpart L of part 422. We proposed
making the requirements essentially the
same since we believe a single set of
CHOW requirements for both MA
organizations and PDP sponsors will
simplify management, assure
consistency, and reduce administrative
burden. The requirements in § 423.551,
§ 423.552, and § 423.553 of this rule,
which apply to PDP sponsors, are,
therefore, substantially the same as the
requirements found in § 422.550,
§ 422.552, and § 422.553, which apply
to MA organizations. We received no

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

comment on this proposal and will
adopt these provisions without
modification (with the exception of a
slight change in wording which we will
describe below).
We also sought comments regarding
the potential modification of the CHOW
rules. In particular, we sought
comments regarding—
• The situations which constitute a
CHOW;
• How these provisions should be
applied to large companies with
multiple business units;
• The notification requirements
related to a CHOW and the novation
agreement provisions; and
• The provision related to the
leasing of a PDP sponsor’s facilities.
We received only favorable comments
on our proposal to consider that, under
§ 423.551(a)(2), an asset sale only occurs
when there is a transfer of substantially
all the assets of the sponsor to another
party. We requested comments on
situations where a sponsor transfers
substantial assets to another party, but
less than substantially all of its assets.
We received a few comments describing
different scenarios that commenters
believe should not constitute a CHOW.
The intent of the proposals under
subpart L was to fashion requirements
that would not unfairly burden an
organization when something less than
substantially all of an organization’s
assets were sold or transferred. When
reviewing the comments, however, it
became apparent that for some
organizations selling or transferring
their entire PDP line of business could
constitute something less than
substantially all of their assets. We note
that we interpret the sale or transfer of
an entire PDP line of business as an
asset transfer. We recognize that we
cannot define all possible existing
business arrangements and transactions,
we are, therefore, issuing these rules as
a framework and will provide guidance
as needed via interpretive documents
(for example, FAQs,) and on a case by
case basis. Contracting organizations
should be aware that we will be alert to
situations where organizations may be
looking to avoid compliance with the
CHOW provisions to evade Medicare
liabilities and obligations.
In this final rule, we note that
contracted PDP sponsors must adhere to
the Privacy Rule on sharing protected
patient health information in the course
of a CHOW and the preparation of a
novation agreement. PDP sponsors are
not permitted to share protected health
information, absent authorization from
an enrollee, with a new owner that is
not, or will not, become a covered
entity.

PO 00000

Frm 00149

Fmt 4701

Sfmt 4700

4341

We also proposed a definition of a
novation agreement. A novation
agreement is an agreement among the
current PDP sponsor, the prospective
new owner, and CMS. This agreement
would have to be signed by all three
parties and, to be effective, contain the
provisions at § 423.552. In the
agreement, we will recognize the new
owner as the successor in interest to the
current owner’s Medicare contract. This
definition has been adopted without
modification.
1. General Provisions
We are adopting the provisions we
proposed for this Subpart with one
slight modification to § 423.551(a)(2).
This paragraph is now entitled, Asset
transfer rather than Asset sale.
2. Change of Ownership (§ 423.551)
We asked for comments on the
various arrangements between and
within companies that may, or may not,
constitute a CHOW.
Comment: Commenters requested that
we clarify that a CHOW does not occur
when a change in the structure of an
entity’s business units occurs, but the
same entity continues to be the PDP
sponsor.
Response: The commenter did not
provide, or otherwise define, what was
meant by ‘‘change of structure.’’
Assuming the entity here is a unit of a
multi-unit business with the PDP
sponsor contract, and that the change of
structure is within the company, and
the same entity continues to hold, and
be responsible for, the PDP sponsor
contract, we would agree that a CHOW
would not appear to occur in this
instance. However, as mentioned above,
we will be alert for any attempts by any
Medicare contracted organizations to
evade their responsibility to the
Medicare program and its enrollees by
avoiding compliance with the CHOW
requirements.
Comment: We sought comments
regarding how the CHOW provisions
and provisions regarding the lease of a
PDP sponsor’s facilities should be
applied to large companies with
multiple business units. We received a
number of similar comments regarding
this issue. Commenters questioned
whether the transfer of functions within
a multi-State operation that centralizes
functions within one entity would
constitute a CHOW. One commenter
recommends that the final regulation
clarify that the transfer of functions
within a multi-State company to an
entity in another State does not
constitute a CHOW.
Response: We believe that the
transferring of functions within a

E:\FR\FM\28JAR2.SGM

28JAR2

4342

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

company consisting of multiple
business units is a common practice and
will in most cases be free of CHOW
obligations, regardless of whether or not
the transfer of functions was from one
State to another, and was done in
compliance with all applicable State
licensure laws. What is pertinent in this
instance is whether the transfer of
functions does not represent
substantially all assets of the
organization and is truly an intra­
company transfer—that is, that the same
party, or parties, continues to be
responsible for the PDP contract. As
discussed in a previous response we
will be scrupulous in ensuring that
organizations contracting with the
Medicare program do not evade their
Medicare contract obligations. Any
transfer of functions, or assets cannot
result in a change of the entity
responsible for the PDP contract without
complying with all the CHOW
provisions at § 423.551, § 423.552, and
§ 423.553.
Comment: A commenter requested
that, given the impact a CHOW might
have on SPAPs and State retirees, the
final regulation provide for States to be
notified of any CHOW.
Response: We will adopt the
commenter’s suggestion to notify States
in the event of a CHOW. We will likely
handle this internally and notify the
appropriate State agencies.
3. Novation Agreement Requirements
§ 423.552
In the proposed rule, we identified
the three conditions that would have to
be met for approval of a novation
agreement. A novation agreement is an
agreement among the current PDP
sponsor, the prospective owner and
CMS. All three parties must sign the
novation agreement for it to be in effect.
Consistent with the requirements that
apply to the MA program, at
§ 423.552(a) we proposed that three
conditions would need to be met in
order to obtain our approval of a
novation agreement. First, the PDP
sponsor would be required to give us
notice at least 60 days before the
effective date of a CHOW. That notice
would include updated financial
information and a discussion of the
financial and solvency impact of the
CHOW on the surviving organization. If
notice were not timely, the contractor
would continue to be liable for
payments that we make to it on behalf
of Medicare enrollees after the date of
the CHOW, as described in
§ 423.551(c)(2). Second, the PDP
sponsor would be required to submit
three signed copies of the novation
agreement (that contains the provisions

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

specified in § 423.552(b)) at least 30
days before the proposed CHOW date,
and submit one copy of other required
documents. Third, the PDP sponsor
would have to obtain our determination
that—
• The new owner is in fact a
successor in interest to the contract;
• Recognition of the new owner as a
successor in interest is in the best
interest of the Medicare program; and
• The successor organization meets
the requirements to qualify as a PDP
sponsor under proposed subpart K.
At § 423.552(b) we proposed that a
valid novation agreement would include
the following provisions:
• The new owner would assume all
obligations under the Medicare contract.
• The previous owner would waive
its right to reimbursement for covered
services furnished during the rest of the
current contract period.
• The previous owner would
guarantee performance of the contract
by the new owner during the contract
period, or post a performance bond that
is satisfactory to us;
• The previous owner would agree
to make its books, records, and other
necessary information available to the
new owner and to us to permit an
accurate determination of costs for the
final settlement of the contract period.
We proposed that the new owner
would become the successor in interest
to the current owner’s Medicare contract
if the novation agreement meets all the
requirements of § 423.552 and is signed
by us (and the parties to that
agreement).
Comment: One commenter requested
that we require that enrollees of the PDP
undergoing a CHOW receive detailed
notification about any change, including
any impact the CHOW may have on the
ability of the new PDP sponsor to
provide for enrollees’ healthcare. This
commenter also notes that we do not
seem to provide for a special enrollment
period to ensure continuity of care for
beneficiaries in the event a novation
agreement is not reached between the
prior owner of the Medicare contact and
the new owners, and the commenter
requests that a special enrollment
period be provided to ensure continuity
of care.
Response: If a CHOW takes place that
we believe would not be in the best
interest of the beneficiaries then we will
not enter into a novation agreement
with the parties. Under § 423.551(3)(e),
if a novation agreement is not reached,
the existing contract will become
invalid. However, before this occurs, we
will send out notification of the pending
CHOW, and will make every effort to
ensure that beneficiaries are made aware

PO 00000

Frm 00150

Fmt 4701

Sfmt 4700

of the alternate PDPs in the same service
area. In the event that a novation
agreement is not executed, an enrollee
will be allowed to enroll during a
Special Enrollment period, as provided
for at § 423.36(c).
Comment: A commenter noted that it
does not believe the proposed
requirements are administratively
burdensome. However, the commenter
points to the advance notice
requirement under § 423.551(c), which
requires a PDP sponsor that is
considering a CHOW to provide
updated financial information and a
discussion of the financial and solvency
impact of the CHOW on the surviving
organization. With respect to that
requirement, the commenter suggests
that administrative burden could be
further reduced if the information
required be equivalent to the
documentation routinely submitted to
State departments of insurance or
similar entities.
Response: We appreciate the
commenter’s suggestion, but, in order to
maintain uniformity, we will retain the
advance notice requirement as
proposed. Given that different States
require different financial solvency
information we believe that the advance
notice requirement will best serve both
our interests and the interests of our
beneficiaries without being unduly
burdensome for the PDP sponsors.
M. Grievances, Coverage
Determinations, and Appeals
1. Introduction
Subpart M of part 423 implements
sections 1860D–4(f), 1860D–4(g), and
1860D–4(h) of the Act, which sets forth
the procedures PDP sponsors and MAPDs must follow with regard to
grievances, coverage determinations,
and appeals. The MMA amended the
Act to provide the following:
• A PDP sponsor or MA-PD must
provide meaningful procedures for
hearing and resolving grievances
between the PDP sponsor or MA-PD
(including any entity or individual
through which the PDP sponsor or MA­
PD provides covered benefits) and
enrollees.
• A PDP sponsor’s or MA-PD’s
procedures must meet the same
requirements as those that apply to MA
organizations for organization
determinations and redeterminations.
• If a PDP sponsor or MA-PD has
tiered cost sharing for formulary drugs,
it must establish an exceptions process.
• PDP sponsors or MA-PDs must
follow appeals requirements that are
similar to those applicable to MA
organizations regarding independent

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
review entity (IRE) review
Administrative Law Judge (ALJ)
hearings, Medicare Appeals Council
(MAC) review, and judicial review,
respectively.
• Appeals involving coverage of a
covered part D drug that is not on a
PDP’s or MA-PD’s formulary are
permissible only if the prescribing
physician determines that all covered
Part D drugs, on any tier of the
formulary for treatment of the same
condition, will not be as effective for the
individual as the non-formulary drug,
would have adverse effects on the
individual, or both.
We received 192 comments on
subpart M in response to the August
2004 proposed rule. Below we
summarize the major proposed
provisions in this subpart and respond
to public comments. (For a detailed
discussion of our proposals, please refer
to our proposed rule (69 FR 46,632).)
Please note that, for the convenience of
the reader, we use the term ‘‘plan’’ to
connote a PDP sponsor, MA-PD, or other
Part D plan sponsor throughout the
discussion in this subpart.
Comment: We received several
comments that we need to clarify
whether all of the subpart M provisions
apply to PDPs, Medicare Advantage
plans that offer prescription drug
benefits (MA-PDs), and Section 1876 of
the Act cost plans that offer qualifying
Part D coverage. Two commenters
argued that we should determine which
provisions in subpart M of Part 423
apply to MA organizations and cost
plans and incorporate those provisions
in Part 422 and Part 417 by crossreference. Alternatively, the
commenters suggested that we add
language to the corresponding sections
in Parts 422 and 417.
Response: We agree with the
commenters, and wish to clarify that the
Part D appeal provisions do apply to
PDPs (including fallback plans),
Medicare Advantage plans that offer
prescription drug benefits (MA-PDs),
and Section 1876 of the Act, cost HMOs
that offer qualifying Part D coverage.
Therefore, this final rule replaces all
‘‘PDP sponsor’’ references in subpart M
with ‘‘Part D plan sponsor,’’ which is
defined in § 423.4 as PDP sponsors
(including fallback entities), MA
organizations offering MA-PD plans,
PACE plans offering qualified
prescription drug coverage, and costbased HMOs and CMPs.
We recognize that MA-PDs and costbased HMOs and CMPs will be required
to follow two different processes
depending on whether a claim involves
a request for benefits under Part 422 or
Part 423. (Note that cost-based HMOs

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

and CMPs will be required to follow
Part 422 procedures no later than
January 1, 2006). However, we do not
believe that it is unduly burdensome for
MA-PDs and cost-based HMOs and
CMPs to follow two sets of rules instead
of one. To the contrary, we believe that
if we adopted the commenters’
suggestions, the Part 422 provisions
would be difficult to follow.
2. General Provisions (§ 423.560 through
§ 423.562)
We proposed, at § 423.560, several
definitions for terms used in the
subpart. These definitions were
generally self-explanatory and mirror
those used in subpart M of part 422 for
MA, but were modified to reflect
applicability to Part D drug benefits.
Proposed § 423.562, General
Provisions, provided an overview of the
responsibilities of plans and the rights
of enrollees for grievances, coverage
determinations, and appeals. In general,
plans are responsible for establishing
and maintaining procedures for
grievances, coverage determinations,
exceptions to tiered cost-sharing
formulary structures, requests for
formulary exceptions, and appeals.
Enrollees must receive written
information about the grievance and
appeal procedures available to them
through the plan, and about the QIO
complaint process available to enrollees.
If the plan delegates this task, it is still
ultimately its responsibility to ensure
that the requirements are met.
Section 423.562(b) of our proposed
rule explained the basic rights of
enrollees in relation to plans under
subpart M and referenced the
regulations that explain the rights.
Proposed § 423.562(c) specified that
an enrollee has no appeal right when
there is no payment liability, or when
benefits have been provided by a nonnetwork provider, except in those
situations in which, under subpart C,
the plan is obligated to cover such
drugs. Finally, § 423.562(d) explained
that, unless otherwise noted, the general
Medicare appeals rule under part 422,
subpart M, is applicable for appeals to
an ALJ or the MAC. We note that since
new § 423.562(c) will incorporate part
422, and since part 422 incorporates
part 405, the provisions of part 405
apply to the extent that they are
appropriate. This means, for example,
that the provisions to implement the
time and place for a hearing before an
ALJ under section 1869 of the Act
would apply to Part D appeals. Thus, we
have added a reference to § 423.612(b)
that the time and place for a hearing
before an ALJ will be set in accordance
with section 405.1020. Although that

PO 00000

Frm 00151

Fmt 4701

Sfmt 4700

4343

section has not yet been published in
final form, we expect that it will be
published prior to the effective date of
this rule. Readers may refer to 67 FR
69311, 69331 (Nov. 15, 2002) for an
explanation of the proposals and a
discussion of the possibility of using
video-teleconferencing in ALJ hearings.
On the other hand, the ALJ and MAC
provisions that are dependent upon
qualified independent contractors
would not apply since an independent
review entity will conduct
reconsiderations for Part D appeals.
Comment: We received a comment
suggesting that we modify the definition
of appeal in § 423.560 from ‘‘when a
delay would adversely affect the health
of the enrollee’’ to ‘‘when a delay could
adversely affect the health of the
enrollee.’’ The same commenter
suggested that we must define ‘‘delay’’
in order for it to have functional
meaning.
Response: We disagree with the
commenter. The ‘‘would adversely
affect the health of the enrollee’’
standard we proposed in the proposed
rule is consistent with the language
governing MA procedures, which were
incorporated in the Part D regulations.
In addition, we do not think the term
‘‘delay’’ needs to be defined in the
regulations. The term ‘‘delay’’ simply
refers to the plan not providing benefits
within the applicable adjudication
timeframe.
Comment: We received several
comments requesting that we not
prohibit an enrollee’s appeal rights
when the enrollee has no further
financial liability for a Part D benefit.
The commenters’ underlying concern is,
by prohibiting enrollees who have no
financial liability for a medication from
filing a request for appeal, we are also
prohibiting State Pharmaceutical
Assistance Programs (SPAPs) or other
secondary payors from acting on behalf
of enrollees in the appeals process.
Response: Under our proposal, an
enrollee’s appointed or authorized
representative (which could include
SPAPs or secondary payors) are able to
act on behalf of enrollees in the appeals
process. However, in the proposed rule
we took the position that if an enrollee
has no further financial liability for a
medication because the secondary payor
(that is also the enrollee’s appointed or
authorized representative) covered the
enrollee’s additional cost-sharing
amount, neither the enrollee nor the
secondary payor would be able to
request an appeal. We did not intend to
preclude SPAPs or other secondary
payors from filing appeals with Part D
plans on behalf of enrollees. Therefore,
we agree with the commenters and have

E:\FR\FM\28JAR2.SGM

28JAR2

4344

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

deleted the proposed provision that
would prohibit an enrollee’s appeal
rights when he or she has no further
liability to pay for prescription drugs
furnished through a Part D plan.
Comment: We received one comment
requesting that the definition of enrollee
be revised to include people who are
automatically enrolled in a PDP or MA­
PD.
Response: We agree with the
commenter and have revised the
definition of enrollee in this final rule
to mean a Part D eligible individual who
has elected or has been enrolled in a
Part D plan.
3. Grievance Procedures (§ 423.564)
As defined in § 423.560 of our
proposed rule, a grievance means any
complaint or dispute, other than one
that constitutes a coverage
determination, expressing
dissatisfaction with any aspect of a
plan’s operations, activities, or behavior,
regardless of whether remedial action is
requested. Our proposed regulations (at
§ 423.564) required that each plan have
procedures to ensure that grievances are
heard and resolved in a timely manner,
but the regulations did not include
prescriptive details on the procedures.
The only exception to this approach was
proposed under § 423.564(d) and
involved certain limited situations
where a plan must respond to a
grievance within 24 hours.
Section 423.564(c) explained the
distinction between the grievance
procedures of the plan and the quality
improvement organization (QIO)
complaint process. This section further
established that when an enrollee
submits a quality of care complaint to a
QIO, the plan must cooperate with the
QIO in resolving the complaint.
Proposed § 423.564(e) completed the
grievance procedures by proposing
minimum record keeping requirements
for a plan, which included recording the
receipt date of a grievance, its final
disposition, and the date the enrollee is
notified of the disposition.
Comment: We received one comment
suggesting that the QIO be utilized to
respond to expedited external appeals
related to drug benefits, and all
complaints regarding quality of care
should be forwarded to the QIO.
Response: We thank the commenter
for the suggestion, and will take it into
consideration when determining the
entity that will perform the IRE
workload. In addition, we believe that a
complaint involving a quality of care
issue must be processed by the QIOs
since they are statutorily required to
perform such reviews under section
1154(a)(14) of the Act. Although QIOs

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

are required to review complaints
involving quality of care issues, by
statute, plans must establish an internal
grievance procedure to resolve these
types of issues as well. An enrollee may
choose to file a quality of care complaint
with either the plan, QIO, or both.
Therefore, quality of care complaints
will not be automatically forwarded to
QIOs. In addition, even if the quality of
care complaints were voluntarily
forwarded by a plan, QIOs do not have
a statutory responsibility to review such
complaints. QIOs are responsible for
reviewing quality of care complaints
only when the complaint has been filed
directly with the QIO, in writing, and by
an individual (or his or her
representative) who is entitled to
Medicare benefits.
Comment: We received several
comments indicating that the grievance
procedures should be modeled after MA
and include better record-keeping
requirements for grievances. Other
commenters suggested that we allow
enrollees to appeal grievances directly
to the IRE. Commenters also requested
that we clarify what types of issues can
be adjudicated in the grievance process,
and what types of issues are subject to
the appeals process. Another
commenter recommended allowing
enrollees to choose whether they want
their complaint to be filed as an appeal
or a grievance.
Response: We agree with the
commenters who suggested that the Part
D grievance procedures be modeled
after the MA grievance procedures.
Therefore, as proposed, the same
grievance requirements (including who
may request a grievance, the filing
procedures and record-keeping
procedures) that are applicable under
MA are applicable under Part D. In the
MA final rule, we are adopting revised
grievance provisions similar to those
from a January 24, 2001
Medicare+Choice proposed rule. See 66
FR 7,593. This is in response to
comments we received on the August 3,
2004 proposed rule to establish the MA
program. See 69 FR 46,866, 46,913.
There, in response to statutory changes
in the MA Federal rules governing
preemption of State requirements,
commenters recommended that we
adopt the January 2001 proposed
grievance provisions in an effort to
establish uniform Federal procedures
under MA. Once these regulations are in
effect, MA organizations will be
required to notify enrollees of their
decisions as expeditiously as the case
requires, but no later than 30 calendar
days after receiving a complaint. An
extension by up to 14 calendar days
may be permitted if the enrollee

PO 00000

Frm 00152

Fmt 4701

Sfmt 4700

requests the extension, or if the
organization justifies a need for
additional information and the delay is
in the best interest of the enrollee. Also,
grievances that are made orally may be
responded to orally or in writing, unless
the enrollee specifically requests a
written response. Quality of care issues
and written complaints must be
responded to in writing. An enrollee
must file a grievance no later than 60
days after the event or incident that
precipitates the grievance. Because the
MMA dictates that the grievance
provisions of the MA program also
apply to the Part D program, the final
MA requirements have been included
under § 423.564, and thus will apply to
PDP sponsors and MA-PDs as well.
In the proposed rule, we specified the
differences between grievances,
coverage determinations, and appeals in
proposed § 423.564, paragraphs (b) and
(c). Nothing in the proposed rule
prohibits an enrollee from requesting
that his or her complaint be adjudicated
under the process applicable for appeals
or grievances. However, plans are
required to maintain different processes
for each and must determine which
process applies when a request is
received. As stated in the proposed rule,
any complaint that does not involve a
coverage determination or quality of
care issue may be filed under the
grievance process. However, if the
complaint involves a coverage
determination issue, plans must process
it under its appeals procedures. If the
complaint involves a quality of care
issue, an enrollee may request the
quality improvement organization or the
plan to review the complaint using its
procedures. When a plan makes a
decision on a grievance, its resolution is
final and is not subject to an appeal. We
have retained these proposals in the
final rule.
4. Coverage Determinations (§ 423.566
through § 423.576)
Proposed § 423.566 through § 423.576
implemented the MMA requirement
that plans establish procedures for
making coverage determinations and
redeterminations regarding covered
drug benefits that are essentially the
same as those in effect for MA
organizations under part 422, subpart M
for MA. Therefore, for the drug benefits
under Part D, we continued standard
and expedited requirements for
coverage determinations and
redeterminations.
Section 423.566(a) of our proposed
rule specified that each plan must have
a procedure for making timely coverage
determinations regarding the drug
benefits an enrollee is entitled to receive

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
and the amount, if any, that an enrollee
is required to pay for a benefit. The plan
would be required to establish both a
standard procedure for making coverage
determinations and an expedited
procedure for situations in which
applying the standard procedure could
seriously jeopardize the enrollee’s life,
health, or ability to regain maximum
function.
As proposed in § 423.566(b), actions
that constitute coverage determinations
include: a plan’s decision not to provide
or pay for a Part D drug (including a
decision not to pay because the drug is
not on the plan’s formulary, the drug is
determined not to be medically
necessary, the drug is furnished by an
out-of-network pharmacy, or because
the plan determines that the drug
otherwise would be excluded under
section 1862(a) of the Act); failure to
provide a coverage determination in a
timely manner that would adversely
affect the health of the enrollee;
decisions on the amount of cost sharing;
or decisions on whether the preferred
drug is appropriate for an enrollee. As
proposed at § 423.566(c), only the
enrollee (including his or her authorized
representative) and the prescribing
physician on behalf of the enrollee
could request a standard coverage
determination.
Similarly, those individuals who
could request an expedited
determination or an expedited
redetermination were an enrollee
(including his or her authorized
representative), or the prescribing
physician on behalf of the enrollee. In
these situations we proposed that a
prescribing physician need not be an
appointed representative of the enrollee
in order to assist in obtaining either a
standard or an expedited coverage
determination. We welcomed comments
on any additional individuals or entities
that should be able to request a coverage
determination.
The standard timeframes and notice
requirements for coverage
determinations were proposed in
§ 423.568. These requirements, which
are consistent with MA requirements
and were incorporated in Part D,
included making a determination as
expeditiously as the enrollee’s health
condition requires, but no later than 14
calendar days after receipt of the request
if the request was for prescription drug
benefits. An extension of the timeframe
by up to 14 calendar days would be
allowed if the enrollee requests the
extension, or if the plan can justify how
a delay is in the interest of the enrollee.
An enrollee must be notified of the
reasons for the delay, and informed of
the right to file an expedited grievance

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

if the enrollee disagrees with the plan’s
decision to invoke an extension.
As specified at proposed § 423.568(b),
which is consistent with MA
requirements and was incorporated in
Part D, if the request is for payment, the
determination would need to be made
no later than 30 calendar days after
receipt of the request. This section also
established, at proposed § 423.568(c),
the requirement for written notice for
plan denials and the form and content
of the denial notices, including that the
notices must explain the reason for the
denial and the availability of appeal
rights.
Section 423.570 and § 423.572
proposed the requirements regarding
expedited coverage determinations,
including how an enrollee or an
enrollee’s prescribing physician could
make an oral or written request
(§ 423.570(b)), and how the plan must
process requests (§ 423.570(c)). We
clarified in § 423.570(a) that requests for
payment of prescription drugs already
furnished for an enrollee could not be
expedited.
Section 423.570(b)(2) specified that a
prescribing physician may provide
written or oral support for a request for
expedition, and under
§ 423.570(c)(3)(ii), we clarified that
when requests for expedition were made
or supported by an enrollee’s
prescribing physician, the plan would
grant the request if the physician
indicated that applying the standard
timeframe could seriously jeopardize
the enrollee’s life, health, or the ability
to regain maximum function. Section
423.570(d) proposed actions following a
denial of a request and explained that
when a plan denies a request for an
expedited determination, the request
would be automatically transferred and
processed under the standard
determination procedures.
Proposed § 423.572 outlined the
timeframe and notice requirements for
expedited determinations. Specifically,
this section proposed the following:
• The plan must make its expedited
determination and notify the enrollee
and the prescribing physician of its
determination as expeditiously as the
enrollee’s health condition requires, but
no later than 72 hours after receiving the
request.
• The enrollee has the right to file an
expedited grievance if he or she
disagreed with the plan’s decision to
invoke an extension.
• If the plan first notified an enrollee
of an adverse expedited determination
orally, then it must mail written
confirmation to the enrollee within 3
calendar days.

PO 00000

Frm 00153

Fmt 4701

Sfmt 4700

4345

• Notice of expedited determination
must contain specific information
outlined by us.
• Failure to provide a timely notice
would constitute an adverse coverage
determination, which may be appealed.
Similar to the expedited requirements
for MA under Part C, these sections
proposed requiring that drug coverage
determinations be made as
expeditiously as the enrollee’s health
condition requires. Note that given the
requirement that the timing of
determinations (and redeterminations)
be based on an enrollee’s health
condition, the plan would have a
responsibility to ensure that an
enrollee’s health situation and needs are
fully considered in reviewing any
request (for example, if an enrollee has
a chronic condition that has
necessitated ongoing use of the drug in
question).
Comment: Several commenters were
unclear about the differences between
the processes for coverage
determinations, exceptions for nonformulary and non-preferred drugs, and
appeals. Some commenters believed
that the procedures were too complex
for enrollees to navigate.
Response: We believe that it is
important to clarify the process for
coverage determinations, including
exceptions, and appeals to ensure that
enrollees, prescribing physicians, and
plans understand the procedures that
apply to disputes involving drug
benefits. Section 1860D–4(g) of the Act
addresses the procedures for coverage
determinations and redeterminations of
plans. In general, the MMA requires that
a plan’s procedures meet the same
requirements as those that apply to MA
organizations (under paragraphs (1)
through (3) of section 1852(g) of the Act)
for organization determinations and
redeterminations. This includes the
same requirements for expedited
procedures when the standard
timeframes could seriously jeopardize
an enrollee’s life, health, or ability to
regain maximum function. In addition,
section 1860D–4(g)(2) of the Act
specifies that if a plan has tiered cost
sharing for formulary drugs, it must
establish an exceptions process. Under
the exceptions process, consistent with
guidelines established by the Secretary,
a non-preferred drug could be covered
under the terms applicable for preferred
drugs 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
addresses appeals of a plan’s coverage

E:\FR\FM\28JAR2.SGM

28JAR2

4346

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

determinations and redeterminations.
Here, the MMA requires that the plans
follow appeal requirements that are
similar to those applicable to MA
organizations under paragraphs (4) and
(5) of section 1852(g) of the Act
(regarding IRE review and ALJ hearings,
respectively). In addition, section
1860D–4(h)(2) of the Act specifies that
appeals, involving coverage of a covered
part D drug that is not on a plan’s
formulary, are permissible 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 non-formulary
drug, would have adverse effects on the
individual, or both.
In light of the MMA requirements
mentioned above, our final regulations
at § 423.566 through § 423.630 establish
a process for addressing coverage
determinations and appeals that largely
mirror the procedures under the MA
program. The primary structural
difference between the Part D
requirements and the MA rules involves
the unique feature whereby enrollees
may request exceptions to a plan’s
formulary and tiered cost-sharing
structure. (Note that requests for nonformulary drugs are of course part of the
MA program today, but they are not
addressed separately in either the
statute of regulations.) We treat these
exception requests as requests for
coverage determinations. Put another
way, requests for tiering and formulary
exceptions are forms of coverage
determinations. We have made several
technical changes to the proposed
regulations to help clarify this point.
Section 423.566(b) of this final rule
specifies the actions that we consider
coverage determinations. They include a
plan’s decision not to provide or pay for
a Part D drug (including a decision not
to pay because the drug is not on the
plan’s formulary, because the drug is
determined not to be medically
necessary, because the drug is furnished
by an out-of-network pharmacy, or
because the plan determines that the
drug is otherwise excluded under
section 1862(a) of the Act) that the
enrollee believes may be furnished by
the plan; failure to provide a coverage
determination in a timely manner when
a delay would adversely affect the
health of the enrollee; a decision on the
amount of cost sharing for a drug; and
a decision on whether a drug is a
preferred drug for an enrollee. Although
a plan’s decision to pay for or provide
a Part D drug is a coverage
determination, these types of
determinations are not appealable and
therefore are not included in the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

definition of a coverage determination
for purposes of subpart M. We
anticipate that only a fraction of all Part
D claims will involve disputes subject to
the appeals and grievance procedures
Cost-utilization tools employed by
plans may also result in coverage
determinations. For instance, a plan’s
denial of a request for a specific drug
based on an enrollee’s failure to
complete step-therapy requirements
constitutes a coverage determination.
Similarly, a denial based on an
enrollee’s exceeding a plan’s quantity
limitation also constitutes a coverage
determination. Although enrollees may
appeal such determinations if they
believe that the cost-utilization
requirements have been satisfied or the
requirements cannot be satisfied for
reasons of medical necessity, enrollees
may not challenge the fact that a plan
has cost-utilization tools. These tools
are essentially part of a plan’s benefit
design, which is reviewed by us as part
of the plan approval process, and like
other parts of the benefit design may not
discourage enrollment by certain Part D
eligible individuals as described in
§ 423.272.
Only adverse coverage determinations
are subject to the appeals process.
Therefore, if a plan denies an enrollee’s
request for an exception, this action
constitutes an adverse coverage
determination that may be appealed. If
we did not treat a plan’s decision
regarding an exceptions request as a
coverage determination, then any
adverse decision by a plan regarding an
exceptions request would not be subject
to the appeals process.
All of the enrollee filing deadlines;
plan decision-making timeframes,
including rules on when to apply the
expedited versus the standard
procedures; and notice requirements
apply to exceptions requests in the same
manner as they apply to other coverage
determinations. Thus, § 423.578(c)
specifies that a plan’s decision
concerning an exceptions request
constitutes a coverage determination
under § 423.566.
Consistent with MA appeal
procedures, the entity that makes the
coverage determination has an
opportunity to take a second look at its
original determination. Thus, the first
level of the appeals process is a
redetermination by the plan. One or
more individuals who were not
involved in making the coverage
determination must make the
redetermination. If a lack of medical
necessity formed the basis for the
coverage denial, then a physician with
expertise in the field of medicine
appropriate for the services at issue

PO 00000

Frm 00154

Fmt 4701

Sfmt 4700

must make the redetermination. The
redetermination procedures are set forth
under § 423.580 through § 423.590.
Plan redeterminations are subject to
reconsideration by an IRE under
§ 423.600 through § 423.604. Further
appeals may be made to an ALJ under
§ 423.610 through § 423.612, the MAC
under § 423.620, and to Federal court
under § 423.630. An enrollee must meet
an amount in controversy threshold, as
determined by the Secretary on an
annual basis, for appeals at the ALJ and
Federal court levels.
Comment: We received a significant
number of comments indicating that the
adjudication timeframes were
unreasonably long. The commenters
argued that if we shortened the
timeframes for coverage determinations,
including exceptions, and appeals, the
process would be less complex. Some
commenters recommended designing an
expedited exceptions process for
enrollees with immediate needs such as
mental health issues or chronic or
debilitating conditions, which requires a
response within 24 hours. Many others
suggested shortening the proposed 14­
day deadline for exception requests to
72 hours, or 24 hours for emergencies.
One commenter stated that requiring
plans to respond to all exceptions
requests within 72 hours would be
consistent with the practice typical in
private plans and would allow enrollees
better access to the therapies they need.
The commenter maintained that the
adjudication timeframes under Part D
should be shorter than the MA
adjudication timeframes because the
majority of Part D claims will involve
prescription drugs that have not been
received by enrollees, while MA claims
typically relate to payment for physician
and hospital benefits that enrollees have
received. A few commenters supported
allowing for immediate online point of
sale adjudication.
Response: We agree with the
commenters that the proposed
adjudication timeframes are too long for
making decisions involving an
enrollee’s access to drugs. Therefore, we
have amended the adjudication
timeframes for coverage determinations
(which includes exception requests),
redeterminations by the plan, and
reconsiderations by the IRE. The NAIC
created and adopted the Health Carrier
Prescription Drug Benefit Management
Model Act, which has been used by
many States to develop laws that
regulate prescription drug formularies
and Pharmacy Benefit Managers (PBMs).
The NAIC Model Act requires plans to
make determinations within 72 hours
after the date of the receipt of the
request, or if required by the health

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
carrier, the date of the receipt of the
physician’s supporting statement. Many
of the States that have created laws
requiring plans and PBMs to make
determinations within a specified timeperiod have adopted adjudication
timeframes that are shorted than the 72­
hour timeframe adopted in the NAIC
Model Act. For instance, Michigan, New
Jersey, Oklahoma, and Virginia requires
plans and PBMs to make a
determination on an exceptions request
within 24 hours of receipt, while New
Hampshire requires determinations on
exceptions requests to be made within
48 hours of receipt. Like many States,
we have relied on the adjudication
timeframes adopted in the NAIC’s
Model Act as a benchmark for
developing the Part D adjudication
timeframes. We continue to maintain
the requirement that all determinations
be made as expeditiously as the
enrollee’s health condition requires, but
will shorten the maximum amount of
time that a plan or the IRE can take to
make a determination. A plan will have
24 hours for expedited coverage
determinations (including exception
requests) and 72 hours for expedited
redeterminations. The expedited
procedures will continue to apply to
situations where an enrollee’s life,
health, or ability to regain maximum
function could be seriously jeopardized
by waiting for a determination within
the standard timeframe. For nonexpedited matters, plans will have up to
72 hours to make standard coverage
determinations (including acting on an
exceptions request) and no later than 7
days for standard redeterminations. In
this final rule, the adjudication
timeframes begin after receipt of the
request, or in the case of an exceptions
request, after receipt of the physician’s
supporting statement. The timeframes of
72 hours for expedited cases and 7 days
for non-expedited cases used for
redeterminations also apply to
reconsiderations by the IRE.
Although the MMA requires plans to
meet the requirements for plan
determinations and redeterminations for
Part D in the same manner as such
requirements apply to MA organizations
under sections 1852(g)(1) through (3) of
the Act, we believe that we have the
authority under the Act to shorten the
adjudication timeframes. Section
1852(g)(1)(A) of the Act does not require
us to mandate a specific amount of time
for MA plans to make standard coverage
determinations. The Act requires only
that such coverage determinations be
made on a ‘‘timely basis.’’ Under MA,
we interpreted ‘‘timely basis’’ to mean
no more than 14 days from the date the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

request is received. However, we agree
with many of the commenters that 14
days is not timely for determinations
that involve prescription drugs. There is
too much risk for an enrollee’s health if
determinations are not made sooner
than 14 days from the date the request
is received, since an enrollee often will
not be able to pay out-of-pocket for a
prescribed medication and thus must
forgo necessary therapy until a
determination is made. We agree with
the commenter that the MA
adjudication timeframes do not offer an
appropriate standard for Part D. We
anticipate that the majority of Part D
requests for exceptions and appeals will
involve prescription drugs that have not
yet been provided to enrollees, in
contrast with MA requests, which
typically involve services that have
already been received or are not
immediately needed, such as
procedures that are often scheduled
weeks in advance of being performed.
(Expedited determinations are the
exception to this general rule.) Clearly,
Part D enrollees are likely to suffer
significant adverse consequences if
medications are not received quickly.
Section 1852(g)(2)(A) of the Act gives
the Secretary the authority to require
MA organizations to make standard
reconsiderations in a time period that is
no later than 60 days from the date the
request is received. In MA, we require
MA organizations to complete standard
reconsiderations in 30 days from the
date it receives a request. However, in
this final rule, we have established
adjudication timeframes that are shorter
than the 60-day maximum imposed by
the Act. Under our final regulations at
§ 423.590(a), plans must make standard
redeterminations within 7 days from the
date a request is received.
Because section 1860D–4(h)(1) of the
Act only requires plans to meet the
requirements that apply to Part D IRE
reconsiderations or higher appeals in a
similar manner as they apply to MA
organizations, we have the authority to
revise the adjudication deadlines as
appropriate. As mentioned previously,
we will hold the IRE to the same
timeframes as Part D plans (that is, as
quickly as the beneficiary’s health
requires but no later than 72 hours for
expedited reconsiderations and 7 days
for standard reconsiderations).
However, ALJ hearings and
Departmental Appeals Board (DAB)
reviews will follow the same timeframes
and procedures under MA. The
complexities associated with in-person
hearings and appellate reviews make it
impossible for an ALJ or the DAB to
complete a decision in an abbreviated
timeframe.

PO 00000

Frm 00155

Fmt 4701

Sfmt 4700

4347

Section 1852(g)(3)(B)(iii) of the Act
requires MA organizations to process
expedited coverage determinations and
reconsiderations ‘‘under time
limitations established by the Secretary,
but no later than 72 hours of the time
of receipt of the request or the
information necessary to make the
determination or reconsideration, or
such longer period as the Secretary may
permit in expedited cases.’’ Under MA,
health plans and the IRE must process
expedited reviews no later than 72
hours. However, given that the final rule
reduces the timeframe for making a
standard coverage determination
(including an exceptions request) under
Part D from 14 calendar days to 72
hours, the 72-hour decision-making
timeframe we initially proposed for
expedited determination is
unreasonable. We believe that a 24-hour
deadline for expedited initial coverage
determinations (including expedited
exceptions requests) is more
meaningful. This change is reflected
under § 423.572(a). Expedited
redeterminations and reconsiderations
will be processed no later than 72 hours,
as proposed. We note that we have
removed references to 14-day extensions
of the adjudication timeframes. We
believe that allowing extensions is
inconsistent with our rationale for
shortening the adjudication timeframes.
Comment: We received many
comments from the public suggesting
that we require plans to provide
continued coverage of a prescription
drug during part or all of the coverage
determination and appeals process, or
provide an emergency supply in limited
circumstances. Several of the
commenters were concerned that the
proposed timeframes for making
coverage determinations were too long,
which would result in lapses of
coverage for enrollees.
The commenters’ recommendations
varied on the length of time a drug
should be supplied, as well as who
should bear the burden of cost. Some
commenters recommended providing
enrollees with a 72-hour emergency
supply of the prescription, while others
suggested that enrollees be provided
with coverage for 45 days. A number of
commenters suggested that enrollees be
permitted to continue receiving a
requested drug at no cost until the
appeal is resolved, while others
recommended providing enrollees with
the requested drug at the preferred costsharing amount until final resolution.
Response: Although the commenters
suggested different solutions, each has
requested some degree of continued
coverage as a means of addressing a
larger concern—whether and how

E:\FR\FM\28JAR2.SGM

28JAR2

4348

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

enrollees can continue receiving a
prescribed medication until the
coverage issue is properly adjudicated.
We do not believe we have the statutory
authority to require plans to continue
covering a drug that has been removed
from the plan’s formulary, or placed on
a different tier during the plan year,
pending the outcome of an appeal.
Nevertheless, we believe that we can
address the commenters’ concern in this
final rule by minimizing the
adjudication timeframes as discussed
above, and by modifying the proposed
provisions related to the timelines for
notices and coverage and appeals
decisions. As required under subpart C
of this regulation, plans must either
provide notice to affected enrollees 60
days in advance of a change to its
formulary or tiering structure, or
provide notice regarding the change
along with a 60-day supply after an
enrollee’s request for a refill of the drug
affected by a change. As mentioned
above, we have also significantly
reduced the adjudication timeframes for
coverage determinations,
redeterminations, and reconsiderations.
As a result, when a formulary changes,
enrollees will have sufficient time to
obtain a determination, including an
independent review, before their
medication runs out. Finally,
beneficiaries always have the option of
paying out of pocket for an initially noncovered Part D drug and then appealing
to seek reimbursement.
Comment: Some commenters also
suggested that we incorporate a fasttrack appeals process for Part D similar
to the fast-track appeals process
provided in the Medicare appeals
regulations as a result of the Grijalva v.
Shalala settlement.
Response: The MA provisions at
§ 422.624 and § 422.626 apply to
situations where an MA organization
intends to terminate an enrollee’s
services in a skilled nursing facility,
home health agency, or a
comprehensive outpatient rehabilitation
facility. The provider must deliver a
notice two days in advance of the
services ending, thereby affording an
enrollee the ability to request an appeal
by an IRE before the services end. As
noted above, we have created a similar
concept in Part D by shortening the
maximum amount of time that a plan or
the IRE can take to make a
determination and requiring plans to
either provide notice to affected
enrollees 60 days in advance of a change
to its formulary or tiering structure, or
provide notice regarding the change
along with a 60-day supply after an
enrollee’s request for a refill of the drug
affected by a change. Thus, enrollees

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

will receive notice in advance of a
change to a plan’s formulary, thereby
affording an enrollee the ability to
request an appeal by an IRE before a
lapse in coverage occurs.
Comment: We received several
comments from organizations arguing
that the regulations proposed in subpart
M fail to meet the Due Process Clause
of the Fifth Amendment of the United
States Constitution. Specifically, the
commenters believe that the proposed
rules do not afford enrollees with
adequate notice explaining the reasons
for a denial and right to appeal, and an
adequate opportunity to a hearing with
an impartial trier of fact. The
commenters also noted that Medicaid
enrollees whose prescription requests
are not being honored currently receive
a 72-hour supply of medication pending
a resolution of the initial coverage
request, and Medicaid appeals are
completed more expeditiously than
Medicare appeals. The commenters
recognize that although the most
efficient means of protecting enrollees,
amending the MMA to provide for an
appeals process similar to Medicaid, is
beyond our authority, we can take steps
to improve notice and the opportunity
for a speedy review.
Response: As noted above, we have
addressed the commenters’ concerns by
significantly reducing the adjudication
timeframes for coverage determinations,
redeterminations, and reconsiderations,
and requiring plans to either deliver
notice to affected enrollees 60 days in
advance of a change to its formulary or
tiering structure or provide notice
regarding the change along with a 60­
day supply after an enrollee’s request
for a refill of the drug affected by a
change. Under § 423.568(d) and
§ 423.572(c), we require plans to
provide enrollees with detailed written
notices explaining the reason(s) for the
denial, and the enrollee’s right to, and
conditions for, obtaining a
redetermination and the rest of the
appeals process. In addition, under
§ 423.590(g), we require plans to
provide enrollees with the same type of
written notices required in § 423.568(d)
and § 423.572(c) when a
redetermination is made. Finally,
§ 423.602 contains provisions governing
the notice issued by an IRE upon a
reconsideration. Thus, we believe that
the Part D process affords enrollees with
appropriate notice explaining their
rights to an exceptions process, reasons
for any coverage denials, and the
opportunity to appeal to an independent
review entity.
Comment: We received many
comments that we need to clarify
whether the point-of-sale transaction at

PO 00000

Frm 00156

Fmt 4701

Sfmt 4700

the pharmacy counter constitutes a
coverage determination. Some
commenters suggested that the
transaction should not be considered a
coverage determination on the basis that
it would be unrealistic to treat a
pharmacy as an agent of a plan for the
purpose of accepting and processing
appeals, and providing information
about a plan’s benefit design does not
constitute a denial triggering notice.
Others commented that point-of-sale
transactions should be considered
coverage determinations because those
transactions result in enrollees receiving
a decision that a drug is either covered
or not, and pharmacies receive real-time
claims adjudication information from
plans and deliver that information to
enrollees.
Response: We agree with the
commenters who suggested that
transactions that occur at the pharmacy
counter should not be considered
coverage determinations. Although
pharmacists will receive information
from plans regarding whether to provide
or pay for a covered Part D drug, the
amount of cost sharing, or whether a
drug is a preferred drug for the enrollee,
we do not believe as a policy or
practical matter that such information
by itself should be considered a
coverage determination. Instead, the
pharmacist is conveying information
regarding the plan’s benefit design as it
pertains to all enrollees, and is
exercising no discretion on behalf of a
plan. The same type of information is
provided in writing by the plan to
enrollees at the beginning of a new plan
year, and is often made available to
enrollees in other formats, for example,
online.
Like MA organizations under Part C,
plans must issue written notices to
enrollees whenever the plans deny a
drug benefit in whole or in part. The
written notice must state the specific
reason(s) for the denial and explain the
enrollee’s right to an appeal. It would be
difficult for pharmacists to create and
issue written notices that satisfy the
coverage determination requirements
given the number of customers (likely
from various plans) that pharmacists
assist each day. In addition, not all
pharmacies have systems capable of
receiving information specific enough to
explain that a prescription is not on a
plan’s formulary or why the level of
cost-sharing is higher than the enrollee
expected to pay.
The DOL considered a similar issue
under 29 CFR 2560.503–1, which
generally applies to all claims for
benefits under plans subject to the
Employee Retirement Income Security
Act (ERISA). Specifically, the DOL

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
considered whether, when a group
health plan participant presents a
prescription to a pharmacy to be filled
at a cost to the participant determined
by reference to a formula or schedule
established in accordance with the
terms of such plan and for which the
pharmacy exercises no discretion on
behalf of the plan, the regulation under
§ 2560.503–1 requires that the
presentation of the prescription be
treated as ‘‘claim for benefits.’’ The DOL
is of the view that neither ERISA nor the
regulation under § 2560.503–1 requires
that a group health plan treat
interactions between participants and
preferred or network providers under
such circumstances as a ‘‘claim for
benefits’’ governed under § 2560.503–1.
See DOL, EBSA, Benefit Claims
Procedure Regulation Frequently Asked
Questions and Answers, A–11, at http:/
/www.dol.gov/ebsa/faqs/
faqlclaimslproclreg.html. We agree
with the approach taken by DOL. Under
this final rule, therefore, a plan is not
required to treat the presentation of a
prescription as a claim for benefits;
instead, enrollees must contact their
plans to formally request coverage
determinations. However, consistent
with the DOL approach, nothing in this
rule prohibits a plan from treating the
presentation of the prescription as a
claim for benefits if it chooses to. As
under Part C, we will require PDP
sponsors and MA-PDs to provide
information in the enrollee’s Evidence
of Coverage explaining how to contact
the plan to obtain a coverage
determination and an appeal. We will
also develop standardized notices and
require plans under § 423.562(a)(3) to
arrange that their pharmacy networks
utilize the standardized notices to notify
enrollees of the right to receive, upon
request, a detailed written notice from
the Part D plan sponsor regarding the
enrollee’s prescription drug coverage,
including information about the
exceptions process. The standardized
notices may, for example, be posted in
or disseminated by a plan’s network
pharmacies.
Comment: One commenter requested
that we clarify § 423.566(b)(4), which
specifies that a decision on whether a
drug is a preferred drug for an enrollee
is a coverage determination. The
commenter is concerned that, as
proposed, the provision allows an
enrollee to challenge a plan’s formulary
development process, without regard to
whether the enrollee actually received
the drug. To remedy this problem, the
commenter suggested that we ‘‘limit the
coverage determination in this case to
the scope of the exception.’’

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Response: We agree that enrollees
may not challenge a plan’s formulary.
The intent of § 423.566(b)(4) was to
ensure that a plan’s determination
regarding an enrollee’s request for an
exception involving a non-formulary
drug is considered a coverage
determination. To clarify our intent, we
have amended § 423.566 (b)(3) and (4) to
state that a decision concerning an
exceptions request under § 423.578(a),
or a decision concerning an exceptions
request under § 423.578(b), is a coverage
determination.
Comment: One commenter requested
clarification as to whether a decision
made by a plan not to pay for drugs
obtained at an out-of-network pharmacy
is subject to appeal.
Response: If a plan decides not to pay
for a drug that an enrollee obtained at
out-of-network pharmacy in accordance
with § 423.124(a), this action constitutes
a coverage determination that is subject
to appeal. Therefore, § 423.566(b)(1)
requires that a plan’s decision not to
provide or pay for a Part D drug because
the drug is furnished by an out-of­
network pharmacy is a coverage
determination. To avoid confusion, we
deleted the limitation proposed in
§ 423.562(c)(2), which gave the
impression that such determinations are
not appealable. When a plan denies
coverage for a drug obtained at an out­
of-network pharmacy on the grounds
that the provisions of § 423.124(a) were
not satisfied, but the enrollee believes
that the denial was unreasonable, for
example, the enrollee obtained a drug at
an out-of-network pharmacy because he
or she needed the drug at midnight and
the only pharmacy open at that time
within a reasonable driving distance
was an out-of-network pharmacy, then
the enrollee can appeal the plan’s
determination. However, the policies
that plans develop to encourage
enrollees to use network pharmacies are
not subject to appeal.
Comment: We received several
comments expressing concern regarding
the notification procedures when a plan
denies a prescribed medication. Some
commenters suggested that both the
physician and enrollee be provided with
immediate written notification, while
others recommended providing the
prescribing physician and the enrollee
with notification within 24 hours from
the time the determination is made.
Several commenters requested that
denials and approved requests be
reported to the pharmacists, and a
significant number of commenters
suggested that we require pharmacists to
distribute notices to enrollees at the
pharmacy counter.

PO 00000

Frm 00157

Fmt 4701

Sfmt 4700

4349

Response: Most commenters who
suggested that the point-of-sale
transaction is a coverage determination
also argued that pharmacists should
deliver written notification of the
coverage determination to enrollees
when they are not able to obtain a
prescription at the pharmacy counter.
Although plans are required under the
regulations to deliver written notice to
enrollees when plans make a coverage
determination, plans are not required to
deliver a notice as a result of the
transaction that occurs at the pharmacy
counter. As mentioned above, point-of­
sale transactions are not coverage
determinations and thus do not trigger
the notice requirements associated with
adverse determinations. However, we
recognize that it would be helpful for
enrollees to receive some information at
the pharmacy explaining how to obtain
a coverage determination or request an
exception. Therefore, we will require
plans under § 423.562(a)(3) to arrange
that their network pharmacies notify
enrollees of their right to receive, upon
request, a detailed written notice from
the Part D plan sponsor regarding the
enrollee’s prescription drug coverage,
including information about the
exceptions process. Plans may, for
instance, require their network
pharmacies to post or distribute notices
that instruct enrollees on how to contact
their plans to obtain a coverage
determination or request an exception
when enrollees disagree with the
information provided by the pharmacist.
Another concern raised by the
commenters involved who would
receive notices from the entities offering
Part D plans. Entities offering Part D
plans must send written notification to
enrollees whenever the plan makes any
adverse coverage determination. Plans
also must notify prescribing physicians
of any adverse coverage determination
when the physician requests standard or
expedited coverage determinations, and
expedited redeterminations on behalf of
enrollees. Plans must notify enrollees
and prescribing physicians, if the
physician requested the determination,
for all favorable coverage
determinations. Also, when a plan
denies a request that a determination or
redetermination be expedited, renders
an unfavorable expedited coverage
determination, or affirms its unfavorable
expedited coverage determination, the
plan must provide oral notification
within the applicable timeframe and
follow-up with a written notice within
three days.
A written notice of any determination
must be sent to enrollees, or any
individual or entity appointed by an
enrollee or authorized under State or

E:\FR\FM\28JAR2.SGM

28JAR2

4350

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

other applicable law to act on behalf of
an enrollee. We also wish to point out
in this final rule that we believe it is
unnecessary to require plans to provide
pharmacists with formal written notice
of plans’ coverage determinations or
appeals. Plans have established
customary practices for communicating
their benefit determinations with
pharmacists, and we see no reason to
interfere with that relationship.
Comment: We received many
comments expressing concern regarding
who should be considered an
authorized representative. Commenters
suggested that we modify the definition
of authorized representative to include
any licensed healthcare and social
service provider caring for the
beneficiary, a practitioner’s agent who
may act on behalf of the physician
caring for the enrollee, pharmacists
where State Pharmacy Acts empower
collaborative practice agreements, and
secondary payors, including employers,
SPAPs, Medicaid agencies, and charities
that provide wrap-around coverage or
otherwise may pay for a drug when the
plan denies coverage. One commenter
suggested that we limit representatives
to authorized family members and
physicians.
Response: We considered the
comments provided and believe that the
commenters’ concerns are already
addressed. We do not need to add to the
list of individuals or entities permitted
to act on behalf of enrollees because
they have the ability to appoint anyone
to be their representative under this
rule. In addition, individuals or entities
authorized under State law may also act
on behalf of enrollees. Therefore, we
removed the definition of an
‘‘authorized representative’’ under
§ 423.560 and replaced it with
‘‘appointed representative’’ to clarify
that a representative is an authorized
representative, or is an individual
appointed by an enrollee, or authorized
under State or other applicable law, to
act on behalf of the enrollee in obtaining
a coverage determination or in dealing
with any of the levels of the appeals
process. Thus, any individual or entity
(including prescribing physicians,
secondary payors, charities, and
pharmacists) appointed by an enrollee,
or authorized under State law, may file
a grievance, request a coverage
determination, or appeal on behalf of
enrollees. We also have clarified that the
appointed representative will have all of
the rights and responsibilities of an
enrollee in obtaining a coverage
determination or in dealing with any of
the levels of the appeals process.
In proposed § 423.560, we proposed
to define ‘‘enrollee’’ as a part D eligible

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

individual or his or authorized
representative. Instead, in our final rule
we clarify that an enrollee is a Part D
eligible individual who has elected or
has been enrolled in a prescription drug
plan offered by a PDP sponsor, MA
organization, or other Part D plan
sponsor. Although we have now
clarified that an appointed
representative is not an enrollee, a plan,
nevertheless, has an obligation to the
appointed representative to fulfill the
requirements under this subpart in the
same manner that it is required to do so
for the enrollee.
We also disagree with the commenter
who suggested that we limit authorized
representatives to authorized family
members and physicians. We have
always provided Medicare beneficiaries
with the ability to choose who may act
on their behalf, and we see no reason to
deviate from this practice in Part D.
Comment: We received several
comments addressing permissible filing
methods and locations for grievances,
appeals, and exceptions. Some
commenters suggested that we require
enrollees to submit requests in writing
only. Other commenters suggested that
we require plans to accept requests
electronically, or by telephone, fax, or
mail. One commenter stated that
accepting oral requests would be unduly
burdensome, and another argued that
requests only be submitted directly to
the plans.
Response: As noted above, an enrollee
may file a grievance either orally or in
writing. Also, as previously mentioned,
the MMA requires plans to meet the
requirements for coverage
determinations and redeterminations
under Part D in the same manner as they
apply to organization determinations
and plan-level reconsiderations in MA.
The regulations applicable to MA do not
specify the method by which enrollees
must file requests for standard
organization determinations. However,
the MA regulations require MA
organizations to have procedures for
accepting oral or written requests for
expedited organization determinations.
The MA regulations also require
requests for reconsideration to be filed
in writing, but permit requests for
expedited reconsiderations to be filed
orally or in writing. Therefore, plans
must also have procedures for accepting
oral or written requests for expedited
coverage determinations (including
exceptions) and requests for expedited
redeterminations. However, plans need
only accept standard requests for
redetermination when they are made in
writing.
Similar to the MA proposed rule, we
proposed to require plans to have

PO 00000

Frm 00158

Fmt 4701

Sfmt 4700

procedures for accepting oral (including
by telephone) or written (including by
fax or mail) requests for standard
redeterminations. However, consistent
with the MA final rule, Part D enrollees
must make standard requests for
redetermination in writing, unless the
plan accepts oral requests. Therefore,
we deleted the provision in § 423.582(a)
that would have permitted enrollees to
file oral requests for redetermination
with plans. Although the process
currently cannot accommodate
electronic appeal requests, we intend to
explore this as another filing option for
Medicare appeals.
Comment: We received several
comments related to the consequences
that should apply when a plan fails to
meet its adjudication deadlines or
provide timely notice. Some
commenters suggested that this failure
should be considered a favorable
determination because, under the
proposed rule, plans have no incentive
for making coverage determinations or
redeterminations since the failure to
meet the adjudication deadlines result
in de facto denials. The commenters
argue that, to ensure enrollee protection,
there must be meaningful consequences
when plans fail to meet adjudication
deadlines. Still others believed that it
should result in an adverse
determination that may be appealed.
Response: In the proposed rule, we
indicated that the failure to provide
timely notice of a coverage
determination or redetermination would
constitute an adverse determination that
may be appealed. We also proposed in
§ 423.578(c)(2) that when the plan fails
to make a determination on an
exceptions request when a drug is being
removed from a formulary, the enrollee
would be entitled to receive the
medication in dispute until the plan
notified the enrollee of its
determination. We agree with the
commenters who suggested that this
provision provides little incentive for
plans to make determinations any
sooner than by the end of the
adjudication deadline, especially if the
plan expects to issue an unfavorable
determination. Our intent, in part, was
to require plans to make timely
determinations as mandated by section
1852(g) of the Act. However, we also
wanted to remove any barriers for
enrollees to accessing needed
medications as quickly as possible. We
now believe that the provisions, as
proposed, fall short of that policy goal.
Under MA, if a plan does not provide
the enrollee with timely notice of an
organization determination, this failure
constitutes an adverse determination
that may be appealed. However, if the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
MA plan fails to issue its
reconsideration within the appropriate
timeframe, this failure constitutes an
adverse determination that must be
automatically forwarded to the IRE
within 24 hours of the expiration of the
timeframe. Unlike under MA, however,
we did not propose that Part D plans be
required to automatically forward all
adverse determinations to the IRE.
Instead, we believe that a more effective
policy under Part D is to require plans
to automatically forward enrollees’
requests for determination or
redetermination to the IRE only when
the plans fail to meet the adjudicatory
timeframes for making determinations
and redeterminations. As under MA,
plans must forward the enrollees’
requests to the IRE within 24 hours of
the expiration of the adjudication
timeframe.
Comment: Several commenters
maintained that enrollees should be able
to pursue an expedited appeal
regardless of whether they already paid
for the drug in dispute. Commenters
believed that low income beneficiaries,
in particular, would be harmed by
having to wait 30 days for a plan to
make a coverage determination or 60
days to render a redetermination.
Response: A determination regarding
benefits is expedited when the
application of the normal time frame for
making a decision could seriously
jeopardize the life or health of the
enrollee or the enrollee’s ability to
regain maximum function. As proposed
in Part D and like Part C, such a
determination would not involve a
payment request since a medical
emergency does not exist for an enrollee
who already obtained the medication in
dispute. Nevertheless, the concern
raised by the commenters regarding the
length of time it takes for an enrollee to
be reimbursed has been remedied by our
decision to no longer distinguish
between payment and service-related
disputes. As a result, we have reduced
the timeframe for plans to make
standard coverage determinations to 72
hours in § 423.568(a), and
redeterminations to 7 days in
§ 423.590(a). In addition to shortening
the adjudication timeframes, we also
reduced the effectuation timeframes for
requests involving payment issues to 30
days. Thus, while plans must make a
decision on whether to pay for a
prescription drug within 72 hours, they
must effectuate the decision within 30
days. Likewise, although a plan must
make a redetermination within 7 days,
it must effectuate no later than 30 days.
The effectuation timeframes for requests
involving payment issues are longer
than the effectuation timeframes for

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

requests for benefits because our
experience is plans normally process
claims in 30-day cycles. Therefore,
plans must effectuate claims for
payment no later than 30 days after
making a favorable coverage
determination or redetermination, or
receiving notice of a reversal by the IRE,
ALJ, MAC, or Federal court.
Comment: One commenter suggested
that we delete the term ‘‘seriously’’ and
add ‘‘or maintain’’ to the last sentence
of § 423.566(a) so that it states ‘‘may
jeopardize the enrollee’s life, health, or
ability to regain or maintain maximum
function, in accordance with § 423.570.’’
The commenter maintained that such a
modification is necessary because any
amount of jeopardy to an enrollee’s
health or life is serious enough to
warrant an expedited review, and
maintenance of maximum function is
just as important as regaining maximum
function.
Response: The MMA requires entities
that offer Part D plans to meet the
requirements that apply to Part D
coverage determinations and
redeterminations in the same manner as
they apply to MA organizations for
organization determinations and
reconsiderations. Section 1852(g)(3)(B)
of the Act requires MA organizations to
establish procedures for expediting
organization determinations and
reconsiderations when ‘‘the application
of the normal timeframe for making a
determination...could seriously
jeopardize the life or health of the
enrollee or the enrollee’s ability to
regain maximum function.’’ Therefore,
we are not adopting the commenter’s
suggestion.
Comment: We received one comment
suggesting that the prescribing
physician should make the
determination whether to expedite an
enrollee’s request for a coverage
determination or redetermination. The
commenter maintained that the
physician, not the plan, is in the best
position to determine how quickly an
enrollee needs a prescribed medication.
Response: We agree with the
commenter. Therefore, like under MA,
we require plans to automatically
provide an expedited determination or
redetermination when the prescribing
physician indicates that applying the
standard timeframe would seriously
jeopardize the life or health of the
enrollee or the enrollee’s ability to
regain maximum function.
Comment: Two commenters suggested
that prior authorization decisions
should be included in the list of actions
that constitute a coverage determination
under § 423.566(b). The commenters
maintain that placing a medication on a

PO 00000

Frm 00159

Fmt 4701

Sfmt 4700

4351

prior authorization list has the effect of
limiting access to such a medication
since the administrative cost and
burden associated with obtaining a prior
authorization may cause physicians to
cease prescribing drugs that require that
a prior authorization requirement be
satisfied.
Response: As previously noted,
information regarding a plan’s benefit
design as it pertains to all enrollees is
not a coverage determination. We will
allow plans the flexibility to determine
how to structure their formularies,
subject to our approval. As a result,
plans are permitted to determine which
medications are placed on their prior
authorization lists. The decision to
place a medication on a prior
authorization list is not a coverage
determination and is not subject to
appeal. However, when a plan processes
a prior authorization request, the plan’s
determination on whether to grant
approval of a drug for an individual
enrollee constitutes a coverage
determination that is subject to appeal.
In addition, if a plan denies a drug,
because the enrollee failed to seek prior
authorization, that would also constitute
a coverage determination subject to
appeal.
Comment: One commenter requested
that we define ‘‘State law’’ where we
stipulate in § 423.560 that a
representative authorized under State
law may act as an authorized
representative on behalf of an enrollee.
The commenter suggests that State law
be defined as a constitution, statute,
regulations, rule, common law, or other
State action having the force and effect
of law.
Response: We agree that ‘‘State law’’
may include a constitution, statute,
regulation, rule, common law, or other
State action having the force and effect
of law. However, we do not believe that
it is necessary to define State law under
§ 423.560.
Comment: We received one comment
suggesting that we define the phrase
‘‘furnished by the PDP’’ in
§ 423.566(b)(1), which limits actions
that are coverage determinations to the
failure to provide or pay for a covered
Part D drug that an enrollee believes
may be furnished by the plan. The
commenter is concerned that if an
enrollee receives prescription drugs
while satisfying the deductible or
during the period between the initial
coverage limit and the out-of-pocket
threshold, a plan could determine that
it did not furnish the drugs to the
enrollee. As a result, enrollees who
receive prescription drugs during such
periods would not receive a coverage
determination and would therefore be

E:\FR\FM\28JAR2.SGM

28JAR2

4352

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

excluded from the appeals process. The
commenter maintains that enrollees
should be entitled to appeal a
determination that denies coverage even
when a plan does not pay for the
prescription drug because of the
enrollee’s cost-sharing obligations.
Response: Our intent in
§ 423.566(b)(1) was to indicate that the
failure to provide or pay for a Part D
drug that the enrollee believes may be
covered by the plan results in a coverage
determination. Rather than define what
‘‘furnished by the PDP’’ means, we
replaced ‘‘furnished’’ with ‘‘covered’’ to
make clear that coverage determination
and appeals procedures do apply in
these situations.
5. Formulary Exceptions Procedures
(§ 423.578)
a. Exceptions to a Plan’s Tiered CostSharing Structure
The MMA specifies that an enrollee
may request an exception to a plan’s
tiered cost-sharing structure and that
plans must have a process in place to
handle such requests. Under such an
exception, a ‘‘non-preferred drug could
(emphasis added) be covered under the
terms applicable for a preferred drug’’
under certain conditions. At a
minimum, the prescribing physician
will have to determine that the preferred
drug either will not be as effective for
the individual, or will have adverse
effects for the individual, or both.
Unfavorable determinations constitute
coverage denials and are subject to all
the appeal rights discussed in subpart M
of part 423.
We proposed under § 423.578 that a
plan must establish a tiering exceptions
process that addresses each of the
following sets of circumstances: (1) the
enrollee is using a drug and the
applicable tiered cost-sharing structure
changes during the year; (2) the enrollee
is using a drug and the applicable tiered
cost-sharing structure changes at the
beginning of a new plan year; and (3)
there is no pre-existing use of the drug
by the enrollee.
While we thought it necessary to
require plans to include certain criteria
in the tiering exceptions process, we
also recognized the need to avoid a
situation where a plan’s cost-sharing
rules are effectively driven by the tiering
exceptions criteria, rather than the other
way around.
At proposed § 423.578(a)(2) we
outlined a limited number of elements
that must be included in any plan’s
tiering exceptions criteria: (1) a
description of the process used by the
plan to evaluate the physician’s
supporting statement; (2) consideration
of the cost of the requested drug

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

compared to that of the preferred drug;
(3) consideration of whether the
formulary includes a drug that is the
therapeutic equivalent of the requested
drug; and (4) consideration of the
number of drugs on the plan’s formulary
that are in the same class and category
as the requested drug.
Consistent with existing MA rules, we
proposed that an enrollee, the enrollee’s
authorized representative, or the
prescribing physician may request a
tiering exception. The statutory
requirement that the prescribing
physician determine that the preferred
drug either would not be as effective for
the individual generally, or would have
adverse effects for the individual,
constitutes a minimum threshold for
approving an exception request. We
proposed at § 423.578(a)(4) that a plan
may require a written supporting
statement to that effect from the
prescribing physician, as well as certain
limitations on the content requirements
that plans could impose for these
supporting statements. We would
permit plans flexibility in how this
standard would be applied. For
example, a plan could require that a
physician certify that the preferred drug
would be less effective than the nonpreferred drug, or the plan could choose
to apply a more stringent standard (such
as requiring that the prescribing
physician’s supporting statement also
include the enrollee’s patient history or
require the enrollee to first try the plan’s
preferred formulary drug, absent
medical contraindications).
A plan’s exceptions procedures will
also be required to describe how a
determination on an exception request
will affect the enrollee’s cost sharing
obligations under the plan’s tiering
structure.
Comment: Several commenters
expressed concern regarding our
proposal to allow plans the flexibility to
establish exceptions criteria. Some
commenters opposed giving plans the
flexibility to determine their own
exceptions criteria because the MMA
requires the Secretary to establish
guidelines for the exceptions process.
Other commenters stated that drug
plans should establish their own criteria
to determine whether a preferred drug
would not be as effective or would have
adverse effects for the enrollee’s health
condition.
Response: We agree with commenters
that plans should impose some criteria
for making tiering exception
determinations, and in this final rule,
we are requiring that plans grant
exceptions when the plan determines
that the lower-tier drug would not be as
effective for the enrollee as the

PO 00000

Frm 00160

Fmt 4701

Sfmt 4700

requested drug, would have adverse
effects for the enrollee, or both. Other
than the above requirement, however,
we will not be overly prescriptive in
how tiering exception criteria are
designed and what criteria a plan uses
to determine whether a preferred drug
would not be as effective or would have
adverse effects for the enrollee.
Although the MMA requires plans to
develop an exceptions process for
requests involving a tiered cost-sharing
issue that is consistent with the
guidelines established by the Secretary,
it does not require the Secretary to
establish a comprehensive and uniform
set of criteria that plans must meet
when developing their exceptions
processes. We have established specific
requirements that plans must satisfy
when processing exceptions requests
that are the same as other coverage
determinations. They include, for
example, timeframes for decisionmaking; the consequences for failing to
make timely decisions; expedited
procedures when an enrollee’s life,
health, or ability to regain maximum
function could be seriously jeopardized;
detailed notices when exceptions are
denied; the right to appeal through a 4–
tiered administrative process, and if
necessary, to request judicial review;
and when the plan must continue
benefits. However, while plans must
design their exception criteria so that
drugs determined by the plan to be
medically appropriate for the enrollee
are covered, we do not believe that we
should require detailed standards that
go beyond such a medical necessity
requirement. This is particularly the
case for the reasons previously
mentioned, that is, allowing plans
flexibility, and our uncertainty of how
plans will develop formularies. Also, we
still have ultimate authority over what
the criteria will entail. Rather than
exercise this authority through the
establishment of specific exceptions
criteria, we believe that the most
appropriate policy is to review the
plans’ exceptions criteria as part of the
approval process, to ensure that the
criteria are reasonable and complete.
For example, we would likely expect
that a plan would establish different
types of criteria for different classes of
drugs. Thus, in some instances, tiering
exceptions may be connected to
demonstrated adverse effects based on
previous use of the lower tiered drug,
while in others, exceptions may be
linked to predictive adverse effects
based on knowledge of the enrollee’s
medical condition. While we are by no
means dictating the establishment of
separate criteria for each drug class or

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
category, a plan’s criteria should
encompass all drug classes. Thus, to the
extent that the plan chooses to
differentiate among drug classes, its
exceptions procedures need to clearly
explain which criteria apply for various
types of drugs or situations.
Additionally, we would not approve a
plan’s tiering procedures if they are
unreasonable. Similarly, we would not
approve a plan’s procedure that would
require demonstrated adverse effects in
every situation. Clearly, there are
situations in which enrollees would
suffer significant harm if they are
required to demonstrate adverse effects.
Comment: One commenter suggested
that plans only be required to maintain
an exceptions process for instances
where an enrollee is receiving a drug
that is affected by a plan’s mid-year
tiering change. The commenter believed
that the four categories established
under the proposed rule were
unnecessary.
Response: We disagree with the
commenter that a plan’s exceptions
procedures need only address instances
where an enrollee is using a drug that
is affected by a plan’s mid-year change
to its formulary tiers. We believe that a
plan’s exceptions procedures must
encompass all types of tiering exception
requests and have added language to
§ 423.578(a) to make clear that Part D
sponsors must have complete
exceptions procedures that grant
exceptions when the plan determines
that the factors under § 423.578(a)(4)
exist (that is, the lower-tiered drug
would not be as effective, would have
adverse effects, or both). Nevertheless,
we also recognize that the
circumstances raised by the commenter
involve perhaps the single most critical
aspect of a plan’s exceptions
procedures.
To reflect and emphasize the
importance of such circumstances
(where a tiering structure changes mid­
year and the enrollee has already been
using the drug), we are modifying
§ 423.578(a)(1) and (b)(1) to mention
only that circumstance as a situation
that plans must specifically address in
their exceptions procedures. By no
means does this change obviate the need
for complete exceptions procedures. A
plan must have exceptions procedures
that can be applied to all requests for
exceptions. Thus, for example, plans’
exceptions procedures would need to
address situations where an enrollee has
no pre-existing use of a drug in dispute
and the tiering structure changes mid­
year. However, the case of a beneficiary
who has a preexisting use of a drug and
where the tiering structure changes mid­
year represents the only set of

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

circumstances that needs to be
addressed distinctly.
We recognize that each plan is
required to notify enrollees of changes
that will occur in an annual notice of
coverage by October 31st each year.
Since enrollees have the option of
switching plans at the beginning of a
new plan year, an exceptions request
that has been approved may be
reviewed at the end of the year.
Consistent with plans notifying affected
enrollees of changes to their formularies
60 days in advance under
§ 423.120(b)(5), a plan must also notify
enrollees if the plan intends to change
the cost-sharing for a drug on its
formulary during the next enrollment
period. Therefore, enrollees will have
sufficient notice of any tiering changes
made at the beginning of a plan year to
either choose a new plan, or request an
exception.
Comment: We received numerous
comments concerning how the price for
a drug will be determined when there
are mid-year changes in the tiering
structure and an exception is approved.
Some commenters suggested that, when
there is a mid-year change in the tiering
structure, enrollees should be granted
continued access to drugs at the price
before the change. Other commenters
argued that we should define who
should receive continued access at the
price before the change. One commenter
argued that it would be impossible to
manage a benefit if enrollees could
obtain an exception that would permit
non-preferred drugs to be priced at the
generic drug level. A few commenters,
however, believed that, when there is a
mid-year change, we should not require
plans to provide access to drugs at the
price before the change.
Response: We agree that enrollees
who are receiving a medication affected
by a mid-year change in the tiering
structure must have a method for
ensuring that they are able to receive a
medically necessary drug at a given
cost-sharing amount when a tiering
exception is granted. Consistent with
section 1860D–4(g)(2) of the Act,
§ 423.578(c)(3) requires that where a
plan grants an exception to its tiered
cost-sharing structure, a non-preferred
drug will be covered under the terms
applicable for preferred drugs. Thus, if
a plan has a generic level in its tiering
structure, we would not expect the plan
to provide a non-preferred drug at the
generic level. In addition, if a plan has
developed a tier in which it places very
high cost and unique items, for
example, genomic and biotech products,
a plan may design its exception process
so that such Part D drugs are not eligible
for a tiering exception. We have added

PO 00000

Frm 00161

Fmt 4701

Sfmt 4700

4353

regulatory language to § 423.578 to make
these two points clear.
As stated in § 423.578(c), if a tiering
exception is granted, the enrollee will
be approved for coverage as long as the
prescribing physician continues to
prescribe the drug; the drug continues to
be safe for treating the enrollee’s disease
or medical condition; and the
enrollment period has not expired.
Comment: Many commenters
suggested that we develop a single welldesigned exceptions process in which
decisions are made based on the
medical needs of the enrollee. The
commenters maintained that a single
process may help streamline
administrative requirements and costs,
and one based on the medical needs of
the enrollee would address all three
circumstances proposed in § 423.578,
that is, where an enrollee is using a drug
and the applicable tiered cost-sharing
structure changes mid-year; the enrollee
is using a drug and the cost sharing
changes at the beginning of a new plan
year; or there is no pre-existing use of
the drug by the enrollee. Other
commenters recommended that the
certifying standard for physicians under
proposed § 423.578(a)(4) be revised to
comply with the statute.
Response: We partially agree with the
commenters, and have added regulatory
language that requires both offformulary and tiering exceptions to be
based on the medical needs of the
enrollee. However, tiering exceptions
are not typically offered in private
industry currently. While tiering
exception procedures must be
reasonable, complete, and based on
medical needs, as we discuss above, we
do not believe that it would be
appropriate at this stage to dictate a
single type of tiering exception
procedure that must be used by all
plans.
We also agree with the commenters
that the ‘‘certifying’’ standard for
physicians must be revised to comply
with section 1860D–4(g)(2) of the Act.
Note that the statute does not use the
term ‘‘certification,’’ and we believe that
this term may be interpreted too
formally. Therefore, we have modified
§ 423.578(a)(4) to require plans to obtain
a ‘‘supporting statement from the
prescribing physician that the preferred
drug for treatment of the same condition
either would not be as effective for the
enrollee, would have adverse effects for
the enrollee, or both. We have made
corresponding technical changes to the
regulation wherever the term
‘‘certification’’ was previously used.
We also believe that a physician must
be able to certify that the enrollee meets
one or both of these conditions orally or

E:\FR\FM\28JAR2.SGM

28JAR2

4354

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

in writing. A plan may require a
physician who provides an oral
supporting statement to subsequently
follow-up in writing, particularly where
a plan decides not to grant an exception.
The plan may require the prescribing
physician to provide additional
supporting medical documentation as
part of the written follow-up. A plan
may want to preserve the record in the
event the enrollee or physician requests
an appeal. However, we do not want to
create a process whereby physicians
must routinely provide written
supporting statements. Otherwise, such
an administrative burden could have the
unintended consequence of
discouraging exceptions requests when
enrollees need non-preferred drugs.
Finally, once a physician provides an
oral or written supporting statement, the
plan will review the request. The plan
may obtain other evidence, including
additional medical information from the
prescribing physician. After performing
its review, the plan must determine if
the enrollee’s condition can be treated
with the preferred drug. We removed
the content requirements for a
physician’s supporting statement, such
as the enrollee’s name, patient history,
primary diagnosis related to the
exceptions request, and why the nonpreferred drug is needed. Again, we do
not want to mandate that every
exceptions request must be processed
according to a listing of procedures. We
believe that plans are in the best
position to determine on a case-by-case
basis the type of information they need
to overcome the burden.
Comment: We received two comments
suggesting that, instead of creating a
separate definition of therapeutic
equivalence in proposed
§ 423.578(a)(2)(iii), we should apply the
same definition proposed in § 423.100.
Response: We agree with the
commenter. Therefore, we have deleted
the definition of therapeutic
equivalence in the proposed rule and
added a cross-reference to § 423.100.
Comment: A few commenters
recommended that we adopt a uniform
set of exceptions codes to be used by
physicians and pharmacists. One
commenter suggested that we work with
the National Council for Prescription
Drug Programs, Inc. to develop a
standard claim processing field that
payors and pharmacies would be
required to use for purposes of
communicating which tier is applied.
Both commenters argued that adopting
a uniform set of codes to be utilized by
plans, pharmacists, enrollees, and
physicians would streamline the
exceptions process and make it easier to
navigate.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Response: We appreciate the
commenters’ suggestions, but we believe
the entities that provide Part D plans are
in the best position to determine how to
communicate with physicians and
pharmacies. As we gain a better
understanding of how plans intend to
develop their formularies, we will work
with interested parties to ensure that
there are standard systems or
procedures in place to make the process
as simplistic as possible for
pharmacists, physicians, and enrollees
to navigate.
b. Exceptions and Appeals Rules for
Non-Formulary Determinations
Section 1860D–4(h)(2) of the Act
establishes a limitation on requests for
exceptions when a particular drug is not
on a plan’s formulary at all. The statute
specifies that an enrollee may appeal a
determination not to provide coverage
of a non-formulary drug ‘‘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 non-formulary
drug, would have adverse effects for the
individual, or both.’’
Notably, this limitation is set forth
under the ‘‘appeals’’ provisions of the
statute, as opposed to under the
preceding coverage determination and
redetermination provisions that are
discussed above for exceptions to tiered
cost-sharing rules. Thus, we believe the
intent of this provision is to limit
appeals to cases where the prescribing
physician has made the determination
described by the law.
Unlike for the tiering exceptions, the
statute does not specifically require that
plans develop an exceptions process to
review requests for exceptions for nonformulary drugs. However, the statute
under section 1860D–4(h)(2) of the Act
permits enrollees to appeal a
determination not to provide for
coverage of non-formulary drug only if
the prescribing physician determines
that all of the covered Part D drugs on
any tier of the formulary for treatment
of the same condition would not be as
effective for the enrollee as the nonformulary drug, would have adverse
effects, or both. As a result of the
statutory requirement that enrollees
obtain a physician’s determination to
request an appeal, we do not believe
that the statute intends to preclude an
enrollee from obtaining a coverage
determination from a plan absent a
determination by the prescribing
physician, or to require that the
physician’s determination alone will
result in a favorable coverage
determination by the plan. Therefore,
we proposed to require that plans also

PO 00000

Frm 00162

Fmt 4701

Sfmt 4700

establish exceptions criteria for
addressing these situations.
We stated our belief that requiring
plans to use an exceptions process to
review requests for coverage of nonformulary drugs would ensure that
enrollees know what standards are to be
applied and ensure that a plan’s
formulary is based on scientific
evidence rather than tailored to fit
exceptions and appeals rules for
formulary drugs.
Under the exceptions process
proposed at § 423.578(b), a plan would
be required to allow enrollees to request
(1) coverage of Part D drugs that are not
on a plan’s formulary; (2) continued
coverage of a drug the plan has removed
from its formulary; (3) an exception to
a plan’s policy regarding coverage for a
step therapy; and (4) an exception to a
plan’s dosing limitation.
A plan’s criteria would have to
include a description of the criteria it
would use to evaluate the prescribing
physician’s determination, clarify how
the plan will evaluate the relative safety
and efficacy of the requested drug, and
describe the cost-sharing scheme that
will be applied if coverage is provided.
Again, an enrollee, the appointed or
authorized representative, or prescribing
physician could request an exception,
and the plan could require a written
supporting statement from the
prescribing physician that the noncovered drug was medically necessary
to treat the enrollee’s disease or medical
condition. We proposed that an enrollee
would have the right to a
redetermination by the plan of any
unfavorable coverage determination.
Comment: One commenter suggested
that we not require plans to develop and
maintain an exceptions process for nonformulary drugs because it would make
formulary adherence more difficult for
plans to control.
Response: Although the statute does
not specifically require that plans
develop an exceptions process to review
requests for exceptions for nonformulary drugs, we continue to believe
that there is ample authority in the
statute to require plans to have
exception processes for off-formulary
drugs. First, section 1860D–4(h) of the
Act permits a beneficiary to request an
appeal of an off-formulary drug if the
prescribing physician determines that
all covered part D drugs on any tier of
the formulary under the plan for
treatment of the same condition would
not be as effective for the individual,
would have adverse effects, or both. We
do not believe that it is reasonable to
require a beneficiary to wait until the
appeal stage in order to receive an offformulary drug, when the plan could

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
just as easily determine at the initial
coverage determination stage that the
on-formulary drugs are not appropriate
for the beneficiary. In addition, the
entire structure of the benefit, as
explained in section 1860D–2 of the
Act, is a structure that assumes that
beneficiaries will have access to
medically necessary drugs when
appropriate, regardless of whether such
drugs are on or off the formulary.
Finally, under section 1860D–11(d)(2) of
the Act we have the authority to set
minimum standards for sponsors’
benefit packages, and under section
1860D–12(b)(3)(D) of the Act, we have
the authority to add contract terms to
PDP sponsor contracts. Based on all of
these authorities, we believe it is
appropriate to require plans to maintain
exception processes for off-formulary
drugs. Requiring plans to use an
exceptions process to review requests
for coverage of non-formulary drugs will
create a more efficient and transparent
process and will ensure that enrollees
know what standards are to be applied.
In addition, this requirement is
consistent with the industry standard
where private plans allow enrollees to
file exceptions to receive non-formulary
medications.
Comment: Several commenters
recommended that we require plans to
establish additional exceptions criteria,
including criteria that would preclude
the use of a formulary drug where the
enrollee experiences an adverse reaction
from the drug previously tried and
failed. Commenters believed that we
should develop exceptions criteria for
certain classes of drugs, namely those
used by special populations such as
beneficiaries with HIV/AIDS or mental
health patients. Other commenters,
however, believed that the exceptions
criteria should be limited to whether the
requested medication is appropriate for
the patient, as documented by the
prescribing physician.
Response: First, we agree with
commenters that exceptions criteria
should be designed to grant exceptions
in cases where a plan determines that an
off-formulary drug is medically
appropriate for an enrollee and that the
drug would have been covered but for
the fact that the drug is off-formulary.
We have added language to § 423.578(b)
to this effect. As stated above, we
believe the structure of the benefit
under section 1860D–2 of the Act, the
authority to create minimum standards
and additional contract terms, and the
requirement for off-formulary appeals,
provide ample authority for this
requirement. However, while plans
must design their exception criteria so
that drugs determined by the plan to be

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

medically appropriate for the enrollee
are covered, we do not believe that we
should require detailed standards that
go beyond such a medical necessity
requirement. This is particularly the
case because we do not know how plans
will design their formularies. These
comments illustrate the complexity of
attempting to do so. Instead, the plan
must establish criteria that encompass
all exceptions requests and the
procedural elements that must be
followed to process a request. We will
review these criteria as part of the plan
approval process.
The primary issue that plans must
address in a plan’s non-formulary
exceptions criteria is how it will
determine medical necessity. Although
plans must provide access to all Part D
drugs that they determine are medically
necessary (as that is described in
§ 423.578(b)(5)), we are not requiring
prescriptive requirements for the
methods that plans use to determine
medical necessity. Therefore, plans will
have some flexibility in creating the
criteria or methods, such as prior
authorization or step-therapy, to
determine whether a non-formulary
drug is medically necessary for an
enrollee. We agree that where an
enrollee’s prior use of a drug has proven
ineffective or caused adverse
consequences to the enrollee’s health,
the plan must not require the use of the
formulary drug as a condition in the
exceptions process. This is a key
component of the exceptions process,
which entails a written statement from
the prescribing physician that all
covered Part D drugs on any tier of the
formulary would not be as effective as
the non-formulary drug, would have
adverse effects for the enrollee, or both.
Note that such a statement does not
necessarily result in an automatic
approval of the request. Clearly, nothing
in this rule precludes a plan adopting a
process whereby it grants automatic
approval of a non-formulary drug upon
a physician’s supporting statement.
However, some plans may want
physicians to provide their rationale as
to why, for example, the formulary drug
would not be as effective for treating the
enrollee’s condition.
Finally, we do not believe that the
statute permits us to develop unique
exceptions criteria for certain classes of
drugs used by special populations.
Nevertheless, special populations will
benefit from the rights and protections
that the exceptions process affords all
enrollees.
Comment: Several commenters
requested us to provide an exception
that would permit an enrollee to obtain
a drug that is excluded from Part D.

PO 00000

Frm 00163

Fmt 4701

Sfmt 4700

4355

Response: We strongly disagree with
the commenters. The MMA mandates
that we only provide access to Part D
drugs and specifies certain categories of
drugs as excluded. Therefore, we do not
have the statutory authority to require
plans to provide access to drugs that are
excluded from Part D. As a result, we
have strengthened § 423.578(e) to
emphasize that nothing in the
exceptions process shall be construed to
allow an enrollee to use the exceptions
process to request or be granted
coverage for a prescription drug that is
not a Part D drug. However, we note that
while an enrollee cannot appeal the
policy that a drug is not a Part D drug
if excluded (that is, covered by Part B
or otherwise excluded from the
definition of Part D drug in § 423.100),
the enrollee can request a coverage
determination or an appeal regarding
the policy as it applies to his or her set
of facts. In other words, the enrollee can
seek to demonstrate that the policy is
not applicable in a particular instance
based on the facts of his or her case.
This is the same standard used in claims
appeals where a beneficiary cannot
appeal a national coverage
determination (NCD) through the claims
appeals process, but may appeal
whether the NCD should apply in his or
her case.
Comment: One commenter sought
clarification on whether formulary use
includes the type of the dosage, for
example, liquid, capsule, tablet, and
packaging, such as bubble wraps for
long-term care facility residents. The
commenter argued that ‘‘formulary use’’
includes more than just dose restriction,
and § 423.578 must be revised to meet
the statutory requirements that the
Secretary establish guidelines for the
exceptions process.
Response: We believe that an enrollee
must be permitted to file an exception
when he or she cannot take the dosage
form of a medication that is included on
a plan’s formulary. If a medication is
offered in tablet and liquid form but the
plan only covers the tablet form on its
formulary, an enrollee must be
permitted to file an exception to obtain
the liquid form of the medication if the
prescribing physician indicates that the
tablet form either would not be as
effective for the enrollee, would have
adverse effects, or both. For example, an
elderly enrollee may not be able to
swallow the tablet form. Therefore, we
clarified in § 423.578(b) that ‘‘formulary
use’’ includes the form of the dosage.
However, we do not agree that
‘‘formulary use’’ includes packaging
because the packaging of a drug, for
example, bubble-wrapping, blistercards, cassettes, does not impact the

E:\FR\FM\28JAR2.SGM

28JAR2

4356

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

effectiveness of a medication. In
addition, activities related to the
transfer of Part D drugs are included in
the negotiation of the dispensing fee
under section 1860D–2(d)(1)(D) of the
Act.
Comment: A few commenters
requested that we clarify who should
make the determination as to whether a
drug is no longer safe and effective for
treating an enrollee’s disease or medical
condition. The commenters suggested
that an authoritative agency or
organization such as the FDA should
make this type of determination.
Response: Plans may discontinue
coverage of a medication for safety
reasons, and in their exceptions
procedures for non-formulary drugs,
must include a process for comparing
applicable medical and scientific
evidence on the safety and effectiveness
of the requested non-formulary drug
with the formulary drug. Thus, in some
instances, plans themselves may make
an initial determination whether a drug
is no longer safe and effective for the
treatment of a disease or medical
condition, subject to the appeals
process. Plans also will rely on safety
information generated by an
authoritative government body such as
the FDA (for example, relying on
information released in an FDA
Medwatch form) when discontinuing
coverage of a medication for safety
reasons.
c. Exceptions and Appeals Rules for a
Plan’s Tiered Cost-Sharing Structure
and Non-Formulary Determinations
We received several comments that
raise issues related to § 423.578(a) and
(b). Instead of addressing the comments
in each of the preamble discussions in
sections 5.a. and 5.b. above, we have
consolidated the comments and
responses in this section since the
issues are common to exceptions
involving tiered cost-sharing structure
and non-formulary issues.
Comment: We received numerous
comments regarding the weight that
plans will give a physician’s supporting
statement. Many commenters suggested
that the physician’s supporting
statement carry great weight in
determining whether an enrollee should
receive a prescribed medication. Other
commenters suggested that, if a
physician prescribes a medication for an
enrollee, he or she should automatically
receive it. Still other commenters
suggested that once a physician certifies
that an enrollee should receive a
prescribed medication, the burden
should shift to the plan to show why the
physician’s supporting statement is not
dispositive. The commenters argued
that the burden on physicians to justify

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

their drug selection decisions is too
great under the proposed rule. In order
to make the process faster and simpler
for enrollees, physicians, and
pharmacists, the physician’s supporting
statement should be the primary factor
in determining whether an enrollee
should receive a requested medication.
Response: As noted above, we agree
with the commenters that a physician’s
opinion must carry great weight.
However, we do not agree that a
physician’s supporting statement
necessarily means that an enrollee must
automatically receive a drug. If the
Congress intended such an outcome,
there would be no need for plans to
develop exceptions procedures.
Therefore, once a physician provides a
supporting statement that an enrollee
should receive a prescribed medication,
the plan will review the request. The
plan may obtain other evidence,
including additional medical
information from the prescribing
physician. After performing its review,
the plan must determine if the enrollee’s
condition can be treated with the
preferred or formulary drug. We note
that if an enrollee disagrees with the
plan’s exception determination, it can
still appeal that determination through
the regular appeals process.
Comment: We received several
comments objecting to an option
considered by us that would require an
enrollee who is using a drug that is
subsequently removed from the plan’s
formulary, or is no longer designated as
the ‘‘preferred drug,’’ to try a preferred
drug(s), and experience adverse effects,
before being permitted to resume using
the original drug.
Response: We agree with the
commenters that we must not add an
exceptions criterion that will require an
enrollee to try a preferred drug(s) and
experience adverse effects before being
permitted to resume using the original
drug. However, we wish to point out
that nothing in this rule precludes a
plan from establishing such a
requirement in its exceptions process.
As mentioned in our earlier response,
we do not believe that an enrollee who
has used a formulary or preferred drug
and has already experienced adverse
consequences should be required to take
the same harmful drug, as certified by
the prescribing physician. For instance,
most clinicians find it inappropriate to
change the medication of a patient
stabilized on a selective serotonin
reuptake inhibitor (SSRI) that was
moved from a formulary, or from a
lower tier to a higher tier, because the
effectiveness level of SSRIs is not
reached for two weeks. However, the
scenario that the commenters have

PO 00000

Frm 00164

Fmt 4701

Sfmt 4700

described is quite different. There, the
situation involves a drug that has been
removed from the plan’s formulary or
moved to a different tier, subsequent to
an enrollee’s use of a drug. Because the
enrollee would be affected by the plan’s
formulary or tiering change, the plan is
obligated to provide a notice to the
enrollee 60 days in advance, or continue
coverage of the drug as required under
subpart C of this rule. Thus, this gives
the enrollee sufficient time to request an
exception. If the physician indicates
that the formulary or preferred drug
would have an adverse effect on the
enrollee’s health, the plan likely will
not require the enrollee to take the drug.
However, if the physician’s supporting
statement does not demonstrate that the
drug would have adverse consequences
or would be ineffective, we would not
prohibit the plan from requiring the
enrollee to try the formulary or
preferred drug. For example, in many
instances, a patient may be able to try
a formulary alternative statin
medication when their current statin
medication is being removed from the
formulary. However, if the enrollee
experiences adverse effects after trying
the drug, the plan must then grant the
exception. In addition, as we state
above, there may be some cases where
requiring a beneficiary to try a drug and
experience adverse effects would be
unreasonable.
d. Treatment of Determinations
Regarding Exceptions Requests
We proposed at § 423.578(c)(1) that
determinations on exception requests
would constitute plan coverage
determinations under § 423.566 and
should be completed in the same
timeframes. Enrollees would then have
an opportunity to request a plan
redetermination. Unfavorable
redetermination decisions could then be
appealed to the IRE. If the IRE
determines that the plan correctly
applied its exceptions criteria, the
plan’s determination would be upheld.
Thus, we proposed that the IRE would
not have any discretion regarding the
validity of the plan’s exceptions criteria
or formulary. Instead, we would be
responsible for evaluating and
approving a plan’s exceptions criteria
and formulary as part of the annual plan
approval process. In many instances,
however, evaluating whether the plan
had appropriately applied its own
exceptions criteria for a formulary
exception would necessarily involve an
element of medical judgment (for
example, if the plan had a rule that an
enrollee would need to suffer significant
adverse effects by using the Part D drug
covered by the plan in order to obtain
an exception, the IRE would need to

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
review whether such adverse effects had
been experienced). In those situations,
we stated the IRE’s medical staff would
be responsible for reviewing the plan’s
determination as to whether the
formulary exceptions criteria had been
applied properly. Because the final rule
requires a Part D plan’s formulary and
tiering exceptions process to grant an
exception when the plan determines it
is medically appropriate, the IREs will
likely be reviewing medical necessity in
numerous cases.
Although not required by statute, we
thought it important to put in place
certain safeguards regarding the issuing
and effect of a coverage determination
made as part of the exceptions process.
We believed that certain safeguards
would help to ensure that the
exceptions process was both fair and
efficient for enrollees. First, to ensure
that enrollees who file exceptions
requests for drugs that are being
removed from a plan’s formulary are not
disadvantaged by a plan’s failure to
issue a timely decision, we proposed in
§ 423.578(c)(1) and § 423.578(c)(2) that
if a plan failed to issue a timely
decision, the plan would be required to
continue providing coverage until a
decision was made on the request.
Proposed § 423.578(c)(2)(i) allowed
enrollees to receive up to a one-month
supply of the requested drug, but a plan
could adjust the supply to account for
a shorter time frame. As noted above,
we have revised proposed
§ 423.578(c)(2) to be consistent with our
requirement in MA that an MA plan’s
failure to issue its reconsideration
within the appropriate timeframe
constitutes an adverse determination
which must be automatically forwarded
to the IRE within 24 hours of the
expiration of the timeframe. We also
provided, at proposed § 423.578(c)(3),
that once a plan approved a drug
pursuant to the exceptions process, an
enrollee would be entitled to continue
receiving refills of the drug at the
prescribing physician’s discretion.
The final safeguard implemented
under proposed § 423.578 prohibited
plans from assigning drugs approved
under either exceptions process to a
special formulary tier, co-payment, or
other cost-sharing requirement. In other
words, plans must employ reasonable
criteria in determining the co-payments
or other cost-sharing requirements of
drugs approved for coverage under the
exceptions process.
Comment: We received several
comments regarding the level of costsharing that enrollees would be required
to pay when an exception is approved.
Some commenters suggested that all
drugs be approved at the preferred level

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

of cost-sharing. Another commenter
agreed that non-preferred drugs should
be approved at the cost-sharing level
applicable for preferred drugs when an
exception request is approved, but
recommended that we clarify that nonpreferred drugs can not be approved at
the generic cost-sharing level.
Response: We agree with the
commenters that, when an exceptions
request involving a tiering issue is
approved, the enrollee is entitled to the
amount of cost-sharing that applies for
a preferred drug, but not for a generic
drug. We have clarified this under
§ 423.578(c)(3).
We do not agree that we must
mandate the amount of cost-sharing that
applies when an exception involving a
non-formulary drug is approved.
Section 1860D–4(h)(2) of the Act
requires plans to treat non-formulary
Part D drugs approved under the
exceptions process as being included on
the plan’s formulary for purposes of
determining whether an enrollee has
reached the annual out-of-pocket
threshold specified in section 1860D–
2(b)(4)(B)(i) of the Act. However, the
MMA does not mandate that plans
apply the cost-sharing terms of a
particular tier when plans establish tiers
to manage covered Part D benefits.
Therefore, we do not specify in
§ 423.578(c) the tier that must be
applied when a plan approves an
exceptions request that involves a nonformulary drug. Instead,
§ 423.578(b)(2)(iii) gives plans the
flexibility to determine which level of
cost-sharing will apply when it
approves an exceptions request
involving non-formulary drugs. Plans
must explain in its exceptions criteria
the cost-sharing scheme that will be
applied. Allowing plans the flexibility
to determine which level of cost-sharing
will apply is consistent with section
1860D–2(b)(2) of the Act, which permits
a plan to establish tiers to manage its
covered Part D benefits so long as the
co-payments associated with the plan’s
tiers meet the actuarial equivalence
standard in section 1860D–2(b)(2)(A)(ii)
of the Act. If we required plans to apply
the cost-sharing amount that applies to
covered part D drugs at a specific costsharing level, we would impede a plan’s
flexibility to develop its tiered costsharing structure.
We note that plans are prohibited
under § 423.578(c)(4)(ii) from
establishing a special formulary tier or
other cost-sharing requirement that is
applicable to non-formulary Part D
drugs that are approved under the
exceptions process. As mentioned
previously, we will review all of the
plans’ exceptions criteria and determine

PO 00000

Frm 00165

Fmt 4701

Sfmt 4700

4357

if they are appropriate and meaningful.
We have clarified under § 423.578(c)(3)
through (4) the difference between how
exceptions involving tiering and nonformulary issues must be treated after
approval.
We would also like to clarify that, if
a plan approves an exception for a nonformulary drug, an enrollee may not
request a tiering exception for the nonformulary drug. Although, section
1860D–4(h)(2) of the Act requires plans
to treat non-formulary Part D drugs
approved under the exceptions process
as being included on the plan’s
formulary, it does so only for purposes
of determining whether an enrollee has
reached the annual out-of-pocket
threshold. Plans are not required to add
a non-formulary drug to its formulary
once an exception is granted. Therefore,
although a non-formulary drug could be
obtained at the amount of cost-sharing
that applies to drugs on a plan’s nonpreferred tier under the exceptions
process, the ‘‘non-formulary drug’’ is
not a ‘‘non-preferred drug,’’ and only
non-preferred drugs are subject to the
exceptions process.
Comment: We received one comment
recommending that we delete the
requirement in proposed
§ 423.578(c)(3)(ii) which would prohibit
plans from assigning drugs approved
under an exceptions request to a special
formulary tier, co-payment, or other
cost-sharing requirement. The
commenter acknowledges that the
provision is derived from the statute,
but maintains that the provision is
unnecessary because the commenter
believes that we have presented two
options for cost-sharing (payment at the
preferred and generic cost-sharing
levels) that constitute a special
formulary tier.
Response: We disagree with the
commenter that we have created a
special formulary tier. We believe that it
is necessary to include in
§ 423.578(c)(4)(ii) a provision that will
ensure that plans do not assign drugs
approved under a non-formulary
exceptions request to a special
formulary tier, co-payment, or other
cost-sharing requirement. This policy is
consistent with the statute.
Comment: Several commenters
contended that, when an exceptions
request is approved, the approval
should not be for an indefinite period of
time. The commenters argued that we
should include provisions for limiting
indefinite exceptions based on safety or
accepted clinical practice standards,
including step-therapy and length of
therapy edits. Some commenters
suggested that plans be permitted to
annually re-evaluate exceptions that

E:\FR\FM\28JAR2.SGM

28JAR2

4358

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

have been approved. However, other
commenters believed that proposed
§ 423.578(c)(3) provided important
beneficiary protections to the extent that
the enrollee would not need to renew an
exceptions request so long as the
prescribing physician continues to
prescribe the drug.
Response: We agree that plans must
continue providing a drug that was
approved under the exceptions process
so long as the prescribing physician
continues to prescribe the medication
and the medication continues to be
considered safe for treating the
enrollee’s condition. However, we do
not believe that an approval should last
indefinitely. Therefore, we have added
§ 423.578(c)(4) to provide that once an
exceptions request is approved, the plan
must provide coverage of the drug so
long as the enrollee also continues to be
a member of the plan, or the enrollment
period has not expired, whichever is
sooner. Thus, in no case will a plan be
required to continue coverage beyond
the plan year.
6. Appeals
a. Redeterminations (§ 423.580 through
§ 423.590)
Sections 423.580 through § 423.590
explain the right to a redetermination
and the requirements that apply to plans
for both standard and expedited
redeterminations. If a decision regarding
a coverage determination is unfavorable
(in whole or in part) to the enrollee, the
enrollee may file an oral or written
request with the plan for a
redetermination on the decision.
The proposed regulations did not
identify Social Security Administration
(SSA) field offices as possible locations
for filing redetermination requests.
Using any filing location other than the
plan itself can significantly affect the
speed with which the appeal is
resolved. Moreover, given that section
931 of the MMA mandates the transfer
of responsibility for Medicare appeals
from SSA to DHHS by no later than
October 1, 2005, we believed that an
explicit regulatory reference to SSA
field offices would not be appropriate.
For an expedited redetermination, an
enrollee or the prescribing physician
(acting on behalf of an enrollee) may
submit an oral or written request for
redetermination. However, requests for
payment of drugs already received
would not be expedited. The proposed
requirements for making standard
redeterminations for requests involving
covered benefits in proposed
§ 423.590(a) specified that the plan
would issue its redetermination as
expeditiously as the enrollee’s health
condition required, but no later than 30

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

calendar days from the date of receipt of
the request.
Under proposed § 423.590(b), for
standard redeterminations involving
requests for payment, the plan would be
required to issue its redetermination no
later than 60 calendar days from the
date of receipt of the request. In the case
of expedited redeterminations,
§ 423.590(d) specified that a plan would
complete its redetermination and give
the enrollee and the prescribing
physician involved, as appropriate,
notice of its determination as
expeditiously as the enrollee’s health
condition required, but no later than 72
hours after receiving the request. For
both the standard and expedited
redetermination for covered benefits,
the plan could extend the timeframe for
making its determination by up to 14
calendar days if the enrollee requested
the extension, or if the plan justified a
need for additional information and
how the delay would be in the interest
of the enrollee. An extension would not
be provided for redeterminations
involving requests for payment. If the
plan’s redetermination resulted in an
affirmation, in whole or in part, of its
original adverse coverage determination,
the plan would be required to give
written notification to the enrollee and
advise the enrollee of the right to file an
appeal with the IRE that contracts with
us.
Comment: Several commenters asked
us to define ‘‘good cause’’ for extending
the timeframe for filing a
redetermination request in § 423.582(c).
Response: Although we have not
defined ‘‘good cause’’ in the regulations
applicable to either MA or prescription
drug appeals, we believe that it is useful
to provide examples of good cause to
plans. Examples of circumstances when
good cause may be found to exist
include, but are not limited to, the
following situations: (1) the enrollee
was prevented by serious illness from
contacting the plan in person, in
writing, or through a friend, relative, or
other person; (2) the enrollee had a
death or serious illness in his or her
immediate family; (3) important records
were destroyed or damaged by fire or
other accidental cause; (4) the plan, or
its designated entity, gave the enrollee,
appointed or authorized representative,
or prescribing physician incorrect or
incomplete information about when and
how to request a redetermination; (5)
the enrollee, appointed or authorized
representative, or prescribing physician
did not receive notice of the
determination or decision; or, (6) the
enrollee, appointed or authorized
representative, or prescribing physician
sent the request to another Government

PO 00000

Frm 00166

Fmt 4701

Sfmt 4700

agency in good faith within the time
limit and the request did not reach the
correct plan until after the time period
had expired. Again, these examples are
not an exhaustive list, but are
illustrative of the kinds of scenarios that
a plan might find good cause for
extending the filing deadline.
Comment: We received many
comments that argued that the 30-day
redetermination timeframes were
unreasonably long and should be
shortened.
Response: As mentioned earlier, we
agree with the commenters that the
proposed adjudication timeframes are
too long. Therefore, redeterminations by
the plan must be made as expeditiously
as the enrollee’s health condition
requires, but no later than 72 hours for
expedited cases and 7 days for standard
cases. In response to the concern raised
by the commenters regarding the length
of time it takes for an enrollee to be
reimbursed, we are no longer
distinguishing between payment and
service-related disputes. As previously
mentioned, we reduced the timeframe
for plans to make standard
redeterminations to 7 days in
§ 423.590(a) and (b). Again,
redeterminations that involve requests
for payment cannot be expedited
because a medical emergency does not
exist for an enrollee who already
obtained the medication in dispute.
Comment: Some commenters did not
support the provision at § 423.586,
which would require plans to have
methods in place for receiving evidence
in person because it is unduly
burdensome for plans to receive
evidence in person.
Response: We disagree that permitting
enrollees or prescribing physicians to
submit evidence in person is unduly
burdensome. The right to present
evidence in writing as well as in person
is consistent with MA, and we
anticipate that Part D enrollees may
want to deliver evidence in person
rather than mailing their materials to
plans. Therefore, plans must have
procedures in place for accepting
evidence in person from enrollees,
including, for example, the ability to
accept evidence delivered by enrollees
at the plan’s physical location or by
telephone. However, we note that this
requirement is not intended to require
plans to provide in-person hearings for
enrollees.
b. Independent Review Entity (IRE)
Reconsideration (§ 423.600 through
§ 423.604)
The MMA gives the Secretary the
flexibility to establish an appeals
process similar to that used for the MA
appeals process. Thus, the proposed IRE

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
reconsideration process set forth at
§ 423.600 through § 423.604 was much
like that applicable to MA organizations
under Part C. Note that when the plan’s
redetermination affirms, in whole or in
part, its adverse coverage determination,
any issue remaining in dispute could be
appealed by the enrollee to the IRE that
contracts with us. However, unlike
under the MA program, plan
redeterminations involving tiering
issues or coverage of a non-formulary
drug would not be automatically
forwarded to the IRE. Instead, an
enrollee would need to request an IRE
review. This proposed requirement
modified the MA procedure that affords
automatic referral to the IRE whenever
the MA organization’s original denial
was upheld by the organization’s
redetermination.
At § 423.600, we proposed that an
enrollee who was dissatisfied with the
plan’s redetermination could file a
written request for reconsideration by
the IRE. We also proposed that when an
enrollee filed for an appeal, the IRE
would be required to solicit the views
of the prescribing physician. In order to
request an off-formulary drug, the
prescribing physician would be required
to indicate 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. To be consistent with our
requirement in § 423.590(f), we added
(e) to § 423.600, which requires
reconsiderations to be made by a
physician with expertise in the field of
medicine that is appropriate for the
services at issue 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).
Section 423.602 proposed the
requirements for the IRE reconsideration
determination notice, including the
requirement that if the determination
were adverse, the enrollee must be
informed of the right to request an ALJ
hearing and the procedures that must be
followed to obtain the hearing.
Section 423.604 of our proposed rule
explained that a reconsideration by the
IRE was final and binding on the
enrollee and the plan, unless the
enrollee requested an ALJ hearing.
Comment: We received a number of
comments regarding automatic
forwarding of redeterminations to the
IRE. While a few commenters supported
our decision to require enrollees to
request an IRE reconsideration, many
argued that cases should be
automatically forwarded as provided in

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

MA to ensure that enrollees receive an
independent review of a plan’s
redetermination. The commenters
maintained that the automatic
forwarding of unfavorable
redeterminations to the IRE is necessary
to prevent enrollees from experiencing a
lapse in coverage due to the length of
time that it takes for an appeal to receive
an independent review. Some
commenters also disagreed that the
dollar value of drug appeals would
involve relatively small monetary
amounts, which we reasoned that
forwarding all adverse redeterminations
to the IRE would be inefficient.
Response: As previously mentioned,
we have streamlined the appeals
process by shortening the adjudication
timeframes and requiring plans to either
provide notice to enrollees 60 days in
advance of a change to its formulary or
provide notice and a 60-day supply of
a medication that is affected by a
formulary change. Thus, enrollees will
not be faced with any lapses in coverage
of a medication they are already taking
by being required to request a
reconsideration with the IRE directly. In
addition, even if the amount in
controversy for reconsiderations is
higher on average than originally
anticipated by us, we do not believe that
requiring enrollees to request appeals
has any bearing on the process.
Therefore, § 423.600 requires that an
enrollee who is dissatisfied with the
plan’s redetermination may file a
written request for reconsideration with
the IRE. We note that we have
eliminated the plan as an alternative
filing location since the decisionmaking timeframe begins upon receipt
of the IRE’s request. This change
ensures that there are no delays in
enrollees receiving timely responses.
Comment: Some commenters stated
that the scope of an IRE’s review should
not be limited to whether a plan applied
its exceptions criteria correctly.
Response: We agree with the
commenters that the IRE’s review must
not be limited to whether a plan applied
its exceptions criteria correctly. As
stated above, plans’ exceptions
procedures must include measures to
grant an exception when the plan
determines that an exception would be
medically appropriate. Because these
determinations will be subject to review
by the IRE, the IRE will necessarily also
review whether a drug is medically
necessary. Therefore, the IRE’s medical
staff also must review the plan’s
medical necessity determination in
addition to whether the plan properly
applied its exceptions criteria for the
individual in question. Examining the
record de novo using the plan’s

PO 00000

Frm 00167

Fmt 4701

Sfmt 4700

4359

exceptions criteria, as approved by us,
and making an independent medical
necessity determination will form the
basis for the IRE’s decision. However,
the IRE is prohibited from ruling on the
validity of a plan’s exceptions criteria or
formulary. Only we can evaluate and
decide whether to approve a plan’s
exceptions criteria and formulary as part
of the annual plan approval process.
Comment: We received several
comments requesting that we specify
the method under § 423.600(b) by which
the IRE can solicit the views of the
prescribing physician.
Response: The IRE may solicit the
views of the prescribing physician
either orally, or in writing. We also
clarified that a written account of the
prescribing physician’s views (prepared
by either the prescribing physician or
IRE, as appropriate) must be contained
in the IRE’s record so that, if appealed,
the ALJ, MAC, or Federal court will be
able to review all of the evidence
considered or disregarded by the
reviewing entity.
Comment: A few commenters
recommended that we require requests
for IRE review to be filed directly with
the IRE, as opposed to alternative
locations, to avoid delays.
Response: We agree with the
commenter, and as mentioned above,
have modified § 423.600(a) to require
enrollees to file requests for IRE review
directly with the IRE instead of
permitting enrollees to choose whether
to file a request with the IRE or plan.
Comment: One commenter
recommended that enrollees and
prescribing physicians should be able to
submit additional evidence to the IRE.
Response: We agree with the
commenter, and like under MA,
enrollees and prescribing physicians
must have an opportunity to submit
additional evidence to the IRE.
Comment: We received one comment
suggesting that we require physician
certifications to accompany all requests
for reconsideration by an IRE and
hearing by an ALJ. The commenter
believed this requirement would ensure
that the reconsiderations are focused on
medical necessity rather than patient
preference.
Response: We agree that supporting
statements from prescribing physicians
are often necessary for making proper
determinations, especially when
medical necessity is at issue. However,
since the IRE is required to solicit the
views of the prescribing physician, it is
not necessary to require that supporting
statements from physicians accompany
all requests for IRE reconsiderations or
ALJ hearings. In fact, IREs may not
always be called upon to make medical

E:\FR\FM\28JAR2.SGM

28JAR2

4360

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

judgments. For example, the definition
of a Part D drug excludes ‘‘agents when
used for anorexia, weight loss, or weight
gain.’’ See § 423.100 citing section
1927(d)(2) of the Act. An IRE may be
called upon to review whether an agent
was in fact used for anorexia, weight
loss or weight gain (and therefore
excluded from the definition of Part D
drug), or whether it was used for some
other purpose.
Comment: One commenter suggested
that we require IREs to include
information about an enrollee’s right to
an ALJ hearing, the procedure for
requesting it, and the amount in
controversy threshold amount required
for an ALJ hearing in the notices of
reconsideration.
Response: Section 423.602(b)
specifies the requirements for the IRE
reconsideration determination notice,
including the requirement that if the
determination is adverse, the enrollee
must be informed of the right to request
an ALJ hearing if the amount in
controversy meets the requirements of
§ 423.610, and the procedures that must
be followed to obtain the hearing.
c. Administrative Law Judge (ALJ)
Hearings, Medicare Appeals Council
(MAC) Appeals, and Judicial Review
(§ 423.610 through § 423.630)
As stated above, section 1860D–
4(h)(1) of the Act merely requires the
Secretary to establish a reconsideration
and appeals process that is ‘‘similar’’ to
the process used for MA organizations
under the authority of sections
1852(g)(4) and (5) of the Act. Although
we believe the Congress gave us a good
deal of discretion in designing these
procedural rules under Part D, we
determined as a policy matter to adopt
most of the ALJ, MAC, and judicial
review procedures currently used in the
MA program.
Section 1852(g)(5) of the Act provides
the right to a hearing and to judicial
review for an enrollee dissatisfied by
reason of the enrollee’s failure to receive
a Part D drug to which he or she
believes he or she is entitled, and at no
greater charge than he or she believes he
or she is required to pay. Section
1852(g)(5) of the Act also specifies the
amount in controversy needed to pursue
a hearing and judicial review, and
authorizes representatives to act on
behalf of individuals that seek appeals.
As provided in proposed § 423.610, if
the IRE’s reconsideration determination
is not fully favorable, the enrollee may
request a hearing before an ALJ if the
amount remaining in controversy meets
the threshold requirement established
annually by the Secretary. The
threshold requirement will be published
annually in the Federal Register. We

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

note that in § 423.612 (a) of the
proposed rule, we required enrollees to
file their requests for ALJ review with
the entity specified in § 423.582(a).
However, we did not intend that
requests for ALJ hearing be filed with
the Part D plan sponsor. Therefore, we
modified § 423.612(a) of this final rule
to require enrollees to file written
requests for an ALJ hearing with the
entity specified in the IRE’s
reconsideration notice. The plan is not
considered a party to the ALJ hearing,
but may participate in the hearing at the
discretion of the ALJ. If the ALJ hearing
does not result in a fully favorable
determination, the enrollee may request
MAC review of the ALJ decision. Unlike
under MA, the plans do not have the
right to request an appeal of an ALJ
decision with which the plan disagrees.
Following the administrative review
process, the enrollee is entitled to
judicial review of the final
determination if the amount remaining
in controversy meets the threshold
requirement established annually by the
Secretary and published in the Federal
Register.
Comment: We received several
comments expressing concern about
how we will calculate the amount
remaining in controversy. Many
commenters noted that the proposed
rule does not clearly state how ALJs and
the MAC will determine whether an
enrollee has met the applicable amount
in controversy (AIC) threshold. One
commenter recommended that
calculation of the amount remaining in
controversy include the projected cost
of the drug at issue for at least the
duration of the current calendar/plan
year, including consideration of any
cost sharing amount paid by the
enrollee or a third-party. Additionally,
commenters asked that we define the
term ‘‘projected value’’ as used under
§ 423.610(b) of the final regulation.
Response: In order to clarify how the
amount remaining in controversy will
be calculated, we have adopted a
modified version of the formula used in
the Medicare fee-for-service program to
determine the amount remaining in
controversy. Therefore, the amount
remaining in controversy will be
calculated by subtracting any allowed
amount under Part D, payments made
by third parties, deductible, and
coinsurance amounts applicable to the
particular Part D drug at issue from
either the projected value of the drug,
or, where the enrollee is seeking
reimbursement, the actual amount the
enrollee paid for the Part D drug. Like
the MA program, rather than putting
this formula in regulation, we will
include it in separate guidance, such as

PO 00000

Frm 00168

Fmt 4701

Sfmt 4700

CMS manuals, in order to adjust the
formula if necessary.
In response to comments we received
about defining the term ‘‘projected
value,’’ we have amended § 423.610(b)
to state that the projected value of a Part
D drug, for purposes of calculating the
amount remaining in controversy, shall
include any costs the enrollee could
incur based on the number of refills
prescribed for the drug in dispute
during the plan year.
Comment: Two commenters were
concerned that the aggregation of
multiple enrollee appeals would limit
the consideration given to individual
cases. Both commenters felt strongly
that the assessment of a particular
prescription drug for an enrollee
requires an evaluation of the enrollee’s
individual case, including his or her
medical condition, medical history and
other factors. To ensure that all
enrollees’ cases receive this type of
consideration, the commenters
recommended either reducing the AIC
threshold at the ALJ level of appeal so
that aggregation is almost never
necessary or precluding aggregation of
appeals by multiple enrollees.
Response: We first note that the ALJ
AIC is a statutorily established
threshold. Neither CMS nor the
Secretary has discretion to alter this
requirement. Nevertheless, we do not
agree with the commenters’ assessment
of the consideration individual appeals
will receive if multiple enrollees elect to
aggregate their appeals for purposes of
meeting the AIC threshold. Currently, in
the Medicare fee-for-service program,
two or more beneficiaries may combine
claims to meet the AIC requirement for
obtaining an ALJ hearing, so long as the
claims involve common issues of law or
fact. In adjudicating these appeals, ALJs
often make individual medical necessity
determinations for each beneficiary who
received the item or service in dispute.
Given the ALJ’s experience in
adjudicating aggregated cases, we
believe that Part D appeals that are
aggregated by multiple beneficiaries will
receive appropriate individual
consideration.
Comment: Several commenters
requested that we clarify the applicable
filing requirements for appeals that an
enrollee wishes to aggregate for
purposes of meeting the AIC threshold
for requesting an ALJ hearing.
Response: We agree with the
commenters’ observation that the
proposed rule was not clear regarding
the applicable filing timeframes for
appeals an enrollee wishes to aggregate.
Therefore, we have to amended
§ 423.610(c)(1)(ii) and (2)(ii) in this final
rule to specify that multiple appeals,

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
filed by either a single enrollee or
multiple enrollees, may be aggregated to
meet the AIC threshold for ALJ hearings
so long as all of the appeals to be
aggregated have been filed in
accordance with the requirements in
§ 423.612(b).
Comment: One commenter suggested
that we revise our proposal that plans
are considered a ‘‘party to the ALJ
hearing’’ for the limited purpose of
participating in the hearing. The
commenter believes that plans should
be afforded full party status at the ALJ
level so that they can defend their
redetermination decisions, rather than
just respond to questions asked by the
ALJ. Additionally, the commenter
suggested that when a plan is a party to
an ALJ hearing, it should be permitted
to file a request for review with the
Medicare Appeals Council and the
appropriate Federal court, just as MA
organizations are permitted.
Response: In the proposed rule, we
stated in the introduction of the
preamble to § 423.610 that plans had
party status for the limited purpose of
participating in ALJ hearings. Part 422,
subpart M gives MA organizations party
status at the ALJ level. However, we do
not agree with the commenter that plans
should have full party status at the ALJ
level as MA organizations. Section
1860D–4(h) of the Act, which requires
plans to provide Part D enrollees with
ALJ hearings and MAC review, allows
only Part D enrollees to file appeal
requests at these levels. Thus, the
Congress did not grant plans with party
status at the ALJ levels of the appeals
process. To clarify this point, § 423.620
has been revised to state that the MAC
provisions that apply to MA
organizations apply to plans, to the
extent applicable. Even though plans are
not parties to ALJ hearings, we continue
to believe that it is important to give
plans the ability to participate in ALJ
hearings. Therefore, plans may
participate in hearings at the ALJ’s
discretion.
Comment: One commenter suggested
that we modify the Part D regulations so
that if the ALJ issues a decision that is
favorable for an enrollee and the plan
files an appeal with the MAC, the plan
does not have to effectuate the ALJ’s
decision until the MAC upholds the
decision favorably to the enrollee. The
commenter also suggested that plans be
required to effectuate ALJ decisions
within 60 days after the decision has
been issued if the plan does not request
a review by the MAC within the 60-day
timeframe. The commenter argued that
adding these provisions would be
consistent with the MA regulations.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Response: As indicated above,
§ 423.620 permits only Part D enrollees
to appeal ALJ decisions. Therefore, in
accordance with the requirements set
out in § 423.636(c), plans are required to
effectuate favorable ALJ decisions
involving payment issues no later than
30 calendar days after a final decision
is issued and all other cases as quickly
as the enrollee’s condition warrants, but
no longer than 72 hours after a final
decision is issued. These effectuation
timeframes have been reduced from the
proposed 60-day deadline in light of our
decision to shorten the adjudication
timeframes.
7. Effectuation of Reconsideration
Determinations (§ 423.636 through
§ 423.638)
Section 423.636 and § 423.638
proposed the requirements for
effectuation of coverage determinations
reversed by the plan, redeterminations
reversed by the IRE, or reversals by an
ALJ or higher level of appeal. When the
plan’s redetermination is reversed by
the IRE, § 423.636(b)(1) required that it
must authorize the benefit under
dispute within 72 hours from the date
it received notice reversing the
redetermination, or provide the benefit
as expeditiously as the enrollee’s health
required, but no later than 14 calendar
days from the date of the reversal notice.
For redeterminations of requests for
payment, proposed § 423.636(a)(2)
required that if the plan reversed its
coverage determination, it must pay for
the benefit no later than 60 calendar
days after the date it received the
request for reconsideration. Under
§ 423.636(b)(2), if a plan’s
redetermination was reversed by the
IRE, it must pay for the benefit no later
than 30 calendar days from the date it
received notice reversing the
redetermination.
Section 423.638 proposed that for
expedited redeterminations reversed by
the plan or the IRE, the plan must
authorize or provide the benefit under
dispute as expeditiously as the
enrollee’s health condition required but
no later than 72 hours after the date it
received the request for
redetermination, or in the case of
reversal by the IRE, from the date it
received the reversal notice.
Finally, for reversals by an ALJ or
higher level of appeal, we proposed
under § 423.636(c) and § 423.638(c) that
the plan must pay for, authorize, or
provide the benefit under dispute as
expeditiously as the enrollee’s health
condition required, but no later than 60
calendar days from the date it received
notice reversing its determination.

PO 00000

Frm 00169

Fmt 4701

Sfmt 4700

4361

Comment: We received a number of
comments requesting us to revise the
effectuation timeframes. Several
commenters recommended that plans
effectuate IRE determinations within
24–48 hours, ALJ hearing decisions
within 48 hours, and the MAC review
decisions within 48 hours. The
commenters also suggested that plans be
required to authorize benefits within 72
hours after receiving notice from the
IRE.
Response: As mentioned previously,
we agree that the proposed adjudication
timeframes were too long. As a result,
we need to make corresponding changes
to the effectuation timeframes in
§ 423.636 and § 423.638. Therefore, the
effectuation timeframes for appeals
involving non-payment issues are no
later than 72 hours (expedited) or 7
calendar days (standard) from the date
the plan receives the request for
redetermination if the plan is reversing
its previous determination, or no later
than 24 hours (expedited) or 72 hours
(standard) from the date the plan
receives notice of a reversal by the IRE,
ALJ, MAC, or Federal court. For
payment issues, the plan must authorize
payment within 7 calendar days from
the date it receives the request for
redetermination and make payment
within 30 days from the date from the
date it receives the request for
redetermination if the plan is reversing
its previous determination, or it must
authorize payment for the benefit within
72 hours and make payment no later
than 30 calendar days from the date it
receives notice reversing the coverage
determination by the IRE, ALJ, MAC, or
Federal court.
Comment: We received a comment
suggesting that we remove the term
‘‘completely’’ from § 423.638(a) when
describing a plan’s obligation to
effectuate a coverage determination the
plan reversed.
Response: We agree with the
commenter. Under MA, the term
‘‘completely’’ was added to § 422.638(a)
because any MA reconsideration that
was not completely favorable was
automatically forwarded to the IRE for
reconsideration. However, under Part D,
the regulations, except in limited
circumstances where a Part D plan
sponsor has missed its claims
adjudication or redetermination
deadline, do not allow automatic
forwarding of unfavorable
redeterminations to the IRE. Therefore,
we have deleted the term ‘‘completely’’
from § 423.638(a).

E:\FR\FM\28JAR2.SGM

28JAR2

4362

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

8. Federal Preemption of Grievances and
Appeals
Section 232(a) of the MMA amended
section 1856(b)(3) of the Act so that it
now reads: ‘‘The standards under this
part shall supersede any State law or
regulation (other than State licensing
laws or State law relating to plan
solvency) with respect to MA plans
which are offered by MA organizations
under this part.’’ Section 1860D–12(g) of
the Act then incorporates this
preemption rule for plans.
We believe that the grievance
procedures for the Part D Drug Program
under Title I must be the same as those
that apply to the MA program under
Title II. In the proposed rule, we
proposed continuing to defer to State
law on the issue of authorized
representatives of enrollees in the
appeals process.
We did not believe that the Congress
intended for the Secretary to regulate
matters for which the Secretary was not
authorized to promulgate standards (for
example, spousal rights, powers of
attorney, or legal guardianship). Often,
authorized representative matters are
non-Federal issues. However, because
we do have the authority to regulate in
the field of grievances, we were
concerned that State grievance
requirements would now be preempted,
thereby requiring us to reexamine our
Federal grievance requirements. We
requested comments on this preemption
issue and the specific State grievance
requirements that should be
incorporated into Federal regulatory
requirements at § 423.564.
We also noted that tort law, and often
contract law, are generally developed
based on case law precedents
established by courts, rather than by
legislators through statutes or by State
officials through regulations. In
addition, we did not believe we would
have the authority under Part D to set
specific tort remedies or to govern
resolution of private contracting
disputes between plans and their
subcontractors. We believed that the
Congress did not intend for our
regulations to supersede each and every
State requirement applying to plans—
particularly those for which the
Secretary lacks expertise and authority
to regulate. Thus, we did not believe, for
example, that wrongful death or similar
lawsuits based upon tort law would be
superseded by the appeals process
established in these regulations.
Similarly, State contract law would
continue to govern private contract
disputes between plans and their
subcontractors.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Under principles of Federalism, and
Executive Order 13132 on Federalism,
which generally require us to construe
preemption narrowly, we believe that an
enrollee will still have State remedies
available in cases in which the legal
issue before the court is independent of
an issue related to the organization’s
status as a stand alone PDP or an MA­
PD plan.
Comment: We solicited comments on
whether the proposed Federal grievance
procedures should preempt State
grievance requirements. We received
several comments on this issue, which
primarily supported adopting a single
set of grievance procedures to reduce
enrollee confusion and plan burden.
Some commenters recommended that
we adopt the provisions proposed by us
for Medicare+Choice organizations in a
January 24, 2001 proposed rule. See 66
FR 7,593. However, one commenter
opposed Federal law preempting State
law where Part D appeals are concerned.
Response: We agree with the
commenters that establishing a uniform
set of grievance standards will reduce
confusion and burden for enrollees and
plans. We also believe that one set of
rules will ensure better beneficiary
protections and achieve consistency
among plan operations. Thus, § 423.564
implements the specific guidelines for
Part D grievances that we proposed in
January 2001 for Medicare+Choice
organizations. We disagree with the
commenter that Federal provisions
should not preempt State requirements
for appeals. We believe that such an
approach is inconsistent with § 232(a) of
the MMA, which preempts State appeal
and grievance requirements and which
is incorporated into the Part D laws
through section 1860D–12(g) of the Act.
Under the grievance requirements,
plans must notify enrollees of decisions
as expeditiously as the enrollee’s case
requires, but no later than 30 calendar
days after receiving a complaint. Plans
may extend the timeframe by up to 14
calendar days if the enrollee requests
the extension, or if the plan justifies a
need for additional information and the
delay is in the interest of the enrollee.
We believe that the timeframes must be
according to the enrollee’s case as
opposed to the enrollee’s health since
not all grievances involve medical care.
For example, an enrollee may complain
that a network pharmacy does not offer
convenient hours for getting
prescriptions filled. In addition, we
believe that most plans will be able to
respond to most grievances within 30
days. If an enrollee makes a grievance
orally, the plan may respond to it orally
or in writing, unless the enrollee
requests a written response. If an

PO 00000

Frm 00170

Fmt 4701

Sfmt 4700

enrollee files a written grievance, then
the plan must respond in writing. In
addition, a plan must provide
information to enrollees on their right to
request a review by a Quality
Improvement Organization (QIO) if the
grievance involves a quality of care
issue. For any complaint involving a
QIO, the plan must cooperate with the
QIO in resolving the complaint. Plans
must establish a 72-hour expedited
grievance process for complaints
involving certain procedural matters in
the appeals process. Finally, plans must
create a system to track and maintain
records on all grievances.
We note that under MMA, enrollees
will still have access to various State
remedies available in cases in which an
issue is unrelated to the plan’s status as
a PDP or MA-PD plan.
9. Employer Sponsored Prescription
Drug Programs and Appeals
As explained above, MA-PDs and
PDPs are subject to the requirements of
Part 423 for Part D benefits. In addition,
when an employer, whether by
contracting with an MA-PD, PDP, or
otherwise, provides prescription drug
benefits in addition to those covered
under Part C and Part D of Title XVIII
of the Act to their retirees, such
employer may have established a group
health plan governed by both Title I of
the Employee Retirement Income
Security Act of 1974, as amended
(ERISA), and State law (to the extent
such State law is not preempted by
ERISA).
In drafting our Part C, MA rules, we
consulted the Department of Labor
(DOL), employer groups, and the health
plan industry in trying to eliminate
unnecessary Federal regulation of
claims and appeals issues that impact
matters within the jurisdiction of both
DOL and DHHS. Based on our
experience under Part C, we have reason
to believe that some Medicare eligible
individuals may receive integrated
prescription drug benefits, that is, Part
D benefits through an MA-PD or PDP
and supplemental benefits through an
ERISA-covered plan. For example, an
ERISA-covered plan could pay all or
part of the retiree’s cost sharing amount
(for example, deductibles and
coinsurance amounts specified in
subpart C of Part 423) for a covered Part
D drug provided through an MA-PD or
PDP. Clearly, if the enrollee had a
dispute about Part D coverage, he or she
could file an appeal under the
provisions in subpart M of Part 423. If
the enrollee’s dispute involved only the
amount of cost sharing paid by the
ERISA plan, he or she would file an
appeal in accordance with the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
procedures of the ERISA covered plan.
In some cases, however, the dispute
might involve independent coverage
decisions under both Part D and the
ERISA plan; possibly necessitating
parallel appeal procedures on the same
case. In this regard, we solicited
comments on whether, and to what
extent, the application of parallel
procedures in this context might be a
problem for plans, employers, and
eligible individuals. We also solicited
suggestions for addressing problems, if
any, resulting from the application of
parallel procedures.
Comment: Generally, commenters
supported utilizing only the Medicare
appeal procedures for claims involving
integrated ERISA and Part D benefits.
One commenter stated that enrollees
probably do not distinguish between
ERISA and CMS approved benefits
when they are integrated, and therefore,
a single appeals process would be less
confusing. Another commenter agreed,
recommending that to the extent any
benefits received by an individual are
part of an underlying Part D plan,
including benefits separately negotiated
between the Part D sponsor or
organization and an employer (or labor
organization), those benefits should be
governed by the Part D regulations
rather than by two separate processes.
One commenter suggested that, where
possible, we make our requirements
consistent with the existing DOL final
rule that establishes standards for
processing benefit claims under an
ERISA-covered plan.
Three commenters agreed that
adopting and applying a single, uniform
appeals process for all benefits would be
easier for the enrollee to understand.
Other commenters pointed out that
parallel appeal processes for enrollees
with Medicare and ERISA benefits were
costly, redundant, and burdensome to
administer, with the potential for
conflicting determinations. Only one
commenter promoted Part D plans to
process appeals under an employersponsored plan.
Response: After reviewing the public
comment and conferring with
representatives of DOL, we have
concluded that changes (not only to our
regulations but also to the DOL
regulations) are needed to properly
address this issue. Accordingly, we have
added § 423.562(d), which is intended
to give ERISA plans the option,
pursuant to regulations of the Secretary
of Labor, of electing the Part D process
rather than the procedures under 29
CFR 2560.503–1 for claims involving
supplemental benefits provided by
contract with a Part D plan. In this
regard, DOL has agreed to work with us

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

to develop such regulations. We note
that the language in § 423.562(d) is
intended to demonstrate our
commitment to make the entire Part D
process available in this context. The
provision in § 423.562(d) will not take
effect in the absence of regulations by
the Secretary of Labor.
10. Miscellaneous
Comment: Two commenters believed
that there would be an additional
administrative workload for physicians
and their staff in light of the appeals and
exceptions processes. They asked
whether we would provide
reimbursement for these activities, as
they are not currently reflected on the
physician fee schedule.
Response: We were mindful of any
administrative burden that physicians
might encounter as they help enrollees
pursue prescription drugs through the
exception and appeals processes. As a
result, we eliminated the requirement
that a physician’s supporting statement,
which the statute requires for tiering
and non-formulary exceptions, be in
writing. We also provide that the IRE
may solicit the view of the prescribing
physician orally or in writing. Thus, a
prescribing physician need not in all
circumstances provide a written account
of the medical necessity or
appropriateness of the prescription
drug. We anticipate that physicians and
other healthcare providers will assist
enrollees with their Part D appeals to
the same extent that they currently help
beneficiaries with Part A, Part B, and
Part C appeals. We do not pay
physicians for their assistance with
appeals under Part A, B, or C. Likewise,
we do not expect to pay physicians
under Part D for certifying and sharing
their views on an enrollee’s need for a
medication.
Comment: Some commenters
expressed concern about the lack of
enrollee participation in the formulary
development process. These
commenters felt that we should either
include enrollees in the formulary
development process or alternatively,
allow enrollees to challenge the
formulary development process.
Response: The formulary
development process is outside the
scope of the grievance and appeals
process. Additionally, section 1860D–
4(h) of the Act does not provide a
mechanism for Part D eligible
individuals to challenge the formulary
development process. Finally, the MMA
intends for plans to compete in regards
to benefit package and premium, which
ensures that enrollees receive the best
package for the lowest premium. The
competitive model contemplated by the

PO 00000

Frm 00171

Fmt 4701

Sfmt 4700

4363

MMA would be undermined if enrollees
are permitted to challenge the formulary
development process.
We also believe that that permitting
enrollees to challenge the formulary
development process is not necessary.
Enrollees are aware of a plan’s
formulary before they choose a plan. If
an enrollee does not agree with a plan’s
formulary, he or she is free to enroll in
a different plan. Once enrollees choose
a plan, we have required plans to
provide significant protections that will
ensure that enrollees either receive the
drug in dispute or are switched to an
appropriate alternative medication if a
plan changes its formulary during the
plan year. In addition, enrollees have
available to them an exceptions and
appeals processes under which they
may request coverage of non-formulary
drugs. If enrollees continue to be
unsatisfied with a plan, they are able to
change plans at the end of the plan year.
Comment: Another commenter
suggested that we establish a drug
manufacturer appeals process to
evaluate the discriminatory effect of a
plan’s negative formulary inclusion
decision and to review negative
formulary inclusion decisions.
Response: We are required by MMA
to model the Part D grievance and
appeals procedures after the Part C
grievance and appeals procedures.
Neither the MMA, nor the applicable
provisions of the Act provide for the
type of appeals process suggested by the
commenter. As a result, we do not have
the statutory authority to create an
appeals process for drug manufacturers.
In addition, allowing manufacturers to
challenge how plans choose to place
drugs on their formularies would also
undermine the competitive model since
it would negate any benefit that could
be obtained by negotiating with plans.
Comment: We received many
comments about the new notification
requirements established under Part D,
particularly those regarding how plans
must communicate information about
coverage determinations and appeals.
Several commenters recommended that
enrollees, physicians, and authorized
representatives receive appeals notices
giving the reason for denial, right to
appeal, and information about accessing
the appeals process. Another
commenter suggested that denial notices
be written at a 6th grade reading level,
while another commenter suggested that
plans provide notices in alternative
formats (for example for the visually
impaired and in different languages).
Other commenters requested that
detailed appeals notices, like those
provided for coverage determinations,

E:\FR\FM\28JAR2.SGM

28JAR2

4364

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

be provided at the redetermination
level.
In addition to the appeals notices,
many commenters also made
recommendations about other important
information they felt plans ought to be
required to provide to enrollees. First,
many commenters requested that we
require plans to provide enrollees with
written information about the
exceptions and grievance processes.
Finally, we received one comment
suggesting that we require plans to
notify enrollees of their potential costsharing obligations if an appeal is
successful.
Response: We agree with many of the
suggestions offered by the commenters.
Therefore, in § 423.568(g) of the final
rule, we require plans to include
specific types of information in denial
notices, including the reason for denial,
the right to appeal, and information
about the appeals process. We also
require denial notices to be written in a
readable and understandable form.
These notices will be developed or
approved by us based on consumertesting and marketing guidelines. We
agree that notices must be made
available in alternative formats, and
expect that they will be made available
in all the same formats MA notices are
currently offered. We also agree that
plans must include information about
the potential cost-sharing obligation if
an exception regarding tiering is
successful. As previously mentioned,
we specify that when an exception for
a lower cost-sharing is approved, the
enrollee is entitled to the amount of
cost-sharing that applies for a preferred
drug, but not for a generic drug. Finally,
as mentioned earlier, plans must
provide written notices to enrollees 60
days in advance when plans change
their formularies. These advance notices
must contain information about the
exceptions process. We also require
plans to provide written information
about the grievance, exceptions, and
appeals processes in enrollment
materials.
We agree with the commenters who
suggested that we require detailed
notices at the redetermination level.
Therefore, we added § 423.590(g) to
require plans to provide detailed written
notices to enrollees whenever plans
make adverse redeterminations. The
redetermination notices must: be
written in approved language that is in
a readable and understandable; state the
specific reasons for the denial; inform
the enrollee of his or her right to a
reconsideration (including a description
of the standard and expedited
reconsideration processes, and the
enrollee’s right to, and conditions for,

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

obtaining an expedited reconsideration
and the rest of the appeals process); and
comply with any other notice
requirements specified by us.
Finally, as previously mentioned, the
final rule requires that notice of any
determination be sent to enrollees or
their appointed or authorized
representative.
Comment: We received a few
comments indicating that plans should
be required to track and report denial
rates for the purpose of identifying
plans with high rates of inappropriate
denials. One commenter suggested
using the IRE to evaluate the data
submitted by the plans.
Response: We appreciate the
commenters’ suggestions and share their
desire to have plans provide
information on the disposition of their
decisions. We are in the process of
developing an appeals system that will
capture case-specific appeals data.
Because appeals are generated as a
result of coverage denials, we believe
that the appeals information will enable
us to identify potential inappropriate
denials.
Comment: We received one comment
suggesting that we create a special
election period of 30 days during which
enrollees who receive unfavorable
coverage determinations or responses to
exceptions requests may elect to enroll
in a different plan.
Response: We strongly disagree with
the commenters that enrollees should be
granted a special election period (SEP)
to enroll in a different plan when they
receive unfavorable coverage
determinations or responses to
exceptions requests. Although section
1860D–1(b)(3)(C) and section 1851(e)(4)
of the Act provides us with the
authority to grant SEPs for exceptional
circumstances, we decline to establish
an SEP for enrollees who have received
unfavorable determinations because we
do not view this as an exceptional
circumstance under the Part D program.
The Congress anticipated that
unfavorable determinations would be
made, and therefore required us to
establish an extensive appeals process.
However, we do retain the authority to
establish additional SEPs through
operational guidance if necessary.
Comment: A few commenters
suggested that we require plans to
assign consumer advocates to enrollees
who need assistance with the appeals
process. One commenter suggested that
we make available the Medicare
Beneficiary Ombudsman to assist Part D
enrollees, or provide the telephone
number of an appropriate ombudsman
in coverage determinations and appeal
notices.

PO 00000

Frm 00172

Fmt 4701

Sfmt 4700

Response: The commenters raise a
very valid point and we agree that Part
D enrollees must be permitted to obtain
assistance with the grievance and
appeals processes, but we do not believe
that we have the authority to use Trust
Fund dollars to pay for consumer
advocates on behalf beneficiaries
accessing the appeals process.
The Medicare Ombudsman is
designed to utilize most inquiry and
appeals processes in place, while
providing enhancements and
efficiencies through monitored
performance metrics, continuous quality
improvement feedback, and
standardized data management. Fiscal
Intermediaries, Carriers, Regional
Offices and SHIPs are all part of the
whole Ombudsman system. These
entities, in addition to others, are being
trained in Part D enrollment, will
handle most routine concerns, and have
the ability to forward any serious
concerns to the Office of the
Ombudsman for resolution.
In addition to obtaining assistance
from the Medicare Ombudsman, we
permit Part D enrollees who are in need
of assistance to select an individual or
an entity to serve as their appointed
representative. Additionally, we
recognize individuals who are
authorized under State or other
applicable law to represent the enrollee.
Both appointed and authorized
representatives may act on behalf of Part
D enrollees in obtaining coverage
determinations or in dealing with any of
the levels of the appeals process, subject
to the rules described in part 422,
subpart M.
Comment: One commenter suggested
that we clarify the difference between a
‘‘non-preferred’’ drug and a ‘‘non­
formulary’’ drug since there are different
processes for requesting each and the
differences may not be apparent to
enrollees.
Response: We have required plans to
establish different exceptions processes
for handling exceptions requests
involving tiered formulary drugs and
exceptions requests involving nonformulary drugs. Under a tiered costsharing structure, drugs are assigned to
different co-payment tiers based on costsharing, clinical considerations, or both.
An enrollee’s level of cost-sharing is
based on the tier into which the
prescribed drug falls. Typically, drugs
fall into one of three tiers—generic
drugs, preferred brand-name drugs, or
non-preferred brand-name drugs. All of
a plan’s cost-sharing tiers make up its
formulary, and an exceptions request
that involves a drug covered under one
of a plan’s tiers must be processed in
accordance with § 423.578(a). A non­

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
formulary drug is simply a drug that is
not on a plan’s formulary. An
exceptions request that involves a nonformulary drug must be processed in
accordance with § 423.578(b).
Alternatively, if a plan organizes its
drug benefits by providing coverage
only for formulary drugs and requires
enrollees to pay for prescriptions out-of­
pocket if they are not on the formulary,
the plan has established a closed
formulary. A drug that is not on a plan’s
formulary under this type of costsharing arrangement is also considered
a non-formulary drug and must be
processed in accordance with
§ 423.578(b).
N. Medicare Contract Determinations
and Appeals
1. Overview
Subpart N implements section
1860D–12(b)(3)(F) of the Act which
directs the ‘‘procedures for termination’’
in section 1857(h) of the Act be
incorporated into the requirements for
PDP sponsors. As we stated in the
proposed rule, to enhance the flow of
the rule, we have separated the
provisions of section 1857(h) of the Act
into two portions and addressed the two
portions in separate subparts—subpart
K (Application Procedures and
Contracts with PDP Sponsors) and this
subpart of the preamble and regulations.
2. Provisions of the Final Rule
Subpart N establishes administrative
appeals procedures available to an
applicant or PDP sponsor in the event
that we—
• Determine that an entity is not
qualified to contract with us as a PDP
sponsor under Part D of title XVIII of the
Act.;
• Determine that an entity is not
authorized to renew its contract as a
PDP sponsor in accordance with
§ 423.507(b); or
• Make a determination to terminate
the contract with a PDP sponsor in
accordance with § 423.509.
We note that in subpart K, in response
to comments, we have explained that
the contract application (or renewal)
process and the bid process under
subpart F will run concurrently. In other
words, we could review and preapprove a contract even though the bid
process was not yet complete. In this
situation, the actual approval of the
contract would be dependent upon us
and the sponsor reaching agreement on
the bid. We have revised our regulations
at § 423.506(d) to reflect this change. As
discussed in the subpart K preamble, we
will make determinations that an entity
is qualified to contract as a PDP sponsor

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

or authorized to renew its PDP sponsor
contract, and these determinations will
be subject to the procedures of subpart
N. However, although an entity may be
determined qualified to enter into or
renew its contract, the contract might
not be signed if we are unable to reach
agreement on the bid with the entity
under subpart F. This failure to reach an
agreement on the bid will not be subject
to the procedures of subpart N. We
revised our proposed regulation by
adding § 423.502(c)(2) to subpart K in
order to clarify this distinction. We refer
readers to subpart K for a full discussion
of the concurrent processes and an
explanation of those policies.
In order to clarify the timeline for
valid contracts, in the event of a
redetermination, we have added new
§ 423.647(c) to subpart N. This
provision specifies that in the case of a
favorable redetermination, to include
favorable decisions as the result of a
hearing or Administrative review, such
determination must be made by July 15
for the contract in question to be
effective on January of the following
year. We have made a corresponding
change to the MA regulations by adding
§ 422.654(c).
We had proposed that a single set of
procedures relating to contract
determinations and appeals would
apply to both MA and PDP sponsor
contractors and that the requirements in
§ 423.641 through § 423.669 would
mirror the requirements at § 422.641
through § 422.698 for the MA program.
We refer readers to the preamble of the
Medicare Prescription Drug Benefit
proposed rule (69 FR 46723–4) for a
fuller discussion of our proposals.
Comment: We received one comment
on this subpart. The commenter—while
acknowledging the provisions in this
subpart duplicate those relating to MA
contractors in part 422, subpart N—
asked that we state in the final rule
specifically that part 423, subpart N,
applies only to PDP sponsors, not to MA
plans.
Response: We do not believe it is
necessary to amend the regulation text
to make clear that the subpart N rules
apply only to PDP sponsors, since the
MA organization contracts will, by
definition, be subject to the appeals
procedures in part 422 and not part 423.
We have, however, clarified that
because fallback prescription drug plan
contracts are entered into using a
competitive process, except to the
extent a fallback contract is terminated,
fallback entities will not be subject to
the procedures of subpart N. We thank
the commenter for the suggestion and
do acknowledge that the subpart N
procedures of part 423 would apply

PO 00000

Frm 00173

Fmt 4701

Sfmt 4700

4365

only to PDP sponsors or PDP sponsor
applicants.
With the clarifying language noted
above, in this final rule we have
adopted these proposed changes almost
entirely without change.
O. Intermediate Sanctions (§ 423.750)
As required by 1860D–12(b)(3)(E) of
the Act, Subpart O provides that the
provisions governing ‘‘intermediate
sanctions’’ for MA organizations, with
two exceptions, will apply to contracts
for Part D Plan sponsors. Specifically,
we would not impose sanctions on a
Part D Plan sponsor in the event it fails
to enforce the limit on balance billing
under a private fee for service plan, as
required at § 422.216(a)(4), or fails to
prohibit interference with practitioners’
advice to enrollees, as required at
§ 422.206, since we do not believe these
provisions are applicable in the context
of the Part D drug benefit. We did not
receive any comments regarding this
proposal. We also proposed that the
requirements in § 423.750 through
§ 423.760 would mirror the
requirements at § 422.750 through
§ 422.760. However, we recently
discovered that these requirements do
not mirror each other and, further, that
recent changes to the requirements at
§ 422.750 through § 422.760 require us
to make conforming changes in this
final rule. We learned that the
regulation text, as proposed, did not
reflect revisions made to the
requirements at § 422.750 through
§ 422.760 in the August 22, 2003 final
rule for MA plans entitled,
‘‘Modifications to Medicare Rules’’ (68
FR 50840). However, several errors were
made in modifying the regulation text in
the August 2003 final rule.
Consequently, an interim final rule with
a comment period was published on
December 30, 2004 to correct this
technical error. We are making changes
to the provisions in Part 423 to reflect
the substance of changes to the
regulations at § 422.750 through
§ 422.760 as corrected by the interim
final rule published on December 30,
2004. Additionally, we proposed, and
asked, for comments on our goal to have
a consistent policy on how sanctions are
imposed. The MMA requires at least
two qualified plans, at least one of
which is a Part D Plan per region. If we
were to freeze the enrollment or
marketing of a Part D Plan sponsor, that
is one of only two plans in a region,
beneficiaries would no longer have the
breadth of choice the MMA intended. If
we are contemplating sanctioning a plan
that is one of only two Part D Plan
sponsors in a region, we may have to
consider using other remedies including

E:\FR\FM\28JAR2.SGM

28JAR2

4366

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

civil monetary penalties (CMPs) to
maintain an adequate level of choice for
beneficiaries. However, we would like
to have consistent policies and
procedures for Part D Plan sponsors and
across all regions with regard to
sanctions. We received two comments
asking us how we would expect to
preserve beneficiary choice if the above
instance should occur. In this final rule,
we decided to adopt the proposed
requirements as final and rely on the
number and kinds of sanctions available
to us under subpart O and deal with
offending entities on a case-by-case
basis.
While we are adopting the substance
of the proposed rule as final, in
reviewing and responding to comments
we discovered a need for some technical
revisions in the interest of clarity.
Consequently, we are making the
following changes in this final rule:
• At § 423.752 (Basis for imposing
sanctions.), paragraph (a), we clarified
our authority to impose more than one
sanction at a time.
• At § 423.752, paragraph (a)(6), we
added the word ‘‘excluded’’ for
clarification.
• Under § 423.752, paragraph (b), we
are deleting references to § 423.756(c)(1)
and (c)(3) because they are listed under
procedures for imposing sanctions, and
replacing them with § 423.750(a)(2) and
(a)(4) which fall under ‘‘Kinds of
Sanctions’’. This clarifies in this final
rule that we are cross-referencing the
basis for sanctions with the kind of
sanctions that could result and not the
procedure for imposing sanctions.
• At § 423.756(f)(2) a reference to
‘‘part 1005 of this chapter’’ was
incorrect. The reference should be to
‘‘part 1003 of this chapter’’ since part
1003 includes the OIG procedures for
imposing sanctions, whereas part 1005
is appeal procedures.
• At § 423.756(f)(3), we have deleted
a reference to ‘‘part 1005 of this
chapter,’’ because this subparagraph
discusses CMS’ authority to impose
CMPs, as opposed to the OIG’s
authority.
• At § 423.758, we revised the
language to better clarify the basis for
CMPs imposed by us.
1. Kinds of Sanctions (§ 423.750)
Comment: Several commenters
requested that the final regulation
clarify how the imposition of the
sanction of suspension of enrollment of
Medicare beneficiaries (§ 423.750(a)(1))
would impact the statutory requirement
that a consumer have a choice of at least
two Part D Plans. One commenter
suggested that, in the event CMS
imposes an enrollment freeze on a Part
D Plan sponsor which results in there

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

being only Part D Plan in a given region,
that we add a fallback plan to the
region.
Response: While freezing marketing
or enrollments has generally been our
first and most frequently used sanction
authority, other kinds of sanctions are
available to us under Subpart O. These
include suspension of our payments to
the Part D Plan sponsor and CMPs (or
a combination of both). The MMA
intends for beneficiary choice to be
preserved and directs us to make every
reasonable effort to preserve that choice.
We have the option of imposing these
other sanctions if the suspension of
enrollment of one of only two Part D
Plans in the same region would
eliminate beneficiary choice.
Comment: Several commenters
suggested that CMS establish a range of
civil money penalties that vary
according to the nature and extent of the
Part D Plan sponsor’s noncompliance
with legal requirements.
Response: Section 423.750 allows us
to impose CMPs from $10,000 to
$100,000 depending on the offense.
2. Basis for Imposing Sanctions
(§ 423.752)
Section 423.752(a) and (b) of this final
rule lists the seven violations for which
sanctions may be imposed on a Part D
Plan sponsor organization. These
violations are the same as those that
warrant the imposition of sanctions for
MA organizations, with the exception of
two deletions we are proposing below.
Specifically, sanctions are imposed if
the Part D Plan sponsor engages in any
of the following:
• Fails substantially to provide, to a
Part D Plan enrollee, medically
necessary services that the organization
is required to provide (under law or
under the contract) to a Part D Plan
enrollee, and that failure adversely
affects (or is substantially likely to
adversely affect) the enrollee.
• Imposes, on Part D Plan enrollees,
premiums in excess of the monthly
basic and supplemental beneficiary
premiums permitted under section
1860D of the Act and subpart F of this
final rule.
• Acts to expel or refuses to reenroll
a beneficiary in violation of the
provisions of subpart O of this final
rule.
• Engages in any practice that may
reasonably be expected to have the
effect of denying or discouraging
enrollment of individuals whose
medical condition or history indicates a
need for substantial future medical
services (that is, health screening or
‘‘cherry picking’’).
• Misrepresents or falsifies
information furnished to us, any other

PO 00000

Frm 00174

Fmt 4701

Sfmt 4700

entity, or individual under the Part D
drug benefit program.
• Employs or contracts with an
individual or entity excluded from
participation in the Medicare program
as specified under sections 1128 or
1128A of the Act (or with an entity that
employs or contracts with an excluded
individual or entity) for the provision of
certain services.
Additionally, as an alternative to the
sanctions listed above, we would be
able to decline to authorize renewal of
the organization’s contract (or may elect
to terminate the contract entirely in
accordance with § 423.509). In addition,
§ 423.509(a) will provide that a Part D
Plan sponsor organization may be
sanctioned if it fails to carry out the
terms of its contract as specified under
this section.
We will not impose sanctions on a
Part D Plan sponsor in the event it fails
to enforce the limit on balance billing
under a private-fee-for-service plan as
required at § 422.216(a)(4), or fails to
prohibit interference with practitioners’
advice to enrollees, as required at
§ 422.206, since we do not believe these
provisions are applicable in the context
of the Part D drug benefit.
We received three comments asking
us to detail our methodology for
imposing sanctions. As we have noted
below, we believe that since the law
grants us the discretion to choose from
multiple options on a case-by-case basis
we should retain this approach. We
received other comments asking that we
explain how we determine if a Part D
Plan sponsor deserves to be sanctioned.
Additionally, one comment suggested
that we amend § 423.752(a) to clarify
that CMS may impose more than one
sanction at a time. In this final rule, we
clarify that one or more sanctions may
be imposed by us when a sanctionable
offense as described under § 423.752 has
been discovered.
Comment: Several commenters asked
that CMS provide a methodology as to
what sanction, or sanctions, will be
imposed on a Part D Plan sponsor in
response to a specific set of
circumstance(s). Additionally, the
commenters note that it is their
understanding that all of the sanctions
are permissive and they believe this
increases the likelihood that sanctions
will not be imposed.
Response: We have intentionally
retained discretion as to what sanctions
will be imposed on a Part D Plan. The
rule lists a variety of sanctions that may
be imposed so as to permit us to tailor
the sanction to the particular offense. As
a condition of contracting with
Medicare, we require that a Part D Plan
sponsor agree to be subject to these

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
sanctions. This approach has been
successful in the Medicare managed
care program, and we believe it will also
be successful in sanction actions against
Part D Plan sponsors. We should not be
confined to only one sanction option for
a certain violation, since the law grants
us the discretion to choose from
multiple options on a case-by-case basis.
We believe that this approach will
improve the oversight of Part D Plan
sponsors and the protection of Medicare
beneficiaries.
Comment: Three commenters state
that it is not clear from the proposed
rule how CMS would determine that a
Part D Plan sponsor is not in
compliance with legal requirements.
The commenters also suggest that CMS
publicize, through press releases in the
Federal Register, an annual report, or
other statements, citations against Part D
Plan sponsors and any sanctions
imposed against Part D Plan sponsors.
Response: We will determine
compliance by a variety of means. We
will be monitoring field reports,
performing random periodic audits and
conducting enrollee surveys. In
addition, we perform random audits
annually in order to ensure that those
entities contracting with us are in
compliance. The corrective action plans
of contractors are subject to public
disclosure under the Freedom of
Information Act. Therefore, we do not
believe it is necessary to publicly
disclose the compliance status of each
contracted organization. Some
organizations that have received
sanctions have later become solid
examples of compliant contract
administration. We believe that a public
listing of sanctioned Part D Plans may
not portray the current level of
compliance by contracted organizations
and could unfairly impede business
opportunities for fully compliant
contractors that were sanctioned in
prior years. The purpose of a sanction
is to protect beneficiaries and public
funds by improving the compliance of
contracted organizations. When an
organization resumes compliant
behavior, the sanction is ended.
Sanction authority is not designed to be
punitive.
Comment: Two commenters
recommend that we revise one of the
bases for sanctions under § 423.752(a).
Section 423.752(a)(1) currently states
that sanctions may be imposed if a Part
D Plan sponsor ‘‘[f]ails to provide
required medically necessary services
with an adverse effect on the enrollee.’’
(emphasis added) The commenters
recommend that we remove the phrase
‘‘adverse effect’’ from this provision.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Response: The specific wording of
this provision is based on the language
in the statute. We have not included the
phrase ‘‘adverse effect’’ in an attempt to
impose an obstacle that prevents the
imposition of a sanction on a Part D
Plan sponsor that fails to provide a
medically necessary service to an
enrollee.
Comment: One commenter suggested
we amend § 423.752(a) to clarify that
CMS may impose more than one
sanction at a time, as we stated in the
preamble to the proposed rule.
Response: We do have the authority to
impose more than one sanction at a
time, but we have taken the
commenter’s suggestion and made this
authority explicit under § 423.752(a).
3. Procedures for Imposing Sanctions
(§ 423.756)
Section 423.756 details our
procedures for imposing sanctions on
Part D Plan sponsor organizations. This
process would mirror that used for the
MA program. A brief summary of the
process is as follows:
• We must send a timely written
notification of the sanction to the Part
D Plan sponsor, outlining the nature and
basis of the proposed sanction, and copy
OIG.
• We must provide the Part D Plan
sponsor with 15 days, or if an extension
is granted, 30 days to respond. If
requested, an uninvolved CMS official
will conduct an informal
reconsideration of the determination
with a written decision.
• Non-monetary sanctions would be
effective 15 days from the organization’s
receipt of a final notice of sanction and
remain in effect until we determine that
the violation is corrected. CMS or the
OIG, depending on the basis for the
sanction, may impose civil money
penalties.
Comment: One commenter suggested
that § 423.756(e) be expanded to allow
CMS to impose civil money penalties
when CMS declines to renew or
terminate a Part D Plan contract.
Response: We have authority to
impose CMPs under the circumstances
described in § 423.758. If we make a
determination under § 423.509(a)
(except a determination under
§ 423.509(a)(4)), we may impose CMPs.
P. Premiums and Cost-Sharing
Subsidies for Low-Income Individuals
Section 1860D–14 of the Act requires
us to subsidize the monthly beneficiary
premium and cost-sharing amounts
incurred under this Part by Part D
eligible individuals with lower income
and resources. The regulations in this
subpart and regulations published by

PO 00000

Frm 00175

Fmt 4701

Sfmt 4700

4367

the Social Security Administration
(SSA) adding a subpart D to a new part
418 of title 20 of the Code of Federal
Regulations, implement section 1860D–
14 of the Act.
The statute divides subsidy eligible
individuals into two different groups
based on income and resources: (1) full
subsidy eligible individuals; and (2)
other low-income subsidy eligible
individuals. The different groups are
entitled to different amounts of
premium assistance and reductions in
cost-sharing. Full-benefit subsidy
eligible individuals are entitled to
further reductions if they are eligible for
full benefits under both Medicare/
Medicaid and have income below a
certain income threshold or if they are
institutionalized in medical institutions
or nursing facilities for which Medicaid
will make payment.
In the proposed regulation, we
defined the eligibility criteria and the
amounts of subsidy assistance provided.
We received several hundred comments
on subpart P. Below we summarize our
proposed rule and respond to
comments. (For a detailed discussion of
our proposals, please refer to the August
2004 proposed rule.)
General
We received general comments
related to delayed implementation of
the Part D program for full-benefit dual
eligible individuals (as defined under
423.772) as well as the transition of
shifting coverage for Part D drugs from
the Medicaid program to the Medicare
program for full-benefit dual eligible
individuals, as discussed below.
Comment: Many commenters
suggested that we delay implementation
of the Part D program for full-benefit
dual eligible individuals by at least five
or six months, and some recommended
a year’s delay, although the commenters
recognized that such a delay would
require a legislative change. The
commenters also expressed concern
about the feasibility of identifying,
educating and enrolling the population
of full-benefit dual eligible individuals
in time for a smooth transition. Some
commenters pointed out the need to
ensure adequate time for physicians and
patients to navigate administrative
barriers and change medications to
comply with formularies. Others
expressed concern that full-benefit dual
eligible individuals tend to have
complex medical or mental health
problems, thus reinforcing the need for
an appropriate transition from coverage
for Part D drugs under Medicaid to
Medicare.
Response: As mentioned by the
commenters themselves, such a delay
requires a legislative change. Absent

E:\FR\FM\28JAR2.SGM

28JAR2

4368

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

such a change we cannot delay
implementation of the Part D program
for dual eligibles.
Comment: Many commenters also
expressed concern about the transition
of coverage for Part D drugs from
Medicaid to Medicare for the population
of full-benefit dual eligible individuals.
Commenters were particularly
concerned about identifying, educating,
and enrolling these individuals in Part
D plans in a timely and efficient manner
and desire to avoid noncoverage on plan
formularies of drugs currently used for
this vulnerable population, particularly
those with AIDS or mental illness.
Response: We recognize the special
needs of the dual eligible population
and those with serious medical or
mental health conditions. We have
addressed in Subpart B of this rule the
efforts to be made to avoid any
interruption in coverage for this
population by auto-enrolling full-benefit
dual eligible individuals in Part D plans
no later than January 1, 2006. Fullbenefit dual eligible individuals and
those eligible for Medicare Savings
Programs as QMBs, SLMBs, and QIs are
automatically deemed eligible for the
low-income subsidy. We are working
with State Medicaid Directors to
develop strategies to educate dual
eligible beneficiaries about the new
Medicare prescription drug benefit, how
this new program impacts their coverage
under Medicaid, and the process to
enroll in prescription drug plans.
We note that Subpart C addresses the
steps that will be taken as part of the
formulary review process to provide
safeguards that ensure a drug coverage
transition process for new enrollees
taking a drug not covered under a plan.
We expect that our review of Part D plan
formularies and transition plans as
outlined broadly under the
requirements in subpart C, and our
review of the plan appeals process as
described in subpart G, will ensure that
all Medicare beneficiaries, including
dual eligibles, have prompt access to the
prescriptions they need.
1. Definitions (§ 423.772)
In the proposed rule we discussed
definitions relevant to the low-income
subsidy provisions of this subpart.
These definitions were explained in
detail in the Preamble discussion
related to § 423.773 of the proposed
rule. Comments related to these
definitions are addressed below.
2. Eligibility for the Low-Income
Subsidy (§ 423.773)
The proposed rule provided that full
subsidy eligible individuals are eligible
for the premium assistance and cost-

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

sharing subsidies set forth in § 423.780
and § 423.782 of the proposed rule. We
have added a definition of full subsidy
at 423.772 of the final rule to mean the
premium assistance and cost-sharing
subsidies for which full subsidy eligible
individuals are eligible for under
§ 423.780(a) and § 423.782(a) of the final
rule.
In order to qualify as a full subsidy
eligible individual, an individual must
live in one of the fifty States or the
District of Columbia and have countable
income below 135 percent of the
Federal poverty line for the individual’s
family size. For purposes of this section,
we said in the proposed rule that
‘‘Federal poverty line’’ (FPL) has the
meaning given that term in section
673(2) of the Community Services Block
Grant Act (42 USC 9902(2)), including
any revision required by that section.
In addition, the proposed rule
provided that to be considered a full
subsidy eligible individual, an
individual must have resources that do
not exceed three times the resource
limit under section 1613 of the Act for
applicants for Supplemental Security
Income (SSI) under title XVI, which in
2006 is $6,000 if single, or $9,000 if
married. Thereafter, this resource limit
would be increased annually by the
percentage increase in the Consumer
Price Index (all items, U.S. city average)
as of September for the year before,
rounded to the nearest multiple of $10.
Individuals not eligible as full subsidy
eligible individuals may be eligible as
other low-income subsidy eligible
individuals if they live in one of the
fifty States or the District of Columbia
and have income below 150 percent of
the FPL for their family size, and have
resources in 2006 that do not exceed
$10,000 if single, or $20,000 if married.
Beginning in 2007 and for each
subsequent year, the resource limit
would be increased annually by the
percentage increase in the Consumer
Price Index (all items, U.S. city average)
as of September for the year before,
rounded to the nearest multiple of $10.
The proposed rule provided that other
low-income subsidy eligible individuals
are entitled to the premium assistance
and cost-sharing subsidies set forth in
§ 423.780 and § 423.782 of the proposed
rule.
Low-income Part D eligible
individuals who reside in the territories
are not eligible to receive premium and
cost-sharing subsidies under this
subpart. Subpart S of the proposed rule
addressed the provision of covered Part
D drugs to low-income individuals
residing in the territories.
For making income and resource
determinations for the low-income

PO 00000

Frm 00176

Fmt 4701

Sfmt 4700

subsidy for Part D, the statute refers to
certain sections of the SSI statute. For
example, the MMA refers to income
being determined in the same manner as
for Qualified Medicare Beneficiaries
(QMBs) under the Medicaid program,
without use of the more liberal
methodologies that States are permitted
to use. The QMB provisions reference
the SSI statutory provisions(specifically,
section 1612 of the Act, which applies
to determining income under the SSI
program). Our proposed definition of
income was consistent with the MMA in
that it references SSI statutory
provisions.
The MMA provides that we will
compare the individual’s income to the
appropriate FPL applicable to ‘‘the
family of the size involved.’’ As there is
no reference in the MMA statute to
using existing definitions of family size,
we proposed to define family size to
include the applicant, his or her spouse
who lives in the same residence, and the
number of individuals related to the
applicant who live in the same
residence and who depend on the
applicant or the applicant’s spouse for
at least one-half of their financial
support.
We said in the proposed rule that we
considered limiting family size to 1 or
2 individuals to more closely resemble
the SSI statutory provisions, where
family size is not actually defined but
where benefits are paid on the basis of
an eligible individual or eligible couple.
This is the definition we use in
determining eligibility for Transitional
Assistance under the Medicareapproved prescription drug card
program (See 42 CFR 402.802). The
decision to limit family size under the
Medicare-approved prescription drug
card program was based on the short
duration of that program (18 months),
the limited benefit ($600 a year), and the
fact that we would have to rely entirely
on a computer and systems-based
process for determining Transitional
Assistance eligibility and verifying
income and other information from
applicants. However, we did not believe
it was the intent of the Congress to
similarly limit the definition for
purposes of determining eligibility for
subsidies under the Part D program.
Unlike the provisions authorizing the
Medicare-approved drug discount card
program, there are no provisions for the
low-income subsidy program that give
the Secretary specific authority to define
family size. Instead, we believed that
the term ‘‘family of the size involved’’
implies a definition that is greater than
an individual or couple and that
includes other dependent relatives
residing in the applicant’s household. In

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
addition, in order for the term ‘‘family
size’’ to have meaning in the context of
subsidy determinations, the notion of
dependency needs to take into account
the impact of a dependent on the
relative need of the applicant or the
applicant’s spouse in attaining the
subsidy. Accordingly, we specified that
dependents included in the calculation
of family size are only those relatives
residing in the residence who are
financially dependent on the applicant
or the applicant’s spouse for one-half of
their support.
In determining the income to be
compared to the FPL for the size of the
family involved, we included income of
the Medicare beneficiary and spouse, if
any. Thus, if a married individual
applies, both the income of the
applicant and his or her spouse who
lives in the same residence, regardless
of whether the spouse is also an
applicant, is counted and measured
against the appropriate standard for the
low-income subsidy.
In our view, this best comported with
the statutory reference to determining
income in the manner described in
section 1905(p)(1)(B) of the Act (for
QMBs). In making a standard QMB
income determination, States would
consider the income of one spouse as
available to the other spouse. Moreover,
since both spouses would be considered
in the family size determination, it
would be illogical to count a spouse’s
presence while not including that
spouse’s income. Other members who
meet the one-half support test would be
counted in the family size calculation,
but income of these dependents will be
ignored in the eligibility determination.
The one-half support test ensures that a
family member with sizable income is
not erroneously counted as a dependent
while that person’s income is ignored.
Section 1860D–14(a)(3)(D) of the Act
provides that resources will be
determined according to section 1613 of
the Act. The resource standard depends
upon whether the applicant is a single
individual or a member of a married
couple and whether the resources will
be measured against the basic or
alternative resources standards. See
sections 1860D–14(a)(3)(D) and (E) of
the Act and H.R. Conference Report No.
108–391 at 470.) However, section 1613
of the Act does not define resources, but
rather only defines what are not
resources.
Sections 1860D–14(a)(3)(E)(ii) and
(iii) of the Act also provides for the
development of a simplified application
in which applicants attest to their level
of resources and submit only minimal
documentation. The implication of this
provision is that the Congress

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

envisioned a simple process. In order to
keep the process simple and minimize
administrative cost, we intended to only
consider liquid resources (that is, those
that could be converted to cash within
twenty days) and real estate that is not
an applicant’s primary residence as
resources that are available to the
applicant to pay for the Part D
premiums, deductibles and copayments.
Thus, we would not consider other nonliquid resources (for example, a second
car) to be available to the applicant for
this purpose.
We did not believe this policy would
have a significant impact on program
costs. We believed any program costs
that would result from counting only
liquid resources and countable real
estate would be offset by the
administrative savings resulting from a
more simplified program. As we
indicated further in this section, we are
working with SSA on a quality
assurance strategy that would strike an
appropriate balance between
administrative costs and program goals
and objectives.
Under Medicaid, the term ‘‘dual
eligibles’’ generally refers to low-income
Medicare beneficiaries who qualify for
some level of medical assistance. Those
entitled to full benefits under Medicaid
generally have most of their health care
expenses, including prescription drugs,
paid for by a combination of Medicare
and Medicaid. However, Federal law
also specifies several groups of dual
eligibles who, while not entitled to full
Medicaid benefits, are entitled to more
limited medical assistance, specifically
payment of Medicare Part A or Part B
premiums or cost sharing, such as
payment of Medicare deductibles and
coinsurance. These groups are certain
qualified Medicare beneficiaries
(QMBs), specified low-income Medicare
beneficiaries (SLMBs), qualified
disabled and working individuals
(QDWIs), and certain qualifying
individuals (QIs).
For purposes of the low-income
subsidy under Part D, in the proposed
rule we proposed to define the term
‘‘full-benefit dual eligible individual’’ as
an individual who for any month has
coverage under a PDP or MA-PD plan
and is determined eligible by the State
for medical assistance for full benefits
under title XIX for the month under any
eligibility category covered under the
State plan or comprehensive benefits
under a demonstration under Section
1115 of the Act. We proposed that
comprehensive benefits referred to in
this section do not include those
benefits received under Pharmacy Plus
demonstrations authorized under
section 1115 of the Act. For individuals

PO 00000

Frm 00177

Fmt 4701

Sfmt 4700

4369

who become medically needy by
‘‘spending down’’ excess income; that
is, incurring medical expenses which
are subtracted from the individual’s
income, the individual is not eligible as
medically needy until he or she satisfies
their spenddown obligation. This
requirement was reflected in the
proposed regulations at § 423.772.
Section 1860D–14(a)(3)(B)(v)(II) of the
Act authorizes the Secretary to treat
QMBs, SLMBs, and QIs who are not
full- benefit dual eligible individuals as
full subsidy eligible individuals. This
authority does not apply to QDWIs. As
proposed at § 423.773(c), the Secretary
elects to exercise this authority and treat
these QMBs, SLMBs, and QIs as being
eligible for the full subsidy.
This decision was based on the fact
that nearly all QMBs, SLMBs, and QIs,
by definition, would likely meet the
requirements to be considered a full
subsidy eligible individual. Generally,
QMB, SLMB, and QI individuals have
income below 135 percent of the FPL
applicable to their family size and
resources that do not exceed twice the
SSI limit. The exception would be in the
few States that have more liberalized
income and asset rules for these groups
under section 1902(r)(2) of the Act. We
did not believe that treating these
groups as full subsidy eligible
individuals will have a large cost
impact. Further, we believed that it
would ease the administrative burden of
having to educate these individuals on
the need to apply for the subsidy.
Finally, the statute gives the Secretary
the option to permit a State to make
subsidy eligibility determinations by
using the methodology it uses under
section 1905(p) of the Act if the
Secretary determines that this would
not result in any significant difference
in the number of individuals who are
made eligible for the subsidy. This
would permit a State to use the same
resource methodologies that it uses to
determine Medicaid eligibility for
QMBs, SLMBs, and QIs if the Secretary
determines that the use of those
methodologies would not result in any
significant differences in the number of
individuals who are made eligible for a
subsidy. This includes the less
restrictive methodologies the State uses
under section 1902(r)(2) of the Act to
determine eligibility for QMBs, SLMBs,
and QIs. In the proposed rule, we chose
not to exercise this option.
This means that when making
eligibility determinations for other lowincome subsidy eligibles, all States
would use the same resource
methodologies across the country. The
rationale for not electing this authority
was twofold. First, uniformity in the

E:\FR\FM\28JAR2.SGM

28JAR2

4370

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

application process is a desired goal and
having alternative resource
methodologies that would vary among
States would detract from that goal.
Second, based on the administrative
burden and complexity that would be
involved in administering this
alternative process, we saw very little
benefit in terms of the number of
individuals who would be determined
subsidy eligible.
Comment: A number of commenters
supported our definition of family size.
Some of those supporting our definition
further urged that the regulations
specify that applicants will be able to
self-attest as to the number of family
members they claim without the need
for further documentation.
Response: As explained elsewhere in
the preamble in our discussion of the
use of a simplified low-income subsidy
application, we anticipate that such
things as income and resources will be
verified to the extent possible using
automated data matches. This reduces
both the administrative cost of making
eligibility determinations, and the
burden on applicants to provide
documentation as to their income and
resources. Similarly, we anticipate that
in most cases an applicant’s declaration
of the size of his or her family will be
accepted without the need for further
documentation from the applicant.
Comment: While a number of
commenters supported our definition of
family size, a number of other
commenters requested clarification or
objected to the definition. All of these
commenters argued that our definition
did not follow SSI statutory rules, and
therefore would make it more difficult
and complex to determine eligibility for
a low-income subsidy. Many of these
commenters argued that since lowincome subsidy eligibility was supposed
to be based on SSI statutory income and
resource rules, the rules under which
SSI pays benefits to individuals or
couples should also be followed.
Response: We understand the
concerns expressed by these
commenters. As explained previously,
and in the preamble to the proposed
regulations, we did consider using the
SSI statutory framework of individual or
couple. However, as we also explained,
we do not believe that the Congress
intended the definition of family size to
be so restrictive for low-income subsidy
eligibility purposes. Moreover, the SSI
statute does not include a definition of
family size. Therefore, we proposed to
define family size to include the
applicant, his or her spouse who lives
in the same residence, and any
individuals related to the applicant who
live in the same residence and depend

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

on the applicant or the applicant’s
spouse for at least one-half of their
financial support.
While we recognize that our
definition may result in some additional
complexity in making eligibility
determinations, we believe the
definition we have adopted is necessary
to take into account the impact that
supporting dependent family members
may have on the need of an applicant
for a low-income subsidy.
Comment: A few commenters
suggested that our definition of family
size should be revised to automatically
include any children under the age of 21
as members of the family, regardless of
other considerations such as whether
the applicant was providing one-half of
the child’s support. This commenter
also suggested that a pregnant woman
should be counted as two family
members.
Another commenter stated that the
one-half child support test is different
than what is used for Medicaid and that
there will be additional burden placed
on States to do this test.
Response: We do not agree with either
of this commenter’s suggestions. We
included relatives who are dependent
on the applicant for one-half of their
support in the definition in recognition
of the impact supporting such relatives
can have on the applicant’s financial
situation. For this reason, we do not
believe it is appropriate to include all
children in the applicant’s household
under age 21 even if they are not
dependent on the applicant, or to count
a pregnant woman as two family
members.
Comment: One commenter said that
the definition of family size is vague as
to whether relatives of the spouse of an
applicant can count toward family size,
and suggested that the definition be
revised to make that explicit.
Response: We do not believe the
definition is as vague as the commenter
suggests. Under our proposed
definition, family size includes the
number of individuals living in the
household who are related to the
applicant or applicants, and who are
dependent on the applicant or the
applicant’s spouse for at least one-half
of their support. The definition places
no restrictions on what is meant by
‘‘related’’ to the applicant other than
that a recognized family relationship
exists, and further provides that
dependence on the applicant’s spouse
will allow a person to be counted as a
family member. Therefore, we do not
believe the definition needs revision as
suggested by the commenter.
Comment: We received two comments
on our definition of ‘‘full-benefit dual

PO 00000

Frm 00178

Fmt 4701

Sfmt 4700

eligible individuals’’ in § 423.772. One
commenter noted that the proposed
regulation defines the term (in part) as
someone who has coverage for the
month under a prescription drug plan
under Part D of title XVIII, or under an
MA-PD plan under Part C of title XVIII.
The commenter believes this language
creates a technical problem with the
auto-enrollment provisions set forth in
§ 423.34(d) of the proposed regulations.
That section provides that full-benefit
dual eligible individuals who fail to
enroll in a PDP or MA-PD during their
initial enrollment period will be
automatically enrolled into a plan.
The commenter believes these two
sections are inherently contradictory
because one requires a person to be
enrolled in a PDP or MA-PD to be
considered a full-benefit dual eligible
individual, while the other provides for
automatically enrolling someone who is
considered to be a full-benefit dual
eligible individual in a PDP or MA-PD,
even though under the first section the
person could not be a full-benefit dual
eligible individual because he or she
was not already enrolled in a PDP or
MA-PD. The commenter suggests
revising the language in § 423.772 to
define (in part) a full-benefit dual
eligible individual as someone who has
coverage, or who will have coverage as
a result of automatic enrollment for the
month under a prescription drug plan.
Response: We understand the
commenter’s concern. The definition of
a full-benefit dual eligible individual in
§ 423.772 reflects the statutory
definition of that term found at section
1935(c)(6) of the Act, which defines a
full-benefit dual eligible individual to
include individuals who have coverage
under a Part D plan. We do not believe
we have the authority to change our
regulatory definition of ‘‘full-benefit
dual eligible individual’’ for purposes of
this subpart. However, we agree with
the commenter that this definition of the
term ‘‘full-benefit dual eligible
individual’’ is problematic for
application of the auto-enrollment rules
under § 423.34. As discussed more fully
in subpart B, section 1860D–1(b)(1)(C)
of the Act requires CMS to auto-enroll
into PDPs an individual ‘‘who is a fullbenefit dual eligible individual’’ who
‘‘has failed to enroll in a prescription
drug plan or an MA-PD plan.’’ Although
this statutory provision specifically
references the statutory definition of
‘‘full-benefit dual eligible individual’’
under section 1935(c)(6) of the Act, if
interpreted literally, section 1860D–
1(b)(1)(C) of the Act would require CMS
to auto-enroll into Part D plans only
individuals receiving full-benefits under
Medicaid who are already enrolled in

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Part D but who have ‘‘failed to enroll
in’’ a Part D plan, a patently absurd
result. We have an obligation to
interpret the statute so as to avoid an
absurd result and give full effect to the
Congress’ intended policy. We think it
is clear that the Congress required CMS
to establish an auto-enrollment process
to ensure that individuals who currently
receive coverage for Part D drugs under
Medicaid continue to receive coverage
for such drugs through enrollment in
Part D beginning in 2006. Therefore, for
purposes of implementing the autoenrollment process of full-benefit dual
eligible individuals, at § 423.34 of
subpart B the final rule we define ‘‘full­
benefit dual eligible individuals’’ as Part
D eligible individuals who meet the
conditions under section
1935(c)(6)(A)(ii) of the Act but are not
enrolled in a Part D plan.
Comment: One commenter expressed
concern about what the commenter saw
as a possible inequity in the definition
of a full-benefit dual eligible individual.
Under that definition in our proposed
rule, anyone with coverage under a PDP
or MA-PD plan who is determined by a
State as eligible for full Medicaid
benefits under any eligibility group is a
full-benefit dual eligible individual.
However, the commenter noted that
some eligibility groups in some States
are not subject to an asset test. The
commenter believes this can lead to
situations where some persons receiving
the full subsidy under Part D would be
subject to an asset test but others would
not, depending on whether they were in
an eligibility group to which an asset
test did not apply in a particular State.
Response: While we understand the
point the commenter is making, we
must note that the definition of a fullbenefit dual eligible individual as
someone who has been determined
eligible for Medicaid under any
eligibility group covered under a State’s
plan is a statutory definition.
Accordingly, we have no authority to
change that definition in the Part D lowincome subsidy regulations.
Comment: One commenter argued
that the definition of full-benefit dual
eligible individual should be interpreted
to include persons participating in that
State’s optional work incentives buy-in
eligibility group, as well as persons
eligible because of the State’s use of
more liberal income disregards under
section 1902(r)(2) of the Act. The
commenter suggested that if this was
not our intention, the regulatory
definition should be clarified. Another
commenter suggested we clarify the
definition to include other protected
classes of Medicaid-covered
individuals, specifically, individuals

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

covered under Medicaid pursuant to
1915(c) and 1619(b) of the Social
Security Act.
Response: As we believe the
definition makes clear, a full-benefit
dual eligible individual is a person who
is eligible for full Medicaid benefits
under any group covered under a State’s
plan. Therefore, we do not believe the
definition needs further clarification.
Comment: One commenter noted that
full-benefit dual eligible individuals
include all persons eligible for full
Medicaid benefits under a group
covered under a State’s plan even if they
have income in excess of 135 percent of
the Federal poverty line applicable to
the individual’s family size. The
commenter asked if any analysis has
been done to determine whether tying
eligibility for a low-income subsidy to
eligibility for Medicaid will lead to an
increased use of qualifying income (also
known as Miller) trusts in States where
the trusts are recognized under
Medicaid.
Response: We are not aware of any
analysis that has been done on that
subject. Further, even if analysis were to
indicate the possibility of increased use
of the trusts under these circumstances,
the statutory definition of a full-benefit
dual eligible individual is clear, and
therefore is not subject to change under
our regulations to address the
possibility.
Comment: We received one comment
on the definition of ‘‘full subsidy
eligible individuals’’ in § 423.772. That
section provides that a full subsidy
eligible individual is an individual who
meets the eligibility requirements under
§ 423.773(b). The commenter suggested
that the latter reference should be
changed to § 423.773(b) and (c) to avoid
ambiguity.
Response: We do not agree with the
commenter’s suggestion. Section
423.773(b), as cited in section 423.772,
defines a ‘‘full subsidy eligible’’
individual, while § 423.773(c), which is
the reference the commenter suggests
adding, provides that certain
individuals must be treated as if they
did meet the definition of full subsidy
eligible individuals as defined in
§ 423.773(b). Section 423.773(c) does
not change the definition of a full
subsidy eligible individual. We believe
that adding the reference the commenter
suggests would create ambiguity where
none exists now.
Comment: One commenter indicated
that for any subset of individuals for
whom States provide pharmacy-only
benefits under a section 1115
demonstration, that subset be excluded
from the definition of full-benefit dual
eligible, since these programs generally

PO 00000

Frm 00179

Fmt 4701

Sfmt 4700

4371

provide the same benefits as offered
under Pharmacy Plus Programs.
Response: We agree with this
commenter and have further clarified
the definition of full-benefit dual
eligible individual at § 423.772 to
exclude those individuals enrolled in
1115 demonstration programs that
provide pharmacy-only benefits to a
portion of its demonstration population.
Comment: We received some
comments on our proposed definition of
income. One comment, which was
submitted by several different
commenters, was that the definition of
income should make it clear that
income not legally owned by the
applicant, even if his or her name is on
the check, should not be counted.
Another comment, submitted by two
commenters, was that the definition
should exclude the same income
currently excluded under the Medicaid
program when determining Medicaid
eligibility for American Indians and
Alaska Natives. And finally, one
commenter asked if income of another
family member from SSI and TANF will
be included.
Response: For these comments it is
important to note that under the Part D
statute, income eligibility for a lowincome subsidy is determined using the
statutory provisions of the
Supplemental Security Income (SSI)
program. The statute does not give us
the authority to change the way those
provisions apply to subsidy eligibility
determinations for the low-income
subsidy under this subpart. Under the
SSI statutory provisions, some income
may be counted even if the person does
not actually receive it, just as some
income a person does receive may not
be counted. Similarly, SSI excludes
certain types of income received by
American Indians and Alaska Natives.
The Social Security Administration
(SSA), which operates the SSI program,
is publishing its own regulations which
will explain how the SSI statutory
provisions will apply to eligibility
determinations for the low-income
subsidy. We expect that SSA’s
regulations will explain in detail how
income will be counted when
determining eligibility for a low-income
subsidy.
Comment: Another commenter noted
that under § 423.772, income is defined
differently from Medicaid in two ways;
the regulatory definition does not
include the use of more liberal income
methodologies under the authority of
section 1902(r)(2) of the Act, and
eligibility is based on a family size that
can be greater than the one or two that
Medicaid normally uses when
determining eligibility for the aged and

E:\FR\FM\28JAR2.SGM

28JAR2

4372

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

disabled. The commenter further noted
that this means that if States are making
eligibility determinations for lowincome subsidies, they will have to use
different rules than they use under their
Medicaid programs.
Response: While the commenter is
correct on both points, we note that
section 1860D–14 (a)(3)(C) of the Act
specifically precludes the use of income
disregards authorized under section
1902(r)(2) of the Act in determining
low-income subsidy eligibility. With
regard to the commenter’s point about
family size, as we explain elsewhere, we
believe the definition of family size we
have adopted most closely reflects the
intent of the Congress with regard to
low-income subsidy eligibility.
Therefore, we do not believe we can or
should revise the proposed regulations
to accommodate the commenter’s
arguments.
Comment: We received a number of
comments about the definition of an
institutionalized individual as it applies
to cost-sharing subsidies under
§ 423.782 of the proposed regulation.
That section provides that
institutionalized individuals have no
cost-sharing for covered Part D drugs
under their Part D plans. The term
‘‘institutionalized individual’’ is defined
in § 423.772 of the proposed rule as a
full-benefit dual eligible individual who
is an inpatient in a medical institution
or nursing facility for which payment is
made under Medicaid throughout a
month, as defined in section
1902(q)(1)(B) of the Act.
Almost all of the commenters urged
that persons receiving home and
community-based waiver services under
the waiver authority under section
1915(c) of the Act be treated as
institutionalized individuals for
purposes of § 423.782 so that they
would not be subject to cost-sharing.
Several commenters also suggested that
institutions for the mentally retarded
(ICFs/MR) be specifically included in
the regulations as meeting the definition
of a medical institution for purposes of
this section. At least one commenter
believed that persons in other living
arrangements such as assisted living
facilities, residential care homes, and
boarding homes should be treated as
institutionalized individuals under
§ 423.782. One commenter urged that
persons receiving PACE services also be
treated as institutionalized individuals
for purposes of this Subpart.
The commenters’ rationale was that in
most of the situations cited in the
various comments, the individuals were
receiving services in the community as
an alternative to institutionalization.
Individuals eligible for Medicaid under

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

a waiver under section 1915(c) of the
Act are often eligible for waiver services
using rules that normally apply in
institutions. Therefore, the commenters
believe these persons should also be
treated as institutionalized individuals
for Part D cost-sharing purposes. Some
commenters also cited the Olmstead
U.S. Supreme Court decision, which
requires States to place persons with
disability in community rather than
institutional settings when possible, as
a basis for the commenters’ position.
Response: For comments suggesting
that ICFs/MR be specifically included in
the regulations meeting the definition of
a medical institution, we do not believe
such inclusion is either necessary or
desirable. If we state that ICFs/MR in
general meet the definition of a medical
institution it could be misleading
because one ICF/MR could meet the
various certification and service
provision requirements set forth in
current regulations while others would
not. Therefore, we would not want to
give the erroneous impression that all
ICFs/MR would meet the definition of a
medical institution for purposes of the
provision under discussion.
For comments urging that persons
receiving waiver services, PACE
services, or those in various living
arrangements such as assisted living
facilities and residential care homes be
treated as institutionalized individuals
for purposes of cost-sharing under
§ 423.782, we understand why the
commenters believe such treatment
would be to the advantage of those
persons. However, the regulatory
provisions under discussion are based
on specific statutory language, and we
do not believe that language contains
the latitude necessary to treat persons in
the various situations described by the
commenters as institutionalized
individuals.
Section 1860D–14(a)(1)(D)(i) of the
Act provides that for purposes of costsharing, an institutionalized individual
is one who meets the definition of that
term in section 1902(q)(1)(B) of the Act.
That section in turn defines an
institutionalized individual as someone
who is an inpatient in a medical
institution or nursing facility for which
payments are made under the Medicaid
program throughout a month, and who
is determined to be eligible for medical
assistance under the State plan. An
inpatient is someone who is physically
in a medical institution. However,
assisted living facilities, boarding
homes, residential care homes, etc., do
not meet the general definition of
medical institutions under the Medicaid
or Medicare programs. Individuals
receiving services under the waiver

PO 00000

Frm 00180

Fmt 4701

Sfmt 4700

authority provided by section 1915(c) of
the Act, or under the PACE program, are
not inpatients of a medical institution
since they are living in the community.
When the Congress intends to include
such individuals, or give States the
option of including such individuals,
within the definition of
‘‘institutionalized individuals’’, it does
so explicitly in the statute. In the
absence of such explicit inclusion in the
Part D statute, we cannot consider the
persons to whom the commenters refer
to be institutionalized individuals for
Part D cost-sharing purposes. We
believe the Congress intended this
provision to address the fact that dualeligible persons residing as inpatients in
medical institutions are permitted to
retain only a small personal needs
allowance, which preclude payment of
even nominal copayments. For PACE
enrollees, we refer commenters to
Subpart T.
Comment: Three commenters objected
to the language in the definition of
institutionalized individual concerning
payment being made under the
Medicaid program throughout a month,
arguing that an individual could be a
full-benefit dual eligible individual
recently returned from a hospital stay
whose nursing facility stay would be
paid for by Medicare Part A for the
entire month.
Response: While we understand the
commenters’ concern, the language in
question is a specific statutory
requirement under section 1902(q)(1)(B)
of the Act. Therefore, we do not believe
we can eliminate or even revise that
requirement in the regulations. It is
worth noting that that if Medicare Part
A is paying for the nursing home stay,
an individual’s drug costs will in all
likelihood be covered through Medicare
Part A payment, and so the issue of Part
D cost-sharing liability does not apply.
Comment: We received several
comments on our proposed definition of
a personal representative in § 423.772.
In the proposed rule we defined a
personal representative as someone who
is (1) authorized to act on behalf of the
applicant; (2) someone acting
responsibly on behalf of the applicant if
the applicant is incapacitated or
incompetent, or (3) an individual of the
applicant’s choice who is requested by
the applicant to act as his or her
representative in the application
process.
One commenter urged that
‘‘authorized’’ to act on behalf of the
applicant be defined to mean authorized
under State law, and that ‘‘State law’’ in
turn be defined as including a
constitution, statute, regulation, rule,

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
common law, or other State action
having the force and effect of law.
Response: While we understand the
commenter’s concern, we do not believe
that the term ‘‘authorized’’ should be
restricted in the manner suggested. The
intent of this portion of our proposed
definition was to enable applicants to
designate someone whom they trust to
act on their behalf in filing an
application for a low-income subsidy.
Defining the term ‘‘authorized’’ to mean
only persons who meet State law-based
requirements could effectively restrict
an applicant’s choice of personal
representative to someone with what
could amount to a guardianship
relationship with the applicant, even if
the applicant is not in need of a formal
guardian. This could make it very
difficult if not impossible for an
applicant to even find a qualified
personal representative.
Comment: Several commenters
suggested that the term ‘‘acting
responsibly’’ needed further
clarification as to who would determine
that a personal representative is acting
responsibly, and under what
circumstances a conflict of interest
could be presumed to exist. Two
commenters suggested that certain
entities for whom the commenters
apparently believe a conflict of interest
can be presumed to exist, such as
insurance agents, Medicare and PDP
marketing representatives, and anyone
charging a fee for assistance, should be
prohibited from acting as a personal
representative.
Response: We understand the
commenters’ concerns about the
possibility of personal representatives
not acting in the best interests of the
applicant. However, we do not believe
it is appropriate to establish rules that
effectively prohibit entire classes of
individuals from acting as personal
representatives for applicants based
solely on a possibility. If, based on
actual program experience, we find that
personal representatives are abusing the
trust placed in them by applicants and
the low-income subsidy program, we
will refer for investigation these
potential program abuses and publish
guidelines to address any specific
patterns of abuse that emerge. In the
absence of evidence to the contrary,
however, we believe that at this time we
should assume that personal
representatives will for the most part act
in the best interests of the applicants
who appoint them.
Comment: One commenter expressed
concern about a requirement in
§ 423.904(d)(2)(ii) of the proposed
regulations that when taking a lowincome subsidy application, States must

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

require a personal representative to
certify under penalty of perjury as to the
accuracy of the information provided.
The commenter believes this
requirement will greatly inhibit
outreach and enrollment activities by
social workers and community service
organizations. The commenter believes
this requirement would expose any
agency, volunteer, SHIP program staff,
friend or neighbor to legal liability.
Response: We do not believe this
requirement will have the dire
consequences the commenter fears. The
requirement the commenter cites is a
standard part of most if not all
applications for Federal benefits, and in
all likelihood the majority of State
benefits as well. This requirement is
intended to deter applicants or their
representatives from knowingly
falsifying applications for low-income
subsidies, and thus only requires the
applicants or their representatives to the
best of their knowledge. It is not
intended to lead to, nor would it be
used for the purpose of, prosecuting
applicants or representatives for simple
errors or inadvertent omissions.
Comment: One commenter indicated
that the definition of personal
representative should also include an
SPAP when the SPAP is functioning as
an authorized representative.
Response: Our definition would
encompass an SPAP when the SPAP is
functioning as an authorized
representative. In such a case, the SPAP
as an authorized representative, can
exercise all the rights of the applicant
including completing the low-income
subsidy application.
Comment: We received a number of
comments on our proposed definition of
‘‘resources’’ in § 423.772, and referenced
elsewhere in the proposed regulations.
In that section we proposed defining the
term ‘‘resources’’ to mean liquid
resources of the individual (and if living
in the same household, his or her
spouse if the individual is married),
such as checking and savings accounts,
stocks, bonds, and other resources that
can be readily converted to cash within
20 days, that are not excluded from
resources in section 1613 of the Act, and
real estate that is not the applicant’s
primary residence or the land on which
the residence is located. We included
this definition of resources because
individuals are subsidy eligible
individuals only if they have resources
(or assets) below certain limits
established under section 1860D–
14(a)(3)(D) and (E).
Several commenters urged that the
asset test eligibility for the low-income
subsidy be eliminated entirely.

PO 00000

Frm 00181

Fmt 4701

Sfmt 4700

4373

Eligibility would then be based solely
on an applicant’s income.
Response: An asset test for lowincome subsidy eligibility is specifically
required under section 1860D–
14(a)(3)(D) and (E). In view of this clear
statutory requirement, we have no
authority to eliminate the asset test in
its regulations.
It should be noted that the Social
Security Administration (SSA), which
operates the SSI program, is publishing
its own regulations which will explain
how the SSI statutory provisions,
including those pertaining to resources,
will apply to low-income subsidy
eligibility. We expect that SSA’s
regulations will explain in detail how
resources will be counted when
determining eligibility for a low-income
subsidy.
Comment: Several commenters
suggested that if the asset test could not
be eliminated entirely, at least certain
specific assets should be excluded from
being counted when determining
eligibility for a low-income subsidy.
Specifically mentioned by commenters
were any life insurance, including the
cash surrender value of life insurance,
burial funds and burial plots, all
officially designated retirement funds
such as IRAs and 401(k) plans, and
vehicles.
Response: We note that of the specific
assets mentioned by commenters, burial
plots are already excluded from being
counted as assets under the SSI
program, and vehicles are also excluded
from being counted for low-income
subsidy purposes because they are not
considered liquid assets. For the other
assets mentioned, we do not agree that
they should be eliminated from the
resource test. Section 1860D–14(a)(3)(D)
provides that resources will be
determined according to section 1613 of
the Act, which designates the
exclusions from resources for the SSI
program. As we explain in the preamble
to the proposed rule, we believe that we
have some flexibility to narrow our
definition of resources to exclude nonliquid resources that would be counted
under the SSI program, since the section
1860D–14(a)(3)(E)(ii) of the Act also
provides for the development of a
simplified application in which
applicants attest to their level of
resources and submit only minimal
documentation. We believe that the
implication of this provision is that the
Congress envisioned a simple process.
Therefore, in order to keep the process
simple and minimize administrative
cost, we will only consider liquid
resources (that is, those that could be
converted to cash within twenty days)
and real estate that is not an applicant’s

E:\FR\FM\28JAR2.SGM

28JAR2

4374

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

primary residence as resources that are
available to the applicant to pay for the
Part D premiums, deductibles and
copayments. While, in the interest of
simplicity, we were willing to exclude
certain non-liquid resources, we do not
believe that the Congress intended to
authorize a wholesale departure from
SSI resource rules in making subsidy
eligibility determinations. Therefore, for
purposes of counting liquid resources,
we believe it is important to adhere to
the resource rules of the SSI program.
These include counting items such as
the cash surrender value of life
insurance and the value of IRAs and
401(k) plans.
Comment: Some commenters
suggested that if the assets discussed
above could not be excluded entirely
from being counted, any disregards
applying to them should be
substantially increased.
Response: For the reasons explained
in the previous discussion, we will not
increase disregards for these or any
other assets beyond whatever disregards
are applicable under the SSI program.
Comment: Many commenters said
that the examples of countable resources
we included in the proposed definition
of resources under § 423.772 was not
detailed enough. They urged that the
final rule provide a specific list of the
resources that would be counted (or,
alternatively, that would not be
counted) in determining low-income
subsidy eligibility. Many commenters
also expressed concerns about the
provision that resources that can be
readily converted to cash within 20 days
would be counted. These commenters
said the 20-day conversion rule was
vague, and needed to be clarified.
Another commenter suggested that we
exclude resources if liquidating that
resource would result in a financial loss
or penalty.
Response: For these comments, and as
we explain in our discussion of the
definition of income elsewhere in this
section of the preamble, it is important
to note that under sections 1860D–
14(a)(3)(D) and (E) of the Act , the
resource component of the eligibility
determinations for a low-income
subsidy is generally determined using
the statutory rules of the Supplemental
Security Income (SSI) program which
govern resource exclusions under that
program. As noted earlier, the Social
Security Administration (SSA), which
operates the SSI program, is publishing
its own regulations which will explain
how the SSI statutory provisions,
including those pertaining to resources,
will apply to eligibility determinations
for the low-income subsidy. We expect
that SSA’s regulations will explain in

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

detail how resources will be counted
when determining eligibility for a lowincome subsidy.
Comment: A few commenters
suggested that the rules for counting
resources for making eligibility
determinations of the low-income
subsidy be exactly the same rules as are
used by the SSI program when counting
resources. These commenters argued
that any deviation from the standard SSI
rules would make it more difficult for
States to determine low-income subsidy
eligibility.
Response: As we explained in the
preamble to the proposed regulations,
the rules for counting resources for lowincome subsidy determination purposes
are for the most part the same as the
standard SSI resource rules. The
primary difference is that most nonliquid resources will not be counted
when determining eligibility for the
low-income subsidy, whereas many
such non-liquid resources would be
counted under SSI. We believe that
rather than making eligibility for a
subsidy more difficult to determine, not
counting most non-liquid resources will
actually make the eligibility
determination process easier.
Comment: Several commenters noted
that under the Part D statute, the
Secretary has the option of allowing
States to use the more liberal resource
rules that the States may use to
determine resource eligibility for QMBs,
SLMBs, and QIs when determining lowincome subsidy eligibility. These
commenters urged that we exercise that
option and allow States to use their
more liberal resource rules rather than
require States to use only the SSI
statutory resource provisions, as we
have proposed.
Response: As we explained in the
preamble to the proposed regulations, a
primary goal under the low-income
subsidy program is to have nationally
uniform standards and rules for
determining eligibility for a subsidy. We
believe national uniformity is desirable
because the low-income subsidy is a
national program, and thus to the
greatest extent possible should be
operated under the same rules
regardless of where in the country an
applicant lives. Allowing States to use
resource rules that would vary from
State to State would compromise that
uniformity. Also, as we explained in the
preamble, we do not believe allowing
States to use different resource rules to
determine low-income subsidy
eligibility would significantly change
the number of persons who might be
found to be eligible for the low-income
subsidy. This is because the option to
allow States to use more liberal resource

PO 00000

Frm 00182

Fmt 4701

Sfmt 4700

rules could be exercised only in cases
where the Secretary found, in a
particular State, that use of those rules
would not materially increase the
number of individuals who would be
subsidy-eligible individuals.
Comment: One commenter suggested
that in addition to allowing States to use
more liberal resource rules, we should
require SSA to use a State’s more liberal
rules as well when making low-income
subsidy eligibility determinations.
Response: As explained above, we are
not exercising the option to allow States
to use more liberal resource rules.
However, even if we were to exercise
that option, the option applies only to
eligibility determinations for the lowincome subsidy by a State. The Part D
statute contains no authority under
which a requirement such as the
commenter suggests could be imposed
on SSA.
Comment: One commenter suggested
that we apply the low-income subsidy
resource rules across the board to the
Medicare Savings Program groups (that
is, the QMBs, SLMBs, and QIs). The
commenter believes this would make
more people eligible for the Medicare
Savings Program because the basic
subsidy resource rules count fewer
resources than the basic Medicare
Savings Program rules.
Response: We would note that to a
large degree individual States already
have the option to do as the commenter
suggests. Under the authority of section
1902(r)(2) of the Act, States can elect to
count fewer resources, or disregard
greater amounts of resources, for
Medicare Savings Program groups than
they would otherwise under the basic
resource rules. However, while this is
an option for States, we do not have the
statutory authority to impose the lowincome subsidy rules on States’
Medicare Savings Programs.
Comment: A few commenters urged
that we consider not applying transfers
of resources for less than fair market
value penalties to low-income subsidy
applicants, as we have proposed in our
regulations.
Response: For purposes of
determining eligibility for the lowincome subsidy, we will not be
considering the value of assets
transferred for less than fair market
value. We do not believe that penalties
associated with transfers translate into
an appropriate method of counting
resources for the low-income subsidy.
Comment: We received at least one
comment that our definition of
resources should exclude the same
resources currently excluded under the
Medicaid program when determining

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Medicaid eligibility for American
Indians and Alaska Natives.
Response: As we have explained
previously in this section of the
preamble, under section 1860D–
14(a)(3)(D) and (E) of the Act, resource
eligibility for a low-income subsidy is
determined using the statutory
provisions of section 1613 of the Social
Security Act, which governs resource
exclusions under the SSI program.
Under the SSI program, a number of
types and amounts of resources
belonging to American Indians and
Alaska Natives are already excluded. If
they are excluded under SSI statutory
provisions, they will also be excluded
when determining low-income subsidy
eligibility.
Comment: One commenter objected to
the provision under which the lowincome subsidy resource standards will
be increased each year by the percentage
increase in the Consumer Price Index,
rounded to the nearest multiple of $10.
The commenter believes this adds
complexity to administering the lowincome subsidy program, and suggested
that resource standards be consistent
across all poverty-level-based Federal
programs.
Response: While we understand the
commenter’s concern, we must note that
the process for increasing the resource
standards is mandated by section
1860D–14(a)(3)(D) and (E) of the Act.
Therefore, we do not have authority to
change or eliminate that process under
its regulations.
Comment: Several commenters
suggested that we clarify the regulations
to reflect that an individual can apply
and be determined a subsidy eligible
individual before enrolling in a Part D
plan. Other commenters remarked that
the proposed rule implies that an
individual must be enrolled in a Part D
plan in order to apply for low-income
subsidies. They assert that the final
regulations should make clear that
determinations could be made both
before and after enrollment in a Part D
plan, and specify the effective date of
that coverage. Other commenters
suggest that we clarify how information
verifying enrollment in a plan is
provided to States and how States will
be notified if an individual disenrolls
from a plan.
Response: Determinations for the lowincome subsidy program can be made in
advance of a person enrolling in a Part
D plan. We believe that fact is clearly
articulated in the proposed regulation
which requires States to take subsidy
applications starting July 1, 2005, well
in advance of the open enrollment
period for the new Part D benefit, a
requirement we retain in the final rule.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Therefore, we do not believe we need to
make further clarifications in the final
rule.
We believe it is important to
emphasize here that while
determinations may be made in advance
of the initial enrollment period
beginning on July 1, 2005, a subsidy
eligible individual is not entitled to the
subsidy until such time as the person’s
enrollment in a plan is effective. Up
until that time, there are no premiums
or cost sharing obligations under Part D
for which we must subsidize payment
under the low-income subsidy.
Accordingly, States need only to send
us information on whether a person is
eligible for the low-income income
subsidy. We will provide information
on subsidy eligible individuals to Part D
plans and will reimburse plans for
enrollees who are subsidy eligible
individuals as provided under
§ 423.329(d). We acknowledge that
States may require plan enrollment
information for purposes of
coordination of benefits, but we do not
believe that such information is
necessary for purposes of determining
whether a beneficiary is eligible for the
low-income subsidy. Therefore, we will
not share enrollment data with the
States on a routine basis for the purpose
of determining eligibility for the lowincome subsidy. In Subpart J, we
address the need for this information
sharing for coordination of benefit
purposes.
Comment: One commenter indicated
that the proposed rule disadvantages
Social Security Title II beneficiaries
who receive Medicare and will receive
low-income subsidies. The proposed
regulation provides that low-income
Medicare beneficiaries will pay little or
nothing for prescriptions, while those
earning over 150 percent of the Federal
poverty line applicable to the
individual’s family size may have to pay
as much as 50 percent of the cost of
their prescription for covered Part D
drugs, giving them a financial
disincentive to return to work if they
incur significant prescription expenses.
The commenter urges us to consult with
SSA about these changes.
Response: The income threshold of
150 percent of the Federal poverty line
for low-income subsidy eligibility is
established by section 1860D–14(a)3)(E)
of the Act, and cannot be changed
without a change in the law itself.
However, while eligibility for the lowincome subsidy is based on income, it
is important to be aware that income
can be earned income or unearned
income. Under the statutory rules of the
supplemental Security Income (SSI)
program, which are used to determine

PO 00000

Frm 00183

Fmt 4701

Sfmt 4700

4375

low-income subsidy eligibility, there are
significant disregards for earned
income. Under those rules, the first $85
of earned income, plus one-half of any
remaining earned income, will not be
counted when determining low-income
subsidy eligibility. Other earned income
disregards may also apply, depending
on each applicant’s personal situation.
Thus, those Social Security Title II
beneficiaries who choose to return to
work will have the potential for total
income that is actually higher than 150
percent of the Federal poverty line as a
result of the earned income disregards
that will be applied in determining lowincome subsidy eligibility.
Comment: Several commenters
suggested that our regulations should
indicate that the indexing of resources
would be rounded up in multiples of
$10.
Response: We do not have authority
to make this change in the final rule.
The reference in sections 1860D–
14(a)(3)(D) and (E) of the Act to the
‘‘nearest multiple of $10’’ does not
provide the discretion to always round
up or to always round down. For
purposes of indexing, the nearest
multiple will be rounded up if it is
equal to or greater than $5 and down if
it is less than $5.
Comment: Several commenters
suggested that we needed to clarify that
individuals deemed to be subsidy
eligible do not have to take any further
action for the low-income subsidy;
rather, they only need to enroll in a Part
D plan.
Response: We have further clarified in
the final rule that individuals deemed
subsidy eligible individuals do not need
to apply for the low-income subsidy.
Comment: Several commenters
expressed support for the proposed
deeming of Medicare Savings Program
individuals as full subsidy eligible
individuals, but expressed concern that
SSA will not apply more generous
income and asset eligibility rules under
Medicaid for individuals potentially
eligible for Medicare Savings programs.
These commenters indicated that the
requirements should be the same for all
subsidy-eligible individuals in a State,
regardless of where and how they apply.
Response: While States may use more
liberalized methodologies under
Medicaid for purposes of determining
eligibility for Medicare Savings
Programs, they may not employ more
liberal methodologies under the
Medicare Part D low-income subsidy
eligibility should an individual apply
and request a State eligibility
determination. (However, if the State
determines the individual is Medicare
Savings Program-eligible under its rules

E:\FR\FM\28JAR2.SGM

28JAR2

4376

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

(that is, as a QMB, SLMB, or QI), the
individual is deemed eligible for the
subsidy) The requirements for counting
income and assets are the same under
the low-income subsidy program
regardless of whether an individual
applies at a State office or an SSA field
office. These requirements are based on
the statutory provisions of the SSI
program. For counting income, States
and the SSA are specifically precluded
from using the more liberalized
methodologies permitted under
Medicaid under section 1902(r)(2) of the
Act. For counting resources, we
acknowledge in the proposed rule that
we could have permitted States to use
the same resources standards that States
employ under Medicaid for purposes of
determining eligibility for Medicare
Savings Programs. However, we elected
not to exercise this discretion since this
authority does not extend to SSA and
we believe national uniformity for
purposes of eligibility determinations is
a desirable goal.
Comment: Some commenters
expressed concern that the proposed
rule does not address eligibility issues
for Medicaid beneficiaries who become
eligible after a spenddown period, either
under a medically needy program or in
a 209(b) State (that is, a State which
does not provide Medicaid
automatically to all of its SSI recipients
but which uses more restrictive rules
than those of the SSI program). They
suggested that these beneficiaries
should be informed of their eligibility
for the low-income subsidy and given
an opportunity to apply for the subsidy.
When they have met their spenddown,
they should be informed of their
entitlement to the low-income subsidy
as a full-benefit dual eligible
individuals.
Response: We agree that the eligibility
rules may be confusing for Medicare
beneficiaries who become eligible for
Medicaid after a spenddown period. In
the final rule, we have clarified that
individuals treated as full-subsidy
eligible individuals will be deemed
eligible for a period up to one year.
Thus, individuals who have met their
spenddown obligation and are eligible
for full Medicaid coverage will be
notified that they are eligible for a full
subsidy under Part D for up to one year
without interruption. If the individuals
periodically go off Medicaid because
they have to meet a new spenddown
budget, they will still be ‘‘deemed’’ full
subsidy eligible individuals for the
remaining period of subsidy eligibility.
We have specified ‘‘a period up to one
year’’ to allow us the operational
flexibility to deem full subsidy eligible
individuals for a period less than 12

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

months during a calendar year if they
are newly identified to us in a month
later than January. Thus, an individual
may be deemed subsidy eligible for 9
months if they are reported by the State
as a full-benefit dual eligible individual
in March, for example. If the same
person continues to be a full-benefit
dual eligible individual in the fall of the
same year, he or she will be deemed a
full subsidy eligible the next year for the
full calendar year.
Comment: We received several
comments that proposed § 423.773(c),
which requires the State to notify fullbenefit dual eligible individuals that
they are full subsidy eligible, should
conform to proposed § 423.904(c)(3) in
subpart S which requires States to notify
all individuals deemed full subsidy
eligible individuals of their eligibility
for the full subsidy. These commenters
suggested that the notice be given by
July 1, 2005, for those eligible at that
time, or at the time they attain eligibility
for the Medicaid program that enables
them to be treated as full subsidy
eligible, if after July 1, 2005. Further, the
commenters suggested that the notice
should make clear the actions required
of individuals treated as full subsidy
eligible individuals, should direct
individuals to information sources
where they may gather additional
information, counseling and assistance;
and apprise individuals of appeal rights
for loss of Medicaid coverage and
appeal rights associated with the
determination on the level of subsidy.
They also suggest that we should
develop model notices based on input
from beneficiaries and encourage States
to include a reminder in their notice
letter of the need to recertify their
eligibility under the applicable benefits
program.
Other commenters suggest that we
should modify its final rule to clarify
that States will notify full-benefit dual
eligible individuals and low-income
Medicaid beneficiaries participating in
the Medicare Savings Program that they
qualify for a full subsidy under the new
drug benefit. In addition, we should
develop a similar notification with the
SSA, or require States to coordinate
with SSA, for to SSI recipients in 209(b)
States and non–1634 States (that is, a
non–209(b) State which requires SSI
recipients to file a separate Medicaid
application) since there could be SSI
recipients in these States who are not
receiving Medicaid and who would not
appear under the States’ eligibility
systems.
Response: We have clarified in the
final rule that we will send notices of
eligibility to all deemed full subsidy
eligible individuals. We believe that if

PO 00000

Frm 00184

Fmt 4701

Sfmt 4700

we send the notices to all the
individuals rather than States, it will
ensure more uniformity in the content
of and timeliness of the notices.
Additionally, our sending the notices to
individuals deemed eligible for the full
subsidy will ensure we reach people
States may not be able to identify,
namely Medicare beneficiaries receiving
SSI benefits in States where SSI does
not automatically entitle a person to
Medicaid. Our goal is to begin sending
notices to individuals deemed to be
subsidy eligible in the Spring of 2005,
before the start of taking applications for
individuals who are not deemed eligible
for the low-income subsidy. We will
ensure that the notices clarify that
individuals deemed eligible for a full
subsidy need not apply to receive the
subsidy.
Comment: One commenter suggested
that we explain how Part D plans are
notified of an enrollees’ eligibility for a
low-income subsidy.
Response: Once a subsidy individual
enrolls in a Part D plan, CMS, through
a data match, will inform Part D plans
that the individual qualifies for a lowincome subsidy.
Comment: One State commenter
remarked that the draft regulation does
not specify which agency is financially
responsible for sending notices to
individuals deemed eligible for the full
subsidy. The commenter pointed to
section 1860D–14(a)(3)(B)(i) of the Act,
which references funds to be
appropriated to the SSA necessary for
the determination of the low-income
eligibility determinations. Some
commenters asked if the SSA would
provide an appropriation to each State
to enable States to provide notices to
dual eligibles as specified in the
proposed rules. The commenters also
wondered which entity had
responsibility for explaining to fullbenefit dual eligible individuals how
coverage of Part D drugs in Part D plans
work and how such coverage will differ
from the coverage they received under
the State’s Medicaid program.
Response: For reasons discussed
above, we have clarified in the final rule
that we will send notices of eligibility
to all individuals deemed full subsidy
eligible individuals. This should relieve
States of the financial burden of sending
notices to these individuals. We will
also educate Medicare beneficiaries,
including full-benefit dual eligible
individuals, through a variety of
methods about prescription drug
coverage under the new Part D benefit.
(See discussion in Subpart B). However,
we expect that States will have an
important role in educating Medicare
beneficiaries, particularly full-benefit

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
dual eligible individuals, about the lowincome subsidy program and the new
Medicare drug benefit. We also note that
during Federal Fiscal Years 2005 and
2006, a total of $125 million in grants
are made available under 1860D–23(d)
of the Act to States with SPAPs to assist
in the outreach and education of SPAP
enrollees transitioning to Medicare Part
D.
Comment: A few commenters
suggested that proposed § 423.773(c)
should be edited to replace the term
‘‘full-benefit dual eligible’’ with ‘‘full
subsidy eligible,’’ where appropriate.
They specifically reference the
requirement on States to notify fullbenefit dual eligible individuals that
they are eligible for full subsidy
premiums and deductible, noting that in
subpart S a similar requirement is
imposed on States to notify full subsidy
eligible individuals. The commenters
suggest that this inconsistency
represents an error in the proposed rule.
Response: We agree that this
inconsistency is an error. For reasons
previously addressed, we have clarified
the final rule to correct this
inconsistency and to indicate that we
(not States) will send notices to all
individuals deemed to be full subsidy
eligible individuals.
Comment: Some commenters suggest
that SSA should screen applications to
identify individuals who appear to have
excess assets or income for the subsidy
but who may qualify for Medicare
Savings Programs in States that use
more liberal eligibility rules for such
programs. Alternatively, the
commenters suggest SSA forward such
applications to State offices or use Statespecific income and asset rules to
determine eligibility.
The commenters noted that by
qualifying for Medicare Savings
Programs, an individual will
automatically be eligible for the lowincome subsidy, despite the fact that if
the same individual applied, he or she
may not have qualified for the subsidy
as a result of excess income or
resources. The commenters suggest that
individuals who qualify should be
automatically enrolled by States in
Medicare Savings Programs with an optout provision. Further, we should make
benefit counseling available to these
beneficiaries since enrollment in a
Medicare Savings Program can affect the
amount of assistance a beneficiary may
receive through other public assistance
programs. Finally, the commenters
suggest that individuals who do not
enroll in a Medicare Savings Program
but who qualify for such a program
should still be considered automatically
eligible for the subsidy.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Response: We acknowledge that some
individuals who apply and qualify for a
Medicare Savings Program (as a QMB,
SLMB, or QI) with a State’s Medicaid
office will be considered automatically
eligible for the full subsidy, despite the
fact that if the same individual applied
for a low-income subsidy at the State or
SSA, they may not have qualified for the
full subsidy as a result of excess income
or resources. This scenario is more a
function of Medicaid rules permitting
States to use more liberalized income
and asset methodologies than a lack of
uniformity for the rules of the lowincome subsidy program. In those States
that use more liberalized income and
asset methodologies under section
1902(r)(2) of the Act for purposes of
determining eligibility for Medicare
Savings Programs, individuals may find
it more advantageous to apply for
Medicare Savings Programs rather than
applying for the low-income subsidy
directly with States or SSA.
We are working with SSA to design a
process that will provide high-level
information which does not include
income or resource information but will
provide the outcome of the subsidy
determinations to States for purposes of
identifying individuals who apply at
SSA and who may also qualify for full
Medicaid benefits or Medicare Savings
Programs. With this process, we hope to
avoid situations in which an individual
applies for a low-income subsidy at an
SSA office, finds out that he or she has
excess income or resources to qualify for
the full subsidy or even the subsidy
available to other low-income subsidy
eligible individuals, and remains
unaware that he or she may
automatically qualify for a full subsidy
if the individual chooses to enroll in a
State’s Medicare Savings Program (as a
QMB, SLMB, or QI).
Comment: We received one comment
that SSA needs to use information
provided from beneficiaries applying for
low-income subsidies to better target the
mailings that SSA is required to do
under section 1144 of the Act.
Commenters note that this provision
requires SSA to annually identify
beneficiaries potentially eligible for
Medicare Savings programs, notify them
about the programs, and send copies of
the list of individuals identified as
potentially eligible for the Medicare
Savings Programs to the appropriate
State agencies. In addition to using the
data on income and assets for the
section 1144 of the Act mailings, the
commenters suggest that SSA could
provide States the income and resource
data for determining eligibility for
Medicare Savings Program eligibles.
Providing this information could reduce

PO 00000

Frm 00185

Fmt 4701

Sfmt 4700

4377

the burden on beneficiaries from having
to submit this information twice (that is,
to SSA for the low-income subsidy and
to States for enrollment in Medicare
Savings Programs). The commenters
suggest that while privacy issues may be
of concern, one option to address those
concerns would be to allow applicants
to consent to sharing information with
their State agency to assist the State in
determining whether they are eligible
for Medicare Savings Programs.
Response: Again, we are working with
SSA to design a process to provide
subsidy determinations to States for
purposes of identifying individuals who
apply at SSA and who may also qualify
for a Medicare Savings Program in the
State. We expect that States will use the
determination to contact individuals
who may qualify and to assist them in
the application process. As the
commenter suggests, SSA is unable to
provide income and resource
information directly to States for
privacy reasons. Therefore, the
information provided to States will be
limited to high-level information on the
outcome of the subsidy determination.
Comment: Some State commenters
noted that States lack a practical way to
determine whether applicants have also
applied for the low-income subsidy
through SSA. They note that if SSA and
States make separate determinations
that do not agree some form of
reconciliation will be needed. They
further note that this need for
reconciliation will further complicate
processing and add to administrative
burden and costs.
Other commenters requested
clarification on the data exchange
process. The commenters assert that
they cannot envision a data exchange
process that would be fast enough to
prevent an applicant from receiving a
denial from SSA and subsequently
applying at the State office. They noted
that this could result in duplicative
work for the State and SSA. The
commenters ask that the rule be
clarified for this coordination.
Response: We agree that it will be
important to design a process in which
States can determine if an individual
has already filed an application with
SSA, and vice versa. We expect to
provide further information on this
process through operational guidance.
We also note that, based on comments,
we have clarified in the final rule that
multiple applications will not be
permitted in cases where an individual
has received a positive determination
from either SSA or the State. In other
words, an individual may not file a
second application for the remainder of
the eligibility period with the alternate

E:\FR\FM\28JAR2.SGM

28JAR2

4378

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

agency if he or she has received a
positive determination from the State or
SSA. This requirement is not intended
to preclude an individual from reporting
subsidy changing events in accordance
with the determining agency’s rules, but
rather to prevent confusion that could
arise if a State and SSA process
determinations for the same individual.
3. Eligibility Determinations,
Redeterminations and Applications
(§ 423.774)
In accordance with section 1860D–
14(a)(3)(B)(i) of the Act, an application
for subsidy assistance may be filed with
either a State’s Medicaid program office
or SSA. Inquiries made by individuals
to Part D plans concerning application
or eligibility for the low-income subsidy
should be referred to State agencies or
SSA. Eligibility determinations would
then be made by the State for
applications filed with the State
Medicaid agency or by the
Commissioner of Social Security for
those filed with SSA.
While our goal is to provide a single
application and determination process
for the low-income subsidy, we
recognize that the statute provides that
redeterminations and appeals of
eligibility determinations are to be made
in the same manner as for medical
assistance for those individuals who are
determined eligible by the State
Medicaid agency. Similarly, the
Commissioner will decide how to
conduct redeterminations and appeals
for those subsidy determinations made
by Social Security.
In the proposed rule we noted that
eligibility determinations for lowincome subsidies would be effective
beginning with the first day of the
month in which the individual applies
for a subsidy, but no earlier than
January 1, 2006, provided the applicant
meets the requirements for eligibility
when he or she applies and has enrolled
with a Part D plan . Initial eligibility
determinations would remain in effect
for a period not to exceed 1 year,
beginning no earlier than January 1,
2006.
Because States and Social Security
offices will be performing subsidy
determinations, States and SSA would
need to share data with us. We would
then use the data to notify the Part D
plan in which the individual is enrolled
of the individual’s eligibility for the
low-income subsidy. We would also use
the data to provide information on the
individual’s income bracket so that Part
D plans may identify the cost-sharing
amounts and, in the case of other
subsidy eligible individuals, the
monthly beneficiary premiums that may

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

be charged to a subsidy eligible
individual as discussed later in this
subpart of the preamble.
Section 1860D–14(a)(3)(E)(ii) of the
Act directs the Secretary and the
Commissioner of SSA to develop a
model simplified application form for
the determination and verification of
Part D eligible individual’s assets or
resources. We believe it is important to
develop a simplified application for
income as well as resources and to
develop an application that will address
both the full and the other low-income
subsidy provisions. Therefore, we have
been working with SSA to develop a
model application form to be used to
determine eligibility for all subsidies.
The application will reflect the
definitions of income and resources
discussed earlier in this subpart.
For the method and degree to which
income and resources will be verified,
our general policy is to not spend more
on verification than the expected return
in terms of benefit savings to the
Medicare program from such
verification. Therefore, as stated in the
proprosed rule, we intend to use the
most efficient and cost-effective process
that will balance the need for program
integrity with the goal of reducing the
paperwork burden and cost.
We envisioned a process based on an
operations research strategy whereby
States and SSA would build on existing
verification processes used for other
programs. We planned on maximizing
the use of automated data matches for
verification of income and certain liquid
resources (which minimize both
paperwork burden and cost), and
relying on specific targeting or profiling
criteria derived from a database that
would identify a subset of applications
for purposes of in-depth verification.
This in-depth verification process
would enable SSA and States to focus
on elements attested to by the applicant
that do not lend themselves to
verification by electronic means (that is,
countable real estate). By developing a
targeted approach, we believed we
could strike an appropriate balance
between administrative costs and
program goals and objectives. We
requested comments on this approach.
In developing a simplified
application, we also considered a
number of other issues in order to
streamline the application process. For
example, the proposed rule permits a
personal representative to assist in the
application process. We proposed to
define personal representative as an
individual who is authorized to act on
behalf of the applicant, an individual
acting responsibly on behalf of an
applicant who is incapacitated or

PO 00000

Frm 00186

Fmt 4701

Sfmt 4700

incompetent, or an individual of the
applicant’s choice who is requested by
the applicant to act as his or her
representative in the application
process.
In addition, we would permit the use
of a proxy signature process to allow
applications to be taken over the phone
or by an Internet process. Under a proxy
signature process, an individual attests
to the accuracy of the information
provided under penalty of perjury prior
to submitting the information for
processing. Our proposed requirements
specify that the individual applying for
the low-income subsidy, or a personal
representative on his or her behalf
complete the application for the lowincome subsidy, and certify as to the
accuracy of the information provided.
Section 1860D–14(a)(3)(E)(iii)(II) of the
Act provides that statements from
financial institutions shall accompany
applications in support of the
information provided therein. We
believe States and SSA will be able to
verify information through data matches
with other sources that will
substantially eliminate the need for the
beneficiaries to bring statements from
financial institutions with them when
they apply.
As a result, we would reduce an
applicant’s burden in producing
financial statements by not requiring
paper copies except when specifically
requested. For example, SSA and States
may verify some resources for the lowincome subsidy through data matches
with 1099 files from the IRS, which
show the annual amount of interest
earned on interest bearing accounts. If
the data from the 1099 files indicate the
applicant’s interest is below a threshold
amount relating to the resource limit
and the applicant has no countable real
estate, the State or SSA could decide
that no further information is needed
from the applicant relating to certain
types of resources. When the threshold
is exceeded, additional information may
be requested of the individual to
support the application. Use of this
process would ease the burden on
individuals preparing to file an
application and will reduce the
administrative burden on States and
SSA in handling paper verification.
Accordingly, § 423.774(d) required the
submission of statements from financial
institutions only if requested by the
State or SSA.
Comment: Some commenters
suggested that the regulations should
specify that a determination notice be
sent to the applicant no later than 30
days after the application is filed.
Additionally, they suggested that SSA
and States should be required to notify

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
CMS within 24 hours of an individual
being determined eligible for the
subsidy. Other commenters questioned
whether the State Medicaid agency is
required to complete determinations
within 45 days as is required for most
Medicaid eligibility determinations
under § 435.911. These commenters
argue that the regulations should specify
a time standard that would apply to
determinations made by either the State
or SSA.
Response: We do not have authority
to direct SSA to determine subsidy
eligibility within a given time period,
and have decided not to impose a
specified period on States through
regulation. Instead, we will provide
operational guidance to States, monitor
the time period for determining subsidy
eligibility, and take action as
appropriate. As general guidance, we
expect that States will determine
subsidy eligibility within time periods
that are at least consistent with the
processing of State Medicaid
applications.
Comment: Some commenters
suggested that in order to avoid delays
in beneficiaries being able to use their
subsidy benefits while their application
is pending, the final rule should offer
beneficiaries the option of applying
through a presumptive eligibility
system. Commenters suggested that the
system could be designed in a manner
whereby an applicant can complete a
form at a provider’s office or other
location where they declare their family
size, income and assets. If the
individual’s income and resources are
below the eligibility levels, they could
be found presumptively eligible. The
individual could then have the
obligation placed on him or her to fill
out the complete application within a
prescribed period of time. The
commenters argue that such a system
would encourage beneficiaries to apply
since they would see the benefits of the
system.
Response: We appreciate that it is
important for subsidy determinations to
be made as quickly as possible so that
individuals will be able to receive extra
help with the payment of cost sharing
and premiums when enrolled in a Part
D plan. We are working with States and
SSA on an outreach strategy to try to
encourage individuals potentially
eligible for the low-income subsidy to
apply for the subsidy as early as
possible, starting July 1, 2005. Under
this outreach strategy, we will
encourage individuals to apply and
‘‘pre-qualify’’ for the low-income
subsidy before enrolling in a Part D plan
so that they will know ahead of time
whether or not they are eligible for extra

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

assistance with the payment of
premiums and cost sharing. However,
the subsidy will not be effective until
the start of the program when the
individual is actually enrolled in a Part
D plan.
At this time, we decline to implement
a presumptive eligibility process for
individuals not deemed to be subsidy
eligible individuals. We believe our
streamlined process that relies on selfattestation of the information on the
application with such verification as
SSA or the States determine is
appropriate will ensure that individuals
quickly receive subsidy determinations
from SSA or States, so that they can get
the extra help they need. It is worth
noting that the simplified application
being developed in consultation with
SSA will be available on the Internet
and will be available to providers if they
choose to offer them at their locations.
In addition, it is important to note that
individuals do not need to apply at
State offices or SSA field offices in
person. They may apply over the phone
via SSA’s 1–800 number, they may send
applications via the mail or over the
internet, and they may have individuals
assist them in completing the
applications on their behalf.
Comment: Some commenters suggest
that we clarify whether individuals who
currently receive benefits as a fullbenefit dual eligible individual, SSI
recipient or under the Medicare Savings
Program (as a QMB, SLMB, or QI) are
required to undergo a separate and new
eligibility determination in order to
qualify as a full subsidy eligible
individual. The commenters suggested
that these individuals should be
required to recertify their eligibility
under these programs in accordance
with existing requirements pertaining to
recertification or redetermination.
Response: Individuals who currently
receive benefits as a full-benefit dual
eligible, SSI recipient or under the
Medicare Savings Program are not
required to undergo a separate eligibility
determination in order to qualify as a
full subsidy eligible. They are ‘‘deemed’’
or treated as full subsidy eligible
individuals without having to complete
a separate application. We have clarified
this in the final rule at § 423.773(c).
As part of our yearly notice to deemed
subsidy eligibiles, we will explain that
the loss of Medicaid near the end of the
calendar year could impact an
individual’s status as a full subsidy
eligible individual in the next year.
Thus if someone loses Medicaid and
does not regain eligibility during a year,
he or she will retain subsidy eligibility
during the remainder of the calendar
year, but will no longer be automatically

PO 00000

Frm 00187

Fmt 4701

Sfmt 4700

4379

deemed for the full subsidy in the next
calendar year.
Comment: Some commenters would
like us to better define eligibility
determination periods for the lowincome subsidy. The commenters
suggest that the eligibility determination
should be defined as one year. Further,
it should not be associated with either
a State Medicaid program
redetermination or an SSA
redetermination.
Another commenter suggested that we
should interpret the ‘‘month of
application’’ for a low-income subsidy
individual to mean the first day of the
month a Part D plan is notified by us of
the individual’s eligibility for the lowincome subsidy. Alternatively, the
commenter suggests that the application
processing timeframes be developed and
implemented in such a way as to avoid
administrative burden and beneficiary
confusion. For example, we should
specify that the application processing
timeframes would start beginning with
the month in which the State agency
received a ‘‘complete’’ application. The
commenter asserts that incomplete
applications must be rendered
‘‘complete’’ or rejected within 30 days.
Further, complete applications should
be processed no later than 30 days from
the date the application was rendered
complete, meaning Part D plans should
be notified within 30 days of the date
the application was rendered complete
that an individual is eligible for a lowincome subsidy. Once notified, these
individuals would be moved into the
appropriate internal plan and costsharing would be appropriately
reflected for that individual sooner
rather than later.
Response: We do not have the
authority to accept the first commenters’
suggestion. Under section 1860D–
14(a)(3)(B)(ii) of the Act, the statute,
initial determinations for individuals
who apply for the subsidy are effective
beginning with the month the
individual applies, but no earlier than
January 1, 2006. These initial
determinations shall remain in effect for
a period specified by the Secretary, but
not to exceed one year, regardless of
whether the determination is made by a
State or SSA. Redeterminations of
eligibility for those applications
processed by States are to be made in
accordance with the frequency and
manner in which the State makes
Medicaid redeterminations, which must
be conducted at least annually.
Redeterminations made by SSA may be
of a frequency determined by the
Commissioner.
We will address the issue associated
with the completeness and timeframe

E:\FR\FM\28JAR2.SGM

28JAR2

4380

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

for processing an application through
operational guidance. It is important to
note that we do not have authority to
direct SSA to determine subsidy
eligibility within a given time period,
and we have decided not to impose a
specified period on States through
codification.
Comment: Some commenters question
whether retroactive eligibility will be
allowed for full-benefit dual eligible
individuals. They suggest that the
regulations be clarified for that
possibility.
Response: Retroactive eligibility for
the low-income subsidy is only an issue
if a full-benefit dual eligible individual
is already enrolled in a Part D plan. For
instance, if a person is enrolled in a Part
D plan and decides not to apply for the
subsidy, he or she may have retroactive
subsidy eligibility if the individual later
qualifies for Medicaid. By extension of
being entitled to full benefits under
Medicaid, the individual will
automatically be eligible for the lowincome subsidy. In this case, subsidy
eligibility will extend back to the start
date of Medicaid eligibility, which
could be up to three months earlier if
the individual would have qualified for
Medicaid during the three month
retroactive period. As such, the
individual will be reimbursed by the
plan for any extra cost sharing he or she
otherwise would not have paid as a full
subsidy eligible individual. This would
also apply to individuals eligible under
a Medicare Savings Program as a SLMB
or a QI(but not as QMB, because QMBs
cannot receive retroactive benefits
under Medicaid statute). For QMBs and
other, non-dual eligible individuals who
are enrolled in a Part D plan, and later
apply and are determined eligible for
low income subsidy assistance, their
eligibility, consistent with the statute,
would be effective on the first day of the
month in which they applied for the
low income subsidy.
Comment: One commenter indicated
that the proposed regulations do not
address whether eligibility
determinations in one State are
transferable to another State. The
commenter also noted that there is no
discussion of the transfer of information
between the State agency and SSA, or
the transfer of information between
States.
Response: If the eligibility
determination for an individual not
deemed to be a full subsidy eligible
individual was processed by SSA, then
SSA ‘‘owns’’ the beneficiary for
redeterminations and appeals. Since
SSA is a national agency applying
uniform national standards,
redeterminations and appeals will be

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

processed even if a beneficiary moves
between States. However, if the
beneficiary no longer resides in a State
and the State processed the subsidy
determination under its own system, the
State can no longer reasonably be
expected to be held liable for the
subsidy redeterminations and appeals,
consistent with the manner and
frequency a State would redetermine
eligibility under Medicaid. The
beneficiary in this instance would need
to apply in the new State of residence,
or could apply with SSA unless
otherwise deemed eligible for the full
subsidy.
Comment: Several commenters
question whether changes in
circumstances, such as increases or
decreases in income, need to be
reported by the beneficiary.
Response: For individuals who apply
for the low-income subsidy, changes in
financial circumstances that could
impact the individual’s eligibility for
the low-income subsidy should be
reported to the agency that processed
the subsidy application in accordance
with that agency’s rules.
SSA will be publishing rules
regarding subsidy changing events that
could impact low-income subsidy
eligibility. For individuals who are
deemed eligible for the full subsidy,
changes in circumstances that would
impact eligibility for Medicaid or SSA
should be reported as required under
those programs. However, it is
important to note that, for
administrative ease, we will deem
individuals as subsidy eligible for a
period not to exceed one year, even if
changes in circumstances may cause
someone to lose Medicaid or SSI for a
period of time. If the person is no longer
eligible for Medicaid or SSI after the
period of deemed subsidy eligibility, he
or she will no longer be automatically
eligible for the low-income subsidy and
must apply in order to continue
receiving the benefit.
Comment: One commenter believes
that we should provide prompt
identification of an individual’s
institutional status for the purpose of
overriding the cost sharing at the point
of sale.
Response: States will be providing
information on a full-benefit dual
eligible individual’s institutional status
on a monthly basis to us. We will
provide this information to Part D plans.
We will address through operational
guidance how plans should address
situations in which an enrollee’s
institutional status is different than the
information provided to them from us.
Comment: One commenter makes an
argument that the statute permits SSA to

PO 00000

Frm 00188

Fmt 4701

Sfmt 4700

contract with SPAPs to make
determinations of eligibility for
financial assistance in accordance with
SSA’s procedures. In addition, the
commenter argues that there is no legal
impediment to a State’s designation of
its SPAP as the State enrollment agency,
so long as eligibility determinations and
redeterminations are made in the same
manner as for Medicaid recipients. The
commenters assert there is precedent for
this practice. One commenter said that
we should ensure that any arrangements
with SPAPs to make eligibility
determinations are considered for
Federal matching funds. Finally, the
commenters suggest that SPAPs have
direct on-line access to on-line reporting
systems to facilitate the SPAP’s ability
to determine a person’s eligibility for
the low-income subsidy. They suggest
that we clarify in the final regulations
and in guidance that State Medicaid
programs have the option to permit
SPAPS to make initial eligibility
determination and redeterminations for
subsidies for low-income persons who
apply for benefits through an SPAP.
Response: By statute, eligibility for
the low-income subsidy program must
be determined by the State Medicaid
agency or the Social Security
Administration. While it cannot be the
entity ultimately responsible for
determining eligibility, SPAPs can serve
as an intake point for low-income
subsidy applications. SPAP offices will
be able to access the SSA application
from the Internet in order to assist
individuals in applying for a subsidy.
We also note that entities other than
SPAPs, including community
organizations and other non-Medicaid
State offices, can provide assistance to
individuals in completing the SSA
application.
Comment: Some commenters note
that the enrollment process for Part D
plans is separate from the application
process for the low-income subsidy.
They note that there is no mechanism in
the proposed rule to permit a
beneficiary to apply for the low-income
subsidy at the time of enrollment in a
Part D plan. They also note that Part D
plans are not required to inform
beneficiaries that a subsidy may be
available to them. They suggest that
SPAPs should be allowed to make
determinations and redeterminations of
subsidy eligibility in order to facilitate
applications for SPAP enrollees.
Response: Again, while SPAPs may
serve as an intake point for low-income
subsidy applications the State Medicaid
agency or the Social Security
Administration retains ultimately
responsible for eligibility
determinations. For the comment that

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Part D plans are not required to inform
beneficiaries that a subsidy may be
available, we agree. However, we
believe many Part D plans will
encourage their enrollees to apply if
they indicate they are low-income and
need extra assistance with premiums
and cost sharing. We also encourage
SPAPs to inform their members of the
availability of the low-income subsidy
to provide extra assistance with
premiums and cost sharing under
Medicare Part D, and to assist their
members in completing the SSA
application.
Comment: Many State commenters
suggest that States should be allowed to
meet their statutory obligation for the
low-income subsidy by receiving
applications and passing them to SSA
for the determination process. They
assert that use by States of a streamlined
low-income subsidy application process
through SSA would reduce the burden
on States of doing separate
determinations. They also suggest that
the process include use of web-based
applications accessed with Federally
funded computers at Medicaid
eligibility sites, paper applications that
are batched and sent to SSA by the
eligibility sites, and phone applications
conducted directly with SSA. Another
commenter suggested that States that
only collect applications and forward
them to SSA should not be responsible
for redeterminations and appeals for
these applications. This commenter also
believes these States should not be
responsible for screening applications
for Medicare buy-in programs.
A few State commenters also assert
that we have made contradictory
statements with regard to the role of
SSA and States in taking applications
for the low-income subsidy. They
indicate that we have issued guidance
that States could batch up applications
and ship them to SSA for processing,
and that SSA would make the
determinations, send the notifications,
and conduct the appeals for the lowincome subsidy program. However, the
commenters point out that the
regulations in § 423.774 and
§ 423.904(a), and the statute at section
1935 of the Act, direct States to make
eligibility determinations and
redeterminations for low-income
premium and subsidies.
Finally, several State commenters
seek clarification on whether States
could be required to perform
administrative functions such as
providing personnel resources for
answering questions and assisting
applicants, making determinations and
redeterminations, making systems
changes to record determinations and

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

redeterminations made by the State,
printing applications, conducting
appeals, sending notices to clients,
coordinating with financial institutions
for verification and developing and
sending reports to us.
Response: The statute clearly sets
forth the requirement that eligibility for
the low-income subsidy program will be
determined by either State Medicaid
agencies or by the Social Security
Administration. As such, States must
have the ability to determine eligibility
if someone requests a ‘‘State’’ subsidy
determination. As part of this
obligation, States are required to send
notices of subsidy determinations,
process redeterminations, and handle
appeals.
We encourage States to consider using
the SSA application form and process as
their default process for processing lowincome subsidy applications. Under this
process, States would assist individuals
who agree to complete an SSA
application. Once completed, States
would submit the applications to SSA
for processing. While States would still
have to develop a process to determine
eligibility for an individual who
specifically requests a ‘‘State’’
determination as opposed to an ‘‘SSA’’
determination, States could offer the
SSA low-income subsidy application
process to individuals in order to reduce
the administrative burden associated
with sending notices, processing
appeals and redeterminations, and
verifying information reported on
subsidy eligibility applications. Again,
States should be mindful that the statute
does not permit States to refuse to
accept and act on subsidy eligibility
applications if the applicants insist on
having them treated as applications
with the State agency.
We will be working with SSA to
provide operational guidance to States
on how they may utilize the SSA
process for those applicants who agree
to use the SSA application. The SSA
process includes an internet-based
application that may also be accessed in
paper form. Under this process,
individuals need not apply in person
with the SSA or States; however, if they
do apply in person at a State office, the
State would be obligated to assist
individuals in completing the
application and to screen individuals
for Medicare Savings Program
eligibility.
Comment: Some State commenters
expressed concern that, should the
States process determinations,
redeterminations, and appeals, as well
as SSA, it is not possible to create equal
systems for clients, resulting in two
competing processes in an already

PO 00000

Frm 00189

Fmt 4701

Sfmt 4700

4381

complex system. They note that in some
States, beneficiaries have limited access
to field offices compared to State offices.
They also argue that, even if the State
follows the Federal guidelines, it does
not seem likely that a beneficiary
following the State process will
experience the same procedure as a
client using the SSA process. The
commenters ask for reconsideration of
this issue, or alternatively, clarification
about how continuity would be assured.
Response: For individuals who apply
for the subsidy, one notable area of
inconsistency could be the timing and
manner of redeterminations of subsidy
eligibility. This process, by statute, is
dependent on which entity processed
the application. If SSA processed the
application, SSA will determine the
manner and frequency of the
redeterminations. If a State processed
the application through its own subsidy
eligibility determination system, the
manner and frequency of the
redetermination will be consistent with
how the State redetermines eligibility
for Medicaid. For individuals deemed
eligible for the full subsidy, the
redetermination process will be based
on the underlying program that
automatically qualified the individual
for the subsidy, for example, Medicaid
or SSI.
Comment: Some State commenters
indicated that they did not believe
States would be able to achieve the
degree of automation at the start of the
program as envisioned by CMS in the
preamble of the proposed rule for
purposes of verifying an applicants’
income and resources. They also noted
that existing State eligibility systems are
not easily modified or adapted without
considerable State expense. Finally, a
few commenters suggested that the
regulation implies that States may be
able to access other agencies’ databases
to verify income and resources. The
commenters suggest that such databases
be listed or otherwise specified.
Response: We recognize that existing
State eligibility systems are not easily
modified or adapted without
considerable State expense; however,
the law is clear that States must be able
to determine low-income subsidy
eligibility. States therefore need to
develop a process to support the
determinations when specifically
requested of them.
We strongly recommend that States
consider using the SSA application as
their default application for processing
low-income subsidy applications and
encourage States to assist applicants in
filing their applications with SSA.
While States would still have to develop
a process to determine eligibility for an

E:\FR\FM\28JAR2.SGM

28JAR2

4382

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

individual who requests a ‘‘State’’
determination as opposed to an ‘‘SSA’’
determination, States may use the SSA
low-income subsidy application and
process in order to reduce the
administrative burden associated with
sending notices, processing appeals and
redeterminations, and verifying
information reported on subsidy
applications. States could focus most of
their attention on assisting individual
with completing the SSA application,
and screening and enrolling individuals
in the Medicare Savings Program.
Comment: One commenter asks that
we keep the period of comment on the
proposed rule open until comments are
due on the SSA’s regulation.
Response: We cannot keep the
comment period open on this proposed
rule until the comments are due on the
SSA regulation regarding low-income
subsidy determinations. We are working
closely with SSA during the regulations
process to ensure consistent rules
regarding low-income subsidy are put in
place by both agencies.
Comment: Since generally only 50
percent Federal financial participation
(FFP) is provided for the State’s role in
the administration of the low-income
subsidy program, several State
commenters asserted that the cost
associated with administration of the
Medicare program could prohibit the
provision of other State services. States
noted that they would have to use a
significant amount of resources from
their general fund and asked us to
consider reducing the State’s
responsibilities due of the lack of
funding for the costs associated with
implementation of the low-income
subsidy program. The State commenters
suggest that FFP associated with the
State role in this program should be
derived from a cost allocation
methodology that attributes 100 percent
to the Medicare program.
Response: While we sympathize with
the commenters’ concerns, we do not
have the authority to change the Federal
financial participation rate available to
States. The statute specifies that States
are to be reimbursed according to the
normal Federal match for administrative
costs, which is generally 50 percent.
Comment: A few commenters
expressed concern that the eligibility
process for the low-income subsidy is
different than the process the State uses
to determine eligibility for Medicaid.
The commenter indicated that by having
different methodologies, States will be
more error prone in making
determinations. The commenters also
noted that they would incur
programming costs and additional staff
training to incorporate this new method,

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

and suggested that Federal financial
participation be increased to 100
percent to account for these costs.
Response: The process for
determining eligibility for the lowincome subsidy is based on statutory
provisions that specifically preclude
States and SSA from using the more
liberalized methodologies permitted
under Medicaid for purposes of
counting income. For counting
resources, we acknowledge in the
proposed rule that we could have
permitted States to use the same
resources standards that States employ
under Medicaid for purposes of
determining eligibility for Medicare
Savings Programs, if such standards
would not significantly increase the
numbers of individuals who are eligible
for the low-income subsidy. However,
as we noted in the preamble to the
proposed rule, we elected not to
exercise this discretion since, as we
noted in responses to previous
comments, we believe national
uniformity for purposes of eligibility
determinations is a desirable goal.
For the suggestion that the Federal
financial participation rate should be
100 percent, we note that we do not
have the authority to change the Federal
financial participation rate available to
States. The statute specifies that States
are to be reimbursed according to the
normal Federal match for administrative
costs, which is generally 50 percent.
Comment: Some commenters believe
that it is unclear whether the Federal
government will require subsidy
applicants to show proof of Medicare
enrollment in order to apply for the
subsidy. If not, the commenters expect
that States will have coordination
problems, as they are reliant on
periodic, and not real-time, data
matches to assess Medicare enrollment.
Response: We are exploring options
for States to verify Medicare eligibility
if the applicant cannot provide proof.
Comment: Some commenters
suggested that low-income subsidy
applicants, no matter where they apply,
should have the opportunity to be
considered for full Medicaid eligibility.
They suggest that the simplified
application form should include an
option for persons to have their
application reviewed for Medicaid
eligibility.
Response: The statute specifies that,
in addition to determining eligibility for
the low-income subsidy, States are
directed to screen for eligibility for
medical assistance programs for the
payment of Medicare cost sharing, and
to offer enrollment to eligible
individuals for such programs. As a
practical matter, we believe States will

PO 00000

Frm 00190

Fmt 4701

Sfmt 4700

identify individuals with limited
income and resources who may qualify
for full Medicaid benefits as part of this
process. In addition, it is important to
emphasize that we are working with
SSA to design a process to provide
subsidy eligibility determinations to
States for purposes of identifying
individuals who apply at SSA and who
may also qualify for a Medicare Savings
Program in the State. We expect that
States will use this information to
contact individuals who may qualify for
assistance with Medicare cost sharing
and to assist them in the application
process for the Medicare Savings
Programs.
Comment: Some commenters suggest
that the verification process for
information provided on low-income
subsidy applications should not impose
an undue burden on applicants. They
argue that the need to provide
documentation of income and assets is
one of the most significant barriers to
enrollment in Medicare Savings
Programs. They suggest that States
should have access to SSA’s automated
systems to verify financial eligibility
information for the low-income subsidy
program. Further, States should only be
permitted to ask for one bank statement
and only in such cases where an
applicant refuses to sign an
authorization form to permit the
eligibility worker to obtain the
information directly from the financial
institution. Some commenters also
suggest that documentation should be
produced as a last possible resort.
Response: Individuals will not have to
bring volumes of information with them
when they apply using the SSA
application process. The simplified
application developed by SSA, in
consultation with CMS, is based on the
principle of self-attestation. While some
information may be requested from
applicants on an exception basis, based
on responses to certain questions or
based on inconsistencies from electronic
data matches, the majority of applicants
will not need to provide additional
information beyond what is submitted
and attested to in the application form.
As we have indicated in other
responses, we recommend that States
encourage and assist applicants in
applying for the low-income subsidy
using the SSA application (that is, assist
applicants in completing the SSA
application and forward it to the SSA to
make the determination). In such cases,
SSA would verify income and resources
for the low-income subsidy utilizing its
automated systems. For individuals who
prefer a ‘‘State’’ rather than ‘‘SSA’’
determination, we encourage States to
use an application form similar to the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
one utilized by SSA and also to find
ways to streamline the verification
process by utilizing electronic data
matches to the greatest degree possible.
However, we recognize that States may
not be able to achieve the same
verification process utilized by SSA.
This may encourage some applicants to
apply using the SSA process rather than
the State process.
Comment: Some commenters
encourage CMS and SSA to retain the
strategy to devise a uniform application
that reflects uniform eligibility
requirements. The commenters suggest
that the application be designed to serve
as the Medicare Savings Program
application and full Medicaid
application as well. The commenters
also suggest that the combined form
should reflect our proposed definition
of countable assets in § 443.772 and be
at least as streamlined as the model
Medicare Savings Program application
adopted by CMS and States. The
commenters assert that the draft SSA
application includes questions on life
insurance, burial accounts, in-kind
support and maintenance, and transfers
of assets that do not appear on the
model Medicare Savings Program
application.
Response: While nothing prevents a
State from developing a special
addendum to the low-income subsidy
application to address questions specific
to Medicaid or Medicare Savings
Programs eligibility, the application for
the low-income subsidy program must
reflect the definition of countable
income and resources outlined in this
final rule. For reasons we have
previously explained, the definition of
income and resources used for purposes
of the low-income subsidy program
could vary from the definitions used by
State Medicaid programs for purposes of
determining eligibility for full Medicaid
or for programs that provide assistance
with Medicare cost sharing. Some States
may use more liberalized methodologies
than the basic SSI statutory rules for
counting income and resources, on
which the low-income subsidy
application is based. For these reasons,
questions on life insurance, burial
accounts, and in-kind support and
maintenance need to be clearly
articulated in the application in order to
determine income and resources for the
low-income subsidy. Questions
regarding transfers of assets for less than
fair market value will not be included
on the application as we do not believe
that penalties associated with such
transfers are appropriate when counting
resources for the low-income subsidy.
Comment: A few commenters suggest
that § 423.774 be strengthened and

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

revised to ensure that eligible older
adults and persons with disabilities
remain enrolled in the low-income
subsidy from year to year. They suggest
that we rewrite the final rule to define
the eligibility period as one year,
regardless of which entity made the
determination. They argue that the
statute and Congressional intent support
an interpretation giving the Secretary of
HHS the authority to determine the term
of the eligibility determination period
and the Commissioner and the States
the authority to determine the manner
in which redetermination or appeals are
made. They argue that redeterminations
in this context are meant to convey
reconsiderations, not renewals of
eligibility. Commenters further suggest
the Secretary use his discretion to
establish an annual, passive
reenrollment process that would apply
regardless of whether the initial
determination was made under a State
Medicaid plan or by the Commissioner
of SSA. They suggest that the process
should entail the use of a pre-printed
renewal post-card with instructions to
return the card only if there are
corrections about eligibility status.
Response: We do not agree that we
have the discretion outlined by the
commenter. Consistent with the statute,
the proposed and final regulations state
that the initial determination is effective
for up to a year. Thereafter, the timing
of redeterminations of eligibility
depends on which entity processed the
application. If SSA processed the
application, SSA will determine the
manner and frequency of the
redetermination. If a State processed the
application under its own subsidy
eligibility determination system, the
manner and frequency of a
redetermination will be consistent with
how the State redetermines eligibility
for Medicaid.
Comment: One commenter questioned
whether the proxy signature process
discussed in the preamble meant that
we are relaxing its requirement for
signatures on applications.
Another commenter suggested that
the regulation clearly set limits as to
how telephonic proxy designations are
made and acted upon. Also, proxy
certification should only apply to the
accuracy of the proxy’s transcription,
and not to the accuracy of the
underlying information.
Response: Under a proxy signature
process, an applicant verbally attests
under penalty of perjury that the
information provided in an application
is correct and valid. As specified in the
preamble to the proposed rule, we
permit the use of proxy signatures for
the low-income subsidy application.

PO 00000

Frm 00191

Fmt 4701

Sfmt 4700

4383

SSA plans to use a proxy signature for
the application it is developing to allow
individuals to attest to their income and
resources when applying over the
telephone and Internet. If States develop
their own application, we encourage
them to consider a similar signature
proxy process. We do not agree that we
need to provide further specificity in the
regulation on this issue. This process
does not alter our position on
requirements for signatures in any other
contexts.
Comment: Some commenters suggest
that the Commissioner of SSA should
handle all appeals in order to ensure
uniformity in the appeals process. One
commenter suggested that requiring the
States to handle Medicare appeals
would require an investment in
additional staff and resources and
represent an unfair burden on States
because only one-half the costs would
be covered by the Federal government.
Another commenter recommends that
the redetermination and appeals process
be consistent among SSA and Medicaid
agencies to eliminate confusion among
applicants.
A few other commenters request
clarification in the final rule as to
whether fair hearing rights under State
Medicaid programs apply to adverse
eligibility or renewal decisions made by
the State. Similarly, they request
clarification as to whether decisions
made by the State or SSA to reduce or
terminate a subsidy upon renewal
triggers continued coverage at the prereduction levels pending the appeal.
One commenter argued that this right
derives from Supreme Court precedent
which established the absolute right to
a pre-determination hearing pending the
loss of welfare of Medicaid benefits.
Response: Appeals of subsidy
eligibility determinations will be
handled by the entity that made the
underlying decision. If SSA processed
the initial application or
redetermination, SSA will handle the
appeal based on procedures established
by the Commissioner. If a State
processed the application or
redetermination, the appeal will be
consistent with the process the State
uses for appeals under Medicaid.
Consistent with the statute, States will
receive normal administrative match for
activities associated with appeals of
eligibility for the low-income subsidy.
For the question of continued
coverage, we agree with the commenter
that decisions made by the State or SSA
to reduce or terminate a subsidy would
trigger a right to continued coverage at
the pre-reduction levels pending the
appeal. This is based on the fact that the
subsidy program, unlike the Medicare

E:\FR\FM\28JAR2.SGM

28JAR2

4384

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

drug benefit itself, is a needs-based
program. This is also consistent with
how States process appeals under
Medicaid.
Comment: Some commenters assert
that there should be a provision for
prompt reconsideration of a subsidy
eligibility determination for
beneficiaries who believe that they have
been erroneously denied eligibility or
approved for the wrong subsidy
category.
Other commenters suggest that we
need to clarify that all aspects of
subsidy determinations, including
eligibility, calculation of subsidy or
copayment categories, the premium
subsidy amount, or the amount of any
late enrollment penalty, are subject to
appeal.
Response: As indicated earlier,
subsidy eligibility determinations or
appeals are acted upon by the entity that
made the underlying decision. We will
be implementing operational guidance
regarding when someone does not agree
with the premium subsidy amount or
late enrollment penalty.
4. Premium Subsidy (§ 423.780) and
Cost-Sharing Subsidy (§ 423.782)
In accordance with section 1860D–14
of the Act, the proposed regulations

specified the Part D premium subsidy
and the Part D cost-sharing subsidy
amounts available to subsidy eligible
individuals, with the specific subsidy
amounts varying depending upon the
individual’s income and resources/
assets level.
a. Full Subsidy Eligible Individuals
In accordance with section 1860D–
14(a)(1)(A) of the Act, full subsidy
eligible individuals are entitled to a full
premium subsidy equal to 100 percent
of the ‘‘premium subsidy amount,’’ not
to exceed the monthly beneficiary
premium for a Part D plan (other than
an MA-PD plan) offering basic
prescription drug coverage, that portion
of the monthly beneficiary premium
attributable to basic prescription drug
coverage for a Part D plan (other than an
MA-PD plan) offering enhanced
alternative coverage, or the MA monthly
prescription drug beneficiary premium
(as defined in section 1854(b)(2)(B) of
the Act) for a MA-PD plan selected by
the beneficiary.
Under section 1860D–14(b)(2) of the
Act, the premium subsidy amount for a
PDP region is equal to the greater of the
low-income benchmark premium or the
lowest monthly beneficiary premium for
a prescription drug plan that offers basic
prescription drug coverage in the region.

Further, under section 1860D–14(b)(2)
of the Act, the low-income benchmark
premium amount for a PDP region
equals either the weighted average of
the monthly beneficiary premiums for
all basic prescription drug plans (if all
prescription drug plans in the PDP
region are offered by the same PDP
sponsor), or if the PDPs in the region are
offered by more than one PDP sponsor,
the weighted average of (i) the monthly
beneficiary premiums for all PDPs in the
region (including any fallback plans)
consisting of basic prescription drug
coverage, (ii) the monthly beneficiary
premiums attributable to basic
prescription drug coverage for all PDPs
in the region offering alternative
prescription drug coverage, and (iii) the
MA monthly prescription drug
beneficiary premium for MA-PD plans.
Because section 1860D–14(b)(2)(A)(ii) of
the Act references section
1851(a)(2)(a)(i) of the Act, the premiums
of cost plans under section 1876 of the
Act, PACE plans, and private fee-for­
service plans are excluded for purposes
of determining the weighted average in
the region. This is because section
1851(a)(2)(a)(i) of the Act refers only to
MA coordinated care plans.
Table P–I below is an illustration of
the premium subsidy determination.

TABLE P–1
DETERMINATION OF THE PREMIUM SUBSIDY AMOUNT
Plan Options in Region

Low-Income Premium Subsidy (Full)
Monthly Beneficiary
Premium 1

Percentage of
Part D enrollees in
each plan 2

Premium times Per­
centage (weighted
average)

Maximum Premium
Subsidy for Eligible
Individual Enrolling
in Plan

PDP 1 Offered by Sponsor A

40.00

15%

6.00

36.00

MA-PD Plan 1

38.00

5%

1.90

36.00

PDP 2 Offered by Sponsor B

36.00

40%

14.40

36.00

MA-PD Plan 2

20.00

15%

3.00

20.00

MA-PD Plan 3

0.00

25%

0.00

0.00

Plans

Weighted Average Basic Premium in Region =
25.30
The greater of the Low Income Premium Benchmark Amount (25.30) or the lowest PDP premium in the region (36.00) equals 36.00, so the
maximum premium subsidy is the lower of 36.00 or the actual plan premium for basic coverage.
1 Assumes no supplemental premium or late enrollment penalties, and for MA-PD plans, any reduction in premium due to application of a
credit against the premium of a rebate under 42 CFR 422.266(b).
2 Assumes enrollment weights from the prior year’s reference month (not first year of program)

Table P–1 illustrates the
determination of the premium subsidy
amount in a hypothetical region in
which there are 2 PDPs, each offered by
different sponsors, and 3 MA-PD plans.
Because there are PDPs offered by more
than one sponsor, the maximum
premium subsidy amount is the greater

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

of 2 amounts: the low-income premium
benchmark amount or the lowest PDP
premium in the region. The former is
calculated by summing the products of
the plan monthly beneficiary premium
for basic prescription drug coverage and
the plan percentage of Part D enrollment
in the region, and equals $25.30. The

PO 00000

Frm 00192

Fmt 4701

Sfmt 4700

lowest monthly beneficiary premium for
a PDP in the region, however, is $36.00.
Therefore, in this exhibit, the full
monthly premium subsidy amount for
the region is determined to be $36.00.
Consequently, a full subsidy eligible
individual would have a choice of 3
zero-premium plans in which to enroll

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
(PDP 2, MA-PD plan 2, and MA-PD plan
3), because the maximum premium
subsidy amount equals or exceeds the
monthly beneficiary premiums for these
plans. However, if a full subsidy eligible
individual chose to enroll in PDP 1 or
MA-PD plan 1 , he or she would be
obligated to pay the difference between
the plan premium and the premium
subsidy amount ($4 or $2, respectively)
each month.
We also stated in the proposed rule
that fallback plan premiums would be
treated the same as those for risk-bid
plans in the calculation of the lowincome benchmark premium amount.
In accordance with section 1860D–
14(b)(2) of the Act, the low-income
benchmark premium amounts are
determined without the addition of any
amounts attributable to late enrollment
penalties.
Individuals eligible for the full
premium subsidy who are subject to late
enrollment penalties under proposed
§ 423.46 would also be entitled to an
additional subsidy equal to 80 percent
of any late enrollment penalty for the
first 60 months in which the penalties
are imposed, and 100 percent of any
penalties in any subsequent month, in
accordance with section 1860D–
14(a)(1)(A)(ii) of the Act and proposed
§ 423.780(c).
Section 423.782 of the proposed rule
incorporates the provisions of sections
1860D–14(a)(1)(B), 1860D–14(a)(1)(C),
1860D–14(a)(1)(D), and 1860D–
14(a)(1)(E) of the Act relating to the
elimination of the deductible,
continuation of coverage above the
initial coverage limit (that is, no
coverage gap), and reductions in costsharing. Specifically, full subsidy
eligible individuals have no deductible.
In addition, these individuals have
continuation of coverage from the initial
coverage limit (under paragraph (3) of
section 1860D–2(b) of the Act and
§ 423.104(d)(5)) through the out-of­
pocket threshold (under paragraph (5) of
the same section and
§ 423.104(d)(5)(iii)). In other words,
there is no coverage gap, for these
individuals and Medicare pays for the
full benefit once the catastrophic level
is reached. In addition, the cost-sharing
subsidies paid by CMS under this
subpart will count toward the
application of the out-of-pocket
threshold.
In accordance with section 1860D–
14(a)(1)(D)(i) of the Act,
institutionalized full-benefit dual
eligible individuals have no cost-sharing
below, or above, the out-of-pocket
threshold. We proposed to define
‘‘institutionalized individual’’ for this
subpart as a full-benefit dual eligible

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

individual who is an institutionalized
individual as defined in section
1902(q)(1)(B) of the Act.
Under section 1860D–14(a)(1)(D)(ii) of
the Act, non-institutional full-benefit
dual eligible individuals in 2006 with
incomes that do not exceed 100 percent
of the Federal poverty line for their
family size will pay no more than $1 for
generic drugs or preferred drugs that are
multiple source drugs (as defined in
section 1927(k)(7)(A)(i) of the Act),$3
for any other drug, or, if less, the
amount charged to other full subsidy
eligible individuals (other than
institutionalized full-benefit dual
eligible individuals) for costs below the
out-of-pocket threshold. These $1 and
$3 copayment amounts are increased
beginning in 2007 by the percentage
increase in the CPI (all items, U.S. city
average), rounded to the nearest
multiple of 5 cents.
In accordance with section 1860D–
14(a)(1)(D)(iii) of the Act, all other full
subsidy eligible individuals and fullbenefit dual eligible individuals with
income above 100 percent of the FPL for
their family size in 2006 will pay
copayment amounts of $2 for a generic
drug or preferred drugs that are multiple
source drugs (as defined in section
1927(k)(7)(A)(i) of the Act) and $5 for
any other drug, for costs up to the out­
of-pocket threshold. In accordance with
section 1860D–2(b)(4) and 1860D–
2(b)(6) of the Act, these copayments are
indexed based on an annual percentage
increase in average per capita aggregate
expenditures for covered Part D drugs,
rounded to the nearest multiple of 5
cents (see § 423.104(e)(5) of this
proposed rule).
In the proposed rule we noted that a
question had been raised concerning
whether an MA-PD plan could choose to
reduce or eliminate copayments for fullbenefit dual eligible individuals. We
stated that specialized MA plans (under
section 231 of the MMA, as defined in
proposed Title II regulations at § 422.2)
offering benefits only to dual eligible
individuals could choose to reduce or
eliminate copayments for their members
as a supplemental benefit. Otherwise,
the Part D copayments stipulated by the
MMA for low-income individuals
cannot be reduced or eliminated. This is
because any reduction of the
copayments must apply to all plan
members under the uniformity of
benefits provisions, set forth in
§ 423.265(c) of the proposed rule.
Accordingly, MA-PD plans other than
special MA-PD plans for dual eligibles
may not offer their members who are
dual eligible lower co-payments or co­
insurance than those paid by its other
plan members.

PO 00000

Frm 00193

Fmt 4701

Sfmt 4700

4385

b. Other Low-Income Subsidy Eligible
Individuals
In accordance with section 1860D–
14(a)(2)(A) of the Act, for other lowincome subsidy eligible individuals
who do not qualify for the full subsidy,
we proposed and in the final rule set a
scale for the premium subsidy in a
stepped fashion. The sliding scale
premium subsidy will range from 100
percent of the benchmark premium
amount for individuals at or below 135
percent of the FPL for their family size,
to no subsidy for individuals at 150
percent of the FPL for their family size.
In contrast to full subsidy eligible
individuals, other low-income subsidy
eligible individuals subject to the late
enrollment penalties under § 423.46 will
be responsible for 100 percent of the
penalties. In the proposed rule we
invited comments concerning the
manner in which the sliding scale
premium subsidy would be calculated
for individuals with income from 135
percent up to 150 percent of the FPL for
their family sizeOther low-income
subsidy eligible individuals will have
their annual deductible reduced from
$250 to $50 in 2006. This $50 is indexed
to grow in accordance with section
1860D–2(b)(6) of the Act beginning in
2007 based on the annual percentage
increase in average per capita aggregate
expenditures for Part D drugs, rounded
to the nearest multiple of $1. Other
subsidy eligible individuals will have
continuation of coverage from the initial
coverage limit (under paragraph (3) of
section 1860D–2(b) of the Act and
423.104(d)(4) through the out-of-pocket
threshold (under paragraph (4) of that
section and 423.104(d)(5)), meaning no
coverage gap or ‘‘donut hole.’’ For
coverage through the out-of-pocket
threshold, these individuals would pay
cost sharing that would not exceed the
15 percent coinsurance, substituting for
the higher beneficiary coinsurance
described in section 1860D–2(b)(2) of
the Act (see § 423.104(d)(2) of this
proposed rule). The cost-sharing
subsidies will count toward the
application of the out-of-pocket
threshold. After the out-of-pocket
threshold is reached, these individuals’
cost-sharing will be limited to the
copayment or coinsurance amount
specified under section 1860D
2(b)(4)(A)(i)(I) of the Act (see
§ 423.104(d)(5)), which, in 2006, means
co-payment amounts of $2 for a generic
drug or preferred multiple source (as
defined in section 1927(k)(7)(A)(i) of the
Act) and $5 for any other drug. In
accordance with sections 1860D–2(b)(4)
and 1860D–2(b)(6) of the Act, the $2 and
$5 copayments will be indexed based on

E:\FR\FM\28JAR2.SGM

28JAR2

4386

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

an annual percentage increase in
average per capita aggregate
expenditures for covered Part D drugs,
rounded to the nearest multiple of 5
cents.
• Premium Subsidy (§ 423.780)
Comment: Some commenters were
interested in what types of data
interfaces we envisioned so that States
would know coverage details.
Response: We are working through
the data system requirements and will
address these issues in further
operational guidance.
Comment: Several commenters
requested clarification on how we plan
to arrive at the weighted average
required to calculate the premium
subsidy amount for a given region.
Some were concerned that the term
‘‘weighted average’’ is not defined in the
context of calculating the low-income
premium benchmark.
Response: In response to public
comment on this methodology, we are
including new language in regulatory
text to clarify our policy on how the
weighted average will be determined for
the low-income benchmark premium.
We intend to use the same methodology
for determining the weighted average for
the low-income premium benchmark as
is used in § 423.279(b) for determining
the weighted average for the national
average monthly bid amount. The lowincome benchmark premium amount for
a region is a weighted average of the
monthly beneficiary premiums for
plans, with the weight for each plan
equal to a percentage with the
numerator equal to the number of Part
D eligible individuals enrolled in the
plan in the reference month (as defined
in § 422.258(c)(1)) and the denominator
equal to the total number of Part D
eligible individuals enrolled in all Part
D plans in a PDP region included in the
calculation of the low-income
benchmark premium amount in the
reference month.
For purposes of calculating the lowincome benchmark premium amount for
2006, we assign equal weighting to PDP
sponsors (including fallback entities)
and assigns MA-PD plans a weight
based on prior enrollment. New MA-PD
plans are assigned a zero weight. Again,
PACE, private fee-for-service plans and
1876 cost plans are not included.
Comment: One commenter
recommends that PDP premium
amounts be regulated to ensure that
subsidy eligible individuals may enroll
in any PDP and be assured a fully
subsidized premium. Another
commenter suggested that full- benefit
dual eligible individuals not pay
additional amounts over the premium
subsidy amount. The commenter argued

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

that if a dual enrolls with a higher
premium plan, that is the fault of the
enrollment system. Another commenter
also suggests that CMS or the Part D
plans provide clear notice to consumers
about set premium standards,
‘‘benchmark premiums,’’ so consumers
can evaluate plans with full
understanding of their premium options
and liability.
Response: We disagree with the first
two comments. Subsidy eligible
individuals, including full subsidy
eligible individuals, may choose to pay
a higher premium in order to enroll in
the Part D plan of his or her choice, and
we do not have the authority under the
statute to limit these individuals’
choices. The Part D plan with the higher
premium may provide a richer benefit
package that better meets the
individual’s prescription needs than
other plans. We will ensure that
beneficiaries are provided complete
information in which to evaluate their
options, including understanding
premium liability, if any.
Comment: Several commenters
requested certain clarifications in the
regulations regarding American Indian
and Alaska Native (AI/AN) Medicare
beneficiaries. The Indian Health Service
(IHS), Indian Tribes and Tribal
organizations, and urban Indian
organizations (collectively, I/T/Us)
provide various services and other
benefits to AI/ANs, including operating
pharmacies and sometimes paying
premiums, cost sharing, and similar
charges for those AI/ANs who are
eligible for various public and private
health insurance and health care
programs. Commenters requested that
the regulations clarify that I/T/U
pharmacies may pay Part D premium
amounts, either in full for non-subsidy
eligibles, or amounts remaining after
application of low-income subsidies, for
AI/AN Medicare beneficiaries that they
also serve.
Response: The clarification requested
by the commenters is a matter for the
Indian Health Service rather than for
CMS and we therefore will not address
this issue in this regulation.
Comment: Commenters asked for
clarification in the regulations as to how
the requirement to apply the ‘‘greater’’
premium calculation (for example,
premium subsidy amount) options will
be applied and enforced.
Response: We are working through
the data system and collections
requirements and will address these
issues in further operational guidance.
Comment: Some commenters
requested clarification about the linear
sliding scale for the premium subsidy
and whether this will be for ranges of

PO 00000

Frm 00194

Fmt 4701

Sfmt 4700

percentages of the Federal poverty level
or by individual percentages. The
commenters prefer the simplest
methodology to implement the scale
and request guidance from us on how
this should be calculated. We received
comments suggesting that there should
be as few as possible different premiums
reductions for low-income beneficiaries
between 135 percent and 150 percent of
FPL (that is, as few ‘‘steps’’ as possible).
Commenters said the administrative
burden of tracking and implementing a
multitude of different premiums for
these other low-income beneficiaries
would vastly outweigh any perceived
equity achieved by setting the premium
in many steps carefully calibrated to
relate directly to the individual’s
income level.
Response: We requested comments on
this issue and had proposed the
breakdown be in 5 percent increments.
Given the comments received, we will
be implementing the sliding scale
premium in four groups as follows:
beneficiaries with incomes at 135
percent of the FPL will receive a 100
percent premium subsidy; beneficiaries
with income greater than 135 percent
but at or below 140 percent of the
Federal poverty level will receive a 75
percent premium subsidy; beneficiaries
with incomes greater than 140 percent
but at or below 145 percent of Federal
poverty level will receive a 50 percent
premium subsidy; and beneficiaries
with incomes greater than 145 percent
but below 150 percent of Federal
poverty level will receive a 25 percent
premium subsidy.
Comment: One commenter indicated
that there should be no late penalty, or
at most a minimum late penalty, if an
SPAP is paying for an individual’s
premiums for Part D.
Response: We do not have the legal
authority to make the changes requested
by this commenter. In addition, SPAPs
are not obligated to pay a late penalty
fee on behalf of the subsidy eligible
individual.
Comment: Some commenters
requested that the premium subsidy for
any late enrollment penalty should be
100 percent for at least the first year in
which a beneficiary is enrolled in the
Part D program.
Other commenters argued that
imposing any late enrollment premium
penalties on individuals eligible for the
low-income subsidies is overly punitive.
They suggested that we delay the late
enrollment penalties for those eligible
for the low-income subsidies or waive
any late enrollment penalties for this
population.
Some commenters suggested that we
should allow the 100 percent subsidy of

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
the late enrollment penalty as soon as a
beneficiary becomes eligible for the full
premium subsidy just as it now
proposes to do after month 60.
Comments were also received
requesting that the reduced late
enrollment penalty under § 423.780(c)
apply for beneficiaries for whom SPAPs
pay premium costs, including the late
enrollment penalties.
Response: We recognize the concern
of the commenters for the needs of lowincome beneficiaries. However, this
change would require a legislative
change as § 1860D–14(a)(1)(A) of the
Social Security Act requires late
enrollment penalties. Section 1860D–
13(b) of the Act imposes the same late
penalty on all beneficiaries; section
1860D–14(a)(1)(A)(ii) of the Act
however, provides that full subsidy
eligible individuals will only be
responsible for paying 20 percent of any
late enrollment penalty imposed for the
first 60 months during which these
beneficiaries are enrolled in a Part D
plan and no late enrollment penalty
thereafter. Late enrollment penalties for
full subsidy eligible individuals
enrolled in SPAPs are subsidized in the
same manner as full subsidy eligible
individuals who are not enrolled in an
SPAP.
Comment: Some commenters asked
for operational clarification as to how
we will determine that the enrollee is
subject to a late enrollment penalty.
Clarification was requested as to who
will ask for information and
documentation; how the information
would get to us; and, how the enrollee
can question or appeal the imposition of
the penalty.
Response: We will issue further
operational guidance on these
processes.
• Cost-sharing subsidy (§ 423.782)
Comment: Many commenters
expressed concern that the cost-sharing
requirement would impose a burden on
full-benefit dual eligible individuals and
were particularly concerned that a
beneficiary could be forced to choose
between paying for medications and
meeting other needs. Under the
Medicaid statute, an individual cannot
be denied medication for failure to pay
a copayment, and commenters urged
inclusion of the same standard for fullbenefit dual eligible individuals under
the Medicare prescription drug program.
Response: Requiring providers to give
prescriptions to individuals who cannot
meet copayment requirements would
necessitate a legislative change because
the MMA does not include the same
prohibition that is contained in the
Medicaid statute. Therefore, we are

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

unable to make this recommended
change.
We note that institutionalized fullbenefit dual eligible individuals have no
cost-sharing responsibilities. For the
remaining full-benefit dual eligible
individuals with income below 100
percent of the Federal poverty level, the
law specifies a ceiling in 2006 of
copayments that do not exceed $1 for a
generic drug or a preferred drug that is
a multiple source drug, and $3 for any
other drug. Copayment amounts are
increased on an annual basis from these
base amounts, as required by § 1860D–
14(a)(4)(A) of the Act.
Additionally, under the law,
specialized MA plans offering drug
benefits to dual eligible individuals and
pharmacies may exercise the option of
reducing or eliminating copayments for
dual eligible beneficiaries.
Alternatively, States may elect to pay
such copayments on behalf of these
individuals.
Specifically, specialized MA plans (as
defined in § 1859(b)(6) of the Act)
offering benefits only to dual eligible
individuals may choose to reduce or
eliminate copayments for their members
as a supplemental benefit. For all other
plans, Part D copayments cannot be
reduced or eliminated for dual eligible
individuals by a non-specialized MA-PD
plan unless reduced or eliminated for
all other plan enrollees. However, we
note that sections 1894(b)(1)(A)(i) and
1934(b)(1)(A)(i) of the Act preclude
beneficiary cost sharing, including
copayments, for PACE enrollees. We
have included discussion of the
conflicting MMA and PACE statutory
copayment provisions in subpart T
preamble language of this regulation.
Further, pharmacies may also waive
or reduce cost-sharing requirements on
behalf of a subsidy eligible individual,
provided the waiver is not offered as
part of any advertisement or solicitation,
as specified in section 1128(B)(3) of the
Social Security Act, as amended by
section 101(e)(2) of the MMA.
Finally, the new Medicare drug
benefit will replace significant State
spending on dual eligible individuals’
drug costs. States, in turn, may choose
to use State dollars to pay for costsharing and provide supplemental drug
coverage, although they will not receive
a Federal match under Medicaid if they
choose to do so.
Comment: One commenter questioned
whether reduction of cost-sharing
obligations by specialized MA plans
(using premium rebate dollars) violates
the uniformity of benefits provision.
Response: The reduction of costsharing obligations by specialized MA

PO 00000

Frm 00195

Fmt 4701

Sfmt 4700

4387

plans does not constitute a violation of
the uniformity of benefits provision in
the law, as long as the reduction is
applied uniformly to all enrollees in the
plan.
Comment: One commenter requested,
for full-benefit dual eligible individuals,
clearer guidance on ensuring that plans
are providing the lesser of a copayment
amount of $1 for a generic drug or
preferred multiple source drug of $3 for
any other drug, or the amount charged
to other individuals with income below
135 percent of the FPL and resources
not greater than 3 times the amount an
individual may have and still be eligible
for benefits under the SSI program.
Specifically, the commenter requested
guidance on dealing with
noncompliance by plans and ensuring
that non-institutionalized dual eligibles
are informed of this provision.
Response: The regulation does clarify
the first point raised by the commenter.
In addition, we are currently working on
an oversight process for noncompliance
and will release further operational
guidance on this issue.
Comment: One commenter suggested
that adjustments made to cost-sharing
amounts be rounded down to the
nearest multiple of 5 cents or 10 cents
(of the percentage increase in CPI),
rather than rounded upward. The
commenter cites that it is illogical to
round upward and charge consumers
more than their estimated spending
limit.
Response: Rounding downward to the
nearest multiple of 5 cents or 10 cents
for any adjustment made to cost-sharing
amounts would necessitate a legislative
change because the methodology for
making adjustments is stated in
§ 1860D–14(a)(4)(A)(ii) of the Social
Security Act as ‘‘adjustments in $1 and
$3 cost-sharing amounts be rounded to
the nearest multiple of 5 cents and 10
cents, respectively.’’ Therefore, this
change cannot be adopted.
Comment: One commenter sought
clarification on the definition of out-of­
pocket limits/thresholds, particularly if
subsidy eligible are subject to
copayments after reaching the out-of­
pocket limit.
Response: For 2006, the premium and
cost-sharing subsidy amounts for
various subsidy eligible groups are as
follows (Preamble, subpart P, Table P–
2):
For 2006, the premium and costsharing subsidy amounts for various
subsidy eligible groups are as follows
(Table P–2):

E:\FR\FM\28JAR2.SGM

28JAR2

4388

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

FPL & Assets

Percentage of Premium
Subsidy Amount (1)

Deductible

Copayment up to out-of-pocket limit

Copayment above out­
of-pocket limit

Full-benefit dual eligi­
ble—institutionalized
individual

100%*

$0

$0

$0

Full-benefit dual eligi­
ble– Income at or
below 100% FPL
(non-institutionalized
individual)

100%*

$0

The lesser of: (1) an amount that
does not exceed $1- generic/pre­
ferred multiple source and $3–
other drugs, or (2) the amount
charged to other full subsidy eligi­
ble individuals who are not fullbenefit dual eligible individuals or
whose incomes exceed 100% of
the FPL

$0

Full-benefit dual eligi­
ble– Income above
100% FPL (non-in­
stitutionalized indi­
vidual)

100%*

$0

An amount that does not exceed $2generic/preferred multiple source
and $5–other drugs

$0

Non-full benefit dual
eligible beneficiary
with income below
135% FPL and with
assets that do not
exceed $6,000 (indi­
viduals) or $9,000
(couples)

100%*

$0

An amount that does not exceed $2–
generic/preferred multiple source
and $5–other drugs

$0

Non-full benefit dual
eligible beneficiary
with income below
135% FPL and with
assets that exceed
$6,000 but do not
exceed $10,000 (in­
dividuals) or with
assets that exceed
$9,000 but do not
exceed $20,000
(couples)

100%*

$50

15% coinsurance

An amount that does
not exceed $2–ge­
neric/preferred mul­
tiple source drug or
$5–other drugs

Non-full benefit dual
eligible beneficiary
with income at or
above 135% FPL
but below 150%
FPL, and with as­
sets that do not ex­
ceed $10,000 (indi­
viduals) or $20,000
(couples)

Sliding scale premium
subsidy (100%-0%)
See attached chart

$50

15% coinsurance

An amount that does
not exceed $2–ge­
neric/preferred mul­
tiple source drug or
$5–other drugs

(1) Premium subsidy amount as defined in § 423.780(b)
*The percentage shown in the table is the greater of the low income benchmark premium amount or the lowest PDP premium for basic cov­
erage in the region.

For 2006, the sliding scale premium and
cost-sharing subsidy amounts for other

subsidy eligible individuals are as
follows:
Percentage of Premium Subsidy
Amount(1)

FPL & Assets
Income at 135% FPL, and with assets that do not exceed $10,000 (individuals) or $20,000 (couples)

100%

Income above 135% FPL but at or below 140% FPL, and with assets that do not exceed $10,000 (indi­
viduals) or $20,000 (couples)

75%

Income above 140% FPL but at or below 145% FPL, and with assets that do not exceed $10,000 (indi­
viduals) or $20,000 (couples)

50%

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

PO 00000

Frm 00196

Fmt 4701

Sfmt 4700

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

4389

Percentage of Premium Subsidy
Amount(1)

FPL & Assets
Income above 145% FPL but below 150% FPL, and with assets that do not exceed $10,000 (individ­
uals) or $20,000 (couples)

25%

(1) Premium subsidy amount as defined in § 423.780(b)

Comment: One commenter requested
that MA organizations be allowed to
obtain OIG advisory opinions that
expressly permit them to reduce or
waive premiums and cost-sharing for
low-income members enrolled in MA
plans.
Response: The law does not permit
general/nonspecialized MA
organizations to reduce or waive
premiums and cost-sharing because
these actions will violate bid integrity
and uniform premium requirements.
Comment: A few commenters
questioned whether a non-specialized
MA plan can reduce cost sharing for its
enrollees, as long as the reduction
applies uniformly to all of its enrollees.
Response: The reduction would be
classified as a supplemental benefit and
cannot be included in the basic bid. The
non-specialized MA plan may buy
down the supplemental premium with
beneficiary or rebate dollars. Reduction
through the use of subsidy dollars is
prohibited and inclusion of reduction
costs in the basic bid or in allowable
costs for purposes of reinsurance or risk
sharing is also not permitted.
Comment: One commenter requested
specification that plans cannot use an
alternative benefit design to charge costsharing to low-income beneficiaries that
exceeds the amounts set out in the
regulation.
Response: Plans may not use
alternative benefit designs to charge
cost-sharing that exceeds the applicable
$1/$3 and $2/$5 amounts set in the law.
In the case of the other subsidy eligible
individuals, they may not be charged
cost sharing that exceeds 15 percent
coinsurance for covered part D drugs
obtained between the deductible and
out-of-pocket threshold. The Part D
plans may establish an alternative cost
sharing structure with cost-sharing tiers
based on an expected coinsurance of 25
percent. If a subsidy eligible individual
enrolls in the plan with an alternative
cost sharing structure, the beneficiary is
responsible for the cost-sharing under
the plan for a particular drug up to 15
percent, with our paying the difference
if any. For example, if under a plan a
covered part D drug has coinsurance of
10 percent, the beneficiary is
responsible for the full 10 percent. If
under a plan a covered part D drug has
coinsurance of 20 percent, the
beneficiary is responsible for 15 percent

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

and CMS for 5 percent, provided this
design is actuarially equivalent.
5. Administration of Subsidy Program
(§ 423.800)
In the proposed rule we discussed
establishing a process to notify the Part
D sponsor that an individual is both
eligible for the subsidy and the amount
of the subsidy. Because we had not yet
developed such a process, comments
were invited concerning notification to
the Part D sponsor that an individual is
eligible for a subsidy and the amount of
the subsidy.
Similarly, we requested comments on
the proposed requirement that the Part
D sponsor notify us that premiums or
cost-sharing have been reduced and the
amount of the reduction. We were also
considering the process for reimbursing
the Part D sponsor for the amount of the
premium or cost-sharing reductions.
Finally, we requested comments on how
to best reimburse subsidy eligible
individuals for out-of-pocket costs
relating to excess premiums and costsharing incurred before the date the
individual was notified of his or her
subsidy eligibility but after the effective
date the individual became a subsidy
eligible.
We also requested comments on how
to deal with premiums and cost sharing
paid by charities or other programs, for
example, the Ryan White program or
State Pharmacy Assistance Programs, on
behalf of an individual during a period
when he or she is determined to be
subsidy eligible. We specifically
requested comments on whether
Medicare should treat these programs
for purposes of premium or cost sharing
reimbursement as we would other
employer-sponsored insurance
programs in which Medicare is a
primary payer for purposes of
coordination of benefits. In addition, we
requested comments on whether
beneficiaries should be responsible for
reimbursing any cost sharing or
premiums paid on their behalf by
another program or charity.
In accordance with section 1860D–
14(c)(2) of the Act, reimbursement to
Part D plans may be computed on a
capitated basis, taking into account the
actuarial value of the subsidies and with
appropriate adjustments to reflect
differences in the risks actually
involved. (Refer to Subpart G of this rule

PO 00000

Frm 00197

Fmt 4701

Sfmt 4700

for a discussion of interim payments
and final reconciliation payments.)
Subsidy amounts under section
1860D–14 of the Act are counted toward
the out-of-pocket threshold at section
1860D–2(b)(4)(C)(ii) of the Act. Part D
plans will be responsible for tracking
the application of the low-income
subsidy amounts as described in
§ 423.100.
Comment: Many commenters
expressed concern about the lack of a
specified timeframe in which we must
notify plans that enrollees are eligible
for a subsidy, raising concerns that if
there were lengthy periods between
enrollment in a Part D plan and
notification of subsidy eligibility, lowincome beneficiaries would have to pay
prohibitive costs and they may not use
their Part D benefits. Some commenters
suggested that we be required to notify
plans within 24 hours after an
application for the subsidy is approved.
One commenter suggested that we
should provide a daily tape match to
Part D plans that provides the lowincome subsidy enrollee identifier. One
commenter expressed concern about
retroactive determinations of lowincome subsidy eligibility and the
burden this could place on a MA
organization that would have to refund
premium and cost-sharing amounts paid
by a member before either the member
or the MA organization was informed of
the member’s low-income subsidy
eligibility. The commenter suggested
that we limit the period of retroactivity
of low-income subsidy eligibility
determination to no more than three
months. One commenter asked for
specific guidance on the data exchange
requirements for a Part D plan. One
commenter believed that the proposed
rule did not adequately explain how
Part D plans are to determine which
beneficiaries are enrolled in the lowincome subsidy. One commenter asked
if the notification of the Part D plan
would occur after a full-benefit dual
eligible individual enrolls in a plan.
Finally, one commenter asked if we
could also notify SPAPs when
notification is sent to Part D plans about
low-income subsidy eligibility.
Response: We do not have authority
to direct SSA to determine an
individual’s eligibility for the lowincome subsidy within a given time
period. In further operational guidance,

E:\FR\FM\28JAR2.SGM

28JAR2

4390

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

we will work with States to ensure
timely State determinations of subsidy
eligibility. As general guidance, we
expect that States will determine
subsidy eligibility within time periods
that are at least consistent with the
processing of State Medicaid
applications. Retroactive eligibility is
only an issue if an individual is enrolled
in a Part D plan, and subsequently
applies for and is determined eligible as
a full-benefit dual eligible individual.
For instance, if an individual is enrolled
in a Part D plan and decides not to
apply for the low-income subsidy, he or
she may have retroactive subsidy
eligibility if the individual later
qualifies for Medicaid. By virtue of
being entitled to full benefits under
Medicaid, the individual will
automatically be eligible for the lowincome subsidy. In this case, subsidy
eligibility will extend back to the start
date of Medicaid eligibility, which
could be three months earlier if the
individual would have qualified for
Medicaid during the three-month
retroactive period. In such cases, the
individual will be reimbursed for the
extra cost sharing he or she otherwise
would not have paid as a full subsidy
eligible individual. This would also
apply to individuals under a Medicare
Savings Program as a SLMB or QI (but
not as a QMB, because QMBs cannot
receive retroactive benefits under the
Medicaid statute). In further operational
guidance, we will specify how these
reimbursements will be made. For
QMBs and other individuals who are
enrolled in a Part D plan, and later
apply and are determined eligible for
low-income subsidy assistance,
consistent with the statute, their
eligibility would be effective on the first
day of the month in which they applied
for the low-income subsidy.
We will address the method of
notification of Part D plans and will
explore issues involving notification to
SPAPs in future operational guidance.
Comment: Two commenters suggested
the need for additional clarification
about the manner in which plans must
notify us on the amount of the subsidy
reductions received by beneficiaries.
One of these two commenters suggested
we provide a methodology while the
other commenter suggested that Part D
sponsors have up to 60 days to inform
us that the reduction in premium and
cost-sharing has been implemented and
that implementation should be effective
no later than the first day of the second
month following the month in which
the low-income determination was sent
by us to the Part D sponsor. The
commenter further suggested that there
should not be any special or separate

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

notice that the Part D sponsor must send
to CMS to indicate that the reduction in
premium or cost-sharing has been
implemented noting that this
notification will be part of the monthly
membership transaction file that Part D
providers send to us.
Response: We will issue further
operational guidance on the notification
methodology that Part D plans must use.
However, we will expedite notification
to plans that its enrollee is a subsidy
eligible individual. In addition, we
similarly expect Part D plans to confirm
that the reductions in premiums and
cost-sharing have been implemented by
plans in a timely fashion.
Comment: One commenter expressed
concern that the rule does not explain
how reimbursements will be made to
Part D plans. Another commenter
expressed concern that pharmacies will
impose the cost-sharing reduction at the
point-of-sale for low-income subsidy
individuals. The commenter suggested
we develop an explicit regulatory
requirement to ensure such reductions
occur at the point-of-sale. The
commenter suggested we add a passthrough requirement to the final
regulation.
Response: This comment is addressed
by the regulation at § 423.329(d)(2). The
interim payments referenced in section
§ 423.329(d)(2)(i) are made in
anticipation of low income subsidies
that will reduce beneficiary cost-sharing
at the point of sale. The final payments
in § 423.329(d)(2)(ii) will reimburse
plans for adjustments made at the point
of sale. There is no need for an
additional pass-through requirement,
since plans will only be reimbursed for
subsidies that actually were used to
reduce beneficiary cost sharing at the
point of sale.
Comment: Commenters expressed
concern about the methodology that will
be developed to implement
reimbursement for cost-sharing on a
capitated basis. One commenter asked
that Part D plans have the opportunity
to work with us as it develops a
methodology, while another commenter
noted that reimbursement for lowincome subsidies on an aggregated
capitation basis—rather than on an
individual member basis—would make
calculation of individual subsidies
difficult for purposes of counting them
toward TROOP as required by the
statute. One commenter recommended
that Part D sponsors offering Part D
plans that serve a significant number of
American Indians/Alaska Natives not
have available to them the option of
having the cost-sharing subsidies
reimbursed to them on a capitated basis.

PO 00000

Frm 00198

Fmt 4701

Sfmt 4700

Response: Subsection (d) of § 423.800
was inadvertently included in the
proposed rule and has been removed.
This is addressed in § 423.329(d)(2).
Plans will be reimbursed for subsidies
that actually were incurred to reduce
beneficiary cost sharing at the point of
sale. Interim estimated payments related
to plan assumptions may be included
with monthly capitated payments to
assist plans with cash flow, and later
reconciled to actual incurred costs.
Although we initially will pay the lowincome subsidy on a claims-paid basis,
we reserve the right to pay on a
capitated basis as allowed by 1860D–
14(c)(2). Further information on
payment methodology will be issued in
separate guidance.
Comment: Commenters raised
concerns about the reimbursement of
cost-sharing expenses incurred by
subsidy eligible individuals before they
have been notified of their eligibility but
after the date the subsidy eligibility is
effective. Several commenters expressed
concern that low-income enrollees
cannot afford to pay cost-sharing even
with the expectation that these out-of­
pocket costs will eventually be
reimbursed and recommended, as an
alternative, that we adopt a presumptive
eligibility system. Alternatively, these
commenters suggested that the
regulations provide that beneficiaries
may present their notice of approval for
the subsidy to their pharmacy and that
pharmacies would accept this notice as
adequate to relieve the beneficiary from
making a copayment. One commenter
expressed concern that plans would
violate the requirement to reimburse
these costs unless more stringent
compliance requirements are adopted in
the regulations, including a requirement
that plans have a 10-day period for
reimbursement after the date a
beneficiary’s subsidy is effective.
Another commenter suggested
strengthening the reimbursement
requirement by explicitly stating that
Part D plans must make these
reimbursements on their own initiative
without requiring beneficiaries to
affirmatively seek the reimbursement
and that these reimbursements must be
made 15 days after the eligibility has
been received by the plans. One
commenter requested that we permit
SPAPs, which may pay the cost-sharing
for individuals who are subsequently
determined to be subsidy eligible, to be
reimbursed for their contributions.
Response: Individuals may incur out­
of-pocket costs from premiums and costsharing before eligibility determinations
and notification to plans are made.
The rule requires plans to directly
reimburse the beneficiary, according to

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
the data it has kept on the beneficiary’s
incurred and paid expenses. We will
then reimburse the plan for these
expenses. We will have in place a
mechanism to pay plans directly for the
incurred and paid expenses. We will
issue further operational guidance on
this issue.
Programs like the Ryan White AIDS
Drug Assistance Program or SPAPs may
pay the premiums and cost-sharing for
beneficiaries until the low-income
subsidy eligibility determinations are
made. The rule requires plans to
reimburse these programs for payments
made after the effective date of the
eligibility determination. Therefore, we
have revised § 423.800, new subsection
(d), to reflect this change.
Comment: One commenter
recommends that Part D plans be
required to reimburse State programs
and charitable organizations that pay
cost sharing on behalf of the Part D
beneficiaries who are later found to be
low-income subsidy eligible
individuals.
Response: We have clarified in the
final rule that plans must reimburse
organizations paying cost-sharing on
behalf of such individuals, any out-of­
pocket costs relating to excess
premiums and cost-sharing paid before
the date the individual is notified of
subsidy eligibility and after the date
subsidy eligibility is effective.
Q. Guaranteeing Access to a Choice of
Coverage
1. Overview (§ 423.851)
Subpart Q implements the provisions
of sections 1860D–3, 1860D–11(g),
1860D–12(b)(2), 1860D–13(c)(3) and
1860D–15(g) of the Act. In this section,
we address a beneficiary’s right to have
access to a choice of at least two
Medicare options for prescription drug
coverage; the requirements and
limitations on fallback plan bidding;
review and approval of fallback
prescription drug plans; contract
requirements specific to fallback plans;
and the determination of fallback plan
enrollee premiums and CMS payments
to those plans.
2. Terminology (§ 423.855)
a. Eligible Fallback Entity
In § 423.855 we state that an eligible
fallback entity is defined for a given
contract period and is an entity that
meets all the requirements to be a PDP
sponsor, (except that it does not have to
be a risk-bearing entity) and does not
submit a risk bid under § 423.265 for
any prescription drug plan for any PDP
region for the first year of that contract
period. We also state that an entity will

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

be treated as submitting a risk bid if that
particular legal entity is acting as a
subcontractor for an integral part of the
drug benefit management activities of a
PDP sponsor (or an entity applying to
become a non-fallback PDP sponsor)
that is submitting a risk bid; however,
the same is not true if the entity is a
subcontractor to an MA organization
offering an MA-PD plan (or a
subcontractor to an entity applying to
offer an MA-PD plan).
Comment: A commenter asks that we
not allow under any circumstances for
the pharmacy benefits management
(PBM) component of the fallback plan to
be the same entity contracted with
either as an MA-PD or a risk PDP in the
same area. The commenter stated that to
do so would reduce competition in the
area, which could ultimately reduce
beneficiary choice and access to drugs.
Another related comment stated that
under the current definition and
contracting requirements described in
the preamble and proposed regulation
that it may be possible for two legally
independent, but affiliated PDP
sponsors to submit bids in the same
region and undercut the clear intent of
the statute requiring that plans be
offered by different organizations in
order to meet the access requirements.
Response: Section 1860D–3(a) of the
Act requires that each Part D eligible
individual have access to a choice of at
least two plans in the area in which they
reside. Additionally, the statute makes it
clear that the beneficiary access
requirement is not satisfied for an area
if only one entity offers all the
qualifying plans in the area. We will be
closely monitoring PDP sponsors, MA
organizations and their subcontractors
to ensure that the same legal entity is
not operating both plans in a fallback
area. We note that there is no
prohibition against a PBM operating as
a subcontractor to an MA-PD plan as
well as being a sponsor of a fallback
PDP. We also note that a PBM can
operate as a subcontractor to all kinds
of PDPs, including fallback PDPs, and to
MA-PDs in any region. There is also no
prohibition against an MA organization
offering both an MA-PD plan and a
fallback plan in the same region.
In the proposed rule we incorrectly
stated at 69 FR 46670 that MA
organizations offering MA-PD plans
could not simultaneously offer
fallbacks. We clarify in this final rule
our belief that such a reading would not
comply with the clear language of
sections 1860D–12(b)(2) of the Act
which governs contracts with PDP
sponsors and not MA organizations
offering MA-PDs or with section 1860D–
11(g)(2)(B) of the Act which speaks only

PO 00000

Frm 00199

Fmt 4701

Sfmt 4700

4391

in terms of prescription drug plans, and
not MA-PD plans. We will be diligent in
reviewing applications in order to
exclude entities that have been set up to
serve no other function than to
circumvent the statute. An entity will
not be considered separate and distinct
if it is merely the instrumentality,
agency, conduit, or adjunct of the other
entity. However, to the extent that other
legitimate legal arrangements are
negotiated in the marketplace to
facilitate the offering of Part D risk
plans, we will not preclude such
arrangements. We have not made any
further changes to the definitions of PDP
sponsors or eligible fallback entities to
further restrict qualifications in
response to these comments.
Comment: Many commenters asked
that governmental entities be able to
sponsor fallback PDPs in order to
provide for a smooth transition of
prescription drug coverage from
Medicaid or other Federally-matched
programs. Some asked that Medicaid
agencies be considered as potential
fallback plan sponsors. Several
commenters asked whether the
definition of an eligible fallback entity
should be modified so that an SPAP can
serve as the fallback plan for SPAP
clients in the event that the fallback
option must be implemented because
not enough PDPs or MA-PD plans
express interest in service in a State (all
other beneficiaries would enroll with
the Part D fallback provider).
Response: We are unable to accept
these suggestions because under section
1860D–41(a)(13) of the MMA,
governmental entities are not eligible to
become PDP sponsors. This is consistent
with the MMA transfer of responsibility
for providing prescription drug benefits
for dual eligibles from State programs to
the Medicare program (under
§ 1935(d)(1) of the Act), and is set up for
the most part so as not to supplant other
government funding for prescription
drug benefits (under section 1860D–
24(c)(2) of the Act). As modified in
§ 423.4 and discussed in subpart A of
this preamble, the definition of PDP
sponsors includes sponsors of fallback
plans.
Comment: One commenter suggested
that in order to encourage traditional
PBMs to serve as ‘‘risk bearing’’ entities,
we should only allow pharmacy benefit
administrators (PBA) to serve as fallback
plans. According to the commenter,
these entities serve as traditional
administrators of prescription drug
programs, rather than the PBM entities
that have evolved from the PBA model,
and this PBA model for the fallback
plans would prevent the conflict of
interest that exists today when a PBM

E:\FR\FM\28JAR2.SGM

28JAR2

4392

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

owns and operates its own mail order
facility.
Response: Although we appreciate the
intent behind this comment to avoid
conflicts of interest that could
theoretically result in higher costs for
the Part D program, we believe that
restricting eligible fallback plan entities
to only pharmacy benefit administrators
would be unnecessarily restrictive and
inconsistent with the statutory
definition provided in section 1860D–
11(g)(2) and described in § 423.855. The
statute does not limit the type of entities
that can apply to meet the requirements
to be either PDPs or MA-PDs, and we do
not think there is any benefit to doing
so. On the contrary, our goal is to do
everything possible to maximize
participation in the Part D program by
any and all qualified entities in order to
maximize beneficiary access to a choice
of private plans and competition among
these plans. Therefore, we have not
modified the definition of eligible
fallback entity, other than to clarify that
it is a form of PDP plan, and have
adopted it as proposed.
In the preamble to the proposed rule
we interpreted the bidding restrictions
to mean that if an organization wins the
fallback bidding, that is, signs a fallback
contract, it is effectively barred under
§ 423.265(a)(2) from bidding as a risk
plan in that region for 4 years—for the
3-year contract term, it is barred
everywhere, and in the 4th year, it is
barred from bidding as a risk plan in
that region. As we described in the
proposed rule, this is because eligible
fallback entities are restricted to only
those entities that have not submitted an
at-risk bid, or agreed to serve as a
subcontractor to an entity that has
submitted an at-risk bid to sponsor a
PDP. As a result of this restriction in
bidding, eligible fallback entities must
decide not to submit either a full-risk,
or limited-risk bid in any region (either
as a primary sponsor or as a
subcontractor for a PDP sponsor) in
order to be eligible to be a fallback
prescription drug plan in any region. If
an organization is awarded a fallback
contract and ‘‘offers a fallback plan’’, it
is effectively barred under
§ 423.265(a)(2) from bidding as a risk
plan in that region for 4 years—for the
3-year contract term, it is barred
everywhere, and in the 4th year, it is
barred from bidding as a risk plan in
any region in which it offered a fallback
plan. A fallback contractor is arguably
offering a fallback plan even if it is only
‘‘on standby’’ to do so.
In the proposed rule we also
suggested an alternative interpretation
of what it means to ‘‘offer a fallback
plan’’ in a region for purposes of section

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

1860D–12(b)(2)(C) of the Act, that is, not
just signing the contract, but also
actually offering prescription drug
benefits to enrollees after a fallback
service area has been identified. With
the second interpretation, if the fallback
contract was not activated and no plan
was offered during year 3, the entity
could be eligible to bid at risk for year
4.
Comment: We received several
comments on our interpretation of our
authority in this area. One commenter
asserted that we do not have the
statutory authority to bar a fallback
entity from at risk bidding for up to 4
years. Another commenter supported
the alternative interpretation of what it
means to ‘‘offer a fallback plan’’ in a
region. This commenter agreed with
CMS that the alternative interpretation
is ‘‘reasonable and consistent’’ with the
statutory intent ‘‘to prevent plans from
converting their enrollment under a
fallback contract to enrollment under an
at-risk plan’’. They also suggested that if
a fallback plan were not activated in
year one or year two of the contract
cycle, it should be able to submit a risk
bid for years two and three,
respectively. They encouraged us to
adopt this interpretation in the final
rule—believing it to be in the best
interests of the program in that it will
provide for better competition if more
entities are encouraged to participate in
Part D, whether as potential fallback
plans or PDPs.
Response: We appreciate this
comment and agree that this
interpretation furthers the goal of
facilitating competition by allowing
former fallback contractors to enter the
risk bidding a year sooner (assuming
they did not actually provide a fallback
plan in year 3 of the contract cycle). We
do not agree, however, that a fallback
contractor should be released from its
three-year contract and, therefore, free
to submit a risk bid any earlier than year
4. If we were to permit this, we would
be undermining the safety net provided
by the three-year contract cycle that
exists to ensure timely access to fallback
coverage in the event that a sufficient
number of risk plans were to withdraw
from the market to create a fallback
service area during or after years 1 or 2.
Moreover, we would also be
undermining the attractiveness of risk
bidding by eliminating an important
disincentive to stay out of the market in
year one. Thus, an entity that is
awarded a fallback contract—even if it
is only on standby—may not submit a
risk bid for the 3 years that it maintains
its fallback contract. For example, a
fallback contractor for the period 2006–
2008 may not submit a risk bid for any

PO 00000

Frm 00200

Fmt 4701

Sfmt 4700

of those years (even if the fallback
contractor is merely on standby for that
entire period). In addition, if the
sponsor offers a fallback plan in regions
1 and 2 for 2008, then such sponsor is
prohibited from risk bidding in such
regions for 2009. The sponsor may,
however, submit risk bids for regions
other than regions 1 and 2 for 2009
(although if it does so, it may not seek
a fallback contract for the period 2009–
2011). In addition, if the sponsor was on
standby for all of 2008, but never
actually offered a fallback plan in 2008,
the sponsor may submit a risk bid for
any region for 2009 (but again, if it does
so, it is prohibited from seeking to
become a fallback contractor for the
period 2009–2011). Therefore, we have
adopted the provisions in § 423.855 and
§ 423.265(a)(2) that provide these
limitations as proposed.
Comment: Numerous commenters
asserted that the contracting restrictions
and other (unspecified) requirements to
become an eligible fallback plan are too
severe, and that they believe we will not
have any organizations stepping forward
to become fallback plans.
Response: We agree the requirements
for fallback plans are more severe than
for full risk plans. We have intentionally
made these requirements stricter than
for risk-bearing plans because we
believe this is an important strategy to
maximizing participation in the
competitive bidding program and to
limit the attractiveness of participating
as a fallback PDP for those plans that
could participate on an at-risk basis.
Our goal is to have either full or limited
risk plans provide MA-PD and PDP
prescription drug coverage in all
regions. To that end, one of our
selection criteria will likely be an
appraisal of whether the fallback
entity’s pharmacy benefit management
subcontractor is also participating as a
subcontractor under risk plan offerings.
The implementation of the fallback plan
is viewed as a last resort—as its name
implies—a plan to ‘‘fall back’’ on in the
event a choice of two qualifying drug
prescription plans is unavailable in a
service area or region. We are aiming to
design our bidding process so that
fallback plans are not required at all,
that is, to do everything possible to
facilitate full-risk plans and to provide
for limited-risk plans in a particular
region if full-risk plans are not available.
In fact, if any fallback plans are needed,
the Congress requires us to submit an
annual report with recommendations for
further limiting the need for such plans
and maximizing future participation by
limited risk plans.
b. Fallback Prescription Drug Plan
(Fallback Plan)

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
In the proposed rule under § 423.855
we stated that a fallback prescription
drug plan is a PDP offered by an eligible
fallback entity that provides only
actuarially equivalent standard
prescription drug coverage, as well as
access to negotiated prices, including
discounts from manufacturers, and that
meets other requirements as specified
by CMS.
Comment: Several commenters stated
that we should amend the phrase
‘actuarially equivalent standard
prescription drug coverage’’ with the
phrase ‘defined standard coverage’ to
reflect the clear intent of the Congress
to limit the benefit offered by a fallback
plan. Others urged us to make sure the
final regulation is clear about what
structures such as premiums or cost
sharing can be different and about what
protections must be in place to ensure
that consumers are clearly informed of
the differences and are protected against
unfair practices.
Response: We agree that the statute
requires fallback plans to offer standard
coverage, but we point out that it makes
a distinction between two types of
coverage that are both considered
‘‘standard’’. For purposes of
administering the Part D benefit we
must maintain the distinction between
defined standard coverage and
actuarially equivalent standard coverage
as described in § 423.100. We continue
to think that beneficiaries and taxpayers
may be able to get better value from
actuarially equivalent packages that
employ all of the cost and utilization
management tools, particularly co­
payment tiering, to drive to the most
cost-effective utilization on the part of
beneficiaries and the best price
concessions from manufacturers, so we
certainly will not preclude such
offerings. However, we cannot say with
impunity that PDPs offering defined
standard coverage could not offer equal
value through other formulary
management tools and competitive
negotiations with manufacturers.
Consequently, we have modified
§ 423.855 to reflect that fallback PDPs
may offer either defined or actuarially
equivalent standard benefits. We do not
believe this flexibility in any way
impedes PDP plans from offering
competitive plans that beneficiaries
would prefer. We also note that we will
be closely reviewing fallback plan
formularies and benefit designs, as well
as cost, quality and utilization
management programs to ensure that
they are reasonable and appropriate for
a region in which beneficiaries do not
have alternative plans from which to
choose.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Comment: Several commenters
recommended that we require that all
price concessions be passed through to
the beneficiary. One commenter also
recommended that we not allow any
pricing differentials on what is paid to
pharmacies for reimbursement of the
dispensing fee or ingredient costs. They
also believe the fallback plan should be
required to adequately reimburse
pharmacies with appropriate dispensing
fees and an appropriate product cost
reimbursement.
Response: We agree with the
commenters that fallback plans must
pass through all price concessions that
are known and available at point-of-sale
to the beneficiary and, furthermore,
must operate under conditions of
complete price transparency in general.
All other price concessions obtained (as
discussed in detail in subpart G) must
be reported to CMS and subtracted from
paid claim amounts upon
reconciliation. We note that some
portion of these latter price concessions
are passed through to the beneficiary in
the form of lower premiums, but
another portion is not and is passed
through solely to the Medicare program
in the form of lower program
expenditures. It would be impractical to
require that all price concessions be
passed through to the beneficiary at the
point of sale because certain price
concessions can only be calculated
retrospectively.
Nonetheless, we require that fallback
plans pass through all price concessions
that are known at the time of the sale
in the point-of-sale price, because we do
not believe that section 1860D–
11(g)(5)(A)(i) of the Act allows us to
reimburse fallback plans for any amount
in excess of actual costs incurred.
Therefore, fallback plans may not claim
any amount in excess of the discounts
and dispensing fees obtained from
participating pharmacies as drug claim
costs. All returns on investment must be
negotiated as part of the management
fees and performance measures. We
note that this policy differs somewhat
from our requirements for risk plans.
We believe that risk plans will be
motivated to pass through as much
discount as practicable at the point-of­
sale due to price competition, and we
will encourage this through our Price
Compare website. Even if they do not,
however, they are paid prospectively
and are in compliance with § 1860D–
2(d)(1)(B) of the Act and § 423.104(g)(1)
of this rule, so long as all price
concessions are reported and deducted
from claims costs in the reinsurance and
risk corridor final payment processes.
Fallback plans, on the other hand, are
paid on the basis of 1860D–11(g)(5)(A)(i)

PO 00000

Frm 00201

Fmt 4701

Sfmt 4700

4393

of the Act and § 423.871(e)(1) of this
rule, and our payments must be limited
to the actual costs of covered Part D
drugs provided to the fallback plan
enrollees. Since fallback plans will
submit their claim costs to us for direct
reimbursement, we require that these
claims represent actual point-of-sale
costs. We have added a definition of
actual costs to § 423.855 and modified
§ 423.871(e)(1) to clarify this
interpretation.
As for the recommendation to
prohibit pricing differentials among
fallback plan contracts with network
pharmacies, we do not believe that such
a requirement would be consistent with
the goal of creating a competitive market
for prescription drugs and obtaining the
best possible prices for beneficiaries and
the Medicare program. We also do not
believe that there is any prohibition on
fallback plans contracting with subset(s)
of preferred pharmacies, just as risk
plans may; such subsets of preferred
pharmacies may indeed have different
pricing arrangements. Although we
agree with the commenter that fallback
plans should adequately reimburse
pharmacies through appropriate
dispensing fees and product cost
reimbursement, we note that this result
must be obtained through competitive
price negotiations and that we may not
interfere in such negotiations by
attempting to define or require
‘‘appropriate’’ fees.
Comment: Several commenters asked
that certain PDP requirements be
extended to fallback plans. For instance,
one commenter argued that the same
out-of-network requirements applicable
to PDPs should apply to fallback plans,
and others suggested that they should be
required by regulation to coordinate
benefits with SPAP’s in the same
manner as must PDPs, or that they
should comply with all the access and
quality standards applicable to PDPs
and MA-PD plans, including all
grievances and appeal procedures.
Response: We agree and wish to
clarify that a fallback plan is a special
type of PDP and as such must meet all
of the requirements established for Part
D plans, including prescription drug
plans, in these regulations, except as
otherwise specified by CMS in this
subpart or in separate guidance. In some
cases, the statutory provisions applying
to fallbacks will be such that to apply
the requirements of PDPs to fallbacks
would create a conflict in the statute.
For example, fallback plans obviously
could not be required to submit bids
under section 1860D–11(b) of the Act,
since fallbacks are paid on a different
basis from risk contractors. Similarly,
fallback contractors will not be required

E:\FR\FM\28JAR2.SGM

28JAR2

4394

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

to report information necessary for
calculating reinsurance, because
fallbacks do not receive any reinsurance
payments. In these cases, where there is
an apparent conflict in the statute, this
subpart, or in our guidance, we would
not require fallback plans to meet the
requirements of PDPs. However, where
there is no conflict, we believe that
fallback plans should be considered
PDPs and have amended the definition
of PDP in subpart A to include a
fallback plan. Thus, for example, a
fallback plan will be required to meet all
of the requirements for beneficiary
protections under subpart C that apply
to other Part D plans. In addition,
fallbacks would be subject to most of the
provisions in subpart K governing the
terms of the contract and procedures for
termination. However, a fallback plan
would not be subject to the same
licensure and solvency requirements
that apply to PDP sponsors under
subpart I. Fallback plans would be
required to have regional networks that
meet the access requirements specified
in § 423.120, including meeting the
Tricare standards for retail pharmacies
at the State level, but they would not
necessarily have to meet the Tricare
standards at the local level of the
eventual fallback service area, as this
particular area could not have been
foreseen. We have amended the
definition of fallback plan in § 423.855,
and the definitions of PDP and PDP
sponsor in § 423.4, accordingly.
c. Qualifying Plan
Under § 423.855, a qualifying plan is
defined as either a full-risk or limited
risk prescription drug plan (PDP) or an
MA-PD plan that provides basic
coverage, or an MA-PD plan that
provides supplemental coverage for no
additional charge to the beneficiary.
Specifically, if the MA-PD plan coverage
includes supplemental prescription
drug coverage, then in order to meet the
definition of a ‘‘qualified plan’’ the MA­
PD must be able to apply a premium
rebate under Part C of Medicare as a
credit against the supplemental
coverage premium, leaving no cost to
the beneficiary for the supplemental
coverage. MA-PD plans must also be
open for enrollment and not operating
under a capacity waiver in order to be
counted as a qualifying plan in an area.
Similarly, we have modified § 423.855
to clarify that a PDP must not be
operating under a restricted enrollment
waiver, such as those that may be
granted to special needs plans or
employer group plans, in order to be
counted as a qualifying plan in an area.
No comments were received on these
provisions, and they will be adopted as
proposed.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

3. Assuring Access to a Choice of
Coverage (§ 423.859)
a. Access Standards
In § 423.859(a) we state that we will
ensure that each Part D eligible
individual has available a choice of
enrollment in at least two qualifying
plans offered by different entities in the
geographic area in which he or she
resides. Therefore, beneficiaries in an
area must have a choice of two plans
that provide basic coverage (or an MA­
PD plan that provides supplemental
coverage for no additional charge to the
beneficiary). However, to meet the
access test, different sponsors must offer
the two qualifying plans, and at least
one of the plans must be a PDP. There
were no comments on these statutorilybased requirements and we are adopting
§ 423.859(a) as proposed.
b. Fallback Service Area
In § 423.859(b) we state that if before
the start of a contract year (or at any
other time) we determine that Part D
eligible individuals in a PDP region do
not have available a choice of
enrollment in a minimum of two
qualified plans as described in
§ 423.859(a), we will establish a
‘‘fallback service area.’’ Thus, a fallback
service area is any area within a PDP
region in which we have determined
that Part D eligible individuals do not
have available a choice of enrollment in
two qualified plans, at least one of
which is a prescription drug plan. Three
examples of the application of a fallback
service area follow:
• Example 1—We would establish a
fallback service area in an area where an
MA regional PPO plan is offered but no
PDP is offered in the region. Since
beneficiaries in the region would only
have the choice of a MA-PD and not a
stand-alone PDP, we would define the
area as a fallback service area.
• Example 2—A fallback service area
would also be designated if only one
PDP is offered in a region, but in some
or all parts of the region neither a
regional (PPO) MA-PD plan nor a local
MA-PD plan are available to
beneficiaries. Since beneficiaries would
not have a choice of two qualifying
plans, we would define the areas within
the region that only have access to the
PDP, and not an MA-PD plan, as
fallback service areas. As a result, it
would be possible for only certain areas
(counties) within a region to be
designated as fallback service areas.
• Example 3—A fallback service area
would also be designated in any area in
which only one entity offered all
qualifying plans, even if that sponsor
offered two PDPs, or one PDP and one

PO 00000

Frm 00202

Fmt 4701

Sfmt 4700

MA-PD plan with basic coverage,
covering the entire region.
Comment: One commenter stated that
a fallback plan should at a minimum be
Statewide.
Response: In the MMA the Congress
directed CMS to form Medicare
Advantage regions of not less than 10
and no more than 50 encompassing the
50 States and the District of Columbia,
and to create PDP regions that are
consistent with these to the extent
practicable. Discussion of the analysis
and comments on the PPO and PDP
regions has been published separately.
However, in the event that we
determine that only sections of a region
are fallback service areas, we are
prohibited by law from allowing the
fallback plan to service the entire
region, no matter its size. We recognize
that this policy may result in fallback
service areas that are much smaller than
the regions on which the contracts are
based. Our compensatory strategy is to
encourage national or other large-scale
fallback contracts in order to maximize
operational efficiencies while operating
under this sort of uncertainty.
c. Waivers for Territories
Section § 423.859(c) of this regulation
makes Medicare beneficiaries residing
in the U.S. territories—which include
American Samoa, the Commonwealth of
the Northern Mariana Islands, Guam,
Puerto Rico, and the U. S. Virgin
Islands—eligible to enroll in Part D. We
have the authority to waive any Part D
requirements, including the requirement
that access to two qualifying plans is
available in each service area, as
required to ensure access to qualified
prescription drug coverage for Part D
eligible individuals residing in the U.S.
territories. In addition, entities wishing
to become prescription drug plans in the
territories may request waivers or
modifications of Part D requirements
that facilitate their operation in those
areas.
In the proposed rule we suggested a
number of Part D requirements that we
were considering waiving and requested
comments on these and any other
potential waivers that would facilitate
the offering of Part D coverage in the
territories. The only comments received
for the territories concerned the design
of the regions, and these have been
addressed in separate guidance. As a
result, we retained the broad waiver
authority in § 423.859(c) without
modification, and will continue to
conduct research to determine how best
to facilitate Part D coverage in the
territories. For risk-based applicants, we
anticipate we would provide a table
identifying requirements for waivers,
and applicants would have to provide a

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
rationale for how a waiver would
facilitate risk-based access in the
territories. We would review each
waiver, and if it is approved, it will
apply to all similarly situated risk plans
in the territories. Waivers of the bid
requirements will not be entertained.
Similarly for Fallback applicants, if
there is a need for any of these, we
would entertain waiver requests.
Additionally, we will modify the
payment incentive and performance
guarantee arrangements as may be
necessary to ensure fallback
participation in the territories.
4. Submission and Approval of Bids
(§ 423.863)
In § 423.863 we establish a separate
bidding process for fallback plans
distinct from the risk bidding process
addressed in § 423.265 of our
regulations, and state that the
solicitation, timing and format
requirements for this process will be
provided in separate guidance.
Comment: A commenter asserts that
neither the MMA nor the proposed rule
address whether a PDP applicant
approved by CMS may withdraw its
application without any adverse
consequences to the PDP applicant if a
fallback plan is invoked in the same
region. The commenter recommends
that this option should be available if a
plan does not wish to compete against
a fallback plan.
Response: We fundamentally do not
think that risk plans need to be
concerned about competing against a
fallback plan. Risk plans will have the
competitive advantages of corporate
marketing and brand recognition and
the ability to offer more varied benefit
designs (including supplemental
benefits), as well as being offered to all
enrollees in a region—not just to those
in fallback service areas. We are also
anticipating that efficient risk plans may
have the opportunity to earn higher
levels of profit. While there is a
possibility that a fallback plan could
enter a region if there is only one PDP
risk plan, our strategic approach to
encourage the offering of risk plans
should also make them attractive to
beneficiaries relative to fallback plans.
And while we do not believe we have
the authority to prevent a risk bidder
from withdrawing its bid prior to
entering into a PDP contract, we expect
risk-based applicants to participate in
the solicitation process in good faith,
with the full expectation of participating
in the regions for which they apply
regardless of the anticipated presence of
a fallback in that region. Accordingly,
we intend to scrutinize applications and
bids.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

In § 423.863(b) we state that, except as
otherwise noted, the provisions of
§ 423.272 apply for the negotiation and
approval of fallback PDP contracts. We
state that if access requirements have
not been met after applying § 423.272(c),
we will contract for the offering of a
fallback PDP in that area, and that all
fallback service areas in any PDP region
for a contract period must be served by
the same fallback plan. Fallback plans
must be prepared to provide Part D
services at the same time as risk plans,
and in the event of mid-year changes,
we will approve a fallback PDP for any
new fallback service areas in a PDP
region in a manner so that the fallback
plan is offered within 90 days of notice.
Under no circumstances may we
contract for only one fallback PDP for all
fallback service areas in the 50 States,
the District of Columbia, and the
territories.
Comment: One commenter pointed
out that according to § 423.863(b)(5), in
the event of mid-year changes we must
approve a fallback prescription drug
plan so that the fallback is offered
within 90 days of notice. The
commenter is concerned that this leaves
open the possibility that beneficiaries
could be without a PDP for a period of
up to 90 days, and urges us to clarify
that fallback plans must enter into a
mid-year market as soon as practicable.
Response: We share the commenter’s
concern with ensuring access and
continuity of care for beneficiaries in
the unlikely event of either a risk plan
or fallback prescription drug plan
failure. We will make every effort to
eliminate this possibility through our
selection criteria that will involve
scrutiny of financial and business
stability, and will favor firms with
national capacity. In addition, we will
select fallback plans, in part, on their
operational capability to be up and
running quickly. We believe it would be
a very rare occurrence to need a fallback
plan in mid-year for a reason that could
not be foreseen in time to have an
alternate fallback plan in place, and
thus we cannot foresee a circumstance
in which there would be the possibility
of a gap in access to a PDP. (Contract
provisions in § 423.509 and § 423.510
require a 90-day notice of intent to
terminate a plan. In 423.508, if a
contract is terminated by mutual
consent, the sponsor and CMS will work
out an appropriate time frame to ensure
time to secure a fallback plan.) In cases
where a new fallback would be invoked
mid-year due to plan withdrawal,
beneficiaries might face different cost
sharing and different formularies, but
they would be eligible for an SEP and
would be allowed to choose the MA-PD

PO 00000

Frm 00203

Fmt 4701

Sfmt 4700

4395

or PDP in the area (if there is one)
instead of the new fallback plan. In the
unlikely event of this occurrence, our
goals will be to explain any differences
to affected beneficiaries, and to limit
disruption as much as possible.
Comment: One commenter stated that
our suggestion in the proposed rule that
we expected to award two fallback
contracts for the entire country,
assuming fallback contracts are needed,
is arbitrary and does not serve the best
interests of either beneficiaries or CMS.
Response: Because we now believe
that two may not be sufficient to
competitively provide for fallback
coverage should it be necessary, we plan
to award as many contracts as needed to
provide potential fallback services.
However, we still plan to have only a
very limited number. We anticipate
awarding a sufficient number of fallback
contracts to ensure that any designated
fallback area(s) are provided for at the
start of the program, as well as later in
the event of plan closure or failure.
However, we do not anticipate awarding
so many as to dampen the incentive for
potential fallback plans to offer
excellent customer service and
competitive drug prices. We also plan to
pursue every opportunity to ensure the
option of at least two risk plans in every
area, and do not anticipate the need to
activate fallback plans.
In the preamble to the proposed rule
we stated that in general we would enter
into contracts with fallback plans using
Federal acquisition rules on a timetable
ensuring that such contracts were in
place at the same time as prescription
drug plans would otherwise be offered.
However, in regulation we more
correctly stated that we would use
competitive procedures (as defined in
section 4(5) of the Office of Federal
Procurement Policy Act (41 USC 403(5))
to enter into a contract under this
paragraph, and that the provisions of
section 1874A(d) of the Act with regard
to limitation of liability for Medicare
contractors for payments on behalf of
Medicare would apply. Thus the
fallback plans must be competed, and
their terms and conditions may be
negotiated. Because fallback plans will
be subject to competitive procedures,
we have clarified subpart N to make
clear that those appeals procedures
would not apply to fallback plans or
fallback entities.
Comment: We received comments
asking that an alternative to the
‘‘indefinite delivery’’ type contracting
be considered, including the use of cost
plus fixed fee contracts.
Response: We do not believe the
fallback contracts will be Federal
Acquisition Regulations (FAR) contracts

E:\FR\FM\28JAR2.SGM

28JAR2

4396

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

per se, even though we plan to use the
FAR competitive procedures to enter
into fallback contracts. Section
1857(c)(5) of the Act, which is
incorporated by section 1860D–
12(b)(2)(B) of the Act, authorizes us to
exercise the authority granted to the
Secretary under Part D of Title XVIII
without regard to provisions of law or
regulations relating to the making,
performance, amendment, or
modification of contracts of the United
States, as we determine is inconsistent
with the furtherance of the purposes of
Title XVIII.
Based on this authority, we proposed
that for risk contractors, the contracts
would not be written or entered into in
accordance with the FAR or the
Departmental acquisition regulations set
forth in title 48 of the CFR. In addition,
in the Medicare Advantage context, the
MA contracts have not been considered
to be FAR contracts and have not
contained FAR provisions within them.
We believe that it would be in
furtherance of the purposes of Title
XVIII to maintain consistency among
the Medicare Advantage, risk, and
fallback contracts to the extent possible.
Therefore, as with both the risk and
Medicare Advantage contracts, the
fallback contracts will not contain many
of the FAR or HHS-specific provisions
automatically included in many
government contracts.
In addition, because the contracts
would not be written under the FAR or
48 CFR provisions, we do not believe it
is accurate to refer to the standby
contracts as indefinite duration,
indefinite quantity (IDIQ) contracts—
which is a term used under the FAR.
Nonetheless, we expect to have
umbrella provisions, which provide the
necessary flexibility to deploy a fallback
plan during a contract year in the event
of a risk plan failure. Although the
fallback contracts will not be written in
accordance with the provisions of the
FAR or 48 CFR, and will not look like
typical ‘‘FAR contracts,’’ as we stated in
the proposed rule at 69 Fed. Reg.46734,
unlike both risk and MA contracts, we
will enter into fallback contracts using
the Federal acquisition rules on a
timetable to ensure that the contracts are
in place on time (that is, at the same
time as the risk plans would otherwise
be offered).
In anticipation of the approach
discussed above, we intend to time the
fallback solicitation process so that we
can actively encourage participation in
risk contracting and minimize the need
for fallback plans while ensuring they
are available if necessary. To this end,
we intend to begin the fallback
solicitation process after the risk plan

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

solicitation process. We may also
conduct a second risk plan solicitation
(for applications) only for areas we
determine to be likely fallback areas.
Final fallback bids under this process
would be due shortly after the risk bids
are due with fallback contracts awarded
in the fall. Further details on the
fallback plan solicitation process will be
provided in separate guidance.
In the preamble to the proposed rule
we referred to the non-interference
provision of the MMA and noted, for
our negotiations with potential fallback
plan sponsors, that we could not
interfere with negotiations between drug
manufacturers and pharmacies and PDP
sponsors, and could not require a
particular formulary or institute a price
structure for the reimbursement of
covered Part D drugs. However, we
noted that at the same time the revenue
requirements standard in 5 USC 8902(i),
discussed in subpart F of the preamble,
require us to ascertain that the bid
‘‘reasonably and accurately reflects the
revenue requirements for benefits
provided under that plan.’’ Therefore,
we concluded that while we may not set
the price of any particular drug, or
require an average discount in the
aggregate on any group of drugs (such as
single-source brand-name drugs,
multiple-source brand name drugs, or
generic drugs), we will take appropriate
steps to evaluate whether the bid is
reasonably justified. As specified in 5
USC 8902(i), we have the authority to
take steps to ensure that benefits are
‘‘consistent with the group health
benefit plans issued to large
employers,’’ in order to ensure that the
bid amounts submitted are comparable
to those available on the private market.
For example, if the price reference
points appear to be particularly high (or
low), we may request an explanation of
the bidders’ pricing structure, and the
nature of their arrangements with
manufacturers to ensure that there is no
conflict of interest leading to higher
bids. We also proposed to negotiate
price-related performance targets with
fallback plans, consistent with current
market practices in which commercial
plan sponsors negotiate price-related
reference points with PBMs. We said we
would also consider potential
contractors based on their bids for
administrative functions like claims
processing.
Comment: We received a few
comments that did not support our
analysis of our negotiating authority.
One commenter specifically
recommended that we clearly indicate
in the final rule that we will not set
price benchmarks, create incentive
payments, or otherwise interfere with

PO 00000

Frm 00204

Fmt 4701

Sfmt 4700

the price structures for Part D drugs,
whether provided through fallback
plans or not.
Response: As stated in the proposed
rule, we believe that section 1860D–
11(g)(5)(B)(i) of the Act makes clear that
the Congress contemplated taking prices
into account in calculating incentive
payments for fallback entities.
Moreover, even though the performance
measures and the potential incentive
payments will be defined in advance,
the determination of actual incentive
payments will be made at the end of the
contract period, and thus does not
represent interference in the bidding
process.
As is the case with risk bids, we
continue to believe we have the
authority to negotiate for fallback plans
in four broad areas: administrative costs,
aggregate costs, benefit structure, and
plan management. We will evaluate
administrative costs for reasonableness
in comparison to other bidders. We will
examine aggregate costs to determine
whether the revenue requirements for
the defined standard or actuarially
equivalent standard prescription drug
coverage as defined in § 423.100 are
reasonable and equitable. We will be
interested in steps that the plan is taking
to control costs, such as through
measures to encourage use of generic
drugs, therapeutic interchange to
preferred brand-name drugs, and
formulary compliance. We will be
interested in reviewing the formulary to
ensure that it is appropriate for a region
in which beneficiaries do not have
alternative plans from which to choose.
We will examine and discuss any
proposed benefit structures or changes
to benefits in later years, particularly
with regard to any potentially
discriminatory features. Finally, we will
review performance metrics and discuss
any identified issues with regard to plan
management, such as customer service.
No changes will be made to § 423.871 in
response to these comments.
Comment: One commenter supported
our position that we have the authority
to negotiate with plans to ensure a good
price for beneficiaries, and if the price
reference points appear to be
particularly high (or low), to request an
explanation of the bidders’ pricing
structure, and the nature of their
arrangements with manufacturers to
ensure that there is no conflict of
interest leading to higher bids. The
commenter urged us to apply these
same authorities to plans in nonfallback situations, as well as to fallback
plans, and notes these ‘‘pricing dangers’’
may also occur in areas where there is
no fallback plan, but just one MA-PD
and one at-risk PDP.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Response: We appreciate the support
of our position and agree that similar,
although not identical, controls are
required for evaluation of risk plan
bidding. Since risk plans are by
definition at risk for ineffective cost
management, there is less need for us to
set targets in order to incentivize
reasonable and appropriate cost
controls. Please refer to our discussion
of risk plan bid negotiation in subpart
F, as well as to our guidelines on risk
bid submission published separately.
Comment: Numerous commenters
wrote in about performance measures
for fallback plans. Some expressed their
approval of our intent to base incentives
on various performance measures. Some
commenters suggested specific
measures such as: using cost per days
supply instead of cost per prescription
to ensure an apples-to-apples
comparison, and including more
specific measures of customer service
such as: speed and efficiency in
handling enrollee calls, timeliness and
accuracy of communication materials to
enrollees, comprehensiveness and
accuracy of business support to
pharmacies, prescribers and CMS, retail
pharmacy network access, and mail
service pharmacy performance.
However, the majority of commenters
had serious doubts about the number,
and kinds of performance measures we
proposed. Some were worried there
were too many proposed performance
plan measures, and several believed that
we were suggesting that the final rule
was going to allow negotiated discounts
for prescription drugs to be the sole
performance measure for a fallback
plan. Other commenters said they
believed that fallback plans should not
be expected to put their management
fees at risk due to factors beyond their
control, or for measures that are not
mutually agreed upon with CMS, and
others said that drug price discounts
should not be used as a performance
measure at all.
Response: We appreciate the
supportive comments, and especially
the suggestions for specific performance
metrics we could utilize. We also agree
that fallback plans should not have their
management fees put at risk due to
factors beyond their control. We have
identified a number of performance
measures that are used in the private
sector as performance guarantees for
which management fees are put at risk
and we intend to adopt these practices
to ensure best practices in benefit
management.
Despite the comments arguing against
the use of performance incentives tied
to price discounts, we will be placing
performance clauses in the contracts

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

with fallback entities that tie
performance payments to the fallback
plan’s ability to secure lower drug
prices for beneficiaries and lower costs
for Medicare. We note that in the
absence of performance guarantees or
incentives, fallback plans are no-risk
cost-based arrangements that are
reimbursed by Medicare for costs
(including administrative fees and
negotiated profit) incurred. In future
guidance we will provide a number of
measures that would encourage an
efficient entity to bid on a fallback plan
contract (because it believes it can meet
the performance metrics), and also give
a successful bidder an incentive to
provide quality services to its
beneficiaries at the best possible price
(because it would have the opportunity
to earn greater profits). We note that this
increased profit opportunity is the result
of performance incentive payments and
not the retention of any spread between
negotiated prices with pharmacies and
the target pricing proposed in the
fallback contract bid.
As stated in § 423.871(d), as part of
the payment process for fallback plans
authorized by section 1860D–11(g)(5) of
the Act, we will assess the performance
of plans with regard to specific
performance measures and tie this
performance to an incentive payment.
Incentive payments may be either
performance guarantees (with downside
risk to management fees) or performance
incentives (with upside potential for
additional profit). These measures will
include, but are not limited to, measures
for cost containment, quality programs,
customer service, and benefit
administration (including claims
adjudication). ‘‘Cost containment’’ refers
to processes in place to ensure that costs
to the Medicare Prescription Drug
Account and to enrollees are minimized
through mechanisms such as generic
substitution. The term ‘‘quality
programs’’ refers to drug utilization
review processes in place to avoid
occurrences such as adverse drug
reactions, drug over utilization and
medical errors. The term ‘‘customer
service’’ refers to processes in place to
ensure that the entity provides timely
and accurate filling of prescriptions and
delivery of pharmacy and beneficiary
support services. We will be surveying
enrollees of fallback plans to assess
customer satisfaction with plan services.
The terms ‘‘benefit administration and
claims adjudication’’ refer to processes
in place to ensure that the entity
provides efficient and effective benefit
administration and claims adjudication,
such as accurately programming and
updating its benefit administration

PO 00000

Frm 00205

Fmt 4701

Sfmt 4700

4397

information systems, and providing
timely and accurate claims adjudication.
We believe the suggested performance
standards are reasonable and largely
consistent with private sector best
practices. As the potential performance
guarantees and incentives mentioned
above illustrate, we will select (and will
continue to refine) measures that focus
on key indicators of the many aspects of
prescription drug benefit management
that are important to us and to
beneficiaries. These measures will be
updated and revised to reflect
opportunities to ensure that best
practice is reflected in each fallback
PDP contract year.
Comment: One commenter indicated
support for the concept of paying for
performance, but expressed concern that
the proposed regulations would subject
only fallback plans (and not at-risk PDPs
or MA-PDs) to performance standards
that would rate these plans on their
success at cost containment. The
commenter argued that under this
approach the fallback plans would have
a greater incentive to make formulary
choices based on the amount of
discount they receive from
manufacturers, rather than on the most
appropriate and cost-effective clinical
treatments. If this were to occur, it could
put beneficiaries enrolled in fallback
plans—including those who have no
other real options—at a significant
disadvantage. The commenter
recommended that performance
standards for all Part D plans need to
balance both cost containment and
access to clinically appropriate
medications.
Response: The MMA was designed in
large part to foster a competitive market
place by making every effort to
encourage at-risk plans to contract with
us, thereby creating competition among
plans and choice for beneficiaries. We
believe that both cost containment and
quality performance will be logical
outgrowths of plans competing for
beneficiaries in the same area. Contract
provisions outlined under (subpart K)
§ 423.505 and performance measures
provided under § 423.871(d) are all
designed to protect the beneficiary and
are a condition of contracting with CMS.
Nonetheless, we too believe that
fallback PDPs, which are paid costs,
may not always have the same
incentives as at-risk plans to negotiate
aggressive discounts and otherwise
minimize net costs, as opposed to net
reimbursement. Consequently, the point
of the performance guarantees is to
bolster the incentives to undertake those
activities aggressively. We understand,
for instance, that if we were to base
performance incentives on rebates

E:\FR\FM\28JAR2.SGM

28JAR2

4398

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

obtained, this would create an incentive
to steer patients toward drugs that
receive higher rebates from
manufacturers, rather than toward drug
choices that optimize both therapeutic
outcomes and cost effectiveness for the
patient and the payer. Consequently,
when evaluating costs, we will avoid
metrics such as average rebate level or
average rebate per script (as we
suggested in the proposed rule) in favor
of better measures of net cost to the
program.
Comment: We received several
comments regarding fallback plan
quality programs. One suggested we
change the language from over- and
under-utilization to ‘‘appropriate use’’.
One commenter wanted us to include a
statistically significant sample of MTMP
enrollees to identify medication
management. Another suggested that in
addition to reducing medication errors
and avoiding adverse drug events,
fallback PDPs should offer quality
programs on prescription drug therapy
that include adherence and persistency
programs.
Response: We appreciate these
comments and share the commenters’
goals of ensuring comparable and
appropriate quality assurance programs
in fallback plans. As noted already,
fallback plans are subject to all of the
requirements for PDPs and other Part D
plans (except as otherwise noted in this
subpart or in separate guidance) and
readers are referred to subpart D for
discussion of related comments and
responses on quality requirements and
initiatives. We have modified
§ 423.871(d)(1)(ii) to reflect the
requirements to monitor for appropriate
utilization.
In the preamble to the proposed rule
we stated that in contrast to plans that
contract on a risk basis, fallback entities
will be paid for covered Part D drugs on
the basis of cost, and thus these entities
will have less of an incentive to
negotiate low drug prices.
Consequently, because the statute
directs us to pay management fees that
are tied to performance measures, and
directs that there must be a measure for
costs, we said we were considering
tying the performance payments of
fallback entities to the average discounts
they are able to negotiate, including
discounts from manufacturers. We
noted that this type of incentive
contracting is found in the commercial
pharmacy benefit management market
today. We requested comments on
alternative reference points or
alternative methodologies that could
promote competitive pricing.
Comment: We received a number of
comments around using AWP as the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

price reference point for negotiated
prices. Numerous commenters
supported our use of a price benchmark
and believe it represents due diligence
on the part of the agency to ensure that
beneficiaries and the Medicare program
are not penalized with high prices in
areas in which there are no choices
among plans. Some recommended that
we use AWP as a reference point to
measure the cost containment by
fallback plans. Others agreed with our
expressed concern that the use of a
fluctuating benchmark like AWP was in
some ways problematic.
Response: Despite its frequent
fluctuations and inherent vulnerability
to manipulation, the AWP remains the
primary measuring stick for drug costs.
We will therefore be incorporating it
into our performance targets, but we
will also be looking at other indicators
or proxies for financial performance,
such as rates of generic substitution,
that will provide other perspectives on
cost management.
Comment: One commenter
recommended that we clarify that
‘‘actual costs’’ incurred to provide the
drug benefit include administrative
costs, and not simply actual drug costs.
Response: We appreciate the
recommendation to clarify these terms
in regulation. The actual costs
referenced in § 423.871(e)(1) refer to the
actual costs incurred by the fallback
plan for the acquisition of drugs, and are
net of administrative expenses.
Administrative costs, including return
on investment, should be included in
the computation and negotiation of
management fees. We have added the
definition of actual costs to § 423.855
and modified § 423.871(e)(1) to clarify
these terms.
Comment: Several commenters urged
us to eliminate the requirement that
fallback entities apply direct or indirect
remuneration as an ‘‘offset’’ to actual
costs incurred by the fallback entity.
Response: We do not believe that we
have the authority to reimburse fallback
contractors for costs at a rate above their
actual acquisition costs. In § 423.308 we
state that ‘‘Actually paid means that the
costs must be actually incurred by the
sponsor and must be net of any direct
or indirect remuneration (including
discounts, chargebacks or average
percentage 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

PO 00000

Frm 00206

Fmt 4701

Sfmt 4700

costs incurred by the sponsor for the
drug.’’ In the proposed rule we also
explained (for allowable costs for risk
plans) that we understand that today a
significant volume of price concessions
are not applied in the context of point
of sale claims data, but rather in
periodic accounting adjustments, and
that they are frequently reported along
with administrative fees paid by the
manufacturer. We are aware and
concerned that, in some cases, plan
sponsors may accept lower
administrative costs or receive services
at less than market value in lieu of some
or all of the price concessions. We are
concerned that this practice may result
in improper shifting of costs in order to
inappropriately maximize cost
reimbursements. We intend to monitor
these arrangements closely to ensure
that actual costs are not improperly
inflated. We are also concerned that
these accounting and business practices
would be incompatible with the
requirement to disclose all price
concessions for purposes of determining
actual costs and we, therefore, are
proposing to require that the true cost of
all price concessions be segregated from
administrative fees in all records. We
require that all price concessions passed
through to the plan sponsor or
beneficiary in any form be subtracted
when calculating actual costs. Again, we
have added the definition of actual costs
to § 423.855 and modified
§ 423.871(e)(1) to clarify this policy.
Comment: One commenter requested
that we extend the confidentiality
protections of the Medicaid rebate
statute to all negotiated pricing
information submitted to, or reviewed
by, CMS under Part D, including
information obtained under subparts F,
G, K, Q, and R of the proposed rule.
Response: We received several
comments regarding extending the
confidentiality provisions of the
Medicaid rebate statute to Part D. As
discussed in subpart F of this preamble,
Part D bid information that determines
payment is protected under section
1860D–15, since the bid information is
used to actually pay the sponsors (if, for
example, it is an estimate of
reinsurance, or it supports the actuarial
value of the bid). We believe this same
protection applies to the information
submitted in response to a fallback plan
solicitation or as part of the cost
reconciliation process. We also do not
believe we have the authority to extend
the confidentiality provisions of the
Medicaid rebate statute where the
Congress has not authorized us to do so.
The Congress has been quite clear when
it wishes the Medicaid rebate statute to
apply. For example, in section 1860D–

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
2(d)(2) of the Act, the Congress
specifically stated that certain aggregate
negotiated price concessions described
in that provision would be protected
under section 1927(b)(3)(D)—the
Medicaid rebate confidentiality
provisions to which the commenter
refers. Similarly, section 1860D–
4(c)(2)(E) of the Act applies the
Medicaid rebate confidentiality
provisions to disclosures made under
that provision. Finally, section 101(e)(4)
of the MMA amended section
1927(b)(3)(D) to specifically add to that
section the information disclosed under
sections 1860D–2(d)(2) or 1860D–
4(c)(2)(E). Therefore, we do not believe
the Medicaid rebate confidentiality
provisions would apply, except where
the Congress specifically indicated they
should. For further information
regarding the Disclosure of Information
provision, please refer to subpart G,
§ 423.322. Please refer to subparts F and
G for discussion of comments and
responses related to confidentiality of
pricing information submitted with the
bid and upon reconciliation.
Section 423.871(f) of the regulation
implements section 1860D–15(d) and (f)
of the Act. Under these provisions the
Secretary is authorized to collect any
information necessary to carry out
section 1860D–15 of the Act, but
information ‘‘disclosed or obtained
pursuant to the provisions of [section
1860D–15] may be used by officers,
employees, and contractors of the
Department of Health and Human
Services only for the purposes of, and to
the extent necessary in, carrying out
[section 1860D–15 of the Act].’’ We have
clarified that information disclosed to
determine Medicare payment or
reimbursement to the fallback entity
may be used by the officers, employees
and contractors of HHS (including OIG)
only for the purposes of, and to the
extent necessary in, determining
payment or reimbursement, and we
have modified § 423.871(f) accordingly.
We also note, however, that this
restriction does not limit CMS or OIG
authority to conduct audits and
evaluations necessary to ensure accurate
and correct payment and to otherwise
oversee Medicare reimbursement to
fallback entities, or to conduct other
statutorily-authorized quality, research,
and oversight functions. Nor does this
restriction necessarily limit the ability
of others with independent authority to
collect data using their own authority.
As we did in subpart D of this preamble,
we interpret sections 1860D–15(d) and
(f) of the Act as limiting the use of
information collected under the
authority of that section. If information

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

is collected under some other authority,
however, we do not believe that section
1860D–15 of the Act would limit its
use—because the information would not
be collected ‘‘pursuant to the
provisions’’ of section 1860D–15 of the
Act. QIOs have independent authority
to collect data, and to fulfill their
responsibilities. To the extent QIOs
need access to data from the
transactions between pharmacies and
Part D sponsors, these data could be
extracted from the claims data
submitted to us. We refer readers to
subpart D for a more extensive
discussion of this issue.
5. Rules Regarding Premiums
(§ 423.867)
In § 423.867 we proposed that the
monthly beneficiary premium charged
under a fallback prescription drug plan
offered in all fallback service areas in a
PDP region must be uniform (except as
provided with regard to any enrollment
penalty, low-income assistance, or
employer group waivers under
§ 423.458(c). It must equal 25.5 percent
of an amount equal to our estimate of
the average monthly per capita actuarial
cost, including administrative expenses
as calculated by the Chief Actuary,
under the fallback prescription drug
plan of providing coverage in the region.
In calculating administrative expenses,
we said we would use a factor based on
similar expenses of prescription drug
plans that are not fallback prescription
drug plans. No comments were received
on these statutorily determined
provisions and they will be adopted as
proposed.
In § 423.867(b) we proposed that
fallback plans would not receive any
applicable late enrollment penalties
since they do not bear risk for increased
expenses attributable to individuals to
whom the penalty applies. We required
that monthly beneficiary premiums for
enrollees in fallback prescription drug
plans be deducted from Social Security
benefits (as provided in § 422.262(f)(1))
or in any other manner provided under
section 1840 of the Act. Both
§ 422.262(f)(1) (as provided under
sections 1854(d)(2)(A) and 1840 of the
Act provide for the collection of
monthly premium through the
withholding of benefit payments. For
those beneficiaries for whom Federally
based monies are not available, section
1840(e) allows for premiums to be ‘‘paid
to the Secretary at such times, and in
such manner, as the Secretary shall by
regulations prescribe’’.
In the proposed rule we interpreted
the reference to section 1840(e) as
requiring direct payment to us when
Federal benefit withholds were not

PO 00000

Frm 00207

Fmt 4701

Sfmt 4700

4399

available. We stated: ‘‘Premiums from
beneficiaries enrolled in fallback plans
would not be collected by the plan.
Instead, these premiums would be
withheld from social security checks (or
from other benefits as permitted under
section 1840 of the Act). Beneficiaries
who do not receive social security
checks or otherwise have premiums
deducted from other benefits or
annuities would pay us directly.’’ We
have clarified that we have the authority
to require that premiums be collected by
fallback plans, and to deduct such
amounts from payments due to fallback
plans in the case of any individual who
does not receive such benefits or
annuities, or who receives insufficient
benefits or annuities to cover the
monthly premium. We believe this
procedure is more familiar to
beneficiaries and to plans, and allows
the plan to be in closer touch with the
beneficiary’s enrollment status.
Therefore, we have modified
§ 423.867(b) to reflect this clarification.
6. Contract Terms and Conditions
(§ 423.871)
In § 423.871 we state that the terms
and conditions of contracts with eligible
fallback entities offering fallback
prescription drug plans will be the same
as the terms and conditions of contracts
for other Part D plan sponsors, with the
following exceptions:
• The contract term for a fallback
prescription drug plan will be for a
period of 3 years (except as may be
renewed after a subsequent bidding
process). However, a fallback
prescription drug plan may be offered
for any year within the contract period
only if that area is a fallback service area
for that year.
• An eligible fallback entity with a
contract under this part may not engage
in any marketing or branding of a
fallback prescription drug plan. This
refers to marketing activities promoting
the plan and its sponsor to Part D
eligible beneficiaries as addressed in
§ 423.50 of this rule. Section 423.50
includes in the definition of marketing
materials: membership communication
materials, such as membership rules,
subscriber agreements, handbooks and
wallet card instructions, letters about
contractual changes, changes in
premiums, benefits, plan procedures,
and membership or claims processing
activities. It also refers to required
dissemination of information on
approved plan characteristics to
enrollees as required in § 423.128 of our
proposed rule. The prohibition on
marketing and branding means that in
none of these required activities or
materials may the fallback plan sponsor

E:\FR\FM\28JAR2.SGM

28JAR2

4400

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

use its corporate identity to brand the
fallback plan; only references to the
approved name of the fallback plan or
Medicare may be used. Beneficiary
education and outreach to employers
potentially interested in providing
supplemental coverage will remain
solely our responsibility.
• Payment will be based on
reimbursement for actual costs (taking
into account price concessions) of
covered Part D drugs provided to Part D
eligible individuals enrolled in the plan,
and management fees tied to the
performance measures that we establish
including but not limited to those for
cost containment, quality programs,
customer service, and benefit
administration (including claims
adjudication).
• Each contract for a fallback
prescription drug plan must require an
eligible fallback entity offering a
fallback prescription drug plan to
provide us with the information that we
determine is necessary to carry out the
fallback plan payment provisions, and
calculate accurate payments, including,
but not limited to, all documentation
relating to including 100 percent of drug
claims, costs, rebates and discounts, and
disclosure of all direct and indirect
remuneration as offsets to the claim
costs.
• We can amend the contract at any
time, as needed, to reflect the exact
regions or counties to be included in the
fallback service area(s).
• Competitive procedures (as
defined in section 4(5) of the Office of
Federal Procurement Policy Act (41
U.S.C. 403(5)) will be used in fallback
plan contracting.
• Other contract terms will be
specified during the bid solicitation
process.
We note that like all Part D plans,
fallback prescription drug plans must
abide by all Federal and State laws
regarding confidentiality and disclosure
of beneficiary health information,
including the obligation of fallback
prescription drug plans as HIPAA
covered entities to comply with the
HIPAA Privacy Rule.
Comment: One commenter asked us
to clarify that the service area of a
fallback plan will not be changed except
by mutual agreement of the parties.
Response: Under umbrella contracts,
service area applies to two different
aspects of the contract: one is where the
fallback plan is actually operating a plan
in any given year, and the other is the
service area to which the umbrella
provisions pertain, meaning the total
potential service area. A fallback plan
would be required to provide service as
determined necessary by CMS in any

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

additional area covered under the
umbrella terms but not beyond that
service area.
Comment: One commenter
recommended that we publish in
advance of bidding any proposed
performance standards that we intend to
use under the proposed fallback
contract. The commenter also
recommended that provisions be
included in § 423.871 to ensure that any
performance standards, as well as the
requirements and process to establish
that the standards have been met,
cannot change during the term of a
contract.
Response: In accordance with
§ 423.871, we may specify other contract
terms during the bid solicitation
process. The performance standards we
intend to use under contracts will be
provided in the fallback solicitation
documentation prior to bidding.
[Competitive procedures (as defined in
section 4(5) of the Office of Federal
Procurement Policy Act (41 U.S.C.
403(5)] will be used in fallback plan
contracting and potential fallback plan
sponsors will need to compete on these
performance measures. Under Part D
plan contract terms and conditions, as
described in § 423.516, we agree not to
implement any significant regulatory
requirements for a Part D plan other
than at the beginning of the year.
7. Payment to Fallback Plans (§ 423.875)
As provided in § 423.875, the amount
payable under approved fallback
prescription drug contracts would be
the amount determined under the
specific contract negotiated for each
such plan under § 423.871(e). In the
proposed rule we proposed some
alternative payment mechanisms,
including draw down accounts and
prospective payments, as well
prospective or retrospective rebate
allocation methodologies.
Comment: One commenter
recommended that we use a prospective
payment approach, and asked for more
detail on how that system would work.
Response: We published separately
the proposed guidelines on payment
methodologies to Part D plans. Further
guidance will be included in the
fallback plan solicitation
documentation. Our goals are to avoid
any undue burden to fallback plans and
at the same time develop a method of
payment that requires a limited amount
of adjustment.
R. Payments to Sponsors of Retiree
Prescription Drug Plans
1. Introduction
Subpart R implements section 1860D–
22 of the Act, which provides for

PO 00000

Frm 00208

Fmt 4701

Sfmt 4700

subsidy payments to sponsors of
qualified retiree prescription drug plans.
Sponsors of qualified plans can receive
an annual subsidy equal to 28 percent
of specified retiree drug costs.
We received 87 comments on subpart
R in response to the August 2004
proposed rule. Below we summarize the
major proposed provisions in the
subpart and respond to public
comments. (For a detailed discussion of
our proposals, please refer to the
proposed rule (69 FR 46736).)
2. Options for Sponsors of Retiree
Prescription Drug Programs
The enactment of Title I of the MMA
has provided sponsors of retiree
prescription drug plans with multiple
options for providing drug coverage to
their retirees. In the preamble of the
proposed rule, we reviewed the various
options available to sponsors. We
believe the availability of these various
options will encourage sponsors to
continue to assist their retirees in
having access to prescription drug
coverage. For the benefit of the
sponsors, we again summarize the
options below.
Generally, employers and unions who
offer drug benefits to their retirees (and
their dependents) who are eligible for
Medicare Part D can choose to:
(1) Continue to provide prescription
drug coverage through employmentbased retiree health coverage. If such
coverage is at least actuarially
equivalent to the standard prescription
drug coverage under Part D (as defined
in § 423.104 of the final rule), the
sponsor is eligible for a special Federal
subsidy for each individual enrolled in
the sponsor’s plan who is eligible for
Part D but elects not to enroll in Part D;
(2) Contract with a prescription drug
plan (PDP) or Medicare Advantageprescription drug (MA-PD) plan to offer
prescription drug benefits to retirees
who are eligible for Medicare.
Alternatively, the retiree plan sponsor
itself could apply to be a Part D plan for
its retirees. Such plan may consist of
‘‘enhanced alternative coverage’’ (as
defined under § 423.104(f) of the final
rule), offering drug coverage that is more
generous than the standard prescription
drug coverage under Part D (as defined
under § 423.104 of the final rule); or
(3) Provide separate prescription drug
coverage that supplements, or ‘‘wraps
around,’’ the coverage offered under
Part D plans in which the retirees (and
their Medicare eligible dependents)
enroll.
The first option is the subject of this
subpart R. The latter two options, which
involve the employer or union’s retirees
(and their dependents) enrolling in Part

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
D, were discussed in the preamble of the
proposed rule for subpart J, § 423.454(b)
We note that if employers or unions
elect to sponsor enhanced alternative
coverage under Part D or provide
separate supplemental coverage that
wraps around Part D, this will affect the
point at which their retirees (and their
dependents) are eligible for catastrophic
drug coverage, which will have
consequences for the participants, the
sponsors, the plans, and the Medicare
program. As specified in subpart C of
the final rule, individuals enrolled in a
Part D plan are eligible for catastrophic
drug coverage after they incur out-of­
pocket drug costs in the amount
specified under § 423.104(d)(5)(iii) of
the final rule. Under the reinsurance
provisions at § 423.329(c), Medicare will
reimburse Part D sponsors 80 percent of
their gross costs for providing
catastrophic coverage (excluding
administrative costs and reduced by any
discounts, rebates, and similar price
concessions). Only drug costs paid by a
Part D enrollee, or on behalf of a Part D
enrollee by another individual, a
charitable organization or a qualified
State Pharmacy Assistance Program but
excluding insurers, government-funded
health care programs, group health
plans, and similar third party
arrangements, would count toward the
annual out-of-pocket threshold. We refer
to those drug expenditures that count
toward the out-of-pocket threshold as
‘‘true out-of-pocket (TrOOP)
expenditures.’’
Under these rules, sponsors who
provide retirees (and their dependents)
enhanced alternative coverage in effect
delay the point at which an individual’s
total drug spending will trigger
catastrophic coverage, since participants
in the plan will have lower cost-sharing,
and thus have lower out-of-pocket costs.
Similarly, when employers or unions
sponsor supplemental coverage that
wraps around Part D coverage, there
will be an increase in drug expense that
must be incurred before catastrophic
coverage is triggered, since drug costs
paid for by such plans do not count
toward the out-of-pocket annual limit.
By delaying the provision of
catastrophic coverage, these plans lower
the cost of Part D to the Federal
government by lowering our reinsurance
payments.
As discussed above, under MMA,
sponsors of retiree prescription drug
plans can provide coverage that
supplements or ‘‘wraps around’’ the Part
D standard benefit in two ways. First,
plan sponsors can purchase integrated
supplemental coverage directly from a
specific Medicare prescription drug
plan (PDP) or Medicare Advantage plan

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

that includes prescription drugs (MA­
PD). Second, plan sponsors can
maintain a free-standing plan which is
not tied to a specific PDP or MA-PD and
is meant to supplement any of the Part
D plans that Medicare-eligible retiree
plan participants enroll in.
We also note that the choice between
integrated and separate supplemental
coverage has operational implications
for plan sponsors. If the sponsor
purchases integrated coverage through a
PDP or MA-PD, the enrollment of
retirees in Medicare Part D will be
handled by the PDP or MA-PD. Under
this approach, the dispensing pharmacy
will only need to undertake one
transaction to the PDP or MA-PD; there
would not be separate standard Part D
and supplemental coverage transactions.
In contrast, when sponsors provide
coverage through a separate plan, they
(or their plan administrator) will only
handle enrollment for their free­
standing coverage; retirees will be
responsible for enrolling in Part D
coverage of their choice. We are
sensitive to the concerns of plan
sponsors regarding the operational
challenges of coordinating separate
plans with Part D plans. Therefore, we
are exploring approaches that
stakeholders may be able to use to
coordinate benefits at point-of-sale
among these plans through the use of a
single point of contact for coordination
of benefits and facilitation of TrOOP
calculation at the Part D plan..
CMS has a program that can assist
plan sponsors and administrators with
identifying Medicare eligible
individuals covered under their plans.
This is a process called the Voluntary
Data Sharing Agreement (VDSA)
process. Plan sponsors that enter into
VDSAs will be better prepared for
enrolling their retirees into either
integrated supplemental coverage
through a Part D plan, establishing a
separate plan to supplement or ‘‘wrap
around’’ Part D coverage, or applying for
the retiree drug subsidy. There is no
requirement that any employer enter
into a VDSA; it is strictly a voluntary
process. (For more information on
VDSAs, go to the website at http://
www.cms.hhs.gov/medicare/cob/
employers/emplvdsa.asp). Other
existing CMS programs permit group
health plans and other secondary payers
to sign agreements to receive Medicare
paid claims data for the purpose of
calculating their secondary payment
liability.
When an employer or union elects to
sponsor retiree coverage through a Part
D plan, the employer, union or entity
seeking to offer or administer such
coverage may submit written requests to

PO 00000

Frm 00209

Fmt 4701

Sfmt 4700

4401

us for permission to waive requirements
under Part D that hinder the design of,
offering of, or enrollment in an
employer-sponsored group prescription
drug plan (as defined under § 423.454)
or a MA-PD plan offered exclusively to
the sponsor’s retirees and their spouses
and dependents. We believe these
waivers will facilitate efficient
administration and integration of
sponsor-provided enhanced alternative
coverage with other retiree health
benefits offered by the sponsor. For
example, the PDP or MA organization
could request permission to restrict
enrollment in its Part D plan to the
retiree plan sponsor’s retirees (and their
dependents). Similarly, should the plan
sponsor wish to enroll its retirees (and
their dependents) in its own plan, with
enrollment limited to such individuals,
the sponsor could apply to be a Part D
plan sponsor organization offering a
PDP or MA-PD plan, and request such
waivers as necessary. Further guidance
on waivers will be provided to assist
sponsors in evaluating this option.
We encourage plan sponsors to
carefully review each option and
determine which one is most beneficial
to the sponsor and its retirees. We
believe that the variety of options will
encourage sponsors to retain drug
coverage for their retirees.
3. Definitions (§ 423.882)
The final subpart R rules provide
definitions that are critical to
understanding how the retiree drug
subsidy functions. We received
comments regarding only a few of the
proposed definitions under subpart R:
group Health Plan, qualifying covered
retiree, allowable retiree costs, and
sponsor. We also amended the
definition of gross covered retiree planrelated prescription drug costs based
upon comments received in response to
the definition of a covered Part D drug
in § 423.100 in subpart C, and added a
definition of sponsor agreement in
response to comments received on the
proposed rule.
A. Group Health Plan: In general, the
subsidy is paid for allowable retiree
costs in a sponsor’s group health plan.
The statute and the proposed
regulations incorporated the definition
of Group Health Plan that appears in
section 607(1) of the Employee
Retirement Income Security Act
(ERISA), 29 U.S.C. 1167(1). (This is also
the definition used in the health care
continuation of coverage provisions of
ERISA, as added by the Consolidated
Omnibus Budget Reconciliation Act of
1985 (COBRA).) The statutory
definition, incorporated in the proposed
regulations, also specifically includes

E:\FR\FM\28JAR2.SGM

28JAR2

4402

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

plans maintained for their employees by
the Federal Government, plans
maintained by State or local
governments, and church plans exempt
from Federal taxes, even if they are not
subject to ERISA or COBRA
requirements.
In the preamble to the proposed rule
we said we intended to model our rules
on the COBRA regulations (26 CFR
§ 54.4980B–2, Q.6) that apply for
determining the number of group health
plans sponsored by an employer or a
union, which is important for purposes
of applying the actuarial equivalence
test. Under the COBRA rules, all health
benefits provided by a single employer
constitute one group health plan, unless
it is clear from the instruments
governing an arrangement or
arrangements that health care benefits
are being provided under separate
plans, and the arrangement or
arrangements are operated pursuant to
such instruments as separate plans. The
COBRA rules also provide that if a
principal purpose of establishing
separate plans is to evade any
requirement of law, then the separate
plans will be considered a single plan
to the extent necessary to prevent the
evasion. To the extent that the COBRA
rules require that an arrangement be
considered a single group health plan,
the sponsor must follow special rules
for determining actuarial equivalence
described in section 4(b)(3) of this
subpart of the preamble below.
Comments: Several plan sponsors,
health plans, and employer advocacy
groups suggested that we adopt the rules
in the COBRA regulations for
determining the number of plans
sponsored by an employer or union, but
remove the requirement that the
arrangements be operated as separate
plans. Some plan sponsors wanted the
flexibility to differentiate between
various groups of retirees within a
single plan without compromising their
plan’s eligibility status. (For example,
some sponsors separate their retirees
according to years of service, family
status, location, retirement date,
coverage level, contribution structure,
etc.) An actuarial association agreed that
we should give employers and unions
the flexibility to define plans and move
away from a single plan definition to
allow multiple benefit options to be
included within a plan.
An employer advocacy group
discouraged us from requiring a separate
filing, other than the attestation of
actuarial equivalence, to satisfy any
documentation requirement for plan
definition purposes. A beneficiary
advocacy group approved the use of the
COBRA rules for determining the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

number of plans, but suggested limits on
how actuarial valuation rules should be
applied if there are multiple drug
benefit options.
Response: For the purposes of subpart
R, the term group health plan will mean
plans that meet the definition of group
health plan in ERISA section 607(1), 29
U.S.C. 1167(1), including plans
established or maintained for its
employees by the Government of the
United States, by the government of any
State or political subdivision, or by an
agency or instrumentality of the
foregoing; plans established or
maintained under or pursuant to one or
more collective bargaining agreements;
and plans established or maintained for
its employees (or their beneficiaries) by
a church or by a convention of churches
which is exempt from tax under section
501 of the Internal Revenue Code.
Provided they meet the definition of
group health plan in ERISA section
607(1), those arrangements are treated as
group health plans even if the plans are
not subject to ERISA or COBRA.
Sponsors should use the rules in the
COBRA regulations and other guidance
issued by the Treasury Department and
Internal Revenue Service for
determining the number of group health
plans offered by a plan sponsor.
However, as discussed in § 423.884, the
final rule generally gives a sponsor with
different benefit options (including
different cost-sharing arrangements)
within a single group health plan a
significant degree of flexibility to choose
whether to measure actuarial
equivalence and receive subsidy
payments for aggregated benefit options
or to apply the rules separately for each
benefit option.
Comments: A business advocacy
group recommended that defined
contribution accounts such as Health
Reimbursement Accounts (HRAs),
Health Savings Accounts (HSAs),
Archer Medical Savings Accounts
(MSAs) and Flexible Spending
Arrangements (FSAs) be considered
group health plans for purposes of
qualifying for the retiree subsidy. In
addition, they recommended that
sponsors establishing account-style
plans that credit amounts during an
individual’s active service toward
retiree benefits have the discretion to
allocate payments between medical and
drug costs for purposes of the actuarial
equivalence test.
Response: The final rule clarifies that
Health Reimbursement Arrangements
(HRAs) (as defined in Internal Revenue
Service Notice 2002–45, 2002–28 I.R.B.
93, and Internal Revenue Ruling 2002–
41, 2002–28 I.R.B. 75) and health
Flexible Spending Arrangements (FSAs)

PO 00000

Frm 00210

Fmt 4701

Sfmt 4700

(as defined in Internal Revenue Code
(IRC) section 106(c)(2)) are treated as
group health plans given the nature of
these arrangements, including that they
generally are treated as health plans by
employers and unions subject to ERISA.
The term group health plan generally
will not include health savings accounts
(HSAs) (as defined in IRC section 223)
or Archer MSAs (as defined in IRC
section 220), unless these accounts are
treated as part of a group health plan
under ERISA rules. While HSAs and
Archer MSAs may not be group health
plans, any high deductible plans that
sponsors provide in connection with
HSAs and Archer MSAs are group
health plans.
However, regardless of whether an
account-type arrangement is a group
health plan, the nature of such a plan
raises certain challenging questions for
purposes of the retiree drug subsidy
program. For example, how should the
value of the prescription drug coverage
available through an account be
determined if the account can be used
to pay for prescription drug coverage
and other benefits? Will beneficiaries be
able to adequately compare that
arrangement to benefits available
through Part D, particularly if the
account stands alone and is not offered
in conjunction with other types of
coverage (such as high-deductible
plans)? How can it be determined
whether these arrangements are
creditable coverage for purposes of
implementing the late enrollment
penalty in § 423.46?
We intend to offer further guidance on
these issues and on what types of
account-based arrangements can be
considered for the subsidy.
Drug costs paid or reimbursed from
funds in an HRA, which is generally
funded solely by the employer, do not
count as an incurred drug cost for
purposes of the True Out-of-Pocket
(TrOOP) rules, while drug costs paid or
reimbursed from funds in other types of
accounts, which can be funded by the
employee, do count towards TrOOP.
(See subparts C and J of this preamble
(Coordination of Benefits), for a more
detailed explanation of the rules for
calculating TrOOP expenditures.)
B. Qualifying Covered Retiree: The
statute defines qualifying covered
retirees as Part D eligible individuals,
who are not enrolled in a Part D plan
but who are covered under a qualified
retiree prescription drug plan. The
statute indicates that qualifying covered
retirees include Part D eligible
individuals who are spouses and
dependents of covered retirees. The
proposed rule used the statutory
definition without further clarification.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Comments: An association of
actuaries requested that the final
regulations clarify whether a qualifying
covered retiree, under the retiree drug
subsidy calculations, includes an
employee who is receiving coverage
following a disability and who is also
entitled to Medicare Parts A or B on
account of that disability (and therefore
eligible for Part D). One employer
advocacy group suggested that disabled
Medicare-eligible individuals under age
65 be considered retirees for subsidy
purposes, and that employers might
drop coverage entirely if we decide not
to allow it.
An employer advocacy group
encouraged us to deem persons with
End Stage Renal Disease (ESRD) as
qualified retirees for purposes of the
subsidy, because these individuals
might receive lower drug coverage
without such designation.
A government association sought
clarification on the status of domestic
partners who are Part D eligible
individuals and their eligibility as
qualifying covered retirees’ dependents,
for purposes of calculating the retiree
drug subsidy.
Response: For the purposes of subpart
R, the term qualifying covered retiree
means a Part D eligible individual who
is: (1) a participant or the spouse or
dependent of a participant; (2) covered
under employment-based retiree health
coverage that qualifies as a qualified
retiree prescription drug plan; and (3)
not enrolled in a Part D plan. In general,
sponsors will have flexibility to
determine whether an individual is a
retiree, and to determine who are
dependents of retirees based on the
coverage rules under the plan. However,
a participant is presumed to not be a
retiree if the person is receiving health
coverage based on current employment
status as determined under the
Medicare Secondary Payer (MSP) rule
(§ 411.104 of this chapter) (regardless of
whether such rules apply to the
sponsor). We believe this approach
gives reasonable flexibility to sponsors
in terms of defining who is a retiree or
dependent for purposes of the subsidy
provisions. Under this definition, for
example, sponsors generally can treat a
person who is entitled to Medicare
based on disability as a retiree for these
purposes; sponsors can treat as a
dependent any person to whom the
sponsor is providing coverage in
connection with a qualified covered
retiree even if the person is not the
retiree’s dependent for Federal or State
tax purposes; and they can treat as
retirees self-employed persons and other
individuals who previously provided
services to the sponsor of the group

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

health plan on a contractual, rather than
employment, basis.
End Stage Renal Disease (ESRD)
beneficiaries who are not active workers
meet the definition of a qualifying
covered retiree if they do not enroll in
Part D. Accordingly, sponsors can count
for purposes of the retiree drug subsidy
the allowable retiree costs of ESRD
beneficiaries, including those costs
incurred in the first 30 months of
eligibility when the sponsor’s plan is
primary to Medicare.
Comments: Comments from
employers, employer advocates and
government entities informed us that
the retiree drug subsidy program not
only affects retirees of the sponsors, but
also the possible dependents of nonMedicare eligible workers or retirees
who will be eligible for Medicare and
therefore covered by the reporting
requirements.
Response: In response to the
comments regarding non-Medicare
eligible, active employees who have
dependents who are Medicare Part D
eligible individuals, the sponsor would
not be eligible to claim the subsidy for
the dependents because the covered
worker is not in a retiree status. For
covered retirees who are not themselves
Part D eligible individuals, but who
have dependents who are Part D eligible
individuals, the sponsor would be able
to claim the dependents’ eligible
prescription drug expenses under the
subsidy.
C. Gross covered retiree plan-related
prescription drug costs: The proposed
rules defined this term as ‘‘non­
administrative costs incurred under the
plan for covered Part D drugs during the
year ... including costs directly related
to the dispensing of covered Part D
drug’’. Section 423.100 of the final rule
now makes a distinction between a
‘‘covered Part D drug’’ and a ‘‘Part D
drug.’’ A ‘‘Part D drug’’ is a drug that
may be covered under Part D pursuant
to section 1860D–2(e) of the Act and a
‘‘covered Part D drug’’ is a Part D drug
that is in a Part D plan formulary. For
purposes of calculating the appropriate
drug costs for the retiree drug subsidy,
sponsors of retiree prescription drug
plans may count costs incurred for any
drug that can be covered under Part D.
Accordingly, we have changed the
definition of gross covered retiree planrelated prescription drug costs to mean
non-administrative costs incurred under
the plan for Part D drugs during the year
... including costs directly related to the
dispensing of Part D drugs.
D. Allowable Retiree Costs: The
proposed rule defined Allowable Retiree
Costs as gross covered retiree planrelated prescription drug costs between

PO 00000

Frm 00211

Fmt 4701

Sfmt 4700

4403

the cost threshold and cost limit that are
actually paid by either the qualified
retiree prescription drug plan or the
qualifying covered retiree (or on the
retiree’s behalf), net of any manufacturer
or pharmacy discounts, chargebacks,
rebates, and similar price concessions.
Comments: Several beneficiary
advocacy groups wanted us to adopt a
definition of allowable retiree costs that
included only the employer’s financial
contribution to retiree drug coverage,
not any of the payments made by the
retiree. They believe that including
contributions from the retiree could
result in ‘‘improper cost shifting.’’
Response: There is no statutory
authority to exclude retirees’ payments
in the definition of allowable retiree
costs. The statute specifies that retiree
drug subsidy payments are made for
gross covered prescription drug costs
paid by or on behalf of a qualified
covered retiree. Thus, as long as
coverage meets the actuarial
equivalence standard, costs paid by the
retiree will be included along with
sponsor payments under the plan in
determining retiree drug subsidy
payment amounts.
Comment: An association of actuaries
found it difficult to understand what we
are is defining as gross costs to be used
in determining allowable retiree costs,
but this might be due to a simple
terminology difference, so they suggest
we provide examples to clarify what
costs should be used.
Response: The statute indicates that
gross covered retiree plan-related
prescription drug costs are costs
incurred under the plan, not including
administrative costs but including the
costs directly related to the dispensing
of Part D drugs. The final rule retains
the basic statutory definition. We may
(if needed) issue further guidance to
clarify what costs constitute gross
covered retiree plan-related prescription
drug costs.
Comment: A government entity found
the term price concessions problematic
because, as used in its contract with a
pharmacy benefit manager (PBM), that
term refers to confidential and
proprietary information. Also, rebates
are included in the pricing quoted to the
PBM, and are not an identifiable line
item that can be easily subtracted to
determine allowable retiree costs.
Employer groups requested that we
distinguish what will be included in the
definition of price concessions for the
purpose of calculating allowable retiree
costs.
Specifically, the groups provided a
number of comments on why price
concessions relating to performance
guarantees and point-of-sale discounts

E:\FR\FM\28JAR2.SGM

28JAR2

4404

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

should not be included in allowable
retiree costs.
They claim that including such price
concessions when calculating allowable
retiree costs would require a large,
nearly impossible administrative
burden. Performance guarantees or
incentives, as well as point of sale
discounts, lower the price of the
prescription drug in a manner that
would make it burdensome for the
sponsor to determine the gross
allowable costs. Thus, the employer
groups argue that, in the instance where
performance guarantees and point-of­
sale discounts occur, reporting the
actual cost to the sponsor as the gross
cost should be sufficient.
Response: The statutory provisions of
the MMA specify that allowable retiree
costs may include only costs actually
paid by the sponsor or by or on behalf
of a qualifying covered retiree, and that
rebates, chargebacks and average
percentage rebates must be subtracted
from those costs. To comply with the
statute, the final regulation retains the
requirement that these and similar price
concessions be taken into account in
determining allowable retiree costs.
We anticipate providing any
additional clarification that is required
for price concessions in further
guidance. However, pending such
guidance, performance guarantees that
are not predicated on actual drug costs
incurred, but rather on matters such as
customer service performance standards
or identification card delivery, are likely
not the types of price concessions that
need to be taken into account in
determining allowable retiree costs.
Moreover, to the extent point-of-sale
discounts and other price concessions
are passed through to the beneficiary
and plan at the point-of-sale for a given
drug expense, the allowable retiree costs
and gross covered retiree plan-related
prescription drug costs for the expense
would be equal, and the point-of-sale
discounts and other price concessions
would not have to be further subtracted
from these costs when a sponsor
calculates allowable retiree costs as
defined in § 423.882.
Comments: For sponsors with fully
insured plans, a health industry
association and insurers ask that we
provide sponsors with the flexibility to
have the retiree drug subsidy calculated
based on the sponsor’s premiums, using
reasonable actuarial methods to
determine what portion of the premium
is allocated to gross covered
prescription drug costs of qualifying
covered retirees within the cost
threshold and cost limits. Commenters
support that position by arguing that
employers and unions purchasing

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

insurance do not pay actual incurred
drug costs; they pay a premium based
on expected costs, which may be pooled
with a broader group of employers and
unions. In a given year, an employer’s
or union’s retirees may incur drug costs
that are more than or less than the
premium paid. They expressed concern
that if drug costs actually paid by the
insurer rather than premiums paid by
the employer or union were the measure
for subsidy payments, for any given
retiree the employer or union would be
getting a subsidy payment that is likely
higher or lower than the allowable cost
actually incurred by the employer or
union (via the premium) for that retiree.
As noted, the commenters propose
using reasonable actuarial methods to
determine a percentage of the premium
that approximates what was paid for
Part D-eligible retirees within the cost
thresholds and cost limits. They also
request being allowed to perform these
calculations on an aggregate basis for all
employers and unions with a specific
retiree drug plan, since the experience
for the employers and unions is pooled
when determining premiums.
Another fully insured plan sponsor
recommended that if the plan sponsor
contracts with an at-risk health plan, the
retiree drug subsidy should be a flat
payment based upon the amount paid
instead of adjusted for actual experience
and requested clarification as to how we
anticipate the subsidy to be integrated
with fully insured plans.
Response: The statute specifically
requires that a subsidy payment be
based on allowable retiree costs
attributable to gross covered retiree
plan-related prescription drug costs,
which are actual prescription drug costs
incurred under the plan (not including
administrative costs but including costs
directly related to the dispensing of Part
D drugs) for a qualifying covered retiree.
In general, we believe the statute
envisions that the incurred costs are
costs actually paid by the insurer for
each qualifying covered retiree.
However, we also recognize the
concerns that were raised in the
comments. Therefore, in lieu of
submission of the cost data under
§ 423.888(b)(2), the sponsor and insurer
may choose instead to have data
submitted in the following manner. If an
sponsor chooses monthly, quarterly or
interim annual payments as described
in § 423.888(b)(5), the interim subsidy
payments made during the year can be
based on a determination by the insurer
using reasonable actuarial principles
that allocates a portion of the premium
costs charged to the sponsor (excluding
administrative costs, risk charges, etc.,
but including premium costs that the

PO 00000

Frm 00212

Fmt 4701

Sfmt 4700

sponsor requires the retiree to pay) to
the gross covered prescription drug
costs incurred for a sponsor’s qualifying
covered retirees between the cost
threshold and the cost limit. If the
insurer determines premiums based on
the pooling of a sponsor’s experience in
a given policy, the insurer will be
permitted to make such determination
based on the aggregate experience
incurred under the policy for the
sponsor’s qualifying covered retirees.
However, a revised cost determination
must be submitted to us (within the
same time frame that year-end data is
required under § 423.888(b)(4)) that
reflects the actual allowable retiree costs
attributable to gross retiree plan-related
prescription drug costs within the cost
limit and cost threshold that were
incurred under the plan for each of the
sponsor’s qualifying covered retirees.
Thus, we must receive data described in
§ 423.888 that indicates the extent to
which actual gross costs and allowable
costs for a sponsor’s qualifying covered
retirees were more or less than the
sponsor’s previously-allocated premium
costs. We will accept data submitted
directly by the insurer. Upon receiving
this data, we will adjust the payments
made for the plan year in question in a
manner to be specified by us.
Comment: Several plan sponsors
wanted clarification that subsidy
payments go to the plan sponsor, not the
insurer.
Response: The statutory language is
clear that the retiree drug subsidy is
paid to the plan sponsor.
Comment: Commenters suggested that
we provide guidance on whether the
prices negotiated with sponsors of
qualified retiree prescription drug plans
are exempt from the Medicaid best price
calculation.
Response: In section 1927(c)(1)(C) of
the Act, best price is defined as the
lowest price available from the
manufacturer during the rebate period
to any wholesaler, retailer, provider,
health maintenance organization, non­
profit entity, or governmental entity
within the United States. Among the
exemptions listed in the statute are any
prices charged which are negotiated by
a qualified retiree prescription drug
plan as defined in section 1860D–
22(a)(2) of the Act. Therefore, prices
negotiated between a qualified retiree
prescription drug plan sponsor and a
manufacturer will not go into the
Medicaid best price calculation.
E. Sponsor:
The proposed regulations state that
sponsor means plan sponsor as defined
in ERISA (29 U.S.C. 1002(16)(B)), which
is an employer in the case of an

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
employee benefit plan established or
maintained by a single employer or an
employee organization (for example,
trade union) in the case of a plan
established or maintained by an
employee organization. In the case of a
plan established or maintained by two
or more employers or jointly by one or
more employers and one or more
employee organizations, ERISA defines
the sponsor as the association,
committee, joint board of trustees or
other similar group of representatives of
the parties who establish or maintain
the plan. The MMA modifies the
definition when the plan is maintained
jointly by one employer and one
employee organization; if the employer
is the primary financing source, sponsor
means only the employer.
Comments: A governmental
organization indicated that plans such
as its own are exempt from ERISA and
therefore may not fall within the strict
definition of an ERISA plan. This plan
believes that Congressional intent was
to include plans like it, and requests
that we include a provision to allow
governmental plans offering a qualified
retiree prescription drug plan to receive
the retiree drug subsidy.
A State government entity expressed
concern over the definition of sponsor
and whether or not it would be included
under the Part D final regulations even
though it is not covered under ERISA.
A national association of public
employee retirement systems indicated
its preference that the final regulations
not contain a definition of plan sponsor,
or if they must, that the definition of
plan sponsor defer to applicable State
and local laws and regulations. The
association suggested this because they
think that imposing a definition in the
final regulations could have unintended
impact on State and local laws.
Response: As noted above, the
definition of a group health plan
includes plans sponsored by Federal
and State government plans and their
political subdivisions, agencies and
instrumentalities. Thus, we agree that
under the MMA, States and other
governmental organizations can
potentially qualify as sponsors. We
believe the definitions for sponsor and
for group health plan as stated in the
proposed rule clearly indicated this. We
believe a more specific definition of a
sponsor in the final rule that takes into
account the various types of sponsor
arrangements that may exist would be
problematic. We will consider issuing
additional guidance to sponsors based
on their particular facts and
circumstances.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

F. Benefit option:
In response to comments we received
on applying the actuarial equivalence
test to individual plans (summarized in
the discussion of actuarial equivalence
in section 4(b)(3) of the preamble,
below), we have added in the final rule
a definition of benefit option, which we
define as a particular benefit design,
category of benefits, or cost-sharing
arrangement offered within a group
health plan.
4. Requirements for qualified retiree
prescription drug plans (§ 423.884)
(a) Overview
(1) General Requirements
In the proposed rule, we outlined the
general requirements for applying for
the retiree drug subsidy, including the
submission of an attestation of actuarial
equivalence and the disclosure notices
to beneficiaries. We requested
comments on the most effective
methods of conducting outreach as well
as prospective venues for conducting
the outreach.
Comments: Several commenters
emphasized that it was critical that we
provide guidance on the retiree drug
subsidy process as soon as possible in
light of the fact that enrollment is to
begin in 2005. Several comments
requested that we publish the final rule
by December 31, 2004 and issue
guidance before that date.
Response: We respect the prospective
sponsors’ need to have guidance on the
retiree drug subsidy as soon as possible
due to the complexity and timing of the
process. In addition to promulgating
this final rule and issuing other
guidance as quickly as possible, we will
continue to conduct outreach to various
groups to educate the stakeholders on
the requirements for applying for the
retiree drug subsidy.
(2) Privacy and Confidentiality
The HIPAA Privacy Rule at 45 CFR
part 160 and subparts A and E of part
164 (‘‘Privacy Rule’’) applies to
‘‘covered entities,’’ which include group
health plans and health insurance
issuers, as defined in 45 CFR 160.103.
Third party administrators would be
business associates, as defined in 45
CFR 160.103, of group health plans.
Sponsors would not become covered
entities by sponsoring a plan. Sponsors
typically do not perform administrative
activities for their group health plans
and therefore do not have access to the
claims information or similar protected
health information (PHI) we require in
this regulation to support the retiree
drug subsidy payment. Much of the data
that we would need to support the
retiree drug subsidy payments, as

PO 00000

Frm 00213

Fmt 4701

Sfmt 4700

4405

outlined above, would be PHI held by
group health plans, health insurance
issuers, or third party administrators on
behalf of group health plans.
As indicated in the proposed rule, we
believe that we have the authority to
mandate the disclosure of the PHI in
accordance with our oversight authority
under section 1860D–22(a)(2)(B) of the
MMA, and covered entities on behalf of
individuals eligible for benefits under
Part A or Part B can comply with the
mandate (without first obtaining
specific authorization from individuals)
pursuant to ‘‘the required by law’’
provisions of the Privacy Rule (45 CFR
164.512(a)). We have added a paragraph,
§ 423.884(b) to clarify that a disclosure
to us by a group health plan or health
insurance issuer is required by law
when necessary for the sponsor to
comply with this subpart.
As noted above, typically group
health plans and issuers or third party
administrators acting on behalf of group
health plans, have PHI that CMS
requires for the submission of cost and
claims data for payment of the retiree
drug subsidy pursuant to § 423.888(b)(2)
and other sections. In these situations,
it may be unlawful, under the Privacy
Rule, for PHI to be shared with the
sponsors. Therefore, for purposes of this
subpart, the sponsor must have a
written agreement with the group health
plan or health insurance issuer, as
applicable, regarding disclosure of
records, and the plan or issuer must
disclose to us, on the sponsor’s behalf,
the information necessary for the
sponsor to comply with this subpart.
Sponsors of self-funded plans with
access to such data will be able to either
provide this data to us themselves or
have a group health plan or insurer
provide the data to us on their behalf.
We asked for comments on the impact
this transfer of data will have on the
plan sponsors, group health plans,
issuers and third party administrators.
Comments: An business consulting
firm indicated that employers do not
collect Medicare information on their
retirees because of HIPAA privacy
concerns and that requiring employers
to store this data will add a great deal
of administrative complexity and cost.
A pharmaceutical company
recommended that we require that only
total aggregate cost data (not broken out
by individual retirees) be submitted to
us for payment purposes in order to
protect patient privacy. An employer
advocacy group agreed that we have the
authority to mandate disclosure of PHI
for retiree drug subsidy purposes and
requested that we clarify that individual
authorization not be required for such
disclosure. A human resource

E:\FR\FM\28JAR2.SGM

28JAR2

4406

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

management association also agreed that
we have the authority to mandate
disclosure of PHI and requested that we
clarify that the disclosures will not
violate State privacy statutes.
Response: As noted above, employers
will not be required to collect or
maintain Medicare data on their retirees
for purposes of collecting the retiree
drug subsidy. They can direct their
group health plans or health insurance
issuers, as well as third party
administrators (or other business
associates), to submit the required
protected data to us on their behalf. We
agree that individual authorization will
not be required for the disclosure of the
data to us since the disclosure is
required by this regulation for purposes
of payment of the retiree drug subsidy.
The HIPAA Privacy Rule preempts a
contrary provision of State law except in
specific circumstances, such as if the
State law is more stringent-that is, more
protective of privacy-than the Privacy
Rule. (See 45 CFR Part 160, subpart B).
Therefore a sponsor, or an issuer, plan
or third party administrator on behalf of
a sponsor, may need to comply with
State privacy laws as well as the HIPAA
Privacy Rule in disclosing information
to us.
Comments: Several pharmaceutical
companies requested that we extend the
confidentiality protections under the
Medicaid rebate law to data submitted
to us under § 423.888.
Response: We agree that the rebate
information being disclosed to us is
confidential. We believe that protections
provided under other sections of the
regulation will ensure this. We
anticipate issuing further guidance
regarding this issue.
(b) Actuarial Attestation
In order to be eligible for a subsidy,
the coverage of a sponsor’s qualified
retiree prescription drug plan must be at
least actuarially equivalent to the
standard Part D coverage. The sponsor
will have to annually submit to us an
attestation that its coverage meets this
requirement. We discuss below the
methodology and the standards for the
sponsor submission of the actuarial
attestation.
1. Timing, Who Can Submit, and Public
Access to Data
(a) We proposed to require that the
attestation be submitted to us before
September 30, 2005 for the calendar
year 2006 and at least 90 days before the
beginning of the calendar year (or plan
year, depending on whether the final
rule used a plan year approach) for
subsequent years. We also proposed to
require that an attestation be submitted
to us at least 90 days prior to the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

effective date of any material change to
the drug coverage of the plan that
impacts the actuarial value of the
coverage.
Comments: Among the comments that
we received, a business consultant
requested that we shorten the time
period for submission of the actuarial
attestation to 30 days prior to the start
of the year because most employers and
unions do not know their final plan
design 90 days in advance. An actuarial
consultant, on the other hand, indicated
that the 90 day timeframe was
reasonable and sufficient to accomplish
the objectives of the MMA. We received
comments from several employer groups
recommending that we not require
subsequent annual attestations from
sponsors that had not implemented any
changes in their retiree drug coverage
since the previous submission of the
attestation for the plan.
Response: In the final rule, we require
that the attestation be submitted 90 days
before the start of the plan year and by
September 30, 2005 for plan years
ending in 2006 (see our discussion of
plan year vs. calendar year under
§ 423.888), unless an extension request
has been filed by the date under rules
specified by the Secretary. We also
require the filing of attestations 90 days
prior to the effective date of any
material change. We believe this process
provides us sufficient time to review the
attestation and to notify the sponsor of
any problems (for example, attestation
not signed by a qualified actuary), yet is
flexible enough to permit extensions in
necessary cases.
The final rule retains the requirement
that sponsors submit a new actuarial
attestation on an annual basis, even if a
sponsor has not implemented any
changes to its retiree coverage since the
previous submission of the attestation
for the plan. The thresholds for Part D
coverage will change each year and this
may impact whether the sponsor’s plan
is actuarially equivalent.
Comment: A beneficiary advocacy
group indicated that a requirement of 90
day advance notice to beneficiaries of
any change that will render coverage no
longer actuarially equivalent is an
important protection.
Response: To be consistent with the
policy on creditable coverage and reflect
statutory requirements, the final rule
requires that sponsors provide notice to
beneficiaries prior to any change that
will render coverage no longer
creditable. See the discussion in subpart
B of the preamble for further guidance
on creditable coverage notice
requirements. Advance notice regarding
changes in actuarial equivalence is not
required by the MMA, and we decline

PO 00000

Frm 00214

Fmt 4701

Sfmt 4700

to impose that requirement in the final
rule. See also our response to the
following comment.
Comment: Several union and
beneficiary advocacy groups
recommended that we provide public
access to the assumptions and methods
used by sponsors for their attestations of
actuarial equivalence. A union
suggested that we develop a form,
similar to the Department of Labor’s
5500 form (used for ERISA disclosures),
for sponsors to file with their
attestations, which would then be
accessible for public inspection. The
unions and beneficiary advocates
indicated that public access to this data
would increase public confidence in the
retiree drug subsidy program and would
permit the retirees to monitor the
sponsors’ filings for accuracy. Business
advocacy groups indicated that the
Congress neither required employers or
unions to disclose their actuarial
equivalency calculations to anyone but
us for audit purposes, nor gave
individuals the right to challenge an
employer’s or union’s actuarial
equivalency determination. An actuarial
consultant recommended that the
attestation of actuarial equivalence and
the application for the subsidy should
be submitted and therefore disclosed to
CMS only. The consultant indicated that
the data submission and the application
may have proprietary information
embedded in it, as well as beneficiary
data subject to privacy concerns.
Response: While we understand the
rationale for requiring public disclosure
of certain attestation data, we have
concerns that requiring public
disclosure of the assumptions and
methods used for the actuarial
attestation could inhibit the desire of
sponsors and their service providers to
file for the subsidy and to maintain their
retiree drug benefits, for example, for
fear of disclosure of proprietary data.
We want to further study this issue to
determine if there is a level of public
disclosure of attestation data that will
enhance beneficiary confidence in the
retiree drug subsidy program but will
not deter sponsors from filing for the
subsidy and maintaining their retiree
coverage.
(b) In the proposed rule, we require
that the attestation be certified by the
attesting actuary. We also required that
the attesting actuary be a member of the
American Academy of Actuaries.
Comments: We received several
comments from small employers stating
that we should accept attestations of
actuaries with the insurance carriers or
with third party administrators who can
attest on behalf of the sponsor that the
sponsor’s retiree drug coverage is

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
actuarially equivalent to Part D. It was
indicated that small employers may not
have the resources to hire an actuary for
the attestation.
Response: We agree that sponsors can
submit attestations of actuaries
employed by insurance carriers,
pharmacy benefit managers or the third
party administrators of their retiree drug
plans. The attestation will be submitted
in a form or forms approved by us in
additional guidance. We expect to
require the attestation to solely address
the sponsor’s plan and meet all
requirements for the attestation.
Comment: One health care industry
organization requested that due to the
cost of an annual attestation, small
employers should be allowed to submit
an application, their eligibility list and
plan benefit descriptions, provide us
with two years of experience or
premium data, and have our actuaries
perform the attestation on behalf of their
plan.
Response: The statute states that, as a
condition of receiving the retiree drug
subsidy, the sponsor must provide the
attestation to us. As indicated above, a
sponsor can have an outside actuary do
the attestation and the attestation may
be submitted directly by such outside
actuary or by the plan sponsor to us
pursuant to the procedures outlined in
this final rule.
2. Establishing Actuarial Equivalency
In the proposed rule, we outlined
three options for the actuarial
equivalence standard. The first option
was a single prong gross value test in
which the plan design of the sponsor’s
retiree drug plan will be compared with
the plan design of standard prescription
drug coverage under Part D without
taking into account the financing of the
coverage. This test would generally
require that the expected amount of
paid claims (or plan payout) under the
retiree prescription drug coverage be at
least equal to the expected amount of
paid claims under the standard
Medicare Part D benefit. The second
option involved using the ‘‘gross value’’
test as in option one but restricting the
subsidy payment to no more than what
the sponsor contributed towards the
cost of the retiree drug coverage. The
third option was a two-prong test in
which the first prong is the gross value
test as in option one, and the second
prong is a net value test which takes
into account the sponsor’s contribution
toward the financing of the retiree
prescription drug coverage.
The proposed rule also discusses
several variants for determining the
value of the second prong of option
three, the net value test. The lowest

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

variant proposed is the average per
capita amount that Medicare will expect
to pay for the retiree drug subsidy. A
second variant was the after-tax value of
the retiree drug subsidy, since the
subsidy is not subject to Federal income
tax. The highest variant stated in the
proposed rule would compare the gross
value of the plan design reduced to
account for the level of benefits
financed by the beneficiary (that is, by
subtracting out the retiree premiums) to
the expected value of paid claims under
standard prescription drug coverage
under Part D minus the retiree’s
expected monthly beneficiary premium
for the coverage. As we indicated in the
preamble to the proposed rule, adopting
a higher variant for the net value could
arguably provide greater protection for
beneficiaries against cost-shifting but
also make it more difficult for sponsors
to qualify for the subsidy. Conversely,
adopting a lower variant would allow
more sponsors to qualify for the subsidy
but may discourage some employers and
unions from increasing their
contributions to reach the higher
threshold level.
Comments: We received numerous
comments on this standard. The vast
majority of the comments, including
those from both the business groups and
beneficiary advocacy groups, supported
the two-prong test (option three) as best
serving our stated goals of maximizing
the number of retirees that retain their
employer and union retiree drug
coverage and not creating windfalls to
the sponsors. Several comments
supported the single prong gross value
test (option one) because they felt there
was no legislative authority to require
any other test. The comments were
varied regarding the value of the second
prong of option three, the net value test.
The beneficiary advocacy and union
groups generally supported the highest
variant stated in the proposed rule,
asserting that lower values would allow
sponsors to shift additional costs to
retirees while still qualifying for subsidy
payments. They believe a higher variant
would give sponsors a disincentive for
such cost-shifting. Employer and
business groups supported the lowest
variant, the expected per capita value of
the retiree drug subsidy. They expressed
concern that higher thresholds would
make fewer employers and unions
eligible for the subsidy, and thus
conflict with the critical goal of giving
as many employers and unions as
possible an incentive to retain their
retiree coverage.
Several employer groups proposed an
additional variant for the net value test.
The subsidy provides an incentive to
sponsors to continue providing retiree

PO 00000

Frm 00215

Fmt 4701

Sfmt 4700

4407

drug coverage rather than reduce
coverage and provide benefits that
supplement those provided under
standard prescription drug coverage
under Part D. Therefore, in determining
whether the drug coverage provided
under a sponsor’s group health plan is
of sufficient value to qualify for the
subsidy, the employer groups argued
that the sponsor’s coverage should be
compared to the value of the standard
prescription drug coverage that a retiree
would receive if the retiree had both the
Part D coverage and the sponsor’s
supplemental coverage. This approach
will have the effect of delaying the point
at which the individual can qualify for
catastrophic coverage under Part D,
which is only available when an
individual’s true out-of-pocket (TrOOP)
expenses exceed a specified threshold.
Because beneficiary out-of-pocket drug
costs reimbursed through group health
plans are excluded from TrOOP, the
existence of employer or union coverage
that reimburses retirees for some of their
out-of-pocket drug costs would mean it
would take longer for the beneficiary to
qualify for catastrophic coverage under
his or her Part D plan, and the value of
the Part D coverage to the retiree
therefore would be less.
These same groups also proposed that
we allow sponsors to use the expected
per capita value of the retiree drug
subsidy as a proxy for this test since, by
their calculation, both tests result in
approximately the same value for Part
D.
Response: While the single prong
gross value test will maximize the
number of beneficiaries retaining their
employer and union-based drug
coverage, it will be the most likely of all
the options to create windfalls to the
sponsors. The second option raised in
the proposed rule using the gross value
test as in option one but restricting the
subsidy payment to no more than what
the sponsor paid into the retiree drug
coverage has the advantages of
eliminating windfalls and being simple
to describe and operationalize.
However, we had questions about the
adequacy of the legal basis
underpinning that policy, and we did
not receive any comments that would
help alleviate those legal questions.
Accordingly, we agree with the
majority of the comments that the twoprong test (option three) accomplishes
our goals of maximizing the number of
beneficiaries retaining employer and
union-based retiree drug coverage while
not creating windfalls to sponsors.
Thus, our final regulations state that in
order to qualify for the retiree drug
subsidy, a sponsor’s plan must meet the
gross value test (which is equivalent to

E:\FR\FM\28JAR2.SGM

28JAR2

4408

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

the test used in determining whether
coverage is creditable prescription drug
coverage under § 423.56), and an
additional test that takes into account
retiree premium payments.
Balancing the various policy goals
and statutory restrictions in determining
the appropriate way of valuing standard
prescription drug coverage (to which
sponsors should be comparing their
coverage under the net value test) is a
difficult challenge. The more stringent
we set the standard, the fewer the
number of sponsors that will qualify for
the subsidy, which will likely have an
adverse impact on the future availability
of retiree drug coverage. However, a
higher value is less likely to create
windfalls to sponsors. In addition, as
noted above, we believe the applicable
statutory provisions under section
1860D–22(a)(2)(A) of the Act impose
some constraints on the methods that
can be used in determining actuarial
values for this purpose.
We believe the most appropriate way
of balancing these competing issues is to
establish in the final rule that
employment-based retiree drug coverage
satisfies the actuarial equivalence
standard if its actuarial value (as
determined after reducing the gross
value of the benefit by expected retiree
premiums) is at least equal to the net
value of defined standard prescription
drug coverage under Part D (as
determined after reducing the gross
value of the benefit by the expected
monthly beneficiary premiums), with
the net value of the defined standard
prescription drug coverage reflecting the
impact of employer or union-sponsored
prescription drug coverage that would
supplement the beneficiary’s defined
standard prescription drug coverage. As
explained previously, the existence of
coverage supplemental to the standard
prescription drug coverage would
postpone the point at which the retiree
would receive catastrophic coverage
under defined standard prescription
drug coverage (as defined under
§ 423.100). This would have the effect of
decreasing the expected amount of paid
claims under the defined standard
prescription drug coverage, and thus
would decrease the actuarial value of
the coverage.
We agree with commenters that it is
reasonable to take this approach given
that many employers and unions will be
deciding between continuing to provide
retiree drug coverage as a primary payer
for retirees (and accept a subsidy), and
coordinating their retiree drug coverage
with Part D (with the sponsor becoming
a secondary payer for Part D drugs).
Sponsors are likely to consider the
impact of their supplemental coverage

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

on the value of the Part D benefit for
their retirees (for example, reducing the
value of the reinsurance subsidy for
catastrophic coverage) in their
calculations. We believe that using this
approach will help maximize the
number of Medicare beneficiaries that
retain their employment-based retiree
coverage.
Because § 423.100 defines the term
‘‘standard prescription drug coverage’’
under Part D to mean either defined
standard prescription drug coverage or
actuarially equivalent standard
coverage, we clarify that sponsors must
use defined standard coverage (and not
actuarially equivalent standard
coverage) as the fixed point of
comparison for applying the actuarial
equivalence standard.
We disagree with commenters who
suggested that we lack the legal
authority to adopt a two-prong net
actuarial equivalence. We believe our
two-prong net actuarial equivalence best
reflects Congressional intent. Under
section 1860D–22(a)(2)(A) of the Act,
the sponsor of employment-based
retiree health coverage is entitled to the
retiree subsidy only if the sponsor
provides us with an attestation that the
‘‘actuarial value of the prescription drug
coverage under the [sponsor’s] plan ... is
at least equal to the actuarial value of
standard prescription drug coverage.’’
As discussed above, were we to
interpret this statutory provision as only
allowing an actuarial equivalence
standard that compares the gross value
of the prescription drug benefits
provided under the sponsor’s plan to
the gross value of the benefits provided
under standard prescription drug
coverage, sponsors who contribute little
or nothing toward the cost of their
retirees’ prescription drug coverage
would receive a windfall. We do not
believe the Congress intended to
provide subsidies to sponsors when the
sponsor’s retirees pay all or most of the
plan premium for prescription drug
coverage. The conference report to the
MMA explains that the purpose of the
retiree subsidy is to help employers
retain and enhance their prescription
drug coverage so that the current
erosion in coverage would plateau or
even improve. (See H.R. Conf. Rep. No.
108–391, at 484 (2003)). This erosion in
employer-sponsored prescription drug
coverage reflects the rising financial
burden for sponsors who finance, in
substantial part or in whole, the cost of
such coverage. (See ‘‘Current Trends
and Future Outlook for Retiree Health
Benefits: Findings from the Kaiser/
Hewitt 2004 Survey on Retiree Health
Benefits’’) As suggested in the
Conference report, providing a subsidy

PO 00000

Frm 00216

Fmt 4701

Sfmt 4700

to these sponsors would lower their
financial cost of providing retiree
prescription drug coverage, thereby
decreasing the likelihood a sponsor will
terminate such coverage. However,
providing a subsidy to sponsors that
bear little or none of the cost of
providing retiree prescription drug
coverage but instead shift the cost of
such coverage to retirees would do little
to reverse this trend. We believe we
have an obligation to interpret the
statute in a manner that would avoid the
absurd result of providing a windfall to
sponsors that bear little or none of the
cost of their retiree prescription drug
coverage, thereby giving effect to the
Congress’ likely intent.
We also believe our interpretation
reflects a permissible reading of the
statute. We believe the statute affords us
significant discretion in adopting a
methodology to determine actuarial
equivalence under Part D, including for
purposes of the retiree subsidy. First, we
interpret section 1860D–11 of the Act as
allowing us to establish more than one
process for assessing the actuarial value
of prescription drug coverage. Section
1860D–11(c)(1) of the Act states that the
Secretary ‘‘shall establish processes and
methods for determining the actuarial
valuation of prescription drug coverage,
including—(A) an actuarial valuation of
standard prescription drug coverage
under section 1860D–2(b).’’ We believe
the use of the plural terms ‘‘processes’’
and ‘‘methods’’ authorizes us to adopt a
methodology for determining actuarial
equivalence for purposes of the retiree
subsidy that differs from the
methodologies used to determine
actuarial equivalence under other
sections of this Part, such as the
determination of whether alternative
coverage is creditable prescription drug
coverage under § 423.56 of the final
rule.
Second, we believe our interpretation
of the actuarial equivalence requirement
under section 1860D–22(a)(2)(A) of the
Act to take into account the sponsor’s
financial contribution finds support
under section 1860D–2(c)(1) of the Act.
Section 1860D–2(c)(1) of the Act
establishes a multi-step test for
comparing the actuarial value of
alternative prescription drug coverage to
standard prescription drug coverage. In
the first step under section 1860D–
2(c)(1)(A) of the Act, the Secretary looks
only at plan design and ensures that the
actuarial value of the total coverage
provided under the alternative
prescription drug coverage is at least
equal to the actuarial value of standard
prescription drug coverage.’’ In the
second step under section 1860D–
2(c)(1)(B) of the Act, however,

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
government financing is taken into
account. Section 1860D–2(c)(1)(B) of the
Act provides that the ‘‘unsubsidized
value of the [alternative] coverage must
be at least equal to the ‘‘unsubsidized
value of standard prescription drug
coverage.’’ The unsubsidized value is
determined by subtracting the
government reinsurance and direct
subsidies provided under section
1860D–15 of the Act from the total value
of the alternative prescription drug
coverage. While this is the inverse of
how sponsors will determine the
actuarial value of prescription drug
coverage provided under their plans and
standard prescription drug coverage for
purposes of this subpart, it does
demonstrate that the Congress believed
that a determination of the actuarial
value of prescription drug coverage
could take into account the financing of
the coverage.
We also note that there is precedent
for us taking into account financing in
determining the value of coverage. For
example, in accordance with section
1854(e) of the Act, currently premiums
are included in the comparison of
beneficiary liability for cost sharing
under a MA plan to the cost-sharing
required under original fee-for-service
Medicare, although we note that
premiums will not be included in this
comparison beginning in 2006.
Comment: We received several
comments from employer groups and
actuarial consultants requesting that we
not issue a fixed numerical value for the
net value test and allow sponsors to
calculate a value based upon their own
claims experience. Some commenters
had requested advance indication of
safe harbors relating to minimum
benefit designs that would meet the
requirements for actuarial equivalence
to ease the uncertainty associated with
the various filing processes and increase
the likelihood of filing success.
Response: We agree with commenters
requesting that we not issue a fixed
numerical value for the net value test
and instead will require sponsors to
calculate the value of the prescription
drug coverage provided under the
sponsor’s plan and defined standard
prescription drug coverage under Part D
based upon their own claims experience
for plan participants or their spouses or
dependents who are Part D eligible
individuals. Section 1860D–22(a)(2) of
the Act requires sponsors to provide an
attestation of actuarial equivalence
‘‘with respect to a Part D eligible
individual who is a participant or
beneficiary under’’ the sponsor’s plan.
We believe requiring sponsors to base
their actuarial valuation on these
individuals’ claims experience best

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

reflects the true value of the
prescription drug coverage under the
plan, as compared to the defined
standard prescription drug benefit, for
those individuals. However, we
recognize that not all sponsors will have
sufficient claims data to support a
reasonable calculation of the actuarial
value of prescription drug coverage
under the sponsor’s plan and defined
standard prescription drug data based
on actual claims data. We will allow
these sponsors to utilize alternative
normative databases in accordance with
CMS guidance.
We will issue further guidelines on
the appropriate methodology for the
actuarial equivalence test in line with
the standard outlined above. The
guidelines will include simplified
actuarial methods that could be used to
qualify for the retiree drug subsidy. We
believe these simplified methods will be
particularly useful for sponsors that may
have difficulty measuring the impact of
their benefit design on the value of
defined standard prescription drug
coverage because the design differs
significantly from the defined standard
prescription drug coverage.
For example, we anticipate that if
there is an out-of-pocket maximum in
the sponsor’s plan (that is less than the
out-of-pocket threshold under
§ 423.104(d)(5)), sponsors will be able to
disregard the value of Part D
catastrophic coverage that would be
provided if participants enroll in
defined standard prescription drug
coverage under Part D. We also
anticipate developing and publishing
simplified actuarial methods for
comparing a sponsor’s plan with the
defined standard prescription drug
benefit that includes the actuarial
impact of any supplemental employer or
union coverage.
Comment: We received one comment
from an association of church plans
stating that we should allow sponsors to
use the single prong gross value test to
determine whether their coverage is
actuarially equivalent to Part D if the
sponsors will certify that the retiree
drug subsidy payment will go into a
trust for the benefit of the beneficiaries
in the plan.
Response: If we allowed certain
sponsors to use the single prong gross
value test for the actuarial equivalence
standard in applying for the retiree drug
subsidy, there would be no guarantees
of prohibiting windfalls to those
sponsors. Accordingly, the two prong
standard, as defined in the final rule,
shall apply to all sponsors who apply
for the retiree drug subsidy.

PO 00000

Frm 00217

Fmt 4701

Sfmt 4700

4409

3. Applying the Actuarial Equivalence
Test to Plans with Multiple Benefit
Designs and Cost Sharing
As noted above, the proposed rule
proposed to use the COBRA regulations
as a model for determining how many
group health plans a sponsor provides
and which benefit options are included
within a single health plan. Under those
rules, all benefit options offered by a
sponsor would be treated as a single
group health plan unless through its
documents and operations, the sponsor
treats them as separate plans. Under the
proposed rule, sponsors would then be
required to determine actuarial
equivalence for each plan as a whole.
That is, a plan would be actuarially
equivalent if, on average, the actuarial
value of retiree drug coverage under the
sponsor’s employment-based retiree
health plan were at least equal to the
actuarial value of defined standard
prescription drug coverage under the
actuarial standards described above.
Comments: While several employer
groups agreed with our use of the
COBRA definition of a plan as a model
for determining what benefit options are
included within an employer’s group
health plan, they indicated that
sponsors need additional flexibility to
distinguish among retirees with
different arrangements within a single
plan for the purpose of determining
actuarial equivalency. They felt that
sponsors should be given the discretion
to aggregate all retirees in a single plan
as a whole or to apply the test to each
individual benefit option within a plan.
An association of actuaries commented
that, if we give employers and unions
the flexibility to define plans, then
employers and unions will presumably
do so in a way that will maximize their
subsidy payment. However, a
beneficiary advocacy group questioned
whether, if an aggregate average is
allowed across multiple options for
purposes of the test, payment could be
made on the basis of incurred costs in
a drug option that does not meet the
actuarial equivalence standard on its
own. The same group suggested using
the enrollment numbers to determine a
weighted average across multiple
options in order to protect retiree’s
interest.
Response: We believe section 1860D–
22(a)(2)(A) of the Act is subject to two
reasonable interpretations: under the
first interpretation the actuarial
equivalence standard would be applied
to the group health plan as a whole, and
under the second interpretation the
actuarial equivalence standard would be
applied for each benefit option
(including separate cost-sharing

E:\FR\FM\28JAR2.SGM

28JAR2

4410

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

arrangement) within a single group
health plan. At this point in time, we
elect not to choose between these two
reasonable interpretations of the statute.
The final rule provides sponsors with
flexibility by allowing them to choose
whether to apply the net prong of the
actuarial equivalence test for each
benefit option, or to apply the net prong
of the actuarial equivalence test on an
aggregated basis for all benefit options
within a group health plan that satisfy
the gross test and creditable coverage
standard of § 423.56. This flexibility
will accommodate sponsors that have a
wide variety of benefit options for their
retirees. However, each benefit option in
the sponsor’s plan must independently
satisfy the gross prong of the actuarial
equivalence test. The gross test is
equivalent to the actuarial equivalent
standard applied for purposes of
determining whether a group health
plan is creditable prescription drug
coverage. As explained in subpart B, the
actuarial equivalence standard for
creditable prescription drug coverage is
separately applied to each benefit
option in the sponsor’s group health
plan. We do not believe it would be
appropriate to provide sponsors a
subsidy under this subpart for
qualifying covered retirees enrolled in a
benefit option that is not creditable
prescription drug coverage. Therefore,
the final rule provides that sponsors
must apply the gross prong of the
actuarial equivalence standard to each
benefit option for which the employer
seeks to receive a retiree drug subsidy.
4. Applying the net test to plans with
integrated drug and non-drug
premiums.
Comments: One commenter noted
that it was unlikely that retiree health
plans would include a separate
identifiable premium for drug benefits
and that an estimate of the portion of
the total premium relating to the drug
benefits would have to be made prior to
doing a net value calculation on
actuarial equivalency. An employer
consultant firm commented that
employers and unions should have wide
latitude to restructure, redesign, or
otherwise limit or improve benefits and
the employer’s or union’s contribution
thereto. A human resource management
association requested that the final rule
clarify that employers and unions may
determine how such amounts are to be
allocated based on sound actuarial
principles.
Response: We agree that sponsors
(both those with insured benefits and
those with self-funded benefits)
generally should have flexibility to
design premium structures that are most

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

appropriate for their employees and
retirees. We also recognize that many
employers and unions offer medical and
drug benefits as an integrated package
providing support to the beneficiaries
and supplementing their current
Medicare Parts A and B coverage, and
in addition have included the drug
benefit since Medicare has not
previously provided coverage for
outpatient prescription drugs.
Accordingly, in many respects for those
employers and unions that decide to
take the retiree drug subsidy, this
subsidy will help maintain retiree
health coverage, including both medical
and drug benefits.
The final rule provides maximum
flexibility to sponsors in allocating the
premium between the medical and drug
benefits for the purpose of determining
the actuarial equivalence of the drug
benefit. By doing so, we are not
allowing for a windfall subsidy payment
to the sponsors since, in order to meet
the net test for actuarial equivalence test
and qualify for the retiree drug subsidy,
the sponsors will have to make a
substantial financial contribution
towards the retiree health coverage.
(c) Sponsor Application for Subsidy
Payment and Required Information
In the proposed rule, we proposed to
require that a plan sponsor who wishes
to be paid the retiree drug subsidy must
annually submit to us a subsidy
application, actuarial attestation, and a
list of qualified covered retirees, no later
than 90 days prior to the beginning of
the plan year. For a subsidy to be paid
for 2006, we proposed that the
application be submitted no later than
September 30, 2005. Plans that begin
coverage in the middle of a year would
have to submit the application 90 days
prior to the date the coverage begins.
Sponsors that establish new plans after
September 30, 2005 would have to
submit the application no later than 150
days prior to the start of the new plan.
Comments: Plan sponsors, actuarial
consultants, business consultants and
health care industry advocates indicated
that there was a need for an extension
beyond the September 30, 2005 due date
for the submission of the retiree drug
subsidy application, attestation and the
list of qualifying covered retirees. Many
felt that while they could provide the
application prior to September 30, 2005,
they might not be able to provide an
attestation as they might not have made
the final plan design determination and
have the final list of qualified
beneficiaries until 30 days prior to the
start of the plan year. Another comment
from an employer advocacy association
recommended that we shorten the
advance submission of an attestation for

PO 00000

Frm 00218

Fmt 4701

Sfmt 4700

new plans from 150 days prior to the
effective date of coverage to 90 days
prior to the effective date.
Response: We reviewed public
comments on the effect that the
application data requirements and the
impact that the timeframe of the
application deadlines will have on plan
sponsors. In order for plan sponsors to
receive a subsidy payment for January
2006, the final rule generally retains the
requirement that all plan sponsors
(regardless of their plan year) apply for
the subsidy payment no later than
September 30, 2005. We believe this is
necessary to reduce confusion and
uncertainty for retirees and for
employers and unions that may be
claiming a subsidy for a retiree enrolling
in Part D coverage when the initial
enrollment period for the new program
opens in November 2005. However, to
accommodate sponsors that are unable
to obtain all necessary data in time, we
will allow sponsors to obtain an
extension under procedures and
conditions we establish. In general, the
procedures will include a requirement
that sponsors file the extension request
prior to September 30, 2005, and have
the extension application include the
names of retirees for whom the sponsor
believes it may be claiming subsidy
payments in 2006. For future years we
will require that plan sponsors apply for
the subsidy no later than 90 days prior
to the start of their plan year, unless an
extension has been filed with us and
granted by us under procedures we
establish. For sponsors that institute
retiree prescription drug coverage after
September 30, 2005, we will require that
these sponsors submit an application,
attestation, and all of the necessary data
as outlined in § 423.884(c)(2) at least 90
days prior to the start of the new plan
for the first plan year. (We agree that the
advance attestation submission for new
plans need not be 150 days.)
We feel that we need this 90 day
period to review the retiree drug
subsidy application and contact the
sponsor if any further information is
needed. However, we will accept
updates to the application up to the
beginning of the plan year. As provided
for in § 423.884(c)(6) and discussed
subsequently, additional periodic
updates relating to eligibility data are
also required during the year.
We also intend to build in safeguards
in the Part D application process for
beneficiaries to decrease the instances
in which a sponsor attempts to claim a
subsidy payment for an individual who
(unknown to the sponsor) has enrolled
in a Part D plan. We would expect such
safeguards to include a process that
could enable retiree plans to obtain

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
relevant information before the
individual’s Part D enrollment takes
effect. For further discussion on
enrollment protections, see § 423.36 of
the subpart B preamble.
Comments: Plan sponsors, health plan
advocates, carriers, insurers and
administrators raised numerous other
issues regarding the retiree drug subsidy
application. They asked for clarification
on who is responsible for signing the
subsidy application. Plan sponsors and
an employer advocacy association
requested confirmation that the plan
sponsor may act with the assurance that
the plan is qualified for the subsidy
upon submission of its signed
completed application and a signed
attestation to us so that they may
communicate plan information to its
retirees and their dependents sooner. A
taxpayer advocacy association felt that
we need to enhance the certification
requirements of § 423.884 and § 423.888
to reflect what is required in
§ 423.505(l). That provision requires
certification by the CEO, CFO or an
individual delegated the authority to
sign on behalf of one of these officers,
or who reports directly to the officer of
the accuracy, completeness and
truthfulness of all the information
related to the enrollment data, claims
data and payments.
Response: The final rule requires that
the application be signed by the sponsor
or by an authorized representative of the
sponsor. A sponsor or its authorized
representative must certify that the
information on the application is true
and accurate to the best of its knowledge
and belief. The final rule does not
specifically require that certifications
for subsidy payments meet the same
standards as § 423.505(l). However, we
will be providing further guidance on
the terms and conditions of the
application.
Comment: The proposed rule
indicated that the application would
require the sponsor to comply with a
number of specific requirements
(including the terms and conditions for
receiving retiree drug subsidy
payments) and that the application
would constitute an agreement between
the sponsor and CMS (the sponsor
agreement). Several employer advocacy
groups requested clarification regarding
whether, upon submission of a signed
application, the sponsor may act with
the assurance that the sponsor is
qualified for the retiree drug subsidy.
Response: Although we intend to
streamline the application process as
much as possible, the mere submission
of a subsidy application does not qualify
an entity to receive subsidy payments.
The sponsor cannot assume it is eligible

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

for a subsidy payment until we (or our
subsidy contractor) review the sponsor’s
application and provide written
notification regarding the sponsor’s
eligibility to receive a subsidy payment.
(We have clarified this in the regulation
text by adding a definition of ‘‘sponsor
agreement’’ at § 423.882.)
Comments: We were asked to clarify
the application process for those
sponsors with multiple tax
identification numbers.
Response: For a sponsor that includes
separate entities with multiple tax
identification numbers, the final
regulation allows them to determine the
appropriate tax identification number
and other appropriate information (such
as contact data) to include as outlined
in the data requirements for that
application.
Comments: Several plan sponsors,
business consultants, insurers/carriers
and health care industry advocates
indicated that they do not collect the
health insurance claim (HIC) or Social
Security numbers of their retirees and
their dependents, which we proposed to
require as part of the application
process in the proposed rule, due to
privacy issues and historical business
practices. They said this requirement
could create an administrative burden
for them. They also raised concerns
about the ability to identify qualifying
covered retirees, given uncertainty
about whether some people (particularly
dependents) are entitled to Medicare
Part A or B and not enrolled in Part D.
Response: We believe that it is
necessary to require the data as outlined
in the proposed rule to establish the
sponsor’s eligibility for the retiree drug
subsidy and to verify the qualified
retirees and their dependents (as
defined in § 423.882) that are enrolled
in the sponsor’s plan. Further, based on
discussions with stakeholders, we
believe sponsors and their vendors
should be able to track the data
elements that we require in this section.
However, we understand that some
sponsors may not collect the HIC
numbers of their Medicare retirees; thus
the final rule requires that either the
HIC number or the social security
number of qualifying covered retirees be
provided. We strongly urge, however,
that sponsors provide both the HIC and
social security numbers of their
qualifying covered retirees if they
collect both in order to reduce the
potential for error and to increase the
confidence range of the submitted data.
We recognize that determining
whether a person (particularly a
dependent) is eligible for Part D may
pose some difficulty for certain
sponsors. However, sponsors are able to

PO 00000

Frm 00219

Fmt 4701

Sfmt 4700

4411

enroll in voluntary data sharing
agreements (VDSAs) with us that would
allow sponsors to submit a list of
retirees and covered dependents prior to
submitting an application for the retiree
drug subsidy and have us determine
which retirees and dependents are
qualified covered retirees. More
information about the CMS Employer
Voluntary Data Sharing initiative can be
found at http://www.cms.hhs.gov/
medicare/cob/employers/
emplvdsa.asp. We may also explore
other approaches that could be used to
provide necessary information to
sponsors.
Comments: A health care industry
association and outside vendors who
provide eligibility and claims data to
plan sponsors and who will be
submitting data to us for enrollment and
payment under the subsidy stated their
concerns about the False Claims Act.
They requested that we clarify their
potential liability and possible relief
from liability for data submitted that
was provided by them.
Response: The False Claims Act
provides a remedy for false claims
submitted to the Federal government if
a person or entity ‘‘knowingly’’ submits
a false claim, or knowingly causes
another to submit a false claim. Section
901 of the MMA expressly states that
nothing in the title dealing with
Medicare contractor reform shall be
construed to compromise or affect
existing legal remedies for addressing
fraud or abuse, and we believe it is clear
that the law is intended to apply for the
retiree drug subsidy program. However,
innocent mistakes and errors do not
result in liability under the Act. Rather,
the False Claims Act imposes liability
on a person or entity which acts with
actual knowledge of the false claim; acts
in deliberate ignorance of the truth or
falsity of the information; or acts in
reckless disregard of the truth or falsity
of the information (31 U.S.C.
§ 3729(b)(1–3)). Thus, the False Claims
Act’s liability provisions were not
intended to apply to a merely
inadvertent reporting error or an
innocent mistake by a sponsor. We note
that parties have a continuing obligation
to disclose to the government any new
information indicating the falsity of the
original statement.
A sponsor, or its authorized
representative requesting the subsidy on
behalf of the sponsor, must certify that
the information on the application is
true and accurate to the best of its
knowledge and belief. Thus, as noted
above, innocent mistakes in the
application, as opposed to intentional
misstatements or statements made with
deliberate ignorance of or reckless

E:\FR\FM\28JAR2.SGM

28JAR2

4412

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

disregard for the truth, will not result in
False Claims Act liability, unless the
sponsor (or its authorized
representative) subsequently fails to
inform the government of information
indicating the falsity of the original
statements.
Comments: Plan sponsors, business
consultants, insurers/carriers and plan
administrators asked us to clarify the
frequency and manner in which updates
will be required. They recommended
that they provide periodic enrollment
updates to us as they identify qualified
retirees and their dependents that
become eligible for Medicare.
Additionally, comments suggested
allowing sponsors to file updated
information during the year following
the September 30 deadline, and to allow

sponsors to submit new census data
only if there are no material changes to
the plan.
Response: The final rule requires
periodic updates of beneficiary data as
outlined in § 423.884(c)(6) to keep our
database accurate and reduce the
possibility of overpayments or
underpayments.
To reduce the lag time between the
occurrence of a change in the
enrollment and the adjustment of the
subsidy payment, and to minimize
situations in which a sponsor is
attempting to claim a subsidy payment
for someone who has enrolled in Part D,
the final rule requires a monthly update
by all sponsors of the enrollment data,
regardless of the subsidy payment
frequency (unless we specify a different

frequency in other guidance). Such data
shall be provided in a manner we
specify.
In general, sponsors will be expected
to provide to us on a periodic basis the
changes, additions and deletions to their
enrollment data. To ensure development
of a procedure that is most
administratively feasible for sponsors
and CMS, we will consider the
possibility of permitting the submission
of entire enrollment files. We anticipate
issuing further guidance on the
frequency and the manner of the
enrollment updates.
Table R–1, containing the key dates
involved in the sponsor retiree drug
subsidy application process is included
at the end of this section.

TABLE R–1

KEY DATES

Publication of Final Rule

January 2005

Application for Retiree Drug Subsidy Due Date for All Sponsors seek­
ing the Retiree Drug Subsidy for plan years which end in 2006, re­
gardless of whether they operate on a calendar year

No later than September 30, 2005, unless an extension request is
filed with CMS prior to the due date

Attestation of Actuarial Equivalence Due Date for all Sponsors seek­
ing the Retiree Drug Subsidy for plan years which end in 2006

No later than September 30, 2005, unless an extension request is
filed with CMS prior to the due date and granted by CMS

Retiree drug subsidy Program Begins

January 1, 2006

For plans operating on a non-calendar year basis—Application for Re­
tiree Drug Subsidy Due Date for Sponsors seeking the Retiree Drug
Subsidy for all subsequent years

90 days prior to beginning of each plan year (that is, for plan years
which begin in 2006 and end in 2007 and for each plan year there­
after), unless an extension request is filed with CMS and granted
by CMS.

For plans operating on a calendar year basis—Application for Retiree
Drug Subsidy and Attestation of Actuarial Value Due Date for Spon­
sors seeking the subsidy for all subsequent years

September 30, 2006 (for 2007) and each September 30 thereafter for
subsequent years, unless an extension request is filed with CMS
and granted by CMS

Application for Sponsors that institute coverage after September 30,
2005

90 days prior to the start of the new plan

Notice to CMS of mid-year plan changes that materially affect actu­
arial valuation

90 days prior to the plan change

Notice to enrollees of plan changes that result in the plan no longer
providing creditable coverage

Prior to the plan change.

(d) Surety bond
We sought comment on whether to
require a surety bond type of instrument
or preferred creditor status as part of the
enrollment process in order to address
situations related to businesses that may
terminate or experience bankruptcy
prior to completion of a final
reconciliation.
Comments: CMS received comments
from private and governmental plan
sponsors that this will be an
unnecessary cost and burden to them
and especially problematic for
governmental entities.
Response: After review of the
comments we have determined that

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

since all subsidy payments will be made
by us after submission of cost data, the
degree of risk to us in connection with
the year-end reconciliation process is
not significant enough to justify
requiring a surety bond type of
instrument or preferred creditor status
certification, particularly given that
many plan sponsors and administrators
are subject to other laws and contractual
obligations that should provide
protections.
(e) Creditable Coverage and Notification
Section 1860D–22(a)(2)(C) of the Act
specifies that in order for a sponsor’s
plan to meet the definition of a qualified
retiree prescription drug plan, the

PO 00000

Frm 00220

Fmt 4701

Sfmt 4700

sponsor must provide for disclosure of
whether coverage is creditable
prescription drug coverage in
accordance with the proposed
requirements set forth under proposed
§ 423.56 of the final rule. This includes,
for example, providing advance notice
to beneficiaries in the plan of any
material change that causes their
coverage to no longer be creditable
prescription drug coverage. The rules
for providing notices of whether
coverage is creditable prescription drug
coverage are described in subpart B,
including the rules for coverage
sponsored by an employer or union not
claiming the subsidy.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
5. Retiree drug subsidy amounts
(§ 423.886)
As outlined in the final regulations,
§ 423.886 governs the subsidy amount a
sponsor of a qualified retiree
prescription drug plan receives for each
qualifying covered retiree that is
enrolled with the sponsor in a given
year. The sponsor is eligible to receive
a retiree drug subsidy payment for each
qualifying covered retiree equal to 28
percent of the allowable retiree costs
that are attributable to the gross costs
that exceed the cost threshold and do
not exceed the cost limit. Section 1202
of the MMA amends the Internal
Revenue Code of 1986 to provide that
these subsidy payments will be exempt
from Federal tax. Further guidance on
the Federal tax treatment of the subsidy
will be under the auspices of the U.S.
Department of the Treasury.
Debts owed to us that are generated by
an overpayment of the subsidy to a
sponsor, including collection of interest,
administrative costs, and late payment
penalties will be governed by
regulations at 45 CFR Part 30, subpart B.
Comments: Many tax-exempt plan
sponsors including governmental plans
commented that the tax-exempt nature
of the subsidy payments means that
taxable plan sponsors can receive a
subsidy that is approximately 35
percent higher in value than what the
tax-exempt sponsors can receive. They
requested that we address this disparity
in the final rule for Part D to make sure
all plan sponsors are treated equally. An
employer advocacy group also asked for
clarification on how the subsidy should
be calculated for allowable costs that are
attributable to gross retiree costs that
exceed the cost threshold and do not
exceed the cost limit.
Response: The statute does not allow
us to provide additional retiree drug
subsidy payments based on tax-exempt
status. As for the calculation of subsidy
payments, the final rule clarifies that the
statute requires the subsidy payment to
be calculated by first determining gross
retiree costs between the cost threshold
and cost limit, and then determining
allowable retiree costs attributable to
such gross retiree costs. As noted
elsewhere, allowable retiree costs are
based on gross retiree costs actually
paid under the plan (or by or on behalf
of the retiree), with rebates and other
price concessions subtracted from these
gross retiree costs.
Comments: Employers and
beneficiary advocacy groups also
commented on additional provisions
regarding the plan sponsor’s use of the
subsidy once received. Beneficiary
advocacy groups suggested that since

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

employers and unions are allowed to
shift costs of retiree plans to retirees by
way of premium contributions and costsharing, beneficiaries should be entitled
to a fair portion of the subsidy amount
received by the plan sponsor. Employer
groups and business consultants
commented that once an employer or
other plan sponsor qualifies for the
retiree drug subsidy, we have no
authority to regulate that employer’s or
union’s or plan sponsor’s utilization of
the subsidy.
Response: The statute does not
impose restrictions on how the sponsors
use the subsidy. However, beneficiaries
may have rights provided under other
laws or by contract.
6. Payment Methods, Including
Provision of Necessary Information
(§ 423.888)
a. Plan Year Versus Part D Coverage
(Calendar) Year
Under section 1860D–22(a)(3)(B) of
the Act, the cost threshold and cost
limits that determine the amount of the
subsidy are calculated for ‘‘plan years
that end in’’ 2006 and subsequent
calendar years. However, section
1860D–22(a)(3)(A) of the Act refers to
the subsidy amount for a qualifying
covered retiree for a ‘‘coverage year,’’
that is defined as calendar year. Thus,
we believe that, in the context of section
1860D–22 of the Act, we have the
interpretive authority to require that the
subsidy determinations be made either
on a calendar year or plan year basis. In
the proposed rule, we proposed to have
the rules apply on a calendar year basis
because Medicare already operates on a
calendar year basis.
Comments: In considering whether
sponsors will use plan year or calendar
year in calculating the retiree drug
subsidy amount, comments varied
among private health care companies
and health care industry associations.
One such entity commented in favor of
utilizing a calendar year schedule for
simplicity. Others prefer having the
flexibility to choose between a calendar
year and a plan year that a sponsor may
currently be operating in. Employer
advocacy associations and actuarial
consulting groups suggested giving
sponsors flexibility, especially if it
means allowing sponsors to choose
between plan year and calendar year. A
government entity commented in favor
of plan year, and discussed utilizing a
pro-rata method for determining the
subsidy amount for the initial year of a
plan using a non-calendar year.
Response: In determining whether
sponsors will be required to use plan
year or calendar year, we took into
consideration the large number of

PO 00000

Frm 00221

Fmt 4701

Sfmt 4700

4413

comments in favor of flexibility. We also
recognized the costs that plan
administrators and sponsors might face
if they maintain records for plan
purposes based on a period that differs
from the calendar year, but are forced to
establish a different system that
maintains records on a calendar year
basis solely for purposes or the retiree
drug subsidy program. Finally, we
considered costs associated with
administering the program by CMS or a
subsidy contractor. In response to these
considerations, the final rule uses the
plan year approach. Thus, if a plan’s
records are maintained on a calendar
year basis, it enables sponsors to
calculate retiree drug subsidy payments
on that calendar year basis. If a plan’s
records are maintained based on a year
that differs from the calendar year,
sponsors can determine those
calculations on the non-calendar year
basis.
Sponsors of non-calendar plans will
use the cost threshold and cost limit for
the calendar year in which the plan year
ends for purposes of determining
subsidy payments. Thus, for example, a
sponsor claiming subsidy payments for
the plan year running from July 1, 2007
through June 30, 2008 would use the
cost thresholds and cost limit amounts
published for 2008 in determining
subsidy payments. If the sponsor
requests payments on a monthly or
quarterly basis, adjustments and
reconciliations for prior payments will
have to be made once the cost threshold
and cost limitation for the relevant year
have been published.
Subsidy payments are determined
based on the plan year that ends in a
given calendar year, using the same rule
in determining whether a sponsor’s plan
is actuarially equivalent to Part D raises
a challenge. It might require that the
sponsor submit an actuarial attestation
for a given plan year before the
deductible, initial coverage limit, and
other elements of the defined standard
prescription drug coverage have been
determined for the corresponding
calendar year. To address that concern,
the final rule allow sponsors to use the
actuarial value of the standard
prescription drug coverage under Part D
for the calendar year in which the
sponsor’s plan year begins, provided the
attestation is submitted to us no later
than 60 days after the publication of the
coverage limits for defined standard
prescription drug coverage for the
upcoming calendar year. If the
attestation is submitted beyond 60 days
after the publication of the coverage
limits for defined standard prescription
drug coverage for the upcoming year,

E:\FR\FM\28JAR2.SGM

28JAR2

4414

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

then the new coverage limits should be
used for the attestation.
Note that our decision to allow
sponsors to use non-calendar year plans
as the basis for the retiree drug subsidy
payment should not have an impact on,
or impede, the timing of the
beneficiaries’ right to drop their
employer or union coverage in favor of
Part D if they choose. For example,
beneficiaries should have the option to
coordinate obtaining Part D coverage
during open enrollment periods and
dropping their retiree coverage in a way
that avoids late enrollment penalties.
Beneficiaries may also have special
enrollment periods relating to the loss of
creditable retiree coverage. (See
§ 423.56.)
The use of a plan year approach also
requires a transition rule for plan years
that begin in 2005 and end in calendar
year 2006. The proposed rule outlined
three transition options. The first is to
start counting gross prescription drug
costs for prescriptions filled after
January 1, 2006, and pay the subsidy
only for claims incurred in 2006. The
second option is to determine the
subsidy amount based on claims
incurred for the entire plan year but
prorate subsidy payments to reflect the
number of months of the plan year that
fall in 2006. The third option is to
determine subsidy amounts monthly for
the entire plan year and then pay the
full subsidy payments, but only for
claims that are incurred in 2006.
Comments: Business advocacy groups
recommended that the final rules allow
employer and union flexibility to select
among the three proposed transitions
alternatives in determining the subsidy
payment for 2006, based on their
administrative capabilities and other
considerations.
Response: For administrative
simplicity, and given the nature of this
rule, we believe it is reasonable to
specify the particular transition option
to be used. Option 1 would require that
sponsors meet the cost threshold twice
in 2006, a strict test that we believe is
not absolutely required under the
statute. In comparing transition options
2 and 3, we have concluded that option
3 provides the most equitable result that
is consistent with the statute. Under
Option 3, sponsors determine claims
incurred in all the months of the plan
year, including those that fall in 2005,
for calculation of the cost threshold for
a plan year that ends in 2006. However,
subsidy payments are based solely on
claims incurred on or after January 1,
2006.
b. Payment Methodology and Frequency
Section 1860D–22(a)(5) of the Act
specifies that payments to plan sponsors

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

are to be made in a manner similar to
the payment rules in section 1860D–
15(d) of the Act, which applies to
payments made to PDP sponsors and
MA organizations under Part D. We
proposed a preferred approach to
calculating and paying the subsidy. For
each month starting with January 2006,
the plan sponsor would certify by the
15th of the following month the total
amount by which actual retireebeneficiary gross drug spending
exceeded the cost threshold yet
remained below the cost limit. Medicare
would pay 28 percent of the certified
amount to the sponsor by the 30th of
that month. Not later than 45 days after
the end of the plan year, the plan
sponsor would submit a final
reconciliation (except for outstanding
rebates) to us for payment by or, if
applicable, to us. In the month in which
they are received (or recognized), the
appropriate share of any discounts,
rebates, chargebacks, or other price
concessions, along with any
adjustments to the actual expenditures
for prior months, are reflected. Any
amounts owed the government would
offset the subsidy payment for that
month, and to the extent that the
amount owed to the government would
exceed any applicable monthly
payment, the plan sponsor would pay
this amount to us.
We proposed three possible
alternatives to this option. The first
alternative was for us to make a single
payment after the close of the year.
Sponsors would submit their cost data,
including rebate data, by the start of the
fourth month after the close of the plan
year. A second alternative would be to
make interim payments throughout the
year based on the sponsor’s estimate of
claims, rebates and discounts
(determined based on historical data),
with a settlement after the end of the
plan or calendar year. We would pay
less than 100 percent of the subsidy
payments that would be calculated from
these estimates, given the uncertainties
associated with these estimates. The
third alternative would be to make
lagged payments based on actual claims
experience on a periodic basis
throughout the year, with the subsidy
payments being reduced by a specified
percentage to reflect the sponsor’s
estimate of discounts, chargebacks and
rebates. After the year ends there would
be a settlement limited to reconciling
estimated versus actual discounts,
chargebacks and rebates. We also sought
comment on the use of bi-annual,
quarterly or monthly payment periods
under these approaches.
Comments: Generally, comments
supported a method that allows

PO 00000

Frm 00222

Fmt 4701

Sfmt 4700

flexibility to select the methodology and
timing of retiree drug subsidy payments
and rebates each year. A number of
commenters, including employer
consultants and government employers
encouraged a monthly payment system.
Entities that supported alternative
option 1 said that it would protect
patient privacy, proprietary information
between plans and manufacturers
would be kept from potential exposure,
and both administrative costs and data
collection burdens would be reduced.
One State commenter supported
alternative option 2, stating this method
takes into account programs that are
fully insured and use a Health
Maintenance Organization (HMO) that
does not segregate actual cost data by
plan and is community rated.
Additionally, advocates claim that
option 2 would be more reasonable for
small business because of the lighter
administrative burden. Comments
critical of the preferred option stated
that the 15 day turnaround time for
submitting monthly payment requests
and the 45-day deadline for year-end
reconciliation seemed rather tight, even
for employers and unions who have
PBMs with excellent administrative
abilities.
A business consultant also
commented that only the third
alternative proposal actually accounts
for drug costs of the group health plan
on an accrual basis. The other methods
appear to follow the cash flow of the
plan but fail to recognize accrual
accounting required for the plans. They
felt that we neglected to consider more
user-friendly methods that are proposed
for other cost based entities, for
example, fallback plans, which we
proposed to pay through a debit account
system. They felt that the second
approach is acceptable because it sets
prospective payments and provides for
reconciliation, even though it arbitrarily
pays less than what the parties agree
upon as the prospective rebate.
Another employer advocacy
association urged us to develop a point
of sale subsidy payment system, and in
the interim, provide the sponsors the
flexibility to choose the payment
methodology that is best for them.
Response: Unless and until such time
technology, resources and other
considerations would enable us to
develop a point-of-sale payment system
for the retiree drug subsidy program, the
final regulation will provide other
methods and frequency options to
address the multiple requests for
payment flexibility.
A sponsor may annually elect during
the application process whether to
receive payments monthly, quarterly, or

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
annually; that sponsor may change its
election during the application process
of a subsequent year. A sponsor
choosing an annual payment method
could avoid the need for interim data
submissions, estimates and
reconciliations, (discussed in more
detail below), and may limit the
administrative costs because data
submissions are less frequent. However,
sponsors that do not want to make
multiple data submissions but also do
not want to wait for subsidy payments
until all rebate and other data is
received will be able to make an interim
annual payment request, with only one
additional (final) reconciliation required
at year-end.
Sponsors who choose the periodic
method of payment must submit
periodic requests for payment to us on
the same schedule as the payments are
to be received, at a time and in a manner
specified by us. Final detailed cost data
must be submitted no later than 15
months following the end of the plan
year. We will make payments to the
sponsor at a time and in a manner to be
specified by us in future guidance.
In the final rule, we reserved the right
to restrict the payment options available
to sponsors in 2006 in case of any
unforeseen operational impediments.
Comments: Actuarial consultants
suggested that we develop approximate
methods of determining individual drug
spending, because of the difficulty of
determining the actual costs and
assigning a rebate to a specific person.
An employer advocacy group suggested
allowing employers and unions to
choose their own methodology for
reflecting rebates, in order to
accommodate their own administrative
capabilities and restrictions. A health
care industry consultant indicated that
group health plans would need to
separate rebates by their applicability
(individual retirees or entire group). An
employer was concerned because they
have a fully insured plan which factors
rebates into the premium; they
suggested that we accept the insurance
carrier’s attestation that the claims used
in the subsidy calculation are net of
rebates and other discounts, rather than
require them to provide information the
sponsor does not have. Another
employer encouraged us to allow
sponsors and PBMs to freely contract
regarding rebate terms, and not require
them to file PBM agreements of
documentation of those negotiations.
A health care industry consultant
recommended that we allow multiple
methods for allocating rebates because a
single method would unduly constrain
health plans in future negotiations with
manufacturers for price concessions. An

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

employer suggested the most
appropriate way to recognize rebates is
to determine the average amount per
rebatable prescription and apply it to
the actual retiree drug utilization of the
plan sponsor. Actuarial consultants and
a health care industry association agreed
with the suggestion to estimate rebates
on a periodic basis to be included in
subsidy payments, and then reconcile
both rebates and subsidies at the end of
the year. One industry association
suggested an ongoing accounting of
rebates to eliminate the need for
reconciliation at the end of the year.
They also asserted that the proposed 4
month period after the end of the year
was not enough time to count the
rebates.
An employer advocacy association
proposed a two-phase settlement
process for rebates, which would
include a preliminary estimate at the
end of the year and a final adjustment
up to twelve months later; the
association states that such a system
would provide maximum flexibility and
minimum administrative burden on the
sponsor.
Response: If the sponsor chooses the
monthly, quarterly or an interim annual
method of payment, then in addition to
the data requirements described below,
the plan sponsor must provide an
estimate of rebates (based on historical
data) upon submission of data for
payment. We believe the sponsor’s
submission of estimated rebates limits
the amount of reconciliation at year end;
is consistent with data capabilities of
the sponsors; limits the extent to which
we would be making overpayments
during the year; and allows for monthly
and quarterly subsidy payments in order
to enhance cash flow of sponsors.
Sponsors choosing the monthly,
quarterly or an interim annual method
of payment will be required to provide
an annual reconciliation to us that
includes cost data segregated per
qualifying covered retiree and actual
rebates, discounts, or other price
concessions received for the costs,
unless we provide for different data
requirements in future guidance. If
rebates and other price concessions for
a plan are not specifically allocated by
a manufacturer to the drug spending of
a particular qualifying covered retiree, a
sponsor (or its designee) will be
permitted to assign the price
concessions to qualifying covered
retirees using reasonable actuarial
principles or other methods we may
specify.
The reconciliation must take place
within 15 months following the end of
the plan year. If gross covered retiree
plan-related prescription drug costs in a

PO 00000

Frm 00223

Fmt 4701

Sfmt 4700

4415

given plan year are reduced at the point­
of-sale to reflect rebates, discounts or
other price concessions and no
additional price concessions for the
costs are received for the year, then
allowable retiree costs will equal such
gross costs for the year. However, any
rebates that are received retrospectively
would have to be subtracted when a
sponsor calculates retiree costs. As a
result of the reconciliation, sponsors
will, as applicable, repay any subsidy
overpayments or be paid any subsidy
underpayments in a manner to be
specified by us.
If a sponsor chooses the annual
payment method, the sponsor will be
required to submit cost data per
individual retiree, including rebate
adjustment within 15 months following
the end of the plan year. However, as
noted in § 423.884 (c)(6), a sponsor who
chooses the annual payment option
must still provide updates of enrollment
information to us on a monthly basis.
c. Data Collection
The plan sponsor will be required to
submit cost data for each qualifying
covered retiree. Regardless of what
payment methodology is ultimately
chosen for the retiree drug subsidy, we
would need certain data from the
sponsors in order to accurately calculate
the amount of the subsidy to which the
sponsor is entitled.
In the proposed rule, we requested
comments on the level of detail of the
cost data that would be submitted to us
in order to receive the retiree drug
subsidy payment. Option 1 would
require that the sponsor submit the
aggregate total of all allowable drug
costs of all of the qualifying covered
retirees in the plan for the time period
in question. This aggregate cost would
not be broken down to each qualifying
covered retiree. Option 2 would require
the sponsor to submit the aggregate
allowable costs for each qualifying
covered retiree for the time period in
question. Option 3 would be to combine
various elements of the first two
options. The sponsor would be required
to submit information with the
specificity outlined in the second option
for each of the first two years of the
subsidy’s availability. In the third and
fourth years, the sponsor would submit
its cost data in accordance with the first
option. Option 4 would have been for
the sponsor to submit the actual claims
data for each qualifying covered retiree,
though the proposed rule specifically
rejected that option given privacy
concerns.
Comments: Comments from
employers, the healthcare industry,
employer advocates and government
entities request that we make data

E:\FR\FM\28JAR2.SGM

28JAR2

4416

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

collection and reporting requirements
reasonable for plan sponsors.
Commenters also stated that we must
account for the fact that employers and
unions do not customarily record some
of the data requested, and third party
administrators, insurers, PBMs and like
entities also do not maintain all of the
data elements required under the
proposed rule. Further, comments
suggested that we concentrate on
attaining aggregate claims data.
Response: We agree that the
requirements for submission of cost data
should be reasonable and the least
burdensome possible. At the same time,
we have an obligation to create rules
aimed at providing only the subsidy
payments authorized by statute. As
noted above, in balancing these
objectives, the final rule provides that
unless we imposes other data
requirements in future guidance, when
a sponsor chooses either the monthly,
quarterly, or interim annual payment
option, it must submit to us, at a time
and in a manner specified by us, the
aggregate gross covered retiree planrelated prescription drug cost data (as
defined in § 423.882), as outlined in
option 1, along with an estimate of the
extent to which its expected aggregate
allowable retiree costs will differ from
the aggregate gross cost data (based
upon expected rebates and other price
concessions) for interim payments.
However, the aggregate data must be
reconciled within 15 months after the
end of the plan year, and the sponsor
would have to resubmit the total gross
cost data segregated by individual
retiree and actual rebate/discount/other
price concession data and repay any
subsidy overpayments (or be paid
subsidy underpayments). (Specific
detail about each claim would not be
required.) Likewise, all sponsors who
choose the annual payment option
would have to submit the total gross
cost data segregated by individual
retiree and actual rebate/discount/other
price concession data within 15 months
after the end of the plan year for
payment. We believe that these
requirements are reasonable and least
burdensome for the sponsors, yet
provide the additional information
needed by us in assessing the accuracy
of payments. As outlined in our earlier
discussion on allowable retiree costs, in
section 3(C) of this subpart of the
preamble, we will provide flexibility to
sponsors of insured plans in the
submission of interim cost data.
d. Record Retention for Audits
In the proposed rule, we stated that a
plan sponsor will be required to
maintain and provide access to
sufficient records for our audits or

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

audits of the Office of Inspector General
(OIG) to ensure the accuracy of the
attestation regarding actuarial value and
the accuracy of subsidy payments made
under this subpart. All records must be
maintained for at least 6 years after the
end of the plan year in which the costs
were incurred.
Comments: Employers, employer
advocacy associations and an employer
business consultant commented that the
data retention period should match the
IRS/SSA/CMS data match program
period of 3 years to ease the
administrative burden on employers,
unions, carriers and plan
administrators. Employers indicated
that if they switched carriers or
administrators, it would be difficult to
force them to retain records for at least
6 years. A taxpayer advocacy
association recommended a 10-year
time period, coinciding with the statute
of limitations in False Claims Act cases.
A governmental employer wanted us to
mandate that carriers retain and provide
the necessary data to the sponsor for the
required period of time. In discussions
with sponsors and employer advocacy
groups, they indicated that they are
required to retain 6 years of certain
types of data for the Department of
Labor (DOL) audits under ERISA.
Response: The final rule retains the 6­
year record retention rule. We believe
that 6 years is a reasonable because it is
consistent with the period for retaining
certain ERISA records and certain
information related to the Health
Insurance Portability and
Accountability Act (HIPAA)
administrative simplification rules.
However, consistent with the
commenters’ concern that records
would not be retained long enough, we
are modifying the regulation text to
specify that a sponsor (or its designee)
must retain records longer than 6 years
if they know that the records are the
subject of an ongoing investigation,
litigation, or negotiation regarding
criminal or civil liability. In such cases,
the obligation to retain records need not
arise solely through a formal
communication from CMS or OIG.
6. Appeals (§ 423.890)
Although the statute does not contain
provisions for administrative appeals of
the retiree drug subsidy amount, we
believe that it is prudent policy to allow
an opportunity for review of certain
agency decisions issued in relation to
this subpart. Examples of these
decisions are as follows—
• A retiree prescription drug plan is
determined not to be actuarially
equivalent.

PO 00000

Frm 00224

Fmt 4701

Sfmt 4700

• An enrollee in a retiree
prescription drug plan is determined
not to be a qualifying covered retiree.
• A determination of the subsidy
amount to be paid to a Sponsor.
Comments: Beneficiaries, beneficiary
advocacy organizations and labor
organizations requested that they have
the opportunity for review and appeal of
the retiree drug subsidy application and
the payment determination so that they
could assist us in verifying that the
benefits provided and the payments
made under the retiree drug subsidy
program were proper and fiscally
responsible. Plan sponsors, business
advocates and health care industry
vendors felt that only they should be
allowed appeal rights because the
application to receive retiree drug
subsidy payments, the actuarial
attestation and payment under the
retiree drug subsidy program would not
affect the benefits provided to
beneficiaries under the plan. Plan
sponsors and business advocates
indicated that third parties, including
beneficiaries, should not have standing
to appeal our decisions. One employer
advocacy association requested that we
consider an appeals process that
provides plan sponsors an opportunity
to develop a detailed record concerning
disputes for which they request
reconsideration. The employer
association also requested that if we
determine that no such opportunity
needs to be provided, require that its
factual determinations relating to such
disputes be decided on a de novo basis
upon judicial review. They also
requested that if an employer or union
seeks to reopen a determination on its
own, such a right should be unfettered
as long as it is made within one year of
final determination.
Response: We do not believe that the
MMA gives participants or other third
parties standing to appeal to us
regarding retiree drug subsidy payment
determinations. The MMA provides that
the subsidy is to be paid to the sponsors
if the sponsors meet certain conditions
imposed on them. We recognize that
participants and beneficiaries in a
sponsor’s plan have an interest in
knowing whether their retiree drug
coverage qualifies for the subsidy, and
that we have audit responsibilities to
ensure the accuracy of payments. But
given the absence of any administrative
appeals provisions in the statute and
our need to also consider the potential
burdens that could be posed on retiree
health plan sponsors, we do not believe
it would be prudent policy to provide
administrative appeal rights to
individual participants or third parties.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
We believe that the appeals process
that is outlined in the preamble to the
proposed rule provides sufficient due
process to protect the interests of the
sponsors. To require that a detailed
record be developed on appeal or to
require de novo judicial review of the
administrator’s decision would create
administrative costs for the retiree drug
subsidy program and would be
burdensome for us. As we indicated in
the preamble of the proposed rule, there
is no constitutional property right to the
retiree drug subsidy. Because the
subsidy payment is not an entitlement,
there is no need to provide for an
extensive appellate process that
includes judicial review.
We also have not accepted one
commenter’s request that an employer
receive an unfettered right to reopen a
determination as long as it is made
within a year of the final determination.
As we stated in the proposed rule, at 69
FR 46750, the Supreme Court has ruled
on reopening in the context of cost
reports. In that case, the Court stated
that the ‘‘right ... to seek reopening
exists only by grace of the Secretary,’’
Your Home Visiting Nurse Services, Inc.
v. Shalala 525 U.S. 449, 454 (1999), and
that a reopening by the Secretary is not
a ‘‘clear nondiscretionary duty.’’ Id. at
456–7. For these reasons we have
decided to retain the rule that while a
reopening may be requested by a
sponsor, there is no right to reopening
under the regulations. We have also
amended the regulations to reflect the
policy announced in the preamble of the
proposed rule that a decision not to
reopen is not subject to further review.
7. Change of Ownership (§ 423.892)
Sponsors who apply for a retiree drug
subsidy payment would be required to
comply with change of ownership
requirements.
Comments: We received no public
comments in this area that disputed the
proposed provisions of change in
ownership.
Response: In § 423.892, we would
carry over the three situations that
constitute change of ownership (CHOW)
in § 423.551 of the final rule.
8. Construction (§ 423.894)
Sections 423.894(a) through
§ 423.894(d) are based on section
1860D–22(a)(6) of the Act, which
outlines the employer and union
options for providing retiree drug
coverage and coordinating with
Medicare under the MMA.
Comments: Beneficiary advocacy
organizations were concerned that
employers and unions will drop
employer and union-based coverage if

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

beneficiaries enroll in Part D coverage.
Plan sponsors want clarification that if
they file for the subsidy, they can tell
beneficiaries not to enroll in Part D
coverage.
Response: The final rule adopts the
provisions as outlined in the proposed
rule. Plan sponsors are not permitted to
tell qualified retirees and their eligible
dependents that they cannot enroll in
Part D coverage. The MMA mandates
that beneficiaries must be allowed to
freely choose whether or not to enroll in
Part D.
However, plan sponsors claiming the
retiree drug subsidy must offer a
prescription drug program that is
actuarially equivalent to or better than
defined standard prescription drug
coverage. If a sponsor elects to apply for
the retiree drug subsidy, it is also able
to design its eligibility rules under its
employer or union-based plan so that
qualifying covered retirees and their
dependents lose eligibility in the
sponsor’s plan if they enroll in a Part D
plan. The sponsor shall give advance
notice of this type of material change to
plan participants as required by other
notification regulations that govern their
plan (that is, ERISA, State or local law).
S. Special Rules for States-Eligibility
Determinations for Low-Income
Subsidies, and General Payment
Provisions
1. Eligibility Determinations (§ 423.904)
The MMA added a new section 1935
to the Act, ‘‘Special Provisions Relating
to Medicare Prescription Drug Benefit,’’
which specifies the requirements for
States regarding low income subsidies
under the new part D benefit. In
accordance with the statute, our
proposed regulations at § 423.904(a) and
(b) required States to make initial
eligibility determinations for premium
and cost sharing subsidies based on
applications filed with the States, to
conduct periodic redeterminations
consistent with the manner and
frequency that redeterminations are
conducted under Medicaid, and to
notify us of eligibility determinations
and redeterminations once they are
made.
As proposed in § 423.904(c), States
would be directed to identify
individuals who apply for the lowincome subsidy who may also be
eligible for programs under Medicaid
that provide assistance with Medicare
cost sharing and to offer enrollment in
these programs. This requirement is
consistent with existing obligations
imposed on States when they make
eligibility determinations for Medicaid.
In § 423.904(d), we proposed requiring

PO 00000

Frm 00225

Fmt 4701

Sfmt 4700

4417

States to begin accepting application
forms for the low-income subsidy no
later than July 1, 2005. In § 423.904(d),
we also proposed requiring States to
make available application forms,
provide information on the nature of
and requirements for the subsidy
program, and provide assistance in
completing subsidy applications.
We also proposed requiring that
States ensure that applicants or personal
representatives attest to the accuracy of
the information provided. In verifying
application information, we specified
that States may require the submission
of statements from financial institutions
and may require that information on the
application be subject to verification in
a manner the State determines to be
most cost-effective and efficient.
In addition, § 423.904(d) directed
States to provide us with necessary
information to carry out implementation
of the Part D program. This includes
information such as income levels for
other low-income subsidy eligible
individuals under § 423.773 needed to
permit Part D plans to determine the
amount of sliding scale premium
subsidy that a person will receive under
§ 423.780(b).
We developed uniform criteria for
determining resources, income, and
family size under the subsidy, which
were reflected in the proposed
definitions at § 423.772, and the
proposed eligibility requirements at
§ 423.773.
We also stated that we were
considering a number of options to ease
the burden on States and to ensure, to
the degree permissible under the MMA,
a consistent eligibility determination
process. We invited comments from
States on this issue.
Comment: Several commenters
suggested that § 423.904(a) be crossreferred to the entire subpart P rules.
Response: We agree with the
commenters and have done so in this
final rule.
Comment: Many commenters
expressed concern that both SSA and
States would be making subsidy
eligibility determinations and stressed
the need for coordinated policies and
processes so that identical treatment is
ensured, no matter where the applicant
goes to apply for the subsidy. It was
further suggested that CMS allow States
to choose whether to make the subsidy
eligibility determinations themselves or
forward applications to SSA.
Response: As stated in our response to
comments on § 423.774, the statute sets
forth the requirement that eligibility for
the low-income subsidy program will be
determined by either the State Medicaid
agencies or by SSA. Therefore, States

E:\FR\FM\28JAR2.SGM

28JAR2

4418

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

must have the ability to determine
eligibility if someone requests a ‘‘State’’
subsidy determination.
While this obligation is imposed on
States, States may encourage applicants
to use the SSA low-income subsidy
application process in order to reduce
the administrative burden associated
with sending notices and processing
appeals and redeterminations. In other
words, States may provide applicants
with the SSA application which they
will forward to SSA or provide access
to a terminal for accessing the SSA
application on line and SSA will
perform the eligibility-processing role
for these applications. However, as we
noted in responses to comments in
subpart P, States must have the ability
to determine eligibility if someone
requests a ‘‘State’’ subsidy
determination. As part of this
obligation, if the applicant files a
‘‘State’’ application, States are required
to send notices of subsidy
determinations, process
redeterminations, and handle appeals.
We are working on a process whereby
States and SSA will be able to access
timely information on the status of a
beneficiary’s application filed at either
SSA or State offices. We expect to
provide further information on this
process through operational guidance.
We also note that we have clarified the
final rule in subpart P, based on similar
comments made in subpart P in
response to the proposed rule. Section
423.774 now requires that multiple
applications not be permitted in cases
where an individual has received a
positive determination from either SSA
or the State. In other words, an
individual may not file a second
application for the remainder of the
eligibility period with the alternate
agency if he or she has received a
positive determination from the State or
SSA. As stated in the response to
comments in subpart P, this
requirement is not intended to preclude
an individual from reporting subsidy
changing events in accordance with the
determining agency’s rules, but rather to
prevent confusion that could arise if a
State and SSA process duplicate
determinations for the individual.
Comment: Some commenters stated
that we should impose a time limit on
how long States have to notify CMS of
eligibility or redetermined eligibility
determinations. Several commenters
suggested we require States to notify
CMS within 24 hours of making such
determinations.
Response: We have decided not to
impose a specified period on States to
notify CMS of eligibility or
redetermined eligibility determinations

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

through regulation. Instead we intend to
provide operational guidance to States,
monitor the time period for determining
subsidy eligibility, and take action as
appropriate. In general, we expect that
States will determine subsidy eligibility
within time periods that are at least
consistent with the processing of State
Medicaid applications.
Comment: One commenter was
concerned that States did not have the
opportunity to comment on the model
application.
Response: SSA published notice of
the model application in the Federal
Register on November 17, 2004 for
public comment.
Comment: One commenter states that
both SSA and the States should be
required to use the same application for
the low-income subsidy. Another
commenter asked what form of
application a State would be required to
accept.
Response: We cannot mandate use of
the same application form by States and
SSA. Where a State finds that it can use
the SSA application for the State’s lowincome subsidy eligibility
determination process, we would
encourage it to do so. However, as States
might need to implement different
verification strategies when they
actually make the low-income subsidy
determinations, they may have to design
application forms specific to their
determination process. States have
expertise in the area of administering
means-tested programs and will be
developing their application forms
based on that expertise. In addition, we
will be working with States and SSA to
assist States as they design and develop
the optimum eligibility process for
making low-income subsidy
determinations.
Comment: One commenter was
concerned about CMS’ requirement for
States to begin taking low-income
subsidy applications by July 1, 2005 due
to State concerns about staffing needs
and necessary support systems.
Response: We continue to believe that
allowing individuals to apply by July 1,
2005, will allow a more seamless
transition of prescription drug coverage
for individuals eligible for the lowincome subsidy. If an individual needs
to consider coverage of specific drugs by
a particular Part D plan in making an
enrollment decision, the greater time in
advance of the new plan’s coverage
effective date allows individuals,
doctors and other payers to assure a
smooth transition of drug coverage.
In addition, we have clarified in this
final rule that CMS will send notices of
eligibility to all deemed subsidy eligible
individuals. This should relieve States

PO 00000

Frm 00226

Fmt 4701

Sfmt 4700

of the financial burden of sending
notices to deemed subsidy eligible
individuals. We will also educate
Medicare beneficiaries, including dual
eligibles, through a variety of methods
about prescription drug coverage under
the new Part D benefit.
Comment: One commenter also asked
about the timeframe in which the State
is to make the low-income subsidy
eligibility determination. This same
commenter also asked about the
timeframe required for applications
taken as early as July 1, 2005, in which
eligibility determinations made after
July 1st and prior to November 15, 2005,
may need to be redone if there is a
change in the applicant’s circumstances.
Response: We expect that States will
determine subsidy eligibility within
time periods that are at least consistent
with the processing of State Medicaid
applications. Initial determinations of
subsidy eligibility shall remain in effect
for a period of up to a year and can be
effective no earlier than January 1, 2006.
As discussed in the response to
comments in subpart P, changes in
financial circumstances that could
impact subsidy eligibility should be
reported to the agency that processed
the subsidy application, according to
that agency’s rules.
Comment: One commenter requested
more detail on the process CMS will use
to collect data from State Medicaid
agencies.
Response: We will provide the data
collection process to State agencies
through operational guidance.
Comment: One commenter indicated
its desire to avoid the need for
beneficiaries receiving assistance from a
SPAP to submit the same information
on two different application forms: the
SPAP eligibility application and the
low-income subsidy application. The
commenter would prefer to use only the
low-income subsidy application for both
the subsidy and SPAP eligibility.
Response: SPAPs will be free to use
the application designed for the lowincome subsidy, or a variation on the
application, to determine SPAP
eligibility.
Comment: A number of commenters
suggested that States should not be
permitted to impose additional
documentation requirements on
beneficiaries over and above what SSA
requires, and asked that the language in
§ 423.904(d)(3) be revised to indicate
that statements from financial
institutions would be required ‘‘only if
the applicant or personal representative
is unwilling to authorize the agency to
contact the financial institution directly
to obtain necessary information.’’

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Response: The simplified application
developed by SSA, in consultation with
CMS, is based on the principle of selfattestation. While we expect some
information may be requested from
applicants on an exception basis, based
on responses to certain questions or
based on inconsistencies from electronic
data matches, we believe the majority of
applicants who use the SSA form will
not need to provide additional
information beyond what is submitted
and attested to in the application form.
We acknowledge that States may
employ different verification strategies
than SSA, if States actually determine
the eligibility for the low-income
subsidy. SSA has access to a variety of
data sources to enable it to verify within
acceptable tolerances the majority of
income and resource information using
electronic data matches. Again, we
encourage States to utilize the SSA
application process to the greatest
extent possible. However, we cannot
limit States’ authority to require
statements from financial institutions by
providing that they may do so only if
the applicant or personal representative
is unwilling to provide authorization to
contact the institution. States have the
expertise necessary to determine what
the best process is for obtaining
necessary information.
Comment: A number of commenters
suggest that individuals who apply at
SSA offices for the low-income subsidy
be screened and enrolled in Medicare
Savings Programs. They argue that the
obligation to screen and enroll should
not be imposed solely on States. They
also suggest that joint applications be
developed for both programs to avoid
requesting duplicate information and to
streamline verification of income and
assets for eligibility purposes.
Response: We received similar
comments in reference to § 423.773 and
§ 423.774. As we indicate in the
responses to those comments, we are
working with SSA to design a process
to provide subsidy eligibility
determination to States for purposes of
identifying individuals who apply at
SSA and who may also qualify for
Medicare Savings Programs under the
State’s Medicaid program. With this
process, we hope to avoid situations in
which an individual applies for a lowincome subsidy at an SSA office, finds
out that he or she has excess income or
resources to qualify, and remains
unaware that he or she may
automatically qualify for a subsidy if the
individual chooses to enroll in a State’s
Medicare Savings Program.
In addition, we also noted in response
to other comments in § 423.773 and
§ 423.774 that the application for the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

low-income subsidy program must
reflect the definition of income and
resources outlined in this final rule.
However, section 1935 (a)(3) of the Act
obligates States to make a determination
of a subsidy applicant’s eligibility for
Medicare Savings Programs and to offer
them enrollment. States may develop a
special addendum to the low-income
subsidy application to address questions
specific to Medicaid or Medicare
Savings Programs eligibility in order to
streamline the application process for
these programs.
Comment: One commenter suggested
that income and resources will not be
verified as rigidly for the subsidy
programs as for Medicare Savings
Programs. The commenter indicated
that the subsidy could be approved and
the State could later, due to verification
requirements for QMB, SLMB, or QIs,
find that the subsidy was approved in
error. The commenter suggests that
there are no provisions for resolving this
occurrence and argue for one standard
to be used nationwide.
Response: Medicare Savings Programs
represent a Medicaid benefit designed to
offer low-income Medicare beneficiaries
assistance with Medicare premiums and
in some cases cost sharing. The lowincome subsidy program is a Medicare
benefit under part D. While eligibility
for the two benefits may be based on
similar methodologies for counting
income and resources, they are not
identical. Moreover, eligibility for the
subsidy can be determined by SSA or
States. While uniformity may be a
desirable goal, verification methods may
differ between the two programs.
Verification for the low-income subsidy,
for example, is based on the principal of
self-attestation. Automation will be
utilized by SSA, and we hope by States,
to the greatest degree possible, with
additional information requested on an
exception basis.
Comment: Some commenters suggest
the proposed regulations regarding State
obligations to screen and offer
enrollment in Medicare Savings
Programs is inadequate. The
commenters suggest that CMS specify
what ‘‘offer enrollment’’ means. They
argue that it should not be interpreted
to imply that someone who presents
himself at a State office to apply for the
subsidy is informed that he can return
at a later time to apply for a Medicare
Savings Program.
A few commenters assert that the
applicant must be offered the
opportunity to enroll in a Medicare
Savings Program during the same visit
or contacted via phone or mail without
having to provide further
documentation or compelling the

PO 00000

Frm 00227

Fmt 4701

Sfmt 4700

4419

completion of additional forms. The
commenters also suggest that it would
be confusing if individuals first receive
notices that they are ineligible for the
subsidy and later receive notices from
the State that they are eligible for a
Medicare Savings Program. Again,
commenters suggest that CMS align the
income and resource rules for both
programs under a single application.
Finally, a few commenters also
suggest that CMS automatically enroll
individuals in Medicare Savings
Programs, with an opt-out provision.
Response: Section 1935(a)(3) of the
Act specifically requires States to screen
individuals applying for the low-income
subsidy for eligibility for Medicaid
Savings Programs and to ‘‘offer
enrollment’’ to such individuals under
the State plan. Under this provision, we
expect that States will perform an initial
assessment of whether an individual is
likely to qualify for the State’s Medicare
Savings Programs, either based on the
individual’s application for the lowincome subsidy taken at the State office
or based on subsidy eligibility
information provided to the State by
SSA. The State should encourage the
individual to complete the application
and assist the individual in doing so.
Given the fact that States administer the
Medicaid program, and the fact that
enrollment in Medicare Savings
Programs could trigger estate recovery
implications, we are not considering the
commenters’ suggestions for CMS to
automatically enroll individuals in
Medicare Savings Programs with an optout provision.
Comment: Some commenters
suggested that in order to align the
enrollment requirements between
Medicare Savings Programs and the
low-income subsidy, States should not
be permitted to pursue estate recoveries
against Medicare Savings Program
beneficiaries.
Response: We do not have authority
under the MMA to implement the
commenters’ recommendation to
prevent States from pursuing estate
recoveries against Medicare Savings
Program beneficiaries.
Comment: Several commenters
suggested that the low-income subsidy
application process represents an
opportunity to connect Medicare
beneficiaries to food stamps and other
programs that might provide assistance
to them. The commenters suggest that
CMS set up an eligibility process in the
final regulation that allows low-income
Medicare beneficiaries to be enrolled as
seamlessly as possible in food stamps,
as well as other State administered
benefits for which they may qualify. The
commenters also remarked that setting

E:\FR\FM\28JAR2.SGM

28JAR2

4420

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

up such a system would likely entail
that CMS work collaboratively with
SSA, USDA, and State agencies. A few
commenters detail specific
opportunities such as providing
information about food stamps and
other major benefit programs in any
outreach materials that CMS, SSA and
State Medicaid programs distribute;
designing procedures that allow
applicant information to be shared
between SSA, State agencies, and CMS;
collaborating with other Federal
agencies, primarily USDA and SSA, on
ways to enroll eligible applicants in all
benefit programs; developing
coordinated redetermination processes
that are simple as possible for Medicare
beneficiaries; and reimbursing SSA for
the food stamps program’s share of any
costs associated with efforts to inform
Social Security recipients of the
availability of food stamps and other
programs.
A few other commenters suggested
that CMS ensure that applicants be
given the choice of opting out of the
other programs, noting that the complex
income calculations under the different
programs such as food stamps or
Section 8 Housing could endanger an
individual’s ability to enroll in other
assistance programs.
Response: We agree that the
application process for the low-income
subsidy represents an opportunity to
improve coordination and awareness of
other programs designed to assist lowincome individuals. As part of outreach
efforts for the low-income subsidy, we
will consider encouraging awareness of
other programs. However, we do not
have the authority to align the eligibility
systems of other programs in order to
design a single application process for
benefits beyond the low-income subsidy
under Medicare Part D.
If SSA is the agency that determines
subsidy eligibility, SSA’s response may
include a paragraph regarding the
individual’s potential eligibility for
other programs like food stamps, SSI,
and Medicaid, based upon the
information SSA received when
determining the low-income subsidy.
Comment: One commenter
recommended CMS conduct a dynamic
enrollment campaign targeted toward
beneficiaries who have been determined
eligible for subsidies during the prequalification process. CMS should also
develop a one-step application/
enrollment process that requires all
prescription drug plans to include
information about the availability of
subsidies in their marketing materials
and requires plans to include specific
eligibility questions on enrollment
forms.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Response: We will be working on a
detailed education and outreach strategy
over the next few months. We note, as
explained in detail in subpart B, that
while we encourage individuals to
choose a plan that best meets their
needs, full- benefit dual eligible
individuals who apply and are found
eligible for the low-income subsidy will
be enrolled automatically in Part D
plans if they fail to choose one. We will
also facilitate enrollment in Part D plans
of other subsidy-eligible individuals.
Comment: A few commenters asked
whether a person screened and found
eligible is required to enroll in a
Medicare Savings Program as a QMB,
SLMB, or QIl. Additionally, the
commenter asked whether such
enrollment is a condition of eligibility
for the low-income subsidy program.
Response: Enrollment for those who
qualify for a Medicare Savings Program
is optional. The State cannot condition
eligibility for the Part D low-income
subsidy on the individual applying for
the Medicare Savings Program.
2. General Payment Provisions
(§ 423.906)
Section 1935(d) of the Act contains
provisions on Medicaid coordination
with Medicare prescription drug
benefits. Specifically, in the case of a
person who is eligible for Part D and
also eligible for full Medicaid benefits,
Federal Financial Participation (FFP) in
State Medicaid expenditures is not
available for Medicaid covered drugs
that could be covered under Part D or
for cost sharing related to such drugs.
As a result, no Federal payment should
be made under Medicaid for covered
Part D prescription drugs for full-benefit
dual eligible individuals.
We proposed in § 423.906(a) that
States could receive the regular Federal
match for administrative costs in
determining subsidy eligibility. We also
proposed, at § 423.906(c), that States
may elect to provide coverage for
outpatient drugs, other than Part D
covered drugs, in the same manner as
provided for full-benefit dual eligible
individuals or through arrangements
with the PDP sponsor or MA-PD.
Comment: One commenter asked that
Medicaid coverage not expire for fullbenefit dual eligible individuals until
they voluntarily enroll in a Part D plan
or until CMS or the State has
automatically enrolled them in a plan.
By changing the date on which
Medicaid coverage ends, SPAPs would
not be obligated to provide drug
coverage during such a period without
coverage.
Response: In accordance with section
1935(d) of the Act, in the case of a

PO 00000

Frm 00228

Fmt 4701

Sfmt 4700

person who is eligible for Part D and
also eligible for full Medicaid benefits,
FFP is not available for Medicaid
covered drugs that could be covered
under Part D or for cost sharing related
to such drugs. In these cases Medicare
is the primary payer. We do not have
the authority to delay the end date of
Medicaid prescription drug coverage for
such individuals. However, we will
deem full-benefit dual eligible
individuals as eligible for Part D lowincome subsidies, and assign these
individuals to a PDP, with the option to
disenroll, so that there will be no breaks
in coverage between Medicaid and the
implementation of Medicare Part D in
January 2006 for this population.
Comment: One commenter asked for
clarification that FFP would also be
available to State Medicaid programs to
conduct the periodic eligibility
redeterminations. The commenter also
asked if work done by States and SPAPs
to enroll beneficiaries in the Part D
program would be claimable as Federal
reimbursable services at the
administrative FFP rate under Medicaid
program costs just as low-income
subsidy eligibility determinations costs
are claimed. Finally, the commenter
asked about claiming FFP for all
administrative expenses associated with
State Medicaid agencies or SPAPs
administering a ‘‘wrap around’’ benefit.
Response: FFP is available to States at
the normal Federal match rate to
conduct redeterminations. However,
because neither States nor SPAPs enroll
beneficiaries in Part D plans no FFP is
available in that regard. In addition, the
statute does not allow for
reimbursement for administering a State
benefit that supplements, or ‘‘wraps
around’’ Part D.
Comment: One commenter asked if a
State could pay for and receive FFP for
non-covered Part D drugs when a Part
D plan’s enhanced alternative coverage
includes supplemental benefits such as
coverage of non-covered Part D drugs. In
such a case, the commenter asked
whether the State Medicaid program
wrap around coverage for dual eligible
beneficiaries in such plans could
continue and whether the State could
receive FFP for these non-covered Part
D drugs.
Response: In the scenario described,
the plan’s supplemental coverage of
non-covered Part D drugs does not
preclude Medicaid from wrapping
around these non-covered drugs and
receiving FFP for such coverage.
However, to the extent that the Part D
plan provides coverage for the noncovered Part D drugs, Medicaid could
only wrap-around (pay for amounts not
covered by the plan for those non­

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

3. Treatment of Territories (§ 423.907)

as not to make the grant
administratively burdensome.
Response: Reporting requirements are
administrative in nature and are not
addressed in this regulation. We will
work with the territories to design
reports that provide CMS with sufficient
information to establish accountability
without creating overly burdensome
reports.
Comment: One commenter believed
that a multi-state PDP region including
Puerto Rico will compromise the
viability of the Medicare Part D program
in that territory because of differences in
language, culture, income, and cost
structure between Puerto Rico and
States.
Response: We appreciate the
commenter’s concerns. The actual
designation of the regions has been
announced by CMS and is listed on our
website.

Low-income Part D eligible
individuals residing in the territories are
not eligible for premium and costsharing subsidies. However, in
accordance with section 1935(e) of the
Act, territories may submit a plan to the
Secretary under which medical
assistance is to be provided to lowincome individuals for covered Part D
drugs. Territories with approved plans
will receive increased grants under
section 1935 (e)(3) of the Act. Proposed
§ 423.907 contained the provisions
explaining the territories’ submittal of
plans and the grant funding.
Comment: One commenter expressed
concern that low-income Medicare
beneficiaries in Puerto Rico will have no
incentive (due to the rich prescription
drug benefit through the Health Reform
program), and no means, to enroll in a
PDP because the low-income subsidy
program is not available to the
territories.
Response: While residents of the
territories are not eligible for the lowincome subsidy, the MMA provides that
the territories receive an increase in the
grants paid under section 1108 of the
Act if the territory has a plan approved
by the Secretary for providing medical
assistance for Part D drugs. The
territories may choose to use these
funds to pay Part D premiums and cost
sharing for low-income residents. The
territories may also design their
programs to wrap around the Part D
benefit, thus providing an incentive for
Medicare beneficiaries to enroll in the
Part D program
Comment: One commenter asked that
CMS not require the same financial and
statistical reporting for the funds
provided to the territories added to the
grant under section 1108 of the Act so

4. State Contribution to Drug Benefit
Costs Assumed by Medicare (§ 423.908
through § 423.910)
Medicare will subsidize prescription
drug costs for full benefit dual eligible
individuals. However, in accordance
with section 1935(c) of the Act, States
and the District of Columbia will be
responsible for making monthly
payments to the Federal government
beginning in January 2006 to defray a
portion of the Medicare drug
expenditures for these individuals. The
percentage of State contributions to
Medicare Part D funding is reduced over
a ten-year period.
The statute directs, and we specified,
in § 423.910(b)(2) that State payments
will be made in a manner similar to the
mechanism through which States pay
Medicare Part B premiums on behalf of
low-income individuals who are eligible
for both Medicare and Medicaid, except
that those payments will be deposited
into the Medicare Prescription Drug
Account in the Federal Supplementary
Medical Insurance Trust Fund.
As we proposed in § 423.908 through
§ 423.910 to calculate the monthly State
contributions we would first calculate
an amount we refer to as the projected
monthly per capita drug payment. This
amount is based in part on a State’s
Medicaid per capita expenditures for
covered Part D drugs for Medicare
beneficiaries eligible for full benefits
under Medicaid for 2003, which is equal
to the weighted average of gross per
capita Medicaid expenditures for
prescription drugs for 2003 for Medicaid
recipients not receiving drugs through a
managed care plan and the estimated
actuarial value of prescription drugs
benefits provided under a
comprehensive Medicaid managed care

covered drugs) the plan’s coverage. FFP
would not be available for amounts
which the plan covers as supplemental
coverage.
Comment: One commenter strongly
recommends that CMS provide States
with a template to take into account
changes to the State plan that will result
from implementation of Part D.
Response: We do not plan to create a
template to take into account changes to
the Medicaid program because of the
implementation of Part D. However,
States should be aware that any changes
it makes to Medicaid payment,
eligibility, or coverage because of the
impact of the new benefit must be
reflected in the State’s plan. A State that
does not amend its Medicaid State plan
to reflect changes to its Medicaid
program risks losing FFP.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

PO 00000

Frm 00229

Fmt 4701

Sfmt 4700

4421

plan for these individuals in 2003. The
weighted average would be based on the
proportion of individuals who, in 2003,
did and did not receive medical
assistance for covered outpatient drugs
through a comprehensive Medicaid
managed care plan.
The gross per capita Medicaid
expenditures for prescription drugs for
2003 is equal to the average (mean) per
person expenditures (including
dispensing fees) for a State during 2003
for covered Part D drugs provided to
Medicare beneficiaries receiving full
benefits under Medicaid who are not
receiving medical assistance for drugs
through a comprehensive Medicaid
managed care plan, based on data from
the Medicaid Statistical Information
System (MSIS) and other available data,
as adjusted by an adjustment factor.
We would apply an adjustment factor
to the gross per capita Medicaid
expenditures for prescription drugs. The
adjustment factor for a State would have
to equal the ratio of the aggregate
payments to the State in 2003 under
rebate agreements under section 1927 of
the Act to a State’s 2003 gross
expenditures for covered Part D drugs
not received through a Medicaid
managed care plan, based on data
contained in the CMS–64 Medicaid
expenditure report. We proposed to
define 2003 as CY 2003 (January 1, 2003
through December 31, 2003). The gross
per capita Medicaid expenditures for
prescription drugs for 2003 will be
reduced by this adjustment factor ratio.
The projected monthly per capita
drug payment will be equal to 1/12 of
the product of the State’s Medicaid per
capita expenditures for covered Part D
drugs for Medicare beneficiaries eligible
for full benefits under Medicaid for
2003 and a proportion equal to 100
percent minus the Federal medical
assistance percentage (as defined in
section 1905(b) of the Act) applicable to
the State for the year for the month at
issue. This amount will be increased by
the growth factor for each year
beginning in 2004 through the year for
the month at issue. The growth factor
for years 2004, 2005, and 2006 will be
the average percent change from the
previous year of the per capita amount
of prescription drug expenditures
(determined using the most recent
National Health Expenditure (NHE)
projections). The growth factor for 2007
and succeeding years will equal the
annual percentage increase in average
per capita aggregate expenditures for
covered Part D drugs in the United
States for Part D eligible individuals for
the 12-month period ending in July of
the previous year as described in
423.104(d)(5)(iv). We will provide

E:\FR\FM\28JAR2.SGM

28JAR2

4422

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

further detail regarding the sources of
data to be used and how the annual
percentage increase will be determined
via operational guidance to States.
The monthly State contributions for
each year, beginning in January of 2006,
will be the product of the projected
monthly per capita drug payment, the
total number of full-benefit dual eligible
individuals for the State in the
applicable month, and the applicable
ten year phased-down factor for the year
(see Table S–1). As illustrated in Table
S–1, State contributions will decline
each year until 2015, at which time the
applicable 10 year phased-down factor
for each year will be fixed at 75 percent.
As specified in proposed
§ 423.910(b)(3), failure on the part of a
State to pay these State contribution
amounts would result in interest
accruing on those payments at the rate
provided under section 1903(d)(5) of the
Act, in accordance with section
1935(c)(1)(C) of the Act. In addition, as
required by the statute, we would
immediately offset unpaid amounts and
accrued interest against Federal
Medicaid matching payments due to the
State under section 1903(a) of the Act.
As specified in § 423.910(e), we would
perform periodic data matches to
identify full-benefit dual eligibles for
purposes of computing State
contributions. As we specified in
§ 423.910(d), States would be required
to provide data on full- benefit dual
eligible enrollees in order to conduct the
data match required under section
1935(c)(1)(D) of the Act.
States will make contributions only
on behalf of Medicare beneficiaries who
would otherwise be eligible for
outpatient prescription drug benefits
under Medicaid. States will not make
contributions on behalf of individuals
such as those QMBs who are not
otherwise eligible for Medicaid, SLMBs,
and QIs for whom the State will pay
only Part B premiums or Medicare cost
sharing on their behalf.
In order to give meaning to the term
full-benefit dual eligible individual for
purposes of the baseline calculation, we
needed to define it in a manner that
would permit the baseline calculation to
operate. Therefore, we proposed that
Medicaid eligible individuals who
receive comprehensive benefits
including drug coverage under
Medicaid and are also covered under
Medicare Part A or Part B are to be fullbenefit dual eligible individuals for
purposes of calculating the baseline.
The proposed definition of full-benefit
dual eligible individuals excluded
Medicare beneficiaries who receive
Medicaid drug coverage under a section
1115 Pharmacy Plus demonstration.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

As we specified in § 423.910(g), to
assist States in their budget planning,
we must notify States by October 15
each year of the projected monthly per
capita drug payment calculation for the
next calendar year.
The ten-year phased-down State
contribution (PDSC) factors are
identified below in Table S–1.

TABLE S–1
PHASED—DOWN PERCENT­
AGES OF STATE CONTRIBUTIONS TO
MEDICARE PART D DRUG BENEFIT
COSTS

ANNUAL

Year

State Percentage

2006

90

2007

88 1/3

2008

86 2/3

2009

85

2010

83 1/3

2011

81 2/3

2012

80

2013

78 1/3

2014

76 2/3

2015 and thereafter

75

Comment: A few commenters
expressed concern that the 2003
baseline per full-benefit dual eligible
drug cost would fail to reflect cost
containment measures by States. The
commenters believed that the legislative
reference to the use of ‘‘other available
data’’ provides for a more expansive
view of adjustments. Proposed changes
included allowing States to submit
documentation of the effects of cost
containment measures to periodically
re-base the cost, and the use of 2004 as
a base year.
Response: The legislation specifies
that we inflate the 2003 base year fullbenefit dual eligible per capita drug
costs for use in 2006 using the NHE
projections for the years involved. This
inflation factor should take into account
changes in the rate of growth of per
capita drug costs. Any effort to measure
the differential effect of State cost
containment against the specified
inflation factor could be imprecise and
would introduce new reporting
requirements. We do not support the
use of optional ad hoc State-reported
data, which will be inconsistently
defined, and would be applied unevenly
to States. The use of a later base year,
such as 2004, is precluded by the
legislative language.

PO 00000

Frm 00230

Fmt 4701

Sfmt 4700

Comment: One commenter
recommends that the regulations allow
State-specific methods for the estimated
actuarial value of capitated prescription
drug benefits, allowing States to use
their data for the dual eligible
population.
Response: Since we believe the data
available on managed care drug costs
will vary by State, the final rule
provides for use of a range of sources of
managed care drug cost data.
Comment: One State commenter
believes it may pay a disproportionate
share in its phase-down contribution for
less comprehensive coverage for its fullbenefit dual eligible individuals.
Response: We believe that the
Medicare drug benefit will pay, on
average, more than 96 percent of fullbenefit dual eligible individuals’ drug
costs. Additionally, about 1.5 million of
these full-benefit dual eligible
individuals are institutionalized,
meaning they will not pay any
premiums, deductibles or co-payments.
While the nominal cost sharing of the
Medicare prescription program is
slightly higher than the cost-sharing
under Medicaid, Medicare provides
catastrophic drug coverage, offering
additional protection to this vulnerable
population. We further believe that
Medicare Part D is likely to result in
more stable and consistent prescription
drug coverage for low-income Medicare
beneficiaries since Medicaid is not a
secure source of drug coverage, as
eligibility is subject to meeting certain
income and resource requirements. As a
result of these requirements, Medicaid
may only provide intermittent drug
coverage to the full-benefit dual eligible
individual.
Comment: One State commenter
asked how member months are being
counted, how people in MA plans will
be counted for the phased-down
payment, and whether individuals from
their family planning waiver are
included.
Response: For the phase-down
baseline, we expect to count every MSIS
reported enrollment for each month for
individuals who are coded as fullbenefit dual eligible individuals. MA
plans have no effect on the baseline
calculations, although we will
distinguish between Medicaid
individuals in comprehensive plans and
those not in comprehensive plans. This
distinction is necessary to establish the
weighting between the fee-for-service
and capitated populations in the
baseline calculations. The only fullbenefit dual eligible enrolled
individuals who are excluded are those
in Pharmacy Plus demonstrations and
drug-only 1115 demonstrations. Those

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
in family planning demonstrations
would not be excluded if they received
benefits beyond drug coverage.
Comment: One commenter requested
clarification on the process to inflate the
baseline per-capita drug cost after 2006.
The legislation specifies the use of the
actual Part D costs for the 12 months
prior to July of each year. For 2007 there
will not be a 12-month history from
2006 available.
Response: We will provide further
detail regarding the sources of data to be
used and how the annual percentage
increase will be determined via
operational guidance to States.
Comment: A few commenters
expressed concern about the use of the
NHE factor to inflate the baseline to
2003, and suggested that we use either
State-specific numbers, or the total
public sector number.
Another commenter asked
clarification as to which specific NHE
projection will be used for the phasedown calculation.
Response: The legislation is clear in
directing the use of the NHE estimate for
the whole country as the basis for this
inflation factor. That source provides
very limited options for use. We believe
the overall per capita drug cost numbers
are the most consistent with the intent
of the law. The specific NHE projection
factor to be used will be discussed in
operational guidance.
Comment: One commenter expressed
concern that the 2003 base year data
may not be representative of drug
utilization experience. The commenter
proposes using pooled data from 2001,
2002, and 2003 to obtain a utilization
estimate. The commenter also expressed
concern over the use of quarterly MSIS
dual eligibility codes to establish
monthly spending and enrollment base
numbers.
Response: We believe that this
proposal would introduce significant
additional problems associated with the
trending forward of that significantly
older base data. This proposal also
conflicts with the legislative language,
which clearly specifies the use of the
calendar year 2003 data. We will
address the use of quarterly dual
eligibility indicators in MSIS by
applying an algorithm that incorporates
both prior and current quarter values.
Comment: A few commenters
proposed that States be allowed to
submit drug rebate dollar amounts that
reflect only the full-benefit dual eligible
population. They propose that these
numbers be used instead of the
aggregate rebate and drug payment
amounts reported on the CMS–64
report.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Response: While this proposal would
allow the rebate adjustment to
correspond more closely to the
population affected by the PDSC, this is
inconsistent with the legislative
language, and would require that we
impose new and complex reporting
requirements on the States. We do not
support the use of optional ad hoc Statereported data, which will be
inconsistently defined, and would be
applied unevenly to States.
Comment: A few commenters
proposed that we allow States to submit,
at their option, rebate collections after
2003 for rebate amounts identified in
2003. These additional rebate amounts
would be used to reduce the base year
drug costs in the baseline calculations.
Response: This comment presumes
that the legislation intended that we use
base year data for rebates on an
incurred, rather than paid, basis. This is
inconsistent with the definition of the
CMS–64 referenced by the legislative
language. Simply adding incremental
collections of 2003 incurred rebates
would inappropriately inflate the rebate
totals, since the law does not provide for
removal of 2003 rebate collections
incurred in 2002. There is no
standardized reported data that would
allow creation of an incurred rebate
amount, and no indication in the
legislation that this was intended. We
believe use of optional State-reported
post–2003 rebate collections would
introduce inconsistent treatment of
States.
Comment: One commenter
recommended that States that provide
pharmacy-only benefits under an 1115
demonstration to a subset of its
population be excluded from the
definition of full- benefit dual eligible
individual, since these programs
generally provide the same benefits as
offered by Pharmacy Plus Programs.
Response: We agree with this
commenter and have clarified the
definition of full-benefit dual eligible
individual at § 423.902 to specifically
exclude those individuals enrolled in
1115 demonstration programs that
provide pharmacy-only benefits to a
portion of its demonstration population.
Comment: One State commenter did
not object to including its Medicare
beneficiaries who are enrolled in its
pharmacy assistance 1115 program in
the baseline expenditures, but believes
it is inappropriate to count them as part
of the future Medicaid enrolled
population that is multiplied by the
trended per person cost as part of the
formula.
Response: As indicated above, we will
not be including these populations in
the baseline expenditures. In order to

PO 00000

Frm 00231

Fmt 4701

Sfmt 4700

4423

remain consistent with the definition of
the baseline and monthly billing counts,
we would also exclude this population
from the future Medicaid enrolled
population.
Comment: One State commenter
recommends CMS use the First Data
Bank generic sequence number in lieu
of the NDC when determining the
excluded list of drugs used in
establishing the State’s phase-down
contribution.
Response: We are using the NDC
because it is the only available identifier
on the MSIS drug claim record.
Comment: One commenter proposed
that we allow States to submit auditable
reports of reductions in base year drug
payments due to judicial settlements
with drug manufacturers and other
accounting adjustments to base year
cost.
Response: This comment presumes
that the legislation intended that we use
base year data on an incurred, rather
than paid, basis. This is inconsistent
with the definition of the MSIS and
CMS–64 data sources referenced by the
legislative language. Simply adding
incremental collections of 2003
settlements would improperly reduce
the total payments, since it does not
provide for removal of 2003 settlements
incurred during 2002. There is no
standardized reported data that would
allow creation of an incurred settlement
amount, and no indication in the
legislation that this was intended. The
legislation directs that we derive the
base year costs from the reported MSIS
drug claims data, and there is no viable
way to associate these settlement
amounts with those individual drug
claims; nor can these settlements be
accurately associated with the target
population on an aggregate basis. We
believe use of optional State-reported
post–2003 settlements would introduce
inconsistent treatment of States.
Comment: One commenter proposed
that full-benefit dual eligible
individuals be enrolled in plans
providing a formulary comparable to the
existing Medicaid coverage, and several
commenters proposed that that the
PDSC payment exclude any payments
for drugs outside the Part D formulary.
Response: There is no provision in the
legislative language to ensure
equivalency of drug formularies under
Medicaid dual eligible and Part D
coverage. The PDSC payments are based
on actual Medicaid program payment
levels, and are not linked to the Part D
formularies.
Comment: One commenter proposed
that 100 percent State funded drug
benefits for drugs not in the Part D

E:\FR\FM\28JAR2.SGM

28JAR2

4424

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

formulary be excluded from the PDSC
payment.
Response: The baseline is specified to
be the actual Medicaid drug payment
experience for each State based on MSIS
data which does not include State-only
programs. The legislation does not
provide for adjustments based on
subsequent State choices to offer drug
coverage that wraps around the Part D
coverage. There is no provision for
Medicaid or other State programs to
receive Federal matching or an
exclusion from PDSC payment for drugs
provided beyond those excluded drugs.
The PDSC payments are based on the
savings from historic State utilization
levels, and do not guarantee equivalence
in coverage formularies.
Comment: One commenter expressed
concern about drugs to be excluded
from the baseline.
Response: We have developed a list of
drug codes for drugs to be excluded
from the baseline based on the Part D
exclusions in the legislation.
Comment: A few commenters asked
that we clarify the start date and
ongoing due dates for the PDSC
payments.
Response: The final regulatory
language includes this information. The
ongoing due dates will parallel those for
the Medicare Part B premium buy-in
process.
Comment: One commenter requested
that we move the due date for State
notification of baseline amounts from
October 15 to August 15 prior to the
payment year. This would allow States
more budgetary lead time.
Response: The legislation requires
that the first year’s baseline data be
provided to States no later than October
15, 2005 for the 2006 payment year. In
order to help support State budgeting
needs, it is our intent to provide this
information to States as soon as it can
be developed. However, the timing to
produce preliminary numbers will be
contingent on timely State reporting of
needed MSIS data.
In regard to years subsequent to 2006,
the only changes to the base number
will be the inflation factor and the
Federal matching rate. States should be
able to develop reasonably accurate
estimates for later years based on the
prior year’s base.
Comment: One commenter expressed
concern that if we require State payment
by check or electronic funds transfer,
payment could conflict with Statelegislated caps. The commenter
proposed that we allow a range of
payment options comparable to the
Medicare buy-in process.
Response: It is our intent, as
evidenced by our clarification of the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

final regulatory language, to mirror the
payment process for the buy-in process
set forth in a Federal Register notice
published on September 30, 1985 at FR
39784. This process includes funds
transfers, with a provision that any late
payments will be offset against the
Medicaid grant with appropriate interest
accrual. In this case, the Medicaid offset
would be transferred to the Medicare
Prescription Drug Account to complete
the transaction. Since failure to pay is
covered in this notice, we have removed
text at § 423.910(b)(3) that was included
in the proposed rule.
Comment: A few commenters
requested that we include a process for
State appeal of the PDSC payment
amount.
Response: The legislation does not
contain a specific provision for an
appeal process. However, it requires
CMS to disallow from the Federal
financial participation in the State’s
Medicaid expenditures any amounts
which the State should have paid under
section 1935 of the act. Because this is
a disallowance of Medicaid funds, any
State disagreements with the phaseddown billing would have to be handled
through the existing disallowance
process under § 430.42.
Comment: A few commenters
expressed concerns about the need for
more specific instructions for reporting
monthly enrollment to CMS, and
proposed the use of the MSIS.
Response: The final regulation
includes more specific information on
this reporting process. CMS has
evaluated this option and has
determined that the change of MSIS
from quarterly to monthly reporting
would represent an undue hardship to
States. The enrollment reporting file
would also require the addition of fields
to address other program needs, such as
subsidy determinations.
Comment: One commenter requested
more detail on the process to be used to
establish the actuarial value of the
capitated prescription drug benefits for
full-benefit dual eligible individuals in
comprehensive managed care plans.
Response: We have provided
clarification in the final regulation at
§ 423.902, based on feedback obtained
from State workgroups addressing this
issue.
T. Part D Provisions Affecting Physician
Self-Referral, Cost-Based HMO, PACE,
and Medigap Requirements
In the August 2004 proposed rule,
subpart T discussed several other
regulatory areas affected by the
provisions implementing the Medicare
prescription drug benefit. This section
discussed the revised requirements for

PO 00000

Frm 00232

Fmt 4701

Sfmt 4700

physician self-referral prohibition, costbased HMOs, PACE organizations, and
Medigap policies.
1. Definition of Outpatient Prescription
Drugs for Purposes of Physician SelfReferral Prohibition (§ 411.351)
Section 1877 of the Act, also known
as the physician self-referral law,
prohibits a physician from making
referrals for certain designated health
services (DHS) payable by Medicare to
an entity with which the physician (or
an immediate family member of the
physician) has a financial relationship
(ownership, investment, or
compensation), unless an exception
applies. Section 1877 of the Act also
prohibits the DHS entity from
submitting claims to Medicare for DHS
furnished as a result of a prohibited
referral.
Outpatient prescription drugs are a
DHS under section 1877 of the Act. As
a result of the Medicare prescription
drug benefit provisions, we proposed to
amend the physician self-referral
definition of ‘‘outpatient prescription
drugs’’ at § 411.351 to include the
additional outpatient drugs covered
under the new Part D benefit. In other
words, under the proposed definition,
physician referrals for outpatient
prescription drugs covered under Part D
would be subject to the physician selfreferral prohibition. We have finalized
this proposal without substantive
change because we believe that referrals
for Part D drugs are subject to the same
risk of over-utilization and anticompetitive behavior as referrals for Part
B drugs when a financial relationship
exists between the referring physician
and the entity furnishing the drugs.
Comment: We received a number of
comments, which supported our
proposal. Some of the commenters cited
analyses, which supported our proposed
action.
Response: We appreciate the support
given to our proposal. We believe that
applying the physician self-referral
provision to referrals for either Part B or
Part D drugs will reduce the potential
for over-utilization and other program
abuse.
2. Cost-Based HMOs and CMPs Offering
Part D Coverage (§ 417.440 and
§ 417.534)
Section 1860D–21(e) of the Act
provides that Part D rules will generally
apply to reasonable cost reimbursement
HMOs and CMPs (Competitive Medical
Plans) that contract under section 1876
of the Act and that offer qualified
prescription drug coverage to Part D
eligible individuals in the same manner
as such rules apply to the offering of

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
qualified prescription drug coverage
under MA-PD local plans. As a result,
we proposed revising § 417.440(b) of
this chapter to specify that a cost-based
HMO or CMP may offer qualified
prescription drug coverage. We also
proposed adding new § 417.534(b)(4),
specifying that to the extent that a cost
HMO or CMP chooses to participate in
the Part D program by offering qualified
prescription drug coverage to its
members, any costs associated with the
offering of Part D benefits may not be
claimed on its Medicare cost report.
After reviewing comments and
responding (below), we are adopting the
proposed policy as final.
In the proposed rule, we incorrectly
stated at 69 FR 46753 that cost-based
HMOs and CMPs would offer qualified
prescription drug coverage to Part D
eligible enrollees under
§ 417.440(b)(1)(iii) as a basic benefit. We
clarify in this final rule our belief that
such a reading would not comply with
the clear language of section
1876(c)(2)(A)(ii)(I) of the Act which
provides that cost-based HMOs and
CMPs may only offer non-Part A/B
Medicare benefits as optional
supplemental benefits. In this final rule,
we therefore amend § 417.440(b)(2) to
make the requirement clear that costbased HMOs and CMPs may offer
qualified prescription drug coverage to
Part D eligible enrollees only as an
optional supplemental benefit.
Section 1860D–21(e)(2) of the Act
stipulates that section 1876 reasonable
cost contractors offering qualified
prescription drug coverage may only
offer such coverage to individuals
enrolled in its reasonable cost contract,
or individuals who receive services
covered under Medicare Parts A and B
through its reasonable cost contract.
After reviewing comments and
responding (below), we are adopting the
proposed policy as final. However, it is
important to note that the HMO or CMP
offering the cost plan is free to also
apply to be a PDP sponsor and may, if
approved, then offer a separate Part D
plan to Part D eligible individuals
enrolled in original Medicare who are
not enrollees of its cost plan.
Section 1860D–21(e)(3) of the Act
provides that the Part D bids of section
1876 reasonable cost contracts will not
be included in the computation of the
national average monthly bid amount
and the low-income benchmark
premium amount. We discuss the
national average monthly bid amount in
the subpart F preamble and the lowincome benchmark premium amount in
the subpart P preamble.
We proposed that the waiver
authority provided in section 1860D–

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

21(c) of the Act would be available to
section 1876 reasonable cost HMOs and
CMPs in the same manner as it is
available to MA-PD local plans, namely
that we will waive any requirement
otherwise applicable under this part for
section 1876 reasonable cost HMOs and
CMPs to the extent such requirement
conflicts with or is duplicative of a
requirement under part 417, or such
waiver is necessary to promote
coordination of the Part D benefits with
the benefits offered under part 417. We
discuss section 1860D–21(c) of the Act
and this waiver authority in subpart J of
the preamble. We invited comment on
whether there are any Part D
requirements otherwise applicable to
the offering of qualified prescription
drug coverage under MA-PD local plans
that would be uniquely problematic to
implement for section 1876 reasonable
cost HMOs and CMPs. After reviewing
and responding to comments (below),
we have not identified any additional
Part D requirements that will be
uniquely problematic for section 1876
reasonable cost HMOs and CMPs to
implement. Nevertheless, in
§ 423.458(d) of the final rule, we
provide for a process that will allow for
waiver of Part D provisions for cost
HMOs and CMPs that offer qualified
prescription drug coverage under Part D
to the extent that the provision
duplicates, or is in conflict with
provisions otherwise applicable to the
section 1876 cost HMO/CMP under
section 1876 of the Act, or when a
waiver is necessary to promote
coordination of the Part D benefits with
the benefits offered under part 417.
Comment: Some commenters
suggested that we make clear that once
a cost plan offers Part D that it becomes
an MA-PD plan and that some (or all)
Part C provisions then supersede or
replace section 1876 (and part 417 of
title 42 CFR) provisions as controlling
on such a cost plan. For instance, some
commenters suggested that the State
preemption authority in section
1856(b)(3) of the Act related to MA
plans, and incorporated by reference in
section 1860D–12(g) of the Act, should
be interpreted to apply to the entire
benefit package that a cost HMO/CMP
offers and not just the prescription drug
coverage portion of the package.
Response: We do not agree. We
interpret section 1860D–21(e)(1) of the
Act as providing that only those
provisions of Part D and related
provisions of Part C pertaining to the
offering of qualified prescription drug
coverage by a MA-PD local plan would
apply to the offering of such coverage by
a cost HMO or CMP. Consequently, the
provisions of Parts C and D, including

PO 00000

Frm 00233

Fmt 4701

Sfmt 4700

4425

the preemption provisions under
sections 1860D–12(g) and 1856(b)(3) of
the Act, would not apply to benefits
offered under a reasonable cost contract
other than any qualified prescription
drug coverage. In other words, the
section 1876 cost-based HMO/CMP does
not gain preemption protection related
to the ‘‘entire benefit package’’ it offers.
Accordingly, the preemption authority
at section 1860D–12(g) of the Act does
not, in and of itself, ‘‘immunize’’ the
cost HMO/CMP from State laws with
respect to the benefits the cost HMO/
CMP offers under the authority in
section 1876 of the Act.
Comment: One commenter said that
section 1860D–21(e) of the Act says that
a cost HMO/CMP that offers qualified
prescription drug coverage to its
members is deemed to be an MA-PD
local plan. This commenter suggested
that CMS should allow a cost plan that
elects to offer qualified prescription
drug coverage to its Part D eligible cost
enrollees to apply related Part C
provisions to those members.
Response: We do not necessarily
agree. Section 1860D–21(e) of the Act
extends to cost plans provisions of Part
C applicable to MA-PD local plans to
the extent they relate to the offering of
qualified prescription drug coverage.
Section 1860D–21(e) of the Act,
however, does not deem a reasonable
cost contract offering qualified
prescription drug coverage a MA-PD
local plan for all purposes.
Consequently, those provisions
applicable to MA-PD local plans that are
unrelated to the offering of qualified
prescription drug coverage would not
apply to reasonable cost contracts. In
other words, it is only in this limited
way that a cost plan offering qualified
Part D coverage is deemed to be an MA­
PD.
Comment: One commenter suggested
modifying § 417.436 to provide that that
the requirement at § 417.436(a)(5) that a
cost HMO or CMP disclose to its
enrollees that they may receive services
through any Medicare provider or
supplier has no effect with respect to
the offering of qualified prescription
drug coverage under the reasonable cost
contract.
Response: We believe that § 423.458 is
clear in providing that rules related to
Part D coverage, whether offered by a
PDP or an MA-PD, are provided in the
part 423 regulations. Therefore, it is not
necessary to specifically say in the part
417 regulations that a specific part 423
regulation applies. Section 423.128(b)
describes the specific information that
PDPs and MA-PDs must disclose related
to their Part D benefit offerings, which
includes ‘‘a disclosure of out-of-network

E:\FR\FM\28JAR2.SGM

28JAR2

4426

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

coverage consistent with § 423.124(a)’’—
see § 423.128(b)(6).
Comment: One commenter asked that
we clarify that a legal entity that
operates a Medicare cost plan may
operate as a PDP sponsor as long as it
meets all the relevant licensure and
other requirements.
Response: We concur and have
clarified this point in our preamble
discussion in this subpart.
Comment: One commenter asked us
to clarify that the definition of service
area for cost HMOs/CMPs is found at
§ 417.1, while the definition for MA
plans is found at § 422.2. The
commenter asked us to clarify that the
reference to service areas for MA-PD
plans in § 423.120(a) had no
applicability to cost plans.
Response: We agree with the
commenter that the reference to service
area of an MA-PD plan in § 423.120(a)
does not apply to cost HMOs/CMPs that
offer Part D coverage. The effect of
section 1860D–21(e)(2) of the Act is not
to ‘‘deem’’ that a cost plan offering
qualified Part D coverage actually
becomes an MA-PD local plan. Rather,
it is that the rule applicable to the
provision of Part D coverage by the cost
plan to enrollees of the cost plan is
similar to the provision of Part D
coverage by MA-PD local plans. As we
provide in subpart J of this rule at
§ 423.458(d), we will waive provisions
in § 423.120(a) to the extent they
duplicate or conflict with section 1876
provisions applicable to cost plans
under section 1876 of the Act or part
417 of title 42 CFR, or to the extent
waiver is necessary to improve
coordination of Part D benefits offered
under the plan with the other benefits
offered by the cost plan. Although we
do not specifically mention such a
waiver at § 423.120(a) for a cost HMO/
CMP offering qualified prescription
drug coverage, such a waiver is
available, to the extent it would meet
the conditions for waiver in
§ 423.458(d).
Comment: One commenter asked if
the disclosure requirements in
§ 423.128, to the extent they were more
stringent than the disclosure
requirements under section 1876 of the
Act and § 417.436 of the title 42 CFR,
would only apply to the Part D portion
of a cost plan’s benefit offerings.
Response: To the extent that a
‘‘coordination’’ waiver has not been
granted under § 423.458(d), the
disclosure requirements in § 423.128
would apply to the Part D portion of a
cost plan’s benefit offering.
Comment: One commenter suggested
that section 1860D–21(e) of the Act
provides to us clear authority to allow

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

us to apply ‘‘deeming’’ authority in
§ 423.165 to cost HMOs/CMPs offering
qualified Part D coverage to cost
enrollees, which allows us to deem an
entity as meeting certain requirements
under this part if the entity is fully
accredited (and periodically
reaccredited) by a private national
accreditation organization approved by
us.
Response: We agree that section
1860D–21(e) of the Act extends the
deeming authority under § 423.165 to
section 1876 cost HMOs/CMPs,
provided the provisions of § 423.165 are
not otherwise waived under
§ 423.458(d) with respect to section
1876 cost HMOs/CMPs.
Comment: One commenter asked us
to clarify that the waiver authority in
§ 423.458(c), which permits us to waive
or modify any requirement under this
part that hinders the design of, the
offering of, or the enrollment in an
employer- or labor-sponsored group
prescription drug plan, would also
apply to section 1876 cost HMOs/CMPs.
Response: We responded to a similar
comment in the subpart J preamble. In
short, we do not interpret the statute as
permitting us to apply our waiver
authority related to employer- or laborsponsored group coverage as extending
to the Medicare Part A and B benefits
offered by a Medicare cost plan.
Comment: A few commenters asked if
section 1876 cost plans that did not
offer qualified prescription drug
coverage would be permitted to offer
non-qualified prescription drug
coverage. One commenter also asked if
such coverage would be creditable
coverage under Part D fearing that such
cost members would be penalized for
electing Part D late.
Response: Section 1876 reasonable
cost plans that do not offer their
members qualified prescription drug
coverage may offer non-qualified
prescription drug coverage to their
members, but only as an optional
supplemental benefit and in accordance
with § 417.440(b)(2). Such coverage will
be considered creditable prescription
drug coverage only if it meets the
standards set forth in § 423.56(a) of the
final rule.
Comment: One commenter asked if
we would permit cost plans to waive
Part A/B and to apply this waiver to the
Part D premium that would otherwise
be imposed on cost plan members.
Response: Such a waiver will not be
permitted. A cost plan must claim its
reasonable costs for services provided
under the plan that are covered under
Parts A and B in accordance with the
applicable requirements of part 417 of
this chapter. If the cost plan elects to

PO 00000

Frm 00234

Fmt 4701

Sfmt 4700

provide its enrollees qualified
prescription drug coverage under Part D,
payment for such benefits will be
governed by the payment rules under
this part. In other words, the financing
of services provided under the cost plan
that are covered under Parts A and B is
separate from the financing of any
qualified prescription drug coverage
provided under the plan. Please see
§ 417.534(c) where we clearly state that
‘‘no costs related to the offering or
provision of Part D benefits will be
reimbursed under this Part [417].’’ To
the extent that we permitted waiver of
A/B to apply to reduction in Part D
premiums, dollars applicable to part 417
would flow to Part D, and therefore such
a proposal cannot be allowed. If a cost
plan wants to reduce cost-sharing values
for A/B services as currently permitted,
it may continue to do so. However, the
revenue thus forgone related to benefits
offered under part 417 cannot be passed
over to reduce premiums required under
part 423.
Comment: One commenter asked if
the waiver of State premium taxes and
the preemption authority granted under
section 1860D–12(g) of the Act to PDP
sponsors and prescription drug plans
would also apply to cost plans offering
qualified Part D. The commenter
suggested that such a waiver and such
authority should also be extended to the
cost plan’s A/B benefit offerings under
part 417.
Response: We have previously
provided guidance to cost plans related
to State premium taxes. As we have
previously indicated, we do not believe
that States can impose a premium tax on
the reasonable costs that we reimburse
cost plans for covered Medicare Part A
and B services. Such payments by us do
not technically represent a premium so
much as they represent reimbursement,
under the Medicare program, for
benefits to which Medicare enrollees are
entitled. On the other hand, we have
also said that premiums changed to cost
plan members for the actuarial value of
fee-for-service deductibles and
coinsurance are properly construed as
premiums and would be correctly
subject to State taxes. On the other
hand, for premiums related to the Part
D offering of a cost plan, there is
specific preemption and waiver of State
taxes. See the subpart J preamble for an
additional discussion on this issue.
3. PACE Organizations Offering Part D
Coverage
a. Overview
Section 1860D–21(f)(1) of the Act
provides that a PACE program may elect
to provide qualified prescription drug

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
coverage to its enrollees who are Part D
eligible individuals.
Currently, sections 1894 and 1934 of
the Act require PACE organizations to
provide enrollees with all medically
necessary services including
prescription drugs, without any
limitation or condition as to amount,
duration, or scope and without
application of deductibles, co-payments,
coinsurance, or other cost sharing that
would otherwise apply under Medicare
or Medicaid. Up until January 1, 2006,
payment for drugs covered under
Medicare Parts A and B is included in
the monthly Medicare capitation rate
paid to PACE organizations for
Medicare beneficiaries, while payment
for outpatient prescription drugs is
included as either a portion of the
monthly Medicaid capitation rate paid
to PACE organizations for Medicaid
recipients, or as a portion of the amount
equal to the Medicaid premium paid by
non-Medicaid recipients.
The MMA alters the payment
structure for Part D drugs for PACE
organizations by shifting the payer
source for PACE enrollees who are fullbenefit dual eligible individuals (as
defined under section 1935(c)(6) of the
Act) from Medicaid to Medicare, and in
part from the beneficiary to Medicare in
the case of non-full-benefit dual eligible
individuals who elect to enroll in Part
D.
Consequently, in order for PACE
organizations to continue to meet the
statutory requirement to provide
prescription drug coverage to their
enrollees, and to ensure that they
receive adequate payment for the
provision of Part D drugs, from January
1, 2006 forward, we explained in the
proposed rule that PACE organizations
would need to offer qualified
prescription drug coverage to their
enrollees who are Part D eligible
individuals. We also indicated that
prescription drug coverage for PACE
enrollees who are ineligible for Part D
(Medicaid-only enrollees) would
continue to be funded by the State in
which each PACE organization is
located through its monthly capitation
payment to the PACE organization.
Section 1860D–21(f)(1) of the Act
provides that in the case of a PACE
program that elects to provide qualified
prescription drug coverage to its
enrollees who are Part D eligible
individuals, the requirements under this
Part apply to the provision of the
coverage in a manner that is similar to
the manner in which the requirements
apply to the provision of such coverage
under MA-PD local plans. Furthermore,
the PACE organization may be deemed
to be MA-PD local plan.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

We believe that the Congress did not
intend to alter the way in which PACE
services, including outpatient
prescription drugs, are currently being
provided to enrollees. Therefore, we
proposed that PACE organizations not
be deemed to be MA-PD local plans.
Rather, we proposed that PACE
organizations would be treated in a
manner that is similar to an MA-PD
local plan for purposes of payment
under Part D for qualified prescription
drug coverage provided under their
PACE plans. We stated that we believed
this approach was consistent with
section 1894(d)(1) of the Act, which
provides that payments will be made to
PACE organizations in the same manner
and from the same sources as payments
are made to a MA organization.
PACE organizations have a
longstanding history of providing
prescription drug coverage under the
authority of sections 1894 and 1934 of
the Act and 42 CFR part 460. Therefore,
many of the new Part D requirements
are duplicative of, conflict with, or do
not promote coordination with, the
PACE benefit. For these reasons, many
of the Part D requirements will be
waived for PACE organizations. A
background of the PACE model is
provided below, followed by a
discussion of Part D administrative and
payment related requirements as they
relate to PACE organizations.
b. Background
Sections 4801 through 4803 of the
Balanced Budget Act of 1997 (Pub. L.
105–33) established PACE as a Medicare
benefit category and a State plan option
under Medicaid. PACE organizations
provide services to frail, elderly
individuals as an alternative to nursing
home placement. The PACE benefit
currently includes all Medicare benefits
under Parts A and B, all services
covered under the Medicaid State plan,
and any other service(s) deemed
necessary by the PACE interdisciplinary
team.
The PACE benefit also currently
includes all outpatient prescription
drugs, as well as over-the-counter
medications that are indicated by the
participant’s care plan. Thus, all PACE
organizations currently provide at least
the equivalent of qualified prescription
drug coverage as described under
subpart C.
PACE organizations are risk-bearing
entities that receive a capitated monthly
rate from Medicare for Medicarecovered services and from Medicaid for
Medicaid-covered services. As required
by sections 1894(f)(2)(B) and
1934(f)(2)(B) of the Act, the PACE
organization pools payments received
from all sources in order to provide all

PO 00000

Frm 00235

Fmt 4701

Sfmt 4700

4427

services needed by its enrollees,
including services covered by neither
Medicare nor Medicaid. Currently, most
PACE enrollees are dually eligible for
Medicare and Medicaid; however,
participants may be eligible for
Medicare only or Medicaid only.
Sections 1894(b)(1)(A) and 1934(b)(1)(A)
of the Act require the PACE
organization to provide all covered
services to enrollees regardless of the
source of payment. Sections
1894(b)(1)(A)(i) and 1934(b)(1)(A)(i)
further clarify that PACE programs
cannot charge deductibles, co-payments,
coinsurance, or other cost-sharing
responsibilities to PACE participants.
Consequently, a PACE organization may
not charge its participants any cost
sharing.
The PACE Medicare and Medicaid
regulations are located in 42 CFR part
460. As directed by sections 1894 and
1934 of the Act, these regulatory
requirements are a blend of MA and
Medicaid managed care requirements,
as well as requirements from the PACE
Protocol that was created by On Lok,
Inc. under a demonstration waiver
program with the Secretary. Thus,
although certain PACE requirements are
the same or similar to MA and Medicaid
managed care requirements, many are
unique to PACE.
We received 11 formal letters of
comment from industry representatives,
PACE organizations, States, and
contractors. Most commenters identified
multiple concerns, regarding the Part D
administrative and payment related
provisions in relation to PACE. Many
commenters also expressed support for
the waivers we proposed, as well as
recommended that we waive additional
Part D rules because they conflict with,
duplicate, or do not promote
coordination with, the PACE statute and
regulations. We thank the commenters
who submitted comments on waiver
issues, and we have summarized all of
the comments below. However, as
explained below, we have chosen to
finalize only our proposed waiver of
section 423.265(b), which would have
required PACE organizations planning
to offer Part D prescription drug plans
to submit bids and supplemental
information no later than the first
Monday in June of each year. We will
issue further guidance that will list
additional Part D provisions that we
will waive for PACE organizations. In
issuing such guidance, we will take into
consideration all of the comments we
received regarding waivers.
c. Application of Payment Related Part
D Requirements to PACE Organizations
In using the term, payment related
requirements, we are referring to

E:\FR\FM\28JAR2.SGM

28JAR2

4428

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

subparts F, G, and P of this regulation
concerning submission of bids and
monthly beneficiary premiums, plan
approval, payments to PACE
organizations for qualified prescription
drug coverage, and premium and costsharing subsidies for low-income
individuals.
In accordance with subpart F, we
proposed that each organization would
submit a Part D bid that would reflect
its average monthly revenue
requirements to provide qualified
prescription drug coverage, including
enhanced alternative prescription drug
coverage, for a Part D eligible individual
with a national average risk profile. This
bidding process would have occurred in
a similar manner as for traditional Part
D plans. In accordance with
§ 423.265(c)(3) of this regulation, Part D
bids were to be prepared according to
CMS guidelines on actuarial valuation
and actuarially certified.
We also proposed that plans would
use qualified actuaries to prepare their
bids in accordance with these
principles. However, we were
concerned that requiring small PACE
organizations to independently contract
with actuaries would be costly and
burdensome. In order to minimize their
cost, we suggested that PACE
organizations collectively contract with
an actuary to develop the methodology
for establishing a bid, but stated that
each bid would need to be actuarially
certified.
Finally, we indicated that since PACE
organizations are required to enroll
Medicare-only individuals who meet
PACE eligibility requirements, all PACE
organization bids would be required to
include the portion of the bid
attributable to the cost of providing the
enhanced alternative prescription drug
coverage.
In the proposed rule, we proposed
policies addressing each of the three
primary categories of PACE enrollees:
individuals enrolled in Medicaid, but
not Medicare (Medicaid-only);
individuals enrolled in Medicare and
Medicaid (Dual eligible individuals);
and individuals enrolled in Medicare,
but not Medicaid (Medicare-only).
First, we indicated that prescription
drug coverage for Medicaid-only
enrollees would continue to be funded
by Medicaid through a portion of the
monthly capitation rate paid to the
PACE organization because these
enrollees are ineligible to receive Part D
prescription drug coverage.
For dual eligible and Medicare-only
PACE enrollees, we proposed that PACE
organizations would offer enhanced
alternative prescription drug packages
with no enrollee cost sharing.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

For both dual eligible individuals and
Medicare-only enrollees, we proposed
that we would pay PACE organizations
the direct subsidy, calculated under
§ 423.329(a)(1). In addition, the PACE
organization would receive low-income
premium and subsidy payments or
partial subsidy payments for those
enrollees who qualify for the lowincome subsidy. We noted that dual
eligible beneficiaries would be deemed
eligible for the full low-income subsidy
under § 423.773(c), which included a
premium subsidy not to exceed the
basic premium for coverage under the
Part D plan selected by the beneficiary,
but no more than the greater of the lowincome benchmark premium amount or
the lowest beneficiary premium amount
for a PDP offering basic prescription
drug coverage in the PDP region where
the beneficiary resides. To the extent a
discrepancy occurred between the lowincome premium amount and PDP or
MA-PD plan’s bid, § 423.286(d)(1) of the
proposed rule required beneficiaries to
pay this amount as a premium which
would have been established by the PDP
or MA-PD plan during the bidding
process. The PACE regulations,
however, conflict with this Part D
provision since they preclude a PACE
organization from charging premiums to
dual-eligibles.
In addition, Medicare-only enrollees
would have been required to account for
the additional cost of providing a
prescription drug package to enrollees
without the application of cost sharing.
This amount would have represented
the ‘‘enhanced’’ portion of the Part D
premium. Because PACE organizations
are not precluded from charging
premiums to Medicare-only enrollees, it
would have been permissible for them
to pass on the responsibility for any
payment discrepancy and enhanced
alternative coverage to their Medicareonly enrollees in order to comply with
Part D requirements. The premium
amounts actually paid by enrollees
would have varied depending on
whether the enrollee was eligible for
both Medicare and Medicaid or only
eligible for Medicare and according to
whether the enrollee qualified for the
low-income premium subsidy.
We were concerned about the impact
on low-income dual eligible and
Medicare-only PACE enrollees and
requested public comment on other
approaches to handling this premium
differential.
We also indicated in the proposed
rule that reinsurance and risk corridor
costs as defined in § 423.308 would be
applicable to PACE organizations and
that PACE organizations would be
required to track allowable costs for all

PO 00000

Frm 00236

Fmt 4701

Sfmt 4700

Part D eligible PACE enrollees
pertaining to reinsurance payments and
under § 423.336(c) pertaining to risk
corridor amounts. Specifically, lowincome subsidy amounts received by
the PACE organizations would count
towards the annual out-of-pocket
threshold applicable to reinsurance.
Comment: We received many bidding
related comments. Some commenters
requested that PACE organizations not
be required to bid, others requested that
PACE organizations be permitted to
delay their bid submission until after
the average benchmark premium and
low income subsidy amounts are set,
and others requested that we grant a
waiver of the bidding requirements
under subpart F of the proposed rule on
behalf of PACE organizations.
Commenters viewed the bidding process
as administratively burdensome and
costly to small scale PACE organizations
that are currently able to effectively
provide prescription drug coverage to
enrollees under the authority of the
PACE statutes and regulations.
Commenters did not view the bidding
approach outlined in the proposed rule
to be consistent with the unique
attributes of PACE, including existing
PACE statutory and regulatory guidance
for the provision of prescription drugs
which precludes cost sharing and small
PACE organization enrollment as
compared with traditional Part D plans.
Some commenters proposed a
transition period during which PACE
organizations would base their Part D
bid on the amounts currently paid to
them by Medicaid for drug coverage.
These commenters recommend that we
utilize the same data gathered under
section 1935(c) of the Act as a basis for
paying PACE organizations for the
prescription drug costs of dually eligible
individuals enrolled in PACE. Each
State currently providing PACE as an
option under its State plan would be
required to reduce its capitation
payment for dual eligible PACE
enrollees by the amount of Medicaid
expenditures for Part D covered drugs
beginning January 2006. The difference
between the old and new State payment
amounts would be the basis for the
PACE organizations’ bids. Specifically,
in States with more than one PACE
organization, the bids of all PACE
organizations located in the same State
would be equal.
These commenters indicate that this
proposed bidding approach would not
only be consistent with the current cost
of providing prescription drug coverage
to the PACE population, but it would be
less administratively burdensome to
small organizations. In addition, a
transition approach would also allow

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
us, States, and the industry additional
time to evaluate the impact of Part D on
PACE and develop a payment approach
consistent with the PACE model. The
commenters proposed that the transition
period continue until an evaluation of
the impact of the Part D program on
PACE could be completed or
appropriate legislative or regulatory
changes could be made to reconcile the
conflicting provisions of the PACE and
Part D requirements.
Response: Because the MMA shifts
responsibility for prescription drugs
from Medicaid to Medicare for the fullbenefit dual eligible beneficiaries, it will
no longer be possible for PACE
organizations to receive prescription
drug payment on behalf of these
beneficiaries from Medicaid. In
addition, section 1860D–21(f) of the Act
indicates that to the extent a PACE
program elects to provide qualified
prescription drug coverage to Part D
eligible individuals, Part D requirements
apply to the provisions of such coverage
in a manner that is similar to that of
MA-PD local plans. As stated
previously, PACE organizations will be
treated in a manner that is similar to
that of MA-PD local plans, including the
bidding provisions of subpart F. We do
not view the proposed transition period
as ‘‘similar to’’ the requirements under
which MA-PD plans will operate. In
addition, section 1860D–21(f)(3) of the
Act implies that PACE organizations
will submit bids by indicating that
PACE organizations bids will not be
included in national average benchmark
amounts. We do not have the statutory
authority to waive the Part D bidding
requirement. Thus, PACE organizations
will be required to submit bids in
accordance with subpart F.
Comment: Many commenters
expressed concern that requiring PACE
plans to bid, and basing premium and
subsidies on MA-PD bids rather than
PACE bids will create an unlevel
playing field for PACE.
Commenters were concerned that the
small size of PACE organizations will
hinder their ability to achieve volume
related price breaks from drug
manufacturers that may be available to
the larger Part D plans. Thus, PACE
organization Part D bids will be higher
than those of traditional Part D plans.
Because PACE organizations primarily
serve dual eligible individuals with the
exception of a few low-income
Medicare-only enrollees, subsidy
payments that accurately capture the
cost of providing prescription drugs will
be critical to the continued financial
stability of PACE organizations. This
importance is magnified by existing
PACE statutory and regulatory

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

provisions that preclude PACE
organizations from imposing enrollee
cost sharing upon any enrollee and from
imposing premiums upon any Medicaid
eligible enrollee. Thus, commenters
believed that it was essential that the
low-income premium and subsidy
payments paid by us to PACE
organizations on behalf of low-income
enrollees be comparable to the cost of
providing the benefit.
Response: We agree that PACE
organizations differ from traditional Part
D plans in terms of the number of
enrollees. Thus, we do not view PACE
organizations as closely comparable to
traditional Part D plans for purposes of
competition.
We believe that the small size of
PACE organizations will hinder their
ability to achieve volume related price
breaks from drug manufacturers that
may be available to the larger Part D
plans. Thus, PACE organizations’ Part D
bids will be higher than those of
traditional Part D plans. The MMA
addresses this key difference,
specifically as it relates to payment in
section 1860D–21(f)(3) of the Act by
indicating that the bids of PACE
organizations are not to be included in
determining the standardized bid
amount. Ironically, however, bids
included in the computation of the
standardized bid amount are directly
related to subsidy payments made to all
plans, including PACE organizations.
Because PACE organizations primarily
serve dual eligible individuals, with the
exception of a few low-income
Medicare-only enrollees, subsidy
payments that accurately capture the
cost of providing prescription drugs will
be critical to the continued financial
stability of PACE organizations. This
importance is magnified by existing
PACE statutory and regulatory
provisions that preclude PACE
organizations from imposing enrollee
cost sharing upon any enrollee and
PACE regulatory provisions that
preclude PACE organizations from
imposing premiums upon any Medicaid
eligible enrollee. Thus, it is essential
that the direct subsidy, as well as the
low-income premium and subsidy
payments paid by us to PACE
organizations on behalf of low-income,
enrollees be comparable to the cost of
providing the benefit.
The MMA did not amend sections
1894 and 1934 of the Act and it is clear
that Part D applies to PACE. We have
determined that the conflicting PACE
and Part D requirements related to
beneficiary cost sharing and the PACE
preclusion of charging any Medicaid
eligible enrollee a premium would
result in a significant Part D payment

PO 00000

Frm 00237

Fmt 4701

Sfmt 4700

4429

discrepancy to PACE organizations
absent our intervention. As a result, we
are considering the application of
section 1894(d)(2) of the Act and
§ 460.180(b)(5) of the PACE regulation
authority which authorize the Secretary
to adjust payment to PACE
organizations based on ‘‘other factors’’
as appropriate. These adjustments will
take into account the PACE preclusion
of and the preclusion of charging any
Medicaid eligible enrollee a premium.
Additional CMS guidelines will be
issued to PACE organizations following
publication of this rule. These
guidelines will outline the PACE/Part D
payment methodology, including an
appropriate payment adjustment
applicable to PACE organizations. We
believe that this guidance will minimize
disruption to PACE organizations and
their enrollees.
Comment: We received public
comment in support of our proposed
waiver on behalf of PACE organizations
of the bid submission deadline of no
later than the first Monday in June for
each Part D plan intending to offer a
Part D prescription drug plan in the
subsequent calendar year under
§ 423.265(b).
Response: As indicated in the
proposed rule, a new PACE organization
may take from 2.5 to 3 years to develop
the capacity to offer PACE services,
including capital expenditures
associated with construction or
renovating space for a PACE Center. In
addition, as required by sections 1894
and 1934 of the Act, many activities
associated with PACE involve the
States. For example, PACE applications
are submitted to the State for review
prior to our review and the PACE
program agreement is a 3–party
contract; CMS, the State in which the
potential PACE program is located, and
the PACE organization. Although we
originally proposed that the bid
submission deadline be broadly waived
for all PACE organizations, we would
like to clarify that we expect PACE
organizations that are operational prior
to the first Monday in June of each year
to meet the bid submission deadline.
However to the extent they are unable,
we will waive the bid submission
deadline for those organizations since
PACE bids are not included in the
computation of any average benchmark
amount or low-income benchmark
premium amount. In addition, we do
not believe that it would be appropriate
for a potential PACE organization that
contracts with us after the June deadline
to be unable to receive payment under
Part D until the following year’s June
deadline is met and the bid has been
approved. Therefore, the requirement of

E:\FR\FM\28JAR2.SGM

28JAR2

4430

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

§ 423.265(b) of this regulation will also
be waived on behalf of potential PACE
organizations which are not operational
by the first Monday in June in order to
promote coordination of benefits
between Part D and PACE. As a result,
new PACE organizations will be
permitted to submit their Part D bids
beyond the June deadline.
Further discussion of Part D waivers
on behalf of PACE organizations is
included below.
d. Application of Administrative
Related Part D Requirements to PACE
Organizations
In using the term, administrative
related requirements, we are referring to
requirements that pertain to subparts A,
B, C, D, I, J, K, L, M, N, and O, of this
regulation concerning general Part D
provisions, eligibility and enrollment,
benefits and beneficiary protections,
cost control and quality improvement,
compliance with State law and
preemption by Federal law,
coordination under Part D with other
prescription drug coverage, application
of procedures and contracts, the effect of
a change of ownership or the leasing of
facilities, grievances and appeals,
coverage determinations, Medicare
contract determinations, and sanctions.
In the proposed rule we identified
several administrative related Part D
provisions that we intended to waive on
behalf of PACE organizations.
(1) Sections 423.48 and 423.128 of the
proposed rule specified requirements
for providing information about Part D
and for the dissemination of plan
information. These sections also
indicated that plans would be required
to provide information to CMS
regarding benefits, formularies,
premiums, , and enrollee satisfaction.
This information would be published in
Medicare’s comparative plan brochures
and provide key information for
beneficiaries to use in making informed
decisions about Part D prescription drug
coverage. We indicated that the
differences between MA-PD plans/PDPs
and PACE would complicate
comparison and confuse beneficiaries.
In addition to specific eligibility
requirements for enrollment in PACE,
PACE organizations exist only in those
States that elect to include PACE in
their Medicaid State plan. We indicated
that including PACE information in the
comparative brochure would be
misleading. As a result, we proposed
that the requirements for providing
information about Part D and for the
dissemination of plan information be
waived on behalf of PACE organizations
in order to promote the coordination of
benefits between Part D and PACE.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(2) Section 423.104(g) of the proposed
rule would require MA-PD plans and
PDPs to provide enrollees with access to
negotiated drug prices. Since PACE
enrollees receive the vast majority of
their prescription drugs directly from
the PACE organization with no applied,
the negotiated price requirement is
already accounted for under part 460.
Therefore, we proposed a waiver of
§ 423.104(g) in order to promote better
coordination of benefits between Part D
and PACE.
(3) Section 423.120(a)(1) of the
proposed rule would require that a
plan’s contracted pharmacy network be
located within specified distances from
enrollees. Because PACE enrollees
receive their prescription drugs directly
from their PACE organization as
opposed to through a pharmacy, the
distance between the enrollee and a
network pharmacy is irrelevant. We
believe that requiring a PACE
organization to set up a pharmacy
network would be burdensome, costly,
and unnecessary and diverts funds from
patient care. Thus, we proposed to
waive this requirement in order to
promote better coordination of benefits
between PACE and Part D.
(4) Section 423.120(c) of the proposed
rule would require plans to employ the
use of a card or other type of
standardized technology to assist
enrollees in accessing negotiated prices
for Part D drugs. Since PACE
participants do not routinely acquire
their prescription drugs directly from
pharmacies, requiring PACE
organizations to develop standardized
technology would be burdensome,
costly, and unnecessary and diverts
funds away from patient care. Therefore,
we proposed to waive proposed
§ 423.120(c) under the authority of
section 1860D–21(c)(2) of the Act for
PACE organizations to promote better
coordination of benefits between Part D
and PACE.
(5) Section 423.124 of the proposed
rule specified access requirements for
drugs obtained through out-of-network
pharmacies. These provisions would
ensure that enrollees residing in long
term care facilities have access to drugs
in an out-of-network long term care
pharmacy and AI/AN enrollees have
access to an out-of-network I/T/U
pharmacy. Enrollees who obtain their
Part D covered drugs from these out-of­
network pharmacies would be
financially responsible for deductibles
or applicable under network
pharmacies.
Under the current PACE regulations
in § 460.90(a) and § 460.100, PACE
organizations are responsible for all
prescription drugs, including those

PO 00000

Frm 00238

Fmt 4701

Sfmt 4700

provided to any participants residing in
long term care facilities, AI/AN
participants, and those associated with
an emergency health event or an
approved urgent care need. As noted
previously, PACE participants are not
responsible for deductibles, co­
payments, coinsurance, or other
associated with prescription drugs. In
the PACE program, when participants
are out of the service area and need
prescription drugs, the PACE
organization would arrange payment in
full with the pharmacy.
As noted previously, PACE
organizations are required to provide all
PACE enrollees with prescription drug
coverage. Therefore, we view the out of
network pharmacy requirements as
duplicative of PACE regulations. Thus,
we proposed to waive § 423.124 of the
proposed rule for the reasons noted
above.
(6) Section 423.104(g)(2) of the
proposed rule specifies that a plan may
not offer enhanced alternative
prescription drug coverage unless it also
offers basic prescription drug coverage.
In this instance, PACE organizations
vary from MA-PD plans in that their
enrollees are exempt from . It would be
impractical to offer basic prescription
drug coverage to PACE enrollees
because stand-alone basic prescription
drug coverage assumes beneficiary.
Thus, we proposed to waive
§ 423.104(g)(2) of the proposed rule to
promote coordination of benefits
between Part D and PACE.
(7) Public disclosure requirements in
proposed § 423.132 provide that a PDP
or MA-PD plan must ensure that its
pharmacies inform enrollees of any
differential between the negotiated price
for a covered Part D drug and the lowest
priced generic equivalent. This
requirement is inconsistent with the
PACE model. PACE participants or their
caregivers work with the PACE
interdisciplinary team in making care
planning decisions and have input into
all aspects of their care, including
prescription drug use. For this reason,
we proposed a waiver of the public
disclosure requirement in proposed
§ 423.132 under the authority of section
1860D–21(c)(2) of the Act for PACE
organizations in order to promote better
coordination of benefits between Part D
and PACE.
(8) Requirements associated with
privacy, confidentiality, and accuracy of
enrollees’ records under Part D are
included in § 423.136 of the proposed
rule. We view these requirements as
duplicative of § 460.200(e) of the PACE
regulation. We believe that the PACE
regulations are providing the same
protections as would be provided under

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
proposed § 423.136. For the reasons
noted above, we proposed to waive
§ 423.136. We note that we also believe
the requirements of § 423.136 are
duplicative of § 460.210 of the PACE
regulation.
(9) The medication therapy
management program requirements in
proposed § 423.150 would require MAPDs and PDPs to employ pharmacists to
counsel beneficiaries who have chronic
conditions and use multiple drugs to
ensure they are taking safe combinations
of prescription drugs and using the
drugs properly. PACE enrollees
typically suffer from multiple health
conditions that necessitate close
monitoring by their interdisciplinary
team. Currently, PACE organizations
have pharmacists on staff or under
contract, working with PACE primary
care physicians as they develop the
participants’ care plans and monitor
their drug regimens. In addition, the
PACE interdisciplinary team, through
its daily interactions with PACE
participants and their caregivers,
provides counseling to ensure that
medication regimens are followed. We
believe that the existing PACE
regulations satisfy or exceed the
medication therapy management
program requirements in proposed
§ 423.150. For the reasons noted above,
we proposed to waive § 423.150 for
PACE organizations in order to promote
the coordination of benefits between
Part D and PACE.
(10) Proposed § 423.401 specifies
licensing requirements for PDPs. A PDP
must be organized and licensed under
State law as a risk-bearing entity eligible
to offer health insurance or health
benefits coverage in each State in which
it offers a prescription drug plan. A
similar requirement exists for MA-PDs.
Organizations that are not licensed
under State law would obtain
certification from the State that the
organization meets financial solvency
and other standards required by the
State for it to operate.
We view these requirements as
duplicative of PACE requirements. First,
sections 1894(e)(2)(iv) and 1943(e)(2)(iv)
of the Act require PACE organizations to
meet applicable State and local laws
and requirements. In addition, sections
1894(f)(2)(B)(v) and 1934(f)(2)(B)(v) of
the Act require PACE organizations to
be at full financial risk. Therefore, we
believe PACE organizations are meeting
the intent of these MA requirements.
For the reasons noted above, we
proposed to waive § 423.401 for PACE
because we believe this section is
duplicative of PACE requirements.
(11) Subpart M proposed process
requirements for grievances, coverage

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

determinations, reconsiderations, and
appeals under Part D. We believe the
PACE grievance and appeals processes
under § 460.120 and § 460.122 meet the
intent of the MMA since they would
accommodate complaints regarding
prescription drug coverage. Therefore,
we proposed to waive § 423.560 through
§ 423.638 for PACE organizations
because we believe they are duplicative
of PACE requirements.
(12) Subpart K includes requirements
governing the application process,
contracts with PDP sponsors, and
reporting requirements. Sections 1894
and 1934 of the Act, as well as PACE
regulations in subparts B and C specify
application and contract (called a
program agreement in accordance with
sections 1894 and 1934 of the Act)
requirements for PACE that duplicate
requirements in subpart K. For this
reason, we proposed to waive the
sections in subpart K that address the
application process and contract
requirements.
We concluded by requesting comment
on these proposed waivers including
any additional waivers that may be
needed to integrate the Medicare
prescription drug benefit and the PACE
benefit.
Commenters expressed support for all
the administrative related waivers on
behalf of PACE organizations that were
identified in the proposed rule,
requested clarification as to the breadth
of specific waivers, and identified
additional waivers that would be
necessary to minimize disruptions to
the PACE program in implementing Part
D.
We proposed in § 423.458(d) of the
proposed rule to codify section 1860D–
21(c)(2) of the Act (as extended to PACE
organizations under section 1860D–
21(f)(1) of the Act), which establishes
authority for us to waive Part D
provisions for PACE organizations that:
(1) duplicate PACE requirements; (2)
conflict with PACE provisions; or, (3) as
may be necessary to improve the
coordination of benefits provided under
Part D and the PACE program. Thus, we
begin with a discussion of the
administrative related Part D
requirements.
Comment: One commenter requested
confirmation as to whether PACE
organizations will be required to
provide Part D coverage to its enrollees
who are Part D eligible individuals
because section 1860D–21(f)(1) of the
Act indicates that PACE organizations
have a degree of discretion in whether
or not to provide Part D coverage.
Another commenter stated that to
require a PACE eligible individual to
obtain prescription drug coverage from

PO 00000

Frm 00239

Fmt 4701

Sfmt 4700

4431

a plan other than PACE (a PDP for
example) would fragment care
coordination associated with PACE.
Response: Section 1860D–21(f)(1) of
the Act provides that PACE programs
may elect to provide qualified
prescription drug coverage to Part D
eligible individuals enrolled in the
program. However, section 1935(c)(6) of
the Act prohibits Medicaid from paying
for Part D drugs provided to full-benefit
dual eligible individuals and requires
that these drugs be paid for under
Medicare Part D. Due to this statutorily
mandated shift in payer from Medicaid
to Medicare for full-benefit dual eligible
individuals, we believe that PACE
organizations will elect to provide Part
D coverage to full-benefit Part D eligible
individuals in order to receive adequate
payment for providing Part D drugs.
In addition, section 1894(a)(1)(B)(i) of
the Act requires that PACE enrollees
receive Medicare benefits solely through
the PACE program, and, therefore,
prohibits them from simultaneously
enrolling in both a PACE program and
a separate Part D plan. As discussed
elsewhere in this preamble under
subpart B, Part D eligible individuals
who enroll in a PACE plan offering
qualified prescription drug coverage
under Part D will be deemed to have
elected to receive their Part D benefits
through such PACE plan, and will be
ineligible to enroll in another Part D
plan, including a PDP. In addition,
§ 423.32(f) specifies that enrollees of
PACE organizations offering qualified
prescription drug coverage shall remain
enrolled in that plan as of January 1,
2006 and receive benefits offered by that
plan until one of the conditions of
§ 423.32(e) is met.
Effective January 1, 2006, States will
continue to include the cost of
prescription drugs in their monthly
capitation payments to PACE
organizations on behalf of those
individuals ineligible for Part D
coverage (Medicaid-only enrollees).
Comment: We received a comment
indicating that there are cost benefits of
the PACE model as an alternative to
nursing home care. The commenter
indicated that implementation of Part D
should not place excessive burdens on
PACE organizations and recommended
that we develop a workgroup with the
National PACE Association (NPA) and
States in order to work through the
administrative related issues with
implementing Part D into PACE so as to
minimize the administrative burden on
PACE organizations.
Response: We appreciate the potential
burden associated with implementing
the Part D benefit into the existing PACE
model. As a result, we proposed to

E:\FR\FM\28JAR2.SGM

28JAR2

4432

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

utilize waiver authority under
§ 423.458(d) of this rule: (1) in instances
where Part D requirements are
duplicative of PACE requirements; (2) in
instances where Part D requirements
conflict with PACE requirements; or, (3)
in order to promote coordination
between Part D and PACE. Under this
authority, we are waiving section
423.265(b), which would have required
PACE organizations planning to offer a
Part D prescription drug plan to submit
bids and supplemental information no
later than the first Monday in June of
each year. We will also use this
authority to issue further guidance
regarding additional Part D provisions
that will be waived for PACE
organizations. We believe that these
waivers will minimize the
administrative burden on PACE
organizations that elect to provide Part
D coverage.
Comment: We received many
comments supporting our proposal to
identify Part D provisions that we will
waive on behalf of PACE organizations
without requiring individual waiver
applications. One commenter also
requested that we outline a waiver
application process that could be
followed by organizations to the extent
additional waivers are identified after
publication of this final rule. As waivers
are granted through this process, the
commenter requested that we apply the
waivers to other similarly situated
organizations offering or seeking to offer
qualified prescription drug coverage as
a PACE organization that otherwise
meets conditions of the waiver.
Other commenters requested that
PACE waivers apply to other similar
health plans such as social HMOs,
Massachusetts Senior Care Options
programs, or other plans that also serve
significant numbers of full-benefit dualeligible individuals.
Response: We believe that the
application of § 423.458(d) waivers will
minimize disruption of the positive
aspects of the structure of PACE.
However, to the extent a PACE
organization identifies a specific need
for additional Part D waivers, the
organization may request such waivers
from us under the authority of
§ 423.458(d) of this regulation. We will
determine on a case-by-case basis
whether to grant the waiver. If we grant
it, the waiver will apply to all similarly
situated PACE organizations, but will
not apply to non-PACE organizations.
The waiver submission and review
process for PACE organizations will be
issued as additional CMS guidance. We
will issue additional guidance to these
programs following publication of this
rule.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

The following list summarizes
comments we received on waiver issues.
As stated previously, the only waiver
we are finalizing at this time is a waiver
of the June bid submission deadline in
section 423.265(b). We will take into
consideration comments regarding other
waivers and issue further guidance on
the Part D provisions that will be
waived for PACE organizations.
(1) Several commenters indicated that
due to the differences between
traditional Part D plans and PACE,
inclusion of PACE in a comparison
brochure would confuse beneficiaries.
These commenters supported our
proposal to waive § 423.48 and
§ 423.128 concerning plan information.
However, one commenter expressed
concern that those eligible for special
programs such as PACE, should be
informed of all choices available under
Part D. This information should include
differences between obtaining services
from a traditional Part D plan or PACE.
The commenter believed that
beneficiaries should also be informed of
what would occur if they disenrolled
from PACE to obtain benefits from a
PDP. This commenter would like to
work with us in developing appropriate
materials and distribution mechanisms.
(2) One commenter asked for
clarification that PACE organizations
will not be required to share in the cost
of enrollment related costs under
§ 423.6, reasoning that PACE
organizations are neither subject to MA
requirements related to dissemination of
annual enrollment information, nor do
PACE organizations contribute towards
their costs.
(3) Commenters indicated that to the
extent requirements under § 423.44 are
duplicative of requirements under
§ 460.164 through § 460.172 of the PACE
regulation or impede coordination of
PACE and Part D benefits, these
requirements should be waived,
allowing for continued coordination of
the prescription drug benefit with all
other benefits provided by PACE
organizations. One commenter
recommended that existing
requirements governing disenrollment
from PACE organizations should apply
in lieu of § 423.44.
(4) We received a comment in support
of our proposed waiver of
§ 423.104(g)(2) of the proposed rule
(now identified as § 423.104(f)(2) in the
final rule) that indicates that a plan may
not offer enhanced coverage for
purposes of reducing co-payments and
deductibles unless it also offers a plan
with basic coverage. The commenter
agreed with our rationale indicating that
it would be impractical for a PACE
organization to offer basic prescription

PO 00000

Frm 00240

Fmt 4701

Sfmt 4700

drug coverage to PACE enrollees
because stand-alone basic prescription
drug coverage assumes beneficiary
which is a PACE statutory preclusion.
(5) Commenters supported our
proposal to waive the negotiated price
requirements of § 423.104(h) of the
proposed rule (now identified as
§ 423.104(g) in this final rule). One
commenter pointed out that we had
incorrectly referred to this section as
§ 423.104(g) on page 46756 of the
proposed rule.
(6) Commenters concurred with our
proposal to waive the pharmacy access
requirements under § 423.120(a)(1). In
addition, a commenter recommended a
waiver of § 423.120(a)(4) of the
proposed rule (now identified as
§ 423.120(a)(8) in the final rule) related
to pharmacy network contracting. PACE
organizations generally have close
working relationships with a very
limited number of pharmacies that can
respond to the specialized requirements
of PACE enrollees, for example, 24/7
access and specialized dispensing
requirements. Requiring PACE
organizations to contract with any
willing pharmacy provider is not
consistent with the PACE model and
could compromise the PACE
organizations’ ability to negotiate
favorable contract terms based on
volume with one or two suppliers.
(7) One commenter indicated that
PACE organizations typically provide an
open formulary to the primary care
physicians that allow immediate access
to a wide variety of covered Part D
prescription drugs in many different
dosages and delivery forms. These open
formularies do not restrict access or
result in co-payment amounts charged
to enrollees. Thus, the commenter does
not believe the formularies used by
PACE organizations should be subject to
the requirements of § 423.120(b). This
commenter also asked for clarification
as to whether ‘‘preferred drug lists’’
utilized by PACE organizations would
be subject to the requirements of
§ 423.120(b). These lists provide
prescribing physicians with current data
on the relative costs of various
medications, such as name brand vs.
generic alternatives. Physicians are not
restricted from prescribing alternatives
that do not appear on the preferred drug
list, and the list does not result in co­
payment amounts charged to enrollees.
The commenter recommended that
these preferred drug lists not be subject
to the requirements of § 423.120(b).
(8) Several commenters concurred
with our proposal to waive the
standardized technology requirements
of § 423.120(c). One commenter
suggested that such technology be

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
limited to one card in order to avoid
data sharing and coordination
requirements.
(9) Several commenters concurred
with our proposal to waive the out-of­
network pharmacy requirements of
§ 423.124.
(10) Several commenters concurred
with our proposal to waive the
disclosure of price differences between
the Part D drug and generic equivalent
requirement of § 423.132.
(11) Several commenters concurred
with our proposal to waive the privacy,
confidentiality, and accuracy of records
requirements of § 423.136.
(12) One commenter requested
clarification regarding our proposal to
waive the MTMP requirements of
§ 423.150 and whether we had intended
to list the additional provisions of this
section including cost and utilization
management programs, quality
assurance programs, programs to control
fraud, abuse, and waste, CMS consumer
satisfaction surveys, an electronic
prescription program, and accreditation.
The commenter believes that the
existing PACE requirements satisfy or
exceed each of these requirements.
(13) We received a comment
requesting that consumer satisfaction
surveys administered to PACE enrollees
under § 423.156 take into account the
differences between PACE enrollees and
traditional Part D plan enrollees.
(14) We received a comment
requesting that quality improvement
organization activities performed under
§ 423.162 take into account the
differences between PACE enrollees and
traditional Part D plan enrollees.
(15) We received public comments
concurring with our proposal to waive
the licensure requirements of § 423.401
to reflect that PACE organizations’ fiscal
soundness is governed by requirements
under sections 1894(e)(2)(iv) and
1934(e)(2)(iv) of the Act and § 460.80 of
the PACE regulation.
(16) We received public comments of
concurrence of our proposal to waive
the application requirements of subpart
K of this rule, agreeing that these
requirements are addressed under
subparts B and C of § 460. This
commenter also requested that we
utilize information already available in
PACE organizations provider
applications and program agreements to
the greatest extent possible.
(17) One commenter requested
clarification as to whether the
requirements of the following sections
would be waived on behalf of PACE
organizations; § 423.502, § 423.503,
§ 423.504, § 423.505, § 423.506,
§ 423.507, § 423.508, § 423.509,
§ 423.510, and § 423.514. The

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

commenter indicated that these
requirements duplicate current PACE
requirements.
(18) Commenters also indicated that
the requirements of subpart K would be
burdensome for plans, providers, and
pharmacies in terms of tracking
coverage issues. Adherence to these
requirements would result in significant
new expenditures for plans, advocates,
clinics, pharmacies, long term care
providers, and other providers in terms
of care coordination and advocacy for
beneficiaries to access the correct
coverage. It will also be necessary to
coordinate with other Part D plans
concerning low-income enrollees at risk
for institutionalization. The commenter
suggests that we hire an outside
facilitation contractor to review and
match data with mechanisms similar to
sharing of information on crossover
claims. Yet, the commenter has
concerns about the ability of States,
plans, providers, and others to gear up
quickly to handle the tracking and
interface that working with these
contractors would require.
(19) In addition, one commenter
indicated that the minimum enrollment
requirements of § 423.512 of the
proposed rule should be waived on
behalf of PACE organizations as such
requirements do not currently apply to
PACE organizations.
(20) Several commenters concurred
with our proposal to waive the
determinations and appeals processes of
subpart M on behalf of PACE
organizations. Commenters agreed that
these requirements are being met by
PACE organizations under § 460.120
and § 460.122 of the PACE regulation.
The MMA did not amend sections
1894 and 1934 of the Act and it is clear
that Part D applies to PACE. As a result,
we have determined that in order to
merge the PACE and the Part D statutory
requirements, waivers we identified in
the proposed rule, as well as waivers
beyond those identified in the proposed
rule and via public comments will be
necessary. Therefore, we are considering
the application of § 423.458(d) waiver
authority for all administrative related
Part D requirements that duplicate or
conflict with PACE requirements or do
not promote coordination between Part
D and PACE. Additional CMS
guidelines will be issued to PACE
organizations following publication of
this rule to include the waiver
submission process and a
comprehensive listing of all Part D
waivers applicable to PACE
organizations. We believe that this
guidance will minimize disruption to
PACE organizations and their enrollees.

PO 00000

Frm 00241

Fmt 4701

Sfmt 4700

4433

In accordance with § 423.458(d) of
this regulation, PACE organizations will
also be permitted to submit Part D
waiver requests beyond those identified
in CMS guidelines on an individualized
basis.
We received several comments
regarding the application of subpart S,
which pertains to State eligibility
determinations for subsidies and general
payment provisions.
Comment: One commenter
recommended that we develop a
workgroup with the NPA and States to
further discuss impacts related to the
phased-down State contribution and
PACE capitation rates. The phaseddown State contribution is a percentage
based on drug costs in the year 2003.
Subpart T of the proposed rule indicates
that States must continue to include
drug costs in the Medicaid monthly
capitation payment to PACE
organizations on behalf of Medicaidonly PACE enrollees. Thus, 2
commenters believe that States will be
required to develop two different PACE
capitation rates; one for dual eligible
beneficiaries and one for Medicaid only
enrollees. Given the small percentage of
Medicaid only PACE enrollees, the
complexities in developing a separate
Medicaid-only PACE capitation rate
may be administratively cumbersome.
Response: The MMA shifts payment
responsibility for prescription drugs
from Medicaid to Medicare for fullbenefit dual eligible beneficiaries. As a
result, States will need to take into
account the Part D premium payments
when calculating the PACE capitation
rate for full-benefit dual eligibles. The
MMA does not change the prescription
drug payment scheme for Medicaid-only
eligible beneficiaries. Thus, we agree
with the commenter that the States will
need to establish separate capitation
rates for Medicaid eligible PACE
enrollees, including one for dualeligible beneficiaries for whom the
PACE organization elects to provide Part
D coverage, and one for non-dual
eligible (Medicaid-only) beneficiaries. In
the case of full-benefit dual eligible
PACE enrollees for whom the PACE
organization elects to provide Part D
coverage, the State in which the PACE
organization is located will pay a
phased-down contribution to Medicare
that defrays a portion of the drug
expenditures for these individuals
assumed by Medicare Part D. State
Medicaid agencies will be required to
participate in this phased-down State
contribution scheme under § 423.910 of
this regulation. This amount will
capture the full extent of a State
Medicaid agency’s responsibility for
Part D prescription drug expenditures

E:\FR\FM\28JAR2.SGM

28JAR2

4434

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

on behalf of full benefit dual-eligible
beneficiaries for whom the PACE
organization elects to provide Part D
coverage. In the case of Medicaid
eligible PACE enrollees whose drug
costs continue to be funded by
Medicaid, States will continue to
include a prescription drug cost amount
in their monthly capitation payment to
PACE organizations.
4. Medicare Supplemental Policies
a. Overview and Background
In the proposed rule, we included two
provisions related to Medicare
supplemental (Medigap) policies. As
required under section 1882(v) of the
Act, as added by section 104 of MMA,
we set forth standards for the written
disclosure notice that Medigap issuers
must provide to their policyholders who
have drug coverage. In addition, in
order to reflect the addition of the
Medicare drug benefit by MMA, we
proposed to revise the definition of a
Medigap policy.
• Medicare Supplemental Policies
A Medigap policy is a health
insurance policy sold by private
insurance companies to fill the ‘‘gaps’’
in original Medicare plan coverage. A
Medigap policy typically provides
coverage for some or all of the
deductible and coinsurance amounts
applicable to Medicare covered services
and sometimes covers items and
services that are not covered by
Medicare. Under section 1882 of the
Act, Medigap policies generally may not
be sold unless they conform to one of
the 10 standardized benefit packages
that have been defined, and designated
as plans A through J, by the NAIC.
Three States (Massachusetts, Minnesota,
and Wisconsin) are permitted by the
statute to have different standardized
Medigap plans and are sometimes
referred to in this context as the waiver
States.
Three of the 10 standardized Medigap
plans (Plans H, I, and J) contain
coverage for outpatient prescription
drugs. In addition, there are Medigap
policies issued before the
standardization requirements went into
effect (‘‘prestandardized’’ Medigap
plans) that cover drugs, as well as
Medigap policies in the waiver States,
some of which have varying levels of
coverage for outpatient prescription
drugs.
• Legislative Authority and
Background
In connection with the addition of a
prescription drug benefit to Medicare,
the MMA also prescribes changes to the
law applicable to Medigap policies.
Among other requirements, section
1882(v) of the Act, as added by section

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

104 of the MMA, requires Medigap
issuers to provide a written disclosure
notice to individuals who currently
have a policy with prescription drug
coverage. (Section 1882(v)(6)(A) of the
Act specifies that this is to be called a
‘‘Medigap Rx policy.’’) The MMA also
requires that the Secretary establish
standards for this disclosure notice in
consultation with the NAIC.
The purpose of this disclosure notice
is to inform an individual who has a
Medigap Rx policy about his or her
Medigap choices once the new Medicare
Prescription Drug Benefit Program goes
into effect on January 1, 2006.
Specifically, effective on that date,
section 1882(v) of the Act will prohibit
the sale of new Medigap Rx policies,
and require the elimination of drug
coverage from Medigap Rx policies held
by beneficiaries who enroll under Part
D. The statute permits the renewal of
Medigap Rx policies if the policy was
purchased prior to January 1, 2006, and
the individual does not enroll in Part D.
In addition, beneficiaries who do not
enroll in Part D during the Initial
Enrollment Period, and choose to enroll
later, will be charged higher Part D
premiums unless they can establish that
they had creditable prescription drug
coverage prior to enrolling in Part D.
Under section 1860D–13(b)(4)(F) of the
Act, and § 423.56(a) of this rule,
Medigap policies meet the definition of
creditable prescription drug coverage if
they also meet actuarial equivalence
requirements.
Issuers of Medigap insurance policies
are required to provide disclosure
notices to policyholders with Medigap
Rx policies that inform them of their
options under the new legislation, as
well as informing them whether or not
their policies constitute ‘‘creditable
prescription drug coverage.’’ As
explained in the preamble to subpart B
of this rule, to be considered creditable
prescription drug coverage, the coverage
must be determined (in a manner
specified by the Secretary) to provide
prescription drug coverage the actuarial
value of which (as defined by the
Secretary) equals or exceeds the
actuarial value of defined standard
prescription drug coverage under
Medicare Part D. Subparts B and F of
this rule provide additional detail on
creditable coverage and actuarial
equivalence.
b. Definition of Medicare Supplemental
Policy
Because of the importance of these
disclosure notices to beneficiaries, we
believe it is necessary to clarify what
comes within the scope of a Medigap Rx
policy. We proposed to revise and
clarify the definition of a Medicare

PO 00000

Frm 00242

Fmt 4701

Sfmt 4700

supplement (Medigap) policy currently
codified at § 403.205, to reflect the
addition of the Medicare drug benefit by
MMA.
We proposed to revise the definition
of a Medigap policy, effective January 1,
2006, to include any insurance policies
or riders that contain a prescription
drug benefit, and that are primarily
designed for, or are primarily marketed
and sold to Medicare beneficiaries. We
also proposed to clarify that any rider
attached to a Medigap policy is an
integral part of the policy. All the
requirements that apply to the base
policy, such as guaranteed renewability
or disclosure requirements, would apply
to the rider. Thus, for instance, if an
issuer offers an optional prescription
drug rider that can be added to any
other policies, addition of the rider to a
Medigap policy would make the entire
policy a Medigap prescription drug
policy (Medigap Rx policy) subject to
the disclosure requirements for these
policies in section 1882(v) of the Act.
Moreover, we proposed that any
stand-alone drug policies that were not
previously considered to meet the
definition of a Medigap policy will meet
that definition as of January 1, 2006
when the prescription drug benefit takes
effect, if the policy is primarily designed
for or primarily marketed and sold to
Medicare beneficiaries. New sales of
these policies would be prohibited after
December 31, 2005.
c. Standards for the disclosure notice
that Medicare Supplemental (Medigap)
issuers are required to provide to
individuals who currently hold policies
with drug coverage
• General
We believe that the statute is quite
clear about the choices that need to be
made by beneficiaries who hold
Medigap Rx policies. Therefore, we
proposed to establish standards for the
disclosure notice in the form of a
required notice that sets forth those
choices.
• Timing and Content of the Disclosure
Notice
The statute requires Medigap issuers
to send a written disclosure notice to
each individual who is a policyholder
or certificate holder of a Medigap Rx
policy at the most recent available
address of that individual. The issuers
must send the disclosure notice during
the 60-day period immediately
proceeding the initial Medicare Part D
enrollment period. The initial
enrollment period (IEP) for Medicare
Part D runs from November 15, 2005
through May 15, 2006. Accordingly,
Medigap issuers must send the written
disclosure notice between September
16, 2005 and November 15, 2005.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
The written disclosure notice must
inform the individual of his or her
Medigap options if the individual does
or does not enroll in Medicare Part D.
These include the following:
• If the individual does enroll in Part
D, he or she can keep the Medigap
policy but the drug coverage must be
eliminated.
• If the individual enrolls in a
Medicare Part D PDP during the IEP, the
individual also has the right to buy
another Medigap plan from the same
issuer that does not include drug
coverage. The individual has a
guaranteed right to buy Plan A, B, C, or
F (including the high deductible Plan F)
or one of the new Medigap benefit
packages mandated by section 104(b) of
the MMA (which have been designated
Plans K and L), if these plans are offered
by the issuer and available to new
enrollees. The issuer may also offer
other Medigap plans on a guaranteed
issue basis.
• If the individual does not enroll in
Part D, he or she has the option of
keeping the Medigap policy with drug
coverage.
• If the individual does not enroll in
Part D during the IEP, the individual
may continue enrollment in his or her
current Medigap plan without change,
but the individual will lose the right to
buy another Medigap plan on a
guaranteed issue basis. In addition, if
the current Medigap plan does not
provide creditable prescription drug
coverage, there are limitations on the
periods in a year in which the
individual may enroll in Medicare Part
D and any such enrollment may be
subject to a late enrollment penalty
(increased premium) if the current
Medigap plan does not provide
creditable prescription drug coverage.
We also proposed to require that the
disclosure notice contain information
on the potential impact of an
individual’s election on his or her
Medigap premiums.
It is important to note that the
disclosure requirement in section 104 of
the MMA that applies to Medigap
issuers is separate from the disclosure
requirement contained in section 101 of
the MMA (section 1860D–13 of the Act).
The disclosure requirement in section
104 of the MMA applies exclusively to
issuers of Medigap policies and contains
very specific statutory criteria for the
disclosure notice. The disclosure
requirement in section 101 of the MMA
applies to various forms of prescription
drug coverage, including Medigap.
As discussed in subpart B of this
preamble, section 101 of the MMA
requires that these entities, including
Medigap issuers, disclose to the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Secretary, as well as to the Part D
eligible individuals, whether the
coverage they provide currently meets
the actuarial equivalence requirement
for creditable coverage. The entities
must also notify the individuals if the
coverage changes so that it no longer
meets the actuarial equivalence
requirement. Section 101 of the MMA
directs the Secretary to establish
procedures for the documentation of
creditable prescription drug coverage by
these entities.
• Medigap Policies as Creditable
Coverage
Medigap issuers will be responsible
for determining whether the drug
coverage under their policies is
creditable drug coverage in accordance
with subpart B of this final rule. We
cannot offer guidance for the likelihood
that any particular pre-standardized
policy, or policy in a waiver State, will
meet this test. However, for
standardized plans, the CMS actuaries
determined that drug coverage in
standardized Medigap Plans H and I
cannot meet this standard. Since
actuarial equivalence can be
demonstrated using a group’s
experience, it is possible to have a
specific group for which the drug
coverage in standardized Medigap Plan
J would be creditable prescription drug
coverage. However, based on the
distributions of drug utilization that the
actuaries have seen so far, they believe
that drug coverage in standardized
Medigap Plan J will be unlikely to meet
the definition of creditable prescription
drug coverage based on this rule.
• Required Disclosure Notice
Section 1882(v) of the Act requires us
to establish standards for the disclosure
notice that issuers must provide to
policyholders of Medigap Rx policies. In
the proposed rule, we proposed a model
disclosure notice with basic language
that would be required to be included
in all disclosure notices sent by
Medigap issuers for policies that do not
provide creditable coverage. We
respond below to comments we
received on the proposed model
disclosure notice. However, because we
have determined that the format and
content of the notice could be improved
based on information gathered through
consumer testing, we now plan to
publish the final model disclosure
notice separately from this final
regulation. We also plan to publish a
model disclosure notice for policies that
do provide creditable coverage.
Comment: We received numerous
comments related to our proposed
clarifications to the definition of a
Medigap policy. Many commenters
believe the proposed clarifications are

PO 00000

Frm 00243

Fmt 4701

Sfmt 4700

4435

too far-reaching and that all limited
health benefit plans would be
considered Medigap policies under the
proposed clarifications to the definition.
Many of these commenters added that
they do not believe that we have the
authority to make the proposed
modifications to the definition of a
Medigap policy.
One commenter supports our
clarification that a rider to a Medigap
policy becomes an integral part of the
policy. The commenter stated that it is
black-letter insurance law that a rider
attached to an insurance policy becomes
a part of the policy.
Response: We believe that the
addition of the Part D drug benefit to
Medicare makes it essential to clarify
the definition of a Medigap policy.
There has been some confusion about
whether a rider attached to a Medigap
policy is considered to be part of the
policy, and therefore subject to Medigap
requirements such as guaranteed
renewability.
Similarly, there was ambiguity in the
past about whether a policy that covered
only prescription drugs, either as a
separate, ‘‘stand-alone’’ policy or as a
rider to another policy, met the
definition of a Medicare supplement
policy. The ambiguity was created by
the fact that there was no Medicare drug
benefit to supplement, and it has been
resolved with the enactment of the
Medicare drug benefit. With respect to
both of these situations, we believe that
it is extremely important to make clear
which Medicare beneficiaries are
entitled to receive a notice about their
rights under the MMA.
First, it is necessary to clarify that a
rider to a Medigap policy is not a
separate insurance product, but rather is
incorporated into, and becomes an
integral part of, the policy. In order to
carry out the intent of the MMA
provisions, we believe that Medigap
policies with drug riders must be treated
the same as Medigap plans H, I, and J;
prestandardized Medigap Rx plans; and
Medigap plans with drug coverage in
the waiver States. Accordingly, if a
beneficiary has an outpatient
prescription drug rider attached to his
or her Medigap policy, that beneficiary
should receive the disclosure notice that
MMA requires Medigap issuers to send
to their policyholders who have
Medigap drug coverage. In addition,
because new sales of Medigap policies
with drug coverage are prohibited after
December 31, 2005, the drug coverage
offered through a rider to a Medigap
policy should be eliminated from the
policy (that is, the drug rider should be
cancelled) as of the date of the

E:\FR\FM\28JAR2.SGM

28JAR2

4436

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

individual’s enrollment in Medicare
Part D.
We also believe it is necessary to
clarify that stand-alone, limited benefit
drug policies will be considered
Medigap policies once the Part D drug
benefit is implemented, but only if the
coverage provided by the policy is
primarily designed to supplement
Medicare, or if the policy is primarily
marketed and sold to, Medicare
beneficiaries. Because these limited
benefit drug polices will not be
considered Medigap policies until the
Part D prescription drug benefit is
implemented on January 1, 2006, these
plans are not subject to the requirement
in section 104 of MMA that Medigap
issuers send a disclosure notice to
policyholders with drug coverage before
that date. However, we encourage
issuers of these policies to send the
notice voluntarily, during the 60-day
period immediately preceding the initial
Part D enrollment that begins in
November 2005.
We reject the argument that we lack
the statutory authority to revise the
regulation’s definition of a Medigap
policy. We are simply clarifying the
scope of the definition. The statutory
definition of a Medicare supplemental
policy, set out in section 1882(g)(1) the
Act states, in part, that a Medicare
Supplemental policy ‘‘provides
reimbursement for expenses incurred
for services and items for which
payment may be made [by Medicare]
but which are not reimbursable by
reason of the applicability of
deductibles, coinsurance amounts, or
other limitations imposed pursuant to
[title XVIII].’’ Section 1882(g)(1) of the
Act specifically excludes a MA plan, or
any policy or plan sponsored by an
employer or labor organization, from the
definition. However, the language
quoted above could be read to include
any other policy that is not specifically
excluded, if the policy pays anything
toward the cost of an item or service
that is generally covered under
Medicare, but is not specifically
reimbursable because of the application
of deductibles, coinsurance, or other
limitations. As of January 1, 2006,
prescription drugs will be covered by
Medicare, and we are simply clarifying
that stand-alone policies will meet the
definition.
As noted above, some commenters
claim that the proposed clarifications
are so far-reaching that all limited
benefit plans will be considered
Medigap policies. However, the
definition also states that a Medicare
Supplemental policy is a health
insurance policy or other health benefit
plan ‘‘offered by a private entity to

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

individuals who are entitled to have
payment made under [title XVIII].’’ The
definition currently in the regulations
essentially interprets this language to
mean that a Medicare supplement
policy is a policy that is offered to
Medicare beneficiaries because they are
Medicare beneficiaries. In other words,
it does not encompass policies that are
offered to a broader population, and
happen to be purchased by a Medicare
beneficiary.
Accordingly, since 1982, the
regulatory language at § 403.205(a)(2)
has specified that a Medigap policy
means a policy or plan that is primarily
designed, or is advertised, marketed, or
otherwise purported to provide payment
for expenses incurred for services and
items that are not reimbursed under
Medicare because of deductibles,
coinsurance or other limitations under
Medicare. Any policy that is not
primarily designed to supplement
Medicare reimbursements and that is
not offered and sold primarily to
Medicare beneficiaries would not be
considered a Medigap policy. Therefore,
we disagree that the proposed
clarification of the definition in the
regulation could be interpreted to apply
to any limited benefit policy purchased
by a Medicare eligible individual,
regardless of how it is marketed and
designed.
Many commenters believed that the
language in proposed § 403.205(c) could
be interpreted to mean that any
individual or group health insurance
policy or rider could be considered a
Medigap policy. We have changed the
regulatory language at § 403.205(c) to
clarify that the individual or group
health insurance policy or rider is a
Medigap policy if the policy otherwise
meets the definition in § 403.205.
Comment: One commenter asked that
we clarify that the antiduplication
disclosure statements applicable to
limited benefit plans that are appended
to the NAIC Model Regulation for
Medicare supplemental insurance do
not apply to stand-alone limited health
benefit plans that are considered
Medigap policies.
Response: The antiduplication
statements that the commenter refers to
do not apply to Medigap policies. We
believe it is necessary to clarify that if
a limited health benefit plan is
considered a Medigap policy because of
the way it is designed, marketed and
sold, the sale of such a plan would be
prohibited because it does not meet the
requirements for standardization of
Medigap policies.
Comment: We received numerous
comments related to the proposed
model disclosure notice that was

PO 00000

Frm 00244

Fmt 4701

Sfmt 4700

published as part of the preamble to the
Title I regulation. Commenters
expressed concern about the model
disclosure notice containing statements
about the value of the Part D drug
benefit being greater than the value of
outpatient prescription drug coverage
under a Medigap policy. Many
commenters believe that the concept of
‘‘value’’ is subjective and goes beyond
the concept of actuarial equivalence.
Commenters stated that beneficiaries
might consider their Medigap drug
coverage to be of greater overall value
than the Part D benefit for a number of
reasons, including the fact that the
Medigap drug coverage is guaranteed
renewable and does not use drug
formularies.
Commenters also stated that the
proposed disclosure notice was too long
and complicated and contained
unnecessary information related to Part
D benefit options. Commenters
expressed concern about having any
statements in the disclosure notice that
may be viewed as requiring Medigap
issuers to promote or advocate the
competing alternative coverage under
the Part D benefit. These commenters
believe that information about the new
Medicare drug benefit will be readily
available from a variety of other sources
and that including such information in
the disclosure notice is confusing and is
not required by MMA. They believe that
statements about the value of Part D
benefits and information concerning
Part D enrollment are irrelevant for
purposes of this disclosure notice.
Many commenters believe that we
should adopt NAIC’s version of the
model disclosure notice as the
disclosure notice that Medigap Rx
issuers must send to policyholders. The
NAIC version of the model disclosure
notice was developed by a work group
comprised of State insurance regulators,
consumer representatives and Medigap
issuers.
Response: We disagree that
information concerning Part D
enrollment options is irrelevant for
purposes of this disclosure notice. The
statute requires that the disclosure
notice provide information to Medigap
Rx policyholders explaining options in
the event the individual does or does
not enroll in Part D during the IEP.
Therefore, we believe it is important to
have some discussion about the Part D
enrollment process in order to provide
meaningful context for the Medigap
options. For individuals who do not
enroll in Part D during the IEP the
statute requires the disclosure notice to
explain, among other things, that the
individual will be subject to a late
enrollment penalty if his or her current

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
coverage does not provide creditable
drug coverage and he or she later
chooses to enroll in Part D. The test for
creditable coverage is based on whether
the economic value of the coverage is
actuarially equivalent to the value of
Part D coverage. Therefore, we believe it
is appropriate to address how the
actuarial value of Part D compares to the
individual’s current Medigap drug
coverage.
As noted previously, we will publish
the final standards for the disclosure
notices separately from this final rule.
We will give due consideration to the
comments we received on the model
disclosure notice set forth in the
proposed rule. In addition, we have
conducted a series of interviews with
beneficiaries about the format and
content of the model disclosure notice.
Once we have completed our
evaluation, the results of this consumer
testing will also inform any changes we
may make to the disclosure notice. We
appreciate the efforts of the NAIC in
developing a model disclosure notice
and we intend to have further
consultations with the NAIC.
Comment: Commenters expressed
concern that the period for transition to
Part D was too short and requested that
we consider options to provide
beneficiaries with additional time to
adjust to the new changes. One
commenter suggested that the Secretary
use the ‘‘exceptional circumstances’’
authority to establish a special Part D
enrollment period lasting at least
through 2007 for beneficiaries who have
Medigap drug coverage, thereby
allowing for a longer period of transition
to Part D. The commenter stated that
Medicare beneficiaries may be reluctant
to give up their Medigap drug coverage
for a benefit that is new and untested
and that an SEP would permit a longer
period to enroll in Part D without a
premium penalty. In the alternative, the
commenter suggested that Medigap Plan
J be deemed actuarially equivalent to
Part D so that beneficiaries with Plan J
who have the most drug coverage could
enroll in Part D without penalty after
the initial enrollment period.
Another commenter expressed
concern about the possibility of a
beneficiary being initially notified of
creditable coverage when the coverage
is no longer creditable or never was
creditable. The commenter suggested
that, in these cases, an SEP into Part D
be established, along with a guaranteed
issue right to a Medigap policy without
drug coverage.
Response: The statute establishes the
IEP for Part D as November 15, 2005
through May 15, 2006. Beneficiaries
with Medigap drug coverage who enroll

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

in Part D during the IEP have a
guaranteed issue right to buy a Medigap
policy without drug coverage. We are
sympathetic to the complexity of the
choices that beneficiaries must make
during this time period, but we believe
there is a strong public policy value in
creating an incentive for immediate,
widespread enrollment in this new,
heavily subsidized benefit in order to
ensure the affordability of the Part D
benefit and the stability of the
associated premium. It is our goal to
provide beneficiaries with information
that will help them make informed
decisions about their health care
options.
Since the statute clearly defines the
IEP and provides a Medigap guaranteed
issue right for beneficiaries who have
Medigap drug coverage and who enroll
in Part D during the IEP, we do not
believe that it is an appropriate use of
the Secretary’s authority to create a
blanket SEP for exceptional
circumstances for these beneficiaries.
We believe that the Secretary’s authority
to establish SEPs for exceptional
circumstances should be reserved for
situations that are not specifically
contemplated in the statute and that this
authority should be exercised on a caseby-case basis depending on the
circumstances of a particular situation.
Even in a case where we would create
an SEP for exceptional circumstances,
there is no corresponding statutory
authority to create a Medigap
guaranteed issue right. The classes of
beneficiaries who have Medigap
guaranteed issue rights are clearly set
out in section 1882(s)(3)(B) and section
1882(v)(3)(B) of the Act. We do not have
statutory authority to establish
additional classes of beneficiaries who
would be entitled to buy a Medigap
policy on a guarantee issue basis.
We do not believe that the statute
permits us to deem all Medigap Plan J
coverage as creditable coverage.
Whether or not Plan J drug coverage will
be considered creditable coverage must
be based on whether the actuarial value
of the coverage equals or exceeds the
actuarial value of defined standard
prescription drug coverage as
demonstrated through the use of
generally accepted actuarial principles
and in accordance with the
requirements of § 423.265(c)(3).
Moreover, as noted above, it is unlikely
that Plan J policies could meet this
standard. Finally, for the concern about
the possibility of a beneficiary being
initially notified of creditable coverage
when the coverage is no longer
creditable or never was creditable, the
regulations at § 423.38(c) permit the
establishment of an SEP for Part D in

PO 00000

Frm 00245

Fmt 4701

Sfmt 4700

4437

cases where an individual was never
informed that the coverage that he or
she had was not creditable, or if current
coverage is reduced so that it is no
longer creditable coverage. If an
individual establishes to CMS that he or
she was not adequately informed that
his or her prescription drug coverage
was not creditable, the individual may
apply to CMS to have such coverage
treated as creditable coverage for
purposes of applying the late enrollment
penalty provisions at § 423.46.
Comment: One commenter urged us
to establish Medigap guaranteed issue
rights for individuals who lose partial
benefits under a retiree plan and for
individuals who lose Medicaid
eligibility.
Response: The classes of beneficiaries
who have Medigap guaranteed issue
rights are clearly set out in section
1882(s)(3)(B) and section 1882(v)(3)(B)
of the Act. We do not have statutory
authority to establish additional classes
of beneficiaries who would be entitled
to buy a Medigap policy on a guaranteed
issue basis. In limited cases, we have
the authority under section
1851(e)(4)(D) of the Act to establish
SEPs for MA enrollees that may trigger
Medigap guaranteed issue rights for MA
enrollees. This authority applies if we
determine that there are exceptional
circumstances that warrant an SEP, but
it does not permit us to establish new
classes of beneficiaries who would have
Medigap guaranteed issue rights.
Comment: Comments were received
suggesting that if a Medigap issuer
becomes a Part D sponsor that the
sponsor be allowed to limit enrollment
in the Part D coverage to its Medigap
policyholders.
Response: While the statute prohibits
a Medigap issuer from providing drug
coverage that supplements the Part D
benefit, a Medigap issuer can choose to
become a PDP or an MA-PD if the issuer
wishes to offer the Part D benefit.
However, a PDP sponsor or MA-PD plan
must offer prescription drug coverage to
all Part D eligible beneficiaries residing
in the plan’s service area, unless a
specific statutory waiver authority
applies. Examples include capacity or
special needs waivers under Part C of
Medicare, or an employer waiver under
section 1860D–22(b) of the Act.
Comment: Comments were received
requesting regulatory guidance on the
MMA provision that provides for the
application of the antiduplication
penalties set out in section
1882(d)(3)(A)(ii) of the Act in cases
where a Medigap policy with drug
coverage is renewed for a Part D
enrollee. The commenters expressed
concern that a Medigap issuer may be

E:\FR\FM\28JAR2.SGM

28JAR2

4438

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

subject to penalties whether or not the
issuer knows about the individual’s
decision to enroll in Medicare Part D.
The commenter’s request that the
antiduplication provisions be enforced
consistently using a standard whereby
only ‘‘knowing’’ violations would be
subject to penalty.
Response: Section 1882(v)(4)(A) of the
Act, added by section 104 of the MMA,
states that the penalties described in
section 1882(d)(3)(A)(ii) of the Act shall
apply for a violation of the prohibition
on the sale, issuance, and renewal of a
Medigap policy that provides drug
coverage in the case of an individual
who is enrolled in Medicare Part D. We
are not incorporating the guidance
suggested by the commenter into these
regulations because these provisions are
under the jurisdiction of the OIG of
HHS. We recommend that Medigap
issuers take reasonable steps to
determine the policyholder’s Part D
status at the time the Medigap policy
with drug coverage is due for renewal.
Comment: One commenter questioned
whether HMO Medicare supplemental
plans offered to its members are
considered to be Medigap plans and, if
so, whether these plans would be
prohibited from offering prescription
drug benefits to retirees.
Response: Medicare managed care
plans that offer supplemental benefits
are not Medicare supplemental
(Medigap) policies. The statutory
definition of Medicare supplemental
(Medigap) policies contained in section
1882(g)(1) of the Act specifically
excludes MA plans. While Medigap
plans are prohibited from
supplementing Part D drug coverage,
MA plans will be permitted to offer
coverage that supplements Part D drug
coverage.
Comment: One commenter suggested
that a process be defined for validating
and approving a Medigap issuer’s
assessment whether the drug coverage
under its policies is creditable in
accordance with the final rule
implementing the Part D drug benefit.
This commenter also suggested that the
determination of creditable coverage
should consider the possibility that
changes in Part D over time could cause
a plan to become creditable coverage
over time. The commenter recommends
that proper advance notice of Part D
changes be scheduled to allow time for
creditable coverage determinations,
disclosure to beneficiaries and decisionmaking time for beneficiaries. The
commenter also suggested that
aggregation of data (combining all ages,
gender, locations, formularies) for a
particular benefit design be allowed as

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

reasonable in determining creditable
coverage.
Response: The issues raised by the
commenter are applicable to all forms of
creditable coverage and are addressed at
§ 423.56.
III. Provisions of the Final Rule
For the convenience of the reader, in
this section, we briefly summarize major
provisions of the proposed rule on
which we requested public comments,
and our final decisions. It is important
to note that this section is not intended
as a comprehensive list of all changes to
the final rule. For a detailed discussion
of a specific issue, see the relevant
portion of the preamble to this final
rule.
Auto-enrollment
We requested comments on:
• Responsibility for auto-enrollment:
Should CMS or the State perform the
auto-enrollment function (or a
contracted entity or entities on their
behalf)?
• Timing of auto-enrollment.
• Auto-enrollment of MA-onlys: How
to provide Part D to those full-benefit
dual eligible individuals who are in an
MA-only plan and who have failed to
enroll in a PDP or MA-PD plan?
• How to provide Part D to a fullbenefit dual eligible individual enrolled
in an MA-only plan when the premium
for the MA-PD plan(s) offered by the
same MA organization exceeds the lowincome premium subsidy amount?
Final Decision: Our response seeks to
balance the twin goals of ensuring
prescription drug coverage and
respecting beneficiary choice. We will:
• Stipulate that CMS-not the Stateswill perform auto-enrollment;
• Perform the auto-enrollment in the
fall of 2005 as soon as eligible Part D
plans are known, and auto-enrollment
will be effective January 1, 2006. After
2006, full-benefit dual eligible
individuals will be auto-enrolled into
plans as soon as their Medicare Part D
eligibility is determined;
• Auto-enroll on a random basis
among available PDPs with monthly
beneficiary premiums at or below the
low-income subsidy amount;
• Reserve the ability to conduct re­
auto-enrollment if we find such action
necessary to ensure adequate coverage
for this population;
• Facilitate full-benefit dual eligible
individuals who are MA enrollees into
the MA-PD with the lowest Part D
premium offered by their MA
organization, and who are cost plan
enrollees into their cost plans Part D
benefit (if any) with the lowest Part D
premium, even if the premium is not

PO 00000

Frm 00246

Fmt 4701

Sfmt 4700

covered by the low-income premium
subsidy amount.
• May facilitate enrollment for all
others deemed or determined eligible
for the low-income subsidy, that is,
Qualified Medicare Beneficiaries
(QMBs), Specified Low-Income
Medicare Beneficiaries (SLMBs),
Qualifying Individuals (QI–1s), and
others who qualify for low income
subsidies.
Optional Involuntary Disenrollment for
Disruptive Behavior
We solicited comments on the
applicability of MA rules to PDPs for
involuntary disenrollment for disruptive
behavior.
Final Decision: We developed policy
to permit PDP sponsors to disenroll
individuals for disruptive behavior
consistent with statutory intent, while
creating the necessary due process
safeguards for individuals who are
subject to our disenrollment rules and
may, as a result, lose Part D coverage. In
the final rule, we—
• Removed the expedited process;
• Required PDP sponsors to provide a
reasonable accommodation as
determined by CMS and in exceptional
circumstances we deem necessary; and
• Reserved the right to deny a request
from a fallback prescription drug plan to
disenroll an individual for disruptive
behavior.
Enrollment and Disenrollment Processes
We envisioned a paper enrollment
form process and requested comments
on other possible enrollment
mechanisms that address data security
and integrity, privacy and
confidentiality, authentication, and
other pertinent issues. We also asked if
we should require PDPs to disenroll
individuals if they no longer reside in
the service area.
Final Decision: We will maintain the
flexibility to allow PDPs to develop
alternative mechanisms other than
paper enrollment forms. We will look to
our recent experience with the drug
card for other mechanisms we may
consider, such as enrollment over the
telephone and through the Internet. We
will require plans to disenroll
individuals upon receipt of notification
that they have moved outside of the
plan service area.
Release of Beneficiary Information for
Marketing
Should we provide individual
beneficiary information to Part D
sponsors for marketing purposes
because Part D is an entirely new,
voluntary benefit that would not
otherwise be available to beneficiaries
absent positive enrollment?
Final Decision: We will consider
provision of such information pending

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
further research of the needs and
capabilities of both organizations and
CMS. If/when we do provide such
information to PDPs and MA
organizations, we will work with
industry and advocates to develop
appropriate guidance.
Creditable Coverage
We asked for comment on the format,
placement, and timing of creditable
coverage notices. We also asked whether
there are more forms of coverage that we
should consider creditable coverage?
Final Decision: We support linking
the notice of creditable status to other
required documents that sponsors must
provided to plan participants as an
acceptable vehicle provided it is
conspicuous and includes standard
information elements. We have revised
§ 423.56(c) and (d) to allow notices of
creditable and non-creditable status to
be provided in the same manner other
required documents.
To ensure beneficiaries are making
informed choices, we require that notice
must be provided to all Part D eligible
individuals prior to the commencement
of the Annual Coordinated Election
Period (AEP), which begins on
November 15, 2005, and also prior to
the AEP each year. We also believe there
are three other key times when notice
must be provided—(1) prior to the
commencement of the individual’s
initial enrollment period for Medicare
Part D; (2) prior to the effective date of
enrollment in such coverage or any
change in creditable status of that
coverage; and (3) upon request by the
beneficiary. We revised § 423.56(f) to
require that notice be provided, at
minimum, at these 4 times.
We revised § 423.56(b) to include
section 1876 cost plans and coverage
offered by State high risk pools as well
as a provision permitting us to recognize
other types of coverage as potentially
creditable in guidance following
publication of the final rule.
Marketing Multiple Products
Since companies frequently offer
additional products that could provide
additional tools to help beneficiaries
manage expenses and financial security,
we asked for comments on allowing
such products to be provided in
conjunction with PDP services and the
appropriate limitations on such
activities.
Final Decision: We will allow only
additional health-related products to be
marketed to Medicare beneficiaries in
compliance with HIPAA. Additional
non-health related marketing of
products would need written
authorization by the beneficiary.
Incurred Costs (TrOOP)

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

We asked a number of questions on
how to treat certain costs for purposed
of TrOOP accounting: How should we
define group health plan (GHP),
insurance or otherwise, and other third
party arrangements for purposes of
TrOOP? How should we treat HSAs
(FSA, HRA, MSA) under TrOOP: Can
we treat HSAs, FSAs, and MSAs as
beneficiary money, and HRAs, as GHP?
Should the price differential between
the cost of an extended supply of a drug
purchased at a retail pharmacy versus a
mail-order pharmacy be counted as an
incurred cost against the annual out-of­
pocket threshold? What is the status of
financial assistance and free goods and
services from pharmaceutical
manufacturers under the anti-kickback
provisions? (Sections 1128A(a)(5),
1128A(i)(6) of the Act).
Final Decision: We included
definitions in § 423.100 that are
consistent with our goals of defining
‘‘payments made by a beneficiary or
another person on their behalf’’ as
broadly as possible, while maintaining
the integrity of the exclusions of ‘‘group
health plan, insurance or otherwise, and
other third party arrangements’’
intended in the statute. These include:
• treating HSAs, FSAs, and MSAs as
beneficiary money, but HRAs as a Group
Health Plan for purposes of TrOOP
accounting.
• allowing beneficiary payment
differentials to count toward TrOOP in
cases in which a beneficiary accesses a
covered Part D drug consistent with the
out-of-network policy in § 423.124(a) of
this final rule, and when a beneficiary
purchases an extended supply of
covered Part D drugs at a retail rather
than a mail-order pharmacy.
• allowing appropriate waivers or
reductions of Part D cost-sharing by
pharmacies to count toward TrOOP.
• allowing financial assistance from
pharmaceutical manufacturers to count
toward TrOOP.
Dispensing Fee
We invited comments on three
definitions of ‘‘dispensing fees’’.
Final Decision: We will include only
those activities related to the transfer of
possession of the covered Part D drug
from the pharmacy to the beneficiary,
including charges associated with
mixing drugs, delivery, and overhead
(Option 1).
Covered Part Drug Definition
Part B/D Issues: We solicited
comments concerning any drugs that
may require specific guidance with
regard to their coverage under Part D,
and any gaps that may exist in the
combined ‘‘Part D & B’’ coverage
package.

PO 00000

Frm 00247

Fmt 4701

Sfmt 4700

4439

Final Decision: We identify issues and
discuss coverage of the following with
respect to the definition of Part D drug:
• Vaccines.
• Compounded Drugs.
• Parenteral Nutrition.
• Insulin Supplies.
• Exclusion of A/B Drugs if
individual could have enrolled in A or
B.
• Tying Arrangements.
Long Term Care Facility Pharmacies
We requested comments regarding our
definition of the term long-term care
facility in § 422.100. We also solicited
comments regarding how we should
guarantee ‘‘convenient access’’ to the
pharmacy benefit for Part D enrollees
who reside in LTC facilities? We
welcomed comments regarding how to
balance convenient access to long-term
care pharmacies with appropriate
payment to long-term care pharmacies
under the provisions of the MMA.
Final Decision: We have expanded the
definition of the term ‘‘long-term care
facility’’ in § 423.100 of our final rule to
encompass not only skilled nursing
facilities, as defined in section 1819(a)
of the Act, but also any medical
institution or nursing facility for which
payment is made for institutionalized
individuals under Medicaid, as defined
in section 1902(q)(1)(B) of the Act.
In addition, we are adopting an
approach requiring Part D plans to
demonstrate ‘‘convenient access’’ to
network long-term care pharmacies that
will inject competition into the longterm care pharmacy market, but also
allow the option of maintaining the
relationships and levels of service that
long-term care facilities now enjoy visa`-vis their contracted long-term care
pharmacies. We will require plans to
demonstrate (in their applications)
‘‘convenient in-network access’’ to longterm care pharmacies and use of
specialized any-willing-pharmacy
(AWP) contracts for long-term care
pharmacies to inject competition into
the long-term care pharmacy market.
Network Access Standards—Home
Infusion
In the proposed rule preamble, we
stated that we were considering using
the authority in section 1860D–
4(b)(1)(C) of the Act (which establishes
requirements regarding convenient
access to network pharmacies) to
require that plans contract with a
sufficient number of home infusion
pharmacies in their service areas to
provide reasonable access for Part D
enrollees, as stand-alone drug plans may
not have an incentive to include home
infusion pharmacies in their networks.
We solicited comments on whether we
should use the authority in section

E:\FR\FM\28JAR2.SGM

28JAR2

4440

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

1860D–4(b)(1)(C) of the Act to require
that both MA-PD plans and PDPs
contract with a sufficient number of
home infusion pharmacies in their
service area to provide reasonable
access for Part D enrollees? How could
such a requirement be structured?
Final Decision: We will require plans
to provide adequate access to home
infusion pharmacies but do not specify
requirements in the final rule. Plans will
be required to tell us how they will
provide such access in their service
area.
Network Access Standards—Tricare
Standards (Retail)
We proposed to apply these access
standards such that a PDP or regional
MA-PD plan would have to meet or
exceed the access standards across each
region in which it operates, and a local
MA-PD plan would have to meet or
exceed the access in its local service
area.
Final Decision: We will require plans
to meet the TRICARE access standards
at the State level.
Network Access Standards—Non-Retail
We requested comments on whether
we should allow plans to count certain
non-retail pharmacies, such as I/T/U
pharmacies, toward the pharmacy
access standards in some (or all) cases.
We also solicited comments on
permissible ways to ensure Part D
enrollees’ access to FQHC and rural
pharmacies.
Final Decision: We will allow plans to
count I/T/U pharmacies and other rural
institutional pharmacies (for example,
FQHCs, RHCs) toward the pharmacy
access requirements in all cases,
provided such pharmacies are under
contract with the plan and do not
substitute for available retail access in
their network.
Network Access—I/T/U Pharmacies
We asked: How will I/T/U pharmacies
and IHS beneficiaries achieve maximum
participation in Part D benefits? What
are the advantages and disadvantages
for AI/AN enrollees who are eligible to
enroll in Part D?
Final Decision: We will require Part D
plan sponsors to include I/T/U
pharmacies in their networks to the
extent that those pharmacies are present
in their service areas. We will require
that plans offer any willing pharmacy
(AWP) contracts to I/T/U pharmacies
that include an addendum addressing
certain minimum terms and conditions
specified by us in separate guidance. We
will require Part D plans to demonstrate
that they have contracts with a
sufficient number of I/T/U pharmacies
to ensure ‘‘convenient access’’ to
prescription drugs for AI/AN enrollees
within the service area.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Any Willing Pharmacy
We asked: Should we require that
PDP sponsors and MA organizations
offering an MA-PD plan make available
to all pharmacies a standard contract for
participation in their plans’ networks?
Should ‘‘any willing pharmacy’’
provisions apply to non-retail—in
particular mail order—pharmacies, as
well as to retail?
Final Decision: We will require plans
to offer standard terms and conditions
to all pharmacies for purposes of
ensuring that any pharmacy, and any
type of pharmacy, willing to accept the
standard contact terms and conditions
can join the pharmacy network.
Out-of-Network (OON) Access
We requested comments on how
emergency access standards should
work. In the proposed rule, we required
plans to ensure that their enrollees have
adequate access to drugs dispensed at
OON pharmacies when they cannot
reasonably be expected to obtain
covered Part D drugs at a network
pharmacy. We requested comments on
our proposed out-of-network access
requirements.
In the preamble to our proposed
regulations, we specified that the case of
a Part D enrollee who is residing in a
long-term care facility whose long-term
care pharmacy does not contract with
that enrollee’s MA-PD plan or
prescription drug plan is one in which
we would expect plans to provide out­
of-network access to drugs as provided
under § 423.124 of our regulations.
Final Decision: We adopt the out-of­
network access policy set forth in the
proposed rule and clarify that
§ 423.124(c) of our final rules requires
plans to establish reasonable rules to
ensure that enrollees use out-of-network
pharmacies in an appropriate manner.
Plans must ensure adequate access to
out-of-network pharmacies on a nonroutine basis when enrollees cannot
reasonably access network pharmacies.
We have defined the beneficiary cost
sharing in relation to the total cost of the
drug to the plan and the beneficiary.
Therefore, in cases where the total
payment is not limited by the plan
allowable due to out-of-network status,
the cost sharing should be defined as
the total paid by the beneficiary, or in
the case of a low-income individual, as
the total cost sharing paid by both the
beneficiary and CMS. However, we
changed our proposed policy of
allowing out-of-network access for longterm care pharmacies and now require
Part D plans to provide network access.
Formularies
We requested comments on many
aspects of formulary management, such
as:

PO 00000

Frm 00248

Fmt 4701

Sfmt 4700

• Does requiring a formulary to be
‘‘developed and reviewed’’ by a P&T
committee mean that a P&T committee’s
decisions regarding the plan’s formulary
must be binding on the plan?
• Should we strengthen the statutory
requirement in section 1860D–
4(b)(3)(A)(ii) of the Act by requiring that
more than just one pharmacist and one
physician on the P&T committee be
independent and free of conflict?
• Should we require the direct
involvement of a Pharmacy and
Therapeutics Committee with cost
containment measures, as well as with
other areas of quality assurance and
medication therapy management?
• What standards and criteria could
we use to determine that a PDP sponsor
or MA organization’s formulary that is
not based on the model classification
system does not in fact discriminate
against certain classes of Part D eligible
beneficiaries?
• How can we balance plans’
flexibility to maximize covered Part D
drug discounts and lower enrollee
premiums with the needs of certain
special populations of Part D enrollees?
• What should be the minimum
timeframes for periodic evaluation and
analysis of protocols and procedures
related to a plan’s formulary by PDP
plans and MA-PD plans (for example,
quarterly, annually)?
Final Decision: We made changes to
the regulatory formulary requirements
to balance: (1) building specific
requirements into regulatory language to
ensure plans offer adequate coverage of
the types of drugs most commonly
needed by Part D enrollees; with (2)
maintaining flexibility to fine-tune
formulary review requirements via
separate guidance consistent with our
final formulary review standards and
processes developed based on public
comment. The regulatory text revisions:
• Clarify that P&T committee
members must be independent and free
of conflict with respect not just to plans,
but also pharmaceutical manufacturers.
• Specify a role for P&T committees
in the approval of policies that guide
medical exceptions and other utilization
management processes, as well as
treatment protocols and procedures
related to a plan’s formulary.
• Require the provision of adequate
coverage of the types of drugs most
commonly needed by Part D enrollees,
as recognized in national treatment
guidelines—above and beyond the 2–
drugs-per-category-and-class
requirement.
• Provide us with the flexibility to
specify additional requirements
regarding plans’ P&T committees and
formularies via separate guidance.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
• Specify that we will review plan
formularies consistent with the non­
discrimination provisions at
§ 423.272(b)(2). We intend to conduct a
comprehensive review of the plan
design consistent with explicit
formulary review standards and criteriadriven processes.
Quality Standards
We asked: Are there industry
standards for cost effective drug
utilization management, and should we
adopt any of these standards for PDPs
and MA-PD plans? Among the issues we
raised in the preamble is whether or not
we should use the OBRA ‘90 Medicaid
standards for these programs. OBRA ‘90
requires pharmacy programs to use
proDUR and retroDUR and to offer
counseling services.
Final Decision: We require plans to
demonstrate that their network
providers are required to comply with
pharmacy practice standards established
by the States, to establish concurrent
and retrospective DUR policies and
systems, and to establish internal
medication error identification and
reduction systems.
Medication Therapy Management
Programs(MTMP)
We sought comments on what
requirements or guidelines for MTMPs
should be formulated in our regulations.
Final Decision: We received a
significant volume of comments on
MTMP. Almost all the comments agreed
that MTMP can make a significant
difference in improving therapeutic
outcomes. Despite some best practice
examples, however, no widely accepted
MTMP standards of practice were
identified. We will not specify further
service and service level requirements at
this time. We also will not specify
multiple chronic diseases and multiple
drug requirements.
Anti-Fraud Programs
We stated that we would be interested
in comments on possible requirements
in the area of fraud, waste and abuse
over and above the incentives operating
in at-risk plans.
Final Decision: In an effort to
consolidate requirements on plans we
moved the fraud and abuse provision to
subpart K at § 423.504(b)(4)(vi)(H) as a
component of a Part D sponsor’s overall
compliance plan. Plans will be required
to add a program to combat fraud, waste
and abuse in their prescription drug
benefits to their compliance plans. In
addition, we eliminated the mandatory
self-reporting requirements that were
proposed, but we expect all Part D
sponsors to comply with the
requirement for a comprehensive fraud
and abuse plan.
E-Prescribing

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

We solicited comments on many
aspects of developing and implementing
e-prescribing standards.
Final Decision: While we included a
fairly lengthy discussion of eprescribing in the August 2004
proposed rule, we intend to issue a
separate proposed rule devoted to the
standards that will be used for eprescribing and have reserved
§ 423.159(a) and § 423.159(b) of this
final rule for such e-prescribing
standards. Therefore, most of the
proposals we made with respect to such
standards are not being addressed in
this final rule. One standard we are
finalizing is the requirement that Part D
plans support e-prescribing. We
received no comments on this proposal
and are adopting it at § 423.159(c).
Evaluating Bids
We asked for comments on whether
we should we adopt the standards used
by OPM in 48 CFR Chapter 16.
Final Decision: We have adopted most
of the proposed rule provisions in the
area of bid review, negotiation and
approval, with the following
clarifications: We­
• Clarify that the OPM-like authority
(section 1860D–11(d)(2)(B) of the Act) is
in addition to our general authority to
negotiate (section 1860D–11(d)(2)(A) of
the Act).
• Clarify that we will not be
proposing additional regulations based
on 48 CFR Chapter 16.
• Clarify that we intend to examine
profit using this authority.
• Clarify that we do not intend to
require detailed information on
acquisition costs from each and every
plan. We would request additional
information only when necessary.
• Reiterate our interpretation that the
bid review authority does not violate the
non-interference directive.
Calculations
We solicited comment on the
appropriateness of all of our proposed
calculations.
Final Decision: We will adopt all of
the proposed calculations with the
exception of our interpretation of the
‘‘negative premium.’’ We will allow for
a ‘‘negative premium’’ for plans with
bids below the benchmark by an amount
in excess of the base beneficiary
premium.
Data Submission
We asked: What should be the
content, format and frequency of data
submissions?
Final Decision: Because of the
complexity of the MMA payment
provisions, collecting 100 percent
events data is necessary. While the
volume is large, the minimal number of
data elements we expect to collect (<25)

PO 00000

Frm 00249

Fmt 4701

Sfmt 4700

4441

and the simplicity of our own data
processing system should minimize the
burden of this approach. Our goal will
be to collect the minimum amount of
data we need to perform our payment
functions.
Payment Adjustments
We solicited comment on many
operational aspects of payment of
reinsurance and low-income subsidies,
as well as for risk corridors and
reconciliations.
Final Decision: Reinsurance will be
paid on a monthly basis during the year
based on estimated reinsurance costs;
however, we may move to payment on
an as-incurred basis in later years. Low
income cost-sharing subsidies will be
made on an interim basis. Final
reconciliation on reinsurance and low
income subsidies will occur after the
close of the year.
We solicited comments on the nature
of waivers that might be required for
MA plans and employer-sponsored
plans, among others.
Final Decision: Information on
specific waivers we will or will not
grant is not addressed in this regulation,
but will be described in separate
guidance.
Coordination with Other Plans
We requested comment on what basis
Part D COB user fees should be imposed
on Part D plans.
Final Decision: We intend to issue
requirements for coordination with
other prescription drug coverage by Part
D plans as soon as possible in advance
of the statutory deadline of July 1, 2005.
Part B/D Coordination of Benefits
We asked: Should Part D cover Part B
drugs denied under Part B because the
pharmacy does not have a Medicare
supplier number? Are there any other
circumstances under which a Part B
drug denied coverage under Part B
should be covered under Part D? Are
automatic claims cross-over procedures
feasible between Part B and Part D
payers?
Final Decision: Based on the
comments received regarding the
various B/D coordination issues we
described, we do not believe
commenters identified any
circumstances under which a drug
denied coverage under Part B should
automatically be covered under Part D,
and we will not provide for automatic
cross-over procedures.
Tracking TrOOP
We requested comment on the
following issues:
Should CMS or the Part D plans be
responsible for determining whether
claims costs have been reimbursed by
alternative coverage?

E:\FR\FM\28JAR2.SGM

28JAR2

4442

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

What are the operational capabilities
of plans to manage COB at the point of
sale, particularly with respect to
alternative wrap around coverage?
Should reporting of third-party claims
costs be mandatory or voluntary?
Should we require beneficiaries to
give consent for release of data held by
third parties as part of their enrollment
application?
Are there any temporary or phased-in
approaches to tracking TrOOP that may
be necessary or advisable given the
short timeframe between the final rule
and program implementation?
How can Part D plans receive
information from beneficiaries or others
regarding payment made by entities that
do not participate in a centralized
coordination of benefits system?
Final Decision: In the proposed rule,
we considered two options for
operationalizing the data exchange
related to the Part D coordination of
benefits system and TROOP accounting:
• Option 1: The Part D plan s and
MA-PD plans will be solely responsible
for tracking TrOOP costs.
• Option 2: We will procure a TrOOP
facilitation contractor to establish a
single point of contact between payers,
primary or secondary.
While this is not a regulatory issue,
we will work toward some variation on
Option 2, since we believe this is the
most efficient and effective way to
implement the TrOOP. Further
information will be issued with our
requirements for coordination with
other plans by Part D plans as soon as
possible in advance of the statutory
deadline of July 1, 2005.
Appeals
We solicited comments on coverage
determinations and notices and
exceptions procedures.
We proposed a limited number of
elements that must be included in a
sponsor’s formulary exceptions criteria.
We also considered including a number
of other exceptions criteria and adding
criteria for the review process that is
used to evaluate formularies and tier
structures. We asked for comment on
whether we should specify the decision
criteria for beneficiary appeals, or
whether Part D plans should be held
accountable to follow their own
decision criteria.
Final Decision: Consistent with the
August 2004 proposed rule, we specify
that a coverage determination is made
by the Part D plan, not at the pharmacy,
and we address notice and timing
issues. We have shortened the coverage
determination timeframes for making
expedited and standard coverage
determinations, redeterminations and
reconsiderations. We limit tiering

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

exceptions to obtaining a non-preferred
drug at the price of a preferred drug, and
specify that tiering exceptions need not
be granted in cases where a Part D
sponsor has a formulary tier in which it
places very high cost and unique items,
such as genomic and biotech products.
We require that plans grant exceptions
to tiering when the physician certifies
that the preferred drug would not be as
effective as the non-preferred onformulary drug or would have an
adverse effect on the individual and the
plan agrees with such certification.
Similarly, for off-formulary exceptions,
if the physician certifies that the onformulary drug would not be as effective
as the prescribed drug or would have
adverse effects and the plan agrees with
such certification, a formulary exception
must be granted. Grievance procedures
also are revised to accordance with
changes to the Medicare Advantage final
rule.
Employer Sponsored Prescription Drug
Programs and Appeals
We solicited comments on whether,
and to what extent, the application of
parallel procedures between employer
sponsored prescription drug plans
governed by ERISA and plans offered
under part 423 of our proposed
regulations might be a problem for
plans, employers, or eligible
individuals. We also solicited
suggestions for addressing problems, if
any, that result from the application of
parallel procedures.
Final Decision: We have added
§ 423.562(d), which is intended to give
ERISA plans the option, according to
regulations of the Secretary of Labor, of
electing the Part D process rather than
the procedures under 29 CFR 2560.503–
1 for claims involving supplemental
benefits provided by contract with a
Part D plan. The provision in
§ 423.562(d) would not take effect in the
absence of regulations by the Secretary
of Labor.
Low-Income Subsidy Determinations
and Notification
We invited general comments on how
we could ensure consistent eligibility
determination, redetermination and
appeal processes for low-income
subsidies. We requested comments on
how we should calculate the sliding
scale premium subsidy for individuals
with income from 135 percent up to 150
percent of the FPL. We offered an
example to set a scale in a stepped
fashion, for example, a set decrease in
the subsidy amount for every 5 percent
increase in income level.
Final Decision: We require that the
Part D plan be responsible for direct
reimbursement to beneficiaries for out­
of-pocket costs incurred after the

PO 00000

Frm 00250

Fmt 4701

Sfmt 4700

effective date of subsidy eligibility. We
also require the Part D plan to have
processes for reimbursing a charity or
program for any premium and cost
sharing amounts paid on behalf of an
individual subsequent to the effective
date of the subsidy. We adopted the
proposed sliding scale premium
methodology in this rule.
Fallback Plan Requirements
We invited comment on whether we
should define ‘‘offering a fallback plan’’
as agreeing to potentially offer a plan in
a region, or as actually providing a
fallback plan in fallback service areas.
We also solicited comment on whether
we should use the Indefinite Delivery
type of contract.
Final Decision: We adopted the
interpretation that offering a fallback
plan means actually providing a fallback
plan in fallback service areas. We have
also determined that fallback contracts
will not be written under the FAR or 48
CFR provisions; therefore, it is no longer
accurate to refer to the standby contracts
as indefinite duration, indefinite
quantity (IDIQ) contracts—which is a
term used under the FAR.
Fallback Payment
We requested comment on fallback
payment methodologies, particularly in
regard to prospective or retrospective
rebate allocation. We also requested
comments on alternative reference
points to the Average Wholesale Price
(AWP) or alternative methodologies that
could promote competitive pricing.
Final Decision: Information on the
fallback payment process is not
addressed in this final regulation, but
will be described in separate guidance.
The AWP remains the primary
measuring stick for drug costs. We will
therefore be incorporating it into our
performance targets. However, we will
be looking at other indicators or proxies
for financial performance, such as rates
of generic substitution, that will provide
other perspectives on cost management.
Access Standards in the Territories
We asked whether the waivers
proposed for the territories were
appropriate, and were any others
warranted to ensure access to
individuals residing in the territories?
Final Decision: The only comments
received with respect to the territories
concerned the design of the regions, and
these have been addressed in separate
guidance. As a result, we have retained
the broad waiver authority in
§ 423.859(c), and will continue to
conduct research to determine how best
to facilitate Part D coverage in the
territories. Specific waivers will be
addressed in separate guidance.
Subsidy Process

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
We solicited comments on many
aspects of the proposed retiree drug
subsidy process.
Final Decision: After reviewing the
comments, we made many policy
decisions in the final rule, including:
• Announcing that we would allow
retiree drug plans the flexibility to
receive subsidy payments on a monthly,
quarterly or annual basis at their
discretion;
• Providing insured plan sponsors the
flexibility to use premiums as the cost
basis for interim subsidy payments;
• Clarifying what information must
be submitted with enrollment data;
• Providing sponsors the flexibility to
use either the calendar year or their plan
year (if different from the calendar year)
for calculating the subsidy and for
determining actuarial equivalence; and
• Allowing sponsors broad discretion
in determining who meets the definition
of a qualifying covered retiree for
purposes of the subsidy.
Further details on the implementation
of the subsidy program will be provided
in separate guidance.
Actuarial Equivalence for Subsidy
We asked for comments on the likely
responses of plan sponsors to the
different approaches we proposed. In
addition, we solicited comments not
only on the desirability of the different
options, but also on the legal bases for
possible options.
Final Decision: The final regulation
includes a two-part test for plan
sponsors to determine whether
‘‘actuarial equivalence,’’ has been met.
Change in Definition of Outpatient
Prescription Drugs
We solicited comments on the new
definition for purposes of the physician
self-referral prohibition.
Final Decision: We finalized this
proposal without substantive change.
Waivers Needed for Cost Plans or CMPs
We invited comment on whether
there are any Part D requirements
otherwise applicable to MA-PD plans
that would be uniquely problematic to
implement for section 1876 reasonable
cost HMOs and CMPs.
Final Decision: We have clarified that
Part D will be offered somewhat
differently by cost plans:
(1) Cost plans that choose to offer
qualified Part D coverage under
§ 417.440(b)(2) may do so only by
offering qualified Part D coverage as an
optional supplemental benefit.
(2) Cost plans that offer qualified Part
D coverage must offer basic prescription
drug coverage. A cost plan that offers
basic prescription drug coverage may
offer additional qualified Part D
coverage choices.
(3) A cost plan that does not offer
qualified Part D coverage under

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

§ 417.440(b)(1)(iii) may offer nonqualified drug coverage that is not
reimbursed under this part or title.
Creditable Coverage Notice for Medigap
Policies
The proposed rule set forth a draft
disclosure notice for Medigap issuers to
use for policies that do not have
creditable coverage. We solicited
comments on how the draft disclosure
notice could be adapted for the types of
Medigap policies that do provide
creditable coverage.
Final Decision: We have determined
that the format and content of the notice
could be improved based on
information gathered through consumer
testing, so we now plan to publish the
final model disclosure notice separately
from this final regulation. We also plan
to publish a model disclosure notice for
policies that do provide creditable
coverage.
PACE Waivers
We invited comments on the MMA
requirements we proposed to be waived
for PACE organizations and asked for
comment on additional waivers that
may be needed to integrate the Medicare
prescription drug benefit and the PACE
benefit.
Final Decision: We have finalized our
proposed waiver of section 423.265(b)
and will allow PACE plans to submit
Part D bids after the first Monday in
June each year. However, we clarified
that we expect PACE plans that are
operational as of the first Monday in
June each year to meet the bid
submission deadline. Information on
additional waivers will not be addressed
in this regulation, but will be described
in separate guidance.
IV. Collection of Information
Requirements
Under the Paperwork Reduction Act
of 1995 (PRA), we are required to
provide 30-day notice in the Federal
Register and solicit public comment
before a collection of information
requirement is submitted to the Office of
Management and Budget (OMB) for
review and approval. In order to fairly
evaluate whether OMB should approve
an information collection, section
3506(c)(2)(A) of the PRA requires that
we solicit comment on the following
issues:
• The need for the information
collection and its usefulness in carrying
out the proper functions of our agency.
• The accuracy of our estimate of the
information collection burden.
• The quality, utility, and clarity of
the information to be collected.
• Recommendations to minimize the
information collection burden on the

PO 00000

Frm 00251

Fmt 4701

Sfmt 4700

4443

affected public, including automated
collection techniques.
Below is a summary of the
information collection requirements in
this regulation.
Subpart A—General Provisions
Subpart A does not contain any
requirements subject to the PRA.
Subpart B—Eligibility and Enrollment.
• § 423.32 Enrollment process.
(a) A Part D eligible who wishes to
enroll in a Part D may enroll during the
enrollment periods specified in
§ 423.38, by filing the appropriate
enrollment form with the Part D plan or
through other mechanisms CMS
determines are appropriate.
The burden associated with this
requirement is the time and effort
necessary for an individual to submit
the required enrollment application to a
Part D plan sponsor. We estimate that it
will take 30 minutes to complete and
submit the required application to the
Part D plan. During the first Part D
initial enrollment period, it is estimated
that 24 million individuals will
complete and submit these applications.
This estimate is based on preliminary
estimates of the number of individuals
who will enroll in Part D plans in 2006.
In 2007, and beyond, the number of
enrollments will be substantially less,
since an individual will generally be
limited to changing Part D plans during
the annual coordinated election period.
Therefore, it is estimated 6 million
individuals may change their Part D
plans annually and that 2 million new
beneficiaries will be making first time
enrollments into Part D plans.
(b) Enrollment form or CMS-approved
mechanism. The enrollment must be
completed by the individual and
include an acknowledgement by the
beneficiary for disclosure and exchange
of necessary information between the
U.S. Department of Health and Human
Services (or its designees) and the Part
D plan sponsor. Persons who assist
beneficiaries in completing the
enrollment, including authorized
representatives, must indicate they have
provided assistance and their
relationship to the beneficiary.
The burden associated with this
requirement is reflected above under
section 423.32(a).
A Part D plan sponsor may require
Part D eligible individuals enrolling or
enrolled in its Part D plan to provide
information regarding reimbursement
for Part D costs through other insurance,
group health plan or other third-party
payment arrangement, in a form and
manner approved by CMS.
The burden associated with the
requirement for individuals to provide
information regarding reimbursement

E:\FR\FM\28JAR2.SGM

28JAR2

4444

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

for Part D costs through other insurance,
group health plan or other third-party
payment arrangement enrolled or
enrolling in a Part D plan is total annual
burden of 43,333 hours. We estimate
that 2.6 million beneficiaries will need
1 minute to disclose reimbursement for
Part D costs to the appropriate entity on
an annual basis, for a total annual
burden of 43,333 hours.
(d) Notice requirement. The Part D
plan sponsor must provide the
individual with prompt notice of
acceptance or denial of the individual’s
enrollment request, in a format and
manner specified by CMS.
The burden associated with this
requirement is the time and effort
necessary for a Part D plan sponsor to
disclose to an individual notice of
acceptance or denial of the individual’s
enrollment request. We estimate that
during the first Part D initial enrollment
period a total of 24 million notices will
be disclosed, affecting approximately 64
Part D plans (based upon an estimate of
2 Part D plans per 34 regions). Given
that each Part D plan will be creating
disclosure notices for mass mailings, we
are proposing the following burden
estimates. We estimate that it will take
each Part D plan approximately 8 hours
to produce each notice—either an
acceptance or a denial notice must be
provided. We further estimate that on
average, it will take each Part D plan
sponsor 1 minute to assemble and
disseminate each notice. We further
estimate that on average, it will take
each sponsor 5,860 hours to disclose
375,000 notices during this first year. In
2007, and beyond, we estimate that
93,750 notices will be disclosed
annually at 1,465 hours per sponsor.
This assumption is based on the
premise that once the notices have been
standardized, a Part D plan sponsor will
mass-produce and mail the required
notices.
• § 423.36 Disenrollment process.
(b) The Part D plan sponsor must
submit a disenrollment notice to CMS
within timeframes CMS specifies;
provide the enrollee with a notice of
disenrollment as CMS determines and
approves; and file and retain
disenrollment requests for the period
specified in CMS instructions.
The burden associated with this
requirement is the time and effort
necessary for a Part D plan sponsor to
disclose to an individual notice of
disenrollment. We estimate that on an
annual basis it will require a total of
576,100 notices, affecting each Part D
plan sponsors to some degree, as
described below. Given that each Part D
plan sponsor will be creating disclosure
notices for mass mailings, we are

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

proposing the following burden
estimates. We estimate that it will take
each Part D plan sponsor approximately
8 hours to produce the standardized
notice. We further estimate that on
average, it will take each Part D plan 1
minute to disclose each notice.
• § 423.38 Enrollment periods.
(c) Under the special enrollment
period provisions, an individual is
eligible to enroll in a Part D plan or
disenroll from a Part D plan and enroll
in another Part D plan, if the individual
demonstrates to CMS, in accordance
with guidelines CMS issues, that the
Part D plan sponsor offering the Part D
plan substantially violated a material
provision of its contract under this part
that meets the requirements set forth in
this section. The burden associated with
this requirement is the time and effort
necessary for an individual to submit
the required materials to CMS
demonstrating that a Part D plan
substantially violated a material
provision of its contract. Based on our
experience with the current Medicare
Advantage program, we would expect
that few, if any, individuals will avail
themselves of this option. Generally, in
those instances where CMS has found
that an M+C organization has
substantially violated a material
provision of its contract, CMS has taken
the necessary action on behalf of these
individuals. Thus, we do not estimate
any burden on individuals under this
provision.
• § 423.44 Involuntary disenrollment
by the Part D plan.
(c) If the disenrollment is for any of
the reasons specified in paragraphs
(b)(1), and (b)(2) of this section (that is,
other than death Part D eligibility), the
Part D plan sponsor must give the
individual timely notice of the
disenrollment with an explanation of
why the Part D plan is planning to
disenroll the individual. Notices for
reasons specified in paragraphs (b)(1)
through (b)(2) of this section must be
provided to the individual before
submission of the disenrollment notice
to CMS; and include an explanation of
the individual’s right to a hearing under
the Part D plan’s grievance procedures.
(d) A Part D plan sponsor may
disenroll an individual from the Part D
plan for failure to pay any monthly
premium if the Part D plan sponsor can
demonstrate to CMS that it made
reasonable efforts to collect the unpaid
premium amount.
The burden associated with this
requirement is the time and effort
necessary for a Part D plan sponsor to
submit the required materials to CMS
demonstrating that the Part D plan
sponsor made reasonable efforts to

PO 00000

Frm 00252

Fmt 4701

Sfmt 4700

collect the unpaid premium amount and
the time and effort necessary for a Part
D plan sponsor to disclose to an
individual the notice of disenrollment.
We estimate that it will take a Part D
plan 5 minutes to submit the required
transaction to CMS for each occurrence
and that each of the Part D plan
sponsors will be required to submit the
necessary documentation to CMS 960
times on an annual basis. We estimate
that on an annual basis 96,000
individuals will be disenrolled for
failure to pay premiums, and it will take
each Part D plan 1 minute to disclose
each notice and that each Part D plan
will be required to disclose 960 notices
on an annual basis for a annual burden
of 16 hours.
A Part D plan may disenroll an
individual whose behavior is disruptive,
only after it meets the requirements
described in this section and after CMS
has reviewed and approved the request.
To disenroll an individual from its
Part D plan, based on an individual’s
behavior, the Part D plan sponsor must
document the enrollee’s behavior, its
own efforts to resolve any problems and
any extenuating circumstances. The Part
D plan must submit this information
and any documentation received by the
beneficiary to CMS. The Part D plan
sponsor may request from CMS the
ability to decline future enrollment by
the individual.
The burden associated with this
requirement is the time and effort
necessary for a Part D plan to document
and retain the documentation that meets
the requirements set forth in this
section. We estimate that it will take a
Part D plan 3 hours to capture and
retain the required documentation for
each occurrence and that each Part D
plan will have 1 occurrence on an
annual basis.
In addition, the Part D plan must
inform the individual of the right to use
the Part D plan ’s grievance procedures.
The burden associated with this
requirement is captured under section
§ 423.128.
When a Part D plan contract
terminates as stipulated under 423.507
and 423.510 the Part D plan sponsor
must send a notice to the enrollee before
the effective date of the plan
termination or area reduction. The
notice must give provide an effective
date of the plan termination and a
description of alternatives for obtaining
benefits under Part D.
The burden associated with these
requirements is discussed below under
sections 423.507 and 423.510.
• § 423.48 Information about Part D.
Each Part D plan and MA-PD plan
must provide, on an annual basis, and

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
in a format and using standard
terminology that CMS may specify in
guidance, the information necessary to
enable CMS to provide to current and
potential Part D eligible individuals the
information they need to make informed
decisions among the available choices
for Part D coverage.
The burden associated with this
requirement is the time and effort
necessary for a Part D plan to submit the
required materials to CMS. We estimate
that on an annual basis it will take 68
Part D plan sponsors 2 hours to submit
the required documentation to CMS.
• § 423.50 Approval of marketing
materials and enrollment forms.
(a) 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 Part D plan
sponsor must submit the its marketing
materials and forms to CMS for review.
The burden associated with this
requirement is the time and effort
necessary for a Part D plan to submit the
required materials to CMS. We estimate
that on an annual basis it will take 68
Part D plan sponsors 2 hours to submit
the required documentation to CMS.
• § 423.56 Procedures to determine
and document creditable status of
prescription drug coverage.
(c) Each entity that offers prescription
drug coverage under any of the types
described in § 423.56(b) must disclose,
to all Part D eligible individuals
whether such coverage meets the
actuarial requirements specified in
guidelines provided by CMS. These
notices must be provided to Part D
eligible individuals, at minimum, at the
following times: (1) prior to an
individual’s initial enrollment period
for Part D, as described under
§ 423.38(a); (2) prior to the effective date
of enrollment in the coverage, and upon
any change in creditable status; (3) prior
to the commencement of the Annual
Coordinated Election Period (ACEP) that
begins on November 15 of each year, as
defined in 423.38(b); or (4) upon request
by the individual. In an effort to reduce
the burden associated with providing
these notices, we have revised our final
regulations to allow most entities (with
the exception of Medigap insurers) to
provide notices of creditable and noncreditable status with other information
materials that these entities distribute to
beneficiaries (rather than separately)
and, as discussed in the preamble, we
anticipate providing model language for
both types of notices.
The burden associated with this
requirement is the time and effort
necessary for each of these entities to
disclose to an individual notice of

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

coverage. We estimate that it will
require slightly over 400,000 entities to
provide notices in existing plan
materials (including 400,000 employer
and union-sponsored group health plans
with Medicare-eligible workers, and
fewer than 50 other entities including
State Pharmaceutical Assistance
Programs, a handful of State Pharmacy
Plus programs), and over 100 Medigap
insurers to provide 1,900,000 separate
initial notices in 2005. In addition to
these initial notices, we estimate that in
each subsequent year these same
entities will be required to distribute
notices in plan materials (including
initial notices to new beneficiaries,
annual notices prior to the ACEP, and
notices of changes in creditable
coverage status), as well as 447,789
additional separate notices to
individuals upon request. [Note: A
discussion of the costs and burden
associated with the disclosure notices
for public and private employers and
unions sponsoring retiree coverage can
be found in the impact analysis section
on administrative costs associated with
disclosure notice requirements and the
PRA section on requirements for
qualified retiree prescription drug plans,
respectively.]
Given that each entity (with the
exception of Medigap insurers) will be
creating most of these disclosure notices
for inclusion in existing plan materials,
we make the following burden
estimates. For initial notices of
creditable coverage, subsequent notices
prior to the commencement of the
ACEP, and notices of changes in
creditable coverage, we estimate that it
will take each entity approximately 8
hours to produce the standardized
notice. We further estimate that on
average, it will take each entity (with
the exception of Medigap insurers) a
negligible amount of time to disclose
each notice, since they will be
incorporating notices into existing plan
materials that are provided to
beneficiaries (which are already being
disseminated to their participants). In
the case of Medigap insurers, we
estimate that they will spend 1 hour per
60 notices for mass-mailing separate
notices to beneficiaries. We further
estimate that each entity will spend
approximately 5 minutes per notice for
providing separate additional copies of
the notices to individual beneficiaries
upon request. It is estimated that the
burden per entity will be as follows:
• On average, the 4 State Pharmacy
Plus programs will provide initial
notices in existing beneficiary plan
materials in 2005 for an annual burden
of 8 hours (these notices are required
even though, as discussed elsewhere in

PO 00000

Frm 00253

Fmt 4701

Sfmt 4700

4445

this preamble, these States may decide
to lower their costs while maintaining
equivalent benefits by replacing or
reforming these programs).
• On average each of the 400,000
group health plans will provide initial
notices in existing beneficiary plan
materials in 2005 for an annual burden
of 2 hours. Additionally, in subsequent
years, on average, we estimate that these
400,000 group health plans will provide
100,000 additional separate notices to
individuals upon request for an annual
burden of 1.25 minutes. We also
estimate that in subsequent years, on
average, 4,000 of these group health
plans will experience changes in
creditable coverage status and provide
notice of their new creditable coverage
status in their plan materials, for an
annual burden of 2 hours. We estimate
that the annual burden associated with
providing notices prior to the ACEP in
subsequent years will be negligible,
since they will be able to include these
notices in their existing plan materials
with minimal modifications.
• On average each of the 20 State
Pharmaceutical Assistance Programs
will provide initial notices in existing
beneficiary plan materials in 2005 for an
annual burden of 8 hours per State. We
estimate that the annual burden
associated with providing notices prior
to the ACEP in subsequent years will be
negligible, since they will be able to
include these notices in their existing
plan materials with minimal
modifications.
• On average each of an estimated
120 Medigap issuers will provide 15,833
separate initial notices in 2005 for an
annual burden of 264 hours.
Additionally, in subsequent years, on
average, we estimate that these 120
Medigap issuers will provide 40
additional separate notices to
individuals upon request for an annual
burden of 3.3 hours. We estimate that
the annual burden associated with
providing notices prior to the ACEP in
subsequent years will be negligible,
since the regulatory impact analysis
assumes that the vast majority of
beneficiaries with Medigap drug
coverage will enroll in Part D.
(e) Each entity must disclose their
creditable coverage status to CMS in a
form and manner described by CMS.
Each entity must disclose their initial
creditable coverage status to CMS in
2005, as well as any subsequent change
in creditable coverage status.
The burden associated with this
requirement is the time and effort
necessary for each entity to submit the
required creditable coverage status
materials to CMS. We estimate that it

E:\FR\FM\28JAR2.SGM

28JAR2

4446

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

will take each entity 1 hour to submit
the required documentation to CMS.
Subpart C—Benefits and Beneficiary
Protections.
• § 423.104 Requirements related to
qualified prescription drug coverage.
(g) A Part D plan sponsor is required
to disclose to CMS data on aggregate
negotiated price concessions obtained
from pharmaceutical manufacturers, as
well as data on aggregate negotiated
price concessions obtained from
pharmaceutical manufacturers that are
passed through to beneficiaries, via
pharmacies and other dispensers, in the
form of lower subsidies paid by CMS on
behalf of low-income individuals or the
form of lower monthly beneficiary
premiums or lower covered Part D drug
prices at the point of sale.
The burden associated with this
requirement is the time and effort
necessary for a Part D plan sponsor to
disclose to CMS the aggregate negotiated
price data on concessions. We estimate
that on an annual basis it will take 100
Part D plan sponsors and 350 MA
organizations 10 hours to submit the
required documentation to CMS for total
annual burden of 4,500 hours.
• § 423.120 Access to covered Part D
drugs.
(b) A Part D plan sponsor’s formulary
must be reviewed by a pharmacy and
therapeutic committee that must
maintain written documentation of its
decisions regarding formulary
development and revision.
The burden associated with this
requirement is the time and effort
necessary for a Part D sponsor’s
pharmacy and therapeutic committee to
document and retain the documentation
that meets the requirements set forth in
this section.
We estimate that it will take 100 Part
D plan sponsors and 350 MA
organizations 1 hour each to capture
and retain the required documentation
on an annual basis for total annual
burden of 450 hours.
Prior to removing a covered Part D
drug from its plan’s formulary, or
making any change in the preferred or
tiered cost-sharing status of a covered
Part D drug, a Part D plan sponsor must
provide at least 60 days notice to CMS,
State Pharmaceutical Assistance
Programs, entities providing other
prescription drug coverage (as described
in § 423.464(f)(1)), authorized
prescribers, network pharmacies, and
pharmacists.
The burden associated with this
requirement is the time and effort
necessary for a Part D sponsor to
provide notice of at least 60 days to
CMS, State Pharmaceutical Assistance
Programs, entities providing other

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

prescription drug coverage, authorized
prescribers, network pharmacies, and
pharmacists of the removal of a covered
Part D drug from its formulary.
Given that each entity will be creating
disclosure notices for mass mailings, we
are proposing the following burden
estimates. We estimate that on an
annual basis it will take each entity
approximately 1 hour to produce the
standardized notice. We further estimate
that on average, it will take 100 Part D
plan sponsors and 350 MA
organizations 40 hours to disclose the
required notice for a total annual burden
of 18,450 hours.
(c) A Part D sponsor must issue and
reissue, as necessary, a card or other
type of technology to its enrollees to use
to access negotiated prices for covered
Part D drugs.
The burden associated with this
requirement is the time and effort
necessary for an entity to provide each
enrollee a card. The burden associated
with this requirement is reflected in
section 423.128.
• § 423.128 Dissemination of Part D
plan information.
(a) A part D sponsor must disclose
information about its Part D plan(s) as
required by this section to each enrollee
of a Part D plan offered by the Part D
sponsor under this part and to Part D
eligible individuals.
The burden associated with this
requirement is the time and effort
necessary for a Part D sponsor to
disclose information and materials
about its Part D plan(s). We estimate
that it will require 100 Part D plan
sponsors and 350 MA organizations 80
hours on an annual basis to prepare the
plan materials. We further estimate that
on an annual basis, on average, it will
require each entity 120 hours on an
annual basis to disclose the required
materials to enrollees and eligible
individuals for a total annual burden of
90,000 hours.
(e) A Part D sponsor must furnish
directly to enrollees an explanation of
benefits when prescription drug benefits
are provided under qualified
prescription drug coverage that meets
the requirements set forth in this
section.
The burden associated with this
requirement is the time and effort
necessary for 100 Part D plan sponsors
and 350 MA organizations to provide an
explanation of benefits when
prescription drug benefits are provided
to enrollees. We estimate that it will
require each entity 160 hours on an
annual basis disseminate the required
materials for total annual burden of
56,000 hours.

PO 00000

Frm 00254

Fmt 4701

Sfmt 4700

• § 423.132 Public disclosure of
pharmaceutical prices for equivalent
drugs.
(a) Except as provided under
paragraph (c) of this section, a Part D
sponsor must require a pharmacy that
dispenses a covered Part D drug to
inform an enrollee of any differential
between the price of that drug and the
price of the lowest priced generic
version of that covered Part D drug that
is therapeutically equivalent and
bioequivalent and available at that
pharmacy, unless the particular covered
Part D drug being purchased is the
lowest-priced therapeutically equivalent
and bioequivalent version of that drug
available at that pharmacy.
Subject to paragraph (d) of this
section, the information under
paragraph (a) of this section must be
provided after the drug is dispensed at
the point of sale or, in the case of
dispensing by mail order, at the time of
delivery of the drug.
The burden associated with this
requirement is the time and effort
necessary for the Part D sponsor to
notify the pharmacy of the disclosure
requirement referenced in this section
and the burden on a pharmacy to
provide the necessary disclosure to the
enrollee. While these requirements are
subject to the PRA, the burden
associated with the requirements is
exempt from the PRA as stipulated
under 5 CFR 1320.3(b)(2) and (b)(3).
These paragraphs of the PRA regulation
state that a usual and customary
business activity incurred by persons in
the normal course of business, or a
requirement sponsored by the Federal
government that is also sponsored by a
unit of a State or local government does
not impose additional burden.
• § 423.136 Privacy, confidentiality,
and accuracy of enrollee records
(c) and (d) For any medical records or
other health and enrollment information
it maintains with respect to enrollees, a
Part D plan sponsor must maintain the
records and information in an accurate
and timely manner and provide timely
access by enrollees to the records and
information that pertain to them.
While these requirements properly
maintain and disclose enrollee records
are subject to the PRA, the burden
associated with the requirements is
exempt from the PRA as stipulated
under 5 CFR 1320.3(b)(2) and (b)(3).
These paragraphs of the PRA
regulation state that a usual and
customary business activity incurred by
persons in the normal course of
business, or a requirement sponsored by
the Federal government that is also
sponsored by a unit of a State or local

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
government does not impose additional
burden.
Subpart D—Cost Control and Quality
Improvement Requirements for Part D
Plans
• § 423.153 Drug utilization
management, quality assurance, and
medication therapy management
prgrams (MTMPs).
(b) A Part D sponsor must provide
CMS with information concerning the
procedures and performance of its drug
utilization management program,
according to guidelines specified by
CMS.
The burden associated with this
requirement is the time and effort
necessary for the Part D sponsor to
provide CMS with information
concerning its drug utilization
management program, according to
guidelines specified by CMS.
We estimate that is will require 100
Part D sponsors, 30 minutes each to
provide the required material to CMS
for consideration for a total annual
burden of 50 hours.
(c) A Part D sponsor must provide
CMS with information concerning its
quality assurance measures and
systems, according to guidelines
specified by CMS.
The burden associated with this
requirement is the time and effort
necessary for the Part D plan sponsor to
provide CMS with information
concerning its quality assurance
measures and systems, according to
guidelines specified by CMS.
We estimate that is will require 100
Part D plan sponsors 30 minutes each to
provide the required material to CMS
for consideration for a total annual
burden of 50 hours.
(d) A Part D sponsor must provide
drug claims data to CCIPs for those
beneficiaries that are enrolled in CCIPs
in a manner specified by CMS and a
Part D sponsor must provide CMS with
information regarding the procedures
and performance of its MTM program,
according to guidelines specified by
CMS.
The burden associated with this
requirement is the time and effort
necessary for each Part D sponsor to
provide drug claims data to CCIPs for
those beneficiaries that are enrolled in
CCIPs and to provide CMS information
regarding the procedures and
performance of its MTM program,
according to guidelines specified by
CMS.
We estimate that is will require 100
Part D sponsors 60 minutes each to
provide the required material to CCIPs
and 100 Part D plan sponsors and 30
minutes each to provide the required

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

material to CMS for consideration for a
total annual burden of 150 hours.
An applicant to become a Part D plan
sponsor must describe in its application
how it will take into account the
resources used and time required to
implement the MTM program it chooses
to adopt in establishing fees for
pharmacists or others providing MTM
services for covered Part D drugs under
a prescription drug plan and disclose to
CMS upon request the amount of the
management and dispensing fees and
the portion paid for MTM services to
pharmacists and others upon request.
Reports of these amounts are protected
under the provisions of section
1927(b)(3)(D) of the Act.
The burden associated with this
requirement is captured under
§ 423.265.
• § 423.168 Accreditation
organizations.
(c) An accreditation organization
approved by CMS must provide to CMS
in written form and on a monthly basis
all of the information required by this
part.
Since CMS expects to contract with
less then 10 organizations on an annual
basis, this requirement is not subject to
the PRA.
• § 423.171 Procedures for approval
of accreditation as a basis for deeming
compliance.
(a) A private, national accreditation
organization applying for approval must
furnish to CMS all of the information
and materials set forth in this part.
Since CMS expects to less then 10
applicants on an annual basis, this
requirement is not subject to the PRA.
Subpart F—Submission of Bids and
Monthly Beneficiary Premiums; Plan
Approval
• § 423.265 Submission of bids and
related information.
(a) An applicant may submit a bid
that meets the requirements set forth in
this section and related sections of this
regulation, to become a Part D sponsor.
The burden associated with this
requirement is the time and effort
necessary for an entity to submit the
required materials to CMS. We estimate
we will receive 100 Part D sponsor
applications on an annual basis and that
it will requires each entity 80 hours to
submit the required documentation to
CMS for total annual burden of 8,000
hours.
Subpart G—Payments to Part D plan
sponsors and MA-PD Plans For All
Medicare Beneficiaries For Qualified
Prescription Drug Coverage
• § 423.329 Determination of
payment.
(b) Part D plan sponsors must submit
data regarding drug claims to CMS that

PO 00000

Frm 00255

Fmt 4701

Sfmt 4700

4447

can be linked at the individual level to
Part A and Part B data in a form and
manner similar to the process provided
under § 422.310 and other information
as CMS determines necessary.
The burden associated with this
requirement is the time and effort
necessary for Part D plan sponsors
submit the required claims data to CMS.
We estimate that on an annual basis it
will take 100 Part D plan sponsors 52
hours to submit the required
documentation to CMS for total annual
burden of 5,200 hours.
(ii) MA organizations that offer MA­
PD plans to submit data regarding drug
claims that can be linked at the
individual level to other data that the
organizations are required to submit to
CMS in a form and manner similar to
the process provided under § 422.310
and other information as CMS
determines necessary.
The burden associated with this
requirement is the time and effort
necessary for MA organizations submit
the required claims data to CMS. We
estimate that on an annual basis it will
take 350 MA organizations 15 hours to
submit the required documentation to
CMS for total annual burden of 5,250
hours.
• § 423.336 Risk-sharing
arrangements.
(a) A Part D plan sponsor may submit
a bid that requests a decrease in the
applicable first or second threshold risk
percentages or an increase in the
percents applied under paragraph (b) of
this section.
The burden associated with this
requirement is the time and effort
necessary for Part D plan sponsors
submit the required bid materials to
CMS. We estimate that on an annual
basis it will take 10 Part D plan sponsors
20 hours to submit the required
documentation to CMS for total annual
burden of 200 hours.
(c) Within 6 months of the end of a
coverage year, the Part D plan plan must
provide the information that CMS
requires.
The burden associated with this
requirement is the time and effort
necessary for Part D plan sponsors
submit the required cost data to CMS.
We estimate that on an annual basis it
will take 100 Part D only sponsors and
350 MA organizations 10 hours to
submit the required documentation to
CMS for total annual burden of 45,000
hours.
• § 423.343 Retroactive adjustments
and reconciliations.
(c) Within 6 months of the end of a
coverage year, the Part D plan plan must
provide the information that CMS
requires.

E:\FR\FM\28JAR2.SGM

28JAR2

4448

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

The burden associated with this
requirement is the time and effort
necessary for Part D only sponsors to
submit the required data to CMS. We
estimate that on an annual basis it will
take 100 Part D Only sponsors and 350
MA organizations 10 hours to submit
the required documentation to CMS for
total annual burden of 4,500 hours.
(d) Within 6 months of the end of a
coverage year, the Part D plan plan must
provide the information that CMS
requires.
The burden associated with this
requirement is the time and effort
necessary for Part only sponsors to
submit the required cost data to CMS.
We estimate that on an annual basis it
will take 100 Part D only sponsors and
350 MA organizations 10 hours to
submit the required documentation to
CMS for total annual burden of 4,500
hours.
Subpart I—Organization Compliance
With State Law and Preemption by
Federal Law
• § 423.410 Waiver of certain
requirements to expand choice.
(e) Under this section a Part D plan
sponsor applicant may submit a waiver
application to CMS to waive certain
State licensure and fiscal solvency
requirements in order to contract with
CMS.
The burden associated with this
requirement is the time and effort
necessary for a Part D plan sponsor
applicant to submit a waiver application
that meets the requirements of this
section. We estimate that on an annual
basis it will take 15 applicants 10 hours
to submit the required waiver
documentation to CMS for total annual
burden of 150 hours.
Subpart J—Coordination of Part D Plans
with Other Prescription Drug Coverage
• § 423.458 Application of Part D
rules to Certain Part D Plans on and
after January 1, 2006.
(b) Organizations offering or seeking
to offer a MA-PD plan may request from
CMS in writing waiver or modification
of those requirements under this part
that are duplicative of, or that are in
conflict with provisions otherwise
applicable to the plan under Part C.
The burden associated with this
requirement is the time and effort
necessary for an organization to submit
the required waiver information to CMS
for consideration. We estimate on
average that we will receive 10 waiver
applicants, 20 hours to provide the
required material to CMS for
consideration for a total annual burden
of 200 hours.
(c) Any entity seeking to offer,
sponsor, or administer an employersponsored group prescription drug plan

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

may request, in writing, a waiver or
modification of additional requirements
under this Part that hinder its design of,
the offering of, or the enrollment in,
such employer-sponsored group
prescription drug plan.
The burden associated with this
requirement is the time and effort
necessary for an organization to submit
the required waiver information to CMS
for consideration.
We estimate on average that we will
receive 500 waiver applicants, 20 hours
to provide the required material to CMS
for consideration for a total annual
burden of 10,000 hours. However, it
should be noted that the number of
respondents is an average for over the
initial five year period and over time we
expect an increase in the number of
applicants.
(d) A cost plan (as defined in 42 CFR
417.401) or PACE organization (as
defined in 42 CFR 460.6) that offers
qualified prescription drug coverage
under Part D may request, in writing, a
waiver or modification of those
requirements under this part otherwise
applicable to cost plans or PACE
organizations that are duplicative of, or
that are in conflict with, provisions
otherwise applicable to cost plans under
section 1876 of the Act or PACE
organizations or under sections 1894
and 1934 of the Act, or as may be
necessary in order to improve
coordination of this Part with the
benefits offered by cost plans or PACE
organizations.
The burden associated with this
requirement is the time and effort
necessary for a cost plan or PACE
organization to submit the required
waiver information to CMS for
consideration. We estimate we will
receive 10 waiver applicants, 20 hours
to provide the required material to CMS
for consideration for a total annual
burden of 200 hours.
• § 423.464 Coordination of benefits
with other providers of prescription
drug coverage
(f) A Part D plan must exclude
expenditures for covered Part D drugs
made by insurance or otherwise, a group
health plan, or other third party
payment arrangements, including
expenditures by plans offering other
prescription drug coverage for purposes
of determining whether a Part D plan
enrollee has satisfied the out-of-pocket
threshold provided under
§ 423.104(d)(5)(iii). To ensure that this
requirement is met, A Part D enrollee
must disclose all these expenditures to
a Part D plan in accordance with
requirements under § 423.32(b)(ii).
The burden associated with this
requirement is the time and effort

PO 00000

Frm 00256

Fmt 4701

Sfmt 4700

necessary for a Part D enrollee to
disclose all these expenditures to a Part
D plan in accordance with requirements
under § 423.32(b)(ii). The burden
associated with this requirement is
captures and discussed above under
§ 423.32(b).
Subpart K—Application Procedures and
Contracts With Part D Plan Sponsors
• § 423.502 Application
requirements.
(b) In order to become a Part D
sponsor, an entity, or an individual
authorized to act for the entity (the
applicant), must complete, comply with,
and submit a certified application in the
form and manner required by CMS that
meets the requirements set forth in this
section.
The burden associated with this
requirement is the time and effort
necessary for Part D sponsors and MA
organizations to submit the required
application materials to CMS. We
estimate that on an annual basis it will
take 100 Part D sponsors and 350 MA
organizations 10 hours to submit the
required documentation to CMS for total
annual burden of 4,500 hours.
• § 423.505 Contract provisions
(d) The Part D sponsor agrees must
maintain for 10 years books, records,
documents, and other evidence of
accounting procedures and practices
that are sufficient to meet the
requirements set forth in this section.
The burden associated with this
requirement is the time and effort
necessary for Part D sponsors and MA
organizations to maintain the required
documentation outlined in this section.
We estimate that on an annual basis it
will take 100 Part D sponsors and 350
MA organizations 52 hours to maintain
the required documentation on an
annual basis, for total annual burden of
23,400 hours.
(f) The Part D sponsor must submit to
CMS certified financial information that
must include the requirements set forth
in this section.
The burden associated with this
requirement is the time and effort
necessary for Part D sponsors and MA
organizations to submit the required
certified data to CMS. We estimate that
on an annual basis it will take 100 Part
D plan sponsors and 350 MA
organizations 8 hours to submit the
required documentation to CMS for total
annual burden of 3,600 hours.
• § 423.507 Nonrenewal of Contract.
(a) If a Part D sponsor does not intend
to renew its contract, it must notify CMS
in writing by the first Monday of June
in the year in which the contract ends
and notify, in an manner that meets the
requirements of this section, each
Medicare enrollee, at least 90 days

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
before the date on which the
nonrenewal is effective.
The burden associated with this
requirement is the time and effort
necessary for a Part D sponsor to submit
a notice of nonrenewal to CMS. Since
this requirement affects less than 9
entities per year, it is exempt from the
PRA in accordance with 5 CFR
1320.3(c).
• § 423.508 Modification or
termination of contract by mutual
consent.
(b) If the contract is terminated by
mutual consent, the Part D sponsor must
provide notice to its Medicare enrollees
and the general public as provided in
paragraph (c) of this section.
Based on our experience with the
M+C program CMS does not anticipate
that more then 9 of these terminations
will occur on an annual basis.
• § 423.509 Termination of Contract
by CMS.
(b) If CMS notifies the Part D sponsor
in writing 90 days before the intended
date of their termination the Part D plan
sponsor must notify its Medicare
enrollees of the termination by mail at
least 30 days before the effective date of
the termination.
The Part D sponsor must also notify
the general public of the termination at
least 30 days before the effective date of
the termination by publishing a notice
in one or more newspapers of general
circulation in each community or
county located in the Part D sponsor’s
service area.
Based on our experience with the
M+C program CMS does not anticipate
that more then 9 of these terminations
will occur on an annual basis.
• § 423.510 Termination of contract
by the Part D sponsor.
(b) If a Part D sponsor terminates its
contract because CMS fails to
substantially carry out the terms of the
contract the Part D sponsor must give
advance notice to CMS, its Medicare
enrollees, and the general public in a
manner that meets the requirements set
forth in the section.
Based on our experience with the
M+C program CMS does not anticipate
that more then 9 of these terminations
will occur on an annual basis.
• § 423.514 Reporting requirements.
(b) Each Part D sponsor must report to
CMS or other Federal agencies, on an
annual basis the information necessary
to meet the requirements set forth in
this section.
The burden associated with this
requirement is the time and effort
necessary for 100 Part D sponsors to
submit the required document that
meets all of the requirements referenced
in this section to CMS or other Federal

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

agencies. We estimate that on an annual
basis it will take 100 Part D plan
sponsors 40 hours to submit the
required documentation, for total
annual burden of 4,000 hours.
(d) For an employees’ health benefits
plan that includes a Part D sponsor in
its offerings, the Part D plan sponsor
must furnish, upon request, the
information the plan needs to fulfill its
reporting and disclosure obligations (for
the particular Part D plan sponsor)
under the Employee Retirement Income
Security Act of 1974 (ERISA). The Part
D sponsor must furnish the information
to the employer or the employer’s
designee, or to the plan administrator,
as the term ‘‘administrator’’ is defined
in ERISA.
The burden associated with this
requirement is the time and effort
necessary for 100 Part D plan sponsors
to submit the required document that
meets all of the requirements referenced
in this section. We estimate that on an
annual basis it will take 100 Part D plan
sponsors 40 hours to submit the
required documentation, for total
annual burden of 4,000 hours.
(e) Each Part D plan sponsor must
notify CMS of any loans or other special
financial arrangements it makes with
contractors, subcontractors and related
entities.
The burden associated with this
requirement is the time and effort
necessary for 100 Part D plan sponsors
to notify CMS of any loans or other
special financial arrangements it makes
with contractors, subcontractors and
related entities. We estimate that on an
annual basis it will take 100 Part D plan
sponsors 1 hour to notify the required
entities, for total annual burden of 100
hours.
(f) Each Part D plan sponsor must
make the information reported to CMS
under this section available to its
enrollees upon reasonable request.
The burden associated with this
requirement is the time and effort
necessary for Part D plan sponsors to
disclose the required materials that meet
all of the requirements referenced in
this section to the public upon request.
We estimate that on an annual basis it
will take 100 Part D plan sponsors 20
hours to submit the required
documentation, for total annual burden
of 2,000 hours.
Subpart L—Effect of Change of
Ownership or Leasing of Facilities
During Term of Contract
• § 423.551 General provisions
(c) states that a Part D plan sponsor
that has a Medicare contract in effect
under § 423.502 of this part and is
considering or negotiating a change in
ownership must notify CMS at least 60

PO 00000

Frm 00257

Fmt 4701

Sfmt 4700

4449

days before the anticipated effective
date of the change. The Part D plan
sponsor must also provide updated
financial information and a discussion
of the financial and solvency impact of
the change of ownership on the
surviving organization.
The burden associated with this
requirement is the time and effort of the
Part D plan sponsor considering or
negotiating a change in ownership, to
notify CMS and provide the information
specified in this section. While this
requirement is subject to the PRA, we
believe that it would affect less than 10
entities on an annual basis; therefore, it
is exempt from the PRA in accordance
with 5 CFR 1320.4.
• § 423.552 Novation agreement
requirements
(a) Discusses the conditions for CMS
approval of a novation agreement. This
paragraph requires the Part D plan
sponsor to notify CMS at least 60 days
before the date of the proposed change
of ownership and requires them to
provide CMS with updated financial
information and a discussion of the
financial solvency impact of the change
of ownership on the surviving
organization.
The burden associated with this
requirement is discussed above in
§ 423.551 of the PRA section.
This paragraph also requires the Part
D plan sponsor to submit to CMS, at
least 30 days before the proposed
change of ownership date, 3 signed
copies of the novation agreement
containing the provisions specified in
this section, and 1 copy of other
relevant documents required by CMS.
The burden associated with this
requirement is time and effort of the
Part D plan sponsor to provide CMS
with the required documentation. While
this requirement is subject to the PRA,
we believe that it would affect less than
10 entities on an annual basis; therefore,
it is exempt from the PRA in accordance
with 5 CFR 1320.3(c).
Subpart M—Grievances, Coverage
Determinations, and Appeals
• § 423.562 General Provisions
(a) A Part D plan sponsor must ensure
that all enrollees receive written
information about the grievance,
coverage determination, and appeals
procedures that are available to them
through the Part D plan sponsor and
that meet the requirements set forth in
this section.
The burden associated with this
requirement is the time and effort
necessary for each of the 100 Part D plan
sponsors to disclose the necessary
information to an enrollee. We estimate
that it will require each of the 100 Part
D plan sponsors 8 hours on an annual

E:\FR\FM\28JAR2.SGM

28JAR2

4450

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

basis to disclose the information for a
total annual burden of 800 hours.
• § 423.564 Grievance procedures.
(e) The Part D plan sponsor must
notify the enrollee of its decision as
expeditiously as the case requires, based
on the enrollee’s health status, but no
later than 30 days after the date the plan
sponsor receives the oral or written
grievance.
The burden associated with this
requirement is the time and effort
necessary for Part D plan sponsors to
notify enrollee of its decision as
expeditiously as the case requires, based
on the enrollee’s health status, but no
later than 30 days after the date the plan
sponsor receives the oral or written
grievance. We estimate that on an
annual basis it will take 100 Part D plan
sponsors 52 hours to meet the
notification requirements of this section
an annual basis, for total annual burden
of 5200 hours.
(g) The Part D plan sponsor must
maintain records on all grievances
received both orally and in writing,
including, at a minimum, the date of
receipt, final disposition of the
grievance, and the date that the Part D
plan sponsor notified the enrollee of the
disposition.
The burden associated with this
requirement is the time and effort
necessary for Part D plan sponsors to
maintain the required documentation
outlined in this section. We estimate
that on an annual basis it will take 100
Part D plan sponsors 52 hours to
maintain the required documentation on
an annual basis, for total annual burden
of 5,200 hours.
• § 423.568 Standard timeframe and
notice requirements for coverage
determinations.
(a) When a party makes a request for
a drug benefit, the Part D plan sponsor
must notify the enrollee 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 supporting
statement.
The burden associated with this
requirement is the time and effort
necessary for each of the 100 Part D plan
sponsors to disclose the necessary
information to an enrollee whenever a
coverage determination is unfavorable.
We estimate the universe of such
determinations to be 140,000
(approximately 80 percent of which will
be ‘‘exceptions requests’’ under
§ 423.578). We estimate that it will take
30 minutes to prepare a notice of
unfavorable decision. The total
estimated annual burden is 56,000
hours.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(b) When a party makes a request for
payment, the Part D plan sponsor must
notify the enrollee of its determination
no later than 72 hours after receipt of
the request.
The burden associated with this
requirement is the time and effort
necessary for the 100 Part D plan
sponsors to disclose the necessary
information to an enrollee. We estimate
that approximately 10 percent of
coverage determinations will involve
payment disputes. Thus, the annual
associated burden will be 7000 hours.
(c) The burden associated with
requirement is discussed above in
§ 423.568(a).
• § 423.570 Expediting certain
coverage determinations.
(c) The Part D plan sponsor must
document all oral requests in writing
and maintain written and oral request
documentation in the case file.
The burden associated with this
requirement is the time and effort
necessary for Part D plan sponsors to
maintain the required documentation
outlined in this section. We estimate
that on an annual basis 10 percent of all
coverage determinations will be
expedited requests. Of the 12,600
requests, we estimate that
approximately 90 percent will be oral
requests. Thus, it will take 100 Part D
plan sponsors 57 hours to maintain the
required documentation on an annual
basis, for total annual burden of 5700
hours.
(d) If a Part D plan sponsor denies a
request for expedited determination, it
must give the enrollee prompt oral
notice of the denial and subsequently
deliver, within 3 calendar days, a
written letter that explains the notice
requirements set forth in this section.
The burden associated with this
requirement is the time and effort
necessary for each of the 100 Part D plan
sponsors to disclose the necessary
information to an enrollee. We estimate
that 1 percent of the expedited requests
will be transferred to the standard
process. We estimate that it will take
each of the 100 Part D plan sponsors 15
minutes to process each of the 126
cases. Thus, it will take Part D plan
sponsors 32 hours an annual basis to
disclose the information.
• § 423.572 Timeframes and notice
requirements for expedited coverage
determinations.
(a) 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 involved,
as appropriate) of its decision, whether
adverse or favorable, as expeditiously as

PO 00000

Frm 00258

Fmt 4701

Sfmt 4700

the enrollee’s health condition requires,
but no later than 24 hours after
receiving the request, or, for an
exceptions request, the physician’s
supporting statement.
The burden associated with this
requirement is the time and effort
necessary for each of the 100 Part D plan
sponsors to disclose the necessary
information to an enrollee and
prescribing physician involved in
11,340. We estimate that it will require
each of the 100 Part D plan sponsors 30
minutes to disclose adverse coverage
determinations. We estimate that
approximately 15 percent of the cases
(1700) will involve adverse coverage
determinations, for a total annual
burden of 850 hours. We estimate that
it will take 5 minutes for the Part D plan
sponsors to disclose favorable decisions
for the remaining 9640 cases for a total
annual burden of 803 hours.
(b) The burden associated with this
requirement is discussed above in
§ 423.572(a).
• § 423.578 Exceptions process.
(a) An enrollee, the enrollee’s
representative, or the enrollee’s
prescribing physician (on behalf of the
enrollee) may file a request for an
exception that meets the requirements
of this section.
The burden associated with this
requirement is the time and effort
necessary for an individual to submit a
request for exception. We estimate it
will require an individual 30 minutes to
provide the request and that the 100
Part D plans sponsors will receive
112,000 requests on an annual basis.
Therefore, we estimate a total annual
burden of 56,000 hours.
(b) An enrollee, the enrollee’s
representative, or the prescribing
physician (on behalf of the enrollee)
may file an exception request that meets
the requirements of this section.
The burden associated with this
requirement is the time and effort
necessary for an individual to submit a
request for exception. We estimate it
will require an individual 30 minutes to
provide the request and that that the 100
Part D plan sponsors will receive
112,000 requests on an annual basis.
Therefore, we estimate a total annual
burden of 56,000 hours.
A Part D plan sponsor may require a
written supporting statement from the
enrollee’s prescribing physician that the
requested prescription drug is medically
necessary to treat the enrollee’s disease
or medical condition. The Part D plan
sponsor may require the prescribing
physician to provide additional
supporting medical documentation as
part of the written follow-up.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
The burden associated with this
requirement is the time and effort
necessary for a prescribing physician to
submit the required documentation to
the Part D plan sponsor. We estimate it
will require a prescribing physician 15
minutes to provide the supporting
documentation and that that the 100
Part D plan sponsors will make 5,600
requests on an annual basis. Therefore,
we estimate a total annual burden of
1400 hours.
• § 423.582 Request for a standard
redetermination.
(a) An enrollee must ask for a
redetermination by making a written
request with a Part D plan sponsor that
made the coverage determination. The
Part D plan sponsor may adopt a policy
for accepting oral requests.
The burden associated with this
requirement is the time and effort
necessary for an individual to submit a
request for redetermination. We
estimate that approximately 15 percent
of the 140,000 coverage determinations
will be adverse. Of those 21,000 cases,
we estimate that approximately 50
percent will be appealed. We further
estimate it will require an individual 30
minutes to provide the request and that
the 100 Part D plan sponsors will
receive 9,450 standard requests on an
annual basis. Therefore, we estimate a
total annual burden of 4,725 hours.
(c) If the 60-day period in which to
file a request for a redetermination has
expired, an enrollee may file a request
for redetermination and extension of
time frame with the Part D plan sponsor.
The burden associated with this
requirement is the time and effort
necessary for an individual to submit a
request for extension of
redetermination. We estimate it will
require an individual 15 minutes to
provide the request and that each of the
100 Part D plan sponsors will receive
100 requests on an annual basis.
Therefore, we estimate a total annual
burden of 2500 hours.
(d) The person who files a request for
redetermination may withdraw it by
filing a written request for withdrawal at
the location listed in paragraph (a) of
this section.
The burden associated with this
requirement is the time and effort
necessary for an individual to submit a
withdrawal request. We estimate it will
require an individual 15 minutes to
provide the request and that each of the
100 Part D plan sponsors will receive 5
requests on an annual basis. Therefore,
we estimate a total annual burden of 125
hours.
• § 423.584 Expediting certain
redeterminations.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(c) The Part D plan sponsor must
document all oral requests in writing,
and maintain the documentation in the
case file.
The burden associated with this
requirement is the time and effort
necessary for Part D plan sponsors to
maintain the required documentation
outlined in this section. We estimate
that on an annual basis, 10 percent of
the 10,500 redeterminations will be
expedited requests. Of the 1,050
expedited requests, we estimate that
approximately 90 percent will be oral
requests. Thus, it will take the 100 Part
D plan sponsors approximately 5 hours
to maintain the required documentation
on an annual basis, for total annual
burden of 500 hours.
(d) If a Part D plan sponsor denies a
request for expedited redetermination, it
must give the enrollee prompt oral
notice, and subsequently deliver, within
3 calendar days, a written letter that
explains the requirements set forth in
this section.
The burden associated with this
requirement is the time and effort
necessary for each of the 100 Part D plan
sponsors to disclose the necessary
information to an enrollee. We estimate
that 10 percent of the expedited requests
will be transferred to the standard
process. We further estimate that it take
each of the 100 Part D plan sponsors 15
minutes to process each of the 105 cases
to disclose the information for a total
annual burden of 26 hours.
• § 423.590 Timeframes and
responsibility for making
redeterminations.
(a) When a party makes a request for
a drug benefit, the Part D plan sponsor
must notify the enrollee in writing of its
redetermination as expeditiously as the
enrollee’s health condition requires, but
no later than 7 calendar days from the
date it receives the request for a
standard redetermination.
The burden associated with this
requirement is the time and effort
necessary for each of the 100 Part D plan
sponsors to disclose the necessary
information to an enrollee. We estimate
that it will require each of the 100 Part
D plan sponsors 30 minutes to disclose
the information for a total annual
burden of 4,725 hours.
(b) When a party makes a request for
payment, the Part D plan sponsor must
issue its redetermination no later than 7
calendar days from the date it receives
the request for a standard
redetermination. We estimate that 10
percent of the 9,450 standard
redetermination requests will involve
payment disputes.
The burden associated with this
requirement is the time and effort

PO 00000

Frm 00259

Fmt 4701

Sfmt 4700

4451

necessary for each of the 100 Part D plan
sponsors to disclose the necessary
information to an enrollee. We estimate
that it will require each of the 100 Part
D plan sponsors 30 minutes on an
annual basis to disclose the information
for a total annual burden of 473 hours.
(d) A Part D plan sponsor that
approves a request for expedited
redetermination must complete its
redetermination and give the enrollee
(and the prescribing physician 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 for an
expedited redetermination.
The burden associated with this
requirement is the time and effort
necessary for each of the 100 Part D plan
sponsors to disclose the necessary
information to 895 enrollees (and the
prescribing physicians involved, as
appropriate). We estimate that it will
require each of the 100 Part D plan
sponsors 30 minutes on an annual basis
to disclose the information for a total
annual burden of 448 hours.
Subpart N—Medicare Contract
Determinations and Appeals
This Subpart deals with Contract
Determinations and Appeals; therefore,
the information collection requirements
referenced in this Subpart are exempt
from the PRA in accordance with 5 CFR
1320.4(a)(2) during the conduct of an
administrative action, investigation, or
audit.
Subpart O—Intermediate Sanctions
• § 423.756 Procedures for imposing
sanctions.
(a) Before imposing the intermediate
sanctions specified in this section, CMS
will allow the Part D plan sponsor to
provide evidence that it has not
committed an act or failed to comply
with the requirements as described. In
addition, CMS may allow additional
time for the Part D plan sponsor to
provide the evidence if the Part D plan
sponsor sends a written request
providing a credible explanation of why
additional time is necessary.
These information collection
requirements are exempt from the PRA
in accordance with 5 CFR 1320.4(a)(2)
during the conduct of an administrative
action, investigation, or audit.
Subpart P—Premiums and CostSharing Subsidies for Low-Income
Individuals
• § 423.774 Eligibility
determinations, redeterminations, and
applications.
Paragraph (d) of this section discusses
the application requirements for
individuals applying for low-income
subsidy. This paragraph states that
individuals applying for low-income

E:\FR\FM\28JAR2.SGM

28JAR2

4452

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

subsidy, or a personal representative
applying on the individual’s behalf,
must complete all required elements of
the application, provide any statements
from financial institutions, as requested,
to support information in the
application, and certify, as to the
accuracy of the information provided on
the application form.
The burden associated with this
requirement is the time and effort for
the individual or personal
representative applying on the
individual’s behalf, to complete the lowincome subsidy application, provide
financial statements as requested and to
certify that the information provided is
accurate. These collection requirements
are subject to the PRA; however, the
burden associated with these
requirements is currently approved
under OMBι 0938–0467 with a current
expiration date of October 31, 2005. We
will revise this currently approved PRA
package to incorporate the burden being
imposed on new enrollees. We estimate
that this requirement will impose a
burden on 4.5 million new enrollees for
a total additional burden of 750,000
hours annually (4.5M X 10 minutes).
• § 423.800 Administration of
subsidy program.
Paragraph (b) of this section requires
the Part D plan sponsor offering the Part
D plan plan, or the MA organization
offering the MA-PD plan, to reduce the
individual’s premiums and cost-sharing
as applicable and provide information
to CMS on the amount of such
reductions, in a manner determined by
CMS. This paragraph also requires the
Part D plan sponsor offering the Part D
plan to maintain documentation to track
the application of the low-income costsharing subsidies to be applied to the
out-of-pocket threshold.
The burden associated with these
requirements is the time and effort for
the Part D plan sponsor offering the Part
D plan to provide information to CMS
and to maintain documentation. We
estimate that it will take each of the 450
Part D plan or MA-PD sponsors offering
the Part D plans or MA-PD
approximately 52 hours on an annual
basis to provide the information to CMS.
We also estimate that it will take
approximately 26 hours for each of the
450 entities to maintain the information
for tracking purposes. Therefore, we
estimate that it will take approximately
35,100 total hours annually to comply
with these requirements.
Subpart Q—Guaranteeing Access to a
Choice of Coverage
• § 423.859 Assuring access to a
choice of coverage.
(c) states that CMS may waive or
modify the requirements of this part if

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

an entity seeking to become a
prescription drug plan in an area such,
as a territory, other than the 50 States
or the District of Columbia requirement
Part D in order to provide qualified
prescription drug.
The burden associated with this
requirement is the time and effort for
the Part D plan to make a request of
waiver or modification to CMS. We
estimate that approximately 2 Part D
plan s will request a waiver or
modification on an annual basis. Since
this requirement affects less than 10, it
is exempt from the PRA in accordance
with 5 CFR 1320.3(c).
• § 423.863 Submission and approval
of bids.
(a) discusses the process CMS uses for
the solicitation and approval of bids.
CMS solicits bids from eligible fallback
entities for the offering in all fallback
service areas in one or more Part D plan
regions of a fallback prescription drug
plan. CMS specifies the form and
manner in which fallback bids are
submitted in separate guidance to
bidders.
The burden associated with this
requirement is the time and effort for
the fallback entities to prepare and
submit a bid that meets the
requirements of the section and related
sections.
We estimate as an upper limit that
approximately 20 fallback entities will
submit a bid every three years. We also
estimate that it will take each fallback
entity approximately 80 hours to
complete and submit the bid to CMS.
Therefore, we estimate it will take a
total of (20 * 80) /3 = 533.33 hours on
an annual basis to comply with this
requirement.
(b) Negotiation and Acceptance of
Bids discusses the procedures CMS uses
to enter into contracts. CMS solicits bids
from eligible fallback entities and uses
competitive procedures to enter into
contracts.
The burden associated with this
requirement is the time and effort for
the fallback entities to enter into a
contract with CMS that meets the
requirements of this section and related
sections.
We estimate, again as an upper limit,
that approximately 5 fallback entities
will enter into a contract with CMS on
an annual basis. Since this requirement
affects less than 10, it is exempt from
the PRA in accordance with 5 CFR
1320.3(c).
• § 423.871 Contract terms and
conditions.
(f) states that each contract for a
fallback prescription drug plan requires
an eligible fallback entity offering a
fallback prescription drug plan to

PO 00000

Frm 00260

Fmt 4701

Sfmt 4700

provide CMS with the information CMS
determines is necessary to carry out the
requirements of this section.
The burden associated with this
requirement is the time required of the
fallback prescription drug plan to
provide CMS with the information CMS
determines necessary. We estimate that
approximately 5 fallback prescription
drug plans will enter into a contract
with CMS. Since this requirement
affects less than 10, it is exempt from
the PRA in accordance with 5 CFR
1320.3(c).
Subpart R—Payments to Sponsors of
Retiree Prescription Drug Plans
• § 423.884 Requirements for
qualified retiree prescription drug plans.
(a),(b), (c),and (d) In order to qualify
for the retiree drug subsidy, the
employer or union sponsor shall file an
annual application with CMS that meets
the requirements of this section and
related sections, for each qualified
retiree prescription drug plan
maintained, including an attestation as
to actuarial value.
The burden associated with this
requirement is the time and effort
necessary for an entity to submit the
application to CMS. The requirements
of this part state that an application
must provide sponsor and plan
identification information, together with
an actuarially-certified attestation that
the actuarial value of the retiree
prescription drug coverage in each plan
(benefit option) is at least equal to the
actuarial value of standard Medicare
Part D prescription drug coverage in
accordance with actuarial guidelines
established by CMS in accordance with
generally accepted actuarial principles.
If there is a change during the year that
materially affects the actuarial value of
their drug coverage, sponsors will need
to submit an updated attestation.
Sponsors will also be required to collect
identifying information on their
qualifying covered retirees and submit
this information with their application,
along with a signed sponsor agreement.
If we determine that a sponsor of a
retiree prescription drug program meets
all of the requirements of this section,
we will send to the sponsor a written
notification regarding the sponsor’s
eligibility to receive a subsidy payment
along with a list of qualified retirees that
has been verified with the Medicare
Beneficiary Database (MBD).
For each entity we estimate an
average of 2 hours administrative work
to assemble the application, 31 hours for
systems changes to extract identifying
information on qualifying covered
retirees, about 7 hours for preparation of
the actuarial attestations, and about 30
minutes to sign the required sponsor

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
agreement, for a total of approximately
40.5 hours, for each prescription drug
plan (benefit option). The 7–hour
estimate for preparation of actuarial
attestations represents an average and
varies substantially across firm size (see
the economic impact section of this
proposed regulation for the analysis
pertaining to the range of time needed
for sponsors of various sizes and
numbers of plans).
For the number of entities applying
for the subsidy, we have used 50,000,
our estimate of the total number of
public, private, and union sponsors
projected to offer retiree prescription
drug coverage in 2005. We have
estimated on the basis of this figure in
order to calculate the highest potential
burden.
The total burden for preparation and
filing of the 2005 applications for 50,000
sponsors is 2,025,000 hours. We also
estimate that 5 percent of the initial
applications may have to be re-filed due
to mid-year changes to drug coverage
that materially affect actuarial value. We
estimate 101,250 hours for this activity.
(e) Each entity must disclose the
creditable coverage status for each
prescription drug plan to CMS in a form
and manner described by CMS. We
estimate this activity to take about 1
hour each for a total of approximately
50,000 hours. Additionally, in future
years, each entity must notify CMS of
any changes in creditable coverage
status for an average annual burden of
1 hour.
In addition, each entity must notify
each Part D eligible individual of the
plan’s creditable coverage status in a
form and manner prescribed by CMS.
The burden associated with the sponsor
notices is required by § 423.56 of the
proposed regulation, as discussed
earlier in this analysis.
For the sponsors of retiree drug
coverage, we estimate that it will take
50,000 entities approximately 8 hours
each to produce a standardized notice
for a total of 400,000 burden hours.
Since each entity can include initial
disclosure notices in existing
beneficiary plan materials, which are
already being disseminated to their
participants, we estimate that this will
involve a negligible amount of time.
Additionally, in subsequent years, on
average, we estimate that each entity
will provide 13 additional separate
notices to individuals upon request for
an annual burden of about 1 hour. We
also estimate that in subsequent years
some of these sponsors of retiree
coverage will provide notices of a
change in creditable coverage for an
average annual burden of 8 hours. We
estimate that the annual burden

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

associated with providing notices prior
to the ACEP in subsequent years will be
negligible, since they will be able to
include these notices in their existing
plan materials with minimal
modifications.
If an individual establishes to CMS
that he or she was not adequately
informed that he or she no longer had
creditable prescription drug coverage or
the coverage is involuntarily reduced,
the individual may apply to CMS to
have the coverage treated as creditable
coverage so as to not be subject to the
late enrollment fee described in
§ 423.46. The burden associated with
this requirement is the time and effort
necessary for an individual to apply to
CMS to have such coverage treated as
creditable coverage. While we have no
way of determining how many
individuals will apply to CMS, for the
purpose of providing an upper bound
estimate for public comment we
estimate that on an annual basis it will
take 100,000 individuals 15 minutes to
apply to CMS, for a total of 25,000
hours.
(f) The employer or union sponsor of
the plan must maintain the records
outlined in this section for 6 years after
the expiration of the plan year in which
the costs were incurred.
The burden associated with this
requirement is the time and effort
necessary for an entity to maintain the
required documentation for six years.
We estimate that on an annual basis it
will take 50,000 entities 20 hours in
total to retain the required
documentation prescribed in this
section and in § 423.888(d), for a total of
1,000,000 burden hours. We believe that
for a small firm the total number of
hours required for record retention will
be less than 20 hours, but for purposes
of the PRA we assume 20 hours for
firms of all sizes.
• § 423.888 Payment methods,
including provision of necessary
information.
(b) and (c) To receive payment under
this section, each qualified entity must
submit information in a form and
manner and at such times provided in
this paragraph and under other
guidance specified by CMS, by the
sponsor or any party designated the
sponsor.
If a sponsor elects to receive monthly
or quarterly retiree subsidy payments or
an interim annual retiree subsidy
payment, the plan sponsor must submit
aggregated gross cost data, an estimate
of the difference between these gross
costs and allowable costs (based on
expected rebates and other price
concessions), and any other data CMS
may require upon submission of data for

PO 00000

Frm 00261

Fmt 4701

Sfmt 4700

4453

payment at each of the time intervals
elected by the sponsor, with a final
reconciliation within 15 months after
the end of the plan year. For final
reconciliation purposes, sponsors must
submit total gross cost data segregated
per qualifying covered retiree; actual
rebates, discounts or other price
concessions received with respect to
such costs; and any other data CMS may
require, within 15 months after the end
of the plan year. In addition, plan
sponsors are required to provide on a
monthly basis an update to their
enrollment file, (for example, accretes
and deletes).
The burden associated with this
requirement is the time and effort
necessary for an entity to submit the
required data and information that
meets the requirements of this section.
We estimate that on an annual basis it
will take 50,000 entities 17 hours to
provide the required documentation, for
a total of 850,000 burden hours. The 17–
hour estimate reflects an average across
firms of various sizes and reflects our
expectation that the time involved in
the data submission process will be
lessened by the development of
automated systems to calculate this
information. (See the regulatory impact
analysis for more detailed discussion of
these estimates.)
(d) Participating entities must
maintain the records outlined in this
section for 6 years after the expiration
of the plan year in which the costs were
incurred and fully meets the
requirements of this section.
The burden associated with this
requirement is the time and effort
necessary for an entity to maintain the
required documentation for six years.
We estimate that on an annual basis it
will take 50,000 entities 20 hours to
retain the required documentation
prescribed in this section and in
§ 423.884(e), for a total of 1,000,000
burden hours.
• § 423.890 Appeals
The information collection
requirements set forth in this section are
exempt from the PRA as stipulated in 5
CFR 1320.4.
• § 423.892 Change in Ownership.
(c) A sponsor who is contemplating or
negotiating a change of ownership must
notify CMS at least 60 days before the
anticipated effective date of the change.
We estimate that approximately 5
percent of sponsors will fall into this
category in a given year.
The burden associated with this
requirement is the time and effort
necessary for a sponsoring entity to
submit the required notification to CMS.
On an annual basis it will take 2,500
entities (5 percent of 50,000) about 30

E:\FR\FM\28JAR2.SGM

28JAR2

4454

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

minutes to submit the required
notification to CMS, for a total of
approximately 1,250 burden hours.
Subpart S—Special Rules for StatesEligibility Determinations for LowIncome Subsidies and General Payment
Provisions.
• § 423.904 Eligibility
determinations.
Paragraph (b) of this section states the
State agency must inform CMS of cases
where eligibility is established or
redetermined.
The burden associated with the
requirement on State agencies to inform
CMS of cases where eligibility is
established or redetermined is estimated
to total approximately 11,220 annual
hours. We estimate that there will be
approximately 600,000 of these cases on
an annual basis. We also estimate that
it will take approximately 10 hours per
month for the State agency to inform
CMS of these cases.
Paragraph (d) of this section requires
States to make available—low-income
subsidy application forms, information
on the nature of, and eligibility
requirements for the subsidies under
this section, and offer assistance with
the completion of the application forms.
States must require an individual or
personal representative applying for the
low-income subsidy to complete all
required elements, provide documents
as necessary, and certify as to the
accuracy of the information provided. In
addition, States must provide CMS with
other information as specified by CMS
that may be needed to carry out the
requirements of the Part D prescription
drug benefit.
The burden associated with the
requirement on States to make available
the information specified in this section
is subject to the PRA; however, we
believe the burden for this requirement
to be a reasonable and customary
business practice; therefore, imposes no
additional burden on the States.
The burden associated with the
requirement on States to require the
applicant of the low-income subsidy to
complete all required elements, to
provide documents, and to certify as to
the accuracy of the information is
subject to the PRA; however, the burden
associated with this requirement is
discussed in § 423.774 above.
The burden associated with the
requirement on States to provide CMS
with other information as specified by
CMS is estimated to total approximately
1,020 annual hours. Since it is difficult
to determine at this time the volume of
information CMS will request, we are
estimating that it will take on average 20
hours per State on an annual basis to

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

provide CMS with the specified
information.
• § 423.907 Treatment of Territories
Paragraph (a) of this section discusses
the requirements on territories to submit
plans for approval by the Secretary to
receive increased grants. This paragraph
states that a territory may submit a plan
to the Secretary under which medical
assistance is to be provided to lowincome individuals for the provision of
covered Part D drugs. Paragraph (b) of
this section describes what a plan must
include.
The burden associated with this
requirement is the time and effort of
territories to prepare and submit a plan
for approval. While this requirement is
subject to the PRA, we estimate that this
requirement would affect only 5
territories; therefore, it is exempt from
the PRA in accordance with 5 CFR
1320.3(c).
• § 423.910 Requirements.
(c) This subpart sets forth the
requirements for State contributions for
Part D drug benefits based on dual
eligible drug expenditures. It requires
States to submit MSIS data to provide
accurate and complete coding to
identify the numbers and types of
Medicaid and Medicare dual eligibles in
their MSIS data submittals.
The burden associated with the
requirement on States to provide
accurate and complete coding in their
MSIS data submittals is subject to the
PRA; however, this requirement is
already approved under OMB ι0938–
0502 with a current expiration date of
January 31, 2006.
(d) The subpart also requires States to
submit an electronic file, in a manner
specified by the Secretary, identifying
each full benefit dual eligible enrolled
in the State for each month with Part D
drug coverage who is also determined to
be full benefit eligible by the State for
full Medicaid benefits.
The burden associated with the
requirement on States to submit an
electronic file identifying each full
benefit dual eligible enrolled in the
State for each month with Part D drug
coverage is estimated to total
approximately 120 hours per State on an
annual basis. We estimate that it will
take approximately 10 hours for each
State to submit an electronic file on a
monthly basis. Therefore, we estimate a
total burden of 6,120 hours on an
annual basis. Startup development effort
is estimated at 100 hours per State for
a total of 5,100 hours.
Subpart T—Financial Relationships
Between Physicians and Entities
Furnishing Designated Health Services.
Subpart T does not contain any
requirements subject to the PRA.

PO 00000

Frm 00262

Fmt 4701

Sfmt 4700

If you comment on these information
collection and recordkeeping
requirements, please mail copies
directly to the following:
Centers for Medicare and Medicaid
Services
Office of Strategic Operations and
Regulatory Affairs,
Attn: John Burke (CMS–4068–F)
Room C5–13–28, 7500 Security
Boulevard,
Baltimore, MD 21244–1850;
and Office of Information and
Regulatory Affairs,
Office of Management and Budget,
Room 10235, New Executive Office
Building,
Washington, DC 20503,
Attn: Christopher Martin, CMS Desk
Officer (CMS–4068–F),
[email protected]. Fax
(202) 395–6974
V. Regulatory Impact Statement
A. Overall Impact
We have examined the impacts of this
rulemaking under Executive Order
12866 (September 1993, Regulatory
Planning and Review), the Regulatory
Flexibility Act (RFA) (September 16,
1980, Pub. L. 96–354), section 1102(b) of
the Social Security Act, the Unfunded
Mandates Reform Act of 1995 (Pub. L.
104–4), Executive Order 13132 on
Federalism, and the Congressional
Review Act (5 USC 804(2)).
Executive Order 12866 directs
agencies to assess all costs and benefits
of available regulatory alternatives and
if regulation is necessary, to select
regulatory approaches that maximize
net benefits (including potential
economic, environmental, public health
and safety effects, distributive impact
and equity). A regulatory impact
analysis (RIA) must be prepared for
major rules with economically
significant effects ($100 million or more
in any one year). Our estimate is that
this rulemaking is ‘‘economically
significant’’ as measured by the $100
million standard, and hence also a
major rule under the Congressional
Review Act. Accordingly, we have
prepared a regulatory impact analysis.
The Medicare Prescription Drug,
Improvement, and Modernization Act of
2003 (MMA) amends Title XVIII of the
Social Security Act (the Act) to create a
voluntary prescription drug benefit
within the Medicare program beginning
in 2006. The Medicare prescription drug
benefit will make prescription drugs
more affordable for beneficiaries by
offering subsidized Medicare
prescription drug coverage to all
beneficiaries, with even more generous
assistance available to low-income

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
beneficiaries. We believe that this is an
important step in modernizing the
Medicare program to better meet
beneficiaries’ needs. We anticipate that
by giving beneficiaries access to
affordable insurance coverage that helps
them to pay for their outpatient
prescription drugs—which have become
a critical component in the delivery of
comprehensive, quality health care
services—the Medicare prescription
drug benefit will help beneficiaries to
lead healthier, more productive lives,
while also helping to improve the
effectiveness of the Medicare program.
The MMA also includes provisions to
help employers and unions continue to
provide drug coverage to their Medicare
eligible retirees that is at least as
generous as the new Medicare coverage.
The MMA authorizes Medicare to make
retiree drug subsidy payments to
employers and unions that provide
qualified retiree prescription drug
coverage to beneficiaries who do not
enroll in a Part D plan. This retiree drug
subsidy provides special tax-favored
payments to the sponsors of qualified
retiree health plans. The retiree drug
subsidy program has highly flexible
rules that permit employers and unions
to retain their current plan designs that
are at least equivalent to the standard
Part D benefit while using the drug
subsidy to reduce the cost of providing
generous coverage.
With the trend toward declining
retiree health insurance coverage that
has occurred over the past decade, the
Medicare retiree drug subsidy is
intended to ‘‘help employers [to] retain
and enhance their prescription drug
coverage so that the current erosion in
coverage would plateau or even
improve’’ (Medicare Prescription Drug,
Improvement, and Modernization Act of
2003 Conference Report, p. 53).
Medicare Part D also offers employers
and unions a variety of other options for
continuing to assist their Medicare
retirees, and our final regulation reflects
comments on how Medicare can best
implement all of these approaches to
achieve the maximum support for
retiree coverage. In addition to having
the opportunity to obtain the Medicare
retiree drug subsidy, employers and
unions can choose to provide additional
drug coverage to their Medicare-eligible
retirees through or in coordination with
Part D by encouraging their Medicareeligible retirees to enroll in Part D (with
Medicare subsidizing the costs of their
standard Part D benefits), and providing
enhanced or supplemental coverage
over and above the standard Part D
benefit. This can be achieved by either
providing separate supplemental drug
coverage that wraps around a Part D

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

plan (similar to policies that wrap
around Medicare benefits under Part A
and Part B), arranging for a Part D plan
(that is, a Part D plan (PDP) or Medicare
Advantage Prescription Drug Plan (MA­
PD)) to provide enhanced benefits to
their retirees, or choosing through
waivers to become a Part D plan that
offers enhanced benefits to their
retirees. In all of these cases, financial
support from the new Medicare benefit
and retiree drug subsidy can augment
contributions by employers and unions
to provide a more generous and less
costly drug benefit for retirees than is
possible through employer/union
support alone.
We described this range of employer/
union options in our proposed rule and
in a subsequent white paper and public
meetings, and we received extensive
public comments on the key issue of
how this combination of employer/
union options can be used to achieve
maximum support for retiree drug
coverage. Based on the public comments
and further analysis, we believe that the
mechanism for implementing options
for strengthening employer and union
coverage with Medicare Part D,
including the Medicare retiree drug
subsidy and the other opportunities it
affords employers and unions for
providing continued prescription drug
assistance to their Medicare retirees,
will result in combined aggregate
payments by employers/unions and
Medicare for drug coverage on behalf of
retirees that are significantly greater
than they otherwise would have been
without the enactment of the MMA.
Furthermore, the Medicare prescription
drug benefit and retiree drug subsidy
represent a particularly important
strengthening of health care coverage for
future Medicare-eligible retirees, given
the erosion in the availability and
generosity of employment-based retiree
coverage for future Medicare
beneficiaries that has already been
taking place, as is discussed in further
detail subsequently in this impact
analysis.
We have updated our impact analysis
from what was presented in our August
3, 2004 proposed rule. Our update
reflects responses to public comments,
changes due to final policy and
implementation decisions,
improvements to the analysis based on
additional information and new
research studies (see, for example, our
discussion of the financial value of the
Part D benefit to beneficiaries), and
updated data and actuarial and
economic assumptions. A discussion of
our updated assumptions and the effects
of these various changes is presented
subsequently in the impact analysis.

PO 00000

Frm 00263

Fmt 4701

Sfmt 4700

4455

We estimate that in calendar year (CY)
2006 about 39 million Medicare
beneficiaries will receive creditable
drug coverage either through a Medicare
Part D plan (including beneficiaries who
receive additional drug coverage or
premium assistance from other sources
such as a former employer or union), or
through an employer/union sponsored
retiree plan that is eligible for the
Medicare retiree drug subsidy. By CY
2010, with growth in the overall
Medicare population, we estimate that
about 42 million Medicare beneficiaries
will receive such coverage.
The Medicare drug benefit, including
the retiree drug subsidy, will lead to an
increase in Federal spending on
Medicare benefits and a decrease in
Federal spending on Medicaid benefits
(as dual eligibles’ drug coverage is
shifted from Medicaid to Medicare). The
net effect of these changes on Federal
outlays is estimated to be about $49
billion in CY 2006 and about $68 billion
in CY 2010, with the total effect
estimated to be roughly $293 billion
over the period from CY 2006–2010.
The vast majority of this Federal
spending is on Medicare subsidies that
defray the cost of the Medicare drug
benefit for beneficiaries, that provide
substantial additional cost-sharing and
premium assistance to low-income
beneficiaries, and that make it more
affordable for employers and unions to
continue to provide and support high
quality retiree drug coverage. We also
anticipate that some of the Federal
spending will generate savings for
States, as responsibility for drug
coverage for full-benefit dual eligibles is
shifted from Medicaid to Medicare and
as State spending on State prescription
drug assistance programs is likely to be
at least partly displaced by the Medicare
drug benefit. We also estimate that more
eligible low-income beneficiaries will
enroll in Medicaid and other lowincome benefits, in addition to the
comprehensive Medicare drug benefit,
as a result of the additional value of the
drug benefit and unprecedented
beneficiary outreach activities. Taking
together the various State savings and
costs related to Medicare Part D, we
estimate that the Medicare drug benefit
will lead to net State budgetary savings
of about $1.0 billion in CY 2006 and
$2.2 billion in CY 2010, with total net
savings of about $7.9 billion over the
period from CY 2006–2010.
As discussed in more detail in section
L of the impact analysis, from both an
economic and budgetary accounting
perspective, Federal spending on the
Medicare drug benefit largely represents
transfers of Federal budget revenue from
taxpayers to Medicare beneficiaries and

E:\FR\FM\28JAR2.SGM

28JAR2

4456

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

retiree plans sponsored by private and
public sector employers and unions.
Also, from an economic perspective,
there is effectively a transfer of Federal
budget revenues from taxpayers to State
governments, as Medicare pays for some
of the costs of drug coverage for fullbenefit dual eligibles that had been
previously paid for by States and as the
Medicare drug benefit displaces some
State spending on prescription drug
assistance programs. In addition, a
portion of the Federal spending on
Medicare Part D is for administrative
costs incurred by PDPs and MA-PDs to
administer the benefit effectively.
B. Unfunded Mandates
Section 202 of the Unfunded
Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated
costs and benefits and take certain other
actions before issuing a final rule that
includes any Federal mandate that may
result in expenditure in any one year by
State, local, or tribal governments, in the
aggregate, or by the private sector, of
$110 million. We anticipate that this
rule would not impose costs above the
$110 million UMRA threshold on State,
local, or tribal governments. We have
determined that this rule would not
impose costs on the private sector
exceeding $110 million. We note that
the provisions of the Act related to
electronic prescribing are dealt with in
a separate rule.
1. Private Sector
The provision of this rule related to
disclosure notices of creditable coverage
represents a mandate on the private
sector. As discussed elsewhere in this
document, certain private sector
entities—Medigap plans and private
sector employer or union sponsored
health plans that provide drug coverage
to Medicare beneficiaries who are
retired or who are active workers—are
required to provide at certain times
disclosure notices on whether the
coverage provided equals or exceeds the
actuarial value of defined standard Part
D coverage. Later in the impact analysis
we provide a discussion of the costs
expected to be borne in providing such
notices. The largest cost for providing
these notices is expected to occur in the
months preceding the implementation
of the drug benefit in January 2006
when the largest volume of notices need
to be provided. Following receipt of
these notices, beneficiaries will be
making choices regarding where they
receive their drug coverage.
For private sector employers and
unions that provide retiree drug
coverage, the implementation of
Medicare Part D, including the Medicare
retiree drug subsidy program, is

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

expected to produce net savings that far
exceed the costs of the disclosure
notices. This is true both for employers
and unions that choose to obtain the
retiree drug subsidy, and for employers
and unions that decide to restructure
their prescription drug coverage to
provide continued assistance by
supplementing the Medicare
prescription drug benefit and/or paying
Medicare Part D premiums.
For those private entities that will not
achieve savings—Medigap insurers and
employer/union group health plans that
offer coverage only to beneficiaries who
are active workers, not retirees—as
discussed in greater detail later in this
analysis, the cost of providing
disclosure notices is estimated to be
approximately $62 million in 2005
(which translates into an average of
roughly $151 per employer/union that
offers drug coverage to Medicare
beneficiaries who are active workers
and about $11,050 per Medigap insurer).
Thus, the costs associated with the
notice requirements are not expected to
reach the $110 million UMRA
threshold.
We also note that Section 104 of the
MMA, which prohibits the sale of new
Medigap policies with drug coverage or
the renewal of existing Medigap policies
that contain drug coverage for Medicare
drug benefit enrollees, is not an
unfunded mandate as defined by
UMRA. This statutory Medigap
prohibition does not result in the
‘‘expenditure’’ of funds by the private
sector, one part of the statutory test for
an unfunded mandate. For a discussion
of the effect on Medigap insurers of the
MMA prohibition, see section J of the
impact analysis.
2. States, Local and Tribal Governments
While States will incur direct costs as
a result of this rule, as discussed in
greater detail in section H on State
impacts, States will achieve net savings
under this rulemaking, as now Medicare
will be paying for prescription drug
costs previously funded under
Medicaid, State Pharmacy Assistance
Programs (SPAPs), and State sponsored
retiree health insurance, or will be
providing subsidies for State sponsored
qualified retiree prescription drug
coverage. There are several sources of
the direct costs States will incur. As
described below, several of these, taken
alone and without consideration of
offsetting gains, would reach or exceed
the threshold level in UMRA.
In order to defray a portion of the
Medicare drug expenditures for fullbenefit dual eligibles, States will be
responsible for making monthly
payments to the Federal government
beginning in January 2006. These

PO 00000

Frm 00264

Fmt 4701

Sfmt 4700

payments are estimated to be $9.0
billion in CY 2006, reaching $13.0
billion by CY 2010. These payments
represent the largest direct cost to
States.
States will also incur administrative
costs associated with Medicare Part D.
The statute gives States, as well as the
Social Security Administration,
responsibility for eligibility
determinations for the Medicare Part D
low-income subsidy. States are also
responsible for screening and enrolling
low-income subsidy applicants in the
Medicare Savings Program. While we
anticipate that the Social Security
Administration will play a substantial
role in Part D low-income subsidy
eligibility determinations, we anticipate
that States will incur some
administrative costs related to these
activities, including costs associated
with refining their data on dual
eligibles; developing eligibility
determinations systems; training staff;
performing eligibility determinations,
re-determinations, and appeals; and
screening and enrolling for the Medicare
Savings program. To the extent
allowable under Title XIX, Federal
matching payments will be available to
assist in paying for these administrative
costs. We estimate that the State share
of Medicaid administrative costs
associated with Medicare Part D will be
$39 million in FY 2004, $73 million in
FY 2005, and average about $90 million
per year over the period 2006 to 2010.
We are undertaking collaborations with
the Social Security Administration
(SSA), the State Health Insurance
Assistance Programs (SHIPs), and other
groups to assist in outreach and
enrollment, and to help minimize
administrative burdens for States as
much as possible. Furthermore, as
discussed in more detail in the State
section of the impact analysis, we
anticipate that SSA will play a
substantial role in the eligibility
determinations process for the lowincome subsidy, lessening the
administrative burden on States.
In addition, States will also have
revenue losses associated with the
MMA prohibition on States imposing
taxes on premiums related to Part D
coverage. As a result of the shift of
beneficiaries from prescription drug
coverage subject to State premium taxes
to Part D coverage, we estimate that the
loss in premium tax revenue to States
will be about $62 million in CY 2006,
and $145 million by CY 2010, totaling
about $504 million over this period.
States will also incur direct costs
attributable to required disclosure
notices for creditable coverage. Similar
to the requirement for private sector

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
group health plans, State governments
that offer retiree health insurance
benefits with drug coverage will need to
provide disclosure notices to Medicare
beneficiaries enrolled in those plans.
States will also need to provide
disclosure notices to Medicare
beneficiaries who receive drug coverage
through State Pharmacy Plus programs,
and State Pharmacy Assistance
Programs. As noted elsewhere in this
document, the costs of providing such
notices are small and are more than
offset by the savings achieved from
receiving the Medicare retiree drug
subsidy (because States may also qualify
for this subsidy) or through the
enrollment of beneficiaries in the Part D
benefit. As discussed elsewhere in the
preamble we will be deeming
beneficiaries who are full-benefit duals
as eligible for the full low-income
subsidy. As part of the notices to these
beneficiaries regarding their eligibility
for the low-income subsidy we will also
inform them of the change to receiving
their drug coverage through Medicare
and that Medicaid will no longer
provide creditable coverage to Medicare
beneficiaries. Our notices to
beneficiaries will relieve State Medicaid
programs of the burden of providing
disclosure notices to full-benefit dual
eligibles.
As discussed in the State section of
the impact analysis, the direct and
indirect costs and revenue losses to
States are offset by savings States will
achieve as a result of the
implementation of the Medicare
prescription drug benefit and retiree
drug subsidy. As noted in that section,
the net savings to States increase over
time, as the share of drug coverage costs
for full-benefit dual eligibles for which
States are required to compensate
Medicare declines. States do, however,
begin incurring administrative costs
prior to implementation of Medicare
Part D. We estimate that States will
incur net administrative costs in FY
2005 of $73 million. These costs do not
exceed the UMRA threshold.
Furthermore, we estimate that State
costs in 2005 will be more than offset by
State savings related to Medicare Part D
beginning in 2006.
Local governments that offer retiree
health insurance benefits that include
coverage for prescription drugs also will
need to provide disclosure notices to
Medicare beneficiaries enrolled in their
group health plans related to that
coverage. As noted previously, the costs
of providing such notices are small, and
are more than offset by the savings
achieved either from receiving the
Medicare retiree drug subsidy (because
local governments may also qualify for

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

this subsidy) or through the enrollment
of beneficiaries in the Part D benefit.
We have determined that this rule
does not mandate any requirements for
Tribal governments.
Comment: We received comments
from a number of States that asserted
that Medicare Part D represents an
unfunded mandate on States. Several
States asserted that it is an unfunded
mandate because the Federal
government provides matching payment
for State administrative expenses related
to Medicare Part D, rather than
providing 100 percent reimbursement.
A few States asserted that they should
not be responsible for auto-enrollment
of dual eligibles and asserted that it
would represent an unfunded mandate.
One State asserted that eligibility
determination costs in the initial start­
up period would exceed the UMRA
threshold.
Response: The statute gives States
certain administrative responsibilities
related to Medicare Part D enrollment.
To the extent allowable under Title XIX,
the Federal government will provide
Federal matching payments for those
activities, which cover at least 50
percent of State costs related to those
activities. Within the context of the
Unfunded Mandates Reform Act, we are
obligated to determine whether this
regulation imposes costs on States (as
well as local and tribal governments and
the private sector) in excess of $110
million in any one year.
As discussed previously, in 2005
prior to implementation of Medicare
Part D, we anticipate that States will
incur administrative expenses related to
Medicare Part D, including refining
their data on dual eligibles; developing
eligibility determinations systems;
training staff; performing eligibility
determinations, re-determinations, and
appeals; and screening and enrolling for
the Medicare Savings program. We
estimate that those costs are
approximately $73 million in FY 2005,
and consequently, do not exceed the
UMRA threshold. Furthermore, savings
that States achieve in future years once
Medicare Part D is implemented will
substantially outweigh the
administrative costs they incur in 2005.
Finally, with respect to the autoenrollment responsibilities that a few
States were concerned would be an
unfunded mandate, the final rule
indicates that these responsibilities will
be handled by CMS.
C. Federalism
Executive Order 13132 establishes
certain requirements that an agency
must meet when it promulgates a final
rule that imposes substantial direct

PO 00000

Frm 00265

Fmt 4701

Sfmt 4700

4457

costs on State and local governments,
preempts State law, or otherwise has
Federalism implications. Specifically,
an agency must act in strict accordance
with the governing law, consult with
State officials, and address their
concerns.
As discussed previously, the MMA
and this rule have implications for
States. In addition to the provisions
addressed in the UMRA discussion, the
statute includes specific provisions
prohibiting State regulation of PDP
plans, except for licensure and
solvency, and permitting the Secretary
to waive even State licensure and
solvency requirements. The majority of
these waivers, however, are temporary
and may not exceed 36 months, except
in the case of a State that does not have
a licensing process for PDP sponsors. As
specified in the MMA, we have
consulted with the National Association
of Insurance Commissioners (NAIC) on
establishing the financial solvency and
capital adequacy standards that will be
used in the waiver process. In addition,
because of the national nature of the
Medicare Part D benefit, the statute
prohibits States from limiting the
amount that a PDP sponsor can recover
from liable third parties under Medicare
Secondary Payer provisions. Also, as
discussed in the preamble, the statute
preempts State any willing pharmacist
laws with respect to a plan’s Part D
business. Finally, the statute permits
Federal grievance procedures to
preempt State grievance requirements
for PDPs and MA-PDs. As discussed in
subpart M of the preamble, we have
established Federal grievance
procedures that preempt State
requirements because we believe that
one set of grievance standards protects
beneficiaries, promotes consistency
among plans, and reduces confusion
and burden for enrollees and plans.
However, enrollees would still have
access to various State remedies in cases
in which an issue is unrelated to the
plan’s status as a PDP or MA-PD. We
note that State law has been preempted
in an identical way for the Medicare
Advantage program, through MMA
changes expanding a preemption law
that had previously applied to that
program. The impact analysis for the
final Medicare Advantage rule (CMS
4069–F) contains a discussion of the
preemption issue as it applies to these
Federal programs.
As discussed earlier in this preamble,
especially in subpart I, we received a
number of comments on preemption
issues. Our responses to these
comments are included in subpart I and
other relevant preamble sections.
Although most of these comments

E:\FR\FM\28JAR2.SGM

28JAR2

4458

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

opposed the broad scope of the MMA’s
preemption clauses, the Congress
intended to provide that scope and it is
necessary to the operation of the
prescription drug program. Should any
issues of interpretation arise in any
particular State, we would work with
that State to resolve these issues.
In addition, we have also consulted
extensively with States regarding the
numerous provisions related to the
Medicare prescription drug benefit that
have implications for States. Among
these, our Center for Medicaid and State
Operations has regular meetings with
State Medicaid Directors and has used
these opportunities to provide our State
partners with information about the
MMA. For example, in March 2004, we
held conference calls with State
representatives to provide them with an
overview of the MMA and information
on what to expect during
implementation, to discuss the
provisions in the statute dealing with
State payments to the Federal
government under Section 103 of the
MMA, and to allow States to raise issues
about the implementation process. In
April and May 2004, we held
conference calls with State
representatives to discuss the
calculation of State phased-down
contribution, definition of ‘‘full-benefit
dual eligibles’’, excluded drugs,
enhanced FMAP on family planning
drugs, and related State payment issues.
We have also organized a group of
interested States to work collaboratively
on proposals for addressing the
managed care adjustment component of
the phase-down calculation. We have
set up special email addresses for phasedown issues so that States may send
questions and communicate specific
concerns to the appropriate experts.
We are currently working with State
Medicaid Directors, State
Pharmaceutical Assistance Program
staff, and State Health Insurance
Assistance Program (SHIP) counseling
staff to raise awareness of the Medicare
prescription drug discount card
program, and we are building on those
efforts for the implementation of the
Medicare Part D prescription drug
benefit. In August of 2004, we convened
the State Issues Workgroup, which
includes State Medicaid Directors
(including members of the Executive
Council of the National Association of
State Medicaid Directors), SSA, and
CMS. The purpose of this group is to
identify all significant issues and
concerns related to Medicare Part D
(and other MMA changes) that affect
States and to identify potential
solutions, including providing
recommendations for data exchanges

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

and systems processes and developing a
protocol for working with SSA on
training and outreach associated with
the low-income subsidy. Numerous
meetings and conference calls of the full
workgroup and its five subgroups have
already taken place. The efforts of this
workgroup are continuing and have
been extremely valuable in identifying
State issues and concerns and potential
solutions. We have also been working
with the State Pharmaceutical
Assistance Transition Commission,
which was established by the statute, to
provide support and technical
assistance as it develops
recommendations for addressing the
unique transitional issues facing SPAPs.
In addition, we have consulted with the
NAIC on Medigap issues.
The Medicare retiree drug subsidy is
an optional program that public or
private sector employers or unions may
choose to participate in if they offer
qualified retiree prescription drug
coverage. Like other plan sponsors,
State and local governments that offer
qualified retiree prescription drug
coverage and wish to receive Medicare
retiree drug subsidy payments will need
to comply with the reporting
requirements of this rule, such as
attestation of actuarial equivalence and
certain data reporting necessary for
calculating the retiree drug subsidy
payments. However, these are not
requirements because no public or
private employer or union need apply
for Medicare retiree drug subsidy
payments. Thus, we have determined
that the retiree drug subsidy provisions
of this rule would not impose direct
costs on State and local governments. In
addition, we have been conducting
outreach to prospective applicants for
Medicare retiree drug subsidy
payments, including public sector
employers, for example through open
door forums and an educational web
cast, in an effort to better understand the
needs of this segment of the employer
community, share information about the
Medicare retiree drug subsidy program
and its implementation. We have also
had discussions with representatives of
individual State retiree benefit systems,
as well as the National Conference on
Public Employee Retirement Systems, to
hear their concerns about the retiree
subsidy program.
D. Limitations of the Analysis
The following analyses present
projected effects of this rule on
Medicare beneficiaries, the Federal
budget, States, private sector
organizations that provide drug
coverage to Medicare beneficiaries, and
small entities. Unless otherwise noted,

PO 00000

Frm 00266

Fmt 4701

Sfmt 4700

all estimates in this impact analysis are
net budgetary spending based on
calendar year data.
We have updated our impact
estimates from what was presented in
our August 3, 2004 proposed rule. Since
publication of the proposed rule, we
have continued to refine our
assumptions and estimates of Medicare
Part D impacts to take into account
policy decisions made in the final rule
and to incorporate more up-to-date data,
additional research, information from
industry experts, and public comments
on the expected impact of Medicare Part
D. The estimates presented in this rule
are a result of those efforts and represent
our best estimate of the likely effects of
Medicare Part D. Discussion of the
public comments and the updates made
to our estimates is included in the
relevant sections of the impact analysis.
While we believe the estimates in this
final rule represent our best estimate of
the likely impact of Medicare Part D, we
emphasize that there is considerable
uncertainty in these estimates and the
discussion throughout the impact
analysis reflects this. Because 2006 will
be the first year of the Medicare
prescription drug benefit and retiree
drug subsidy program, we do not have
program experience from prior years. In
estimating the impact of a completely
new program, there are limited data and
considerably greater uncertainty than
would be the case with modifications to
existing programs. Furthermore, we note
that analyses in the 2004 Medicare
Trustees Report (currently available)
and in future annual Trustees Reports,
including the 2005 Medicare Trustees
Report (forthcoming in spring 2005), can
provide a sense of the range of
uncertainty inherent in these types of
estimates. (The Trustees Report is
available on the CMS website at http:/
/www.cms.hhs.gov/publications/
trusteesreport/).
E. Enrollment Estimates
1. Summary
Table IV–1A shows for CY 2006–2010
our estimates of the number of
beneficiaries projected to receive
creditable drug coverage through a
Medicare Part D plan (that is, by
enrolling in a PDP or MA-PD), or
through an employer/union sponsored
retiree plan that is eligible for the
Medicare retiree drug subsidy. We
estimate that in CY 2006 about 39
million Medicare beneficiaries will
receive drug coverage either through a
Medicare Part D plan or through an
employer/union sponsored retiree plan
that is eligible for the Medicare retiree
drug subsidy. By CY 2010, due to
growth in the overall Medicare

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
population, we estimate that about 42
million Medicare beneficiaries will be
receiving such coverage.
Tables IV–1B and 1C provide further
details on these estimates. Table IV–1B
shows for CY 2006–2010 our estimates
of the number of beneficiaries projected
to receive drug coverage through a
Medicare Part D PDP or MA-PD, and the
number of individuals receiving the
low-income subsidy. In 2006, we
estimate that about 29 million
beneficiaries will receive their drug
coverage through a Part D plan. We
estimate that this number will grow to
about 35 million in 2010.
As mentioned previously, Medicare
Part D offers additional assistance with
Medicare drug benefit cost-sharing and
premiums to low-income beneficiaries
who meet certain income and assets
requirements. We estimate that about
10.9 million beneficiaries will enroll in
the Medicare Part D low-income subsidy
program in CY 2006. Among lowincome subsidy participants, we
estimate that in 2006 about 6.3 million
would be full-benefit dual eligibles,
about 3.0 million would be other
beneficiaries with income less than 135
percent of FPL and meeting the lower
assets test (including newly enrolled
beneficiaries in the Medicare Savings
Program), and 1.6 million would be
other beneficiaries with income less
than 150 percent of FPL and meeting the
higher assets test. By 2010, we estimate
that 11.8 million beneficiaries will be
receiving the low-income subsidy.
Table IV–1C presents estimates
related to employment based retiree
drug coverage. The table includes an
estimate of the number of Medicare
beneficiaries who would have
employment-based retiree drug coverage
absent the law change, including those
with access-only coverage where the
beneficiary pays the entire premium.
For the population with retiree
coverage, the table presents estimates of
their anticipated sources of drug
coverage following implementation of
Medicare Part D. Our estimates of drug
coverage for these beneficiaries reflect
the various options that are available to
employers and unions through the
Medicare prescription drug benefit and
the Medicare retiree drug subsidy for

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

continuing to provide prescription drug
assistance to their retirees.
In 2006, we estimate that 11.4 million
beneficiaries would have had retiree
drug coverage absent the law change.5
We estimate that 9.8 million of these
Medicare beneficiaries will receive
creditable drug coverage through an
employer/union sponsored retiree plan
that is eligible for the Medicare retiree
drug subsidy, and that 0.4 million will
receive drug coverage through a PDP or
MA-PD plan, with their previous
employers/unions offering enhanced
benefits or providing wraparound or
coordinated coverage. We also estimate
that 1.3 million beneficiaries will enroll
in the standard Part D drug benefit
through a PDP or MA-PD, including
those who receive additional employer/
union premium assistance or other
financial assistance and those who will
benefit from the more generously
subsidized coverage of Medicare Part D
(for example, those who would
otherwise have had unsubsidized
‘‘access-only’’ employer plans that are
becoming increasingly common). We
note that recent employer surveys
suggest significant interest in providing
comprehensive drug benefits through
additional supplemental or wraparound
coverage. Depending upon the amount
of time it may take employers/unions to
adopt such approaches, it is possible
that the provision of wraparound
coverage might be more prevalent in the
earlier years of Medicare Part D.
In 2010, we estimate that 11.8 million
beneficiaries would have had retiree
drug coverage absent the law change. By
2010, we estimate that 7.2 million
beneficiaries will be receiving creditable
drug coverage through an employer/
union sponsored plan that is eligible for
the Medicare retiree drug subsidy, and
2.4 million will have drug coverage
through a PDP or MA-PD plan while
also receiving enhanced benefits or
wraparound coverage through their
former employers or unions, including
Part D plans that employers or unions
are sponsoring under waivers. We note,
however, that there is a great deal of
uncertainty in estimating employers’
and unions’ responses to the various

PO 00000

5 This

figure includes Federal retirees.

Frm 00267

Fmt 4701

Sfmt 4700

4459

options available under Medicare Part D
and the retiree subsidy. As discussed in
greater detail subsequently, these
estimates do reflect our expectation that,
over time, some employers and unions
will choose to take advantage of the
other opportunities for continuing to
provide high quality retiree drug
coverage that are available to them
under Medicare Part D—by transitioning
from providing drug coverage that
qualifies for the retiree subsidy to
providing their own enhanced Part D
plan (through waivers), purchasing
enhanced Part D coverage, or providing
supplemental drug coverage that wraps
around Medicare Part D.
Given the trends in decreasing
generosity of employment-based retiree
coverage and the increasing provision of
‘‘access-only’’ coverage, we also
estimate that by 2010 approximately 2.3
million beneficiaries will receive drug
coverage through standard Medicare
Part D plans, including those receiving
additional premium assistance or other
financial assistance from their former
employers or unions, and those who
may benefit from the more generously
subsidized coverage of Medicare Part D.
For example, recent employer surveys
have shown that more new retirees are
paying a larger share of the cost of their
retirement benefits, with new retirees in
about 20 percent of large private-sector
firms (1,000 or more employees) having
‘‘access-only’’ benefits in which they
receive no employer premium subsidy.
Assuming this trend continues,
increasingly more of the retirees with
employer/union coverage would be
paying for much or all of the cost of
their retiree drug coverage in the
absence of the law change. With the
availability of Medicare Part D drug
coverage these beneficiaries will gain
access to a generous subsidized benefit.
These enrollment estimates above
have been updated from those that were
presented in the August 3, 2004
proposed rule. A discussion of how
these estimates have been updated to
incorporate policy decisions made in
the final rule and to take into account
additional information and data is
included in the following section on
projection assumptions.

E:\FR\FM\28JAR2.SGM

28JAR2

4460

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

TABLE IV–1A. TOTAL BENEFICIARIES ESTIMATED TO RECEIVE CREDITABLE DRUG COVERAGE, EITHER THROUGH MEDI­
CARE PART D PLANS (PDPS OR MA-PDS), OR THROUGH EMPLOYER/UNION SPONSORED RETIREE PLANS THAT ARE
ELIGIBLE FOR THE MEDICARE RETIREE DRUG SUBSIDY, CY 2006–2010
2006
Total Beneficiaries Receiving Creditable Drug Coverage Through a Medi­
care Part D Plan or Through an Employer/Union Sponsored Retiree
Plan That Is Eligible For the Medicare Retiree Drug Subsidy

39.1

2007

2008

39.8

40.5

2009

41.4

2010

42.2

TABLE IV–1B. BENEFICIARIES ESTIMATED TO RECEIVE PRESCRIPTION DRUG COVERAGE THROUGH MEDICARE PART D

PLANS (PDPS OR MA-PDS), CY 2006–2010

2006

2007

2008

2009

2010

Total Beneficiaries Enrolling in Medicare Part D Plans (including those re­
ceiving additional assistance from employers/unions, see Table IV–1C)

29.3

30.6

32.0

33.5

35.1

Subtotal Medicare Part D Enrollees Receiving Low-Income Subsidy

10.9

11.1

11.3

11.6

11.8

—Full-Benefit Dual Eligibles

6.3

6.4

6.6

6.7

6.8

—Other beneficiaries with income less than 135% FPL and meeting the
lower assets test*,**

3.0

3.1

3.2

3.2

3.3

—Other beneficiaries with income less than 150% FPL and meeting the
higher assets test*

1.6

1.6

1.6

1.7

1.7

18.4

19.5

20.7

21.9

23.2

Subtotal Medicare Part D Enrollees Not Receiving Low-Income Subsidy
* In

CY 2006, an individual beneficiary must have assets not in excess of $6,000 ($9,000 per couple) for the lower assets test and $10,000 per
individual ($20,000 per couple) for the higher assets test. In years after 2006, these dollar amounts will be indexed to the Consumer Price Index.
** This group includes beneficiaries deemed eligible for the full low-income subsidy based on their status as QMB, SLMB, or QI individuals, or
as recipients of SSI benefits, including those beneficiaries who we estimate will newly enroll in the Medicare Savings Program. In 2006, this is
estimated to be approximately 2 million individuals.
Note: Numbers may not sum to total due to rounding.

TABLE IV–1C. ESTIMATES RELATED TO EMPLOYER/UNION SPONSORED RETIREE DRUG COVERAGE, CY 2006–20101
Estimated beneficiary counts (in millions)

2006

Total beneficiaries with employment-based retiree drug coverage absent
the law change*

2007

2008

2009

2010

11.4

11.5

11.6

11.7

11.8

Beneficiaries receiving creditable drug coverage through an employer/
union sponsored retiree plan that is eligible for the Medicare retiree drug
subsidy

9.8

9.1

8.5

7.8

7.2

Beneficiaries enrolling in Medicare Part D through PDP or MA-PD plans
and receiving enhanced benefits or wraparound coverage through their
former employer or union

0.4

0.9

1.4

1.9

2.4

Beneficiaries enrolling in the standard Medicare Part D benefit through
PDP or MA-PD plans (including, for example, those receiving additional
premium or other financial assistance from their former employer or
union, and those previously enrolled in ‘‘access only’’ retiree plans)

1.3

1.5

1.8

2.0

2.3

Note: Numbers may not sum to total due to rounding.
* Includes Federal retirees.

2. Projection assumptions
We project that there will be nearly 43
million beneficiaries entitled to or
enrolled in Medicare Part A or enrolled
in Medicare Part B in 2006 who will be
eligible for Medicare Part D. We
estimate that about 91 percent of these
beneficiaries, about 39 million, will
receive creditable drug coverage either
through a Medicare Part D plan (that is,
a PDP or MA-PD) or through an
employer or union-sponsored retiree

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

plan that is eligible for the Medicare
retiree drug subsidy.
First, we assume that Medicare
beneficiaries who are active workers (or
spouses and dependents of active
workers) and who have employmentbased insurance as their primary payer
with Medicare as a secondary payer
(MSP), will not participate in Medicare
Part D at this time. Since these
beneficiaries receive coverage that is
related to active worker employment,
and they are not retirees (or spouses/

PO 00000

Frm 00268

Fmt 4701

Sfmt 4700

dependents of retirees), their plan
sponsors would not be able to claim the
Medicare retiree drug subsidy on their
behalf. In addition, we believe that it is
unlikely that these beneficiaries will
enroll in the Medicare drug benefit at
this time. These beneficiaries are likely
to have creditable drug coverage and
that coverage would be the primary
payer (if their employer is subject to
MSP requirements by virtue of having
20 or more employees, or 100 or more
employees in the case of disabled

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
workers) regardless of enrollment in the
Medicare drug benefit. In the future,
when these beneficiaries retire, they
will have an opportunity to enroll in
Medicare Part D without being subject
to a late enrollment penalty as long as
they had creditable drug coverage
through their previous primary group
health plan.
Second, we assume that all fullbenefit dual eligibles and other
beneficiaries who are deemed to be full
subsidy eligibles (that is, QMBs, SLMBs,
QIs, and beneficiaries with
Supplemental Security Income (SSI))
will enroll in the Medicare drug benefit.
As discussed in the preamble for
subpart B, there will be automatic
processes put in place to ensure that
full-benefit dual eligibles will be
automatically enrolled in a Medicare
Part D plan. In addition, we will
establish a facilitated enrollment
process for non-full-benefit dual eligible
individuals who are deemed or
determined eligible for the low-income
subsidy.
Third, among all other Part D eligible
beneficiaries, except those beneficiaries
estimated to have retiree drug coverage
absent the law change who are
discussed later, we assume 95 percent
uptake among these beneficiaries, with
the exception of beneficiaries who have
very low drug spending (that is,
beneficiaries with spending in the
lowest quintile) for whom we assume
about 71 percent uptake. We anticipate
somewhat lower uptake among
beneficiaries with very low drug
spending because some may decide to
forgo enrollment in Part D, since there
is the possibility that they may pay
more in premiums than they realize in
savings in a particular year. However,
we assume that the majority of
beneficiaries with very low drug
spending will choose to enroll in
Medicare Part D to gain protection
against higher drug costs, including
catastrophic costs, that they could
experience in the future. In addition,
given the presence of the late
enrollment penalty, we expect that
many beneficiaries with low drug
spending will enroll in Medicare Part D
at the outset of the program, recognizing
that they will very likely achieve
savings in subsequent years as they age
and have increasing drug costs.
Our uptake assumptions for this
group of beneficiaries are slightly lower
than those used in the proposed rule. In
the proposed rule, we assumed that 99
percent of these beneficiaries would
enroll in Medicare Part D. While we
have lowered our uptake assumptions
slightly based on additional research
and technical discussions, as well as

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

input from public comments, we
continue to believe that there will be
very high uptake of Medicare Part D for
a number of reasons. This expectation is
based in part on the experience of high
participation rates in Medicare Part B,
but on other factors as well. The
standard Medicare Part D benefit shares
several similar features with Medicare
Part B that encourage enrollment. Both
are subsidized benefits, where the
beneficiary premium is set at roughly 25
percent of the cost of the insurance,
with the government providing a
subsidy to cover the remaining 75
percent. In addition, under both Part B
and Part D, beneficiaries face a late
enrollment penalty or surcharge (in the
form of higher premiums) unless they
enroll within the initial enrollment
period, have met creditable coverage
requirements in the case of Medicare
Part D, or have met certain other
requirements that occur in a limited
number of circumstances. We think that
beneficiaries’ concern about current
prescription drug costs and the
likelihood that an elderly or disabled
individual will have even greater need
for prescription drugs as they age, in
combination with the late enrollment
penalty, will promote high initial
enrollment in the Medicare drug benefit.
Other features of the Medicare drug
benefit are also likely to encourage high
enrollment. In addition to the Federal
subsidy of the beneficiary premium
(which is a part of the standard benefit),
a subset of beneficiaries, specifically
those who meet certain income and
assets requirements, are eligible for
additional low-income subsidies. We
along with the Social Security
Administration will be conducting
aggressive outreach efforts to
individuals eligible for the low-income
subsidy. In addition, we expect that
States will also be doing outreach
particularly related to the lower income
population. For example, many States
have been working with us to facilitate
enrollment of beneficiaries participating
in State Pharmaceutical Assistance
Programs into the Medicare drug
discount card program (including autoenrollment arrangements for some
States). In addition, as discussed
elsewhere in the preamble, the MMA
also provides for transitional grants to
States with Pharmaceutical Assistance
Programs in each of fiscal years 2005
and 2006 to among other things help
facilitate enrollment in Part D. Also as
discussed elsewhere in the preamble, to
facilitate the enrollment process for lowincome beneficiaries our final regulation
includes auto-enrollment for the fullbenefit dual eligibles and we will also

PO 00000

Frm 00269

Fmt 4701

Sfmt 4700

4461

implement steps to facilitate enrollment
for other individuals who are
determined or deemed eligible for the
low-income subsidy. In addition, any
beneficiary currently enrolled in an MA
plan that offers any prescription drug
coverage (as of December 31, 2005)
would be deemed to be enrolled in an
MA-PD plan offered by that same
organization as of January 1, 2006.
Also, in the months preceding the
implementation of the Part D benefit,
beneficiaries who have drug coverage
(other than full-benefit duals, who will
be deemed) should receive disclosure
notice information from the entities
from which they receive that coverage
regarding enrollment in the Medicare
prescription drug benefit and the
applicability of the late enrollment
penalty. These notices from other
sources are in addition to the extensive
outreach efforts that CMS and SSA will
conduct.
Fourth, for those beneficiaries who we
anticipate would have employer or
union sponsored retiree drug coverage
(including unsubsidized coverage)
absent the law change, we made
assumptions about their anticipated
sources of drug coverage following
implementation of Medicare Part D. We
begin by making assumptions about the
percent of beneficiaries (excluding those
with MSP) that would have employer or
union sponsored retiree drug coverage
absent the law change. In 2006, we
assume that 28 percent of
beneficiaries—11.4 million—would
have retiree drug coverage from a former
employer or union absent the law
change. By 2010, we assume that about
27 percent of beneficiaries—11.8
million—would have employer or union
sponsored drug coverage absent the law
change. Since the availability and
generosity of retiree drug coverage has
been declining over the last decade, we
assume that absent the law change there
would be a continuation of this baseline
trend. However, the number of
beneficiaries that we estimate would
receive employer or union sponsored
retiree drug coverage absent the law
change actually increases due to growth
in the Medicare population.
We next make assumptions about
sources of future drug coverage for these
beneficiaries after the implementation of
the Medicare prescription drug benefit
and the retiree drug subsidy. In making
these assumptions, we took into account
that Medicare Part D offers employers
and unions a variety of options for
continuing to provide high quality
retiree drug coverage at a lower cost for
both retirees and employers and unions.
Employers and unions that offer retiree
drug coverage that is at least actuarially

E:\FR\FM\28JAR2.SGM

28JAR2

4462

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

equivalent to Medicare Part D can apply
for the tax-free 28 percent Medicare
retiree drug subsidy (which is equal to
28 percent of allowable prescription
drug costs attributable to the portion of
gross prescription drug costs between
$250 and $5,000 in 2006). The Medicare
retiree drug subsidy lowers the cost of
providing drug benefits for employers
and unions that sponsor qualified
retiree plans, making it more affordable
for employers and unions to provide
this comprehensive subsidized coverage
than it would otherwise be.
In addition to the retiree drug
subsidy, Medicare Part D also offers
employers and unions other
opportunities to continue to provide
comprehensive prescription drug
coverage at a lower cost. Employers and
unions can choose to provide
supplemental drug coverage to their
Medicare-eligible retirees through or in
coordination with Part D by encouraging
their retirees to enroll in Part D (with
Medicare subsidizing the costs of their
standard Part D benefits), and paying for
supplemental coverage over and above
the standard Part D benefit. This can be
achieved by either: 1) arranging for a
PDP or MA-PD Part D plan to provide
enhanced benefits to their retirees; 2)
arranging for a PDP or an MA-PD under
a waiver to offer a customized plan that
is exclusive to the employer’s retirees;
3) choosing through a waiver to become
a Part D plan for their retirees that offers
enhanced benefits (this is equivalent to
offering a self-insured benefit); or 4)
providing separate supplemental drug
coverage that wraps around a Part D
plan. The various options available for
providing supplemental drug coverage
make it possible for employers/unions
to provide coverage that mimics their
current benefits package, while
achieving cost savings due to the
Federal government subsidizing a
significant portion of the cost of
standard Part D coverage (a subsidy
which, not taking into account the value
of the reinsurance,6 is estimated to
average about $900 per beneficiary). In
other words, employers/unions can offer
comprehensive drug coverage by
wrapping around standard Medicare
Part D coverage for, on average, at least
$900 less than it would cost the
6 The relative value of the reinsurance subsidy for
catastrophic coverage would be lower for retirees
whose employers/unions provide supplemental
drug coverage that wraps around the standard Part
D benefit. Catastrophic coverage is only available
when an individual’s true out-of-pocket (TrOOP)
expenses exceed a specified threshold, and
employers/unions’ contributions for supplemental
drug coverage would not count toward the TrOOP
threshold (thus increasing the total drug spending
level at which the retiree would receive
catastrophic Part D benefits).

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

employer/union to do so absent the new
law. This supplementation by
employers/unions also results in lower
Medicare costs. The supplemental
employer coverage results in lower out­
pocket-costs for beneficiaries, and thus
fewer individuals reaching the
catastrophic out-of-pocket threshold,
and those that do, having lower
catastrophic costs for which the
government would provide reinsurance
payments to Part D plans.
As discussed in more detail later in
this impact analysis, employers’ and
unions’ evaluations of the relative
advantages and disadvantages of
choosing among the options that are
available under the MMA for assisting
their retirees with prescription drug
coverage (for example, taking the
Medicare retiree drug subsidy versus
offering enhanced prescription drug
benefits through a Part D plan) will be
influenced by a number of factors. For
example, these include current benefit
design, employer/union and retiree
contributions and other financial
considerations, tax status, labor
relations, and contractual agreements.
Regardless of whether employers and
unions seek to obtain the Medicare
retiree drug subsidy or provide drug
coverage to their retirees by encouraging
them to participate directly in the
Medicare prescription drug benefit
while providing enhanced benefits or
wraparound coverage, Medicare Part D
is estimated to significantly lower their
cost of providing retiree drug coverage.
Thus, the Medicare prescription drug
benefit and retiree drug subsidy make
the provision of employer/union
sponsored retiree benefits much more
affordable. The amount of financial
support available under each option
will vary depending in part on the
characteristics of each sponsor and their
retiree population. As discussed in more
detail subsequently in section F.4 of the
impact analysis, we estimate that retiree
drug subsidy payments will average
about $668 per retiree in 2006. While
the tax-free nature of the retiree drug
subsidy does not alter the value of the
subsidy to firms without taxable
income, for plan sponsors with tax
liabilities, the tax-free nature of the
retiree subsidy increases its value. For
example, a tax free subsidy of $668
would be equivalent to a taxable
payment of $891 for an employer with
a 25 percent marginal tax rate and
$1,028 for an employer with a 35
percent marginal tax rate. In
comparison, if an employer or union
chooses to provide supplemental drug
coverage to standard Part D, the indirect
subsidy to the employer or union

PO 00000

Frm 00270

Fmt 4701

Sfmt 4700

excluding the value of reinsurance is
estimated to average about $900 per
retiree in 2006. Thus, for plan sponsors
that do not have taxable income, the
indirect Federal support associated with
providing supplemental drug coverage
to standard Medicare Part D could be
larger than the support they would
receive through the Medicare retiree
drug subsidy. For plan sponsors that
have taxable income, the level of
support under the two options may be
more comparable, and, depending on a
plan sponsor’s marginal tax rate and
retiree population, could possibly be
larger under the Medicare retiree drug
subsidy.
In making our assumptions about
employer and union sponsored retiree
drug coverage, we also took into account
that some sponsors currently do not
provide drug coverage that has the same
or greater actuarial value as Medicare
Part D, and many employers provide
coverage that (in contrast to Part D) is
not subsidized at all. For example, in
the Kaiser/Hewitt 2004 survey of large
firms with at least 1,000 employees
offering retiree health benefits, 5 percent
of these firms reported that they
believed the actuarial value of their
current retiree drug benefit was less
than the value of the standard Medicare
Part D drug benefit, 4 percent reported
that they believed their benefits were
equal to Medicare Part D, and 22
percent reported that they did not know
how their benefit compared to the
standard Part D benefit, while 69
percent reported that they believed their
benefits were greater than the standard
Part D drug benefit. However, it is
important to note that employers
responding to the survey could not have
been aware of our final approach for
comparing the actuarial value of retiree
drug coverage with the value of the
standard Part D benefit, since the survey
was conducted in 2004 before
publication of this final rule (‘‘Current
Trends and Future Outlook For Retiree
Health Benefits: Findings from the
Kaiser/Hewitt 2004 Survey on Retiree
Health Benefits,’’ The Henry J. Kaiser
Family Foundation and Hewitt
Associates, December 2004, available at
http://www.kff.org). Furthermore, many
employers with coverage that has a high
actuarial gross value do not make
contributions equal to the Medicare
contributions to Part D coverage, so that
the employer-based retiree coverage
would potentially cost more to the
retiree than Part D. For example, the
survey found that 19 percent of large
firms require new Medicare-age retirees
to pay 100 percent of the premium for
retiree health insurance and another 11

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
percent require these retirees to pay 61–
99 percent—a level of contribution that
may not satisfy the ‘‘no windfall’’ net
test for the retiree subsidy, and thus
may be less than the new government
subsidy on the Part D benefit. In certain
cases, where employers are currently
making no premium contribution or a
very limited premium contribution for
retiree drug coverage, beneficiaries are
likely to be better off financially if they
enroll in Medicare Part D, since it
includes a 75 percent government
subsidy of the cost of the insurance
coverage. To the extent that
beneficiaries without substantial
employer/union subsidies enroll in
Medicare Part D and to the extent that
employers/unions provide additional
premium or other financial assistance,
the significant financial gain that such
retirees would receive by enrolling in
the subsidized Medicare Part D benefit
would be further increased. Thus, the
significant increase in total support
(from employers/unions and Medicare)
for retiree coverage as a result of the
MMA’s retiree options in part reflects
the fact that many retirees who enroll in
Part D plans are likely to obtain
significant savings in their drug costs,
particularly in future years.
In developing specific numeric
assumptions about how employers and
unions are likely to respond to the
various options Medicare Part D offers
for providing prescription drug
assistance to retirees, we considered
information from a number of experts in
the employee benefits consulting
industry, as well as recent surveys and
studies that have been conducted.
Among the 11.4 million beneficiaries we
estimate would have retiree drug
coverage in 2006 absent the law change,
we assume that 86 percent would
receive creditable drug coverage from an
employer or union plan that is eligible
for the Medicare retiree drug subsidy, 3
percent would enroll in a Medicare Part
D plan and receive employer or union
sponsored enhanced or supplemental
drug coverage, and 11 percent would
enroll in a standard Part D plan
(including those who receive additional
premium or other financial assistance
from their former employer or union).
We note that these assumptions reflect
the percentage of beneficiaries whom
we estimate will receive drug coverage
through the various sources. The
percentage of firms choosing the various
options will likely be different from the
above percentages, as the distribution of
beneficiaries across firms that offer
retiree drug coverage tends to be
concentrated among the largest firms.
Over time, we assume that some
employers and unions will transition

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

from providing retiree drug coverage for
which they receive the Medicare retiree
drug subsidy to providing their own
enhanced Part D plan (through waivers),
or purchasing enhanced Part D
coverage, or offering supplemental drug
coverage that wraps around Medicare
Part D. Recent surveys suggest
significant interest among employers in
providing enhanced or supplemental
drug coverage that wraps around
standard Part D. Employers and unions
commonly provide wraparound
coverage for Medicare Part A and Part
B, either through separate supplemental
policies or through arrangements with
Medicare Advantage plans, and we
anticipate that some employers/unions
may prefer using a similar approach
with Medicare Part D. In addition, as
discussed previously, for some plan
sponsors, the indirect subsidy plan
sponsors receive by providing enhanced
coverage or supplemental drug coverage
that wraps around Medicare Part D may
be greater in value than the Medicare
retiree drug subsidy. While we expect
that some employers and unions may
want to provide enhanced or
supplemental benefits, we anticipate
that it may take some time for
employers/unions who are interested in
doing so to restructure their drug
benefits to complement Medicare Part
D, and thus these employers and unions
may initially elect to obtain the retiree
drug subsidy. As discussed in more
detail previously, employers and unions
that wish to restructure their drug
coverage to supplement Medicare Part D
have a number of options to consider for
providing enhanced or supplemental
drug coverage, including the option for
an employer or union to obtain a waiver
to provide its own enhanced Part D
plan. It may take some time for these
employers/unions to choose which
supplemental coverage option they wish
to pursue and make the requisite
changes. Consequently, we assume that
over time an increasing number of
employers/unions would transition
from receiving the Medicare retiree drug
subsidy to providing their own
enhanced Part D plan, purchasing
enhanced Part D coverage, or providing
separate supplemental drug coverage
that wraps around Medicare Part D.
Depending upon the amount of time it
may take employers/unions to adopt
such approaches, it is possible that the
provision of wraparound coverage may
also be more prevalent in the earlier
years of Medicare Part D.
In addition, because some employers
have placed caps on their contribution
to retiree health benefits, we expect that
the number of retiree plans that qualify

PO 00000

Frm 00271

Fmt 4701

Sfmt 4700

4463

for the Medicare retiree drug subsidy
will decline somewhat over time. Once
these plans hit the existing caps that
employers have placed on their
contributions, the net value of the plans’
benefits relative to total drug costs will
decline over time and eventually fall
below the net value test required to
qualify for the Medicare retiree drug
subsidy. When this occurs, we
anticipate that these employers and
unions will likely encourage their
retirees to enroll in Medicare Part D and
provide either enhanced or
supplemental coverage that wraps
around Medicare Part D, or additional
premium or other financial assistance or
some combination of these steps. By
doing this, beneficiaries would gain
financially since they would receive the
more generous Medicare Part D benefit,
plus any additional support that the
employer or union might offer in terms
of wrap around coverage or premium
assistance.
Also, due to steps some employers
have taken to reduce retiree health
benefits for future retirees, such as
increasing retiree premium
contributions, we anticipate that in
future years as new retirees age into the
Medicare program, there would be more
retirees enrolling in standard Part D
(including those with employer or
union assistance with the Part D
premium). As noted previously, the
2004 Kaiser/Hewitt survey of large
employers offering retiree drug coverage
found that roughly 20 percent of firms
provide new retirees with access only
coverage (that is coverage, where the
employer makes no financial
contribution to the cost of the
premium). In situations where
employers or unions make no or only a
minimal contribution to the cost of
retiree drug benefits, beneficiaries
would be better off financially if they
enrolled in Medicare Part D, since
Medicare Part D includes a significant
government subsidy. Furthermore, if
employers or unions that provide only
a very minimal contribution to retiree
drug coverage instead offered to put that
contribution toward the standard
Medicare Part D premium, those retirees
would benefit financially from both the
subsidized Medicare Part D benefit and
their employers/ unions’ assistance with
premiums. In addition, there has also
been a trend toward declining
generosity of retiree benefits for current
retirees (for example, through increased
premiums or cost-sharing), and we
expect that this may also result in a
slight increase in the number of retirees
enrolled in standard Part D.
Due to the various considerations
discussed above, among the 11.8 million

E:\FR\FM\28JAR2.SGM

28JAR2

4464

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

beneficiaries that we estimate would
have employer or union sponsored
retiree drug coverage in 2010 absent the
law change, we assume that 61 percent
would receive creditable drug coverage
from an employer or union plan that is
eligible for the Medicare retiree drug
subsidy, 20 percent would enroll in
Medicare Part D and receive employer
or union sponsored enhanced or
supplemental drug coverage, and 19
percent would enroll in standard Part D
including those who would receive
additional premium or other financial
assistance from their former employer or
union.
Depending on the circumstances of
the retiree, all of these types of drug
coverage have the potential to reduce
retiree lifetime drug costs significantly
compared to retiree costs in the absence
of the law. Because of the substantial
new subsidies and the range of
subsidized options available to
employers and unions for continuing
coverage and enhancing total support
for retiree coverage, we conclude that
combined payments by employers/
unions and Medicare for drug coverage
on behalf of retirees will generally be
greater—and frequently significantly
greater—than they otherwise would
have been without the enactment of the
MMA. That is, lifetime drugs costs for
retirees will generally be lower, and
frequently substantially lower, than they
otherwise would have been, as a result
of strengthened retiree coverage and
new assistance with drug costs.
A fifth participation assumption
concerns enrollment in the low-income
subsidy portion of the program. We
estimate that approximately 14.4
million beneficiaries will be eligible for
the low-income subsidy in 2006. We
assume that a portion of beneficiaries
who are eligible for the low-income
subsidy (while receiving prescription
drug coverage under Part D) will not
take up the low-income assistance. We
assume 100 percent uptake among fullbenefit dual eligibles and 57 percent
uptake among all other low-income
subsidy eligibles. Among this latter
group, we assume 100 percent uptake
among those beneficiaries who will be
deemed full low-income subsidy
eligible and have facilitated enrollment
(that is, QMBs, SLMBs, QIs, and
beneficiaries with SSI). As noted in the
proposed rule, we assume less than full
uptake of the low-income subsidy
among the remaining low-income
beneficiaries based on experience with
other means tested programs such as
Medicaid and Medicare Savings (QMB/
SLMB) programs, which suggests that
full take up does not generally occur.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

There are several limitations inherent
in the assumptions for predicting the
specific impacts of a major new program
like the Medicare drug benefit. For
example, it is difficult to project
enrollment rates in this entirely new
program, and there is uncertainty about
how employers and unions will respond
to the retiree drug subsidy or the other
approaches available to augment
Medicare Part D prescription drug
coverage. The assumptions discussed
previously reflect our current best
estimates, considering the structure of
the program, the wide variety of new
efforts to educate beneficiaries and
facilitate enrollment, and information
about participation rates in other types
of similar programs where available.
Comment: One commenter asserted
that our assumption in the proposed
rule that 99 percent of non-low-income
and non-actively working beneficiaries
would receive drug coverage through a
Medicare Part D plan or through an
employer or union sponsored health
plan that is eligible for the Medicare
retiree subsidy was unrealistic, claiming
that the late enrollment penalty for
Medicare Part D was not sufficient to
generate that level of participation. This
commenter also asserted that our
assumptions did not reflect the potential
for selection bias in enrollment in
Medicare Part D.
Response: In addition to receiving this
comment on our Part D program uptake
assumptions, in our efforts to refine our
model of Medicare Part D impacts, we
also obtained information from industry
experts on their expectations of the
likely response to Medicare Part D.
While we continue to believe that there
will be high participation in Medicare
Part D, we have revised our uptake
assumption downward slightly to reflect
what we think is the current best
estimate of likely participation in
Medicare Part D and we have accounted
for selection by assuming graduated
uptake rates based on beneficiaries’ drug
spending levels, as discussed
previously.
F. Anticipated Effect of Medicare Part D
on Beneficiaries
The Medicare prescription drug
benefit is designed to provide all of the
nation’s Medicare beneficiaries with the
opportunity to enroll in a prescription
drug benefit that is subsidized by the
Medicare program. We believe that
giving Medicare beneficiaries access to
affordable drug coverage that helps
them to pay for their outpatient
prescription drugs (which have become
an increasingly important component of
health care service delivery), and helps
beneficiaries to use prescription drugs

PO 00000

Frm 00272

Fmt 4701

Sfmt 4700

more effectively, will assist beneficiaries
in leading healthier, more productive
lives, while improving the effectiveness
of the Medicare program. Additionally,
we believe that the substantial
additional resources that Medicare Part
D provides through the retiree drug
subsidy and the various opportunities
employers and unions have for
providing additional coverage that
complements the standard Part D drug
benefit will make it more affordable for
employers and unions to continue
providing high quality retiree drug
coverage to Medicare-eligible retirees.
The following section contains
discussions of: a recap of the Medicare
drug benefit’s structure, estimates of the
average amount of drug spending
covered by the Medicare drug benefit
and average beneficiary premiums, the
anticipated positive effects that the
Medicare prescription drug benefit will
have on beneficiaries, and a discussion
of the anticipated positive effects that
the Medicare retiree drug subsidy and
other options that are available to
employers and unions under Medicare
Part D will have on the availability and
generosity of retiree drug coverage.
1. Recap of the Structure of the
Medicare Part D Drug Benefit
As discussed in more detail in subpart
C in the preamble, standard prescription
drug coverage under Medicare Part D for
2006 consists of a $250 deductible, 25
percent cost-sharing (or an actuarially
equivalent cost-sharing structure) up to
an initial coverage limit of $2,250, 100
percent beneficiary cost-sharing after
the initial coverage limit until an out-of­
pocket threshold of $3,600 is reached,
and nominal cost-sharing for
expenditures beyond the out-of-pocket
threshold (that is, the greater of 5
percent coinsurance or a copayment of
$2 for a generic or preferred multiple
source drug and $5 for any other drug
in 2006, or an actuarial equivalent costsharing structure). For each year after
2006, the deductible, initial coverage
limit, out-of-pocket threshold, and
nominal copayment amounts are
indexed to per capita growth in
prescription drug expenditures for Part
D enrollees, as described in more detail
in the preamble.
While we model all of our impact
estimates on the defined standard
benefit structure, we note that PDP and
MA-PD plans have the option of offering
actuarially equivalent alternative
coverage. In addition, plans may offer
enhanced alternative coverage where for
an additional premium they offer
supplemental drug coverage such as
coverage for benefits above the initial
coverage limit (that is, coverage of the
so-called ‘‘doughnut hole’’), and we

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
anticipate that some plans will offer this
coverage.
Beneficiaries who meet certain
income and assets requirements qualify
for low-income subsidy assistance with
cost-sharing and premiums. While the
out-of-pocket threshold level is the same
for all enrollees, the beneficiary costsharing liability covered by the lowincome subsidy counts towards the Part
D out-of-pocket threshold. Therefore,
subsidy-eligible individuals will pay
substantially less than all other
enrollees before the catastrophic
coverage begins. Institutionalized fullbenefit dual eligibles pay no costsharing. Other full-benefit dual eligibles
with income not in excess of 100
percent of the Federal Poverty Level
(FPL) face no deductible, have nominal
cost sharing of $1 for generic drugs or
preferred multiple source drugs and $3
for any other drug up to the out-of­
pocket threshold, and receive full
coverage for drug costs beyond the out­
of-pocket threshold. Other full-benefit
dual eligibles with income above 100
percent of FPL and beneficiaries who
are not full benefit dual eligibles, but
who have income less than 135 percent
of FPL and assets up to $6,000 per
individual (or $9,000 per couple) in
2006, face no deductible, have nominal
cost sharing of $2 and $5 for the
respective drugs up to the out-of-pocket
threshold, and receive full coverage for
costs beyond the out-of-pocket
threshold. For other beneficiaries with
income less than 150 percent of FPL and
assets up to $10,000 per individual (or
$20,000 per couple) in 2006, there is a
reduced deductible of $50, cost-sharing
of 15 percent for costs up to the out-of­
pocket threshold, and nominal cost
sharing of $2 and $5 for the respective
drugs for costs beyond the out-of-pocket
threshold. For years after 2006, all
aspects of the benefit structure related to
the low-income subsidy are indexed to
growth in per capita drug spending,
except for the nominal copayment
amounts for full-benefit dual eligibles
with income not in excess of 100
percent of FPL and the low-income
assets tests, which are indexed to the
Consumer Price Index.
The low-income subsidy also offers
beneficiaries substantial help with
premiums. Many beneficiaries who
receive the low-income subsidy will pay
no premium for Medicare drug
coverage. Full-benefit dual eligibles and
beneficiaries who have incomes up to
135 percent of FPL and who meet the
assets test receive a full Federal subsidy
of the beneficiary premium—that is,
beneficiaries pay no premium as long as
they select a PDP or MA-PD that has a
premium that does not exceed the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

greater of the low-income benchmark
premium or the lowest PDP premium
for basic coverage for the region and as
long as they sign up for Medicare Part
D within the initial enrollment period or
have met creditable coverage
requirements. Other beneficiaries
receiving a low-income subsidy—those
with income between 135 percent and
150 percent of FPL and meeting asset
requirements—would face a sliding
scale premium based on income.
Medicare Part D also has implications
for beneficiaries enrolled in the Program
of All Inclusive Care for the Elderly
(PACE). PACE programs already provide
a comprehensive drug benefit to dual
eligible enrollees and to enrollees who
only have Medicare coverage. For the
dual eligible enrollees, PACE programs
will now be receiving funding for
prescription drugs through Medicare
Part D instead of through the State
Medicaid program. PACE enrollees who
only have Medicare coverage are today
paying the full cost of their drug
coverage. As a result of the Federal
subsidization of Part D coverage, they
will receive substantial premium relief.
This lowering of premiums for
beneficiaries who only have Medicare
coverage may lead to an increase in
enrollment in PACE organizations.
2. Estimated total drug spending,
spending paid by the Medicare drug
benefit, and premiums
a. Summary
Table IV–2 presents estimates for
Medicare Part D enrollees of (1) average
per capita total drug spending
(including spending paid for by the
Medicare drug benefit, by the
beneficiary, and by any sources of
supplemental coverage), (2) average
drug spending paid for by the standard
Medicare Part D benefit, and (3) the
average premium associated with
standard Medicare Part D drug coverage.
Since beneficiaries who are eligible for
the low-income subsidy receive
additional assistance with cost-sharing
and premiums, we present estimates
separately for beneficiaries who do and
do not receive the low-income subsidy.
A discussion of how these estimates
were developed is included in the next
section, ‘‘b. Methodology and
Assumptions Underlying Estimates.’’
For Medicare Part D enrollees who do
not receive the low-income subsidy, we
estimate that average per capita drug
spending in CY 2006 would be $2,260.
This projection of drug spending
includes cost-management savings
discussed in the next subsection, such
as price concessions and generic
substitution, or utilization effects
resulting from the Medicare drug
benefit. The Medicare drug benefit

PO 00000

Frm 00273

Fmt 4701

Sfmt 4700

4465

would be expected to pay for on average
about $1,138 of prescription drug costs,
or on average half of total beneficiary
drug spending in CY 2006.7 Beneficiary
premiums for defined standard coverage
will vary across PDPs and MA-PDs. We
estimate that the beneficiary premium to
obtain defined standard coverage would
be on average about $440 per year in CY
2006. Thus, we estimate that the average
monthly premiums would be less than
$37. A beneficiary may pay a higher or
lower amount depending upon which
PDP or MA-PD the beneficiary selects.
In CY 2010, drug spending for Part D
enrollees who do not receive the lowincome subsidy is projected to be $2,945
on average, with the Medicare drug
benefit paying for on average $1,490 of
prescription drug costs. The average
premium in CY 2010 for these
beneficiaries is projected to be $580 per
year or roughly $48 per month for
defined standard coverage.
For enrollees who receive the lowincome subsidy, we estimate that
average per capita drug spending in
2006 would be $4,359.8 We estimate
that on average the Medicare drug
benefit would be expected to pay for
about $4,189 of prescription drug costs,
or approximately 96 percent of total
drug spending. In 2010, these
beneficiaries would be expected to
spend on average $5,684 per capita on
prescription drugs, with the Medicare
drug benefit paying for on average about
$5,439 of beneficiaries’ drug costs. As
discussed in the preamble, the lowincome cost-sharing amounts vary
depending upon a beneficiary’s income
and assets. Consequently, the share of
drug spending paid for by the Medicare
drug benefit would vary by subsidy
eligibility category, ranging from an
average of about 85 percent for the
highest-resource subsidy eligibility
category (that is, those beneficiaries who
qualify for the subsidy under the criteria
that they have income less than 150
percent of FPL and assets up to $10,000
7 We note that $1,138 reflects the average payout
of the Medicare drug benefit for non-low-income
beneficiaries in 2006. This is different from what
the payout would be for a beneficiary with total
drug spending equal to average total drug spending
for all enrollees. For example, standard coverage
under Medicare Part D would payout $1500 for a
beneficiary with total spending of $2260. The
difference between the average payout versus the
payout for a beneficiary with average total drug
spending is due to the interaction between the
distribution of drug spending and the deductible
and cost-sharing structure of the Medicare drug
benefit.
8 Average drug spending for enrollees eligible for
the low-income subsidy is higher than for enrollees
not eligible for the subsidy because a substantial
portion of those eligible for the low-income subsidy
are full-benefit dual eligibles, who on average tend
to be sicker.

E:\FR\FM\28JAR2.SGM

28JAR2

4466

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

per individual (or $20,000 per couple)
in CY 2006) to 98 percent for the most
generous subsidy category (that is, fullbenefit dual eligibles with income not in
excess of 100 percent of FPL). As
discussed in the following methodology
section, these estimates do not take into
account the waiver of cost sharing for
institutionalized full-benefit dual
eligibles, which further enhances the
subsidy for this category of
beneficiaries.
As noted previously, many
beneficiaries who receive the lowincome subsidy receive a full Federal
subsidy of the beneficiary premium
(that is, the beneficiary pays no
premium at all), as long as they enroll
in a PDP or MA-PD with a premium that
does not exceed the greater of the lowincome benchmark premium or the
lowest PDP premium for basic coverage
for the region and as long as they enroll
during the initial enrollment period or
have met creditable coverage
requirements. For low-income enrollees
with income between 135 percent and
150 percent of FPL who face a sliding
scale premium based on income, we
estimate that the premium will average
$220 per year or roughly $18 per month
in 2006, and $290 per year or roughly
$24 per month in 2010.
Overall, the government is estimated
to contribute $1355 to the $1795 cost of
standard Part D insurance coverage. In
addition, the government will provide
further financial assistance for lowincome subsidy enrollees—an average of
$1863 in low-income cost-sharing
subsidies and $420 in premium
subsidies.
We note that our total per capita drug
spending estimates for the two groups of
Part D enrollees—those receiving and
those not receiving the low-income
subsidy—differ from those presented in
the proposed rule. Our current estimate
of total per capita drug spending is
lower for Part D enrollees not receiving
the low-income subsidy and is higher
for Part D enrollees receiving the lowincome subsidy than our prior proposed
rule estimates. The reasons for these
changes include use of more recent
(2001) Medicare Current Beneficiary
Survey (MCBS) data in which spending
for non-low-income beneficiaries did
not grow as rapidly as predicted using
earlier baseline data and benchmarking
spending estimates for low-income
beneficiaries to Medicaid data.
b. Methodology and Assumptions
Underlying Estimates
To estimate beneficiary drug spending
for the period CY 2006–2010, we use
drug spending data from the 2001 MCBS
adjusted for underreporting and trended
forward based on projected growth in

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

per capita drug spending based on the
National Health Expenditures
projections.
In projecting drug spending for
enrollees in Medicare Part D, we assume
that PDPs and MA-PDs will achieve a
certain level of savings due to cost
management activities such as
negotiation of manufacturer rebates,
retail discounts, and other price
concessions, and promotion of generic
substitution together with other
utilization management efforts. We
assume discounts and cost-management
savings of 15 percent in 2006, 17
percent in 2007, 19 percent in 2008, 21
percent in 2009, and 23 percent in 2010.
To take into account that some enrollees
in the Medicare Part D drug benefit are
likely to have had previous drug
coverage from other sources and
received some level of discounts and
cost-management savings through that
coverage, we adjusted the MCBS
spending data upward to reflect the full
retail price by backing out any assumed
discounts and cost management savings
and then applied the Part D savings
factor. We note that some beneficiaries
without drug coverage are currently
receiving discounts through the
Medicare-approved drug card program.
Conceptually, those discounts should
also be backed out of drug spending
before applying the Part D savings
factor; however, because the drug
spending data on which our projections
are based predate the Medicareapproved drug card program, such an
adjustment was not necessary.
Our assumptions related to the cost
management savings take into account
several factors. Insured products
generally obtain lower drug prices than
those available to cash paying
customers. For example, an April 2000
study prepared by HHS entitled, ‘‘A
Report to the President: Prescription
Drug Coverage, Spending, Utilization
and Prices,’’ indicated a significant
price differential between individuals
paying cash for prescriptions at a retail
pharmacy versus individuals with
insurance. This difference held true for
both the Medicare and non-Medicare
populations. According to the study, in
1999 the price paid by cash customers
was nearly 15 percent more than the
total price paid under prescription drug
insurance, including the enrollee cost
sharing. For 25 percent of the most
commonly prescribed drugs, this price
difference was higher—over 20 percent.
Such price concessions are envisioned
to be an important part of the Medicare
drug benefit, as the statute specifically
requires PDPs and MA-PDs to provide
beneficiaries with access to negotiated
prices, which would reflect

PO 00000

Frm 00274

Fmt 4701

Sfmt 4700

manufacturer rebates, retail discounts,
and other price concessions. Besides
these types of price concessions, we also
anticipate that PDPs and MA-PDs will
achieve savings as a result of other cost
management activities such as
promotion of generic substitution,
which Medicare will help support as
well through providing information on
opportunities for cost savings to
beneficiaries and their health providers.
As discussed elsewhere in the preamble,
the statute requires PDPs and MA-PDs
to put in place a cost-effective drug
utilization management program that
would include incentives to reduce
costs when medically appropriate. We
believe that these various efforts are
likely to increase use of generics relative
to brand-name drugs among Medicare
Part D enrollees.
In addition, our drug spending
projections assume that changes in
beneficiary out-of-pocket costs resulting
from the Medicare drug benefit would
affect beneficiaries’ utilization of drugs.
For example, as discussed previously,
beneficiaries without drug coverage fill
fewer prescriptions and spend less in
total on prescription drugs than
beneficiaries with drug coverage. Under
the Medicare drug benefit, we would
expect that drug utilization and
spending would increase for
beneficiaries without prior drug
coverage. Our estimates assume that
aggregate beneficiary drug spending
(that is, total drug spending for all
beneficiaries including those with and
without drug coverage prior to 2006)
would be 7.2 percent greater in CY 2006
than it otherwise would be, due to
reduced out-of-pocket costs resulting
from the Medicare drug benefit. Our
estimate of the increase in drug
spending that results in response to
reduced out-of-pocket costs is somewhat
lower than our previous proposed rule
estimate because we have refined our
methodology. For the final rule
estimates, we have developed a
regression model, where we estimate the
demand for prescription drugs as a
function of the share of drug costs that
are out-of-pocket controlling for the
number of physician visits, age, and
gender.
Using our estimates of projected drug
spending for enrollees in Medicare Part
D, we estimate the amount of drug
spending that would be paid for by the
Medicare drug benefit assuming the
defined standard benefit design,
separately for enrollees who would and
would not receive the low-income
subsidy. For enrollees who receive the
low-income subsidy, these estimates
take into account the differential costsharing by income and assets within the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
low-income group. However, due to
data limitations, our estimates do not
take into account the fact that
beneficiary cost-sharing is waived
entirely for institutionalized full-benefit
dual eligibles.
Using the drug spending estimates,
we also estimate the statutorily
specified share of spending financed
through beneficiary premiums for
defined standard Part D coverage. For
the purpose of this impact analysis,
those beneficiaries who are assumed to
enroll in Medicare Part D are assumed
to do so within their initial enrollment
period and face no late enrollment
penalty. We also assume that all lowincome beneficiaries with income under
135 percent of FPL select PDP and MA­
PD plans with a premium that does not
exceed the greater of the low-income
benchmark premium or the lowest PDP
premium for basic coverage for the
region, and thus face no beneficiary
premium. To estimate the average
sliding scale premium, where lowincome subsidy enrollees receive a 75
percent premium subsidy (if income is
greater than 135 percent of FPL but does
not exceed 140 percent of FPL), a 50
percent subsidy (if income is greater
than 140 percent of FPL but does not
exceed 145 percent of FPL), or a 25
percent subsidy (if income is greater
than 145 percent of FPL but less than
150 percent of FPL), we assume a
uniform income distribution between
135 percent and 150 percent of FPL. If
the income distribution is not uniform,
the average sliding scale premium could
differ somewhat from our estimates.
We received several comments related
to the methodology and estimates in this
section.
Comment: One commenter raised
concern about the use of Medicare
Current Beneficiary Survey data and
National Health Expenditure projections
to estimate beneficiary drug spending in
future years. The commenter questioned
the reliability and completeness of selfreported survey data like the MCBS and
questioned the use of the NHE
projections of per capita prescription
drug expenditure growth because these
projections are not Medicare specific.
The commenter maintained that data
from the Federal Employee Health
Benefits Program and other public
programs that reflect a large number of
geographically diverse Medicare
beneficiaries should be used for the
estimates instead.
Response: We agree with the
commenter that there are limitations to
the data used to project beneficiary drug
spending in future years. We also
recognize that data from the Federal
Employee Health Benefits Program and

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

other public programs can provide
important information about
prescription drug spending among
Medicare beneficiaries and we have
used those data in our other research
efforts. However, for the purpose of
developing nationally representative
costs estimates for Medicare Part D, both
CMS and the Congressional Budget
Office have relied on the MCBS data.
CMS has chosen to use the MCBS
because it is the largest nationally
representative survey of prescription
drug expenditures for Medicare
beneficiaries and it has the advantage of
being a single data source that provides
information on all types of
beneficiaries—for example, both
beneficiaries with and without
prescription drug coverage, beneficiaries
with varied income levels, and
beneficiaries of different ages and health
acuities. The administrators of the
survey undertake a number of measures
to reduce inaccuracies associated with
self-reported data, including supplying
respondents with calendars to record
drug purchases, requesting that
beneficiaries save their drug containers
for their next interview, and providing
the interviewer with a roster of drugs
previously mentioned by the respondent
to ensure we are capturing refills.
Moreover, we recently completed and
published a pharmacy follow-back
analysis in which we compared
beneficiary-reported drug data to
pharmacist-reporting data (‘‘Reporting
of Drug Expenditures in the MCBS,’’
John A. Poisal, Health Care Financing
Review, Winter 2003–2004, pp. 23–36).
This allowed those who oversee the
survey to adjust their estimates to
account for survey drug mis-reporting.
All of our drug estimates reflect the
results from the follow-back study.
With respect to the National Health
Expenditures projections, we
acknowledge that these projections are
national and not specific to the
Medicare population. These projections
are based on data obtained by our Office
of the Actuary (OACT) from a variety of
sources, including the National
Prescription Audit conducted by IMS
Health. OACT adjusts the data from the
National Prescription Audit to take into
account a number of factors, including
benchmarking to the Economic Census
and adjusting the data to subtract an
estimate of manufacturer rebates
provided to health insurers related to
insurance coverage for prescription
drugs. Since no such projections that
take these various factors into account
exist specifically for the Medicare
population, we believe it is appropriate
to use the NHE projections.

PO 00000

Frm 00275

Fmt 4701

Sfmt 4700

4467

Comment: We received a comment
from a retiree advocacy group in which
they provided independently generated
data on the cost of prescription drugs for
a group of beneficiaries who currently
receive generous drug coverage through
large employers and unions. The data
were generated by having retirees use
the website of an Internet pharmacy to
determine the cost of a 90-day supply of
the drugs they use. Based on this, the
commenter estimated average total drug
spending, average drug spending paid
for by Medicare Part D, and the average
beneficiary premium. The commenter’s
estimate of average drug spending for its
group of retirees was higher than the
proposed rule estimate while its
estimate of average drug spending paid
for by Medicare Part D was lower than
in the proposed rule. The commenter’s
estimate of the beneficiary premium was
fairly similar to the proposed rule
although the commenter’s estimate was
slightly lower.
Response: It would not be unexpected
that average drug spending for a specific
group of beneficiaries may differ from
our projections of average drug
spending for all Medicare Part D
enrollees. However, if on average a
specific subgroup of enrollees has
higher drug spending, then the average
amount of drug spending paid for by the
Medicare drug benefit would also be
higher for that subgroup of beneficiaries.
As discussed elsewhere, we have
based our estimates for Medicare Part D
on the MCBS, which is the largest
nationally representative survey of
prescription drug expenditures for
Medicare beneficiaries and which has
the advantage of being a single data
source that provides information on all
types of beneficiaries. The projections
based on this data reflect our best
estimate of the average impact of
Medicare Part D on beneficiaries.
Comment: One commenter took issue
with the application of the cost
management savings equally to all
segments of the Medicare Part D
population. The commenter asserted
that it is not realistic to expect the same
level of savings for low-income subsidy
enrollees because their cost-sharing is
extremely limited and plans have little
ability to incentivize the use of cost
effective drugs.
Response: While it is true that low
income subsidy enrollees will have
minimal cost-sharing, we believe that
cost management savings are possible
for this population because Part D plans
still have other cost management tools
available—for example, notably, price
concessions for drugs on a plan’s
formulary, as well as such tools as
mandatory generic substitution, step

E:\FR\FM\28JAR2.SGM

28JAR2

4468

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

therapy, and prior authorization. Costsharing is only one of many tools
available to Part D plans that influence
cost management savings.
Comments: Some commenters
asserted that they did not believe
private price negotiations between Part
D plans and drug manufacturers would
yield as large savings for beneficiaries as
direct government price negotiation
(which is prohibited by statute). Some
commenters claimed that Medicare Part
D plans or PBMs, rather than
beneficiaries, would benefit from price
concessions negotiated with
manufacturers.
Response: We disagree with the
commenters. We expect that the private

price negotiations between PDP
sponsors and drug manufacturers would
achieve comparable or better savings
than direct price negotiation between
the government and manufacturers, as
well as coverage options that better
reflect beneficiary preferences. This
expectation reflects the strong
incentives to obtain low prices and pass
on the savings to beneficiaries resulting
from competition, relevant price and
quality information, Medicare oversight,
and beneficiary assistance in choosing a
drug plan that meets their needs. This
is similar to the conclusion of other
analyses, for example, CBO’s recent
statement that ‘‘Most single-source

drugs face competition from other drugs
that are therapeutic alternatives. CBO
believes that there is little, if any,
potential savings from negotiations
involving those single-source drugs. We
expect that risk-bearing private plans
will have strong incentives to negotiate
price discounts for such drugs and that
the Secretary would not be able to
negotiate prices that further reduce
Federal spending to a significant
degree.’’ In addition, the provision of
relevant price and quality information
on each Part D plan through a price
comparison website will further
promote low prices to beneficiaries.

TABLE IV–2. ESTIMATED AVERAGE ENROLLEE TOTAL DRUG SPENDING, DRUG SPENDING PAID FOR BY MEDICARE DRUG

BENEFIT, AND DRUG BENEFIT PREMIUM, CY 2006 AND CY 2010

Estimated Av­
erage Annual
Drug Spending
Paid For By
the Medicare
Drug Benefit**

Estimated Average Annual Drug Spending*

Estimated

Average Annual

2006
Enrollees Not Receiving Low-Income Subsidy

$2,260

$1,138

$440

Enrollees Receiving Low-Income Subsidy

$4,359

$4,189

$0 or $220***

Enrollees Not Receiving Low-Income Subsidy

$2,945

$1,490

$580

Enrollees Receiving Low-Income Subsidy

$5,684

$5,439

$0 or $290***

2010

* Estimated

average total drug spending includes spending paid for by the Medicare drug benefit, by the beneficiary, and by any other sources
of coverage.
** Average annual drug spending paid for by the Medicare drug benefit reflects on average how much the Medicare drug benefit will payout per
beneficiary. This is different from the amount of drug costs the Medicare drug benefit would payout for a beneficiary with average total drug
spending, due to the interaction between the distribution of drug spending and the deductible and cost-sharing structure of the Medicare drug
benefit. We also note that the average drug spending paid for by the Medicare Part D plan reflects drug costs reimbursed by the plan and does
not include PDP or MA-PD administrative costs.
*** These numbers reflect separate premium estimates for two groups of low-income subsidy enrollees. (1) Those low-income subsidy enrollees
with income under 135 percent of FPL have a $0 beneficiary premium, as long as they select a PDP or MA-PD with a premium that does not ex­
ceed the greater of the low-income benchmark premium or the lowest PDP premium for basic coverage for the region, and as long as they enroll
within the initial enrollment period or have met creditable coverage requirements. (2) Low-income subsidy enrollees with income between 135
percent and 150 percent of FPL face a sliding scale premium based on income, which is estimated to average $220 per year in 2006 ($290 in
2010).

2. Qualitative Discussion of Positive
Effects of the Medicare Drug Benefit
The purpose of the Medicare
prescription drug benefit is to provide
all of the nation’s Medicare beneficiaries
with the opportunity to enroll in a
prescription drug benefit that is
subsidized by the Medicare program.
Outpatient prescription drugs have
become an integral component in the
delivery of comprehensive, high quality
health care services. Giving
beneficiaries access to affordable drug
coverage, that helps them to pay for
their outpatient prescription drugs and
helps beneficiaries and their health
professionals to use prescription drugs
more effectively as part of their overall

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

health care, will enable beneficiaries to
lead healthier, more productive lives,
while improving the effectiveness of the
Medicare program.
a. Enhancement of the Medicare Benefit
Package
When the Medicare program was first
enacted, outpatient prescription drug
coverage was generally not included in
private sector health benefit packages.
However, over the last two decades,
prescription drugs have played an
increasingly critical role in health care
service delivery. For example, currently,
at least one medication is ordered,
provided, or continued in
approximately 65 percent of all visits to
office-based physicians by persons 65

PO 00000

Frm 00276

Fmt 4701

Sfmt 4700

years and over (2001 National
Ambulatory Medical Care Survey,
National Center for Health Statistics).
Prescription drugs have significantly
improved the treatment and
management of many major
conditions—including life-threatening
diseases such as stroke (anticoagulant or
clot-blocking therapy), heart disease and
coronary artery disease
(antihypertensive medications,
cholesterol-lowering drugs), and cancer
(targeted biologics and other agents that
modify the course of illness and can be
taken orally), as well as disorders that
have fundamental impacts on quality of
life like psychiatric illnesses
(antipsychotics and antidepressants),

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
osteoporosis (bone-strengthening drugs),
and arthritis (anti-inflammatory drugs
and other disease-modifying agents)—
thereby contributing to longer and
healthier lives as well as reductions in
other types of medical expenditures
such as inpatient admissions and
lengths of stay (‘‘The Price of Progress:
Prescription Drugs in the Health Care
Market,’’ J. D. Kleinke, Health Affairs
20:5, September/October 2001, available
at www.healthaffairs.org). Many other
significant diseases have also seen
improvements in treatment and
management, and thus in patient health,
as a result of the availability of new
medications, including: HIV/AIDS,
complex infections, diabetes, asthma
and chronic lung diseases, Parkinson’s
disease, and many less common but
serious disorders. With more new
medicines in development than ever
before, potential future health benefits
from better drug therapies are even
greater. Medicare Part D will augment
the Medicare program’s benefit package
by making drug coverage, which is
currently offered in most private sector
health plans, available to all
beneficiaries. This represents an
important step in modernizing the
Medicare program to better meet
beneficiaries’ needs and respond to
changes in health care delivery.
b. Access To Subsidized Prescription
Drug Coverage
For the first time in the history of the
Medicare program, the Medicare
prescription drug benefit will make
subsidized prescription drug coverage
available to all Medicare beneficiaries.
Historically, many Medicare
beneficiaries have received prescription
drug coverage through a variety of
sources, including: employment-based
retiree health coverage, Medigap
policies with drug coverage, Medicare
Advantage plans, Medicaid, and State
Pharmaceutical Assistance Programs.
These various types of drug coverage
have traditionally varied widely in
comprehensiveness and cost (for
example, many of these policies may
not include catastrophic coverage),
leaving some beneficiaries at risk for
high out-of-pocket costs and related
financial access issues even though they
have drug coverage. Meanwhile, an
estimated 24 percent of Medicare
beneficiaries currently do not have any
prescription drug coverage at all (based
on 2001 Medicare Current Beneficiary
Survey data).
In the proposed rule, we stated that by
providing substantial additional
resources to defray the cost of Medicare
drug coverage—including direct subsidy
and government reinsurance payments
to PDPs and MA-PDs that will cover

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

roughly 75 percent of the total cost of
the Medicare drug benefit for all
beneficiaries, additional assistance with
cost-sharing and premiums for lowincome beneficiaries, and new subsidies
for the retiree coverage and Medicare
Advantage coverage that many
beneficiaries receive today—the
Medicare prescription drug benefit will
make prescription drug coverage more
accessible and affordable for
beneficiaries. Since we issued the
proposed rule, several new independent
studies have been published that have
examined the financial benefits that are
available to beneficiaries through
Medicare Part D. In the remainder of
this section, we highlight some of the
ways that having access to subsidized
Part D drug coverage will be helpful to
Medicare beneficiaries as a whole, and
for specific subgroups within the
beneficiary population.
The Medicare prescription drug
benefit will provide access to basic
subsidized prescription drug coverage
for all Medicare beneficiaries, regardless
of income, and additional targeted
assistance for low-income beneficiaries.
We anticipate that beneficiaries who
choose to take advantage of the
subsidized drug coverage that is
available through Medicare Part D by
enrolling in a PDP or MA-PD will
experience reductions in their out-of­
pocket spending for prescription drugs,
both in the short-term and over their
lifetime, and will also gain generous
insurance protection against
catastrophic drug costs. Ultimately, we
believe that the Medicare prescription
drug benefit will significantly reduce
the financial burden that beneficiaries
may face in obtaining needed outpatient
prescription drugs.
Medicare beneficiaries’ out-of-pocket
spending for prescription drugs has
been increasing during the past decade.
However, several independent analyses
confirm our belief that beneficiaries
enrolling in the Medicare drug benefit
are likely to receive substantial help
through lower out-of-pocket spending.
These savings will be associated with
Medicare’s direct subsidy, low-income
subsidy and reinsurance payments
(‘‘Estimates of Medicare Beneficiaries’
Out-of-Pocket Drug Spending in 2006,’’
Jim Mays et. al., Actuarial Research
Corporation, and Tricia Neuman et al.,
The Henry J. Kaiser Family Foundation,
November 2004, available at http://
www.kff.org). Beneficiaries will also
achieve savings from the additional
price discounts that will be available
through the Part D plans (‘‘The
Medicare Prescription Drug Benefit:
Potential Impact on Beneficiaries,’’ Jack
Rodgers and John Stell,

PO 00000

Frm 00277

Fmt 4701

Sfmt 4700

4469

PricewaterhouseCoopers, prepared for
the AARP Public Policy Institute,
November 2004, available at http://
research.aarp.org/health/
2004_13_rx.pdf).
These independent analyses suggest
that although the level of savings that
beneficiaries receive will vary by
income and total drug costs, the
Medicare drug benefit will enable
beneficiaries to achieve savings across
all age and health status cohorts. For
example, one study consistently found
lower out-of-pocket spending for all of
the major beneficiary sub-groups
analyzed, including age, sex, race,
income, place of residence (rural/urban)
and health status (Mays, et. al.,
November 2004).
Although most beneficiaries will
experience lower out-of-pocket costs
during the first year of the Medicare
drug benefit, the available studies
suggest that some healthier beneficiaries
with low utilization could potentially
pay more in premiums than they collect
in benefits in 2006 (Mays, et. al.,
November 2004; King et. al., November
2004; Rodgers et. al., August 2004).
However, it is important to note that
insurance coverage is purchased to
protect against high or unexpected
costs. Thus, the value of the Part D
benefit should not be measured solely
based on savings during any given year;
rather, it is more appropriate to compare
beneficiaries’ out-of-pocket costs with
their total lifetime prescription drug
expenditures to determine the net
savings that beneficiaries will receive
through Medicare Part D over their
lifetime (King et. al., November 2004).
To further illustrate this point, we note
that like the existing Medicare Part B
benefit, which covers physician care
and other outpatient services, the new
Medicare drug benefit is voluntary.
Under current Medicare Part B coverage,
an estimated 30 percent of beneficiaries
pay more in premiums than they collect
in benefits during any given year;
nevertheless, most beneficiaries choose
to enroll in Part B when they first
become eligible because they know that
they will do better over time if they
have insurance coverage than if they
remain uninsured. The same is true for
the new Medicare Part D prescription
drug benefit. Younger and healthier
beneficiaries who currently have low
drug utilization will still be
substantially better off over time by
enrolling in Medicare Part D. Most
beneficiaries who currently have low
drug spending will need more costly
medicines in the future, as drug
utilization and spending tend to
increase with age. Moreover, many
illnesses can strike unforeseeably, so

E:\FR\FM\28JAR2.SGM

28JAR2

4470

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

that a beneficiary that is healthy during
a given year may need an expensive
drug the following year. Thus, even if
they expect to have no drug spending or
modest drug spending in 2006, these
beneficiaries will want to join Part D in
anticipation of the benefits they will
need in the future. This is particularly
important because there is a late
enrollment penalty for people who do
not sign up for Part D, and who do not
maintain creditable coverage elsewhere.
Indeed, one study concluded that
‘‘since annual net benefits even for
beneficiaries in the youngest age group
and in good health exceed the
premiums paid, it is readily apparent
that over the lifetime of all but the
healthiest beneficiaries, benefits will
exceed premiums paid for the coverage’’
(King et. al., November 2004).
Additionally, millions of beneficiaries
who choose to enroll in Medicare Part
D will benefit from the availability of
catastrophic drug coverage that was
lacking in Medigap drug plans, as well
as in most Medicare Advantage plans
and many employer/union-sponsored
plans. A portion of the beneficiary’s Part
D premium, as well as a portion of the
government subsidy, is for this
catastrophic protection. In addition to
its financial value, this catastrophic
coverage also has a psychological value
in that even if a given beneficiary’s drug
spending does not reach the
catastrophic coverage threshold during a
given year, the beneficiary can still have
greater peace of mind in knowing that
this valuable catastrophic protection is
available to them, should they need it
(Mays, et. al., November 2004; Rodgers
et. al., August 2004; King et. al.,
November 2004).
In addition to the Medicare
prescription drug benefit, Medicare Part
D also provides additional resources to
support the continuation of high quality
employer and union-sponsored retiree
drug coverage. We discuss the
anticipated effects of the Medicare
retiree drug subsidy and the various
other ways that Medicare Part D offers
assistance with retiree prescription drug
costs to employers and unions in a
subsequent section of this impact
analysis.
The remainder of this section
provides a more detailed description of
how different types of Medicare
beneficiaries will be helped by the new
Medicare prescription drug benefit.
Low-income beneficiaries—As
discussed earlier, Medicare Part D
makes substantial assistance available to
beneficiaries with lower incomes.
Altogether, we estimate that more than
a third of the Medicare beneficiaries that
are expected to enroll in Part D plans in

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

2006 will receive the low-income
subsidy. These 11 million beneficiaries
with limited incomes and assets (which
includes the full-benefit dual eligibles)
will receive substantial additional help
from Medicare, with no gaps in coverage
and limited or no premiums,
deductibles, or co-payments. As
discussed elsewhere in this impact
analysis, Medicare Part D is estimated to
cover on average 96 percent of
prescription drug costs for these lowincome beneficiaries.
There are three major groups of lowincome beneficiaries that will receive
additional assistance through the lowincome subsidy. About 6.3 million
‘‘dual eligible’’ low-income beneficiaries
will pay no premium, or a limited
premium, no deductible and nominal
co-pays of as little as $1 or $3 per
prescription. As discussed elsewhere in
greater detail, the Medicare drug benefit
will pay, on average, 98 percent of dual
eligible beneficiaries’ drug costs.
Additionally, about 1.5 million of these
dual eligible beneficiaries are
institutionalized, and will be totally
exempt from Part D cost sharing, which
means that they will not pay any
premiums, deductibles, or co-payments.
While the nominal cost sharing of the
Medicare prescription drug benefit may
in some cases be slightly higher than the
cost-sharing under a State’s Medicaid
program, Medicare Part D provides
catastrophic drug coverage protection
with no cost sharing for all dual
eligibles, a benefit that is not currently
available in all States. Since this
population on average experiences
higher drug costs, the catastrophic
coverage provided by Part D offers
important additional protection to this
vulnerable population. We also believe
that Medicare Part D is likely to result
in more stable prescription drug
coverage for low-income Medicare
beneficiaries. For many dual eligibles,
Medicaid is not a secure source of drug
coverage, as eligibility is subject to
meeting certain income and resource
requirements; as a result, for some dual
eligibles, Medicaid only provides
intermittent drug coverage. The broader
income eligibility criteria for the
Medicare Part D low-income subsidy are
such that, when compared to Medicaid
full-benefit dual eligibility standards,
Medicare Part D is likely to result in
more stable prescription drug coverage
for this population because small
income fluctuations will be less likely to
jeopardize beneficiaries’ eligibility for
the subsidized Part D coverage. In
addition the duration of eligibility for
the low-income subsidy is for one year.
About 3 million Medicare
beneficiaries who are not full-benefit

PO 00000

Frm 00278

Fmt 4701

Sfmt 4700

dual eligibles, but whose incomes are
less than 135 percent of the Federal
poverty level ($12,568 for an individual
and $16,861 for a couple in 2004) and
who have limited assets will also pay
only a few dollars per prescription, with
no premium, and no deductible under
the Part D low-income subsidy.
Medicare will also cover 96 percent of
these beneficiaries’ drug costs, on
average.
About 1.6 million beneficiaries with
incomes less than 150 percent of the
Federal poverty level and assets up to
$10,000 (or $20,000 if married) in 2006
will pay 15 percent co-pays with a
sliding-scale premium under Medicare
Part D, which will cover 85 percent of
their drug costs, on average.
Beneficiaries with help from State
Pharmaceutical Assistance Programs—
States that operate State Pharmaceutical
Assistance Programs (SPAPs) have
shown a historical commitment to
provide the elderly with assistance with
prescription drug costs, and are
generally showing an interest (for
example, through their comments on the
proposed rule) in continuing to provide
some assistance by working in
conjunction with the new Medicare Part
D benefit. As noted elsewhere in the
preamble, the Act recognized this
interest on the part of States through
special provisions related to SPAPs. As
discussed in greater detail subsequently
in this impact analysis, States operating
SPAPs which provide subsidized drug
coverage to individuals that will be
eligible for the Medicare drug benefit
will gain substantial savings starting in
2006, when Medicare Part D begins
providing very generous coverage for
beneficiaries with limited means. As a
result of these savings, States may have
additional funds, with which they could
provide additional coverage that wraps
around the Medicare drug benefit if they
wish to do so. SPAP assistance with
beneficiary cost sharing will count
toward the true out-of-pocket cost
catastrophic threshold. As a result, this
would enable SPAPs to provide as
generous or more generous assistance
for the beneficiaries who currently
receive coverage through these
programs, at a lower cost per beneficiary
for the States due to the availability of
the Medicare drug benefit.
Higher income beneficiaries that do
not currently have prescription drug
coverage—Non-low income
beneficiaries that do not currently have
prescription drug coverage will also
benefit from the subsidized drug
coverage that will be available through
Medicare Part D. On average, these
beneficiaries will be much better off
with Part D coverage than they were

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
without drug coverage. Indeed, average
spending for non-low-income
beneficiaries is expected to be about
$2,260 in 2006. Compared with not
having drug coverage, beneficiaries who
spend at least $820 a year (around $70
a month) on prescription drugs in 2006
will see immediate net savings through
the Medicare drug benefit. This breakeven point actually comes earlier when
the discounted prices and other
formulary management savings that
plans will offer are considered.
Beneficiaries spending less than $820 a
year on prescription drugs will pay
more in premium than they receive in
benefits during the first year of the Part
D drug benefit. However, a relatively
small portion of beneficiaries will fall
below the break-even point, largely due
to the fact that the Part D premium is
highly subsidized, with beneficiaries
only paying about a quarter of the total
cost of the premium on average. We
estimate that about one-fourth (27
percent) of all Medicare beneficiaries
will have drug spending below $820 in
2006. However, as discussed earlier,
even for these relatively healthy
beneficiaries, an unexpected illness
could result in large and unanticipated
drug costs, and annual prescription drug
spending levels are expected to rise as
people age, such that these beneficiaries
will be much better off enrolling in Part
D when they first become eligible to do
so, and avoiding the late enrollment
penalty. As noted previously, an
estimated 30 percent of beneficiaries
pay more in premiums under current
Medicare Part B coverage than they
collect in benefits during any given
year. Nevertheless, most beneficiaries
choose to enroll in Part B when they
first become eligible because of its
insurance value—they know that they
will do better over time if they have
insurance coverage than if they remain
uninsured. The same is true for the new
Medicare Part D prescription drug
benefit.
Beneficiaries that currently have
Medicare Advantage—In July 2004,
approximately 4.2 million beneficiaries
were enrolled in general Medicare
Advantage Plans (that is, those not
operating under an employer waiver),
and about 82 percent of these
beneficiaries (3.4 million) had some
prescription drug coverage through their
Medicare Advantage plan. However,
most beneficiaries that currently have
drug coverage through Medicare
Advantage plans do not have a drug
benefit that is as generous as the
Medicare Part D standard benefit. For
example, around 34 percent had
coverage for generic drugs only, about

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

48 percent had coverage for both brand
and generic drugs, and almost all
beneficiaries in these plans had annual
coverage limits of $2,000 or less, while
only about 2 percent of the beneficiaries
in Medicare Advantage plans had
unlimited brand and generic drug
coverage. Medicare Part D will give all
beneficiaries access to subsidized brand
and generic drug coverage and
catastrophic coverage through Part D
plans, including MA-PDs, as well as
additional assistance for low-income
beneficiaries. We expect that the
combination of the new Medicaresubsidized Part D drug benefit, as well
as the availability of rebates for
Medicare Advantage Plans that are
related to the provision of Medicare Part
A and Part B services, and the
attractiveness of drug coverage to
beneficiaries will result in Medicare
Advantage plans offering prescription
drug premiums and benefit designs that
are more advantageous to beneficiaries
than the existing prescription drug
offerings in the current Medicare
Advantage market.
Beneficiaries that currently have drug
coverage through a Medigap plan—The
Medicare Part D prescription drug
benefit will also provide savings for
beneficiaries in comparison to existing
Medigap insurance policies that include
drug coverage. The new Medicare
prescription drug coverage offers a
much better value to beneficiaries than
Medigap plans, where the enrollee must
pay the full cost of the premium (which
is not subsidized by the Federal
government) and has no catastrophic
protection against high prescription
drug costs. By comparison, the Medicare
drug benefit provides beneficiaries with
comprehensive drug coverage at a lower
cost, with the beneficiary paying only
about 25 percent of the Part D premium.
These savings occur at all spending
levels. For example, at a drug spending
level of $1,000 a year, beneficiaries who
switch from Medigap H and I plans will
save over $800 a year in premiums and
cost-sharing, and those in plan J will
save over $1,300 a year in premiums
and cost-sharing by enrolling in Part D.
Similarly, a beneficiary who spends
$3,000 a year on drugs will typically
save about $1,300 a year in premiums
and cost sharing by switching to the
new Medicare drug benefit from a
Medigap H or I plan, and save almost
$1,700 a year by switching from a
Medigap J plan. Additionally, it is
important to note that enrollees who
switch from Medigap drug coverage into
a Part D prescription drug plan will be
able to keep their other Medigap
benefits, such as payment of deductibles

PO 00000

Frm 00279

Fmt 4701

Sfmt 4700

4471

and coinsurance for doctor and hospital
care, while paying lower premiums
since their drug coverage will no longer
be included in the Medigap plan. They
will also be able to switch into two new
Medigap benefit packages that will
allow purchasers to insure against
catastrophic costs for benefits covered
under traditional Medicare and, together
with the new drug benefit, allow
beneficiaries to insure against
catastrophic expenses for hospital,
doctor, and prescription drug costs.
Since all beneficiaries face some risk of
catastrophically high bills for these
services, these are important additions
to the choices available to beneficiaries
to manage their costs and potential
financial exposure.
Beneficiaries that currently have
employer- or union-sponsored
coverage—As discussed elsewhere in
this impact analysis, for well over a
decade the availability and generosity of
employment-based retiree health
coverage has been eroding, particularly
for future retirees. Medicare Part D,
including the retiree drug subsidy and
the other options it gives employers and
unions for providing additional drug
coverage that complements the standard
Part D drug benefit, will help to
counteract this trend by increasing the
financial support that is available to
employers and unions for retiree drug
coverage. We discuss the anticipated
effects of the Medicare retiree drug
subsidy and the various other ways that
Medicare Part D offers assistance with
retiree prescription drug costs to
employers and unions in a subsequent
section of this impact analysis.
Overall, both our analysis and the
analyses of several independent
researchers have found that the new
Medicare drug benefit will provide
substantial help to millions of
beneficiaries. However, we did receive
some comments expressing concerns
about how Medicare Part D will affect
access to prescription drugs for certain
beneficiary subpopulations.
Comment: We received numerous
comments from beneficiary advocacy
groups, States, and others expressing
concern about the potential for dual
eligible beneficiaries to experience
coverage gaps if they do not enroll in a
Part D plan prior to January 1, 2006
(when their primary prescription drug
coverage will be transitioned from
Medicaid to Medicare). These
commenters stated that dual eligibles
are particularly vulnerable due to their
extensive and complex medical needs
and limited financial resources, and that
such coverage gaps could interfere with
their ability to obtain medically
necessary prescription drugs.

E:\FR\FM\28JAR2.SGM

28JAR2

4472

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

Additionally, various commenters noted
that it will be particularly difficult to
educate the dual eligible population
about the relatively complex array of
choices that are inherent in the new Part
D drug benefit due to a variety of
factors, including cognitive impairments
(which may make it difficult for some
dual eligibles to select a Part D plan,
including those who are disabled,
mentally ill, and/or institutionalized),
limited proficiency with written
English, and general poor health status.
A few commenters also asserted that the
potential for various different
actuarially equivalent benefit designs
under Part D could contribute to
beneficiaries’ difficulty in comparing
Part D plans and making an informed
choice among the options that are
available to them. Some commenters
expressed concern that dual eligible
beneficiaries could be exposed to late
enrollment penalties if they enroll in a
Part D plan after the initial enrollment
period has ended, which could
represent an added financial burden for
individuals that are on a fixed income.
Some commenters also expressed
concern that the provision allowing Part
D plans to disenroll individuals whose
behavior is disruptive could cause
additional gaps in drug coverage and
exposure to late enrollment penalties
that could disproportionately affect
beneficiaries with mental illness or
cognitive difficulties. Commenters
asserted that interruptions in access to
needed prescription drugs could
ultimately potentially have a negative
impact on health outcomes and costs for
dual eligibles and other beneficiaries
with HIV/AIDS, mental illness, or
developmental disabilities, as well as
for beneficiaries that are
institutionalized in skilled nursing
facilities. For this reason, several
commenters recommended either
delaying implementation of Part D for
dual eligibles to ensure a smooth
transition; delaying implementation of
the late enrollment penalty for dual
eligibles; or auto-enrolling dual eligibles
into Part D plans by Fall 2005 (with the
ability to change plans) to avoid
coverage gaps. Additionally, some
commenters also suggested autoenrolling beneficiaries that are enrolled
in Medicare Savings Programs, as well
as other low-income subsidy-eligible
beneficiaries into Part D plans. Finally,
some commenters recommended
increased funding for SHIPs, AAAs, and
States to provide an extensive network
of local, face-to-face, culturally and
linguistically competent counseling
services to notify and educate the dualeligible population about the low-

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

income subsidy, and improve
beneficiaries’ overall comprehension of
and enrollment into Part D plans.
Response: We share the commenters’
concerns about the importance of
facilitating a smooth transition to
Medicare Part D for dual eligibles, and
ensuring access to necessary
prescription drug coverage for
vulnerable populations. As discussed
elsewhere, we have modified the final
rule to ensure that auto-enrollment of
dual eligibles will begin as soon as the
eligible Part D plans are known prior to
January 1, 2006. Additionally, given the
significant savings that will be available
to beneficiaries through the low-income
subsidy, our final rule also includes
facilitated enrollment provisions for all
other beneficiaries who are determined
or deemed eligible for the low-income
subsidy. It is important to note that for
low-income beneficiaries, the Part D
benefit design will be fairly
standardized due to the cost-sharing
subsidies.
Also, as discussed in the preamble,
we anticipate making every effort to
provide beneficiaries with information
to assist them in considering whether
they should change Part D plans after
they have been auto-enrolled and as part
of the facilitated enrollment process. For
example, we anticipate working with
SHIPs, States and a broad array of
public, voluntary, and private
community organizations serving
Medicare beneficiaries to assist dual
eligibles and other beneficiaries
(including targeted efforts among
historically underserved populations) in
understanding the various options that
are available to them under Medicare
Part D. We also anticipate that the
special enrollment period provisions in
the final rule will help to ensure that
dual eligibles and other beneficiaries are
able to change to a PDP or MA-PD that
better meets their needs. We have also
made additional revisions in the final
rule to provide additional protections
for vulnerable individuals, such as the
mentally ill, who potentially might face
involuntary disenrollment from a PDP
due to disruptive behavior. Ultimately,
as discussed earlier, we believe that
Medicare Part D will improve access to
and stability of generously subsidized
drug coverage for many dual eligibles
and lower income beneficiaries due to
the broader income eligibility criteria
that are associated with the Medicare
Part D low-income subsidy, which
means that small income fluctuations
will be less likely to jeopardize
beneficiaries’ eligibility for coverage. In
addition, the duration of eligibility for
the low-income subsidy is for one year.

PO 00000

Frm 00280

Fmt 4701

Sfmt 4700

Comment: We also received numerous
comments from beneficiary advocacy
groups and others expressing concern
that some beneficiaries with extensive
and complex medical needs that enroll
in PDPs and MA-PDs could be required
to switch their medications due to a
given Part D plan’s formulary
restrictions. Several commenters stated
that there is a possibility that a
beneficiary’s current prescription drugs
may not be included on their Part D
plan’s formulary, or may be included in
a formulary tier that has higher costsharing requirements, because PDPs and
MA-PDs will only be required to
include at least two drugs from each
therapeutic class on their formularies,
and will not have any limits on their
application of tiered co-payments under
Medicare Part D (including the ability to
use different tiers for different classes of
drugs, and to make changes in tiers
during the plan year). These
commenters stated that many
beneficiaries need immediate and
ongoing access to medically necessary
and therapeutically appropriate
medications, which often may not be
interchangeable with other drugs in the
same therapeutic class—including dual
eligibles; institutionalized beneficiaries;
beneficiaries with HIV/AIDS, mental
illness, developmental disabilities, or
other life-threatening and
pharmacologically complex conditions;
and beneficiaries in subpopulations
where there is data suggesting that
specific drugs may be more efficacious
than others (for example, based on
gender, ethnicity or disease category)—
and expressed concern that the Part D
appeals process could cause delays in
these beneficiaries receiving timely
access to needed medications.
Commenters also asserted that various
other cost-control mechanisms can
potentially delay beneficiaries’ access to
necessary and appropriate treatment,
including dispensing limits, prior
authorization requirements, therapeutic
substitution, step therapy, and fail first
provisions. Some commenters also
suggested that Part D formulary costsharing requirements could be
particularly burdensome for certain
beneficiaries, including dual eligibles
whose States do not currently require
co-payments for prescription drugs and
institutionalized beneficiaries (who
could be subject to out-of-network costs
if they obtain their drugs through a longterm care pharmacy that has an
exclusive contract with the facility
where they reside and provides valueadded therapeutic management services,
but is not part of their Part D plan’s
pharmacy network). Some commenters

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
also expressed concern that Part D plans
may not actively solicit the inclusion of
I/T/U pharmacies in their networks,
noting that in some areas, I/T/U
pharmacies may be the only facilities
capable of providing medication therapy
management services to certain
American Indian / Alaska Native
beneficiaries due to language and
cultural barriers. Additionally, several
commenters expressed concern that
some mentally ill patients could be
switched to less effective medications
and experience painful withdrawal
symptoms because benzodiazepines and
barbiturates are excluded from being
Part D drugs. Finally, a substantial
number of commenters requested that
CMS designate certain groups of
beneficiaries—including dual eligibles;
institutionalized beneficiaries; and
beneficiaries with HIV/AIDS, mental
illness, developmental disabilities, or
other life-threatening and
pharmacologically complex
conditions—as special populations that
are protected from the potential effects
that formulary restrictions could have
on their access to medically necessary
prescription drugs through the inclusion
of alternative or open formularies and
other special provisions and
exemptions.
Response: We agree with commenters’
concerns about the importance of
continuity of care and access to
medically necessary drugs for
vulnerable populations. The preamble
considers the various issues that were
raised in the comments relating to
special populations and Part D plans’
formulary restrictions, and discusses the
steps we are taking to be responsive to
these concerns. For example, although
Part D plans will not be required to
include every Part D drug on their
formularies, we will require Part D plan
formularies to include adequate access
to a broad range of drugs used to treat
diseases for which drugs exist.
Additionally, we will comprehensively
review Part D plans’ proposed benefit
designs—including their tiered costsharing formulary structures, P&T
committee structure and utilization,
utilization management policies and
processes, and exceptions and appeals
processes—to ensure that they provide
an adequate benefit that generally
complies with all applicable standards
under Part D.
As discussed in the preamble, we will
also review Part D plan formularies to
ensure that plans do not discriminate
against certain classes of Part D eligible
individuals by adopting a benefit design
(including any formulary or tiered
formulary structure) that would
substantially discourage enrollment by

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

certain beneficiaries. We believe that
our review of Part D plans’ benefit
designs, including their utilization
management policies and processes,
will address commenters’ concerns
regarding access to Part D drugs for
vulnerable populations and ensure that
Part D plans’ benefit designs do not
discriminate against certain groups of
beneficiaries.
In addition to the safeguards noted
above, as discussed in the preamble, we
have also modified the final rule to
include a requirement that Part D plans
establish an appropriate transition
process for new enrollees whose current
drug therapies may not be included in
the Part D plan’s formulary. We expect
that a plan’s transition process would
address procedures for medical review
of non-formulary drug requests and,
when appropriate, a process for
switching new plan enrollees to
therapeutically appropriate formulary
alternatives failing an affirmative
medical necessity determination. We
will review the Part D plans’ proposed
transition processes as part of our
overall benefit package review process.
We have also modified the final rule
to clarify that Part D plans must disclose
information about any utilization
management procedures that they may
use as part of the formulary information
that they must disseminate to
beneficiaries. We believe that this
provision will assist beneficiaries in
making informed choices during the
enrollment process in determining
which Part D plan will best meet their
needs.
Additionally, as discussed elsewhere
in the preamble, we believe that our
approach of providing for any willing
pharmacy contracts tailored to longterm care pharmacies that serve
institutionalized populations will
encourage the participation of long-term
care pharmacies in the Part D plans’
networks, and thus help to assure that
institutionalized beneficiaries will
continue to have access to these
pharmacies, while also providing for
increased competition in this area. Also,
in what we anticipate are those limited
instances where a beneficiary’s Part D
plan does not have the long-term care
pharmacy servicing the beneficiary’s
particular long-term care facility in its
network, then the beneficiary is eligible
for a special enrollment period that will
enable them to switch plans. Should
such a change in Part D plans be
necessary and involve a transition
period, our rules also provide that nonroutine use of an out-of-network
pharmacy is permitted when the
beneficiary cannot reasonably access a
network pharmacy. We note that the

PO 00000

Frm 00281

Fmt 4701

Sfmt 4700

4473

final rule provides that CMS will pay
the out-of-network differential for
appropriate non-routine use of out-of­
network pharmacies on behalf of all full
low-income subsidy individuals and
will pay amounts above the statutory
cost-sharing limit for partial low-income
subsidy-eligible Part D enrollees.
We have used a similar approach in
addressing concerns relating to access to
I/T/U pharmacies. As discussed
elsewhere in the preamble, we have
added a provision to our final
regulations requiring Part D plans to
offer contracts to all I/T/U pharmacies
in their service areas, and to include a
special addendum to their standard
contracting terms and conditions in
order to account for the special
circumstances of I/T/U pharmacies.
Finally, we expect that some
Medicare beneficiaries will continue to
have access to drugs excluded under
Medicare Part D, such as
benzodiazepines, through Part D plans
or State Medicaid plans. First, Medicare
Part D allows PDPs and MA-PDs to
provide drugs that are specifically
excluded from being Part D drugs if they
do so as supplemental benefits through
enhanced alternative coverage. We
believe that some beneficiaries with
chronic conditions will choose to enroll
in Part D plans that offer enhanced
alternative coverage. Additionally,
under Medicaid, States will be able to,
at their discretion, provide coverage for
a drug that is an excluded Medicare Part
D drug.
c. Improved Compliance with Treatment
Regimens
Available data suggest that not having
drug coverage, combined with high drug
expenses, may cause some beneficiaries
to either not have their prescriptions
filled or have them filled less often
because they are not financially able to
purchase outpatient prescription drugs.
Because the Medicare prescription drug
benefit will reduce affordability barriers
associated with obtaining outpatient
prescription drugs by reducing both the
costs of drug treatment and
beneficiaries’ payments, we believe it
will help to improve beneficiaries’
compliance with their drug treatment
regimens.
There is evidence that some
beneficiaries, particularly those without
drug coverage, do not fill some
prescriptions ordered by their
physicians and skip doses to make their
drugs last longer due to cost concerns.
For example, a study of Medicare
beneficiaries in eight States found that
among those without drug coverage, 25
percent reported not filling a
prescription due to cost, while 27
percent reported skipping doses to make

E:\FR\FM\28JAR2.SGM

28JAR2

4474

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

drugs last longer. These rates of
‘‘noncompliance’’ with physician
prescribing orders were more than
double the rates reported among
beneficiaries with drug coverage (Dana
G. Safran, et. al., ‘‘Prescription Drug
Coverage And Seniors: How Well Are
States Closing the Gap?’’ Health Affairs
Web Exclusive W253, July 2002, http:/
/content.healthaffairs.org/cgi/reprint/
hlthaff.w2.253v1.pdf).
Furthermore, analysis of data from the
2001 Medicare Current Beneficiary
Survey (MCBS), a nationally
representative sample of Medicare
beneficiaries shows that Medicare
beneficiaries without drug coverage fill
fewer prescriptions than those with
drug coverage. Overall, beneficiaries
without drug coverage, on average, selfreport filling 37 percent fewer
prescriptions (18) than those with drug
coverage (29). While some of this
difference in utilization likely reflects
differences in health status and other
beneficiary characteristics, this
phenomenon holds true even among
groups of beneficiaries with large
numbers of chronic conditions. For
beneficiaries with five or more chronic
conditions, those without drug coverage
self-report, on average, filling
approximately 38 prescriptions a year
compared to beneficiaries with drug
coverage, who self-report filling, on
average, 50 prescriptions.
Finally, a study in the December 2001
issue of the Journal of General Internal
Medicine found that certain
characteristics, such as minority
ethnicity, and low income (defined as
income less than $10,000) significantly
increase the risk that individuals
without drug coverage will restrict their
use of medications by, for example,
skipping doses or avoiding taking
medication altogether. For example, the
odds of medication restriction in
minority subjects were higher among
those with no drug coverage than among
those with full drug coverage. Similarly,
the odds of medication restriction were
higher in low-income subjects with no
drug coverage than in those with full
drug coverage. (Michael A. Steinman, et
al., ‘‘Self-restriction of Medications Due
to Cost in Seniors without Prescription
Coverage,’’ 16 Journal of General
Internal Medicine 793–799, Dec. 2001).
Thus, comprehensive coverage is
particularly likely to have an impact on
prescription drug use among
disadvantaged populations.
d. Improved Health and Reduction of
Adverse Health Effects
Not filling prescriptions, skipping
doses, or cutting pills in half are
referred to in medical literature as
‘‘medication noncompliance,’’ and can

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

have adverse health effects. We believe
that by reducing financial barriers
associated with obtaining outpatient
prescription drugs and encouraging
beneficiary compliance with their drug
treatment regimens, the Medicare
prescription drug benefit will reduce the
occurrence of adverse health events and
lead to overall improvements in
beneficiaries’ health.
Medication noncompliance can lead
to worsening health problems and the
need for additional health care services.
For example, a study of prescription
drug noncompliance among disabled
adults found that about half of the
individuals reporting medication
noncompliance due to cost reported
experiencing one or more health
problems as a result, including pain,
discomfort, disorientation, change in
blood pressure or other vital signs,
having to go to a doctor or emergency
room, or being hospitalized. (Jae
Kennedy and Christopher Erb,
‘‘Prescription Noncompliance Due to
Costs Among Adults with Disabilities in
the United States,’’ American Journal of
Public Health, July 2002). This same
study cited other research indicating
that medication noncompliance is a
clinical problem, particularly related to
chronic illnesses such as hypertension,
and has been found to be a predictor of
hospital admissions and emergency
room visits in other studies.
Similarly, another study found that
limiting access to medications among
low-income, elderly Medicaid patients
increased rates of admission to nursing
homes. The study analyzed Medicaid
recipients aged 60 years or older who
took three or more medications per
month and at least one maintenance
drug for chronic diseases. Limiting
affordable access to prescription drugs
for this population (through a
reimbursement cap on medications)
increased rates of admission to nursing
homes. The authors concluded that for
the sicker patients in the study, the
limitation on medication more than
‘‘double[d] the rate’’ of admission in
comparison to a group whose
medications were not limited. (Stephen
B. Soumerai et al., ‘‘Effects of Medicaid
Drug-Payment Limits on Admission to
Hospitals and Nursing Homes,’’ 325
New England Journal of Medicine 1072,
1074, 1991).
There is also evidence suggesting that
the use of specific drugs may reduce
adverse health events, utilization of
other health care services, and related
costs for certain groups of patients. For
example, a recent study found that the
use of statins in cholesterol-lowering
drug therapy reduced the incidence of
coronary disease-related deaths by 24

PO 00000

Frm 00282

Fmt 4701

Sfmt 4700

percent in elderly men and women (ages
70 to 82) with a history of, or risk factors
for, vascular disease, and also reduced
the incidence of non-fatal heart attacks
and fatal or non-fatal strokes in these
patients (‘‘Pravastatin in Elderly
Individuals at Risk of Vascular Disease
(PROSPER): A Randomised Controlled
Trial,’’ Lancet 2002, 360:9346, 1623–
1630).
Similarly, the Heart Outcomes
Prevention Evaluation (HOPE) study has
found that antihypertensive drug
therapy reduced the combined risk of
cardiovascular death, heart attack and
stroke by 22 percent in approximately
9,000 high-risk middle-aged and elderly
patients (ages 55 and older), with
$871,000 in net estimated savings
associated with direct hospitalization
and procedural costs for this cohort of
patients over the first 4 years of the
study, and also significantly reduced the
risk of adverse cardiovascular outcomes
by 25 to 30 percent in a broad range of
high-risk middle-aged and elderly
patients with diabetes mellitus (See
‘‘Drug Therapy and Heart Failure
Prevention,’’ Editorial, Jennifer V.
Linseman, PhD, and Michael R. Bristow,
MD PhD, Circulation 107:1234,
American Heart Association, 2003;
‘‘Economic Impact of Ramipril on
Hospitalization of High-Risk
Cardiovascular Patients,’’ Cathryn A.
Carroll, PhD MA MBA BSPharm, The
Annals of Pharmacotherapy, Volume
37, No. 3, pp. 327–331; and ‘‘Effects of
Ramipril on Cardiovascular and
Microvascular Outcomes in People With
Diabetes Mellitus: Results of the HOPE
Study and MICRO-HOPE Substudy,
Evaluation (HOPE) Study Investigators,
Lancet 355 (9200):253–259, 2000).
While there is evidence that the use
of certain prescription drugs may be
cost-effective for specific groups of
patients (in the sense that they result in
net health care cost savings or produce
health improvements at relatively low
cost), thus far it has been difficult to
generalize the results of these drugspecific studies more broadly to
estimate the potential health care cost
savings or morbidity or mortality
reductions in the context of an overall
Medicare prescription drug benefit.
First, the findings from available costeffectiveness analyses in the literature
suggest that while some prescription
drugs may lead to short-term or longterm reductions in net health care costs,
other prescription drugs may lead to net
increases in health costs (for example,
as a result of adverse drug reactions
which require additional health care
services). Second, the Medicare
prescription drug benefit will improve
access to prescription drugs for a

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
broader patient population than is
typically included in the available
studies in the literature, which may
affect the potential cost-effectiveness of
certain drugs. For example, while the
literature suggests that the use of statin
drugs for lowering blood cholesterol
levels in patients with existing heart
disease is relatively cost-effective, using
these drugs to preventively lower blood
cholesterol levels in patients that do not
have heart disease may be less costeffective (see ‘‘Are Pharmaceuticals
Cost-Effective? A Review Of The
Evidence,’’ Peter J. Neumann, Eileen A.
Sandberg, Chaim M. Bell, Patricia W.
Stone, and Richard H. Chapman, Health
Affairs 19:2, March/April 2000; and
‘‘The Price of Progress: Prescription
Drugs in the Health Care Market,’’ J. D.
Kleinke, Health Affairs 20:5, September/
October 2001 available at
www.healthaffairs.org).
In addition to the anticipated
reductions in adverse health events
associated with anticipated
improvements in prescription drug
compliance, we believe that many
elements of the Medicare prescription
drug benefit—including quality
assurance, electronic prescribing, better
beneficiary information on drug costs
and ways to reduce drug costs (for
example, through generic substitution),
and medication therapy management
which are designed to improve
medication use and reduce the risk of
adverse events, including adverse drug
interactions—will also improve
beneficiaries’ health outcomes. We
believe that these improvements will
occur through enhanced beneficiary
education, health literacy and
compliance programs; improved
prescription drug-related quality and
disease management efforts; and
ongoing improvements in the
information systems that are used to
detect various kinds of prescribing
errors—including duplicate
prescriptions; drug-drug, drug-allergy
and drug-food interactions; incorrect
dosage calculations, and problems
relating to coordination between
pharmacies and health providers. We
also believe that additional reductions
in errors and additional improvements
in prescription choices based on the
latest available evidence will occur over
time as the electronic prescribing
provisions of the MMA are
implemented (To Err is Human:
Building A Safer Health System,
Institute of Medicine of the National
Academies, 1999, pp. 191–193,
www.iom.edu or www.nap.edu).
Ultimately, we believe that the
evidence supports our conclusion that
making prescription drugs more

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

available and affordable will help
beneficiaries to live healthier, more
productive lives. We also believe that
expanding prescription drug coverage
will reduce adverse health events and
Medicare program spending on more
costly services for some beneficiaries,
and will be particularly important for
beneficiaries with limited means who
are more likely to forego beneficial
prescription drugs when they do not
have coverage. However, the effect on
aggregate Medicare program spending
across all beneficiaries is difficult to
ascertain. At this time, there have not
been studies that have found evidence
that expansions of drug coverage across
a large population, as will occur under
the Medicare drug benefit, yields
aggregate health care cost savings.
Furthermore, there have been mixed
results on the impact of coverage on the
cost-effectiveness of care involving
certain individual drugs in general, and
in differing patient populations. Thus,
the extent to which the Medicare drug
benefit may lead to reductions in
Medicare spending for other health care
services in the aggregate across all
beneficiaries is difficult to predict.
Additional research will be needed to
further examine and quantify these
potential effects. For example, we are
currently conducting a demonstration
study on the extent to which coverage
of oral medicines reduces the use of
professionally-delivered medicines and
the associated physician and health care
services that are currently covered in
Part B. We are very interested in
developing further evidence on the best
ways to encourage outcome
improvements and overall health care
cost reductions through drug coverage.
For example, we are currently
collaborating with AHRQ and other
experts to identify priorities for
developing better evidence and
increasing value in the use of outpatient
medications, and intend to develop
further evidence as part of the
implementation of the drug benefit.
In the proposed rule, we requested
comments related to how outcome
improvements and overall health care
cost reductions related to drug coverage
can be incorporated into the
implementation of the drug benefit.
Comment: We received a comment
from a quality organization which stated
that when administered appropriately, a
prescription drug benefit can affect care
across the spectrum, from preventing
infection or disease to managing or
reversing the impact of chronic disease,
and controlling the cost of overall care;
however, a poorly managed drug benefit
can worsen the health of beneficiaries,
raise costs, and potentially negatively

PO 00000

Frm 00283

Fmt 4701

Sfmt 4700

4475

affect public health. The commenter
went on to state that prescription drugs
are a critical element of an evidencebased benefit package, and that
administration of a drug benefit must
simultaneously guard against potential
underutilization of needed drugs and
over utilization of inappropriate drugs,
both of which have the potential to
negatively affect quality and costs for
the individual and for society as a
whole. Another quality organization
stated that medication therapy
management program services are a vital
component for ensuring that Medicare
beneficiaries receive their Part D
benefits in a safe and effective manner.
Several quality organizations provided
recommendations relating to Part D plan
quality assurance measures and
systems, encouraged us to develop
quality and performance measures for
assessing the services provided by PDPs
and MA-PDs, and offered to assist us in
developing requirements and
performance measures. Additionally, we
received a number of comments that
included examples of successful
medication therapy management
programs and described methods for
measuring outcomes for asthmatic,
diabetic, and hypertensive patients.
Additionally, one quality organization
commenter urged us to standardize the
format, terms, definitions, and types of
information that PDP sponsors will use
in describing their quality assurance
measures and systems and medication
therapy management programs in the
plan information they disseminate to
beneficiaries.
Response: We appreciate the
information that commenters provided
relating to incorporating quality
improvements and potential cost
reductions into the implementation of
the Medicare drug benefit. We agree that
effective medication therapy
management programs and quality
assurance measures and systems can
help to improve beneficiaries’ health
outcomes, and ultimately reduce health
care costs, and will continue to look at
this issue closely. As mentioned in the
preamble, we intend to work with
various stakeholders to develop
appropriate quality elements and
utilization measures, and incorporate
them into Medicare Part D where
appropriate.
4. Positive Effects of the Medicare
Retiree Drug Subsidy and Other
Employer/Union Options for Providing
Prescription Drug Assistance
The Medicare prescription drug
benefit and retiree drug subsidy
represent additional funding sources
that can help employers and unions
continue to provide high quality drug

E:\FR\FM\28JAR2.SGM

28JAR2

4476

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

coverage for their retirees. In this
section, we describe the Medicare
retiree drug subsidy and the various
other ways that Medicare Part D offers
financial assistance with retiree
prescription drug costs to employers
and unions. We also discuss some of the
potential effects that these options will
have on the availability and generosity
of retiree drug coverage for Medicareeligible retirees.
We anticipate that these new sources
of support will have many important
positive benefits for the quality and
security of drug coverage for retirees.
Overall, we believe that the
implementation of Medicare Part D,
including the Medicare retiree drug
subsidy and the other opportunities it
affords employers and unions for
providing continued prescription drug
assistance to their Medicare retirees,
will result in combined aggregate
payments by employers/unions and
Medicare for drug coverage on behalf of
retirees that are significantly greater
than they otherwise would have been
without the enactment of the MMA.
Furthermore, we believe that the
Medicare prescription drug benefit and
retiree drug subsidy represent a
particularly important strengthening of
health care coverage for future
Medicare-eligible retirees, given the
erosion in the availability and
generosity of employment-based retiree
coverage for future Medicare
beneficiaries that has already been
taking place.
a. Overview of the Medicare Retiree
Drug Subsidy
The positive benefits for retiree
coverage from the new retiree drug
subsidy program are related to the
subsidy payments it will make available
to sponsors of employer and union
plans that provide high quality retiree
drug coverage, the special tax-favored
status of the subsidy payments that will
be made to the qualified retiree health
plan sponsors, and the flexibility in
using the subsidy to support retiree
coverage. The retiree drug subsidy
program has highly flexible rules and
stands as an additional option that
permits employers and unions to
continue providing drug coverage to
their Medicare-eligible retirees while
retaining their current plan designs that
are at least equivalent to the standard
Part D benefit, and receiving a Federal
subsidy that reduces the cost of
providing this coverage. We note that
employers and unions that want to
participate in the retiree drug subsidy
program also retain the option of
providing regular supplementation to
Medicare Part A and Part B benefits
through arrangements with Medicare

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Advantage organizations offering a MA
only plan without the Part D benefit,
while still qualifying for the retiree drug
subsidy program by arranging for an
employer or union-sponsored retiree
drug benefit through a separate private
contract with the MA organization.
The intent of the Medicare retiree
drug subsidy is to offer qualified retiree
prescription drug plans financial
assistance with a portion of their
prescription drug costs and thereby
‘‘help employers [to] retain and enhance
their prescription drug coverage so that
the current erosion in coverage would
plateau or even improve’’ (Medicare
Prescription Drug, Improvement, and
Modernization Act of 2003 Conference
Report, p. 53). By making a tax-free
subsidy for 28 percent of allowable
prescription drug costs attributable to
the portion of each qualifying retiree’s
gross prescription drug costs that is
between the cost threshold and cost
limit (that is, drug spending between
$250 and $5,000 for 2006) available to
qualified retiree prescription drug plans,
the Medicare retiree drug subsidy
significantly reduces the financial
liabilities associated with employmentbased retiree drug coverage and
encourages employers and unions to
continue assisting their retirees with
prescription drug coverage.
To provide a rough estimate of the per
capita retiree drug subsidy, we used
MCBS data on prescription drug
spending for retirees with employmentbased coverage, adjusted for underreporting, and trended these data
forward based on the projected growth
rate in prescription drug spending from
the National Health Expenditures
projections. We then applied 28 percent
to the drug spending between $250 and
$5,000 to approximate the average
annual retiree drug subsidy for 2006.
This calculation yielded an estimated
per capita retiree drug subsidy amount
of $668 in 2006. The per capita subsidy
amount was calculated across all
beneficiaries in qualified retiree
prescription drug plans, including both
those who do and do not have spending
high enough to qualify for a Medicare
retiree drug subsidy payment. In the
proposed rule, we sought comment on
the completeness and accuracy of our
MCBS-based projections for valuing the
retiree subsidy. While we did not
receive any comments specifically
relating to the use of MCBS data for
valuing the retiree drug subsidy, we did
receive comments about the use of
MCBS data more generally (see section
D of this impact analysis). As discussed
in more detail previously, we
acknowledge that there are limitations
associated with using MCBS data;

PO 00000

Frm 00284

Fmt 4701

Sfmt 4700

however, we believe that the MCBS
offers the best data available for making
these estimates because it is the largest
nationally representative survey of
prescription drug utilization and costs
for Medicare beneficiaries.
The Medicare retiree drug subsidy is
excluded from the taxable income of the
plan sponsor (just as the Medicare
subsidy provided to beneficiaries
through the Medicare prescription drug
benefit is excluded from the taxable
income of the beneficiary). While the
tax-free nature of the retiree drug
subsidy does not affect the value of the
subsidy to firms without taxable
income, the tax-free nature of the
Medicare retiree drug subsidy generally
increases its value to plan sponsors that
are subject to taxation. As indicators of
the value of this tax subsidy, we provide
some estimates of the equivalent values
of a taxable subsidy for employers at
several corporate income tax rates. For
corporations with taxable incomes,
marginal tax rates generally range from
15 percent to 35 percent. According to
estimates by the Congressional Research
Service, the weighted average effective
tax rate for corporations that pay taxes
is approximately 28.5 percent
(Congressional Research Service,
‘‘Weighted Effective Total Tax Rates on
the Corporate and Noncorporate
Sectors,’’ cited in the Congressional
Budget Office’s letter and report to the
Honorable Don Nickles, February 24,
2004, see www.cbo.gov). Combining this
tax rate and the estimated $668 average
per capita subsidy amount for 2006, we
estimate that the $668 tax-free retiree
drug subsidy amount would be
equivalent to a taxable subsidy of $934
for employers subject to taxation. The
equivalent taxable subsidy for any
particular employer with taxable
income would, of course, vary
depending on its specific marginal tax
rate. For example, the tax-free $668
average retiree drug subsidy amount
would be equivalent to about $891 of
taxable income for employers with a
marginal tax rate of 25 percent and
about $1,028 of taxable income for
employers with a marginal tax rate of 35
percent.
Our implementation of the retiree
drug subsidy program is guided by the
following four policy goals: 1)
maximizing the number of Medicareeligible retirees with high quality
employer or union-provided retiree drug
coverage, and maximizing the
generosity of their coverage; 2) avoiding
financial windfalls in the retiree drug
subsidy program by ensuring that plan
sponsors contribute at least as much to
retiree drug coverage as Medicare pays
them as a subsidy; 3) minimizing

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
administrative burden while
maximizing flexibility for employers
and unions; and 4) fulfilling our
fiduciary responsibility by limiting
overall budgetary costs. We have taken
a number of steps to be responsive to
the concerns that were raised in the
comments relating to the retiree drug
subsidy program. We believe that the
flexibility that we have provided
relating to actuarial equivalence, plan
definition, qualifying covered retirees,
payment methodology, and data
reporting requirements will make it
easier for employers and unions to
continue offering their existing retiree
drug plans to Medicare-eligible retirees,
while qualifying for the retiree drug
subsidy.
b. Overview of Additional Options
Available to Employers and Unions
Through Medicare Part D
As indicated earlier, in addition to the
ability to obtain Medicare retiree drug
subsidy payments for sufficiently
generous drug coverage, Medicare Part
D also gives employers and unions a
variety of other options for continuing
to assist their Medicare-eligible retirees
in obtaining more generous drug
coverage. For example, employers and
unions that are supporting retiree
coverage now could also choose to
provide additional drug coverage by
using the new Medicare Part D subsidy
directly (that is, encouraging their
retirees to enroll in a Medicare Part D
plan which includes a significant
government subsidy for the standard
benefit) with the employer/union
providing additional coverage over and
above the standard Part D benefit that
maintains or exceeds the generosity of
their current benefit designs. This can
be achieved by either: 1) arranging for
a PDP or MA-PD Part D plan to provide
enhanced benefits to their retirees; 2)
arranging for a PDP or an MA-PD under
a waiver to offer a customized plan that
is exclusive to the employer or union’s
retirees; 3) choosing through a waiver to
become a Part D plan for their retirees
that offers enhanced benefits (this is
equivalent to offering a self-insured
benefit); or 4) providing separate
supplemental drug coverage that wraps
around a Part D plan (similar to the
typical employer and union policies
that wrap around Medicare benefits
under Part A and Part B). In addition to
the various options that are available for
providing additional retiree drug
coverage in coordination with a Part D
plan, employers and unions also have
the opportunity to assist their Medicareeligible retirees in paying all or part of
their Part D premiums.
Under these approaches for
coordinating employer or union-

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

sponsored retiree drug coverage with
Part D, the employers/unions’ costs
associated with providing retiree drug
benefits are reduced on a dollar-for­
dollar basis by the amount that
Medicare subsidizes Part D plans. For
example, we estimate that employers
and unions that choose to provide
enhanced or separate supplemental drug
coverage that wraps around Part D will
achieve, on average, a minimum of $900
per beneficiary of savings in 2006.
For Medicare Advantage Part C, we
have broad authority to waive rules that
hinder the design, enrollment in, or
offering of employer plans to Medicare
eligible beneficiaries. We believe that
this waiver authority, which has also
been extended to Part D, can assist PDPs
and MA-PDs in designing prescription
drug benefits that are offered
exclusively to employers for their retiree
populations, and make it easier for
employers to contract with (or become)
PDPs and MA-PDPs to provide
enhanced benefits to their retirees that
supplement the standard Part D benefit
(for example, additional assistance with
cost sharing).
We anticipate providing considerable
flexibility in the waiver process for
PDPs and MA-PDs that are offered
exclusively to employers. As discussed
in the preamble, we will be using a
streamlined approach for implementing
employer group waivers that allows
maximum flexibility for employers to
retain retiree prescription drug
coverage. As part of this process, we
will include details on the types of
waivers that we will consider in
guidelines, and we will address
additional waiver requests from specific
employers or plans on a flow basis.
Additionally, we note that once waivers
have been granted, they will be
available to all similarly situated
employers or unions, thus maximizing
the number of employers that will be
able to benefit from the flexibility of the
waiver process.
We are also committed to easing the
transition to employer/union
participation in providing separate
supplemental coverage that wraps
around Part D. Employers and unions
that choose this option will need to
coordinate their wraparound benefits
with the standard Part D benefit, a
function that can be performed by the
employer or union’s insurer or third
party administrator. As discussed more
fully in the preamble, CMS will play a
role in facilitating coordination of
benefits and the tracking of TrOOP. We
are considering the most efficient way of
assisting in coordinating benefits and
TrOOP tracking, including through the
establishment of a TrOOP facilitation

PO 00000

Frm 00285

Fmt 4701

Sfmt 4700

4477

contractor, contractors, or a blend of
approaches. We will provide more
details of our solution in this regard in
CMS guidance to be released before the
statutory deadline of July 1, 2005. We
believe that the TrOOP facilitation
process will make it easier for
employers and unions to offer
supplemental coverage that wraps
around Part D.
Finally, it is important to note that
since the final rule includes a two-prong
actuarial equivalence test for qualifying
for the retiree drug subsidy, as
discussed in subpart R of the preamble,
there may be some employers or unions
that provide retiree drug coverage that is
creditable on a gross value basis but, for
example, are not making sufficient
contributions toward the financing of
the benefit to qualify for the retiree drug
subsidy on a net value basis. These
employers and unions can choose at any
time to modify their existing retiree
drug benefit designs to supplement Part
D. Under this circumstance, as
discussed in subpart B of the preamble,
the Medicare retirees would be eligible
for a special enrollment period for
Medicare Part D because their retiree
drug coverage no longer meets the
criteria for creditable coverage. The
special enrollment period provision
would enable these employers/unions to
work with their retiree populations and
the new Part D plans to achieve a
smooth transition and ensure that their
Medicare-eligible retirees would not be
subject to late enrollment penalties
when they enroll in Part D. We believe
that the availability of special
enrollment periods provides important
additional flexibility and time to
employers and unions as they evaluate
the various options that are available to
them under the Medicare drug benefit
and retiree drug subsidy.
c. How Employers and Unions Are
Likely To Respond To The Options That
Are Available To Them Under The
MMA
While there is considerable
uncertainty about the choices that
employers and unions will make
regarding the form of prescription drug
assistance that they may choose to
provide for their Medicare-eligible
retirees, we believe that employers and
unions will generally continue to
provide prescription drug assistance to
their retirees and that Medicare Part D
will make it more affordable for them to
do so.
First, as we noted in the proposed
rule, with the decline over the years in
the number of employers/unions
offering retiree health insurance
coverage, it is likely that many of the
remaining employers and unions who

E:\FR\FM\28JAR2.SGM

28JAR2

4478

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

continue to offer such coverage directly
are likely those employers/unions who
have a contractual commitment or other
interest in maintaining that coverage.
Second, although employers and
unions’ responses to Medicare Part D
and the retiree drug subsidy are
expected to play out over the next few
years, initial signals suggest that there
has been a positive response to the
Medicare retiree drug subsidy. Several
major employer associations have
praised the MMA for giving businesses
flexibility in deciding how their retiree
health plans will work in relation to the
Medicare prescription drug benefit, and
for offering employers and unions a 28
percent Medicare retiree drug subsidy
payment that would not be taxed for
plan sponsors who continue to provide
high quality retiree coverage (‘‘ECOM
Applauds Historic Passage of Medicare
Reform Legislation,’’ Employers’
Coalition on Medicare press release,
November 25, 2003,
www.employersandmedicare.org;
‘‘Chamber Praises Congressional Action
on Medicare Reforms,’’ U. S. Chamber of
Commerce, November 25, 2003,
www.uschamber.com).
Additionally, several major
corporations issued 2003 annual reports
that included estimates suggesting that
they will collectively experience an
$11.8 billion reduction in their
accumulated postretirement benefits
obligation that will occur over time due
to the Medicare subsidy payments they
anticipate receiving under the Medicare
retiree drug subsidy program (‘‘Expected
Cost Savings From Medicare Act May
Top $11.8 Billion’’, Lingling Wei, Dow
Jones Newswires, The Wall Street
Journal, March 22, 2004, available at
www.wsj.com). Although some of these
companies may have needed to revise
their initial estimates to reflect the
Financial Accounting Standards Board’s
(FASB) Final Staff Position on
accounting for the effects of the
Medicare retiree drug subsidy
payments, which was effective for
financial statements for periods
beginning after June 15, 2004 (‘‘FASB
Staff Position Number FAS 106–2,
Accounting and Disclosure
Requirements Related to the Medicare
Prescription Drug, Improvement, and
Modernization Act of 2003,’’ posted
May 19, 2004, available at
www.fasb.org) and the provisions of this
final rule, these initial reports suggest
that some employers are already
planning to take advantage of the
substantial savings that are available to
them under Medicare Part D.
However, given the uncertainty that
exists about the future choices that
employers and unions will make we

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

requested comments about how
employers and unions are likely to view
the various options that are available
under Medicare Part D for assisting
them in continuing or enhancing their
retiree health benefits. Specifically, we
were interested in comments on the
factors that will affect employers’ and
unions’ choices between applying for
the retiree drug subsidy, wrapping
around Part D coverage, qualifying as an
enhanced Part D plan directly, or using
an enhanced PDP or MA-PD plan to
provide enhanced coverage to their
retirees. This information will assist us
in understanding how these options can
be designed together to maximize the
increase in availability of high quality
drug benefits for retirees. The following
sections summarize the major issues
relating to employers and unions’ likely
responses to the various options
available to them under the MMA that
we discussed in the proposed rule, as
well as the comments that we received
relating to these issues.
i. Major Factors That Will Affect
Employers And Unions’ Responses To
The Options That Are Available To
Them Under The MMA
In the proposed rule, we identified
several factors that could potentially
influence employers and unions’
responses to the opportunities for
continuing to provide high quality
retiree drug benefits that are available to
them through the retiree drug subsidy
and the various options that are
available for coordinating their coverage
with Part D.
For example, we noted that the
Medicare retiree drug subsidy is
excluded from the taxable income of the
plan sponsor (just as the Medicare
subsidy provided to beneficiaries
through the Medicare prescription drug
benefit is excluded from the taxable
income of the beneficiary). While the
tax-free nature of the retiree drug
subsidy does not affect the value of the
subsidy to firms without taxable
income, the tax-free nature of the
Medicare retiree drug subsidy generally
increases its value to private sector
employers that are subject to taxation.
For example, as noted previously, the
tax-free $668 average retiree drug
subsidy amount would be equivalent to
about $891 of taxable income for
employers with a marginal tax rate of 25
percent and about $1,028 of taxable
income for employers with a marginal
tax rate of 35 percent.
We also stated that based on
published employer surveys, reports
from employers and benefit consultants,
and other available sources of evidence,
we expect that some employers and
unions will choose to provide

PO 00000

Frm 00286

Fmt 4701

Sfmt 4700

prescription drug assistance to their
Medicare-eligible retirees in the form of
enhanced benefit packages through Part
D plans or separate wraparound
coverage. In both cases, the employer/
union contributions would augment
Medicare’s subsidized coverage under
Part D. We noted that many employers
and unions currently do this relative to
Medicare Part A and Part B coverage,
either through separate supplemental
policies or through arrangements with
Medicare Advantage plans. In fact, the
Medicare retiree drug subsidy
represents a new type of arrangement
for employers and unions relative to the
interaction of their retiree coverage with
Medicare. Thus, some employers and
unions may prefer to interface with the
new Medicare prescription drug benefit
in a manner similar to their
supplementation of the basic Medicare
Part A and Part B benefits. We also
stated that we expect that many of the
employers and unions that choose to
provide drug coverage through or in
coordination with Part D will also
choose to pay some or all of their
retirees’ Part D premiums. Since the
Medicare Part D drug benefit includes a
direct Federal subsidy, these approaches
would allow employers and unions to
continue to provide a benefit package of
similar or greater generosity compared
to their existing arrangements while
potentially lowering their prescription
drug costs.
We also noted that another important
factor that will affect whether employers
or unions will use the retiree drug
subsidy is whether their contribution to
the retiree coverage is sufficient to
qualify for the retiree drug subsidy, and
if it is not currently sufficient, whether
they will increase the generosity of their
contribution in order to receive the cash
and tax value of the subsidy. We
suggested that such increased
contributions could be in the financial
interest of some employers and unions
because they could qualify for the value
of the full subsidy by making an
additional incremental contribution of
less than the full value of the subsidy,
thereby achieving net savings. However,
we also stated that providing enhanced
benefits or separate wraparound
coverage in coordination with Part D
may also be an attractive option to
employers and unions that may not be
eligible for the Medicare retiree drug
subsidy because their retiree drug
benefits, as currently structured, are not
actuarially equivalent to the standard
Medicare Part D drug benefit. In both
cases, these employers/unions could use
their contributions to augment
Medicare’s subsidized coverage under

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Part D, and thereby provide a more
generous benefit to their Medicareeligible retirees.
Comment: We received several public
comments from employers and
employer groups that supported the
MMA and proposed rule’s overall
approach of encouraging employers and
unions to continue providing retiree
health coverage, while providing
flexibility and minimizing
administrative burdens. Several of these
comments indicated that employer and
union retiree health plan sponsors’
responses to the various options that are
available to them under the Medicare
drug benefit and retiree drug subsidy
will be affected by a variety of factors,
including: the timeframe of CMS
regulation and guidance; the degree of
flexibility in the retiree drug subsidy
program (for example, relating to the
actuarial equivalence methodology,
application process, plan sponsor and
qualifying covered retiree definitions,
payment methodology and frequency,
and subsidy payment allocation
requirements); the amount of flexibility
in the waiver process for employersponsored PDPs and MA-PDs; the
financial incentives and degree of
administrative burden associated with
the various options; the timely
availability of feasible PDP and
wraparound options in the market; and
employers and unions’ own internal
timeframes and processes required to
make benefit design changes.
We also received several comments
suggesting that plan sponsors’ responses
to the various options that are available
to them under the MMA, including
whether or not they will choose to
accept the retiree drug subsidy, may
vary according to the type of employer
or union plan. For example, one
commenter stated that small, selfinsured employers might find that the
cost of obtaining an actuarial attestation
may exceed the value of the retiree drug
subsidy payments that they would
receive. Similarly, a few commenters
stated that employer/union plan
sponsors and insurers offering fullyinsured retiree health plans might have
difficulty tracking claims at the
individual plan sponsor level for
purposes of meeting the retiree drug
subsidy program’s data submission and
record retention requirements.
Additionally, a few public sector
employer commenters stated that the
definition of plan sponsor that was
being used in the proposed rule did not
seem to be broad enough to allow some
public retirement systems to qualify for
the retiree drug subsidy. Two public
sector employer commenters suggested
that some governmental entities may be

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

discouraged from obtaining the retiree
drug subsidy because its tax-free nature
does not provide an additional financial
incentive to non-taxable plan sponsors
that provide retiree health benefits.
Also, one public employer group
commenter requested that we assure
through final regulations or the waiver
process that State and local government
plans have the same opportunity to
directly sponsor a PDP or MA-PD as
other employer/union plan sponsors.
Finally, a few commenters expressed
concerns that retiree health plans with
limited employer/union contributions—
including some State and local
government retiree health plans and
many church plans that require their
retirees to contribute in excess of 50
percent of the cost of prescription drug
coverage—might have difficulty
qualifying for the retiree drug subsidy if
a net-value test is used in determining
actuarial equivalence.
Response: In recognition of the
considerable diversity that exists within
the employer and union community, the
MMA gives employers and unions
several options for accessing the new
financial resources that Medicare Part D
makes available for assisting them in
continuing to offer high quality retiree
drug coverage. For example, employers
and unions have the option of
continuing to provide drug coverage
that is at least actuarially equivalent to
the standard Part D benefit for their
Medicare-eligible retirees as a primary
insurer, and receiving a direct retiree
drug subsidy that reduces the cost of
providing this coverage. As discussed in
more detail in subpart R, to qualify for
the retiree subsidy, plans must meet a
two-prong test for actuarial equivalence,
which includes a net-value test. We
chose this definition of actuarial
equivalence for the retiree subsidy
because we believe it best achieves our
goals of maximizing the number of
beneficiaries retaining employmentbased retiree drug coverage while not
creating windfalls to sponsors.
Employers and unions, including
those that do not qualify for the subsidy,
have several other options under
Medicare Part D for providing
prescription drug assistance to their
retirees. For example, employers and
unions can choose to offer drug
coverage that maintains or exceeds the
generosity of their current benefit
designs by providing additional
coverage that complements the standard
Part D prescription drug benefit,
effectively becoming a secondary
insurer that uses the Part D benefit to
subsidize the costs of their Medicareeligible retirees’ drug coverage. As
discussed earlier, this coordination can

PO 00000

Frm 00287

Fmt 4701

Sfmt 4700

4479

be achieved by: 1) arranging for a PDP
or MA-PD Part D plan to provide
enhanced benefits to their retirees; 2)
arranging for a PDP or an MA-PD under
a waiver to offer a plan that is exclusive
to the employer’s retirees; 3) choosing
through a waiver to become a Part D
plan that offers enhanced benefits; or 4)
providing separate supplemental drug
coverage that wraps around a Part D
plan (similar to policies that wrap
around Medicare benefits under Parts A
and B). We recognize that some of the
options that are available through the
Medicare drug benefit and retiree drug
subsidy may be more attractive to
certain employers/unions than other
options. However, we believe that these
options give employers and unions a
wide variety of opportunities for
continuing to provide a generous level
of retiree coverage.
Our implementation of the various
options that are available to employers
and unions under the Medicare drug
benefit and retiree drug subsidy for
continuing to offer high quality
prescription drug coverage to Medicareeligible retirees at a lower cost is guided
by four policy goals: 1) maximizing the
number of Medicare-eligible retirees
with high quality employer or unionprovided retiree drug coverage, and
maximizing the generosity of their
coverage; 2) avoiding financial windfalls
in the retiree drug subsidy program by
ensuring that plan sponsors contribute
at least as much to retiree drug coverage
as Medicare pays them as a subsidy; 3)
minimizing administrative burden
while maximizing flexibility for
employers and unions; and 4) fulfilling
our fiduciary responsibility by limiting
overall budgetary costs. The preamble
considers the issues that were raised in
the comments from employers, unions,
and other related entities and describes
the policy decisions that we made
relating to these issues, balancing the
various policy goals in an effort to
achieve the maximum increase in
support for retiree health coverage as
existing employer and union
contributions are augmented by new
financial support from the Medicare
prescription drug benefit and retiree
drug subsidy. We have taken a number
of steps to be responsive to the concerns
that were raised in the comments.
Similarly, we are exploring options for
increasing flexibility in employers’ and
unions’ ability to directly sponsor PDPs
or MA-PDs. For example, as discussed
in the preamble, we have provided
flexibility in the payment methodology
and data submission requirements
related to retiree drug subsidy payments
to plan sponsors with insured benefits.

E:\FR\FM\28JAR2.SGM

28JAR2

4480

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

In addition, where appropriate, the
potential impact of these various policy
decisions has been factored into the
projection assumptions for the impact
analysis, as discussed elsewhere in this
impact analysis.
ii. Potential Effect of Factors Unrelated
to Medicare on Employer and Union
Behavior
In the proposed rule, we noted that
although the Medicare prescription drug
benefit and retiree drug subsidy
represent additional funding sources for
employment-based retiree drug coverage
that can help employers and unions to
retain drug coverage for their retirees,
there are also a number of economic
forces unrelated to Medicare that will
play a role in employers’ and unions’
decision making regarding both the
availability and the generosity of
employment-based retiree health
coverage. Many of the economic forces
behind the ongoing erosion of retiree
health benefits that are discussed
subsequently in this impact analysis
may continue to give employers and
unions a financial incentive to reduce
the costs associated with providing
retiree health coverage. The Employee
Benefit Research Institute (EBRI) has
estimated that additional declines in
retiree drug coverage could potentially
continue to occur, particularly for future
retirees, ‘‘due to existing business,
accounting, and cost trends,’’ regardless
of changes in the Medicare program
(EBRI Special Analysis prepared for
Senator Charles E. Grassley, Dallas L.
Salisbury and Paul Fronstin, Employee
Benefit Research Institute, July 18, 2003,
available at www.ebri.org).
Comment: We received one comment
from a retiree advocacy group
suggesting that the recent Equal
Employment Opportunity Commission
(EEOC) ruling could significantly affect
employer/union behavior relating to
retiree health benefits for Medicareeligible retirees.
Response: As noted above, several
economic and non-economic forces that
are not related to the Medicare retiree
drug subsidy and the other
opportunities that are available for
coordinating employer/union-sponsored
coverage with Part D could potentially
influence employers’ and unions’
decisions about the availability and
generosity of retiree health benefits for
Medicare-eligible retirees. We agree that
the recent EEOC ruling is a nonMedicare related factor that could
potentially affect employers’ and
unions’ behavior concerning retiree
drug coverage. In that ruling, the EEOC
approved a proposed final rule that
would allow ‘‘employers and labor
organizations to offer retirees a wide

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

range of health plan designs that
incorporate Medicare or comparable
State health benefit programs without
violating the ADEA.’’ EEOC states that
its proposed final rule would enable
employers and unions to supplement a
retiree’s Medicare coverage or take
advantage of the tax-free retiree drug
subsidy without having to demonstrate
that the drug coverage they provide to
their Medicare-eligible retirees is
identical to the drug coverage that they
offer to their early retirees. There is
considerable uncertainty about how the
EEOC’s ruling will ultimately affect
employer and union behavior (see EEOC
web site, http://www.eeoc.gov/policy/
regs/retiree_benefits/).
Similarly, the Governmental
Accounting Standards Board (GASB,
which develops accounting standards
for State and local governments)
recently issued Statement No. 43,
Financial Reporting for Postemployment
Benefit Plans Other Than Pension Plans
and Statement No. 45, Accounting and
Financial Reporting by Employers for
Postemployment Benefits Other Than
Pensions, which will require State and
local governments to begin reporting the
long-term costs of their retiree health
benefit liabilities on an accrual basis
and will encourage them to begin setting
aside money in trust funds to cover the
future costs of providing benefits to
their retirees (‘‘GASB Issues Standards
to Improve Postemployment Benefit
Plan Reporting,’’ May 11, 2004 and
‘‘GASB Issues Statement That Addresses
Employer Reporting of Postemployment
Benefits Other Than Pensions,’’ August
2, 2004, see GASB web site, http://
www.gasb.org/news/index.html). Some
experts have speculated that the GASB
standards could put additional financial
pressures on State and local
governments to reduce their financial
liabilities by making changes in their
retiree health benefits; however, others
have noted that some State and local
governments may find it difficult to
make such changes due to legislative
and collective bargaining
considerations, or may not opt to make
such changes due to labor relations
considerations.
Additionally, while there is some
uncertainty relating to their potential
impact on employer and union
behavior, factors such as existing caps
on retiree health benefits that have been
instituted by some plan sponsors, and
demographic trends could also
potentially influence employer and
union decision making concerning
retiree health benefits. Furthermore, as
discussed elsewhere, the availability
and generosity of retiree health coverage
had been declining for more than a

PO 00000

Frm 00288

Fmt 4701

Sfmt 4700

decade prior to enactment of the MMA,
particularly for future retirees, and
available evidence suggests that this
erosion is continuing to occur (primarily
in the form of increasing retirees’ share
of premiums and increasing eligibility
restrictions for future retirees) due to
ongoing financial pressures on
employers (Comments made during
discussion of the Medicare Payment
Advisory Commission (MedPAC)
Supplement to the Kaiser/HRET Survey,
Transcript of MedPAC Public Meeting,
November 16, 2004, see MedPAC web
site, http://www.medpac.gov/
public_meetings/transcripts/
1104_allcombined_transc.pdf).
iii. Employers And Unions Have Not
Yet Decided How They Will Respond
In the proposed rule, we noted that
some employers and unions have not
yet decided whether they will apply for
the Medicare retiree drug subsidy, and
are considering the various other
options that are available for providing
prescription drug assistance to their
Medicare-eligible retirees (See Press
Releases and Statements, Press Room of
the Employers’ Coalition on Medicare,
available at
www.employersandmedicare.org). We
also noted that at the time that the
proposed rule was published, most
publicly traded companies had chosen
to defer recognizing the effects of the
Medicare retiree drug subsidy payments
pending receipt of additional
accounting and regulatory guidance.
However, we noted that available
evidence suggests that numerous large
companies that offer employment-based
retiree prescription drug coverage
anticipate continuing to provide this
coverage and accepting the Medicare
retiree drug subsidy payments.
Comment: We received comments
suggesting that most employers and
unions have not yet decided how they
will respond to the options that are
available to them under the Medicare
drug benefit and retiree drug subsidy.
However, a few commenters did provide
some information about employers’ and
unions’ future plans. For example, two
public sector employer commenters
expressed a desire to continue providing
their current retiree health benefits and
receive the retiree drug subsidy.
Similarly, a retiree advocacy group
comment included information about a
private employer that plans to separate
its retiree drug coverage from its other
retiree health coverage so that its
Medicare-eligible retirees can choose
between remaining in the employer’s
retiree drug plan or enrolling in a Part
D plan, and plans to stop offering retiree
drug coverage in a few years when the
value of its retiree drug benefit becomes

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
lower than the value of the standard
Part D benefit due to existing financial
caps that the company had placed on its
contribution to the costs of retiree
coverage.
Response: Recent anecdotal
information from various benefit
consultants, researchers, and other
experts suggests that many employers
and unions have not yet determined
how they will respond to the options
that are available under the Medicare
drug benefit and retiree drug subsidy,
due to uncertainty about some of the
details relating to how these options
will be implemented.
However, in spite of employers and
unions’ uncertainty, some early
evidence suggests that many employers
and unions are likely to continue
providing prescription drug assistance
to their Medicare-eligible retirees.
Recent surveys that included questions
related to the Medicare drug benefit and
retiree drug subsidy suggest that the vast
majority of current Medicare-age retirees
are likely to continue receiving some
form of prescription drug assistance
from their former employers/unions—
either primary drug coverage that
qualifies for the retiree drug subsidy,
enhanced or supplemental coverage that
wraps around the standard Part D
benefit, or assistance with paying Part D
premiums—and that few beneficiaries
with retiree drug coverage were likely to
lose their employment-based retiree
drug benefits and/or retiree health
benefits. The surveys suggest that many
employers are likely to continue to
assist their retirees by taking advantage
of the financial support for retiree drug
coverage that is available through the
retiree drug subsidy and other options
for coordinating with Part D, rather than
ceasing to provide prescription drug
assistance for their Medicare-eligible
retirees (Comments made during
discussion of the Medicare Payment
Advisory Commission (MedPAC)
Supplement to the Kaiser/HRET Survey,
Transcript of MedPAC Public Meeting,
November 16, 2004, see MedPAC web
site, http://www.medpac.gov/
public_meetings/transcripts/
1104_allcombined_transc.pdf; Kaiser/
Hewitt 2004 Survey on Retiree Health
Benefits).
iv. Employers’ And Unions’ Responses
May Change Over Time
Comment: We received several
comments suggesting that employers’
and unions’ responses to the various
options that are available to them under
the Medicare drug benefit and retiree
drug subsidy may change over time. For
example, a benefit consultant stated that
many plan sponsors will initially be
attracted to accepting the retiree drug

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

subsidy because this decision may be
the easiest course administratively;
however, as time goes on, it may be
more attractive for employers and
unions to consider modifying their
retiree drug plans to supplement and
coordinate with Part D. This benefit
consultant also anticipated that the
typical employer/union plan will
provide retiree drug benefits that are
better than Part D in 2006, but suggested
that this pattern is likely to reverse over
time. This commenter stated that the
value of employment-based coverage for
future retirees may well be less than the
value of the highly-subsidized standard
Part D coverage, suggesting that as plan
sponsors’ retiree populations begin to
include more future retirees (who may
be disproportionately affected by the
economic caps that some companies
have placed on their contributions to
the cost of retiree coverage), this could
result in a gradual shift in the average
generosity of employment-based plans,
thus making the option of
supplementing the Part D benefit a more
attractive approach for providing retiree
drug coverage.
Similarly, we received a comment
suggesting that another factor that may
contribute to changes in employer and
union behavior over time relates to the
effect of financial caps that some
employers have placed on their
contributions to retiree health benefits
in response to rising costs and the
implementation of Financial
Accounting Statement No. 106 (FAS
106). Specifically, as employers’
contribution levels reach these caps,
their retiree drug plans may no longer
qualify for the retiree drug subsidy, or
their retiree drug plans could become
less valuable than the new Medicare
drug benefit.
In addition, several commenters
stated that employers and unions
typically require a lead-time of at least
one year to implement benefit design
changes (and even longer in the case of
church plans), and may not have
sufficient advance information that
would enable them to take full
advantage of the various options that are
available to them under Medicare Part D
by 2006. For example, two commenters
indicated that although employers are
very interested in the option of
wrapping around Medicare Part D
coverage, they do not yet see
arrangements in the marketplace that
they feel would make this option
feasible, such as the availability of
cross-regional PDP and MA-PD
offerings.
Response: In responding to the
various options that are available to
them under the Medicare drug benefit

PO 00000

Frm 00289

Fmt 4701

Sfmt 4700

4481

and retiree drug subsidy, employers and
unions have two major choices. They
will either need to determine whether
they want to continue to offer creditable
coverage that qualifies for the retiree
drug subsidy and remain the primary
insurer for their Medicare-eligible
retirees’ drug coverage, or whether they
want to become a secondary payer that
offers additional coverage that
complements the Medicare Part D, with
Medicare acting as the primary insurer.
In developing this final rule, we have
sought to provide significant flexibility
in implementing the various options
that are available to employers and
unions under the Medicare drug benefit
and retiree drug subsidy. We believe
that this approach will help us to
maximize the number of employers and
unions that are able to take advantage of
the various options available under the
Medicare prescription drug benefit and
retiree drug subsidy for retaining and
enhancing their retiree drug coverage.
As discussed earlier, it is also
important to note that an employer or
union that provides retiree drug
coverage that is creditable on a gross
value basis but, for example, is not
making sufficient contributions toward
the financing of the benefit to qualify for
the retiree drug subsidy on a net value
basis can choose at any time to modify
its existing benefit design to supplement
Part D. Under this circumstance, as
discussed in subpart B of the preamble,
the Medicare retirees would be eligible
for a special enrollment period for
Medicare Part D because their retiree
drug coverage no longer meets the
criteria for creditable coverage. The
special enrollment period provision
would enable these employers and
unions to work with their retiree
populations and the new Part D plans to
achieve a smooth transition and ensure
that their Medicare-eligible retirees
would not be subject to late enrollment
penalties when they enroll in Part D. We
believe that the availability of special
enrollment periods provides important
additional flexibility and time to
employers and unions as they evaluate
the various options that are available to
them under the Medicare drug benefit
and retiree drug subsidy.
However, we recognize that
employers and unions will not be
making their decisions in a static
environment; rather, many of the
environmental factors that will affect
their decisions will continue to change
over time, including the impact of rising
health care costs and financial caps on
employer contributions to retiree health
coverage, demographic shifts in
employers’ and unions’ retiree
populations (as more of the future

E:\FR\FM\28JAR2.SGM

28JAR2

4482

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

retirees who may have less generous
benefits than the current retirees begin
to retire), and changes in a plan
sponsor’s financial position.
Additionally, as discussed in the
proposed rule, we believe that some
employers and unions may prefer to
provide coverage that interfaces with
Medicare Part D in much the same way
that they supplement the basic Medicare
Part A and Part B benefits, and we
acknowledge that they may require
some additional lead-time to implement
this option. Moreover, anecdotal
information from various benefit
consultants, researchers, and other
experts suggests that some employers/
unions that initially choose to accept
the retiree drug subsidy may move to a
wraparound option a few years later
(Comments made during discussion of
the Medicare Payment Advisory
Commission (MedPAC) Supplement to
the Kaiser/HRET Survey, Transcript of
MedPAC Public Meeting, November 16,
2004, see MedPAC web site, http://
www.medpac.gov/public_meetings/
transcripts/
1104_allcombined_transc.pdf).
For these reasons, we believe that it
is likely that some employers’ and
unions’ responses to the various options
that are available to assist them in
providing high quality drug coverage
under the Medicare drug benefit and
retiree subsidy may change over time—
either in the aggregate or for specific
retiree subpopulations. As discussed
earlier, we have updated our enrollment
estimates to reflect this potential change
in employer and union behavior over
time. We believe that these enrollment
estimates are the best available given the
considerable amount of uncertainty
surrounding the possible responses of
current plans to the many options that
are available to them for interacting
with Part D.
d. Anticipated Effects of the Medicare
Retiree Drug Subsidy Program and Part
D Assistance for Retirees on the
Availability and Generosity of Retiree
Drug Benefits
We also requested comments on how
choices by employers and unions
relating to the retiree drug subsidy,
wrapping around Part D coverage,
qualifying as an enhanced Part D plan
directly, or using an enhanced PDP or
MA-PD plan will affect retirees’ net
payments for drugs and other health
services.
Comment: We received several
comments from retiree advocacy groups
and unions, which stated that the
implementation of Medicare Part D will
pose several potential risks for retirees
with regard to the availability and
generosity of their employment-based

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

coverage, and requested that the final
rule include additional retiree
protections. Specifically, these
commenters stated that Medicareeligible retirees have a risk of: losing
their current generous employer or
union-sponsored retiree drug coverage;
experiencing significant increases in
out-of-pocket costs; not making the best
choice for receiving prescription drug
coverage due to confusion about the
multiple options that are available to
them; being exposed to the late
enrollment penalty; and experiencing
reduced access to newer drugs due to
Part D formulary limitations. We also
received comments from two employer
groups suggesting that there is a risk for
disabled beneficiaries in active worker
plans (although they are in a non-work
status) to receive less generous drug
coverage if they are not deemed as being
qualifying covered retirees for purposes
of the retiree drug subsidy. Finally, one
employer group commenter suggested
that some retirees that choose to enroll
in Part D plans could lose their other
retiree health benefits because many
employers may require their retirees not
to enroll in a Part D plan as a condition
of eligibility for the employer’s qualified
retiree health plan.
Response: A variety of factors will
affect employers’ and unions’ decisions
about how to respond to the various
options that are available to them under
the Medicare drug benefit and retiree
drug subsidy. These decisions will
ultimately affect the nature of the retiree
drug benefits that will be available to
current and future Medicare-eligible
retirees. As discussed elsewhere, the
availability and generosity of retiree
health coverage had been declining for
more than a decade prior to enactment
of the MMA, particularly for future
retirees, and available evidence suggests
that this erosion is continuing to occur
(primarily in the form of increasing
retirees’ share of premiums and
increasing eligibility restrictions for
future retirees) due to ongoing financial
pressures on employers. For example,
according to comments made by a
researcher from the Health Research and
Educational Trust, the cost of retiree
health benefits has increased by 56
percent since 2000, and 27 percent of
Medicare-eligible retirees receive their
benefits from firms that have more
Medicare-eligible retirees than active
workers (Comments made during
discussion of the Medicare Payment
Advisory Commission (MedPAC)
Supplement to the Kaiser/HRET Survey,
Transcript of MedPAC Public Meeting,
November 16, 2004, see MedPAC web
site, http://www.medpac.gov/

PO 00000

Frm 00290

Fmt 4701

Sfmt 4700

public_meetings/transcripts/
1104_allcombined_transc.pdf).
In the context of this continuing
erosion in the availability and
generosity of retiree coverage, the
Medicare drug benefit and retiree drug
subsidy make considerable new
financial resources available to assist
employers and unions in continuing to
offer high quality retiree health benefits.
Employers and unions have
considerable latitude in making changes
in their existing retiree health benefit
designs unless they have made a
specific promise to maintain these
benefits in their formal written plan
documents, collective bargaining
agreements, or other contractual
commitments; or in the case of public
employers, unless they have other
statutory or regulatory constraints on
their ability to make such changes. This
has always been the case, and continues
to be the case with the enactment of the
MMA. However, we believe that the
substantial additional resources that
Medicare Part D provides through the
retiree drug subsidy and the various
options that employers and unions have
for coordinating with Part D can help to
counteract some of the financial
pressures that have been contributing to
the trends toward erosion in retiree
health benefits by making it more
affordable for employers and unions to
continue providing high quality retiree
drug coverage. Additionally, as
discussed earlier, available evidence
suggests that the majority of current
Medicare-age retirees are likely to
continue receiving prescription drug
assistance from their former employers
and unions—either in the form of
primary drug coverage that qualifies for
the retiree drug subsidy, enhanced or
supplemental coverage that wraps
around the standard Part D benefit, or
assistance with paying Part D
premiums—and that very few
beneficiaries are likely to lose their
employer or union-sponsored retiree
drug benefits altogether.
The preamble describes the policy
decisions that we made relating to the
various options that are available to
employers and unions under Medicare
Part D, in an effort to balance our
various policy goals and to achieve the
maximum increase in support for retiree
health coverage. We have taken a
number of steps to be responsive to the
concerns that were raised in the
comments that we received relating to
the proposed rule. For example, we
believe that the flexibility that we have
provided relating to actuarial
equivalence, plan definition, qualifying
covered retirees, payment methodology,
and data reporting requirements will

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
make it easier for employers and unions
to continue offering their existing retiree
drug plans to Medicare-eligible retirees,
while qualifying for the retiree drug
subsidy. In cases where employers and
unions choose to provide additional
retiree drug benefits through separate
wraparound coverage that supplements
Part D, or enhanced benefits through
Part D plans, they can coordinate this
additional coverage with Part D in such
a way that they can continue providing
generous retiree drug benefits at a lower
cost, while ensuring that their retirees
do not experience significant changes in
their out-of-pocket spending.
Additionally, given that
approximately 30 percent of the large
private sector firms (that is, firms with
1,000 or more employees) that currently
offer retiree health coverage to new
Medicare-age retirees require those
retirees to pay 61 to 100 percent of the
cost of their retiree health premiums,
based on findings from the 2004 Kaiser/
Hewitt Survey on Retiree Health
Benefits, some retirees are likely to
experience a significant reduction in
their out-of-pocket costs by enrolling in
the government-subsidized Part D plans.
We also note that many beneficiaries’
current employer/union-sponsored
coverage includes various features that
are similar to Part D, including the use
of tiered formularies, which may help to
minimize potential disruptions
associated with switching from an
existing employment-based retiree drug
plan to a Part D plan (‘‘Current Trends
and Future Outlook For Retiree Health
Benefits: Findings from the Kaiser/
Hewitt 2004 Survey on Retiree Health
Benefits,’’ The Henry J. Kaiser Family
Foundation and Hewitt Associates,
December 2004, available at http://
www.kff.org).
Additionally, as discussed earlier, it is
also important to note that an employer
or union that provides retiree drug
coverage that is creditable (on a gross
value basis) can choose at any time to
modify its existing benefit design to
supplement Part D. Under this
circumstance, the Medicare retirees
would be eligible for a special
enrollment period for Medicare Part D
because their retiree drug coverage no
longer meets the criteria for creditable
coverage. Thus, the special enrollment
period provision would enable these
employers and unions to work with
their retiree populations and the new
Part D plans to achieve a smooth
transition and ensure that their
Medicare-eligible retirees would not be
subject to late enrollment penalties
when they enroll in Part D.
We anticipate working closely with
employers, unions, and advocacy

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

groups to assist beneficiaries that have
employment-based drug coverage in
understanding the various choices that
are available to them under Part D and
choosing the option that will provide
them with the best value, given their
particular circumstances. Ultimately, we
believe that Medicare Part D, including
the retiree drug subsidy and the other
options it gives employers and unions
for providing drug coverage, will help to
counteract the trend toward erosion in
retiree health benefits by significantly
increasing the amount of financial
support that is available to employers
and unions for retiree drug coverage,
and by providing important support for
recent retirees and future retirees that
may have less generous employer/union
support.
Overall, we believe that the
implementation of Medicare Part D,
including the Medicare retiree drug
subsidy and the other opportunities it
affords employers and unions for
providing continued prescription drug
assistance to their Medicare retirees,
will result in combined aggregate
payments by employers/unions and
Medicare for drug coverage on behalf of
retirees that are significantly greater
than they otherwise would have been
without the enactment of the MMA.
Furthermore, we believe that the
Medicare prescription drug benefit and
retiree drug subsidy represent a
particularly important strengthening of
health care coverage for future
Medicare-eligible retirees, given the
erosion in the availability and
generosity of employment-based retiree
coverage for future Medicare
beneficiaries that has already been
taking place.
e. Historical Trends in the Availability
and Generosity of Retiree Drug Coverage
As additional background, we provide
a discussion of trends in the availability
and generosity of employer-sponsored
retiree drug coverage, based on data
from several different sources. We note
that there are a limited number of data
sources relating to retiree coverage, and
some of these data sources may not be
directly comparable to one another due
to differences in the scope of analysis
(for example, overall retiree health
benefits versus specific information on
retiree drug coverage), unit of analysis
(for example, retirees versus firms, or
firms versus establishments), as well as
differences in the age groups, types of
retirees (current versus future), and
employer sizes that are being analyzed.
For these reasons, caution should be
exercised in making comparisons across
the various data sources that are cited in
this section.

PO 00000

Frm 00291

Fmt 4701

Sfmt 4700

4483

As noted previously, employersponsored insurance has been an
important source of drug coverage for
many Medicare beneficiaries. For
example, the trend in retiree health
coverage for older Medicare
beneficiaries (ages 70 and older) was
essentially flat between 1996 and 2000
(‘‘Employer-Sponsored Health Insurance
and Prescription Drug Coverage for New
Retirees: Dramatic Declines in Five
Years,’’ Bruce Stuart et al, Health
Affairs, July 23, 2003, available at
www.healthaffairs.org). However, for
well over a decade, the availability and
generosity of employer-sponsored
retiree health coverage has been
eroding, particularly for future retirees.
The level of employer-sponsored retiree
health coverage has been relatively
stable for the nation’s current retirees
during recent years. However, the
apparent stability of benefits has been
changing for future retirees. We believe
that certainly absent the new law, these
trends would have continued. In
enacting the law, the Congress hoped
that the opportunities available to
employers and unions under the
Medicare prescription drug benefit and
retiree subsidy would help to ameliorate
the erosion in retiree health coverage.
Overall, we do expect that the
implementation of Medicare Part D,
including the Medicare retiree drug
subsidy and the other opportunities it
affords employers and unions for
providing continued prescription drug
assistance to their Medicare retirees,
will result in combined aggregate
payments by employers/unions and
Medicare for drug coverage on behalf of
retirees that are significantly greater
than they otherwise would have been
without the enactment of the MMA.
From 1988 to 1991, the percentage of
firms with 200 or more workers offering
health benefits to active workers that
also offered retiree health benefits
declined substantially from 66 percent
to 46 percent (KPMG Survey of
Employer-Sponsored Health Benefits:
1988, 1991, cited in Kaiser/HRET 2004
Annual Survey of Employer-Sponsored
Health Benefits, available at
www.kff.org) due to the implementation
of Financial Accounting Statement No.
106 (FAS 106) as well as increasing
costs. FAS 106, which was published in
December 1990, required companies to
make significant changes in the way that
they accounted for future retiree health
benefits on their balance sheets for fiscal
years ending after December 15, 1992
(‘‘Retiree Health Benefits: Trends and
Outlook,’’ Paul Fronstin, Employee
Benefit Research Institute (EBRI) Issue
Brief No. 236, August 2001; ‘‘Statement

E:\FR\FM\28JAR2.SGM

28JAR2

4484

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

of Financial Accounting Standards No.
106: Employers’ Accounting for
Postretirement Benefits Other Than
Pensions,’’ Financial Accounting
Standards Board, December 1990,
available at www.fasb.org/pdf/
fas106.pdf). The percentage of large
employers offering retiree health
coverage has continued to decline
during the past decade (General
Accounting Office (GAO), ‘‘Retiree
Health Benefits: Employer-Sponsored
Benefits May Be Vulnerable To Further
Erosion,’’ May 2001, available at
www.gao.gov). However, the recent
declines have been more gradual than
what occurred during the early 1990s,
with less than 40 percent of the nation’s
large firms with 200 or more workers
that offer health benefits to active
workers also offering retiree health
benefits in 2003 (Kaiser/HRET 2004
Annual Survey of Employer-Sponsored
Health Benefits, available at
www.kff.org).
Many of the changes in availability of
retiree health coverage in the past
decade have primarily affected future
retirees, rather than current retirees.
(Fronstin, August 2001). For example,
the percentage of large employers with
500 or more employees offering retiree
health benefits to new Medicare-age
(that is, ages 65 and older) retirees
decreased from 40 percent in 1993 to 20
percent in 2004 (data from the National
Survey of Employer-Sponsored Health
Plans, 2004 cited in a press release
entitled ‘‘US health benefit cost rises 7.5
percent in 2004, lowest increase in five
years,’’ Mercer Human Resource
Consulting, November 22, 2004,
available at www.mercerhr.com). As a
result, new retirees are less likely to
have employer-sponsored retiree drug
coverage than current retirees.
Availability of retiree health coverage
varies depending on the type of
employer. Employers with union
workers are more likely to offer retiree
coverage than employers without union
workers. Similarly, public sector
employers are more likely to offer
coverage to retirees than private sector
employers. (Kaiser/HRET 2004 Annual
Survey of Employer-Sponsored Health
Benefits, available at www.kff.org; ‘‘How
States Are Responding to the Challenge
of Financing Health Care for Retirees,’’
Jack Hoadley, Henry J. Kaiser Family
Foundation, September 2003, available
at www.kff.org.)
Availability of retiree health coverage
also varies according to the size of the
employer. Larger employers are more
likely to offer retiree health coverage
than smaller employers. For example, in
2004, 36 percent of the nation’s private
sector firms with 200 or more workers

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

that offered health benefits to active
workers also offered retiree health
coverage to pre-age 65 and/or Medicareage retirees (Kaiser/HRET, 2004).
However, very few smaller employers
offer retiree health insurance. Recent
surveys have found that only 3 to 10
percent of the nation’s smaller private
sector firms (3 to 199 workers) that offer
health benefits to active workers also
offer retiree health coverage (Kaiser/
HRET 2001, 2002, 2003 and 2004
Annual Surveys of Employer-Sponsored
Health Benefits, available at
www.kff.org).
Larger employers account for the
majority of the beneficiaries with
employer-sponsored retiree coverage. In
2001, data from the Medical
Expenditures Panel Survey indicate that
less than 1 percent of the nation’s
smallest private establishments (those
with a ‘‘firm size,’’ or total number of
employees for the entire firm, of less
than 50 employees) offered health
insurance to Medicare-age retirees,
compared with 37 percent of the
nation’s largest private sector
establishments (those with a firm size of
1,000 or more employees). As a result,
within the private sector, the largest
firms (1,000 or more employees)
covered approximately 90 percent of the
Medicare-age retirees who had
employer-sponsored retiree coverage,
while smaller firms (fewer than 1,000
employees) covered only 10 percent of
these retirees.
In an effort to control costs, many
employers have been changing their
benefit packages (for example, reducing
the benefit that is offered and/or
increasing the amount that the retiree
has to pay), resulting in gradual erosion
in the generosity of this coverage over
time. For example, since the mid–1990s,
some employers have made changes in
eligibility for retiree health coverage (for
example, age and service requirements),
reduced their subsidization of retiree
health costs (by increasing retirees’
share of premiums and increasing
retirees’ co-payments and deductibles),
placed caps on the employer
contribution to retiree health costs
(aggregate or per beneficiary), or
changed their health benefit designs to
a defined contribution structure
(Fronstin, August 2001; GAO, May
2001). Because many employers have
identified prescription drug costs as a
major contributor to rising retiree health
benefit costs, they have adopted cost
control measures in an effort to manage
their retiree prescription drug costs
(Kaiser/HRET, 2004).
The intent of Medicare Part D and the
retiree drug subsidy is to provide
employers and unions with a set of

PO 00000

Frm 00292

Fmt 4701

Sfmt 4700

highly flexible options that are designed
to make it more affordable for them to
continue providing high quality
prescription drug assistance to their
Medicare-eligible retirees. As discussed
earlier, the MMA Conference Report
indicates that by lowering the cost of
providing retiree drug benefits and
providing financial incentives for
employers and unions to maintain this
coverage for their Medicare-eligible
retirees through Medicare Part D and the
retiree drug subsidy, it is hoped that the
erosion in the availability of
employment-based retiree drug coverage
will plateau or even improve.
Overall, we expect that the
implementation of Medicare Part D,
including the Medicare retiree drug
subsidy and the other opportunities it
affords employers and unions for
providing continued prescription drug
assistance to their Medicare retirees,
will result in combined aggregate
payments by employers/unions and
Medicare for drug coverage on behalf of
retirees that are significantly greater
than they otherwise would have been
without the enactment of the MMA.
Furthermore, the Medicare prescription
drug benefit and retiree drug subsidy
represent a particularly important
strengthening of health care coverage for
future Medicare-eligible retirees, given
the erosion in the availability and
generosity of employment-based retiree
coverage for future Medicare
beneficiaries that has been taking place.
G. Anticipated Effect on the Federal
Budget
The following section presents
estimates of the effect of Medicare Part
D on net Federal budgetary spending.
As indicated previously, there is a great
deal of uncertainty related to making
these estimates. However, we believe
that these estimates provide a
reasonable representation of the likely
net Federal budgetary effects of the
Medicare Part D program.
We expect that the Medicare drug
benefit will affect several components of
the Federal budget. Specifically, we
anticipate that it will increase Federal
spending on Medicare benefits and
decrease Federal spending on Medicaid
benefits (as dual eligibles’ drug coverage
is shifted from Medicaid to Medicare).
The net effect of these changes on
Federal spending is estimated to be
about $49 billion in CY 2006 and $68
billion in CY 2010, with the total net
effect estimated to be about $293 billion
over the period from 2006–2010. We
note that these estimates are slightly
higher than those presented in the
proposed rule due largely to the higher
per capita spending estimates for the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
low-income subsidy enrollees as
discussed in section F.2 of this impact
analysis. Table IV–3 provides year-by­
year estimates of the net Federal
budgetary effects9 of Medicare and
Medicaid benefit spending. We discuss
these effects subsequently, as well as the
expected impacts of the Medicare drug
benefit on Federal administrative costs
for Medicare, Medicaid, and the Social
Security Administration.
1. Federal Medicare Spending
We estimate that the net Federal
budgetary effect of Medicare benefit
spending related to Medicare Part D,
including the Medicare retiree drug
subsidy program, will be nearly $61
billion in CY 2006 and nearly $365
billion over the five-year period from
CY 2006–2010. The estimated $365
billion in additional net Federal
spending over the five-year period is
made up of approximately $419 billion
in Federal Medicare spending on direct
government subsidies, government
reinsurance payments, low-income
subsidies, and retiree drug subsidies,
with an offset of nearly $55 billion in
additional Medicare revenues received
from States to partially compensate for
Medicare coverage of dual eligibles’
drug costs (overall, we estimate States
will save due to reduced Medicaid
spending, as is explained
subsequently).10
In addition, CMS expects to incur
administrative expenses related to the
Medicare drug benefit. Implementing a
new program of the size and scope of
the Medicare drug benefit requires
substantial implementation expenses,
including extensive computer and other
systems changes. Estimates of CMS
administrative costs for these activities
will be incorporated in the forthcoming
President’s Budget.
2. Federal Medicaid Spending
As a result of Medicare Part D, there
is expected to be a reduction in net
Federal spending on Medicaid benefits
for the period CY 2006–2010, with the
reduction estimated to be about $11
billion in CY 2006 and about $72 billion
9–We note that the estimated net Federal
budgetary effect of Medicare subsidy payments
excludes changes to governmental receipts (that is,
tax collections) because we do not have sufficient
data to estimate these effects at this time.
10 For the purpose of this impact analysis, we do
not assume any additional Medicare costs or
savings related to risk corridors. We also do not
assume any savings on Part A and Part B benefits.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

over the five-year period from CY 2006–
2010.
With the Medicare program providing
drug coverage to dual eligibles who had
previously received drug coverage
through Medicaid, State Medicaid
spending on prescription drugs will be
reduced, and as a result Federal
spending on Medicaid matching
payments will also be reduced. We
estimate reduced Federal Medicaid
spending on prescription drugs for fullbenefit dual eligibles of about $13
billion in CY 2006 and about $84 billion
during the five-year period from CY
2006–2010.
The reduction in Federal spending for
Medicaid prescription drug benefits will
be partially offset by an increase in
Federal Medicaid spending for newly
enrolled dual eligibles. As discussed in
more detail in the State impacts section,
the additional benefits available to lowincome beneficiaries through Medicare
Part D and our related outreach
activities are likely to raise awareness of
other benefits available to such
individuals through Medicaid,
including Medicare Savings (QMB/
SLMB) programs, and lead to higher
enrollment in these programs. We
assume that 1.1 million more Medicare
beneficiaries will enroll in Medicaid,
including Medicare Savings (QMB/
SLMB) programs, in CY 2006 as a result
of the Medicare drug benefit. As
discussed later in the State impacts
section, we estimate that a larger share
of these beneficiaries will receive
benefits as QMB/SLMB individuals than
will receive full Medicaid benefits.
Among beneficiaries that are eligible for,
but not enrolled in Medicaid and the
Medicare Savings Program, we assume a
smaller new enrollment rate among
those beneficiaries that are eligible for
full Medicaid benefits, because we
believe that if these beneficiaries were
likely to sign up for the full Medicaid
benefits package, most would have done
so already. We assume a somewhat
higher new enrollment rate for those
beneficiaries that are eligible for QMB/
SLMB benefits. We estimate Federal
matching payments for State Medicaid
expenditures for these beneficiaries will
be about $2 billion in CY 2006, and total
about $12 billion during the five-year
period from CY 2006–2010.
In addition, the Medicare drug benefit
has implications for Federal spending

PO 00000

Frm 00293

Fmt 4701

Sfmt 4700

4485

on Medicaid administrative costs. The
statute gives responsibility to State
Medicaid programs as well as the Social
Security Administration (SSA) for
conducting eligibility determinations for
low-income benefits under Part D. In
addition, States are required to provide
us with data for the purpose of
calculating the amounts States are
required to pay Medicare to compensate
for a portion of full-benefit dual
eligibles’ drug costs. These and other
State administrative activities related to
Medicare Part D will generate State
administrative costs, as discussed in
more detail in the State section of the
impact analysis. We estimate that the
Federal share of these net costs will be
$39 million in FY 2004, $73 million in
FY 2005, and average $67 million from
FY 2006–2010.11 These net costs reflect
savings from reduced State claims
processing workload as dual eligibles’
drug coverage is shifted from Medicaid
to Medicare.
3. SSA Administrative Costs
SSA will incur administrative costs
associated with its responsibilities
under the MMA. SSA is developing and
executing an outreach plan to educate
beneficiaries about the low-income
subsidy assistance that is available
under Medicare Part D. To assist
beneficiaries with their requests for
subsidy assistance, SSA is developing
simplified application, appeal, and
redetermination forms. SSA has
responsibility for determining eligibility
for the low-income subsidy, performing
reviews of determinations based on
requests for appeal, and redetermining
eligibility. To do this, SSA must
develop computer systems, regulations,
and internal SSA instructions for
processing applications, appeals, and re­
determinations. In addition, SSA is
developing training materials for State
employees so that they can use SSA’s
simplified application form and
application process, and is conducting
data exchanges with CMS and other
Federal Agencies necessary for making
eligibility determinations. Estimates for
SSA administrative costs for these
activities will be incorporated in the
forthcoming President’s Budget.
11 For the purpose of this impact analysis, we do
not assume any additional Medicare costs or
savings related to risk corridors. We also do not
assume any savings on Part A and Part B benefits.

E:\FR\FM\28JAR2.SGM

28JAR2

4486

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

TABLE IV–3. ESTIMATED NET FEDERAL BUDGETARY EFFECTS OF MEDICARE AND MEDICAID BENEFIT SPENDING, CY
2006–2010 (BILLIONS OF DOLLARS)
2006

2007

2008

2009

2010

2006–
2010

Net Effect of Medicare Benefit Spending Related to Medicare Part D
Federal Spending Related to Medicare Part D, Including the Retiree Sub­
sidy

69.7

76.2

83.3

91.0

99.2

419.3

State Payments to Partially Offset Medicare Drug Costs for Dual Eligibles

-9.0

-9.9

-10.9

-11.9

-13.0

-54.7

Subtotal

60.6

66.2

72.5

79.1

86.1

364.6

2.0

2.2

2.5

2.7

2.9

12.3

Reduction in Federal Matching Payments for Medicaid Drug Expenditures
for Dual Eligibles

-13.3

-14.9

-16.6

-18.5

-20.7

-84.0

Subtotal

-11.3

-12.7

-14.1

-15.8

-17.8

-71.7

49.3

53.6

58.4

63.3

68.3

292.9

Net Effect of Medicaid Benefit Spending
Additional Federal Matching Payments for Newly Enrolled Dual Eligibles

Net Federal Budgetary Effects of Medicare and Medicaid Benefit Spending

Note: Positive numbers denote increased spending; negative numbers denote reduced spending (that is, savings). Numbers may not sum to
totals due to rounding and exclude effects on Federal tax revenues.

H. States
1. Overall State Budgetary Impacts
We estimate that, as a result of
Medicare Part D, States will realize net
savings of $7.9 million over the CY
2006–2010 period, as shown in Table
IV–4. Estimated State savings range
from approximately $1.0 billion in CY
2006, increasing each year during the
five-year period, to reach about $2.2
billion by CY 2010. The estimated $7.9
billion in net State savings over the fiveyear period are made up of $72.6 billion
in State savings related to Medicare Part
D that are partially offset by $64.8
billion in State costs related to Medicare
Part D. We note that our estimates of
State savings are slightly lower than
those presented in the proposed rule
because our current estimate of the
overall impact on States includes an
estimate of State administrative costs
while our previous estimate had not.
We estimate that States will save
approximately $73 billion from CY 2006
to 2010 as the Medicare Part D drug
benefit and Medicare retiree drug
subsidy provide financial support for
the prescription drug costs of fullbenefit dual eligibles, State retirees, and
participants in State prescription drug
assistance programs. The vast majority
of these State savings ($63.4 billion) are
the result of Medicare Part D replacing
drug coverage for full benefit dual
eligibles that would otherwise be paid
for by Medicaid. States offering
qualified retiree prescription drug

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

coverage to their own former employees
(and their spouses and dependents) will
also achieve savings due to the
Medicare retiree drug subsidy and the
other options Part D offers employers
and unions for providing retirees with
prescription drug coverage at lower
costs. We estimate these savings to be
$6.3 billion from CY 2006 to CY 2010.
In addition, States that operate
prescription drug assistance programs,
as well as States with Pharmacy Plus
programs, will also realize additional
savings as Medicare Part D displaces a
portion of their spending on
prescription drug coverage for enrollees
($3 billion from CY 2006 to CY 2010).
We discuss the estimated savings for
State prescription drug programs in
more detail in a separate section later in
this analysis.
The estimated $73 billion in State
savings, discussed previously, will be
partially offset by approximately $65
billion in State costs related to Medicare
Part D over the period CY 2006–2010.
The largest component of these costs are
State payments to the Federal
government to defray a portion of the
Medicare drug expenditures for fullbenefit dual eligibles, estimated at about
$54.7 billion from CY 2006–2010. As
discussed in the preamble, the States
and the District of Columbia are
required to make these monthly
payments beginning January 1, 2006. It
is important to note that the data
sources and methodology used to

PO 00000

Frm 00294

Fmt 4701

Sfmt 4700

estimate these State payments for the
purpose of this impact analysis differ
somewhat from those that will be used,
as stipulated by statute and described in
more detail in subpart S of the
preamble, to calculate the actual State
payment amounts for 2006. The
expenditure data that will be used to
calculate the actual State payment
amounts are not yet available. Thus, for
the purpose of this impact analysis, we
relied on MCBS as the data source to
produce an estimate of aggregate State
payments.
Another component of these costs is
increased State Medicaid spending due
to increased Medicaid enrollment. We
anticipate that in the process of
outreach and applying for the Part D
low-income subsidy, some beneficiaries
will learn of their eligibility for other
low-income assistance such as Medicaid
or Medicare Savings (QMB/SLMB)
programs and choose to enroll in these
programs. We estimate that about 1.1
million additional beneficiaries will
enroll in Medicaid or the Medicare
Savings programs in CY 2006. We
assume that a larger share of these
beneficiaries will receive benefits as
QMB/SLMB individuals than will
receive full Medicaid benefits, with 21
percent of the new enrollees estimated
to receive full Medicaid, 20 percent to
receive QMB benefits, and 59 percent to
receive SLMB benefits. We assume a
smaller new enrollment rate among
those beneficiaries that are eligible for

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
full Medicaid benefits, because we
believe that if these beneficiaries were
likely to sign up for the full Medicaid
benefit package, most would have done
so already. We assume a somewhat
higher new enrollment rate for those
beneficiaries that are eligible for QMB/
SLMB benefits. Because there are
currently more beneficiaries eligible for
but not enrolled in the SLMB program
than the QMB program, new enrollees
into the SLMB program make up the
majority of the estimated 1.1 million
new enrollees. We estimate that State
Medicaid spending on benefits for these
1.1 million individuals will be about
$9.1 billion over the five-year period
from CY 2006–2010.
Also included in our estimate of State
costs is the effect of the MMA’s
prohibition on States imposing taxes on
premiums related to Part D coverage. As
a result of this prohibition, we estimate
that States will realize reduced
premium tax revenues of approximately
$504 million over the period CY 2006–
2010.
States will also incur administrative
costs related to Medicare Part D. We
estimate that these State costs will be
$39 million in FY 2004, $73 million in
FY 2005 and average $90 million per
year from FY 2006–2010 (after receiving
Federal matching payments). In FY 2004
and 2005, we anticipate that States will
incur costs on data file cleanup (to
enable States to provide us with
information on dual eligibles). In
addition, in FY 2005, we estimate that
States will incur costs for development
of State eligibility determinations
systems for Part D and for processing
eligibility determinations for
individuals who apply for the lowincome subsidy through the State
during the early stages of the lowincome subsidy application period. In
FY 2006–2010, we expect that the bulk
of States’ administrative costs will be
associated with processing Part D
applications, re-determinations, and
appeals; and State screening of Part D
low-income subsidy applicants for
eligibility for the Medicare Savings
programs. The additional administrative
costs during FY 2006–2010 will be
partially offset by State savings on
claims processing costs, as dual
eligibles’ prescription drug claims will
no longer be processed by States. We
note that our estimates of State
administrative costs are somewhat
lower than those cited in the proposed
rule because, as discussed subsequently,
we anticipate that SSA will play a
substantial role in the eligibility
determinations process for the lowincome subsidy, lessening the burden
on States. We anticipate that prior to

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

implementation of Medicare Part D,
States will incur costs related to the data
file preparation work necessary to
provide us with information on which
beneficiaries are full dual eligibles,
QMBs, SLMBs, or QIs. States are
required, effective with CY 2003 and all
subsequent MSIS data submittals, to
provide accurate and complete coding
to identify the numbers and types of
Medicaid and Medicare dual eligibles,
with CY 2003 data submittals required
to be completed by December 31, 2004.
In accordance with the statute, this final
rule also requires States to submit an
electronic file, beginning effective
August 2005, and each subsequent
month, that identifies each full benefit
dual eligible enrolled in the State for
each month.
As discussed in the preamble, we will
send notices of eligibility to all deemed
low-income subsidy eligible
individuals, relieving States of the
financial burden of sending notices to
these beneficiaries. We will also educate
Medicare beneficiaries, including dual
eligibles, through a variety of methods
about prescription drug coverage under
the new Part D benefit, which we expect
would eliminate the need for States to
carry out this function.
The statute gives responsibility to
State Medicaid programs as well as the
Social Security Administration for
conducting eligibility determinations for
low-income benefits under Part D. As a
result, States will need to develop an
eligibility determinations system for
processing Part D low-income subsidy
applications. However, States have
considerable flexibility in designing the
system in a manner that would be most
cost-effective given their existing
eligibility determination processes and
the likelihood that SSA will process a
substantial number of applications. We
anticipate that SSA will have a
substantial role in processing Part D
eligibility determinations, which will
considerably reduce State costs related
to processing Part D applications. SSA
will be conducting an extensive
outreach campaign to inform lowincome Medicare beneficiaries about the
Medicare Part D low-income subsidy
assistance and inform them that they
can apply for the low-income subsidy
through SSA. In addition, as discussed
in the preamble, we are encouraging
States to consider using the SSA
application form and process as their
default approach for processing lowincome subsidy applications. While
States would have to develop a process
to determine eligibility for an individual
who requests a ‘‘State’’ determination as
opposed to an ‘‘SSA’’ determination,
States may use the SSA low-income

PO 00000

Frm 00295

Fmt 4701

Sfmt 4700

4487

subsidy application in order to reduce
the administrative burden associated
with sending notices and processing
appeals and re-determinations. With
SSA performing a substantial role in
eligibility-processing, States would also
be relieved of a significant burden in
verifying information reported on lowincome subsidy applications. As a
result, States could focus most of their
attention on assisting individuals with
completing the SSA application, and
screening and enrolling individuals in
the Medicare Savings Program.
We also note that States are generally
responsible for issuing licenses to health
insurers. While some new PDP plans
will require new licenses, the States
charge fees for licensing and the States
already have the mechanisms in place to
handle these new license applications.
Furthermore, licensing would not affect
current insurers that want to become
PDPs if these insurers are already
licensed as insurers in a given State; the
PDP would simply be a new line of
business for these insurers. Thus, we do
not estimate any cost implications for
the States associated with licensing
insurers.
Comment: Several States noted that
they did not believe they would realize
net savings as a result of Part D. These
States commented that their costs would
exceed their savings. In addition, some
States pointed out that the
characteristics of their situation, in
terms of such issues as savings for
retirees, existence of a SPAP,
administrative costs associated with
low-income eligibility determinations,
or new Medicaid enrollments, would
mean that their particular State costs
would exceed savings from Medicare
Part D.
Response: Based on our estimates, we
believe that, in aggregate, State savings
will exceed State costs over the 5 year
period, CY 2006–2010. Our best
estimate, based on available data, is that
generally States will realize net savings
from the implementation of Medicare
Part D, and these savings will increase
over time, as shown in Table IV–4. We
estimate that States will save
approximately $7.9 billion from CY
2006 to CY 2010 as the Medicare Part
D drug benefit and Medicare retiree
drug subsidy provide financial support
for prescription drug costs of full-benefit
dual eligibles, State retirees, and
participants in State prescription drug
assistance programs. The vast majority
of these State savings are the result of
Medicare Part D replacing drug coverage
for full benefit dual eligibles that would
otherwise have been paid for by
Medicaid (about $63 billion from CY
2006 to CY 2010).

E:\FR\FM\28JAR2.SGM

28JAR2

4488

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

Comment: Several States asserted that
exempting Medicare Part D prices from
Medicaid best price will have a negative
financial effect on States. In addition,
several States also asserted that
Medicare Part D will reduce their drug
price negotiating power for the non-dual
population.
Response: As noted elsewhere in the
preamble, we do not have the statutory
authority to modify the best price
provisions of the Medicaid best price
statute and the exemption of Part D
under the MMA. However, we do not
believe that the exemption of PDP and
MA-PD prices from ‘‘best price’’ will
adversely affect best price compared
with what it would have been in the
absence of Medicare Part D. We expect
that price negotiations by PDPs and MA­
PDS with drug manufacturers will lead
to price concessions for beneficiaries.
Nevertheless, the expected increase in
drug use among the Medicare
population, due to the expansion of
drug coverage, will make it less likely
that manufacturers will respond by
raising their prices to other lines of
business. Consequently, we expect that
there would be minimal, if any effect,
on best price.
In terms of the impact on States’
negotiating power with drug
manufacturers, we believe that States
would remain large volume purchasers
of prescription drugs even after the dual
eligible beneficiaries transition to Part D
coverage. Furthermore, a number of
States have joined purchasing pools to
increase their market power in an effort
to reduce their Medicaid spending on
prescription drugs. As such, we believe
that the States would maintain their
bargaining power with drug
manufacturers and that there would be
minimal impact on their ability to
negotiate price concessions.
Comment: Two States noted that the
estimate of net State savings should
include administrative costs.
Response: The estimate of State
administrative costs is included in the
estimate of net State savings, as shown
in Table IV–4.
Comment: One State wanted us to
clarify whether we included the
estimated fiscal impact of the following
programmatic and administrative State
costs: (1) additional compliance
responsibilities with HIPAA and
privacy rule notice of practice
provisions; (2) Certificates of Coverage
requirements; (3) educating staff; (4)
coordinating the State pharmacy
programs (and systems) with the PDPs
for purposes of medication management
programs; and (5) educating dual
eligibles on Medicare Part D.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Response: Our estimates of State
administrative costs take into account
staff training activities. We have not
included new costs for HIPAA, the
privacy rule notice of practice
provisions, or Certificates of Coverage
because we do not agree that the MMA
imposes additional compliance
responsibilities on States in these areas.
In terms of the costs of educating
beneficiaries, we did not include these
costs in our estimate as we believe they
will be negligible, for several reasons.
First, SSA will be conducting an
extensive outreach campaign to inform
low-income Medicare beneficiaries
about the Medicare Part D low-income
subsidy assistance and inform them that
they can apply for the low-income
subsidy through SSA. Second, CMS will
send notices of eligibility to all deemed
low-income subsidy eligible
individuals, relieving States of the
financial burden of sending notices to
these beneficiaries. Third, CMS will
educate Medicare beneficiaries,
including dual eligibles, through a
variety of methods about prescription
drug coverage under the new Part D
benefit, which we expect would lessen
the need for States to carry out this
function.
As discussed elsewhere in the
preamble, we recognize that SPAPs and
States have an interest in acquiring
access to prescription drug utilization
data for purposes of their medical and
case management activities. We are
continuing to work on means to
practically expedite data sharing. As
noted previously, although we do not
have the authority to require data
exchanges between Part D plans and the
States, we will strongly encourage Part
D plans to independently share data on
these shared enrollees with State
Medicaid plans consistent with the
HIPAA Privacy Rule provisions for the
sharing of protected health information
with another covered entity for that
entity’s health care operations.
Comment: Two States noted that we
underestimated the administrative cost
estimates for States to conduct low
eligibility determinations under Part D.
One State noted that, due to the
complexity of the new drug benefit and
the incidence of cognitive impairment
in the dual eligible population, the
figure of $100 million is underestimated
and should be reconsidered. Similarly,
another State noted that if the States are
required to determine low-income
subsidy eligibility for low-income
individuals other than Medicaid and
Medicare Savings Program recipients,
there will be additional costs to the
States. The State asserted that the
significant costs include system changes

PO 00000

Frm 00296

Fmt 4701

Sfmt 4700

necessary to do the eligibility
determinations and to issue notices to
beneficiaries and notify CMS; the cost of
applications, forms, and information
material; the cost of writing and
maintaining a policy manual; the cost of
developing training materials and
training staff; and the cost of new
positions, space, and supplies for new
staff needed to do determinations. This
State noted that these costs will be even
higher if the States are required to
process automatic enrollments and if
each State must coordinate subsidy
eligibility determination processes with
SSA.
Response: We recognize that States
will incur costs associated with the
eligibility determinations for Medicare
Part D benefit. In developing our State
administrative cost estimates related to
eligibility determinations, we took into
account the costs of developing
eligibility systems; developing training
materials; processing Part D
applications, re-determinations, and
appeals; screening and enrolling
beneficiaries in Medicare Savings
programs; and notifying CMS about
beneficiaries determined eligible for the
Part D low-income subsidy. In
estimating these costs we included the
cost of staff time, benefits, overhead,
and training involved. We did not
include State costs for auto-enrollment
as CMS will be responsible for that
function. We have estimated total State
administrative costs (after receiving
Federal matching payments) of $39
million in FY 2004, $73 million in FY
2005 and on average $90 million per
year from FY 2006–2010. The vast
majority of these costs are for the
eligibility determinations process
described above. While we recognize
that States will incur significant costs
related to eligibility determinations, we
believe that our estimates represent a
reasonable assessment of these costs. As
noted previously, we anticipate that
SSA’s role in processing Part D lowincome subsidy eligibility
determinations will considerably reduce
State costs related to processing Part D
low-income subsidy applications. SSA
will be conducting an extensive
outreach campaign to inform lowincome beneficiaries about the Medicare
Part D low-income subsidy assistance
and inform them that they can apply for
the low-income subsidy through SSA. In
addition, we are encouraging States to
consider using the SSA application form
and process as their default approach
for processing low-income subsidy
applications. While States would have
to develop a process to determine
eligibility for an individual who

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
requests a ‘‘State’’ determination as
opposed to an ‘‘SSA’’ determination,
States may use the SSA low-income
subsidy application in order to reduce
the administrative burden associated
with sending notices and processing
appeals and re-determinations. With
SSA playing a substantial role in
eligibility-processing, States would also
be relieved of a significant burden in
verifying information reported on lowincome subsidy applications. In
addition, while States must develop a
process to support eligibility
determinations when specifically
requested of them, States have
flexibility in designing the system in a
manner that would be most costeffective given their existing eligibility
determination processes and the
likelihood that SSA will process a
substantial portion of Part D low-income
subsidy applications.
2. State Prescription Drug Assistance
Programs
As mentioned previously, one of the
components of our estimate of net State
savings resulting from Medicare Part D
is savings on State Pharmaceutical
Assistance Programs (SPAPs). We
estimate that SPAPs spend roughly
$1.45 billion of State only resources on
prescription drug assistance for 1.2
million individuals, based largely on FY
2002 data. Five States account for
approximately 87 percent of the SPAP
spending, and have approximately 77
percent of the enrollment. For Medicare
beneficiaries who have income less than
135 percent of the Federal Poverty Level
(FPL) and assets valued up to $6,000 per
individual (or $9,000 per couple) in
2006, Part D offers comprehensive drug
coverage with a full Federal subsidy for
the beneficiary premium and only
nominal cost-sharing. Thus, SPAP
expenditures on this group of Medicare
beneficiaries will be mostly displaced
by the Medicare prescription drug
benefit. We estimate that the savings
that will accrue to States as a result of
Medicare Part D displacing SPAP
expenditures for low-income
beneficiaries will be approximately
$600 million per year, or about $3
billion over the five-year period from
CY 2006–2010.
States with SPAPs have shown a
commitment to assisting their lowincome residents with drug costs. As of
Spring 2004, twenty States were
operating SPAPs that provide
subsidized drug coverage to individuals
who will be eligible for Medicare Part D.
We anticipate that many of these States
will choose to continue providing
financial assistance with drug
expenditures, because they can achieve
the same or a greater level of assistance

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

for their beneficiaries at a lower cost to
the States. Part D provides States with
a number of options for continuing their
provision of prescription drug
assistance to Medicare beneficiaries, if
they choose to do so. States, for
example, have the flexibility to
restructure their SPAP programs to wrap
around the Part D benefit and pay
deductibles and cost sharing for
beneficiaries, with the State’s assistance
counting toward the Medicare Part D
annual out-of-pocket threshold
triggering protection against
catastrophic drug costs. States can also
provide assistance by paying for Part D
premiums for beneficiaries. As part of
their SPAPs, States also have the
flexibility to make arrangements with
PDPs and MA-PDs to provide enhanced
Part D benefits.
Comments: The comments from States
did not indicate a preferred option for
restructuring their SPAP benefits in
relation to Medicare Part D. One
commenter indicated that given the
proposed system for coordination of
benefits, it seems likely that SPAPs will
structure their benefit design to wrap
around Medicare Part D. However,
another commenter stated that choosing
a wraparound benefit design would
entail significant administrative and
information systems costs.
Response: We are uncertain at this
time what actions States will take to
structure their SPAP benefits in relation
to Part D. Part D provides States with a
number of options for continuing their
provision of prescription drug
assistance to Medicare beneficiaries (for
example, wrapping around Medicare
Part D, or paying for some portion or all
of premiums, including buying
enhanced coverage). While we recognize
that SPAPs will incur administrative
costs in modifying their programs, we
do not have enough information to
quantify those costs. Currently, SPAPs
have varying levels of administrative
costs and their choices will influence
the size of their future operating costs.
For example, if SPAPs choose to
provide premium assistance in contrast
to a wraparound design, then their
administrative costs might be lower
than an operational design that would
require ongoing processing of claims.
We believe that we have provided
flexibility for the States to restructure
their SPAP programs to best serve the
needs of their enrollees. We expect that
regardless of how States choose to alter
their SPAP benefits to work in relation
to Part D, States will achieve savings as
Part D coverage replaces benefit
spending previously financed by SPAPs.
Even though States will incur
administrative costs in adapting the

PO 00000

Frm 00297

Fmt 4701

Sfmt 4700

4489

structure of their programs in relation to
Part D, the benefit savings will far
exceed administrative costs as
administrative costs represent a small
share of expenses associated with
providing prescription drug coverage.
In the proposed rule, we invited
States to provide specific enrollment
and expenditure data by FPL for their
State and any State-specific savings
estimates they may have developed, as
well as comments on improvements in
our methodology. However, the public
comments did not include estimates of
SPAP enrollment and expenditure data
by FPL, nor did the comments include
State-specific savings estimates.
Additionally, we did not receive any
comments on our methodology for
estimating potential savings from SPAP
expenditures. Several States with SPAPs
have publicly stated that they are
realizing savings from the Medicare
approved drug discount card and
transitional assistance program. We
anticipate that Medicare Part D will
bring even larger savings for SPAP
programs.
We retain the same methodology for
estimating savings related to SPAP
programs as we used in the proposed
rule. We believe that we are presenting
a conservative estimate of the
displacement of SPAP expenditures,
because our assessment does not
include any potential State savings for
SPAP enrollees at income levels above
135 percent of FPL. States that choose
to restructure their programs to
complement Medicare Part D can still
achieve savings because of the
substantial Medicare displacement of
SPAP spending for low-income
beneficiaries as well as for individuals
who enroll in Part D and do not qualify
for the low-income subsidy.
We also note that, as discussed
elsewhere in the preamble, Section
1860D–23(d) of the Act provides for the
payment of transitional grants to States
with Pharmaceutical Assistance
Programs of up to $62.5 million in each
of fiscal years 2005 and 2006. On
October 28, 2004 HHS announced the
awards to States for fiscal Year 2005. In
addition, the statute provides the
authority (Section 1860D–23(a) of the
Act) for the Secretary to establish
requirements for effective coordination
between Part D plans and SPAPs. For
further discussion related to
coordination of benefits, see the section
on coordination of benefits under
Administrative Costs.
To estimate potential SPAP savings
resulting from Medicare Part D
expenditures, we focus our analysis on
SPAP expenditures that may be spent
on individuals with income below 135

E:\FR\FM\28JAR2.SGM

28JAR2

4490

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

percent of FPL. We are primarily relying
on State-published data that describe
SPAPs and their eligibility standards
(sources such as State government
websites, program annual reports, and
Governor’s budget documents). Our
ongoing work with States also provides
us with certain information regarding
enrollment and expenditures under
SPAPs. Unless we have adequately
detailed State-published data on SPAP
expenditures for enrollees by income,
we use the Census Bureau’s Current
Population Survey (CPS) data to help us
estimate SPAP spending on
beneficiaries with income under 135
percent of FPL.
We recognize that our methodology
has significant limitations and that our
estimates are imprecise. For example,
our analysis does not take into account
the effect of the Medicare Part D assets
test and does not include an estimate of
potential savings for SPAP enrollees
with income greater than 135 percent of
FPL. We believe that States, with their
own internal data and resources, are in
the best position to project individual
State-level impacts.
3. Pharmacy Plus Waiver Programs
Four States under Medicaid section
1115 waivers operate Pharmacy Plus
demonstration programs that provide
assistance to Medicare beneficiaries
with the cost of prescription drugs.
Expenditures for these services receive
Federal matching payments in the same
manner as do services for full benefit
Medicaid beneficiaries. In the proposed
rule, we noted that due to the special
treatment SPAPs receive relative to the
TrOOP, States that operate Pharmacy
Plus programs and beneficiaries
enrolled in those programs could benefit
financially by States restructuring their
Pharmacy Plus programs to use a State
only SPAP design to wrap around
Medicare Part D. We sought comments

on this issue and welcomed further data
and analyses from States.
Comment: One State that operates a
Pharmacy Plus waiver program
responded to our request for comments.
The State indicated that it does not plan
to restructure its Pharmacy Plus
program as a SPAP. The State
commented that its pharmaceutical
assistance programs provide its
residents with benefits that are more
generous than Medicare Part D. It
provided comparative scenarios based
on illustrative beneficiary spending
levels and stated that beneficiaries in its
State would be better off financially
under the current arrangement. One
beneficiary advocacy group agreed with
the State’s point-of-view. The public
comments did not contain any other
data or analysis on the issues we raised
in the proposed rule regarding
Pharmacy Plus Waiver programs.
Response: The State’s comments
compare a current benefit design with
the structure of the standard Medicare
Part D benefit, which will be
implemented in January 2006, but
assumes no State supplementation to
the Medicare benefit nor does it include
the special Medicare low-income
subsidies that will be available to
certain populations. Medicare Part D
will provide a generous package of
prescription drug coverage. While State
Medicaid programs will no longer be
able to claim Federal financial
participation for those drugs after
January 1st, 2006, we assume that States
that developed special pharmaceutical
assistance programs may be interested
in continuing to provide financial
assistance to these beneficiaries. The
final rule provides that Pharmacy Plus
programs can continue with Federal
match after January 1, 2006, under
certain circumstances. As indicated
elsewhere in the Preamble, any State
that operates a Pharmacy Plus

demonstration program must determine
whether it is feasible to continue that
Pharmacy Plus program by submitting a
revised budget neutrality calculation for
the demonstration. We will review the
revised budget neutrality calculation
and approve or disapprove the
continuation of the Pharmacy Plus
demonstration for the period when Part
D is effective.
Under the Statute, there is a financial
incentive favoring States that provide
Medicare beneficiaries direct financial
assistance for the purchase of
prescription drugs. As noted elsewhere
in the preamble, Section 1860D–
2(b)(4)(C)(ii) of the Act only allows a
person or a SPAP to make payments that
will count toward TrOOP for an
individual Part D enrollee. However, as
previously discussed, Pharmacy Plus
waiver programs are not considered to
be SPAPs. Therefore, Pharmacy Plus
program expenditures cannot be
counted towards the calculation of
TrOOP. As noted earlier, the Pharmacy
Plus Waiver Programs could be
modified to take advantage of the
incentive set by statute.
Given these considerations, we
continue to believe that generally States
would benefit by restructuring their
prescription drug programs using a
State-only SPAP design that wraps
around Medicare Part D, rather than
continuing their Pharmacy Plus
programs. Depending on the State and
the nature of the population, we believe
that generally States could realize
savings relative to their current
Pharmacy Plus spending levels while
protecting program participants from
higher out-of-pocket costs. To be
conservative, State savings estimates for
these four Pharmacy Plus programs have
not been included in our estimates of
overall State savings, and would be in
addition to net State savings presented
in this analysis.

TABLE IV–4. PROJECTED STATE SAVINGS AND COSTS DUE TO THE MEDICARE DRUG BENEFIT AND RETIREE DRUG

SUBSIDY, CY 2006–2010 (BILLIONS OF DOLLARS)

2006

2007

2008

2009

2010

2006–2010

Savings
Reduction in State Medicaid Spending

-10.0

-11.2

-12.5

-14.0

-15.6

-63.4

State Savings on Drug Costs for Retired State Workers

-1.0

-1.2

-1.3

-1.4

-1.5

-6.3

Savings for State Pharmacy Assistance Programs

-0.6

-0.6

-0.6

-0.6

-0.6

-3.0

State Payments to the Federal Government for Full-Benefit
Dual Eligibles

9.0

9.9

10.9

11.9

13.0

54.7

State Spending for New Medicaid Enrollees

1.5

1.6

1.8

2.0

2.2

9.1

Costs

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

PO 00000

Frm 00298

Fmt 4701

Sfmt 4700

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

4491

TABLE IV–4. PROJECTED STATE SAVINGS AND COSTS DUE TO THE MEDICARE DRUG BENEFIT AND RETIREE DRUG

SUBSIDY, CY 2006–2010 (BILLIONS OF DOLLARS)—Continued

2006
Lost Revenue from Prohibition on Taxes on Premiums for
Part D Coverage
State Administrative

Costs*

Net Savings/Costs

2007

2008

2009

2010

2006–2010

0.06

0.08

0.10

0.12

0.14

0.50

0.09

0.09

0.09

0.09

0.09

0.45

-1.0

-1.3

-1.5

-1.8

-2.2

-7.9

Note: Positive numbers denote increased spending; negative numbers denote reduced spending (that is, savings). Numbers may not sum to
total due to rounding.
* Prior to 2006, States are estimated to incur administrative costs related to Medicare Part D of $39 million in FY 2004 and $73 million in FY
2005.

I. Administrative Costs
There are four major areas of
administrative costs associated with
Medicare Part D that will be incurred by
the private and public sector that merit
separate discussion. These areas include
the costs of PDPs and MA-PDs
administering the Medicare prescription
drug benefit, the cost of creditable
coverage disclosure notices that the
MMA requires be provided to Medicare
beneficiaries and to CMS, the
administrative costs associated with
certain coordination of benefits as
required by the MMA, and the
administrative costs for employers and
unions associated with obtaining the
Medicare retiree drug subsidy. The
following provides a detailed discussion
of each of these areas.
1. Prescription Drug Plans and MA-PD
Plans
The administrative cost estimates are
based on taking into account the normal
fixed costs associated with
administering a prescription drug
benefit, for example, such functions as
claims processing, responding to
customer inquiries, information
dissemination, appeals processes,
pharmacy network negotiations and
contracting, and drug manufacturer
negotiations and contracting. In
addition, we assume ‘‘risk-premium’’
costs associated with risk-based
insurance products that require
companies to maintain certain levels of
financial reserves. The other factor
taken into account when developing our
estimate is that PDPs and MA-PDs will
likely incur slightly higher
administrative costs during the initial
few years of the Part D benefit due to
start-up costs related to implementation
and initial operations for a new benefit,
for example more marketing and
enrollment activities. We also assume
that entities that will participate as
PDPs will have already made the
necessary changes to be HIPAA
compliant because of the other business
arrangements they will have been

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

functioning in prior to choosing to
participate as a PDP under the Medicare
drug benefit program.
As is typically done with insurance
products, we express the average
administrative costs as a percentage
relative to net standard benefit
expenses. This percentage is commonly
referred to as the ‘‘administrative load.’’
We estimate that the average
administrative load will be 12.7 percent
in CY 2006, with this declining slightly
over time, and reaching 11.9 percent in
CY 2010. The administrative load is
expected to decline slightly over the
period for two reasons: (1)
administrative costs are expected to
grow at a somewhat slower rate than
PDP and MA-PD plans’ prescription
drug costs and (2) initial administrative
start-up costs associated with
implementation are expected to phase
out in the first few years of operations.
Our estimates for administrative costs
are similar to those seen in the general
health insurance market. Our
administrative load of 12.7 percent in
2006 translates into administrative costs
being about 11.2 percent of total Part D
plan expenditures (including both
benefits and administrative costs). This
is similar to the share of total health
plan spending accounted for by
administrative costs in the private
sector. For example, as CMS reported in
its ‘‘Health Care Industry Market Update
on Managed Care,’’ Blue Cross Blue
Shield health plans had average sales,
general and administrative (SG&A)
expenses ranging from 12 percent in
1999, 11.7 percent in 2000, 11.3 percent
in 2001, and 10.9 percent in the first
half of 2002. Similarly, in examining
our Medicare Advantage plans data we
see variation in administrative costs, for
example newer plans (less than 5 years)
seem to have higher administrative costs
(11 percent) than older plans (7
percent).
The MMA also requires PDPs and
MA-PDs to pay a user fee to help offset
ongoing beneficiary education and
enrollment costs relating to the

PO 00000

Frm 00299

Fmt 4701

Sfmt 4700

Medicare prescription drug benefit,
which represents an expansion of the
user fees that are currently required of
MA plans. As discussed earlier in this
preamble, the MMA authorizes up to
$200 million for beneficiary education
and enrollment activities in FY 2006
and thereafter, reduced by the fees that
will be collected from MA organizations
and PDP sponsors in that fiscal year.
Our rough estimates of the user fees for
beneficiary education and enrollment
costs in CY 2006 are approximately $21
million for PDPs and $34 million for
MA organizations, with the remainder
(approximately $144 million) being the
government’s share. These estimates are
slightly different from those presented
in the proposed rule and reflect our
updated estimates for the Medicare
Advantage program and Part D. While
the user fees will actually be collected
on a fiscal year basis, we believe that
these estimates, which are based on
calendar year data, provide a reasonable
estimate of what the magnitude of these
user fees will be during a given fiscal
year. We assume that the cost of these
user fees will be built into the
administrative cost structure of the
PDPs and MA-PDs, and will therefore be
reflected in bids. We note that these
user fees represent a minuscule
percentage of the estimated total
payments to MA organizations and PDP
sponsors under the Medicare program.
2. Disclosure Notice Requirements
A number of entities that provide
prescription drug coverage to Medicare
beneficiaries such as Medigap plans,
private and public sector employer or
union sponsored plans that provide
drug coverage to Medicare beneficiaries
who are retired or who are active
workers, State Medicaid Pharmacy Plus
programs, State Pharmacy Assistance
programs (SPAPs), and the Indian
Health Service—are required to provide
at certain times disclosure notices to
beneficiaries on whether the drug
coverage they provide equals or exceeds
the actuarial value of standard Part D
coverage. As discussed in the preamble,

E:\FR\FM\28JAR2.SGM

28JAR2

4492

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

certain entities that provide Part D
coverage that is by definition creditable
coverage (that is, PDPs and MA-PDs)
will not be required to provide
disclosure notices. Additionally, as
discussed previously, States will not
need to provide disclosure notices to
full-benefit dual eligibles, as this will be
handled through our process of deeming
these beneficiaries as being eligible for
the low-income subsidy.
The largest cost for providing these
disclosure notices is expected to occur
in the months preceding the
implementation of the drug benefit in
January 2006. Thereafter, notices will
need to be provided by these entities
prior to each subsequent Part D annual
coordinated election period (AEP), if
there is a change in creditable coverage
status, or upon request by the
individual. Also, firms that provide
drug coverage to active workers will
have to provide disclosure notices in the
future to those active workers who
become new Medicare beneficiaries. In
an effort to reduce the burden associated
with providing these notices, we have
revised our final regulations to allow
notices of creditable and non-creditable
status to be provided with other
information materials that these entities
distribute to beneficiaries (rather than
separately) and, as discussed in the
preamble, we anticipate providing
model language for both types of
notices.
With the exception of Medigap
insurers and group health plans that
provide drug coverage only to Medicare
beneficiaries who are active workers
(and not retirees), implementation of the
Medicare prescription drug benefit and
the retiree drug subsidy is expected to
produce net savings to public and
private sector entities that provide drug
coverage to Medicare beneficiaries. For
SPAPs, State Pharmacy Plus programs,
the Indian Health Service (IHS), and
private sector and State/local
government group health plans that
provide retiree drug coverage, we
estimate that the cost of creditable
coverage disclosure notices will be
about $18 million in CY 2005, with
anticipated savings from the
implementation of Medicare Part D
expected to far exceed the disclosure
notice costs for each of these entities.
We note that the estimated disclosure
notice cost for these entities has
decreased from our previous estimate in
the proposed rule because we are
allowing most entities (with the
exception of Medigap plans) to include
disclosure notices with other existing
plan materials (instead of requiring a
separate notice) and CMS will be
handling the disclosure notices for full-

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

benefit dual eligibles through our
process of deeming these beneficiaries
as being eligible for the low-income
subsidy.
For Medigap insurers and employer/
union group health plans that offer
coverage only to beneficiaries who are
active workers, not retirees, the cost of
providing disclosure notices is
estimated to be approximately $62
million in CY 2005 (which translates
into an average of roughly $151 per
employer/union that offers drug
coverage to Medicare beneficiaries who
are active workers and about $11,050
per Medigap insurer).
We anticipate that annual disclosure
notice costs in years after 2005 will
generally be significantly lower. For
example, while entities will be required
to provide disclosure notices prior to
each Part D annual coordinated election
period, they will be able to include
these notices in their existing plan
materials with minimal modifications
unless there has been a change in their
creditable coverage status. Similarly,
while group health plans that provide
drug coverage to active workers will
also need to provide disclosure notices
to the more limited number of new
beneficiaries who age into the Medicare
program, they will also be able to
include these notices in their existing
plan materials at minimal cost.
We anticipate that most of the
disclosure notice costs in years after
2005 will be related to changes in
benefit design and/or creditable
coverage status among employer and/or
union-sponsored plans providing
coverage to active workers and retirees.
For example, we estimate that some
group health plans providing coverage
to active workers will incur costs in the
event that their plan has a substantial
change in its benefit structure that
makes a reconfirmation of their
creditable coverage status appropriate,
as well as in the event of a change in
their creditable coverage status.
Similarly, we anticipate that there will
be some disclosure notice costs
associated with changes in creditable
coverage status among employer/union­
sponsored retiree plans that choose to
transition from providing coverage that
qualifies for the retiree subsidy to
providing coverage that complements
the Medicare drug benefit. Additionally,
we anticipate that a small number of
beneficiaries will request an additional
copy of their creditable coverage
disclosure notice during any given year,
which may need to be sent separately
from the other plan materials that the
various entities normally provide to
their participants.

PO 00000

Frm 00300

Fmt 4701

Sfmt 4700

We estimate maximum costs of
roughly $8 million to $9 million per
year for disclosure notices during the
period CY 2006–2010. We note that the
estimated disclosure notice cost for
years after 2005 has increased somewhat
from our previous estimate in the
proposed rule because in addition to the
estimated costs associated with
creditable coverage status changes and
reconfirmations relating to active
worker plans, we have also included
costs associated with plan sponsors
providing notices to Medicare retirees in
the event of a change in status and costs
associated with providing additional
copies of notices to a small number of
individual beneficiaries upon request.
For private sector and State/local
government group health plans that
provide retiree drug coverage, we
estimate that the maximum cost of
creditable coverage disclosure notices
will be about $3 million per year during
the period CY 2006–2010 (including
costs associated with change of
creditable coverage status notices and
costs associated with providing
additional notices to individuals upon
request). For Medigap insurers and
employer/union group health plans that
offer coverage only to beneficiaries who
are active workers, the cost of providing
disclosure notices is estimated to be
approximately $5 to $6 million per year
during the period CY 2006–2010.
In brief, we take the following
approach to estimate the cost of
disclosure notices. For the various
entities that are required to provide
disclosure notices, the circumstances of
these different types of coverage and
how they will relate to the new
Medicare prescription drug benefit
differ. Consequently the nature of the
disclosure notice and any associated
actuarial valuation will vary. Beyond
the cost of the actuarial valuation are
the costs of preparing and mailing the
notices. We generally base our cost
estimates on wage data from the
Department of Labor for an actuary and
for administrative personnel, adjusted to
2005 and loaded for compensation,
overhead, general administration and
fee, with additional adjustments for
wage growth in subsequent years.
In terms of the basic costs of
preparing and mailing the disclosure
notices, we assume that each entity
required to provide these notices
expends 8 hours for developing the
notice (with one exception described
below), 1 hour for providing a copy of
the notice to CMS, 1 hour per 60 notices
for providing separate notices to
beneficiaries in the case of Medigap
plans, approximately 5 minutes per
notice for providing separate additional

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
copies of the notices to individual
beneficiaries upon request, and
negligible costs for incorporating notices
into existing plan materials that are
provided to beneficiaries (since these
plan materials are already being
disseminated to their participants). The
one exception to this relates to group
health plans that provide drug coverage
only to Medicare beneficiaries who are
active workers, not retirees. We assume
these entities expend less time
developing the notice (2 hours) because
we expect that this service is likely to
be provided to them by insurers or
health plan administrators, who we
anticipate will spread the cost of this
service across many plan sponsors.
In terms of the time involved in
performing the actuarial valuation that
forms the basis of the disclosure notices,
we anticipate that it will vary somewhat
by the type of entity providing the
notice. As discussed subsequently in the
section on administrative costs for the
retiree drug subsidy, our estimates of
the time involved in doing actuarial
valuations were informed by
discussions held with actuaries in our
Office of the Actuary and other industry
experts. With respect to SPAPs and
State Pharmacy Plus programs, we
expect that the actuarial assessment is
not likely to be complex, and that the
disclosure notice will likely focus on
how the State program will work with
the new Medicare drug benefit. We
assume that each SPAP and State
Pharmacy Plus program would expend
on average 2 hours for actuarial work.
With respect to the Indian Health
Service, we expect that the actuarial
assessment is not likely to be complex
since the coverage is likely to be
creditable; we assume that the IHS
would expend less than 6 hours for
actuarial work.
We believe that the notice
requirement related to Medigap drug
policies will be relatively
straightforward. In accordance with
section 104 of the MMA, we are
developing a model disclosure notice
for Medigap insurers in consultation
with the NAIC. For standardized
Medigap plans, we anticipate that the
actuarial work involved in developing
these notices will be minimal. As
discussed elsewhere in the preamble,
we believe that standard Medigap plans
H and I are not creditable and that it is
very unlikely that plan J would be
creditable. In the case of the prestandardized policies, the nature of the
actuarial valuation and the level of
effort involved will likely vary with the
nature of the benefit package. For the
purpose of this analysis, we assume 6
hours on average per Medigap insurer

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

for actuarial valuations, taking into
account that those with prestandardized plans may do more
extensive actuarial valuations.
Employer or union-sponsored retiree
health plans that apply for the Medicare
retiree drug subsidy will have to
perform an actuarial valuation for the
purpose of their application. We assume
that those plans will simply use the
actuarial valuation that was developed
for the retiree subsidy application for
the disclosure notices. We note that the
first prong of the retiree drug subsidy
program’s actuarial equivalence test
requires plan sponsors to compare the
gross value of their drug benefit with the
value of the standard Part D benefit
(which is the same comparison that they
will need to make for disclosure notice
purposes). Thus, we assume nominal
costs for the actuarial valuation related
to the disclosure notices. Estimates of
the administrative costs related to
applying for the Medicare retiree
subsidy, including the actuarial
valuation, are discussed elsewhere in
this document.
We anticipate that employer or unionsponsored retiree health plans that do
not choose to apply for the retiree drug
subsidy will need a minimal amount of
time to compare the value of their drug
benefit with the value of the standard
Part D benefit, and expect that these
employers/unions will be able to use the
simplified actuarial methods that we
anticipate developing and publishing
for comparing a sponsor’s plan with the
standard Part D benefit, as discussed in
subpart R of the preamble, in making
this comparison. For these reasons, we
assume that each of these plan sponsors
will on average incur expenses for onequarter of an hour of actuarial time. As
discussed in more detail subsequently,
this relatively low number reflects our
assumption that the insurers and PBMs
will build actuarial models that can
determine creditable coverage status for
multiple plans with similar benefit
designs in a relatively automated
fashion, and that they will spread the
associated costs across many plan
sponsors.
In addition, in future years, employer
or union sponsored plans that offer
retiree coverage may incur costs
associated with changes in creditable
coverage status. For those entities that
experience such changes, we use the
same assumptions relating to the time
involved in doing the actuarial
valuation, developing the notice, and
notifying CMS and beneficiaries as for
the initial creditable coverage notices,
with adjustments for future growth in
wages. It is important to note that there
is uncertainty relating to the number of

PO 00000

Frm 00301

Fmt 4701

Sfmt 4700

4493

firms that will apply for the retiree drug
subsidy versus providing enhanced or
supplemental prescription drug
coverage that complements Medicare
Part D, especially since approximately
90 percent of the retirees with
employment-based coverage are
concentrated in 10 percent of the firms
that provide this coverage. Given this
uncertainty, we take the approach of
estimating the maximum possible cost
associated with disclosure notice
activities for these firms.
Disclosure notices are also required of
group health plans that provide drug
coverage to active workers who are
Medicare beneficiaries (that is,
beneficiaries for whom Medicare is the
secondary payer). It is very difficult to
know how many firms that provide
health insurance to their active workers
have a Medicare beneficiary in their
workforce. We have estimated roughly
as an upper bound that there may be as
many as 400,000 firms that provide drug
coverage to at least one Medicare
beneficiary who is an active worker. We
emphasize that this is a very rough
estimate that extrapolates from data
from a number of sources (including an
IRS, SSA, CMS data match, Census data,
BLS data, and a Kaiser survey). We note
that our rough estimate of the number
of employers that may be providing
coverage to Medicare beneficiaries that
are active workers has decreased from
our previous estimate that was included
in the proposed rule, because we had
inadvertently included employers with
fewer than 20 employees who are
exempt from Medicare Secondary Payer
requirements in the prior estimate.
We anticipate that many of these
employers that provide drug coverage to
beneficiaries who are active workers are
purchasing standard health insurance
products from insurers that sell these
plans to numerous purchasers, and that
the cost of the actuarial valuation for
purposes of confirming that this
coverage is creditable will be spread
across a relatively large number of
employers or third party purchasers.
While self-insured employers may have
more distinct health plan benefit
structures, we believe that it is likely
that their health plan administrators
would be able to achieve economies of
scale by building actuarial models that
can serve multiple clients. In addition,
the cost of the valuation for those
employers and unions that also offer
retiree drug coverage could potentially
be incorporated into the costs required
to do an actuarial valuation for both
types of coverage and thus there may be
some economies of scale (particularly
since some employers and unions’
retiree plans provide coverage that is

E:\FR\FM\28JAR2.SGM

28JAR2

4494

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

similar to the coverage that is available
in their active worker plans).
Additionally, we expect that these
employers/unions and their insurers or
plan administrators will be able to use
the simplified actuarial methods
described above in comparing their drug
coverage to the standard Part D benefit.
For these reasons, we assume that each
of these employers/unions will on
average incur expenses for one-quarter
of an hour of actuarial time. This
relatively low number reflects our
assumption that insurers and PBMs will
build actuarial models for determining
creditable coverage in an automated
fashion that will be able to
accommodate different cost-sharing
structures with minor modification, and
that they will spread the fixed cost
associated with building these models
across many employers and unions.
Consequently, the estimated one-quarter
of an hour of actuarial time represents
the estimated share of the cost for those
systems that will be passed on to each
employer.
In years after 2005, employers that
provide drug coverage to Medicare
beneficiaries who are active workers are
likely to expend some additional time
related to disclosure notices, but we
anticipate this time will be substantially
less than in 2005. In subsequent years,
we anticipate that these employers will
provide disclosure notices to their
workers who age into the Medicare
program and continue working. In
addition, it is possible that a portion of
these employers may alter their drug
benefit design to such an extent that a
reconfirmation of their creditable
coverage status may be appropriate. We
assume that those active workers who
become new Medicare beneficiaries
each year will receive disclosure notices
as part of existing plan materials that
these employers normally provide to
their employees, that about 25 percent
of the firms providing coverage to
beneficiaries who are active workers
will need to obtain a new actuarial
valuation on their benefit design per
year, and that about 1 percent of the
firms providing coverage to
beneficiaries who active workers will
have a change in creditable coverage
status that requires them to provide a
notice to CMS as well as a notice to
beneficiaries in their plan materials in
any given year. As discussed previously,
we anticipate that the disclosure notice
cost per employer that offers drug
coverage to Medicare beneficiaries who
are active workers (and not retirees) will
be relatively small—$151 per employer
on average in CY 2005 and we expect
less in future years.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Finally, we anticipate that a minimal
number of beneficiaries will request an
additional copy of a creditable coverage
disclosure notice in any given year.
Specifically, we estimate that
approximately 5 percent of the
beneficiaries receiving coverage through
group health plans for active workers,
and retiree health plans that participate
in the retiree drug subsidy program will
request an additional copy of their
disclosure notice in any given year.
Similarly, we estimate that
approximately 5 percent of the
beneficiaries that choose to continue
receiving creditable drug coverage
through Medigap plans will request an
additional copy of their disclosure
notice in any given year (we assume that
most beneficiaries that have Medigap
drug coverage will enroll in Part D
because most Medigap coverage is not
creditable). Finally, we estimate that a
smaller percentage (1 percent) of the
beneficiaries in retiree health plans that
choose not to participate in the retiree
drug subsidy program will request an
additional copy of their disclosure
notice in any given year because we
anticipate that most of the beneficiaries
in these plans will already be enrolled
in Part D (since many of these
employers/unions are likely to have
drug coverage that complements the
standard Part D benefit). In cases where
individuals request an additional copy
of the creditable coverage disclosure
notice, we assume that the entity will
give the beneficiary a copy of the same
disclosure notice that it has already
incorporated into its plan materials.
Therefore, we do not assume that these
entities will incur an additional cost
associated with developing a new
disclosure notice for this purpose;
however, as discussed previously, we
conservatively estimate that these
entities will incur a nominal cost in
disseminating this information to
beneficiaries upon request.
We believe that the changes that we
have made in the final rule related to
allowing various entities to provide
notices of creditable and non-creditable
coverage status with other existing plan
materials that are distributed to
beneficiaries (rather than separately),
providing model language for both types
of notices, and allowing employers and
unions to use simplified actuarial
methods to determine the actuarial
equivalence of their drug coverage to the
Part D benefit will help to reduce the
administrative burden associated with
the disclosure notice requirements,
while also ensuring that beneficiaries
receive the information they will need

PO 00000

Frm 00302

Fmt 4701

Sfmt 4700

to make an informed decision about
enrolling in Part D.
3. Coordination of Benefits Under
Employer And Union-Sponsored Plans
and SPAPs
We are required under the statute to
establish requirements for coordination
of benefits between Medicare PDPs and
MA-PDs and other insurers including
SPAPs, Medicaid programs, group
health plans, FEHBP, military coverage
including TRICARE, and other coverage
CMS may specify. Ensuring accurate
and timely coordination of benefits is
important for tracking the true out-of­
pocket limit, a cornerstone of the benefit
design. This will necessitate that an
efficient and effective operational
framework be established to track
beneficiary out-of-pocket expenditures.
Section 1860D–23(a) of the Act
authorizes the Secretary to establish
procedures and requirements to
promote the effective coordination of
benefits between a Part D plan and an
SPAP with respect to payment of
premiums and coverage, and payment
for supplemental prescription drug
benefits. In addition, as specified at
section 1860D–24(a) of the Act, we will
apply coordination of benefit
requirements to other prescription drug
plans including group health plans, the
Federal Employees Health Benefits
Program (FEHBP), military coverage
(including TRICARE), Medicaid
(including a plan operating under a
waiver under section 1115 of the Act),
and other coverage that we specify.
The elements to be coordinated
include enrollment file sharing, claims
processing, payment of premiums for
both basic and supplemental drug
benefits, third-party reimbursement of
out-of-pocket costs, application of
protection against high out-of-pocket
expenditures (defined in section 1860D–
2(b)(4) of the Act), and other
administrative processes and
requirements that we specify. As
required by the statute, we will establish
procedures before July 1, 2005, to
ensure the effective coordination of
benefits between Part D plans and
SPAPs and third party coverage.
As discussed more fully in the
Preamble, we plan to play a role in
ensuring that benefits are coordinated
and TrOOP is tracked. We intend to
establish an efficient and effective
process for handling coordination of
benefits and tracking of the TrOOP by
the Part D plans, consistent with the
statute and the guidance we will issue.
We are considering how best to facilitate
these processes, including through the
establishment of a TrOOP facilitation
contractor, contractors, or some type of
blended approach. We also plan to

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
facilitate TrOOP by leveraging
coordination of benefits processes
currently in place under Medicare, and
by creating an on-line eligibility file
query to assist pharmacies in directing
claims to the correct payer. As
discussed, we will provide guidance on
the specific processes for coordinating
claims prior to July 1, 2005. We believe
the coordination effort will reduce the
confusion that could result for multiple
payers being involved in payment of an
individual claim. We believe that a
coordination of benefits and TrOOP
facilitation effort will ease the burden
on Part D plans especially, but also on
pharmacists and ultimately on
beneficiaries since it will help ensure
that claims involving multiple payers
are paid correctly, accurately, and as
timely as possible.
Section 1860D–24(a)(3) of the Act
permits the Secretary to impose user
fees on plans (but not on SPAPs) for the
transmittal of benefit coordination
information under Part D. We are also
provided authority to retain a portion of
these user fees to offset costs we incur
in providing for the coordination of
benefits. Costs incurred may include
items such as the necessary
infrastructure, system security, and
outreach and education activities
related to TrOOP. We plan to provide
more detailed information regarding the
user fee, including the amount and
collection processes in CMS guidance to
be issued prior to July 1, 2005. However,
we plan to charge no more than $1 per
annum in 2006 for each beneficiary
enrolled in a Part D plan to provide for
funding of a Part D coordination of
benefits and TrOOP facilitation process,
and we expect that the fee will be
considerably less. This cost is expected
to be collected from plans at a rate of 1/
12 of $1 per month for each enrolled
beneficiary. We expect that these small
costs will be reflected in plan
administrative costs as part of their bids.
We believe that a maximum of $1 per
year per enrolled beneficiary is a
relatively modest sum, given the value
of the coordination of benefits function
to Part D plans, beneficiaries,
pharmacists, and secondary payers. The
user fee represents a small fraction of
the total expense of administering the
Part D benefit. Indeed, the $1 per
enrollee per year maximum user fee
amount is quite small when considered
on a per claim basis, given the sheer
volume of Part D claims expected in
2006. We believe that imposing a user
fee to cover the expenses involved in
coordinating benefits and facilitating
accurate TrOOP tracking is more cost
effective and convenient for Part D
plans than having the plans plan for,

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

implement, and perform these functions
independently.
Pharmacies have much to gain by
having a coordination of benefits effort
as described more fully in the Preamble.
Pharmacies have a great interest in
ensuring that claims are paid correctly
and quickly at the point of sale. We
expect that pharmacies will have an on­
line eligibility file query capability to
facilitate situations where the pharmacy
is lacking information in order to bill
the appropriate payer. Having an
electronic source of payer information
on customers with multiple insurances
will be a valuable service to pharmacies.
While the advent of the Part D benefit
will require pharmacies to electronically
submit a portion of claims to more than
one insurer, the cost of doing so will be
quite small in comparison to the
positive effect on pharmacies of the Part
D benefit (including increased sales of
prescriptions and increased foot traffic
in the ‘‘front end’’ of the store).
The majority of commenters
supported the option of having a TrOOP
facilitator assist us in ensuring that
benefits coordination and TrOOP
facilitation is performed. We believe
that this support underscores the value
of the function to plans, pharmacies,
and beneficiaries. We are currently
considering the best approach for all
parties concerned. We are prepared to
have a role in coordinating benefits and
tracking TrOOP, as explained more fully
in the Preamble, since this approach is
effective and is supported by
commenters. CMS is considering
facilitating TrOOP in many ways,
including through the establishment of
a TrOOP facilitation contractor,
contractors, or a blended approach. We
will continue to work with the parties
involved to pursue an approach that
makes the most sense for plans,
pharmacies, and beneficiaries. We will
continue discussions and will issue
details and guidance prior to July 1,
2005.
4. Estimated Administrative Costs in
Applying for Retiree Drug Subsidy
Qualified retiree prescription drug
plans that choose to accept the Medicare
retiree subsidy will incur some
administrative costs associated with
obtaining the subsidy.
As discussed earlier in the preamble,
sponsors will have to submit to CMS an
application for the Medicare retiree drug
subsidy, including an attestation that
the actuarial value of the prescription
drug coverage under their retiree plan or
plans is at least equal to the actuarial
value of defined standard prescription
drug coverage under Medicare Part D.
The attestation must be certified by the
attesting actuary, and the application

PO 00000

Frm 00303

Fmt 4701

Sfmt 4700

4495

must be signed by the plan sponsor (or
a plan administrator designated by the
sponsor). As part of this application,
employers and unions are also required
to provide other information including
data about the eligible covered Medicare
retirees in their plan or plans, as well as
a signed sponsor agreement. In addition,
entities accepting the Medicare retiree
drug subsidy payments will have to
report certain prescription drug cost
data for the purpose of receiving
subsidy payments and maintain records
for purposes of audit and oversight by
CMS. We also note that employer and
union sponsored health plans that
provide drug coverage to beneficiaries
are required to provide, at certain times,
creditable coverage disclosure notices to
beneficiaries. These notices are required
regardless of whether the plan sponsor
applies for a subsidy, and consequently
the costs of these notices are discussed
in the section of this analysis on
disclosure notices.
In developing the rule, we have tried
to minimize the administrative burden
associated with the operation of the
retiree subsidy program. We want to
establish an efficient administrative
structure that provides maximum
flexibility for qualified retiree
prescription drug plans, while at the
same time providing for an appropriate
level of financial accountability that
assures the accuracy of payments and
safeguards the interests of beneficiaries,
consistent with our fiduciary
responsibility.
For purposes of the ‘‘Collection of
Information Requirements’’ section and
the accounting statement in this rule,
we have developed an estimate of the
time and aggregate employer/union
costs involved in the various
administrative functions associated with
employers and unions obtaining the
Medicare retiree subsidy including:
subsidy application requirements,
including performing the actuarial
valuation; preparing and coordinating
the plan(s)’ enrollment files and other
information databases to identify the
eligible Medicare retiree population and
other relevant information; assembling
the application; reporting data and
information (for example, data on
prescription drug costs for the purpose
of receiving subsidy payments); and
record retention. We base our cost
estimates on 2005 wage data for an
actuary, computer programmer, and
administrative personnel loaded for
compensation, overhead, general
administration, and fee.
a. Application for Retiree Drug Subsidy
Including Actuarial Attestation
In applying for the subsidy, sponsors
of qualified retiree prescription drug

E:\FR\FM\28JAR2.SGM

28JAR2

4496

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

plans are required to provide to us an
attestation that the actuarial value of the
prescription drug coverage in each such
plan is at least equal to the actuarial
value of defined standard Medicare Part
D prescription drug coverage. Sponsors
of qualified retiree prescription drug
plans will need to submit this
attestation on an annual basis, and
submit an updated attestation if there is
a change during the year that materially
affects actuarial value of their drug
coverage. As discussed earlier in the
preamble, a material change means any
change that potentially causes a plan to
no longer meet the actuarial equivalence
test (these submissions would not be
required when non-material changes are
made to the coverage).
One factor in the cost of actuarial
attestation is that one actuarial model
can potentially be used to analyze
multiple plans’ benefit designs that, for
example, are similar in design but use
different co-payments or have different
levels of beneficiary premium
contributions. We believe it is likely
that various entities that work with
employer/union sponsored group health
plans (such as employee benefit
consultants, actuarial firms, insurance
companies, or PBMs) are likely to
develop such models and spread the
development costs across numerous
clients, lessening the cost to any one
employer/union. In addition, we believe
it is likely the entities that develop
actuarial models and pass the costs onto
employers/unions will likely amortize
over time the fixed costs of model
development.
Besides the fixed costs of developing
an actuarial model, each actuarial
valuation will likely require some
individual time by an actuary. That
analysis time may vary depending on
the complexity of the plan offered by
the employer/union. Given that some
employers (particularly large employers)
may often offer multiple plans (benefit
options) which may involve multiple
valuations, we expect that the actuarial
time would vary across employers.
To develop assumptions about the
time and costs involved, we had
discussions with actuaries in our Office
of the Actuary and other industry
experts. From these discussions, we
developed a range of time estimates for
preparing actuarial models, taking into
consideration: the use of actual plan
data if it is available and credible, the
time to conduct the analyses, the issue
of economies of scale in the use of one
model to analyze multiple plans, and
the time involved in preparing the
written attestation report. Based on
these discussions, our preliminary
estimate is that total time involved in

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

developing one actuarial model and
preparing an analysis and report on one
plan could generally range from 6 to 40
hours. For the purpose of this analysis,
we assume that on average employer/
union sponsored retiree health plans
incur costs for the actuarial valuation in
the initial year ranging from 2 hours of
actuarial time for very small firms
(assuming that the entity that performs
the actuarial valuation spreads the cost
of developing an actuarial model across
a large number of clients and amortizes
the costs over time) to 60 hours for very
large firms that offer multiple plans
(benefit options) and require significant
specialized analysis. Based on these
assumptions and taking into account the
time involved for firms of different
sizes, we estimate that the cost of the
actuarial valuation would on average be
in the range of about 1.8 percent of the
value of the retiree subsidy.
In addition to the actuarial valuation,
plan sponsors applying for the retiree
subsidy will need to prepare the
application and related enrollment data
and information on retirees, and sign
the sponsor agreement. We anticipate
that the time involved in preparing the
application and required enrollment
information will vary by firm size, with
the average time ranging from 5 hours
for the smallest firms with 6 retirees on
average to 382 hours for the largest firms
with more than 1,500 retirees on
average. In addition, we assume a half
hour for signing the sponsor agreement.
As discussed elsewhere, some of the
information needed on eligible
beneficiaries may not be routinely
available to plan sponsors and
consequently for initial start-up some
level of effort may be needed to obtain
this information. We have been
conservative in our assumptions to
reflect this possibility. It is important to
note that a significant portion of the
time involved would be a one-time
expense. Based on these assumptions,
we estimate that on average across large
and small firms, the cost involved in
preparing the application and related
enrollment information (excluding the
actuarial work) and signing the
agreement would be in the range of
about 2.9 percent of the value of the
subsidy. It is important to note that after
the first year, we believe these costs will
decline as the initial work associated
with identifying the eligible population
will have been accomplished and as
employers/unions and their agents gain
more experience with the program.
b. Reporting
In order to obtain the subsidy,
sponsors of qualified retiree
prescription drug plans will need to
submit certain data to CMS and

PO 00000

Frm 00304

Fmt 4701

Sfmt 4700

maintain certain records. If a sponsor
elects to receive monthly or quarterly
retiree subsidy payments or an interim
annual retiree subsidy payment, the
plan sponsor must submit aggregated
gross cost data, an estimate of the
difference between these gross costs and
allowable costs (based on expected
rebates and other price concessions),
and any other data CMS may require
upon submission of data for payment at
each of the time intervals elected by the
sponsor, with a final reconciliation
within 15 months after the end of the
plan year. For final reconciliation
purposes, sponsors must submit total
gross cost data segregated per qualifying
covered retiree; actual rebates, discounts
or other price concessions received for
such costs; and any other data CMS may
require, within 15 months after the end
of the plan year. In addition, plans
sponsors are required to provide on a
monthly basis an update to their
enrollment file (for example, accretes
and deletes). Because prescription drug
data and records are highly automated,
there are significant economies of scale
related to data reporting requirements,
which we believe will lessen the cost to
any one employer/union group health
plan. We anticipate that insurers, PBMs,
and third-party administrators will
incur initial fixed costs in modifying
their current claims processing systems
to track prescription spending data in
the required format to be submitted for
payment purposes. We believe there
would be substantial economies of scale
in making these systems changes, as we
anticipate that an entity (such as a third
party administrator or insurer) could
generally use the same approach for
numerous clients. We also anticipate
that entities that work with group health
plans (such as insurers, PBMs, thirdparty administrators, actuarial firms,
and employee benefit consultants) will
incur fixed costs associated with
developing a methodology for rebate
allocation and modifying their systems
to allocate rebates accordingly. We
believe that it is likely that these entities
would generally use a similar approach
for allocating rebates and making
systems modifications for its clients and
would spread the fixed development
costs across those clients. While we
recognize that there will be some
individual client specific work
necessary for rebate allocation, we
believe it is likely that certain aspects of
this process such as developing a
general rebate allocation method and
general approach to systems changes
would provide economies of scale. In
addition, since some of these same
entities will likely be developing

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
systems to track costs and allocate
rebates for both the Medicare retiree
drug subsidy and the Medicare Part D
program, we believe it is likely that
there may be some overlap in the initial
development phases of this work for
some of these entities that may provide
additional economies of scale.
In the initial year, we estimate that
plan sponsors will incur costs equal to
about 0.8 percent of their expected
subsidy payments due to the fixed costs
associated with developing
methodologies and modifying systems
to generate the required cost data and
allocate rebates. As noted previously,
we assume a relatively low amount of
cost per plan sponsor because we
anticipate that entities that work with
group health plans (such as insurers,
PBMs, actuarial firms, and employee
benefits consultants) will spread the
fixed costs associated with this work
across many clients. With respect to
costs associated with developing the
infrastructure to provide a monthly
enrollment update, we believe that the
systems and procedures needed to do
this would have already been developed
as part of the plans sponsors work
identifying qualified retirees during the
initial application process, and
consequently, those costs have been
included in our prior cost estimate in
that area. In terms of the costs
associated with generating the required
cost data and enrollment data (once the
systems have been developed and
tested), we assume that the average
number of hours of staff time involved
in submitting the drug cost data and
enrollment data will range from 12
hours (for a very small firm that we
assume submits cost data annually) to
56 (for a very large firm that we assume
submits cost data monthly). Based on
these assumptions and taking into
account the time involved for firms of
different sizes, we estimate that the cost
associated with submitting drug cost
data and enrollment data would on
average be in the range of about 0.9
percent of the value of the retiree
subsidy.
In addition to data reporting,
employers that receive the subsidy will
also be required to retain data and
records for six years. For the purpose of
this analysis, we assume that the time
involved in record retention would vary
by firm size, with the average time
ranging from 4 hours for the smallest
firms to 20 hours for the largest firms.
Based on these assumptions and taking
into account the varied time involved
across firms of different sizes, we
estimate that on average the record
retention would be in the range of about
0.4 percent of the value of the subsidy.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

c. Conclusion
Based on our analyses, we estimate
that the administrative costs associated
with obtaining the retiree subsidy will
represent on average in the range of
about 6.8 percent of the value of the
subsidy in 2006 and are expected to
decline significantly in subsequent
years. After the first year, we believe
these costs will decline as the initial
work associated with identifying the
eligible population will have been
accomplished and as employers/unions
and their agents gain more experience
with the program.
J. Medigap Provisions
The MMA prohibits Medigap insurers
from selling new Medigap policies that
cover prescription drugs after December
31, 2005 and prohibits the renewal of
existing Medigap policies with drug
coverage for beneficiaries who enroll in
Medicare Part D. Part D enrollees with
current Medigap drug coverage have the
choice of renewing their existing
Medigap policy without drug coverage
or buying certain other Medigap plans
that do not have drug coverage if they
enroll in a Part D plan in the initial
enrollment period. We emphasize that
the MMA itself directly restructures the
role of Medigap insurance, and that it is
not the result of this rulemaking.
We estimate that about 1.9 million
beneficiaries would be enrolled in
Medigap plans with drug coverage in
2006, absent the law change. As
discussed elsewhere in this analysis, we
estimate that the vast majority of these
beneficiaries will enroll in Medicare
Part D. However, we note that these
estimates do not take into account the
possibility that a small portion of
beneficiaries with pre-standardized
Medigap plans may have creditable drug
coverage. To the extent that such
situations exist and beneficiaries, who
have had these policies for a long period
of time (that is, prior to standardization
in the early 1990s), choose to remain in
them, our estimates of the number of
beneficiaries shifting from Medigap
drug coverage to Medicare Part D may
be slightly overstated.
As a result of the statutory prohibition
on the sale of Medigap policies with
drug coverage to Part D enrollees, we
expect these beneficiaries will move
from Medigap policies that contain
prescription drug coverage to Medigap
policies that do not contain such
coverage. We expect that the policies
without drug coverage will have lower
premiums. We estimate that the
resulting reduction in Medigap insurers
revenues associated with the MMA
prohibition on the sale or renewal of
policies with drug coverage would be
approximately $2.4 billion in 2006, $2.5

PO 00000

Frm 00305

Fmt 4701

Sfmt 4700

4497

billion in 2007, $2.7 billion in 2008,
$2.9 billion in 2009, and $3.1 billion in
2010. We note, however, that some
Medigap insurers may choose to enter
the PDP or MA-PD market and offer
those products. As discussed elsewhere
in the impact analysis, the Medicare
prescription drug benefit is subsidized
and expected to attract substantial
enrollment, which may provide new
business opportunities for Medigap
insurers. In addition, we believe that the
movement of beneficiaries from
Medigap drug coverage to Medicare Part
D will generate substantial savings for
these beneficiaries on prescription drug
costs. The standard Medicare Part D
benefit provides a 75 percent
government-subsidized benefit,
catastrophic coverage, and cost savings
from discounts and other cost
management activities. It also is not
likely to suffer from the substantial
adverse selection, and resulting
increased premiums, that are seen in
Medigap plans with drug coverage.
Our projections of Medigap
enrollment in policies with drug
coverage and the premiums associated
with that drug coverage were developed
using data from NAIC on standardized
Medigap plans, and information
gathered by a CMS contractor on prestandardized Medigap plans and waiver
State plans. Our current estimates of the
revenue impact on Medigap insurers are
slightly lower than those presented in
the proposed rule because the analysis
assumes a slightly lower rate of
enrollment in Medicare Part D. While
our estimates do not take into account
standalone Medigap drug policies, these
policies represent substantially less than
1 percent of the Medigap market and
would not affect the estimates.
K. Small Business Analysis
The Regulatory Flexibility Act (RFA)
requires agencies to determine whether
a rule will have a ‘‘significant economic
impact on a substantial number of small
entities.’’
If a rule is expected to have a
significant economic impact on a
substantial number of small entities the
RFA requires that a Regulatory
Flexibility Analysis be performed.
Under the RFA, a ‘‘small entity’’ is
defined as a small business (as
determined by the Small Business
Administration (SBA)), a non-profit
entity of any size that is not dominant
in its field, or a small government
jurisdiction. HHS uses as its measure of
significant economic impact on a
substantial number of small entities a
change in revenues of more than 3 to 5
percent.

E:\FR\FM\28JAR2.SGM

28JAR2

4498

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

With respect to the Medicare
prescription drug benefit and retiree
drug subsidy, there are four areas that
we believe merit discussion related to
small business impacts: (1) retail
pharmacies, (2) long-term care
pharmacies,(3) insurers and PBMs, and
(4) employers. We anticipate that the
retail pharmacy industry, which is
comprised of both chains and a large
number of independent pharmacies,
will play a critical role in the Medicare
drug benefit as it furnishes prescription
medicines and pharmacy services to
beneficiaries enrolled in Medicare Part
D. While the Medicare prescription drug
benefit is expected to have several
effects on retail pharmacy revenues,
both positive and negative, our estimate
is that the impact on the overall retail
pharmacy industry, including small
pharmacies, generally will be positive.
In addition to retail pharmacies, longterm care pharmacies will play an
important role in the Medicare Part D
drug benefit. The long-term care (LTC)
pharmacy industry is dominated by four
large corporations. Because of
significant data limitations related to the
remainder of the market, we are unable
to predict with certainty either the
presence or absence of ‘‘a significant
economic impact on a substantial
number’’ of small LTC pharmacies. We
believe that a more competitive market
under Medicare Part D will reward LTC
pharmacies offering the lowest prices
and highest quality service; it may also
open the door for new entrants into the
market as LTC facilities restructure their
existing contracts with LTC pharmacies.
We anticipate that there may be changes
in market share among the pharmacies
that service LTC facilities. The
competitive results we expect are likely
to impact many small LTC pharmacies
positively, while some will likely
experience a negative effect. This
changing market will be the result of the
competitive situation under Medicare
Part D.
Since PDPs and MA-PDs are the
principal vehicles through which the
Medicare prescription drug benefit is
administered, we also examine whether
there are any small business impacts on
the types of businesses expected to
apply to be prescription drug plans—
that is, insurers and PBMs. The effects
of the statute and regulation
promulgating the Medicare Part D
program would increase drug utilization
and thus be favorable to many insurers
and PBMs. Furthermore, in considering
how the regulations could be made
more flexible, we have analyzed the
regulatory provisions of this rule over
which we have discretion and
concluded that they have little overall

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

effect on the insurance and PBM
industry, and certainly not a significant
adverse impact.
In the case of the small employers
who continue to provide qualified
prescription drug coverage for their
retirees, we estimate that savings
obtained from the Medicare retiree drug
subsidy will greatly exceed the
employer’s administrative costs
associated with obtaining the subsidy,
and thus the result of the retiree drug
subsidy provision is a net positive
impact. We would like to make
participation in the retiree drug subsidy
program as simple as possible for small
entities. As discussed elsewhere in the
preamble we have made the retiree drug
subsidy as flexible as possible for
employers by giving them the option to
use either a calendar year or plan year
cycle for purposes of obtaining the
retiree subsidy, and to elect the payment
frequency (that is, monthly, quarterly, or
annually) that best meets their needs.
For example, small employers may find
receiving payment only on an annual
basis as the least burdensome approach
given the size of their retiree population
and associated Medicare retiree
prescription drug payments, and our
final rule provides for this option.
While we believe that we could
certify that this rule will not have a
significant economic impact on a
substantial number of small retail
pharmacies, employers, or insurers/
PBMs, we provide a Regulatory
Flexibility Analysis for each. In
addition, since we are unable to predict
with certainty either the presence or
absence of a significant economic
impact on a substantial number of small
long-term care pharmacies, we also
provide an analysis for these entities.
In addition, in accordance with
Section 1102(b) of the Social Security
Act, we also address whether this rule
will have an impact on the operations
of small rural hospitals.
1. Retail pharmacies
The RFA requires us to determine
whether this rule will have a significant
economic impact on a substantial
number of small retail pharmacies. SBA
considers pharmacies with firm
revenues of less than $6 million to be
small businesses. The 1997 Economic
Census (the latest available detailed
data) indicates that there were about
21,000 firms operating about 41,000
retail pharmacies and drug store
establishments (NAICS code 44661)
continuously through 1997. Of these
firms, about 20,000 had revenues under
$5 million (which was the small
business size standard in 1997) and
operated a total of about 21,000
establishments. Since over 95 percent of

PO 00000

Frm 00306

Fmt 4701

Sfmt 4700

retail pharmacy firms are small
businesses (as defined by the SBA size
standards), we do expect that the
statutorily-created Medicare
prescription drug benefit will have some
effect on a substantial number of small
retail pharmacies. However, we estimate
that overall the revenue effect on the
retail pharmacy industry, including
small pharmacies, will generally be
positive.
We anticipate that, although the
Medicare prescription drug benefit will
lead to both revenue increases and
decreases for retail pharmacies, the
increase in revenues is estimated to
more than offset the decrease in
revenues. First, we expect that the vast
majority of beneficiaries currently
without prescription drug coverage will
choose to enroll in Medicare Part D. The
extension of drug coverage to these
individuals, and the resulting lower out­
of-pocket costs they face when
purchasing prescription drugs, is
expected to lead to higher drug
utilization and total expenditures, and
consequently higher revenues for retail
pharmacies. At the same time, some of
these beneficiaries without prior drug
coverage, as well as some beneficiaries
with Medigap drug coverage, would be
expected to realize new pharmacy
discounts under Medicare Part D that
they otherwise would not obtain. We
note that the Medicare prescription drug
benefit would not lead to any additional
pharmacy discounts for the majority of
beneficiaries who currently have drug
coverage as they already obtain
pharmacy discounts through their
current insurers (for example, employersponsored health plans, Medicare
Advantage plans, and State plans). In
addition, we have examined the
potential for increased use of mail order
pharmacies among some beneficiaries,
and its potential impact on retail
pharmacies. As described in more detail
in the subsequent methodological
discussion, we estimate that the
complex set of countervailing effects of
increased utilization and new pharmacy
discounts and possibly new use of mail
order pharmacies among some
beneficiaries would result in a net
increase in retail pharmacy revenues
ranging from a lower bound of 1.5
percent to an upper bound of 2.7
percent. This estimated increase in
retail pharmacy revenues will be
partially offset by a reduction in retail
pharmacy revenues for dual eligibles as
discussed subsequently.
Since State Medicaid programs
typically pay higher reimbursement
rates to retail pharmacies than private
sector insurers, we expect that retail
pharmacies would experience some

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
reduction in revenues due to the
movement of full-benefit dual eligibles
from Medicaid drug coverage to
Medicare drug coverage (through PDPs
and MA-PDs). As discussed in more
detail subsequently, our upper bound
estimate of the average reduction in
retail pharmacy revenues that could
result from full-benefit dual eligibles
receiving drug coverage from Medicare
is 1.0 percent. We believe this is an
overestimate of the revenue reduction
because it does not take into account the
effect of the Federal Upper Payment
Limit on reducing Medicaid
reimbursement rates for many multisource drugs. Also, to the extent that a
State Medicaid program has adopted
managed care arrangements to lower the
cost of drugs for dual eligibles, our
estimate of the revenue impact of
pharmacy reimbursement changes for
full-benefit dual eligibles would be
overstated.
Considering together the effect of
increased utilization, new pharmacy
discounts and possibly new use of mail
order pharmacies among some
beneficiaries, and reimbursement
changes for full-benefit dual eligibles,
we estimate that retail pharmacy
revenues would experience a net
increase ranging from 0.5 percent to 1.6
percent, as a result of the Medicare
prescription drug benefit. Furthermore,
while we are not able to provide a
quantitative estimate at this time, we
expect that retail pharmacies may
realize additional revenues from the
MMA requirement that PDPs and MAPDs offer medication therapy
management programs to targeted
enrollees, which may be furnished by
retail pharmacists. Our estimates also do
not take into account that increased use
of prescription drugs resulting from the
Medicare drug benefit may lead to
increased foot traffic in retail
pharmacies and increased sales for
pharmacies’ other goods in addition to
prescription medicines.
We note that our estimate of the
overall impact on small retail
pharmacies represents the average
effect. We recognize that the effect on
any specific retail pharmacy will likely
vary to some extent around the average.
While we have estimated that the
average effect on small retail pharmacies
would range from 0.5 percent to 1.6
percent, it is possible that some
individual retail pharmacies could
experience smaller positive effects and
even in some cases negative revenue
effects. While it is possible that a
specific retail pharmacy because of
unique circumstances could experience
a negative revenue impact, we believe
that this will generally be uncommon.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

While we cannot predict with full
certainty the dynamic effects of this new
program for individual pharmacies, we
will monitor program and plan
performance related to beneficiary
access and periodically solicit views on
ways we can improve the program.
It is important to note that our
estimates of the revenue effect of
Medicare Part D on retail pharmacies
differ slightly from those presented in
the proposed rule. We have revised our
analysis to reflect the slightly lower
uptake assumption for Medicare Part D
assumed throughout the final rule
impact analysis. Because retail
pharmacies are estimated to experience
increased revenues due to the increased
utilization of drugs among beneficiaries
who gain drug coverage under Medicare
Part D, our assumption of slightly lower
enrollment in Medicare Part D results in
our finding a slightly smaller positive
revenue impact on retail pharmacies. In
the proposed rule, we estimated that the
average impact of Medicare Part D on
retail pharmacies would be a revenue
increase of 0.6 percent to 1.9 percent.
Due to our revised Part D uptake
assumptions, we now estimate that the
average impact of Medicare Part D on
retail pharmacies will be a revenue
increase of 0.5 to 1.6 percent.
Comment: In the proposed rule, we
sought comments on several issues
related to small pharmacies, including
comments on our conclusion that retail
pharmacy revenues would be positively
impacted by Medicare Part D, comments
and data related to the distributional
impact of Medicare Part D on small
retail pharmacies, and comments on any
aspect of the rule that may affect
adversely affect pharmacies of any size.
We received several comments that
questioned our conclusion that
Medicare Part D would have a positive
revenue impact on small retail
pharmacies. One commenter asserted
that the proposed rule’s analysis
overstated the degree of certainty about
the revenue impact on retail pharmacies
and failed to acknowledge that some
retail pharmacies may lose revenue. The
commenter also asserted that the impact
on retail pharmacies would depend on
the degree to which its business model
is based on prescription drug sales, the
proportion of its customer base that is
made up of Medicare beneficiaries and
dual eligibles, and whether the
pharmacy is preferred or non-preferred.
This commenter also took issue with the
assertion that small retail pharmacies
will share in the positive revenue effects
of Medicare Part D because the
commenter claimed that the any willing
pharmacy provision was of limited
effectiveness due to the preferred

PO 00000

Frm 00307

Fmt 4701

Sfmt 4700

4499

pharmacy provisions, the special
provisions for MA-PD plans that own
their own pharmacies to meet network
adequacy standards, and the provisions
for Part D plans to meet network
adequacy standards through
accreditation from a Medicare-approved
accrediting organization.
We also received several comments
that asserted that small retail
pharmacies and in some cases regional
chains would be hurt by the preferred
pharmacy provision because they
cannot collectively negotiate contracts
with plans. The commenters asserted
that plans could designate large retail
pharmacy chains as preferred, and leave
out small pharmacies. The commenters
claimed that even if small retail
pharmacies are allowed access to
preferred pharmacy networks, if the fees
negotiated by the large corporations are
very low, smaller pharmacies can not
afford to participate. Another
commenter wanted us to mandate that
plans solicit inner city and rural
pharmacies that meet SBA small
business standard for their pharmacy
network and give them access to any
terms that the plan offers to a subset of
pharmacies.
A number of commenters asserted
that small, independent, or rural
pharmacies would be hurt unless steps
were taken to avert plans from steering
beneficiaries to mail order, implement
TRICARE standards at a smaller
geographic level (many urged
implementation at the local level, some
supported the State level), eliminate the
preferred provider provisions, and
provide guidelines for plans on
dispensing fees. One commenter wanted
dispensing fees for non-profit entities to
reflect their preferred acquisition costs,
arguing that without this Medicare
would be assisting tax-exempt non­
profit competitors of small business
pharmacies.
Response: Our analysis estimated that
on average retail pharmacy revenues
will increase by 0.5 percent to 1.6
percent as a result of Medicare Part D.
We believe these estimates are
conservative because they do not take
into account the effect of the Federal
Upper Payment limit on current
Medicaid reimbursement, the additional
revenues that retail pharmacies are
likely to receive from medication
therapy management, and the additional
revenues that retail pharmacies that sell
non-prescription drug products will
gain from additional foot traffic.
As noted in the proposed rule, we
recognize that our estimates represent
an average impact and that the effect on
individual retail pharmacies will vary
around this average. While we believe

E:\FR\FM\28JAR2.SGM

28JAR2

4500

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

that we have conservatively estimated
an average revenue increase ranging
from 0.5 percent to 1.6 percent, it is
possible that some individual retail
pharmacies could experience smaller
positive effects and even in some cases
negative revenue impacts, while others
may experience larger positive effects.
While a specific retail pharmacy
because of its individual circumstances
could experience a negative revenue
impact we believe this will generally be
uncommon for several reasons.
While we agree with the commenter
that retail pharmacies with a
disproportionate customer base made
up of Medicare beneficiaries and dual
eligibles will be more heavily impacted
by Medicare Part D, we believe this is
unlikely to translate into a negative
impact for retail pharmacies. The effect
of Medicare Part D on retail pharmacy
revenues is largely driven by increased
utilization of drugs among beneficiaries
without prior drug coverage and
reduced revenues for beneficiaries who
are dual eligibles (as well as increased
revenues from medication therapy
management for targeted beneficiaries
with chronic illnesses, which is not
reflected in our estimates). If a retail
pharmacy had an unrepresentative
customer base, with substantially more
dual eligibles and fewer uninsured
beneficiaries than average, then it is
possible that the pharmacy might
experience a negative revenue impact
from Medicare Part D. However, as
mentioned in the proposed rule, we
believe it is likely that retail pharmacies
that serve large populations of dual
eligibles will be located in low-income
areas that also have a large population
of beneficiaries without prior drug
coverage, and consequently, larger
revenue declines associated dual
eligibles would be offset by larger
revenue increases associated with
beneficiaries that lacked prior drug
coverage. We sought comment on this in
the proposed rule and received no
specific data or information on this
issue.
We also agree that Medicare Part D
will generally have a greater impact on
those retail pharmacies that depend on
prescription drug revenues for a larger
portion of their sales. We note, however,
that since the average impact on retail
pharmacies’ prescription drug revenues
is estimated to be positive, the impact
on retail pharmacies’ overall revenues
would also be expected to be positive
regardless of the extent to which a
pharmacy relies on prescription drug
revenues.
A number of commenters voiced
concern that the preferred pharmacy
provision would disadvantage small

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

retail pharmacies. As discussed in the
preamble, the preferred pharmacy
provision is stipulated by statute. This
provision would allow plans the option
of offering differential cost-sharing in
preferred versus non-preferred
pharmacies provided that this does not
increase government costs. While we
acknowledge that preferred pharmacies
may have some competitive advantage
over non-preferred pharmacies, we
believe a number of factors mitigate this.
Importantly, our policy decision in the
final rule to strengthen the network
adequacy requirements by
implementing the TRICARE access
standard at the State (rather than
regional) level provides pharmacies
with more leverage in negotiating with
Part D plans. In addition, the final rule
requirement that plans offer reasonable
and relevant standard terms and
conditions for network participation to
all similarly situated pharmacies
promotes retail pharmacy access to Part
D networks. In addition, the estimated
11 million Part D low-income subsidy
enrollees—which account for more than
one-third of all Part D enrollees in
2006—would not face a difference in
cost-sharing between preferred and nonpreferred pharmacies because of the
nominal cost-sharing levels guaranteed
by the low-income subsidy. Also, as
indicated in the preamble, plans cannot
use the preferred pharmacy provision in
a discriminatory manner, for example
related to rural areas. Finally, the
statutory requirement that any
differential cost-sharing not effect the
Government cost when combined with
the final rule requirement that plans
offer standard terms and conditions for
participation to any willing pharmacy,
we believe mitigates against large
differentials in cost sharing between
preferred and non-preferred pharmacies.
With respect to the commenter
requesting that we require plans to offer
preferred terms to small pharmacies in
rural and inner city areas, we believe
that we have used the available
statutory authority to the fullest extent
possible to promote the participation of
small pharmacies. We have done this
through our requirement that plans offer
reasonable and relevant standard terms
and conditions for network
participation. We also modified our
access standard to be measured on a
State basis rather than a regional basis,
which necessitates plans providing
adequate access to rural areas and
strengthens pharmacies bargaining
power.
We disagree with the comment that
allowing special network adequacy
standards for MA-PD plans that provide
retail prescription drugs through

PO 00000

Frm 00308

Fmt 4701

Sfmt 4700

pharmacies owned by the plan would
impact retail pharmacies negatively, as
we do not think that these types of
arrangements are very common. We also
believe that the provision that Part D
plans could meet the network adequacy
standards through accreditation from a
Medicare-approved accrediting body,
would not in any way jeopardize
network adequacy or retail pharmacies’
ability to participate in networks. As
discussed in the preamble, the
accreditation standards used by the
organizations would have to be
determined by CMS to be no less
stringent than our own requirements
and we would retain the authority to
initiate enforcement action against any
Part D plan sponsor that we determine,
on the basis of our own survey or the
results of the accreditation survey, no
longer meets the Medicare requirements
with regard to network adequacy.
With respect to mail order, as
discussed in the preamble, the statute
allows plans to offer lower cost-sharing
at preferred pharmacies, including mail
order pharmacies. Consequently, we
cannot, as some commenters urged,
require plans to offer similar
coinsurance in both retail and mail
order settings. However, this is similar
to what currently occurs in the
commercial insurance market today. We
have included in our impact estimates
the effect of beneficiaries using mail
order at the same rate as individuals in
the commercial market. Even taking into
account this possible increased use of
mail order among beneficiaries, our
analysis finds an overall positive impact
of Medicare Part D on retail pharmacy
revenues. In addition, there are some
aspects of Medicare Part D, which are
not as typical of the commercial market,
which put retail pharmacies on a more
level playing field with mail order. As
noted in the proposed rule, the nearly
11 million beneficiaries who are
estimated to enroll in the low-income
subsidy face nominal cost-sharing, and
consequently we believe there will be
little, if any, difference in these
beneficiaries’ out-of-pocket costs
between retail and mail order
pharmacies. Our regulation also requires
that plans allow retail pharmacies to
dispense the same quantity of a
prescription (for example, a 90-day
supply) as mail order pharmacies,
provided it is allowed by State
pharmacy law. Also under Medicare
Part D, plans are required to have
medication therapy management
programs which represent an additional
service that pharmacists will be able to
provide and receive reimbursement.
As noted previously, a number of
commenters expressed concern that

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
dispensing fees to retail pharmacies may
not be adequate and urged us to provide
guidance to Part D plans to ensure
adequate dispensing fees, including one
commenter who requested that
dispensing fees for non-profit
pharmacies reflect their preferred
acquisition costs so as to not to
disadvantage for-profit pharmacies that
compete with these entities. Given
plans’ need to secure a network of
providers (especially in light of the final
rule decision to strengthen the network
adequacy standards by implementing
the TRICARE standard at the State,
rather than regional, level), we believe
plans will have every incentive to
adequately reimburse retail pharmacies
for the costs involved with providing
covered Part D drugs to plan enrollees.
Comment: One commenter stated that
retail pharmacies will receive additional
revenues from medication therapy
management and fees paid by plans for
providing drug utilization review and
quality assurance. Another commenter
wrote that the lack of detail in the
proposed rule on medication therapy
management makes it difficult to
estimate its economic impact.
Response: While it is difficult to
quantify the revenue impact on retail
pharmacies of medication therapy
management at this time, we believe, as
one of the commenters indicates, that
plan payments to pharmacies for
medication therapy management will
generate additional retail pharmacy
revenues. As noted elsewhere, the
positive revenue effect from these types
of payments to retail pharmacies is not
included in our impact estimates,
making our estimate of a positive
revenue impact on retail pharmacies
conservative.
Comment: One commenter asserted
that additional foot traffic in retail
pharmacies would not offset what it
claimed was an adverse impact of
Medicare Part D on retail pharmacies
because more than 90 percent of small
retail pharmacy revenues are derived
from prescription drugs.
Response: Our analysis in the
proposed rule found that on average
retail pharmacy revenues would
increase as a result of Medicare Part D
because the increased utilization of
prescription drugs associated with
Medicare beneficiaries acquiring drug
coverage is estimated to more than offset
decreased revenues from new pharmacy
discounts and new use of mail order
among some beneficiaries. We indicated
in the proposed rule that our estimate of
the revenue impact on retail pharmacies
was conservative since it did not take
into account several issues, including
the possibility that pharmacy revenues

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

may increase to some extent due to
additional foot traffic generating
increased sales of non-prescription drug
products for pharmacies. We agree with
the commenter that small retail
pharmacies typically derive more of
their revenues from prescription drugs
than large pharmacies. Consequently,
while small retail pharmacies would
likely experience some increase in their
non-drug revenues due to additional
foot traffic, the increase would be less
significant for small pharmacies than
large pharmacies. However, since our
revenue estimates conservatively
assume no revenue increase resulting
from additional foot traffic, our estimate
of the average revenue impact on retail
pharmacies is unaffected by this issue.
Comment: One pharmacy association
commenter criticized our definition of
significant economic impact as a
revenue impact of 3 to 5 percent. The
commenter claimed that this does not
take into account pharmacy profit
margins, which they assert have ranged
in past decade from 2.9 percent to 3.8
percent (on a net, pre-tax basis).
Response: HHS uses revenues rather
than profit margins to estimate the
economic impact of a rule on small
entities because in our experience
reliable data on profit margins are very
difficult to obtain, while reliable data on
revenues are much more readily
available and straightforward.
One example of the difficulties in
obtaining reliable profit margin data and
in how to interpret those data in the
case of small businesses relates to how
owners’ salaries are treated. Profit
margin estimates can vary substantially
depending on how one considers the
owner’s salary relative to the profits of
the business. For example, a 2002 study
on the pharmacy industry conducted by
Booz Allen Hamilton for us cites data
from the National Community
Pharmacist Association (NCPA), which
indicate that independent retail
pharmacies had average profit margins,
in 2000, of nearly 8 percent when
owners’ salaries were included and
about 3 percent when owners’ salaries
were excluded. Furthermore, when the
Internal Revenue Service (IRS)
determines income tax liability for sole
proprietorships, it considers the
businesses’ incomes to be profits plus
the owners’ salaries. In the case of
pharmacies and drug stores, IRS data on
sole proprietorships show fairly similar
profit margin levels with NCPA—about
7 percent including owners’ salaries in
the late 1990s. Thus, if profit margins
were used to determine the economic
impact of rules on small businesses,
how the owners’ salaries are treated
could significantly alter findings.

PO 00000

Frm 00309

Fmt 4701

Sfmt 4700

4501

Furthermore, data are generally not
available to separate the portion of an
owner’s salary that compensates for
labor versus the portion that reflects
profit taking in the form of salary, which
makes developing an accurate estimate
of small businesses’ profit margins very
difficult.
Even if these difficulties were not
present, changes in sales levels do not
translate directly into proportional
changes in profits. One commenter,
discussed later in this analysis, claims
that higher sales levels can reduce
profits. In fact, retailers have many
possible responses to changes in their
sales levels in terms of management,
staffing, inventory levels, and other
aspects of their business models, and
which responses they choose are likely
to determine whether, and to what
extent, profits rise or fall. We have no
way to predict these responses’ precise
effects on profits, but of course would
expect decisions to be profit
maximizing.
Regardless of whether the HHS
standard for significant economic
impact focuses on revenues rather than
profit margins, as stated elsewhere in
the preamble, we have taken a number
of steps to mitigate the financial impact
on small retail pharmacies and drug
stores.
Comment: One commenter asserted
that the regulatory impact analysis
should estimate collectively the effect of
both the implementation of Medicare
Part D and changes in Medicare Part B
on pharmacies.
Response: Changes to Medicare Part B
are not the subject of this rule, and as
such are not within the scope of this
regulatory impact analysis.
a. Expansion of Drug Coverage and
Increased Access to Pharmacy Discounts
Among Beneficiaries Previously Lacking
Such Coverage or Discounts
A substantial portion of beneficiaries
(about 24 percent as of 2001) lack drug
coverage. As discussed in Section E, we
project that generally 95 percent of
beneficiaries without drug coverage will
enroll in the Medicare drug benefit
(with somewhat lower uptake—71
percent—assumed among beneficiaries
with drug spending in the lowest
quintile). The expansion of drug
coverage to these individuals is likely to
have countervailing effects on pharmacy
revenues. First, it is likely to lead to
increased drug utilization and spending
among beneficiaries without prior drug
coverage, and thus increased pharmacy
revenues. Second, it is likely to lead to
increased access to pharmacy discounts
for some beneficiaries who previously
did not receive such discounts
(specifically, many beneficiaries

E:\FR\FM\28JAR2.SGM

28JAR2

4502

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

without drug coverage and beneficiaries
with Medigap drug coverage), and thus
decreased revenues for pharmacies.
Because many beneficiaries that
currently have prescription drug
coverage (for example, those in
employer sponsored retiree health plans
or Medicare Advantage plans) already
receive pharmacy discounts through
those insurers, we do not expect the
Medicare prescription drug benefit to
generate any new pharmacy discounts
for these beneficiaries. In addition, it is
possible that the Medicare drug benefit
may lead to new use of mail order
pharmacies among beneficiaries without
prior drug coverage and beneficiaries
with Medigap drug coverage, potentially
having some effect on retail pharmacy
revenues. Overall, we estimate that
increased utilization for beneficiaries
without prior drug coverage and new
pharmacy discounts and possible new
use of mail order pharmacies among
some beneficiaries will result in a net
positive revenue impact for retail
pharmacies.
Medicare beneficiaries without prior
drug coverage who enroll in the
Medicare drug benefit will face a
substantial reduction in out-of-pocket
costs for prescription medicines, and
consequently we expect that their drug
utilization and expenditures will
increase. Beneficiaries with drug
coverage fill more prescriptions and
have higher total drug spending than
beneficiaries without drug coverage.
Based on 2001 MCBS data, beneficiaries
with drug coverage have average total
drug spending that is 109 percent
greater than beneficiaries without drug
coverage. These spending differences
hold true even among beneficiaries with
similar numbers of chronic conditions.
For example, average spending for
beneficiaries with drug coverage was
higher than for beneficiaries without
drug coverage among beneficiaries with
no chronic conditions (247 percent
higher), 1–2 chronic conditions (107
percent higher), 3–4 chronic conditions
(76 percent higher), and 5 or more
chronic conditions (53 percent higher).
Thus, we expect that the expansion of
drug coverage to beneficiaries who
previously did not have such coverage
will lead to increased drug utilization
and spending, and thus higher
pharmacy revenues. For the purpose of
this analysis, we assume that
beneficiaries without prior drug
coverage who enroll in the Medicare
drug benefit will experience a 76
percent increase in total drug spending.
We base this assumption on the fact that
most beneficiaries without drug
coverage fall into the category of having

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

1–2 chronic conditions or 3–4 chronic
conditions, and we have chosen the
more modest use difference seen in the
3–4 chronic condition group.
Furthermore, we believe that this is a
conservative assumption because the
average difference across the population
in drug spending for beneficiaries with
and without coverage is 109 percent.
Beneficiaries without drug coverage
whom we project would enroll in
Medicare Part D account for about 12
percent of all drug spending by
Medicare beneficiaries (based on 2001
MCBS data). If we assume that these
previously uninsured Part D enrollees
experience a 76 percent increase in drug
expenditures due to a use effect, this
would represent about an 8.9 percent
increase in total drug spending by
Medicare beneficiaries.
At the same time, to the extent that
beneficiaries without drug coverage did
not receive pharmacy discounts prior to
Medicare Part D, we would expect that
pharmacy discounts negotiated by PDPs
and MA-PDs could result in some
reduction in pharmacy revenues. While
the vast majority of beneficiaries who
currently have drug coverage are likely
to already be receiving pharmacy
discounts, and thus the Medicare drug
benefit would not result in any change
in pharmacy discounts for these
beneficiaries, this may not be the case
for beneficiaries without drug coverage.
As mentioned previously, the April
2000 HHS Report ‘‘Prescription Drug
Coverage, Spending, Utilization, and
Prices’’ found that on average
individuals with drug coverage paid a
15 percent lower price for prescription
drugs at the point of sale than
individuals without drug coverage. The
discount insured individuals receive at
the point of sale reflects a combination
of pharmacy and manufacturer
discounts. However, to take a
conservative approach, we assume that
Medicare Part D enrollees without prior
drug coverage realize 15 percent price
discounts at the point of sale, all of
which reflect pharmacy discounts. This
assumption is conservative not only
because it assumes that the entire 15
percent discount comes from
pharmacies, but also because some of
these beneficiaries are likely to have
received pharmacy discounts previously
through the Medicare drug discount
card, which began offering discounts in
June 2004 and which includes
substantial discounts from drug
manufacturers, and through senior
pharmacy discounts previously offered
by many pharmacies. Thus, our
assumption that all Part D enrollees
without prior drug coverage would

PO 00000

Frm 00310

Fmt 4701

Sfmt 4700

receive new pharmacy discounts of 15
percent under Medicare Part D
overstates the negative revenue impact
on pharmacies. With these beneficiaries
accounting for about 12 percent of all
drug spending by Medicare
beneficiaries, we estimate that
extending a 15 percent discount to these
beneficiaries would result in about a 1.8
percent decrease in total drug spending
by Medicare beneficiaries.
Another group of beneficiaries who
we believe may obtain new pharmacy
discounts under Medicare Part D are
beneficiaries with Medigap drug
coverage. Few Medigap plans actively
negotiate prescription drug discounts
for enrollees. Consequently, we assume
that all beneficiaries with previous
Medigap drug coverage who are
projected to enroll in Medicare Part D
obtain new pharmacy discounts. With
these enrollees accounting for about 4
percent of prescription drug spending
by all beneficiaries, we estimate that
extending pharmacy discounts to these
beneficiaries could result in about a 0.6
percent decline in total Medicare drug
spending by beneficiaries.
It is also possible that the Medicare
prescription drug benefit may result in
new use of mail order pharmacies by
some beneficiaries. We believe that the
new Medicare benefit is unlikely to
affect the use of mail order pharmacies
among beneficiaries currently with
employer sponsored or Medicare
Advantage drug coverage as mail order
is an option currently available to these
beneficiaries and the implementation of
Medicare Part D makes no changes in
this regard. We also believe that there is
likely to be no effect on mail order use
by beneficiaries who qualify for the lowincome subsidy because nominal cost
sharing exists regardless of where the
beneficiary purchases the prescriptions
(and as noted above, for those without
prior drug coverage or less generous
prior drug coverage, we expect that
these beneficiaries will fill significantly
more prescriptions). The two groups
where it is possible that mail order
usage may increase are beneficiaries
without prior drug coverage and
beneficiaries with Medigap drug
coverage. The effect of Medicare Part D
on mail order use by these beneficiaries,
however, is uncertain. For example,
Medicare Part D includes a provision
that allows retail pharmacies (subject to
State pharmacy laws) to provide a 90­
day supply, putting them on equal
footing with mail order pharmacies in
this regard.
To estimate the potential effect of new
mail order use among beneficiaries
without prior drug coverage and
beneficiaries with prior Medigap drug

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
coverage, we take the approach of
making estimates based on two alternate
assumptions. As a lower bound, we
assume that there is no additional mail
order use. As an upper bound, we
assume that the percent of beneficiaries
using mail order pharmacies among
these two groups of beneficiaries
increases to be similar to the rate of use
among beneficiaries with private
employer-based drug coverage. There is
limited publicly available data related to
mail order utilization. To supplement
publicly available data we tried to
obtain information from proprietary
sources to help inform our upper bound
estimates. For our upper bound
assumptions, we use data from the
Medical Expenditure Panel Survey
(MEPS) to assign higher rates of mail
order use (that is, the percentage of
population that fills at least one
prescription through mail order) to the
population that gains drug coverage and
to beneficiaries with prior Medigap drug
coverage. We also tried to obtain data on
the share of drug spending through mail
order pharmacies that occurs among
individuals who use these pharmacies.
However, we were unable to obtain this
type of information. We were able to
obtain some proprietary information
regarding the share of total plan
spending occurring through mail order
and retail pharmacies for a
commercially insured over 65
population. Using this information in
combination with the recognition that a
number of prescriptions are unlikely to
be filled through mail order (for
example such as antibiotics and pain
medication used to treat acute
conditions, or newly prescribed
medications), we developed an upper
bound assumption that as much as 50
percent of drug spending among new
users of mail order might occur through
mail order pharmacies. We do not
expect mail order use to approach this
level; we use it simply for purposes of
estimating the maximum potential
impact. Under this upper bound
assumption, we estimate that as a result
of mail order effects, aggregate Medicare
drug spending in retail pharmacies
could decrease by as much as 2.0
percent. Thus, based on our lower
bound and upper bound assumptions,
we estimate that possible new use of
mail order pharmacies among some
beneficiaries could result in a decrease
in retail pharmacy revenues of
somewhere between 0 to 2.0 percent. If
a shift in mail order use were to occur,
our prior estimates of utilization and
discount effects would be altered
slightly since they are based on the
assumption of no change in mail order

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

use. We estimate that under our upper
bound assumptions related to mail
order, our previous estimates of the
combined effect of utilization increases
and new pharmacy discounts for some
beneficiaries would need to be adjusted
downward by as much as 1.1 percentage
points. We note that even with these
adjustments based on a very high upper
bound assumption, the net effect for
retail pharmacies remains positive. In
the proposed rule, we requested
additional data that could help inform
our assumptions and analysis related to
new mail order use by beneficiaries
without prior drug coverage, but we did
not receive any comments providing
data on this issue.
Taken together, we estimate that the
effect of expanding access to
prescription drug coverage among
beneficiaries without prior drug
coverage and the effect of new
pharmacy discounts and possibly new
use of mail order pharmacies by some
beneficiaries will result in a net increase
in total prescription drug spending by
Medicare beneficiaries at retail
pharmacies of between 3.8 percent and
6.6 percent. We estimate that this would
represent an average increase in retail
pharmacy revenues of between 1.5
percent and 2.7 percent, as Medicare
beneficiaries account for about 40.5
percent of outpatient prescription drug
spending for the non-institutionalized
population according to 1999 MEPS
data (Stagnitti MN et al., AHRQ,
‘‘Outpatient Prescription Drug
Expenses, 1999’’, 2003). Furthermore,
while not quantifiable at this time, we
expect that pharmacies may realize
additional revenues from the MMA
requirement that PDPs and MA-PDs
offer medication therapy management
programs to targeted enrollees, which
may be furnished by pharmacists. In
addition, it is likely that increased use
of prescription drugs by Medicare
beneficiaries will lead to increased foot
traffic in pharmacies and increased
pharmacy revenues from nonpharmaceutical products as well.
b. Medicare’s Assumption of Drug
Coverage for Full-Benefit Dual Eligibles
Because State Medicaid programs
typically pay higher reimbursement
rates to pharmacies than private sector
insurers, the movement of full-benefit
dual eligibles from Medicaid drug
coverage to Medicare drug coverage
(through PDPs and MA-PDs) has
potential implications for pharmacy
revenues. Our upper bound estimate of
the average reduction in pharmacy
revenues that could result from fullbenefit dual eligibles receiving drug

PO 00000

Frm 00311

Fmt 4701

Sfmt 4700

4503

coverage from Medicare is 1.0 percent.12
We believe that this is an overestimate
because it does not take into account the
effect the Federal Upper Payment Limit
has in reducing Medicaid
reimbursement rates for multi-source
drugs with at least three generic
equivalents. Also, to the extent that a
State Medicaid program has adopted
managed care arrangements to lower the
cost of drugs for dual eligibles, our
estimate of the revenue impact of
pharmacy reimbursement changes for
full-benefit dual eligibles would be
overstated.
We conducted the following analysis
to estimate how the transfer of dualeligibles’ drug coverage from Medicaid
to Medicare would affect pharmacy
revenues. First, we developed an
estimate of the average Medicaid drug
reimbursement rate across States. To
begin, we considered how Medicaid
reimburses pharmacies for drugs.
Medicaid reimburses pharmacies for
drugs based on the estimated
acquisition costs (EAC) plus a
dispensing fee. There is variation across
States in how they define and the level
at which they set EAC and the
dispensing fee. The vast majority of
States define EAC as the average
wholesale price (AWP) less a certain
percentage discount, while a small
number define it as wholesale
acquisition cost (WAC) plus a certain
percentage or the lower of an AWPbased or WAC-based payment amount.
Dispensing fees also vary by State and
typically range from $3 to $5. Some
States use the same reimbursement
formula for brand and generic drugs,
while others institute a greater discount
off of AWP for generic drugs or a higher
dispensing fee for generic drugs, and in
some cases both. In addition, Medicaid
reimbursement rates for multi-source
drugs with 3 or more generic
equivalents are generally capped by the
Federal Upper Payment Limit.
Based on information on the Medicaid
EAC and dispensing fee for each State
for brand and generic drugs as of fourth
quarter 2004, we estimated the overall
drug reimbursement rate (EAC plus
dispensing fee) as a percent of AWP
separately for brand and generic drugs.
We did this by estimating the
dispensing fee as a percent of the
average AWP, using unpublished
12 This is slightly lower than our proposed rule
estimate of a 1.1 percent revenue effect because we
have updated our analysis to take into account the
most recently available Medicaid pharmacy
reimbursement rates. Because a few States have
reduced their current Medicaid pharmacy
reimbursement rates, the effect on pharmacy
revenues of shifting dual eligibles’ drug coverage
from Medicaid to Medicare is slightly less.

E:\FR\FM\28JAR2.SGM

28JAR2

4504

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

Express Scripts data on the average
AWP for brand drugs ($77.42) and
generic drugs ($32.57) in 2002.13 (It
should be noted that under this
methodology the total reimbursement
rate for generic drugs (including the
ingredient cost and the dispensing fee)
as a percent of AWP is much greater
than the reimbursement rate as a
percent of AWP for the ingredient cost
alone, because the dispensing fee
represents a fairly high percentage of
AWP for low cost generic drugs.) For
States that set EAC based on WAC
rather than AWP, we express their
reimbursement formula in AWP terms
by assuming that WAC is equivalent to
roughly 20 percent of AWP, based on
information about the typical
relationship between WAC and AWP in
the 2000 HHS Prescription Drug study.
After estimating an overall Medicaid
reimbursement amount for brand and
generic drugs for each State, we estimate
the weighted average reimbursement
rate across States, using the number of
full-benefit dual eligibles with drug
coverage in each State for weights.
Based on this method, we estimate that
average Medicaid reimbursement to
pharmacies (for ingredient cost and
dispensing fee combined) is roughly
equivalent to AWP minus 7 percent for
brand drugs and AWP for generic drugs.
It should be noted that this likely
overstates current Medicaid
reimbursement rates for generic drugs
because it does not take into account
that Medicaid reimbursement for multisource drugs with 3 or more generic
equivalents is generally capped by the
Federal upper payment limit.
We then estimated an average
Medicaid reimbursement rate across all
drugs (brand and generic) by weighting
the average reimbursement estimates for
brand and generic drugs by the percent
of Medicaid expenditures we assume
they comprise. According to a survey of
State Medicaid programs by the Kaiser
Family Foundation, States estimate that
80 percent of State Medicaid drug
expenditures are on brand drugs and 20
percent on generics. Using these figures
for weights, we estimate an overall
average Medicaid drug reimbursement
rate (including dispensing fee) of
roughly 5 percent off of AWP.
The revenue impact on pharmacies of
transitioning dual eligibles from
Medicaid to Medicare Part D is
13 These unpublished Express Scripts estimates of
average AWP for brand and generic drugs in 2002
reflect the average AWP for a 30-day equivalent
weighted by the number of scripts, based on
utilization data from a commercially insured
population age 65 and older, with employer
sponsored insurance and with an integrated benefit
(network and mail prescription coverage).

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

measured by taking pharmacies’ current
revenues for dual eligibles minus their
expected revenues for this population
under Medicare Part D. Consequently,
by overstating current Medicaid
pharmacy revenues, our analysis
overstates (rather than understates) the
adverse impact on pharmacies from
transitioning dual eligibles to Medicare
Part D.
Second, for the purpose of this
analysis, we make assumptions about
the average pharmacy reimbursement
rate for brand and generic drugs under
PDPs and MA-PDs. We base these
assumptions on available literature
about typical pharmacy reimbursement
rates under private sector insured
products. It must be noted that these
assumptions are not meant to convey
our expectation of the actual pharmacy
reimbursement rates negotiated by PDPs
and MA-PDs with pharmacies under the
Medicare drug. Instead, they are
assumptions made solely for this
regulatory flexibility analysis.
According to a survey sponsored by
Takeda Lilly of employer sponsored
insurance plans covering more than 17
million lives, the average
reimbursement for ingredient cost for a
brand drug in 2002 was about 14
percent off of AWP (Takeda, ‘‘The
Prescription Drug Benefit Cost and Plan
Design Survey Report,’’ 2003). In
addition, according to a report by
Express Scripts, there tends to be about
a three times greater discount off of
AWP for generic drug ingredient cost
than for brand drug ingredient cost
(Express Scripts, ‘‘Drug Trends 2002
Report,’’ June 2003). Based on these
studies, we assume reimbursement for
ingredient costs of 14 percent off of
AWP for brand drugs and 42 percent off
of AWP for generic drugs. In terms of
dispensing fees, the Novartis Pharmacy
Benefit Reports, which is a survey of
HMO plans, finds an average dispensing
fee of $1.79 for brand drugs and $2.08
for generic drugs as of 2002 (Novartis,
‘‘Pharmacy Benefit Report: Facts and
Figures,’’ 2003). The Takeda Lilly
survey of employer-sponsored plans
indicates an average dispensing fee of
$2.13 for brand and $2.22 for generic
drugs. For the purpose of this analysis,
we average the findings from the two
studies and assume a dispensing fee of
$1.96 for brand drugs and $2.15 for
generic.14 Similar to the Medicaid
reimbursement analysis, we estimate
14 There was a typographical error in the text of
the proposed rule describing our dispensing fee
assumption for generic drugs. Our model and
findings in the proposed rule were based on an
assumed generic dispensing fee of $2.15. The
proposed rule text should have read $2.15, not
$2.11.

PO 00000

Frm 00312

Fmt 4701

Sfmt 4700

these dispensing fees as a percent of
average AWP for brand and generic
drugs and then add them to our
ingredient cost reimbursement
assumptions to arrive at average
reimbursement estimates—11 percent
off of AWP for brand drugs and 35
percent off of AWP for generic drugs.
We then weight the average
reimbursement estimates for brand and
generic drugs by the percent of
expenditures they are assumed to
comprise to arrive at an overall average
reimbursement estimate (including
dispensing fee) of 16 percent off AWP
for all drugs.
Third, we estimated the share of
national retail prescription drug
spending accounted for by Medicaid
drug expenditures on dual eligibles.
According to a special analysis by the
Kaiser Commission on Medicaid and the
Uninsured, Medicaid prescription drug
spending on dual eligibles was $9.5
billion in 2000, including fee-for-service
and managed care and netting out
manufacturer rebates (Kaiser
Commission on Medicaid and the
Uninsured, ‘‘The Proposed Medicare
Prescription Drug Benefit: A Detailed
Review of Implications for Dual
Eligibles and Other Low-Income
Medicare Beneficiaries,’’ September
2003). In addition, national retail
prescription drug spending, net of
manufacturer rebates, was $121.5 billion
in 2000 according to National Health
Expenditures projections by our Office
of the Actuary. (http://
www.cms.hhs.gov/statistics/nhe/
projections–2003/t11.asp). Based on the
above figures, we estimate Medicaid
drug spending on dual eligibles
comprised about 7.8 percent of total
national retail prescription drug
spending net of rebates in 2000. While
this estimate is based on drug spending
adjusted for rebates, drug spending
without adjustments for rebates would
be a better measure of the actual amount
of revenues flowing through
pharmacies. Manufacturer rebates
typically occur on the back end between
manufacturers and third party insurers
and do not impact pharmacy revenues.
Therefore, we adjust our estimate to prerebate levels of drug spending using the
following method. We take national
retail prescription drug spending net of
rebates and inflate it based on our Office
of the Actuary’s estimate that national
retail prescription drug spending in
2000 would be 6 percent higher without
the adjustments for rebates. We also take
our estimate of Medicaid prescription
drug spending for dual eligibles and
inflate it based on information from the
Kaiser Study, which indicates that

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
rebates reduced Medicaid fee-for-service
drug spending in 2000 by an average of
about 19 percent. Absent information on
the percent of Medicaid drug spending
for dual eligibles that is under fee-for­
service versus managed care, we take an
extremely conservative approach and
inflate Medicaid drug spending to prerebate as though all spending had been
fee-for-service. It should be noted that
we strongly believe this overstates the
amount of Medicaid drug spending on
dual eligibles, and thus overstates any
negative revenue impact on pharmacies.
Based on the above, we estimate that
Medicaid drug spending on dual
eligibles is about 9.1 percent of total
national retail prescription drug
spending. Finally, we estimate the
potential impact on pharmacy revenues
of transferring responsibility for drug
coverage of full benefit dual eligibles
from Medicaid to Medicare.
Based on our previous estimates of
average pharmacy drug reimbursement
rates under Medicaid and private
insurers, we estimate that prescription
drug spending on dual eligibles would
account for about 8.1 percent of national
retail prescription drug spending if
drugs were reimbursed at rates typical
of private sector insurer rates rather
than Medicaid.15 Thus, our upper
bound estimate of the average reduction
in pharmacy revenues that could result
from full-benefit dual eligibles receiving
drug coverage from Medicare is about
1.0 percent. As mentioned previously,
we believe that this is an overestimate
of the impact on pharmacies because it
does not take into account existing
policies that reduce Medicaid
reimbursement rates such as the Federal
Upper Payment limit for multi-source
drugs with at least three generic
equivalents.
Comment: Another commenter
asserted that if pharmacy revenues
increase as predicted in the proposed
rule then pharmacies will lose money
because business expenses (more claims
transmissions, more inventory, higher
paychecks) will be more than 3 percent.
Response: Due to the expansion of
prescription drug coverage among
Medicare beneficiaries, prescription
drug utilization is expected to increase
moderately among beneficiaries, which
will result in more scripts being
dispensed by pharmacies. To
accommodate a modest increase in the
15 The 8.1 percent figure is computed by
multiplying our estimate of drug spending for dual
eligibles as a percent of NHE (9.1 percent) by our
estimate of pharmacy reimbursement rates typical
of private sector insurers (AWP–16 percent, or 84
percent of AWP) and dividing by our estimate of
average Medicaid pharmacy reimbursement (AWP­
5 percent, or 95 percent of AWP).

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

demand for prescription drugs,
pharmacies will turn over more
inventory to sell to beneficiaries and
may also, depending on their current
capacity, respond by increasing their
staff hours. Similarly, pharmacies are
likely to experience some increase in
the number of claims transmissions they
submit due to increased utilization of
drugs among beneficiaries and due to
the submission of claims transmissions
for beneficiaries with Medicare Part D
drug coverage who previously lacked
any coverage. Part D plans will be
paying pharmacies for the cost of
dispensing these drugs through fees
plans negotiate with pharmacies for
ingredient cost and dispensing. In
addition, some pharmacists may receive
additional payments from plans for
medication management services. We
believe that the need for plans to
maintain an adequate pharmacy
network provides a strong incentive for
plans to compensate pharmacies
adequately for their costs.
In addition to the increased claims
transmissions discussed above,
pharmacies may also have additional
claims transmissions for those Part D
enrollees who have supplemental drug
coverage (for example, from an
employer or SPAP) that is coordinated
with, but not integrated with, Medicare
Part D. Since it is unknown how
prevalent supplemental drug coverage
will be, and whether it will more
commonly take the form of enhanced
coverage that is integrated with Part D
or supplemental drug coverage that is
coordinated with Part D, it is difficult to
make an estimate of the additional
claims transmission volume that may be
generated. However, because of the
efficiency of arranging for additional
coverage through the PDP or MA-PD, we
think the incentive is to arrange for or
provide enhanced coverage rather than
utilize claims based coordination of
benefits. Furthermore, since claims
transmissions costs are generally a very
small fraction of the cost of dispensing
a prescription to a beneficiary, and even
smaller fraction of the average price of
a prescription, we believe that these
costs would not be substantial,
especially in comparison to the
additional pharmacies revenues
generated by Medicare Part D. In
addition, as discussed elsewhere, we
will be arranging for a TrOOP
facilitation process to minimize the
level of effort involved for pharmacies
in dealing with coverage that
supplement Medicare Part D.
Comment: One commenter voiced
concern about the private sector
dispensing estimates used in the impact
analysis, arguing that the generic fee

PO 00000

Frm 00313

Fmt 4701

Sfmt 4700

4505

was not sufficiently greater than the
brand fee to provide incentives for use
of generic drugs. In addition the
commenter asserted that these fees were
below a pharmacy’s average cost for
dispensing a prescription, which it
claimed was $7.50 to $8.00 depending
on the geographic location.
Response: We indicated in the
proposed rule that the assumptions we
made about the average pharmacy
reimbursement rate, including
dispensing fees, for brand and generic
drugs under PDPs and MA-PDs were not
meant to convey our expectation of the
actual pharmacy reimbursement rates
negotiated by PDPs and MA-PDs with
pharmacies. Instead, they were
assumptions made in order to estimate
the potential impact of Medicare Part D
on pharmacies for the purpose of a
regulatory flexibility analysis. These
assumptions were based on available
literature about typical pharmacy
reimbursement rates under private
sector insured products.
Dispensing fees paid to pharmacies
will depend on the outcome of the
negotiations between pharmacies and
plans. Given plans’ need to secure a
network of providers, we believe plans
will have every incentive to adequately
reimburse pharmacies for the costs
involved with providing covered Part D
drugs to plan enrollees. Furthermore, as
discussed in the preamble plans have
the flexibility to provide higher
dispensing fees for generic drugs to
encourage utilization if they wish to do
so.
Comment: One commenter asserted
that the analysis overstates the current
Medicaid revenues to pharmacies
because the commenter claims that 20
percent of all Medicaid prescriptions are
paid at the pharmacy’s usual and
customary rate, not the estimated
acquisition cost, and because there are
higher costs of business in Medicaid
that do not exist in private programs.
They assert that this means that the
transfer to Medicare Part D of the dual
eligibles could have a greater effect on
pharmacies than estimated.
Response: As discussed elsewhere, we
believe that our analysis overstates the
revenues pharmacies currently receive
from Medicaid because it does not take
into account the effect of the Federal
Upper Payment Limit in capping
Medicaid reimbursement for multisource drugs with 3 or more generic
equivalents. Due to data limitations, our
analysis also overstates current
pharmacy revenues from Medicaid
because we inflate Medicaid drug
spending for dual eligibles to pre-rebate
levels as though all spending had been
fee-for-service. In addition, to the extent

E:\FR\FM\28JAR2.SGM

28JAR2

4506

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

that Medicaid reimbursement is further
limited by pharmacies’ usual and
customary price, as the commenter
asserts, our estimates of current
pharmacy revenues from Medicaid
would be further overstated.
c. Overall Effect
Considering together the effect of
increased utilization, new pharmacy
discounts and possibly new use of mail
order pharmacies among some
beneficiaries, and reimbursement
changes for full-benefit dual eligibles,
we estimate that retail pharmacy
revenues would increase on average by
between 0.5 percent and 1.6 percent as
a result of the Medicare prescription
drug benefit. This is the result of an
increase in prescription drug revenues
ranging from 1.5 percent to 2.7 percent
due to the net effect of increased
utilization, new pharmacy discounts,
and possibly new use of mail order
pharmacies among some beneficiaries,
and a 1.0 percent decrease in pharmacy
revenues (upper bound estimate) due to
drug coverage for full-benefit dual
eligibles shifting from Medicaid to
Medicare.
In addition, we believe that these
estimates understate the degree to
which pharmacy revenues increase as a
result of the Medicare prescription drug
benefit for several reasons. Our estimate
of the revenue reduction resulting from
the transfer of drug coverage for full
benefit dual eligibles from Medicaid to
Medicare is likely to be overstated
because it does not take into account the
effect of the Medicaid upper payment
limit on reducing Medicaid
reimbursement rates for some multisource drugs. In addition to revenue
effects we have estimated, the Medicare
prescription drug benefit is likely to
provide other sources of revenue
increases for pharmacies; for example,
through targeted medication therapy
management programs under Medicare
Part D which may be furnished by
pharmacists, or through increased foot
traffic in pharmacies leading to
increased pharmacy sales of other goods
in addition to prescription medicines.
For these reasons, we estimate that the
Medicare prescription drug benefit will
have a positive revenue impact on the
pharmacy industry overall.
We believe that the program’s effect
on small pharmacies will also be
positive. We expect that small
pharmacies will participate in the
networks of Medicare Part D plans and
consequently will share in the positive
revenue impacts. Given the current
industry practice of broad pharmacy
networks and given Medicare Part D’s
any willing pharmacy provision, which
includes the requirement that plans

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

offer reasonable and relevant standard
terms and conditions for network
participation to all similarly situated
pharmacies, we anticipate that all
pharmacies that wish to participate in
Medicare Part D will be able do so.
Furthermore, we believe that the
strengthening of the network adequacy
standard in the final rule to be
implemented at the State level provides
pharmacies more bargaining leverage
with plans. For these reasons, we would
expect the great majority of small
business pharmacies to share in the
increased business created by the Part D
drug benefit.
d. Other Pharmacy Issues
Requirements related to reporting,
recordkeeping, and other compliance
activities for small pharmacies under
this program are minimal. The statute
requires that network pharmacies notify
a Part D enrollee at the point of sale of
the differential between the price of a
drug and the lowest priced generic drug
under the program that is
therapeutically equivalent and
bioequivalent and available at the
pharmacy. While it is possible that this
requirement could represent some
burden, we anticipate that the burden
would be at most marginal. The
pharmacy community routinely
indicates that it is common practice for
pharmacies to promote the use of
generic drugs. Thus, this requirement is
unlikely to represent a change in current
practice for most pharmacies. We
anticipate that the costs of the systems
infrastructure required to furnish this
pricing information will be borne by the
Part D plan. The only cost to pharmacies
would be the time involved in
conveying the information to the
beneficiary, which we anticipated
would be small.
2. Long-Term Care (LTC) Pharmacies
a. LTC Pharmacy Access
As discussed in subpart C of the
preamble, the Act provides that, in
establishing rules for convenient access
to network pharmacies, we may include
standards with respect to access to longterm care pharmacies for Part D
enrollees who reside in long-term care
facilities. As discussed previously in the
preamble, we believe that the Medicare
drug benefit can improve competition in
the long-term care pharmacy market,
while Medicare’s requirements for
participation preserve the relationships
and levels of service that long-term care
facilities now enjoy vis-a`-vis their
contracted long-term care pharmacies.
To that end, our final rule requires
that Part D plans offer standard
contracting terms and conditions for
long-term care pharmacies. In other
words, we are establishing a specific

PO 00000

Frm 00314

Fmt 4701

Sfmt 4700

‘‘any willing pharmacy’’ requirement for
long-term care pharmacies. Part D plans
would be expected to develop standard
contracting terms and conditions for
long-term care pharmacies, such that
any pharmacy in a service area could
become an eligible long-term care
pharmacy by certifying that it meets
certain performance and service criteria
for providing pharmacy services to longterm care facilities, which will reflect
widely used best practices and will be
detailed through guidance. Plans in a
region would be required to contract
with any willing long-term care
pharmacy in that region, provided those
pharmacies were able to reach
agreement with plans on all standard
contract terms and conditions—
including payment rates.
As discussed, we will require Part D
plans to demonstrate that they have
contracts with a sufficient number of
LTC pharmacies to ensure ‘‘convenient
access’’ to prescription drugs for
institutionalized beneficiaries within
the service area. As noted in the subpart
C preamble, we do not think we have
the statutory authority to establish
access requirements related to the
routine use of out-of-network
pharmacies. Thus, in the context of
beneficiaries residing in LTC facilities,
Part D plans will therefore have to
demonstrate that they have an adequate
plan network for beneficiaries who may
reside in LTC facilities. We would also
expect that LTC facilities, in choosing
LTC pharmacies, will want pharmacies
who are participating in all Part D plans
in which their residents are enrolled
within their area. We will provide more
detailed information in CMS guidance
regarding what constitutes ‘‘convenient
access,’’ but we expect that plans will
demonstrate convenient access based in
part on the number of enrollees in their
service areas and the geographic
distribution, capacity, and contracting
relationships between long-term care
facilities and long-term care pharmacies
in those service areas. We note that
these LTC pharmacy access
requirements are in addition to the retail
pharmacy access standards.
In formulating our policies for LTC
pharmacy access, we have relied on
information provided by all
stakeholders through the proposed rule
comment process. Through these
comments and follow-up discussions,
we have listened to specific concerns of
pharmacies (chains and independents,
including small pharmacies), trade
associations representing for profit and
non-profit nursing facilities, trade
associations representing LTC
pharmacies, LTC and independent
pharmacists, State Medicaid pharmacy

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
directors, pharmacy benefit managers
(PBMs) and plans, and beneficiary
advocates. We considered a number of
policy alternatives and have discussed
those considerations fully in the
preamble for subpart C and in Section
M., Alternatives Considered, of this
Impact Analysis. Taking into
consideration the feedback we received
from the various stakeholders, we
believe our final regulations for the Part
D benefit will ensure LTC facility
residents’ access to prescription drugs
in a way that balances greater
competition in the LTC pharmacy
market with the preservation of
relationships and levels of service that
LTC facilities currently receive from
their contracted LTC pharmacies. We
also believe that the policy approach we
are taking provides new opportunities
for small LTC pharmacies.
b. Impacts on the Current LTC
Pharmacy Market
We estimate from the National Health
Expenditures data previously
mentioned that prescription drug
spending in the LTC sector of nursing
homes and nursing home providers was
about $12.5 billion in 2003. Clearly, the
implementation of Part D will influence
the LTC pharmacy market. We have
actively sought information on the LTC
pharmacy market and the role of small
pharmacies in that market. From our
stakeholder outreach and research, we
have determined that four large national
corporations claim a majority of the
market’s revenue (about 60 percent).
None of these four corporations is a
small business; their revenues range
from hundreds of millions of dollars to
billions of dollars. As a group these four
corporations do business in all but 4
States, and in the aggregate operate
hundreds of pharmacies.
There are very limited data sources
related to the rest of the LTC pharmacy
industry. Consequently, we present the
information we are able to obtain and
provide a qualitative discussion of our
assessment of impacts on the LTC
pharmacy market. We obtained through
the Economics Department of the
National Association of Chain Drug
Stores (NACDS) information indicating
that in the aggregate there are
approximately 1,760 LTC pharmacies, of
which approximately 1,360 do not
appear to be establishments of the four
large corporations. Based on
information from a financial analyst
report, some of these pharmacies may be
part of smaller regional chains.
Information from financial analysts
indicate that the remaining
approximately 40 percent of the LTC
pharmacy market is handled by smaller
regional or individual market LTC

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

pharmacies. We were not able to locate
publicly available data which would
inform us of the revenues for all LTC
pharmacies. We were able to obtain one
financial analyst report indicating that
some of the smaller regional or
individual entities have revenues
greater than the $6 million small
business threshold established by the
Small Business Administration for
pharmacies. In addition, industry
sources indicate that some of the
entities in the LTC pharmacy market are
also in the retail pharmacy market.
We were also able to learn from
NACDS that there are differences in the
geographic distribution of LTC
pharmacies between the larger corporate
LTC pharmacies and other LTC
pharmacies. For example, 85 percent of
corporate pharmacy facilities are in
urban areas (MSAs), whereas
approximately 77 percent of the regional
or individual LTC pharmacies are in
urban areas. Conversely, the regional
and individual pharmacies appear to
have a relatively larger physical
presence in rural (non-MSA) areas. For
example, the smaller regional and
individual LTC pharmacies outnumber
the national corporate pharmacies 5–1
in rural (non-MSA) areas, whereas in
urban areas this ratio is lower.
Some stakeholders believe that the
size of the independently-owned
pharmacies may make it more difficult
for them to compete in certain
geographic locations. We believe the
data on market presence in rural versus
urban locations supports this. From
financial analysts, we learned that the
chains that own LTC pharmacies
typically view the density of LTC
facilities (that is, number of facilities
within a geographic area) and Medicaid
pharmacy reimbursement rates as some
of the key factors in determining interest
in ownership and geographic market
entry.
As discussed in greater detail
subsequently, we believe that the
changed competitive market under Part
D will likely make it possible for new
players to enter the LTC pharmacy
market, and will likely also create better
incentives for price competition for the
provision of drugs and pharmacy
services to LTC facility residents. The
National Community Pharmacists
Association (NCPA) has indicated that
LTC pharmacy is the fastest growing
segment of the independent pharmacy
business. NCPA has stated that if
competition is injected into this
marketplace, independent pharmacies
will compete on price and win on
service. We have received similar
information from independent and
chain pharmacies, as well as pharmacy

PO 00000

Frm 00315

Fmt 4701

Sfmt 4700

4507

wholesalers who are currently in or
contemplating entry into the LTC
pharmacy market.
Part D plans will be required to offer
a standard contract to ‘‘any willing’’
LTC pharmacy. Once a pharmacy has
negotiated its agreement with a plan and
becomes a network provider, the LTC
pharmacy is eligible for selection by a
LTC facility to serve the pharmacy
needs of the residents of that facility
that are members of that plan. We
expect that each long-term care facility
will select one or more eligible network
pharmacies to provide a plan’s longterm care drug benefits to its residents.
In order to minimize the number of
pharmacy suppliers and maintain
patient safety, long-term care facilities
will likely select long-term care
pharmacies that meet Part D standards
and participate in the largest number of
plans’ long-term care networks.
The competitive design of Medicare
Part D provides several benefits. First,
Part D plans, depending on the level of
competition, may be able to negotiate
more favorable market rates due to the
incentive pharmacies have to be in as
many networks as possible. This
potentially means that LTC facility
residents may receive better pricing on
their prescription drugs. Second, if a
LTC pharmacy is participating in as
many plans as possible, it is likely that
a LTC facility will be able to select only
one pharmacy to serve all of its
residents. This would help to preserve
the ‘‘one pharmacy—one nursing home
relationship’’ priority cited in comments
by LTC facility and LTC pharmacy
representatives.
Another impact of this competitive
model may be a change in who receives
and manages manufacturer rebates.
Currently, large LTC pharmacy chains
maintain their own formularies and
have contracts with pharmaceutical
manufacturers for performance
payments or rebates (that is, price
concessions based on volume, formulary
and market share movement). Under
Part D, with the LTC pharmacy subject
to the formulary of the Part D plan, it
is unlikely that manufacturers would
continue to pay LTC pharmacies for the
same rebates they will likely be paying
Part D plans. In this more competitive
system, the Part D plan would have to
pass on the rebate in the form of lower
beneficiary premiums and better
benefits, in contrast to all of these rebate
dollars generally accruing to LTC
pharmacies under the current system.
As discussed subsequently, this
movement of management of formulary
and related rebates from LTC
pharmacies in the less competitive
current environment through Part D

E:\FR\FM\28JAR2.SGM

28JAR2

4508

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

plans and on to beneficiaries and the
Medicare program in the more
competitive Part D environment may
mean that the competitive pricing
advantage that the large LTC pharmacy
corporations had over smaller LTC
pharmacies is lessened.
While LTC facilities may use a
particular pharmacy for all of their
residents and payers (including
Medicaid prescription drug and LTC
benefits, Medicare Part A drugs and
services, and private pay pharmacy
services), some contracts may need to be
revised because payments from
Medicare Part D plans will replace
Medicaid payments on behalf of
beneficiaries dually eligible for both
programs. Currently, for LTC
pharmacies, Medicaid is the largest
single payer for prescription drugs and
associated dispensing fees, providing for
approximately 60 to 65 percent of their
revenue. Dually eligible beneficiaries
are a large portion of the Medicaid
nursing home population. Thus, we
would expect that a shift from Medicaid
to Part D plan payment could have an
impact on LTC pharmacies. Over time,
we anticipate that the drug payments
negotiated by Part D plans may be lower
than Medicaid rates in some geographic
areas, as a result of market competition.
In support of this view, our analysis of
data supplied by IMS Health for
commonly used drugs provided through
LTC pharmacies suggests an existing
payment differential between Medicaid
and third party payers, on the order of
approximately 7 percent on average.
We expect over time in some
geographic areas where there is healthy
competition among Part D plans and
among LTC pharmacies (including large
corporations, regional and independent
entities) to supply LTC facilities that
payment rates may become more similar
to those currently achieved by third
party payers. In other markets where
there is less competition (that is,
independent entities but few or no large
national corporate or regional chains),
Part D plans may be less able to
negotiate lower rates.
In the current market, some LTC
pharmacies bundle a range of additional
services along with the cost of the drugs
and related dispensing fees that are
offered to LTC facilities. Payment for
these added services is often not
segregated by service offering. Part D
allowable costs do not include some of
the non-dispensing services currently
bundled into LTC pharmacy (for
example, the Part D dispensing fee may
not include costs associated with drug
administration or other professional
fees). With the implementation of Part D
there will be a need to price these

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

services separately, creating more
transparency for the costs and charges
paid by LTC facilities.
We recognize that some LTC
pharmacies in more competitive
markets may face both demand for a
lower cost structure from Part D plans
and simultaneous pressure from LTC
facilities for value-added services that
were previously bundled. As indicated
by one commenter (not a small
business), the demands of the market
can produce stress on the participants;
the commenter strongly suggested that
without adequate reimbursement, LTC
pharmacies will either reduce service
levels or cease doing business. We
believe that market competition in
combination with our access
requirements should result in effective
negotiations between Part D plans and
LTC pharmacies. Furthermore, the
greater transparency in pricing and
competition for value-added LTC
pharmacy services to be provided to
LTC facilities should result in more
competitive pricing for these services.
This transparency and competition may
also provide more opportunities for
small LTC pharmacies to compete on
the basis of quality and service against
larger players for LTC facility business.
In addition, Part D plan payments under
medication therapy management
programs, described in further detail
elsewhere in this preamble, may
represent an additional revenue stream
to long-term care pharmacies for some
of the special services provided by these
pharmacies but not reimbursed through
dispensing fees.
While there is uncertainty related to
the market behavior of the various
players, we believe that under Part D,
greater competition in the LTC
pharmacy market may result over time
in lower average Part D drug prices for
beneficiaries and the Medicare program,
and that it also may have the potential
to reduce drug prices for non-Part D
enrollees (private pay residents, as well
as those covered under the Part A
skilled nursing facility benefit). These
changes would come as a result of
competitive market forces.
Under Part D, small LTC pharmacies
in rural areas are more likely to have a
greater ability in their local markets to
compete effectively compared to the
larger LTC pharmacy chains. In nonrural areas, smaller regional and
individual LTC pharmacies will benefit
from the shift of manufacturer rebates
and the leveling of the field upon which
price is decided. However, structural
efficiencies may be a key determinant of
long-term success in areas in which
there are more LTC pharmacies
competing for business.

PO 00000

Frm 00316

Fmt 4701

Sfmt 4700

A more competitive market will
reward pharmacies offering the lowest
prices and highest quality service; it
may also open the door for new entrants
into the market as LTC facilities
restructure their existing contracts.
Because of the competition there may
also be changes in the LTC facilities’
negotiation of rates and services with
LTC pharmacies. We anticipate that
there may be changes in market share
among the pharmacies that service LTC
facilities. This changing market will be
the result of the competitive situation
afforded LTC facilities in choosing LTC
pharmacies.
Although these changes may
adversely affect some LTC pharmacies,
large or small, we would note that as a
result of the growth in the aged
population, with the aging of the large
cohort of the ‘‘boomer’’ generation,
financial analysts predict significant
growth in the LTC facility and
pharmacy sector, and the changes
associated with Part D implementation
would not be expected to deter that
growth.
As shown by our analysis, we are
unable to predict with certainty either
the presence or absence of ‘‘a significant
economic impact on a substantial
number’’ of small LTC pharmacies. In
accordance with longstanding HHS
policy, we therefore treat our regulatory
provisions as having such an effect.
Under the Regulatory Flexibility Act, we
must present the following information.
The need for and objectives of our final
rule provisions on long term care
pharmacy are described earlier in the
preamble under subpart C. As indicated
there and in this analysis, we have gone
to great lengths (including an Open
Door Forum and other types of
outreach) to consult with the LTC
pharmacy community, to identify
alternatives, and to assess issues in
reaching our final decision.
Unfortunately, we have been unable to
find authoritative data on the number of
‘‘small’’ LTC pharmacies affected in this
fast-evolving field of business. Based on
the previously mentioned data from
NACDS and from a proprietary source
serving this market, we believe there
may be at least several hundred but
probably less than 1,000 ‘‘small’’ LTC
pharmacies, but we do not have specific
data on either overall counts or on the
number of small pharmacies that will
have new access to serving LTC
facilities as a result of the competitive
changes outlined here. We are not
imposing any new reporting or
recordkeeping requirements, other than
the statutory requirement related to
providing beneficiaries with
information on generic alternatives. We

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
have tried to reduce the burden for LTC
pharmacies associated with this
requirement and recognizing the unique
situation for beneficiaries in LTC
facilities, by modifying the timing of the
requirement from a point of service
basis. Long term care pharmacies will
have to provide information about
differential price information to Part D
plans, which will in turn, provide that
information to their institutionalized
beneficiaries through an explanation of
benefits statement. In addition, the
performance and service criteria that we
expect will be included in the standard
contracts between Part D plans and LTC
pharmacies will be those that simply
reflect existing community practices
with respect to LTC pharmacy service
delivery. It is important to note that we
have taken a significant step in terms of
assuring business opportunity for small
pharmacies by requiring that plan
sponsors contract on equal terms with
‘‘any willing’’ pharmacy to assure broad
access to nursing home residents. In
practice, we believe that this means that
many existing LTC pharmacies as well
as new market entrants in certain areas
will have a substantial competitive
opportunity, in most instances broader
than at present. As discussed under
subpart C of this preamble and in the
analysis above, the factual, legal, and
policy reasons for this decision are
compelling. Nonetheless there is
inherent uncertainty related to the
specific impact on any single entity. The
competitive results we expect are likely
to impact many small LTC pharmacies
positively, while some will likely
experience a negative effect.
3. Insurers and Pharmacy Benefit
Managers (PBMs)
This rule sets forth the terms and
conditions that must be met by firms to
be approved to offer the Medicare
prescription drug benefit. Organizations
sponsoring the Medicare prescription
drug benefit can be either stand alone
Prescription Drug Plans (PDPs) or
Medicare Advantage Prescription Drug
Plans (MA-PDs). The requirements for
Medicare Advantage are discussed in
our separate rule. That rule includes a
regulatory flexibility analysis specific to
the Medicare Advantage program.
Consequently the discussion here will
focus on PDP sponsors. As discussed
previously in the preamble, in order to
be approved to offer the Medicare
prescription drug benefit as a PDP an
entity must be organized and licensed
under State law as a risk bearing entity
eligible to offer health insurance or
health benefits coverage in each State in
which it offers a prescription drug plan,
or have secured a time-limited Federal
waiver. The SBA size standard for

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

‘‘small entity’’ health insurance firms is
annual revenue of $6 million or less.
Our regulatory flexibility analysis for
the Medicare Advantage rule includes
an extensive discussion related to
insurance firms that might potentially
be eligible to be MA plans. That analysis
is also applicable to insurance firms that
might be interested in being a PDP. As
noted for the MA market and equally
applicable to the PDP market,
essentially all of the insurance firms
affected by the statute and our rule
exceed size standards for ‘‘small
entities’’ within the meaning of the RFA
and implementing SBA guidelines,
which State that an insurance firm is
‘‘small’’ only if its revenues are below
$6 million annually. Stand-alone drug
insurance policies are not a typical
product in the insurance market today.
Thus, the range of insurance companies
that may choose to enter this market is
uncertain. However, a portion of the
insurance firms that might be interested
in being a PDP and thus affected by
these rules are ‘‘small entities’’ by virtue
of their non-profit status.
PDP eligibility provisions in the MMA
rely on the Medicare Advantage
enrollment provision (unchanged from
prior law) that no health insurance plan
is normally eligible to participate unless
it already serves at least 5,000 enrollees.
Section 1860D–12(b)(3) of the Act
provides that this minimum shall be
waived during the first contract year in
a region, since PDPs in the context of
Part D are new entities. While there is
also a 1,500 minimum standard
enrollment for plans that predominantly
serve rural populations, in the context
of PDP services areas designed on a
regional basis, we do not believe a
predominantly rural situation would
occur. In the proposed rule we sought
comment on this question and received
no response. Consequently, we have not
considered this level of enrollment in
our analysis. At the 5,000–enrollee
level, no insurance plan would fall
below the SBA revenue cutoff assuming
estimated average per enrollee revenue
of approximately $1,675 in 2006, a
revenue level similar to that of
prescription drug plans under the
standard Medicare Part D benefit.
Therefore, the statutory limits generally
prevent any insurance firm defined as
‘‘small’’ pursuant to the RFA’s size
standards from participating in the
program. It is also important to note that
PDPs will only operate on a regional
basis. We have established 34 PDP
regions, not including territories, and
the average population in these exceeds
one million Medicare beneficiaries.
In our RFA for the Medicare
Advantage program, we include a

PO 00000

Frm 00317

Fmt 4701

Sfmt 4700

4509

detailed analysis on regional Medicare
Advantage markets and small entities.
That discussion is applicable to the PDP
market, and therefore we are not
repeating that discussion here. That
analysis also reviews the local Medicare
Advantage market. As is noted in that
analysis the option to be a local MA-PD
plan provides opportunity for health
insurance entities of all types and sizes
(but probably not below the ‘‘small’’
insurance entity cutoff level defined by
the SBA, which is lower than appears
viable for a Part D risk-bearing
insurance plan) to participate in offering
the Medicare prescription drug benefit,
albeit as part of a comprehensive benefit
offered on a local basis. We point out
that many HMOs are non-profit entities,
as are several dozen Blue Cross and
Blue Shield plans, and conclude that on
balance Medicare Advantage provide
favorable opportunities for them. We
note that a number of HMOs and other
insurers including a number of Blue
Cross plans are sponsoring Medicareendorsed drug discount cards under that
new program, which suggests their
future ability to participate as PDP or
MA-PD participants, regardless of profit
status. While this rule extends certain
requirements related to the provision of
Part D benefits to Medicare Advantage
plans (for example, network adequacy
standards and any willing pharmacy
provisions), we believe that these
requirements will not result in
consequential additional costs for MA­
PD plans. We believe that any welldesigned plan would already meet or
readily be able to accommodate these
standards. For example, we believe that
competition among plans for enrollees
will necessitate that they have a
pharmacy network that is at least as
broad as those stipulated by our
network adequacy standards.
The other organizations that we think
potentially may be interested in being
PDP sponsors, or most certainly working
closely with PDP and MA-PD sponsors
to administer all or part of their drug
programs, are pharmacy benefit
managers (PBMs). PBMs are a relatively
new player in the health care market. A
major limitation on PBMs being PDP
sponsors, however, is the statutory
requirement for State licensure as a risk
bearing entity, a status PBMs have not
historically achieved. As discussed in
section C (Federalism) of this Regulatory
Impact Analysis, the MMA provides for
a time-limited waiver to obtain State
licensure, during which an organization
can be approved by CMS to be a PDP
sponsor. Since the Part D benefit is new,
we sought information in the proposed
rule on whether PBMs are considering

E:\FR\FM\28JAR2.SGM

28JAR2

4510

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

becoming PDP sponsors. While we
received no specific comments
indicating PBMs’ intentions with regard
to Medicare Part D, we note that we did
receive comments on the proposed rule
from several PBMs.
There are basically two types of PBMs
in the market today. Some are
subsidiaries of health plans (that is,
managed care organizations or
insurance companies), and others are
independent PBMs. PBMs have evolved
over time in the nature of services they
provide. In the late 1970s and early
1980s they offered claims processing
services. In the late 1980s and early
1990s their services evolved to include
pharmacy network design and
management, formulary design and
manufacturer rebate negotiations, mail
order pharmacy services, drug
utilization review, and enrollee services
(for example, call centers). During the
1990s, PBMs generally expanded to
become managers of a wide array of
pharmacy services as plan sponsors
sought to control drug costs. For
example, some PBMs now also provide
clinical services such as disease
management, and physician and patient
education.
Under the ‘‘carve-out’’ trend by which
pharmacy benefits are administered
separately from medical benefits in
employer-sponsored insurance, PBMs
are now believed to administer roughly
half of all pharmacy benefits for
employer health plans, and this share is
rising rapidly. The primary reasons are
analyzed in a 2003 General Accounting
Office report (‘‘Federal Employees
Health Benefits: Effects of Using
Pharmacy Benefit Managers on Health
Plans, Enrollees, and Pharmacies’’
available at www.gao.gov; see also the
CMS study on PBMs cited above). These
reports and others conclude that PBMs
help insurance plans achieve significant
savings in their drug coverage, for
example, through use of discounts and
rebates to lower prices, through drug
utilization review, and through shifting
sales from name brands to generics.
Obviously, insurance plans can do these
things for themselves, but most find that
PBMs substantially improve their ability
to achieve savings.
Because PBMs rely heavily on
computerized systems to manage
pharmacy records, they also provide
safeguards against many kinds of
medication errors through drug
utilization review. Which services a
PBM provides to a particular plan
sponsor is negotiated between the PBM
and the sponsor. Selection of a PBM
(usually one, but sometimes two, one for
mail order and one for retail) by plan
sponsors is strongly influenced by the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

expected cost of drug benefits, with
PBMs gaining a competitive advantage
in contractual negotiations by offering
lower average costs per prescription.
There are believed to be about one
hundred PBM firms. Some are stand­
alone companies, but most are
subsidiaries of health insurance firms
(for example, Wellpoint and Anthem) or
owned by drug store chains (for
example, Walgreens). Although a
handful of particularly large firms
account for most of the ‘‘covered lives’’
and industry revenue, the industry is
regarded by analysts as highly
competitive. We have no information on
the size of the smaller firms in the
industry, but it is likely that none of
them, or at most a very small number,
would fall below the $6 million annual
revenue threshold used by the SBA for
defining ‘‘small entities’’ in the
insurance industry. (The smallest
companies are in any event most likely
to be subsidiaries or components of
health insurance companies and other
large firms.) This is an industry in
which there appear to be marked
advantages to larger size, through both
economies of scale and bargaining
power. Nor do we believe that a
substantial number, if any, are non­
profit entities. In the proposed rule we
requested additional information on the
characteristics of this industry and its
firms, but we did not receive comments
on this issue.
The MMA will expand PBM business
in two ways. First, assuming that all or
most PDPs and many MA-PDs will use
PBMs, and that nearly all beneficiaries
without drug coverage will enroll in a
plan providing drug coverage, we
anticipate that millions of beneficiaries
will start purchasing their drugs using
PBM-managed benefits. Second, all or
most of those currently enrolled in
plans that cover drug purchases on an
indemnity basis (rather than through
PBMs), and who sign up for PDP or MA­
PD plans, will start using PBM services.
This latter group includes most of the
1.9 million persons we estimate are
currently enrolled in Medigap plans that
offer drug coverage. Thus, drug
insurance plans using PBMs are likely
to enroll millions of new covered lives.
Because these enrollees are on average
much higher utilizers of drugs than
most covered lives in the private sector,
this will create positive and significant
economic impact on the future volume
of business for these firms.
Obviously, the scope, timing, and
nature of additional PBM business will
depend on the future decisions of PDP
and MA-PD sponsors, and the PBMs
themselves, and ultimately on the
decisions of Medicare beneficiaries as

PO 00000

Frm 00318

Fmt 4701

Sfmt 4700

they make choices among their various
insurance options. Nothing in this rule
directly regulates PBMs, positively or
negatively, or directly encourages or
discourages their use over alternative
methods of managing drug benefits.
Furthermore, there are many other
influences on the role of PBMs and on
the amount of drug spending that they
manage. Chief among these is the
continuing growth in spending on
prescription drugs and the incentives
this creates to control costs.
It is possible that the regional
boundaries could affect the ability of
some PBM firms to compete for PDP
contracts. However, we believe that the
regional boundaries are unlikely to be
an issue for PBMs or PDP sponsors more
generally due to our decision
announced on December 6, 2004 to
designate 34 PDP regions—25 regions
made up of a single State, 6 regions
made up of two States, with the
remaining 3 regions made up of 3 States,
4 States and 7 States respectively. We
believe that most if not all PBMs are not
plan-specific, and thus would be able to
compete in single State regions, multiState regions, or nationally. In addition,
in developing the regional boundaries,
we were cognizant that the regions need
to have a large enough Medicare
population to assure PDP viability,
while not being so large as to cause
plans to have difficulty enrolling and
providing services to beneficiaries
especially in the start-up year. The 34
regions were designed to strike that
balance.
For all the reasons given above, we
conclude that while the statutorilycreated Part D and Medicare Advantage
programs will be largely favorable to
PBMs, this rule as such will not
significantly adversely effect a
substantial number of small entity
PBMs. In the proposed rule we sought
comment on this conclusion and on any
provisions that might adversely affect
small firms; however, we received no
comments on this issue.
4. Small Employers
In the case of the small employers,
public and private, who provide
qualified prescription drug coverage for
their retirees, we estimate that savings
obtained from the Medicare retiree drug
subsidy will exceed the employer’s
administrative costs associated with
obtaining the subsidy, and thus the
result of the retiree drug subsidy
provision is a net positive impact. We
would like to make participation in the
retiree drug subsidy program as simple
as possible for small entities.
In the proposed rule we requested
comments on any provisions of this
proposed rule that may be particularly

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
difficult for small entities, and on any
alternatives that might lessen such
burdens. One of the particular areas of
concern was the burden related to the
payment timing, that is, monthly,
quarterly, or annually. As noted
previously, we want to make the retiree
drug subsidy process as flexible as
possible to encourage employers,
including small employers, to
participate. In particular, we think our
provision allowing plan sponsors to
voluntarily elect to use an annual or
quarterly payment process, rather than
requiring a monthly process, will
significantly reduce the burden for
small employers that wish to apply for
the retiree drug subsidy.
In addition, as discussed in greater
detail in subpart R of the preamble,
given statutory provisions, we think our
alternative approach for dealing with
sponsors of insured plans helps to
address concerns that were raised in the
comments we received related to such
retiree plan products. As discussed in
the subpart R preamble and in the final
regulation, the quarterly or monthly
interim subsidy payments can be based
on a determination by the insurer—
using reasonable actuarial principles—
that allocates a portion of the premium
costs to the gross covered prescription
drug costs incurred for a sponsor’s
qualifying covered retirees between the
cost threshold and the cost limit. If the
insurer determines premiums based on
the pooling of employer/union
experience in a given policy, the insurer
will be permitted to make such
determination based on the aggregate
experience incurred under such policy
for all employers’/unions’ qualifying
covered retirees. Thus, we think our
decisions to provide the options for
quarterly or annual payments, in
addition to a monthly process, and to
provide a simplified method for dealing
with premium allocation for fullyinsured retiree benefit arrangements,
recognizing statutory payment
provisions for the retiree drug subsidy,
facilitates the participation of small
employers in the retiree drug subsidy
program.
Another area of concern for small
employers was actuarial attestation. We
received several comments from small
employers stating that we should accept
attestations of actuaries with the
insurance carriers or with third party
administrators who can attest on behalf
of the sponsor that the sponsor’s retiree
drug coverage is actuarially equivalent
to Part D. As indicated in the subpart R
preamble, sponsors can submit
attestations of actuaries employed by
insurance carriers or the third party

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

administrators of their retiree drug
plans.
One health care plan administrator
raised concerns about the burden of
actuarial equivalence on small
employers and requested streamlined
processes. The commenter asserted that
small self-insured retiree plans operated
by third party administrators are
unlikely to have an actuary on staff, and
that even if a group of plans is operated
through the same PBM they would still
need separate actuarial studies. The
commenter requested that due to the
cost of an annual attestation, we allow
small employers to submit an
application, their eligibility list and
plan benefit descriptions and provide
CMS with two years of experience or
premium data and have CMS actuaries
perform the attestation on behalf of their
plan.
As we noted previously, the statute
does not permit us to perform the
attestation on behalf of a plan sponsor.
However, as discussed elsewhere, since
many small employers are likely to
purchase retiree coverage through
insurance companies who offer similar
policies to many employers, we expect
that the costs of the actuarial attestation
would be spread across these
employers. In addition, we would
expect that, in order to offer health
insurance and develop a benefits
package, a self-insured plan sponsored
by a small employer would have access
to actuarial information through a third
party administrator or through the entity
that assisted the employer in designing
the insurance offering, and that the
simplified computation methods that
we are developing would lessen the
complexity and time involved in the
actuarial valuation.
At the same time, we acknowledge
that there are administrative costs
associated with obtaining the retiree
drug subsidy. We believe that the
revenues from the subsidy would
outweigh the costs. As noted earlier, we
estimate that the administrative costs
associated with obtaining the Medicare
retiree drug subsidy will represent on
average about 6.8 percent of the
Medicare retiree drug subsidy payments
in 2006 (declining in subsequent years
after initial start-up costs), and that the
bulk of these costs will be associated
with preparing the actuarial valuation,
retiree drug subsidy application, related
enrollment information, and reporting
data on prescription drug costs for the
purpose of receiving subsidy payments.
It is important to note that this estimate
reflects an average across all plan
sponsors. While administrative costs for
small employers as a percent of retiree
subsidy dollars are likely to be higher

PO 00000

Frm 00319

Fmt 4701

Sfmt 4700

4511

than the average, we believe that
subsidy payments are likely to exceed
the administrative costs of obtaining the
subsidy for many small employers.
Although smaller employers will spread
their administrative costs across fewer
qualifying retirees for whom they will
be receiving Medicare retiree drug
subsidy payments than larger
employers, they are expected to have
lower costs associated with identifying
their Medicare retirees and related
enrollment information than large
employers. Additionally, we expect that
among small employers that purchase
retiree coverage from insurance
companies, much of the costs associated
with the actuarial valuation and data
reporting would generally be spread
across many employers that are
purchasing the same or similar
insurance products.
However, it is important to note that
under Medicare Part D, employers have
several options for providing
prescription drug assistance to their
retirees at a lower cost. For example,
employers that purchase enhanced
benefits or provide supplemental
wraparound coverage for their retirees
who are enrolled in Part D plans will
also achieve savings because the Federal
government provides a significant
subsidy for the cost of standard
Medicare Part D. We recognize that the
relative benefits to employers of one
option versus another will depend on an
employer’s individual circumstances. In
developing all of the employer/union
options described in this final rule, we
have sought to provide employers and
unions with maximum flexibility while
minimizing employer/union burden as
much as possible.
We believe that affected small
businesses are unlikely to experience
increased revenues of the magnitude
that would approach 3 to 5 percent of
revenues due to the Medicare retiree
drug subsidy payments. We arrive at
this conclusion as follows. First, we
estimate the number of covered lives per
firm offering retiree coverage. To make
this estimate, we use 2001 data from the
Medical Expenditure Panel Survey
(MEPS) on the number of
establishments (by firm size), with
retiree coverage for the over 65
population, and the number of retirees
covered by these establishments. As a
conservative approach, we assume two
covered lives per retiree to estimate the
number of covered lives in these
establishments. This assumption
overstates the number of covered lives
as not all Medicare beneficiaries are
married, or are married to an individual
who is also a Medicare beneficiary.
Second, we convert the number of

E:\FR\FM\28JAR2.SGM

28JAR2

4512

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

establishments offering age 65 and over
retiree coverage to a firm based count
using the ratio of the number of
establishments to the number of firms,
based on the U.S. Census Bureau’s
Statistics on U.S. Businesses for 2001
(see http://www.census.gov/epcd/www/
smallbus.htm#EmpSize). Using this firm
based count we then estimate the
average number of age 65 and over
covered lives per firm. For firms with
fewer than 100 employees our estimated
average number of 65 and older covered
lives was 6.15; the corresponding figure
for firms with a firm size of 100 to 999
employees was 44.7. Data for 2001 on
the overall number of establishments,
the overall estimated number of firms,
the number of estimated firms with
retiree coverage for retirees aged 65 and
over, the number of covered retirees,
and the estimated number of retirees
and covered lives per firm, are shown in
Table IV–5.
As an extreme example, we assume
the absolute maximum subsidy per
person that an employer/union can
receive in 2006 is $1,330 (that is, 28
percent of the difference between $250
and $5,000, and assuming no further
adjustment related to netting out
discounts, chargebacks or rebates). As
discussed earlier, we estimated an
average per capita Medicare retiree drug
subsidy amount at $668 in 2006 (which,
for example, would be equivalent to
about $891 of taxable income for
employers with a marginal tax rate of 25
percent and about $1,028 of taxable
income for employers with a marginal
tax rate of 35 percent). Using the $1,330
value, the retiree drug subsidy payments
would be about $8,178 per firm with
less than 100 employees and $59,456 for
firms with 100 to 999 employees. These
amounts almost certainly are overstated
because they assume that every
qualifying covered retiree would have
annual allowable prescription drug
costs of at least $5,000 in 2006, and that
each firm would thus receive the
maximum retiree drug subsidy payment
for every covered individual, which is
unlikely.
We compare these estimates with
revenues for firms of these respective
sizes. We trend forward 1997 revenue
data by firm size, from the U.S. Census,
to 2001 based on the annual change in
the average Consumer Price Index (CPI).
While revenues would likely grow at a
faster rate than the CPI due to increases
in the quantity of items and/or services
sold, we take a conservative approach
by only accounting for increases in
prices from 1997 to 2001 via the annual
changes in the average CPI. The most
recent year that data on revenues are
available is for 1997. We used U.S.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Census Bureau data for 2001 for
estimating the number of firms. The
estimated per firm average revenues for
2001 are about $1.2 million for firms
with a firm size of less than 100
employees and $28 million for firms
with a firm size of 100 to 499
employees.
The Medicare retiree drug subsidy
payments, therefore, represent only 0.7
percent of total revenues for firms with
a firm size of less than 100 employees,
and 0.2 percent for firms with a firm
size of 100 to 999 employees. Because
revenue data are not available for firms
with 100 to 999 employees, we
conservatively use the per-firm revenues
for firms with a firm size of 100 to 499
employees to represent the per-firm
revenues for firms with a firm size of
100 to 999 employees. For further
illustrative purposes, Table IV–6 shows
by different firm sizes the revenue
impacts using the maximum assumption
on retiree drug subsidy payments. Even
for the smallest firms, the revenue
impacts of the subsidy would be less
than 2 percent. The table shows that, as
the firm size increases, the percentage of
the revenues accounted for by the
subsidy decreases. We therefore
conclude that this rule will not have a
significant economic impact on a
substantial number of small employers.
This conclusion applies equally to non­
profit employers and small local
government employers, though we do
not have detailed data on these groups
(had we the data, the comparison would
have been on a cost rather than revenue
basis, but the relationships of retirees to
active employees would have been
similar.) Because of the likely interest in
the Medicare retiree drug subsidy
program, however, we present some
additional background information
related to the number of small entities
that might potentially be eligible to
receive the Medicare retiree drug
subsidy payments.
To estimate the number of potentially
eligible small businesses for RFA
purposes, we need to determine the
appropriate standards for identifying a
small business. In general, the SBA has
size standards that define small
businesses within a given industry
based on either the average annual
receipts (millions of dollars) or average
employment (number of employees) of a
firm (‘‘Table of Size Standards Matched
To North American Industry
Classification System Codes, January 28,
2004,’’ U.S. Small Business
Administration, available at
www.sba.gov). However, we did not
have data available on retiree coverage
among either establishments or firms by
annual revenues, but these data are

PO 00000

Frm 00320

Fmt 4701

Sfmt 4700

available by employee size. We used an
alternative size standard for RFA
purposes based on our consultation
with the Office of Advocacy at the SBA.
The alternative size standards are based
on the number of the firm’s employees,
rather than the firm’s annual revenues.
Because our data from the Medical
Expenditure Panel Survey (MEPS) on
the number of establishments providing
retiree drug coverage are at the 2-digit
North American Industry Classification
System (NAICS) code level and the
MEPS industry group level (which is
based on rolling-up 2-digit NAICS
codes), while the SBA size standards are
at the 6-digit NAICS code level, we
developed an approach for rolling up
the size standards to the 2-digit NAICS
code level. For the purpose of our
analysis, we classified a business within
a 2-digit NAICS code as a small business
based on the largest SBA employment
size standard among all the six-digit
NAICS codes that comprised that twodigit NAICS code. It is likely that this
methodology overstates the number of
small businesses because some large
businesses are likely counted as small
businesses. Our employee firm size
standards ranged from 150 to 1,500
employees.16
We estimate the number of small
businesses who offer retiree drug
coverage based on an analysis of 2001
MEPS data. We mapped the 19 two-digit
NAICS codes to nine MEPS industry
groups. Where the MEPS industry group
consisted of two or more two-digit
NAICS codes, we defined a small
business using the largest employee size
standard among the two-digit NAICS
codes that cross-walked to the MEPS
industry code. However, for each of
nine MEPS industry groups, the MEPS
data do have the number of
establishments offering retiree health
insurance coverage by the number of
employees in the firm. We estimate that
in 2001, there were 399,751
establishments offering retiree coverage
to their retirees age 65 and older. Of this
total, 65,208 (not shown in Table IV–5)
were small businesses, based on the
small business size standards (that is,
150 to 1,500 as noted earlier). These
businesses represented 1.3 percent of all
small establishments. These businesses
also accounted for 16 percent of all
establishments offering retiree coverage
to their retirees that were age 65 and
over.
16 We used the following alternative size
standards for the purpose of this RFA: less than 150
employees (NAICS codes 42 and 44), less than 500
employees (NAICS codes 11, 23, 56, 71, 72, and 81),
and less than 1,500 employees (NAICS codes 21, 22,
31, 48, 51, 52, 53, 54, 55, 61, and 62).

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
While in the case of small businesses
the number of establishments is very
similar to our estimate of number of
firms, this relationship is not the case
for the largest firms; that is, those firms
with more than 1,000 employees. As a
result, from a firm perspective, we
estimate that firms with less than 1,000
employees account for 93 percent of all
private sector firms offering coverage to
retirees age 65 and over, but account for
only 10 percent of all retirees with
employer-sponsored coverage.
While we have data on the number of
small employers who offer retiree
coverage, by industry sector, we do not
have data on the number of retirees
covered by small employers by industry
sector. The only analysis we are able to
do is the distribution of age 65 and over

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

retirees between large firms with 1,000
or more employees and firms with less
than 1,000 employees that offer retiree
health coverage to this population. Most
covered retirees receive their drug
coverage from large employers and
unions, both because these large
employers/unions are more likely to
provide coverage, and large employers/
unions have a large number of retirees.
According to data from MEPS, in 2001
the largest private sector firms (1,000 or
more employees) covered 90 percent of
all the retirees who had employersponsored retiree coverage, with only 10
percent of retirees being covered in
firms of less than 1,000 employees.
As discussed previously, we expect
that Medicare Part D will also positively
impact those small employers that had

PO 00000

Frm 00321

Fmt 4701

Sfmt 4700

4513

provided retiree drug coverage prior to
implementation of the Medicare
prescription drug benefit but choose not
to obtain the Medicare retiree drug
subsidy payments. For example, some of
these employers may choose to provide
alternate forms of prescription drug
coverage by either offering enhanced
Medicare Part D benefits for their
retirees or providing wraparound
coverage. These employers would see
reductions in their spending on retiree
drug coverage, as the Medicare
prescription drug benefit would
partially offset their spending on drug
coverage.
BILLING CODE 4120–01–S

E:\FR\FM\28JAR2.SGM

28JAR2

VerDate jul<14>2003

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

18:11 Jan 27, 2005

Jkt 205001

PO 00000

Frm 00322

Fmt 4701

Sfmt 4725

E:\FR\FM\28JAR2.SGM

28JAR2

ER28JA05.000

4514

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

meet certain requirements, including
responsiveness to public comments,
estimates of small entities affected, a
description of compliance requirements,
a description of steps to minimize
impact on small entities, and a
statement of the factual, legal, and
policy reasons for selecting the adopted
alternatives. This impact analysis, taken
together with the preamble as a whole,
meets all of these requirements. Since
the overall effects of the final rule are
generally positive on small entities
(with the exception of small long-term
care pharmacies for which the effect is
uncertain), and since we have
consistently chosen the least
burdensome compliance options legally
available to us, we believe we have met
or exceeded all expectations.
L. Accounting Statement
In accordance with the OMB A–4
circular on regulatory impact analyses,
we have included an accounting
statement in Table IV–7. The Medicare
prescription drug benefit and retiree

PO 00000

Frm 00323

Fmt 4701

Sfmt 4700

drug subsidy represent a transfer of
revenues from taxpayers to Medicare
beneficiaries, States, and retiree plans
sponsored by employers and unions.
The table provides an estimate of the
annualized amount of transfers from
taxpayers to these entities over the fiveyear period from CY 2006–2010. For the
purpose of the accounting statement,
these estimates are shown separately
with a 3 percent and 7 percent discount
rate in 2001 dollars.
The table also indicates that there will
be some administrative costs associated
with the Medicare prescription drug
benefit, specifically the costs associated
with disclosure notices, coordination of
benefits, and the Medicare retiree drug
subsidy. Costs associated with these
activities are discussed in the respective
sections of this impact analysis.
The accounting statement also
provides a summary of the effects of the
rule on State and local governments and
small businesses, as discussed in the
relevant sections of the analysis.

E:\FR\FM\28JAR2.SGM

28JAR2

ER28JA05.001

5. Rural Hospitals
Section 1102(b) of the Social Security
Act requires us to prepare a regulatory
flexibility 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 604
of the RFA. For purposes of section
1102(b) of the Act, we define a small
rural hospital as a hospital that is
located outside of a Metropolitan
Statistical Area and has fewer than 100
beds. This rule will not affect small
rural hospitals since the program will be
directed at outpatient prescription
drugs, not drugs provided during a
hospital stay. As required by law,
prescription drugs provided during
hospital stays are covered under a
separate Medicare payment system.
Therefore, we are not providing an
analysis.
6. Other Requirements in the Regulatory
Flexibility Act
The RFA requires that a Final
Regulatory Flexibility Analysis (FRFA)

4515

4516

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

PO 00000

Frm 00324

Fmt 4701

Sfmt 4700

E:\FR\FM\28JAR2.SGM

28JAR2

ER28JA05.002

BILLING CODE 4120–01–C

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
M. Alternatives Considered
1. Designation of Regions
The MMA requires that we establish
between 10 to 50 PDP regions within the
50 States and the District of Columbia,
and at least one PDP region covering the
territories. These regions will define
PDP service areas. PDPs that provide
service in a particular region must cover
that region entirely. PDPs can submit
bids to provide services in anywhere
from one to all regions.
The MMA stipulates that, to the
extent practicable, PDP regions must be
consistent with MA regions. However, if
we determine that access to Part D
benefits would be improved by
establishing PDP regions that are
different than MA regions, we may do
so. In developing the PDP and MA-PD
regions, we relied on a market survey
(conducted for us by Research Triangle
Incorporated), obtained input from a
series of public meetings and calls, and
reviewed hundreds of written
comments.
On December 6, 2004, we announced
the 34 PDP regions and 26 Medicare
Advantage PPO regions. The decision
on the regional configuration for PDPs,
per se, is not a subject of this rule,
although our authority from the Act to
designate different regions is included
in the final rule. Therefore, as part of
alternatives considered we are including
background related to our decision to
designate PDP regions that differ
somewhat from the MA regions. In
designating PDP regions, our primary
objective is to ensure that all
beneficiaries have reliable access to PDP
plans at the lowest possible cost. The
law requires that beneficiaries have a
choice of enrolling in at least two
qualifying plans, at least one of which
is a PDP. If it is not possible to achieve
that with PDP plans undertaking the
standard level of risk, the law makes
provision for limited risk PDPs, and in
cases where that does not occur a
fallback plan that is paid based on cost.
For several reasons, we believe it is
beneficial to have several PDP plans
operating in a region. Most importantly,
more plans means greater beneficiary
ability to obtain coverage that meets
their needs and greater competitive
pressure to provide high quality and
low costs. We also believe that PDPs
that assume some financial risk, as
opposed to a fallback plan that is paid
based on cost, are likely to negotiate
larger price concessions for
beneficiaries. In addition, more
competition for enrollees between PDPs,
as well as MA-PDs, is likely to generate
higher quality service for beneficiaries.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Given the goal of providing
beneficiary access to risk-bearing PDP
plans in as many areas as possible, we
considered the need to configure the
PDP regions that are different from MA
regions, and whether a different
configuration would contribute to this
goal. One of the principal questions we
needed to consider is whether regions
should be comprised of the largest
possible number (the 50 States, or a
close approximation), or a smaller
number of regions covering larger
geographic areas. Designating a smaller
number of regions that cover large
geographic areas might be desirable in
the sense that areas that might be less
likely to attract market interest could be
grouped with other more sought after
areas. Large regions might also offer
PDPs a larger potential enrollee market
that would provide more leverage in
negotiating rebates and discounts with
manufacturers. On the other hand,
regions of too large a size could deter
participation if there are concerns by
PDPs about providing uniform benefits
and bearing financial risk across large
and possibly diverse health care
markets. Furthermore, an important
consideration, which we received
comment on, is the administrative
capacity of PDPs to handle a large
volume of initial enrollees in the start­
up year, including distribution of plan
information, enrollment cards, and
answering beneficiaries’ inquiries
through call centers. Because of the
differences in enrollment expectations
between regional PPOs and PDPs, from
an administrative capacity standpoint it
is possible to design somewhat larger
geographic areas covering larger
populations for PPO regions than for
PDP regions. At the same time, to the
extent possible, having consistent or at
least very similar regions for the MAPDs and the PDPs will facilitate
beneficiary choice and Medicare
program administration. As was
announced on December 6, 2004, we
have established in the vast majority of
areas identical PDP and PPO regions. In
a limited set of situations, (that is, for 8
PPO multi-state regions), the regions
have been further subdivided to contain
a smaller number of States, and
consequently population sized PDP
regions. We have used our authority to
create PDP regions that are different
from the MA regions in those
circumstances where we believed it was
necessary to create a reasonably sized
potential population enrollment in
order to attract sufficient PDPs into the
region. While there are PDP regions
with larger populations, those regions
are typically a single State region.

PO 00000

Frm 00325

Fmt 4701

Sfmt 4700

4517

2. Bid Level Negotiations
As mentioned previously, the FEHBP
standard in 5 USC 8902(i) requires us to
ascertain that a PDP’s or MA-PD’s bid
‘‘reasonably and equitably reflects the
costs of benefits provided.’’ In addition,
we note that section 1860D–11(e)(2)(c)
of the Act requires that the portion of
the bid attributable to basic prescription
drug coverage must ‘‘reasonably and
equitably’’ reflect revenue requirements
. . . for benefits provided under that
plan, less the sum . . . of the actuarial
value of reinsurance payments.’’
Analogous to the manner in which the
Office of Personnel Management views
its FEHBP management responsibilities,
we see this requirement as imposing the
fiduciary responsibility to evaluate the
appropriateness of the overall bid
amount.
In general, we expect to evaluate the
reasonableness of bids submitted by atrisk plans by means of the actuarial
valuation analysis. This would require
evaluating the plan’s assumptions
regarding the expected distribution of
costs, including average utilization and
cost by drug coverage tier, for example,
in the case of standard coverage—(1)
those with no claims; (2) those with
claims up to deductible; (3) those with
claims between the deductible and the
initial coverage limit; (4) those with
claims between the initial coverage limit
and the catastrophic limit; and (5) those
with claims in excess of the catastrophic
limit. We could test these assumptions
for reasonableness through actuarial
analysis and comparison to industry
standards and other comparable bids.
Bid negotiation could take the form of
negotiating changes upward or
downward in the utilization and cost
per script assumptions underlying the
bid’s actuarial basis.
As discussed in greater detail in the
preamble, we considered the
circumstances and manner under which
we would need to use our authority to
carry out bid level negotiations. We
anticipate that market forces will
generally lead to efficient and
appropriate bid prices. In areas where
there is competition for enrollees among
a number of PDPs and MA-PDs that are
at-risk for the provision of Part D drug
coverage to beneficiaries, our strong
expectation is that we will be able to
rely on the incentives provided by
competitive bidding, and we would use
our authority for bid level negotiations
only on the rare occasion we find that
a plan’s data differs significantly from
its peers without any indication as to
the factors accounting for this result. If
there are any regions with minimal
competition (for example, just two Part
D plans) or less financial risk (for

E:\FR\FM\28JAR2.SGM

28JAR2

4518

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

example, just limited risk PDPs), we
anticipate that it is possible that bidlevel negotiations might be slightly
more common.
A second issue we considered is to
what extent we could negotiate
aggregate bid prices with fallback plans.
As mentioned elsewhere in the
preamble, similar to at-risk and limitedrisk plans, we will evaluate whether a
fallback plan bid is reasonably justified,
and if the price reference points appear
too high or low, we may request an
explanation of the bidder’s pricing
structure and the nature of their
arrangements with manufacturers. We
would also ensure that there is no
conflict of interest leading to higher
bids.
In addition, since fallback plans are
paid on a cost basis, there is
significantly less incentive for them to
negotiate lower drug prices and take
other steps to reduce drug expenditures.
Consequently, we also considered
options through the contracting process
to provide fallback plans with some
incentives to control cost. We expect to
tie fallback plan performance payments
to the plan’s ability to keep drug costs
below a certain level. We believe that
this carries out the Congress’
requirement under 1860D–11(g)(5)(B)(i)
of the Act that payments to fallback
plans take into account the plan’s ability
to contain costs through mechanisms
such as generic substitution or price
discounts. Under this approach, we
might include performance incentives
similar to those used in many pharmacy
benefit management contracts today,
such as the plan achieving certain
targets such as an average discount
(including manufacturer discounts) off
of AWP (or other pricing reference
points chosen by CMS), average cost per
script, average generic substitution rate,
average dispensing fee per script, or
average administrative fee per script.
However, because these incentives
would apply only to fallback plan
performance fees, they would not
provide as strong incentives for drug
cost control as the incentives faced by
risk-bearing plans to keep overall costs
down.
3. HSAs, FSAs, MSAs, and HRAs and
TrOOP
As discussed in the preamble of
subpart C, we considered how health
savings accounts (HSAs), flexible
savings arrangements (FSAs), health
reimbursement arrangements (HRAs),
and Archer MSAs should be treated
relative to beneficiary spending against
the annual out-of-pocket limit. Costs
that are paid by a Part D enrollee will
count as incurred, or true out-of-pocket
(TrOOP) costs, while costs that are paid

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

by a ‘‘group health plan,’’ ‘‘insurance or
otherwise,’’ or ‘‘third party payment
arrangements’’ through which Part D
enrollees may be reimbursed will not
count as TrOOP expenditures. The issue
we considered was whether
expenditures from an HSA, FSA, Archer
MSA, or HRA are to be exempted from
the definition of ‘‘group health plan’’
and treated as expenditures that are
incurred by a beneficiary.
The statute provides that the
Secretary may establish procedures ‘‘for
determining whether costs for Part D
eligible individuals are being
reimbursed through insurance or
otherwise, a group health plan, or other
third-party payment arrangement..’’ We
believe the statute thus grants us
discretion to decide whether personal
savings vehicles are equivalent to such
plans for the purpose of applying the
incurred costs rule.
As noted previously, we agree with
the majority of commenters that HSAs,
FSAs, and Archer MSAs are similar to
beneficiaries’ bank accounts in the sense
that such accounts consist of funds set
aside by a beneficiary for his or her
personal use, as opposed to group
health plan contributions which are
essentially pooled for the benefit of
numerous enrollees in a structured
benefit plan.
We do not think, as previously
summarized, that allowing HSA, FSA,
and Archer MSA expenditures to count
toward the TrOOP would create a
double taxpayer subsidy. Because a
beneficiary’s own savings, when not in
the context of an HSA, FSA, or Archer
MSA, will be counted as incurred costs
for the purpose of meeting the true-out­
of-pocket threshold, there will be no
differential treatment of funds on the
expenditure side. In contrast, we believe
that to not except HSAs, FSAs, and
Archer MSAs from our definition of
‘‘group health coverage’’ would create
an unjustifiable penalty on beneficiaries
for the use of personal health savings
vehicles. We have determined that the
action most consistent with the intent to
count an individual eligible’s
contributions toward incurred costs is to
exempt personal savings vehicles
(HSAs, FSAs, and Archer MSAs) from
our definition of ‘‘group health plan.≥
However, we think that health
reimbursement arrangements (HRAs)
differ from HSAs, FSAs, and Archer
MSAs because HRAs are solely
employer-funded; therefore, we
considered them separately. HRAs are
fundamentally different from HSAs,
FSAs, and Archer MSAs, which are
funded at least in part by the individual.
Due to this distinction, we have
determined that HRA contributions

PO 00000

Frm 00326

Fmt 4701

Sfmt 4700

should not count toward the true-out-of­
pocket threshold. To reflect this
distinction, we have added a definition
to the regulation that defines ‘‘personal
savings vehicles’’ to include HSAs,
FSAs, and Archer MSAs; the definition
does not include HRAs.
4. Actuarial Equivalence of Retiree Drug
Subsidy and Interactions with Other
Means of Enhancing Retiree Drug
Coverage
As discussed previously, the MMA
requires that plans qualifying for the
retiree drug subsidy must offer retiree
drug benefits that are at least actuarially
equivalent to those available under the
standard Part D benefit. The MMA also
provides the Secretary with the
authority to determine the standards
and methods for specific actuarial
equivalence requirements associated
with qualifying for the retiree drug
subsidy.
In considering the issues related to
actuarial equivalence, we have been
very cognizant that the Congress has
clearly and repeatedly articulated four
key policy objectives for the Medicare
retiree drug subsidy program created by
Section 1860D–22 of the Act and for
securing and enhancing retiree drug
coverage more generally through the
other means of assuring high quality
retiree drug coverage that are provided
by the Act (including, as described
above, employer/union wraparound
coverage and employer/union support
for enhanced Part D plans). As
discussed previously, our consideration
of the various alternatives for
determining actuarial equivalence in the
context of the retiree drug subsidy
reflects these four policy objectives: 1)
maximizing the number of Medicareeligible retirees with high quality
employment-based retiree drug
coverage, and maximizing the
generosity of their coverage; 2) avoiding
financial windfalls in the retiree drug
subsidy program by ensuring that plan
sponsors contribute at least as much to
retiree drug coverage as Medicare pays
them as a subsidy; 3) minimizing
administrative burden while
maximizing flexibility for employers
and unions; and 4) fulfilling our
fiduciary responsibility by limiting
overall budgetary costs.
As discussed elsewhere in this
document, for more than a decade prior
to enactment of the MMA, employers
have been systematically reducing the
availability and generosity of the level
of retiree drug coverage offered,
particularly for future retirees. The
MMA provisions creating Part D provide
multiple options for assisting plan
sponsors in continuing to provide high

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
quality retiree drug benefits. Sponsor
options range from participating in the
retiree drug subsidy program to taking
advantage of various mechanisms for
complementing the drug coverage that
their retirees receive through Part D
plans by providing additional coverage
over and above the standard Part D
benefit that, in combination with
standard Part D coverage, maintains or
exceeds the generosity of their current
benefit designs. As discussed earlier in
this impact analysis, there is
considerable uncertainty about how
plan sponsors will respond to the
various options that are available to
them under Medicare Part D. In the
proposed rule, we sought comments on
how best to use the Secretary’s statutory
authority in setting the specific actuarial
equivalence requirements related to
qualifying for the retiree drug subsidy,
while balancing the various tradeoffs
and interactions among our key policy
objectives. Our ultimate goal in
implementing these MMA provisions is
not only to protect but also to enhance
the availability of high quality drug
benefits for retirees.
a. Options for Determining Actuarial
Equivalence
In the proposed rule, we discussed
various possible options for determining
actuarial equivalence, and sought
comments on desirability and legal
bases for the different options, as well
as on plan sponsors’ likely responses to
the different approaches for determining
actuarial equivalence. We received a
substantial number of comments
encouraging flexibility in the
methodology for determining actuarial
equivalence. The preamble considers
the issues that were raised in the
various comments that we received, and
describes the policy decisions that we
made relating to these issues. A
discussion of the options that we
considered relating to the actuarial
equivalence standard and plan
definition that will be used in
determining actuarial equivalence for
the purpose of qualifying for the retiree
drug subsidy program follows.
i. Actuarial Equivalence Standard
One important factor that will affect
how employers and unions respond to
the retiree drug subsidy relates to the
actuarial equivalence standard. As
discussed earlier in this impact analysis,
while we believe that most of the
employment-based retiree drug coverage
that is currently available in the
marketplace is at least as generous as
the standard Part D benefit on a gross
value basis, there is considerable
variation in employers’ and unions’
contributions to the cost of retiree
coverage (for example, approximately 30

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

percent of the large private sector firms
with 1,000 or more employees that
currently offer retiree health coverage to
new Medicare-age retirees require those
retirees to pay 61 to 100 percent of the
cost of their retiree health premiums,
according to the 2004 Kaiser/Hewitt
Survey on Retiree Health Benefits).
Thus, the actuarial equivalence standard
that is selected will affect the number of
employers and unions that are able to
qualify for the substantial assistance
that is available through the retiree
subsidy. As noted previously, however,
the retiree drug subsidy is one of several
options available to employers and
unions for continuing to provide
assistance with drug costs.
As discussed in the preamble, our
proposed rule described three potential
standards for determining actuarial
equivalence in the context of the retiree
drug subsidy: 1) a single prong ‘‘gross
value’’ test in which the value of the
sponsor’s retiree drug plan design is
compared with the value of the standard
Part D plan design, without taking the
financing of the coverage into account
(the same test as for ‘‘creditable
coverage,’’ which would generally
require that the expected amount of
paid claims under the sponsor’s retiree
drug coverage be at least equal to the
expected amount of paid claims under
the standard Part D benefit); 2) a gross
value test as in the first option, with an
additional stipulation restricting the
subsidy payment that a plan sponsor
receives to no more than what the
sponsor contributed to the cost of the
retiree drug coverage on behalf of its
retirees; and 3) a two-prong test in
which the first prong is the ‘‘gross
value’’ test as in the first option, and the
second prong is a ‘‘net value’’ test which
takes into account the sponsor’s
contribution toward the financing of the
retiree prescription drug coverage. We
also discussed several variants for
determining the threshold value of the
second prong in the third option, the
‘‘net value’’ test, including: a) the
average per capita amount that Medicare
will expect to pay for the retiree drug
subsidy (the lowest variant); b) the after­
tax value of the retiree drug subsidy
(since the retiree subsidy payments are
not subject to Federal income tax); and
c) the expected value of paid claims
under standard Part D coverage minus
the retiree’s expected monthly
beneficiary premiums for such coverage
(the highest variant).
In the proposed rule, we stated that
the first option (single-prong gross value
test) could not by itself preclude the
existence of windfalls because unless
financing is considered, an employer or
union could theoretically impose as

PO 00000

Frm 00327

Fmt 4701

Sfmt 4700

4519

much as the full cost of the retiree drug
coverage on the retiree through retiree
premiums, and still be eligible for a
subsidy payment if the value of the drug
benefit that the employee was paying for
was at least equal to the value of the
standard Part D benefit. We also noted
that the second option (single-prong
gross value test with a requirement that
the retiree drug subsidy payment
amount could not exceed the amount
paid by a plan sponsor on behalf of its
retirees) would preclude windfalls and
be relatively easy to operationalize, but
stated that we had questions about the
adequacy of the legal basis
underpinning this option. Similarly, we
stated that the third option (two-prong
test of the gross value and net value of
the sponsor’s retiree drug coverage)
would preclude windfalls, and that each
of the three potential variants of the
second prong of the two-prong test (that
is, the net value test) would also
preclude windfalls. However, we noted
that each of these variants provides a
different balance between the
potentially competing objectives of
maximizing the number of plan
sponsors that participate in the retiree
drug subsidy and providing greater
protection to beneficiaries.
The vast majority of comments that
we received from both business groups
and beneficiary advocacy groups
supported the two-prong test (the third
option) as best serving our stated goals
of maximizing the number of retirees
that retain their employer or unionsponsored retiree drug coverage while
not creating windfalls to plan sponsors.
However, we did receive several
comments that supported the gross
value test (the first option) because they
felt there was no legislative authority to
require any other test, or because they
were concerned that they would not be
able to qualify for the retiree drug
subsidy based on a net value test (due
to relatively high retiree premium
contribution levels in their plans).
We received a variety of comments
relating to the threshold value for the
second prong of the two-prong test, with
beneficiary advocacy and union groups
generally supporting the highest variant
that was identified in the proposed rule
(that is, the expected value of paid
claims under standard Part D coverage
minus the retiree’s expected monthly
beneficiary premiums for such coverage)
due to concerns about the potential for
cost-shifting, and employer groups
supporting the lowest variant that was
identified in the proposed rule (that is,
the average per capita amount that
Medicare expects to pay for the retiree
drug subsidy in a given year) due to
concerns about maximizing employer

E:\FR\FM\28JAR2.SGM

28JAR2

4520

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

and union eligibility for the retiree drug
subsidy. Additionally, several employer
groups proposed that we consider an
additional variant for the net value test,
which would involve either: 1)
determining the expected value of
claims paid under Part D by adjusting
for the impact that the true-out-of­
pocket (TrOOP) provision would have
on the value of the reinsurance subsidy
portion of the standard Part D benefit if
an employer or union chose to provide
their retirees with additional coverage
that supplemented the standard Part D
benefit; or 2) allowing plan sponsors to
use the expected per capita value of the
retiree drug subsidy that they would
receive (based on their own claims
experience) as a proxy for this test since,
by their calculation, both of these
approaches would result in
approximately the same value. These
employer groups asserted that their
proposed alternative variant would
provide a more appropriate comparison
because the relative value of the
standard Part D benefit would be lower
for their retirees since catastrophic
coverage is only available when an
individual’s TrOOP expenses exceed a
specified threshold, and employers/
unions’ contributions for supplemental
drug coverage would not count toward
the beneficiary’s true out-of-pocket
spending for purposes of TrOOP.
As discussed in the preamble, the
approach that we have taken in the final
rule with regard to the actuarial
equivalence standard seeks to balance
our various policy goals within the
context of our statutory authority. We
agree with the majority of commenters
that the two-prong test best
accomplishes our goals of maximizing
the number of beneficiaries retaining
employment-based retiree drug coverage
while not creating windfalls to
sponsors. We also believe that the MMA
statutory provisions impose some
constraints on the methods that can be
used in determining actuarial values for
the purpose of qualifying for the retiree
drug subsidy.
For these reasons, we have decided to
require the use of a two-prong test for
determining actuarial equivalence in the
contest of the retiree drug subsidy, with
the first prong of the test (the gross
value test) generally requiring that the
expected amount of paid claims under
the sponsor’s retiree drug coverage be at
least equal to the expected amount of
paid claims under the standard Part D
benefit. We have also decided to
establish that employment-based retiree
drug coverage satisfies the net value
portion of the actuarial equivalence test
if its actuarial value (as determined after
reducing the gross value of the benefit

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

by expected retiree premiums) is at least
equal to the net value of defined
standard prescription drug coverage
under Part D (as determined after
reducing the gross value of the benefit
by the expected monthly beneficiary
premiums), with the net value of the
defined standard prescription drug
coverage reflecting the impact of having
an employer’s or union’s coverage
supplement a retiree’s Part D coverage
and thus increase the point at which the
retiree would receive catastrophic Part
D benefits. We will require sponsors to
calculate the value of the drug coverage
provided under the sponsor’s plan and
the defined standard prescription drug
coverage under Part D based upon their
own claims experience for plan
participants (or their spouses or
dependents) who are Part D eligible
individuals because we believe that the
plan sponsors’ claims experience for
these individuals best reflects the true
value of the prescription drug coverage
under the plan. However, we will allow
plan sponsors that do not have
sufficient claims data to support a
reasonable calculation based on actual
claims data to utilize alternative
normative databases in accordance with
our guidance. Our guidelines on the
appropriate methodology for applying
this two-prong actuarial equivalence test
will also include simplified actuarial
methods that could be used by plan
sponsors that may have difficulty
measuring the TrOOP impact associated
with their benefit design.
We believe that this approach
effectively balances our policy
objectives of maximizing the number of
beneficiaries who receive high quality
retiree drug coverage while avoiding the
creation of windfalls. We agree that
employers and unions are likely to
consider the effects that TrOOP will
have on the value of the Part D benefit
for their retirees (that is, reducing the
value of the reinsurance subsidy for
catastrophic coverage) as one of the
factors in their decision making. In this
context, we agree with the commenters
who stated that employers and unions
will be deciding among several options,
including continuing to sponsor a plan
for retiree drug coverage by electing the
retiree drug subsidy, sponsoring or
becoming a PDP, or providing
wraparound coverage that supplements
Part D. While we understand the
concerns of some commenters relating
to the potential for cost-shifting to occur
if a lower threshold value is used for the
net value test, we note that the ongoing
erosion that has occurred in the
generosity of retiree health coverage in
recent years, through increases in

PO 00000

Frm 00328

Fmt 4701

Sfmt 4700

retirees’ premium contributions and
cost-sharing arrangements, indicates
that many plan sponsors already had an
incentive to restructure the costs of their
retiree health benefits prior to the
enactment of the MMA. We do not
believe that the Medicare retiree drug
subsidy program, in and of itself, creates
any additional incentives for plan
sponsors to shift costs than what already
exists; indeed, as discussed elsewhere
in this impact analysis and in the
proposed rule, employer survey results
suggest that prior to the MMA many
plan sponsors were already planning on
making additional increases in retirees’
premiums and cost-sharing within the
next few years in an effort to manage the
cost of retiree health coverage. Rather,
we believe that the presence of the
additional resources that are available
through the retiree drug subsidy
program, as well as the use of the twoprong actuarial equivalence test, will
provide an incentive for more
employers and unions to retain the
generosity of their existing retiree drug
coverage than would have occurred
absent the law change. Thus, we believe
that accounting for the effect of TrOOP
in the net value portion of the twoprong actuarial equivalence test will
assist in maximizing the number of
employers and unions that will qualify
for and choose to apply for the retiree
drug subsidy, thereby helping to
maximize the number of Medicare
beneficiaries that will be able to retain
their employment-based retiree drug
coverage.
ii. Plan Definition
Another important factor that will
affect employers’ and unions’ responses
to the retiree drug subsidy program
relates to plan definition that will be
used for the purpose of determining
actuarial equivalence in the context of
the retiree drug subsidy. In this case, the
primary issue relates to whether
employers and unions that offer
multiple benefit designs within a given
retiree health plan (for example, with
differing retiree contribution levels and/
or cost-sharing arrangements) will be
required to apply the actuarial
equivalence test across all of the
beneficiaries in the plan, or if these
employers and unions should be
allowed to apply the actuarial
equivalence test to subgroups of
beneficiaries and/or benefit designs
within a given plan, if they choose to do
so.
As discussed in the preamble, in the
proposed rule, we proposed to adopt the
rules in COBRA regulations for
determining the number of group health
plans an employer or union sponsor
provides. Under those rules, all benefits

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
offered by a plan sponsor would be
treated as one group health plan unless
the sponsor treats them as separate
plans through its plan documents and
operations. The proposed rule also
stated that plan sponsors would be
required to determine actuarial
equivalence for each plan ‘‘as a whole.’’
That is, a given plan would be
determined to be actuarially equivalent
if, on average, the actuarial value of the
retiree drug coverage under the plan is
at least equal to the actuarial standards
described above.
While several employer groups agreed
with our use of the COBRA plan
definition, they also indicated that plan
sponsors need additional flexibility to
distinguish among retirees with
differing arrangements within a single
plan when establishing actuarial
equivalence (such as groups of retirees
with different benefit arrangements
characterized by contribution or benefit
levels based on years of service, date of
retirement, collectively bargained status,
status as a member of a ‘‘grandfathered’’
group of retirees, or other factors). These
commenters stated that many plan
sponsors may use a single
administrative system to administer
multiple benefit designs, and it is not
uncommon that a given retiree health
plan would include both a
grandfathered group of retirees for
whom the employer makes a substantial
contribution and a non-grandfathered
group with limited or no employer
contributions. These commenters also
expressed concern that it is possible that
such a plan might not be able to qualify
for the retiree drug subsidy based on its
average actuarial value due to the
averaging of the generous benefits of the
grandfathered retirees with the less
generous benefits of the non­
grandfathered retirees that are in the
same plan. For this reason, they
recommended that sponsors should be
given the discretion to aggregate all
retirees in a single plan as a whole or
to apply the actuarial equivalence test to
each individual ‘‘benefit option’’ within
a plan in order to maximize the number
of employers and unions that are able to
qualify to receive retiree drug subsidy
payments. However, a few commenters
expressed concern that the plan
definition that is used for the purpose
of the retiree drug subsidy should
minimize the extent to which some
classes of retirees are offered, and
employers/unions receive subsidy
payments for, retiree drug coverage that
is inferior to the standard Part D benefit.
We believe the MMA provisions give
CMS the authority to provide for the
actuarial attestation to be submitted for
the plan as a whole or to require that

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

separate actuarial attestations be
provided for each benefit option within
a single plan. We also believe that by
providing increased flexibility in the
requirements for qualifying for the
retiree drug subsidy, we can increase
the incentive to plan sponsors to
maintain their retiree drug coverage,
and thereby maximize the number of
Medicare retirees that retain their
employment-based retiree drug
coverage. However, we also believe that
the MMA requires us to insure that all
beneficiaries in plans that are receiving
the retiree drug subsidy have creditable
drug coverage that is at least equal in
value to the standard Part D benefit.
In an effort to balance these concerns,
we have added provisions in the final
rule to allow plan sponsors the
flexibility of choosing whether to apply
the net prong of the actuarial
equivalence test to their plan as a
whole, or to apply the net prong of the
actuarial equivalence test to each
individual benefit option within a plan.
In this context, a sponsor will only be
allowed to apply the net prong of the
actuarial equivalence test to a given
retiree drug plan on an aggregate basis
if each benefit option in that plan
qualifies as creditable coverage (that is,
each benefit design under the plan must
meet the gross value test, which is the
first prong of the two-prong actuarial
equivalence test). A plan sponsor that
fails to meet that standard for a given
plan will be required to apply the net
prong of the actuarial equivalence test to
each individual benefit option within
that plan for the purpose of qualifying
for the retiree drug subsidy. However,
sponsors may aggregate together the
benefit options within the plan that
meet the creditable coverage standard
(that is, the gross value test) for
purposes of the net prong of the
actuarial equivalence test. We believe
that these requirements will maximize
plan sponsors’ flexibility, protect
beneficiaries, and reduce the chance of
windfalls being created.
b. Interaction With Other Means of
Enhancing Retiree Drug Coverage
We recognize that employers’ and
unions’ decisions about choosing
between obtaining the retiree drug
subsidy versus using other means to
provide additional retiree drug coverage
that complements the standard Part D
benefit (for example, by offering
supplemental drug coverage that wraps
around a Part D plan, or providing
enhanced coverage through a PDP or
MA-PD) will depend on the relative
attractiveness of each of these options,
given their particular circumstances. We
believe that the flexibility that we have
provided in this final rule with regard

PO 00000

Frm 00329

Fmt 4701

Sfmt 4700

4521

to the actuarial equivalence
requirements related to qualifying for
the Medicare retiree drug subsidy will
help to make the retiree drug subsidy an
attractive and feasible option for many
employers and unions.
Additionally, as discussed earlier, we
note that in addition to the retiree drug
subsidy, Medicare Part D also gives
employers and unions a variety of other
options for continuing to provide
prescription drug assistance to their
Medicare-eligible retirees. We believe
that these additional approaches to
providing generous retiree coverage will
be attractive to employers and unions
who may not make sufficient
contributions or provide sufficiently
generous coverage on their own to
qualify for the retiree drug subsidy.
Ultimately, we believe that this
combination of approaches will
maximize the number of beneficiaries
who continue to receive employmentbased assistance with their drug
coverage as a result of combining the
additional resources for supporting
retiree health coverage that are available
through Medicare Part D with
contributions from employers and
unions.
5. Retiree Subsidy—Payment
Methodology and Data Reporting
a. Method and Frequency of Medicare
Retiree Drug Subsidy Payments
We believe that the statute gives us
broad discretion to determine the
methodology and timing for distributing
the Medicare retiree drug subsidy
payments. The proposed rule covered in
detail the various options for calculating
and making these payments.
Specifically, we presented several
alternatives for the method and
frequency of subsidy payments and
rebates, and included a discussion of
whether payments should be based on
an employer or union’s plan year or
calendar year.
Regarding the method and frequency
of payments, we described four options
in the proposed rule: (1) monthly
payments based on actual experience
with monthly adjustments for price
concessions; (2) a single end-of-year
payment based on plan sponsors’
submission of actual cost data including
rebate data at the close of the plan year;
(3) multiple payments at interims
throughout the year based on estimates
of claims, rebates, chargebacks, and
discounts, with an end-of-year
reconciliation; or (4) periodic lagged
payments throughout the year based on
actual claims experience and estimates
of discounts, chargebacks, and rebates,
with an end-of-year reconciliation. A
detailed discussion of these four options
can be found in the proposed rule. In

E:\FR\FM\28JAR2.SGM

28JAR2

4522

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

short, annual retroactive payments
would have the greatest administrative
simplicity compared to interim or
monthly payments; however, more
frequent payments would provide a
more even cash flow for sponsors. In
addition, making payments based on
estimates rather than actual costs would
allow for faster payments to sponsors,
but would require additional work to
produce actuarially sound estimates and
later to reconcile estimates with actual
experience, and would potentially have
a greater risk that substantial
overpayments or underpayments could
occur.
In the proposed rule, we stated that
option one was our preferred approach.
Under this option, the plan sponsor
would submit the amount of beneficiary
spending eligible for the retiree subsidy
by the 15th of the month following each
monthly payment period. Sponsors
would also submit the amount of any
rebates, discounts, other price
concessions received, and any
adjustments to actual expenditures from
prior months. By the 30th of each
month, Medicare would make a subsidy
payment based on the certified amount
for the preceding month and adjusted
for price concessions recognized for
prior months. At the end of the calendar
year, there would be a final
reconciliation of actual costs except for
any outstanding price concessions,
which would be accounted for when
they are received or recognized, and
reconciled as an offset of a future
monthly payment.
The responses to our proposed
alternatives were mixed. While
recognizing that plan sponsors may
prefer different methods and frequency
of payments based on their unique
situations, we proposed option one as
our preferred approach because we
wanted to balance employers’ and
unions’ perceived preference for
frequent payments with a desire to
avoid overly complex administrative
procedures. Although we felt that this
solution reasonably balanced various
concerns, the comments we received
indicated that flexibility is needed to
reflect different circumstances of
individual sponsors.
Thus, our final decision was to create
a flexible payment system in which
employers and unions could choose
among multiple methods of receiving
payment. We will allow a sponsor to
receive payments on a monthly,
quarterly, or annual basis. Under the
monthly or quarterly option a sponsor
will provide the aggregated actual gross
covered retiree plan-related prescription
drug costs incurred for all of its
qualifying covered retirees during the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

payment period for which it is claiming
a subsidy payment, an estimate of the
difference between these gross costs and
allowable costs (based on expected
rebates and other price concessions),
and any other data CMS may require.
Sponsors choosing the monthly or
quarterly payment options would then
be required to provide within 15 months
after the end of the plan year the total
gross covered retiree plan-related
prescription drug costs for the plan year
segregated by each qualifying covered
retiree; actual rebate/discount/other
price concession data for the plan year
in question; and any other data CMS
may require.
Under the annual payment approach,
we will offer two payment options: (1)
a one-time final annual payment, in
which a sponsor will submit actual cost
and rebate/discount/other price
concession data per retiree within 15
months after the end of the plan year;
or (2) an interim annual payment, in
which a sponsor after the end of the
plan year will submit the aggregated
actual gross drug costs incurred for all
of its qualifying covered retirees for
which it is claiming a subsidy payment;
an estimate of the difference between
these gross costs and allowable costs
(based on expected rebates and other
price concessions); and any other data
CMS may require after the end of the
plan year. Sponsors choosing the
interim annual payment option would
then be required to provide within 15
months after the end of the plan year the
total gross covered retiree plan-related
prescription drug costs for the plan year
segregated by each qualifying covered
retiree; actual rebate/discount/other
price concession data for the plan year
in question; and any other data CMS
may require. In cases where
manufacturer rebates, discounts, and
other price concessions are not
specifically allocated to the drug
spending of a particular qualifying
covered retiree, we will permit the plan
sponsor (or its agent) to assign these
rebates/discounts/other price
concessions to their qualifying covered
retirees based on reasonable actuarial
principles.
b. Plan Year Versus Calendar Year
The proposed rule included a
discussion of whether to use a plan year
or calendar year in determining the
retiree drug subsidy amount. As with
the method and frequency of payments,
commenters’ preferences were mixed
with respect to this issue. We had
originally proposed the calendar year
approach because it would be the least
burdensome method for us to
administer. This approach is most
straightforward since the cost threshold

PO 00000

Frm 00330

Fmt 4701

Sfmt 4700

and cost limit levels are determined on
a calendar year basis. However, we
recognize that using a plan year
approach would be more consistent
with the administrative practices of plan
sponsors whose plan operations are
based on a non-calendar year. In
response to numerous comments
requesting flexibility in this area, we
have determined that a plan-year
approach should be used. Using a planyear approach, we will be able to
accommodate employer or unionsponsored plans that are structured
around either a calendar-based plan
year or a non-calendar plan year.
A non-calendar year approach to
retiree subsidy payments requires the
creation of rules for: (1) determining
whether a sponsor’s plan is actuarially
equivalent to Part D for purposes of
qualifying for the retiree subsidy; (2)
applying the cost threshold and cost
limit, which function on a calendar-year
basis, to the plan year; and (3)
determining retiree subsidy payments
for employers/unions with a plan year
that straddles 2005 and 2006 when the
Medicare retiree drug subsidy begins. In
subpart R of the preamble we present
the options for calculating subsidy
payments using a plan year approach
with respect to each of these factors. In
summary, we determined that the cost
threshold and cost limit for the calendar
year in which the plan year ends will be
used for determining subsidy payments.
For the purpose of determining actuarial
equivalence, a plan sponsor may use the
elements of the defined standard
prescription drug coverage from the
calendar year before the year in which
the plan year ends, provided that the
attestation of actuarial equivalence is
submitted no later than 60 days after the
publication of the new coverage limits
for the upcoming calendar year. During
the transition to the retiree subsidy
program for employers/unions with a
plan year beginning in 2005 but ending
in 2006, subsidy amounts will be
determined on a monthly basis for the
entire plan year (2005–2006), but will
only be paid for claims incurred in
2006.
c. Retiree Subsidy Data Collection
Another issue we considered related
to the retiree drug subsidy is what type
of data should be collected from plan
sponsors. Our objectives in making this
decision were to minimize the burden
on plan sponsors while ensuring that we
receive adequate data to correctly
determine subsidy payments to plan
sponsors. Regardless of the method that
is used to make the retiree subsidy
payments, we will need data from plan
sponsors to calculate the appropriate
payment levels. The question is whether

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
actual cost data should be submitted by
plan sponsors on an individual retiree
basis or in an aggregated format.
We considered several alternatives in
this area. CMS could require that plan
sponsors submit: (1) aggregate allowable
costs of all eligible retirees in the plan
for the relevant time period; (2) costs
aggregated over the relevant time period
for each individual in the plan; (3) a
combination of individual and aggregate
data; or (4) actual claims data for each
individual retiree in the plan.
Many commenters favored option
one, aggregated reporting of allowable
retiree costs, because employers and
unions may not currently keep records
of individual costs for some of the
elements that must be submitted to
CMS. However, it is important that the
data submissions are sufficiently
detailed to ensure that we can make
accurate payments to plan sponsors. We
ultimately determined that data
aggregated across all plan enrollees
would not be sufficient to fulfill this
purpose.
As described in the proposed rule, we
previously ruled out the fourth option
because we believe requiring
submissions of enrollee level claims
data would be overly burdensome for
plan sponsors taking the subsidy and
raise privacy concerns. Option two—
aggregate per enrollee data—would
create some administrative burdens and
privacy concerns, but to a lesser and
more reasonable degree than a claims
level data requirement.
A combination approach to data
collection would diminish the negative
effects of individual level data
submissions while providing for
sufficient assurance of payment
accuracy. For instance, we could require
the type of submission described in
option two for the first two years of the
subsidy, and require the type of
submission described in option one
thereafter. Alternatively, the format of
data we require might vary depending
on the timing of the plan sponsor’s
submission within a plan year.
We determined that the latter of these
two combinations is better aligned with
the various payment methodologies that
will be used under the retiree subsidy
program. If a sponsor elects to receive
monthly or quarterly retiree subsidy
payments or an interim annual retiree
subsidy payment, the plan sponsor will
be required to submit aggregated gross
cost data, an estimate of the difference
between these gross costs and allowable
costs (based on expected rebates and
other price concessions), and any other
data CMS may require upon submission
of data for payment at each of the time
intervals elected by the sponsor, with a

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

final reconciliation within 15 months
after the end of the plan year. Using
aggregated data for interim monthly,
quarterly or annual payments will allow
plan sponsors to receive more frequent
payments without a disproportionate
administrative burden.
Regardless of the payment method
chosen, for final reconciliation purposes
all sponsors will be required to submit
total gross cost data segregated per
qualifying covered retiree; actual
rebates, discounts, or other price
concessions received for such costs; and
any other data CMS may require, within
15 months after the end of the plan year.
This requirement will provide assurance
that subsidy payments are appropriate
for the actual costs incurred. If rebates
and other price concessions for a plan
are not specifically allocated by a
manufacturer to the drug spending of a
particular qualifying covered retiree, a
sponsor will be permitted to assign such
price concessions to qualifying covered
retirees using reasonable actuarial
principles. For sponsors who choose the
monthly, quarterly, or interim annual
payment option, the final data
submission will serve as the basis for
the reconciliation process, in which we
will adjust the payments made for the
plan year in question in a manner that
we will specify in separate guidance.
For sponsors who choose the one-time
final annual payment method, this will
be the primary submission of cost data
required for payment. However, as
discussed in the preamble, plan
sponsors who choose either of the
annual payment options will still be
required to provide us with updates of
their enrollment information on a
monthly basis.
6. Beneficiary Access to Drugs in LongTerm Care Facilities
Section 1860D–4(b)(1)(C)(iv) of the
Act provides that, in establishing rules
for convenient access to network
pharmacies, we may include standards
with respect to access to long-term care
pharmacies for Part D enrollees who
reside in skilled nursing facilities and
nursing facilities (hereinafter referred to
as ‘‘long-term care facilities’’). While we
do not directly regulate long-term care
pharmacies, this rule will indirectly
influence their operations. Long-term
care facilities generally contract with
one long-term care pharmacy to supply
the prescription drugs needed by the
residents. With the implementation of
Part D, in order to serve Medicare Part
D enrollees as a network pharmacy,
these long-term care pharmacies will
have to contract with both the facility
and the Part D plans serving the region.
In the proposed rule, we stated our goal
of balancing convenient access to long-

PO 00000

Frm 00331

Fmt 4701

Sfmt 4700

4523

term care pharmacies with appropriate
payment to long-term care pharmacies
under the provisions of the MMA. We
proposed two potential options to meet
this goal and requested public comment.
Under one option, we would use the
authority provided under section
1860D–4(b)(1)(C)(iv) of the Act to
require prescription drug plans and MA­
PD plans to approach some or all longterm care pharmacies in their service
areas with at least the same terms
available under their plans’ standard
pharmacy contracts. Alternatively, we
would not require that plans contract
with long-term care pharmacies and
would, instead, strongly encourage PDP
sponsors and MA organizations offering
MA-PD plans to negotiate with and
include long-term care pharmacies in
their plans’ pharmacy networks.
To the extent that we require Part D
plans to solicit long-term care
pharmacies in their service areas to join
their networks, plans may be forced to
negotiate preferential contracting terms
and conditions (relative to the terms
they would offer any other pharmacy
willing to participate in its network) for
long-term care pharmacy-specific
packaging and services with a number
of long-term care pharmacies in order to
meet our requirement. If we require Part
D plans to contract with any long-term
care pharmacy in a service area, we
cannot compel long-term care
pharmacies to accept the plans’ terms
and conditions. Yet, given the
additional risk associated with
institutionalized beneficiaries, it may
not be sufficient to rely on the market
alone to ensure that Part D plans
include a sufficient number of long-term
care pharmacies in their networks.
Absent a contracting mandate, Part D
plans may view contracting with longterm care pharmacies—given the risk
associated with institutionalized
beneficiaries—as too risky.
If we do not require Part D Plans to
contract with long term care
pharmacies, some Part D enrollees in
long-term care facilities may be served
by plans whose networks do not include
the long-term care pharmacy under
contract with their long-term care
facility. As a result, long-term care
facilities could face an additional
administrative burden-managing
covered Part D drugs supplied by
multiple sources (such as other longterm care pharmacies, and mail-order
pharmacies). This scenario differs from
current industry practices of most longterm care facilities. In the absence of
direct collaboration between a plan and
a Part D enrollee’s long-term care
pharmacy, it would be difficult for long­

E:\FR\FM\28JAR2.SGM

28JAR2

4524

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

term care facilities to meet Federal
pharmacy management standards.
The second option (that is, do not
require but encourage Part D plans to
negotiate with and include long-term
care pharmacies in their networks)
would allow for the long-term care
pharmacies to maintain their existing
one-on-one relationships with long term
care facilities. However, for
beneficiaries whose Part D plan
networks do not include the long-term
care pharmacy under contract with their
long-term care facility, accessing out-of­
network pharmacies could remain a
problem. However, it is important to
note that the Final Rule provides a
special enrollment period for PDP
enrollment and disenrollment for
beneficiaries entering in, living in, or
leaving an institution. In addition,
individuals enrolled in MA-PD plans
have an unlimited open enrollment
period for institutionalized individuals.
In addition, we believe that relying on
the pharmacy access standards in
§ 423.120(a) of our final rule will not
assure sufficient access to long-term
care pharmacies, since many of these
pharmacies are not retail pharmacies
and therefore would not count toward
those requirements.
We believe it is essential to inject
competition into the long-term care
pharmacy market while preserving the
relationships and levels of service that
long-term care facilities now enjoy visa`-vis their contracted long-term care
pharmacies. As discussed in greater
detail in the preamble for subpart C, our
Final Rule will require that Part D plans
offer standard contracting terms and
conditions, including product
performance and delivery and
packaging requirements to all long-term
care pharmacies in their service areas.
We will also require Part D plans to
demonstrate that they have contracts
with a sufficient number of long-term
care pharmacies to ensure ‘‘convenient
access’’ to prescription drugs for
institutionalized beneficiaries within
the region.
To further assure ‘‘convenient access’’
to a pharmacy for long-term care
residents, we will allow each long-term
care facility to select one or more
eligible network pharmacies to provide
a plan’s long-term care drug benefits to
its Medicare residents. In order to
minimize the number of pharmacy
suppliers and maintain patient safety,
long-term care facilities will likely
select long-term care pharmacies
meeting Part D standards that
participate in the largest number of plan
networks. To maintain convenient
access and minimize out-of-pocket
expenditures, plan beneficiaries would

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

obtain Part D benefits from the eligible
long-term care pharmacy selected by the
facility. As noted previously,
beneficiaries in long-term care facilities
are eligible for special enrollment
periods. In order to preserve their
existing relationships with long-term
care facilities, all long-term care
pharmacies will likely have to accept
the terms and conditions (and network
pricing) offered by the Part D plan or
lose the plan’s entire book of business
to another long-term care pharmacy. We
believe that our long-term care
pharmacy access rules will align
incentives for competition while
maintaining beneficiary access to the
necessary services.
7. Coordination of Benefits and TrOOP
We also considered options regarding
implementing provisions in the statute
related to coordination of benefits
between PDP and MA-PDs and SPAPs
and other insurance coverage. Under
Option 1, the PDPs and MA-PD plans
would be solely responsible for tracking
TrOOP costs. Under Option 2, we would
be involved, hiring a TrOOP facilitation
contractor to establish a single point of
contact between primary and secondary
payers.
The overwhelming majority of
commenters supported the second
option, with us having a role in
ensuring coordination of benefits and
facilitating accurate TrOOP tracking.
Given this preference, we are prepared
to assume a role in ensuring these
important functions occur, and that they
occur in as real-time as possible. While
plans ultimately are responsible for
tracking TrOOP consistent with the
statute as discussed elsewhere in the
preamble, we will facilitate the
coordination of benefits and participate
in other processes to help ensure that
the plan are in a position to do so. We
continue to fully develop the
specifications of such assistance, and
the operational details involved in
bringing it about. In accordance with the
statute, we will establish procedures
before July 1, 2005 to ensure the
effective coordination of benefits.
N. Conclusion
We estimate that about 39 million
Medicare beneficiaries will receive drug
coverage either through a Medicare Part
D plan (that is, by enrolling in a PDP or
a MA-PD) or through an employer or
union sponsored retiree plan that is
eligible for the Medicare retiree drug
subsidy in CY 2006. By CY 2010, due
to growth in the overall Medicare
population, we estimate that about 42
million Medicare beneficiaries will be
receiving drug coverage through a
Medicare Part D plan or through an
employer or union sponsored retiree

PO 00000

Frm 00332

Fmt 4701

Sfmt 4700

plan that is eligible for the Medicare
retiree drug subsidy. The net Federal
budgetary effect of the Medicare
prescription drug benefit and retiree
drug subsidy is estimated to be about
$293 billion during CY 2006–2010.
Medicare Part D is estimated to generate
about $7.9 billion in net savings for
States over the five-year period from CY
2006–2010.
All Medicare beneficiaries will have
access to a benefit that protects against
catastrophic drug costs. On average, for
non-low-income beneficiaries the
benefit will cover half their costs, and
for beneficiaries with very high drug
costs it will cover substantially more.
For low-income beneficiaries coverage
is comprehensive, covering on average
about 96 percent of their prescription
drug costs.
Medicare beneficiaries who have no
drug coverage today will now be able to
obtain an affordable benefit that
provides substantial assistance with
prescription drug costs. Those
beneficiaries with existing private
coverage through retirement benefits
and Medicare Advantage plans will
receive the benefits of new Medicare
subsidies to maintain and enhance their
coverage. Beneficiaries with public
coverage through Medicaid and State
programs will have more secure (and
potentially more generous) benefits
because of the comprehensive lowincome Medicare benefit. Beneficiaries
who pay the full costs for limited
Medigap drug coverage will now be able
to obtain highly-subsidized, more
generous coverage.
Overall, we anticipate that by giving
beneficiaries access to affordable
insurance coverage that helps them to
pay for their outpatient prescription
drugs—which have become a critical
component in the delivery of
comprehensive, quality health care
services—the Medicare prescription
drug benefit will help beneficiaries to
lead healthier, more productive lives.
List of Subjects
42 CFR Part 400
Grant programs-health, Health
facilities, Health maintenance
organizations (HMO), Medicaid,
Medicare Reporting and recordkeeping
requirements
42 CFR Part 403
Grant programs-health, Health
insurance, Hospitals
42 CFR Part 411
Kidney diseases, Medicare, Reporting
and recordkeeping requirements

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
42 CFR Part 417
Administrative practice and
procedure, Grant programs-health,
Health care, Health insurance, Health
maintenance organizations (HMO), Loan
programs-health, Medicare, Reporting
and recordkeeping requirements
42 CFR Part 423
Administrative practice and
procedure, Emergency medical services,
Health facilities, Health maintenance
organizations (HMO), Medicare,
Penalties, Privacy, Reporting and
recordkeeping
■ For reasons set forth in the preamble,
the Centers for Medicare & Medicaid
Services amend 42 CFR chapter IV as
follows:
PART–400 INTRODUCTION;
DEFINITIONS
1. The authority citation for part 400
continues to read as follows:

■

Authority: (Secs. 1102 and 1971 of the
Social Security Act (42 U.S.C. 1302 and
1395hh) and 44 U.S.C. Chapter 35.

Subpart B—Definitions
2. Section 400.202 is amended by—
A. Adding in alphabetical order the
definition of Medicare Part C.
B. Adding in alphabetical order the
definition of Medicare Part D.
■ The additions read as follows:
■

§ 400.202 Definitions specific to Medicare.

*

*
*
*
*
Medicare Part C means the choice of
Medicare benefits through Medicare
Advantage plans authorized under Part
C of the title XVIII of the Act.
Medicare Part D means the voluntary
prescription drug benefit program
authorized under Part D of title XVIII of
the Act.
*
*
*
*
*
PART 403—SPECIAL PROGRAMS AND
PROJECTS
3. The authority citation for part 403
continues to read as follows:

■

Authority: 42 U.S.C. 1359b–3 and secs.
1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395 hh).

Subpart B—Medicare Supplemental
Policies

(1) A private entity offers to a
Medicare beneficiary; and
(2) Is primarily designed, or is
advertised, marketed, or otherwise
purported to provide payment for
expenses incurred for services and items
that are not reimbursed under the
Medicare program because of
deductibles, coinsurance, or other
limitations under Medicare.
(b) The term policy includes both
policy form and policy as specified in
paragraphs (b)(1) and (b)(2) of this
section.
(1) Policy form. Policy form is the
form of health insurance contract that is
approved by and on file with the State
agency for the regulation of insurance.
(2) Policy. Policy is the contract—
(i) Issued under the policy form; and
(ii) Held by the policy holder.
(c) If the policy otherwise meets the
definition in this section, a Medicare
supplemental policy includes­
(1) An individual policy;
(2) A group policy;
(3) A rider attached to an individual
or group policy; or
(4) As of January 1, 2006, a stand­
alone limited health benefit plan or
policy that supplements Medicare
benefits and is sold primarily to
Medicare beneficiaries.
(d) Any rider attached to a Medicare
supplemental policy becomes an
integral part of the basic policy.
(e) Medicare supplemental policy
does not include a Medicare Advantage
plan, a Prescription Drug Plan under
Part D, or any of the other types of
health insurance policies or health
benefit plans that are excluded from the
definition of a Medicare supplemental
policy in section 1882(g)(1) of the Act.
PART 411—EXCLUSIONS FROM
MEDICARE AND LIMITATIONS ON
MEDICARE PAYMENT
5. The authority citation for part 411 is
revised to read as follows:

■

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

Subpart J—Financial Relationships
Between Physicians and Entities
Furnishing Designated Health Services

■

4. Section 403.205 is revised to read as
follows:

6. In § 411.351, the definition of
‘‘Outpatient prescription drugs’’ is
revised to read as follows:

§ 403.205 Medicare supplemental policy.

§ 411.351

(a) Except as specified in paragraph
(e) of this section, Medicare
supplemental (or Medigap) policy
means a health insurance policy or
other health benefit plan that—

*

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

■

Definitions.

*
*
*
*
Outpatient prescription drugs mean
all drugs covered by Medicare Part B or
Part D.
*
*
*
*
*

PO 00000

Frm 00333

Fmt 4701

Sfmt 4700

4525

PART 417—HEALTH MAINTENANCE
ORGANIZATIONS, COMPETITIVE
MEDICAL PLANS, AND HEALTH CARE
PREPAYMENT PLAN
7. The authority citation for part 417
continues to read as follows:

■

Authority: Secs. 1102 and 1871 of the
Social Security Act (42 U.S.C. 1302 and
1395hh), secs. 1301, 1306, and 1310 of the
Public Health Service Act (42 U.S.C. 300e,
300e–5, and 300e–9), and 31 U.S.C. 9701.

8. In § 417.440, revise paragraph (b)(2)
to read as follows:

■

§ 417.440 Entitlement to health care
services from an HMO or CMP.

*

*
*
*
*
(b) * * *
(2) Supplemental services elected by
an enrollee. (i) Except as provided
under paragraph (b)(2)(ii) of this section,
a Medicare enrollee of an HMO or CMP
may elect to pay for optional services
that are offered by the HMO or CMP in
addition to the covered Part A and Part
B services.
(ii) An HMO or CMP may elect to
provide qualified prescription drug
coverage (as defined at § 423.104 of this
chapter) as an optional supplemental
service in accordance with the
applicable requirements under part 423
of this chapter, including § 423.104(f)(4)
of this chapter.
(iii) The HMO or CMP may not set
health status standards for those
enrollees whom it accepts for these
optional supplemental services.
*
*
*
*
*
■ 9. In § 417.534, add paragraph (c) to
read as follows:
§ 417.534 Allowable costs.

*

*
*
*
*
(c) Medicare Part D program costs. To
the extent that an HMO or CMP
provides qualified prescription drug
coverage to enrollees under Part D, no
costs related to the offering or provision
of Part D benefits are reimbursed under
this part. These costs are reimbursed
solely under the applicable provisions
of part 423 of this chapter.
■ 10. Part 423 is added as set forth below:
PART 423—VOLUNTARY MEDICARE
PRESCRIPTION DRUG BENEFIT
Subpart A—General Provisions
423.1 Basis and scope.
423.4 Definitions.
423.6 Cost-Sharing in beneficiary education
and enrollment-related costs.
Subpart B—Eligibility and Enrollment
423.30 Eligibility and enrollment.
423.32 Enrollment process.
423.34 Enrollment of full-benefit dual
eligibles
423.36 Disenrollment process

E:\FR\FM\28JAR2.SGM

28JAR2

4526

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
423.346 Reopening.

423.350 Payment appeals.

423.572 Timeframes and notice

requirements for expedited coverage

determinations.

Subpart H—[Reserved]
423.576 Effect of a coverage determination.

423.578 Exceptions process.

Subpart I—Organization Compliance with
423.580 Right to a redetermination.

State Law and Preemption by Federal Law
423.582 Request for a standard

423.401 General requirements for PDP

redetermination.

sponsors.

423.584 Expediting certain

423.410 Waiver of certain requirements in

redeterminations.

order to expand choice.

423.586 Opportunity to submit evidence.

423.415 Temporary waivers for entities

Subpart C—Benefits and Beneficiary
seeking to offer a prescription drug plan
423.590 Timeframes and responsibility for

Protections
making redeterminations.

in more than one State in a region

423.100 Definitions.

423.600 Reconsideration by an

423.420 Solvency standards for non-

423.104 Requirements related to qualified

independent review entity (IRE).

licensed entities.

prescription drug coverage.

423.602 Notice of reconsideration

423.425 Licensure does not substitute for

423.112 Establishment of prescription drug

determination by the independent

or constitute certification.

plan service areas.

review entity.

423.440 Prohibition of State imposition of

423.120 Access to covered Part D drugs.

423.604 Effect of a reconsideration

premium taxes; relation to State laws.

423.124 Special rules for out-of-network

determination.

Subpart J—Coordination under Part D
access to covered Part D drugs at out-of­
423.610 Right to an ALJ hearing.

Plans
with
Other
Prescription
Drug
network pharmacies.

423.612 Request for an ALJ hearing.

Coverage
423.128 Dissemination of Part D plan

423.620 Medicare Appeals Council (MAC)

information.

423.452 Scope.

review.

423.132 Public disclosure of

423.453 Definitions.

423.630 Judicial review.

pharmaceutical prices for equivalent

423.458 Application of Part D rules to

423.634 Reopening and revising

drugs.

certain Part D plans on and after January

determinations and decisions.

423.136 Privacy, confidentiality, and

1, 2006.

423.636 How a Part D plan sponsor must

accuracy of enrollee records.

423.462 Medicare secondary payer

effectuate standard redeterminations or

procedures.

reconsiderations, or decisions.

Subpart D—Cost Control and Quality
423.638 How a Part D plan sponsor must

Improvement Requirements for Part D Plans 423.464 Coordination of benefits with

other providers of prescription drug

effectuate expedited redeterminations or

423.150 Scope.

coverage.

reconsiderations.

423.153 Drug utilization management,

Subpart K—Application Procedures and
quality assurance, and medication

Subpart N—Medicare Contract
therapy management programs (MTMPs).
Contracts with PDP Sponsors
Determinations and Appeals
423.156 Consumer satisfaction surveys.

423.500 Scope and basis.

423.641 Contract determinations.

423.159 Electronic prescription program.

423.501 Definitions.

423.642 Notice of contract determination.

423.162 Quality improvement organization
423.502 Application requirements.

423.643 Effect of contract determination.

activities.

423.503 Evaluation and determination

423.644 Reconsideration: Applicability.

423.165 Compliance deemed on the basis

procedures for applications to be

423.645 Request for reconsideration.

of accreditation.

determined qualified to act as a sponsor.
423.646 Opportunity to submit evidence.

423.168 Accreditation organizations.

423.504 General provisions.

423.647 Reconsidered determination.

423.505 Contract provisions.

423.171 Procedures for approval of

423.648 Notice of reconsidered

423.506 Effective date and term of contract.

accreditation as a basis for deeming

determination.

423.507 Nonrenewal of contract.

compliance.

423.649 Effect of reconsidered

423.508 Modification or termination of

determination.

Subpart E—[Reserved]
contract by mutual consent.

423.650 Right to a hearing.

423.509
Termination
of
contract
by
CMS.

Subpart F—Submission of Bids and
423.651 Request for hearing.

423.510 Termination of contract by Part D

Monthly Beneficiary Premiums; Plan
423.652 Postponement of effective date of

sponsor.

Approval
a contract determination when a request

423.512 Minimum enrollment

423.251 Scope.

for a hearing for a contract determination

requirements.

423.258 Definitions.

is filed timely.

423.514 Reporting requirements.

423.265 Submission of bids and related

423.653 Designation of hearing officer.

423.516 Prohibition of midyear

information.

423.654 Disqualification of hearing officer.

implementation of significant new

423.272 Review and negotiation of bid and

423.655 Time and place of hearing.

regulatory requirements.

approval of plans submitted by potential

423.656 Appointment of representatives.

Subpart L—Effect of Change of Ownership
Part D sponsors .

423.657 Authority of representatives.

or Leasing of Facilities during Term of
423.279 National average monthly bid

423.658 Conduct of hearing.

Contract
amount.

423.659 Evidence.

423.286 Rules regarding premiums.

423.660 Witnesses.

423.551 General provisions.

423.293 Collection of monthly beneficiary

423.552 Novation agreement requirements.
423.661 Discovery.

premium.

423.662 Preearing.

423.553 Effect of leasing a PDP sponsor’s

423.663 Record of hearing.

facilities.

Subpart G— Payments to Part D Plan
423.664 Authority of hearing officer.

Sponsors For Qualified Prescription Drug
Subpart M—Grievances, Coverage
423.665 Notice and effect of hearing

Coverage
Determinations, and Appeals
decision.

423.301 Scope.

423.560 Definitions.

423.666 Review by the Administrator.

423.308 Definitions and terminology.

423.562 General provisions.

423.667 Effect of Administrator’s decision.

423.315 General payment provisions.

423.564 Grievance procedures

423.668 Reopening of contract or

423.322 Requirement for disclosure of

423.566 Coverage determinations.

reconsidered determination or decision

information.

423.568 Standard timeframe and notice

of a hearing officer or the Administrator.

423.329 Determination of payments.

requirements for coverage

423.669 Effect of revised determination.

423.336 Risk-sharing arrangements.

determinations.

Subpart O—Intermediate Sanctions
423.343 Retroactive adjustments and

423.570 Expediting certain coverage

reconciliations.

determinations.

423.750 Kinds of sanctions.

423.38 Enrollment periods.

423.40 Effective dates.

423.44 Involuntary disenrollment by PDP.

423.46 Late enrollment penalty.

423.48 Information about Part D.

423.50 Approval of marketing materials

and enrollment forms.

423.56 Procedures to determine and

document creditable status of

prescription drug coverage.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

PO 00000

Frm 00334

Fmt 4701

Sfmt 4700

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
423.752 Basis for imposing sanctions.
423.756 Procedures for imposing sanctions.
423.758 Maximum amount of civil money
penalties imposed by CMS.
423.760 Other applicable provisions.
Subpart P—Premium and Cost-Sharing
Subsidies for Low-Income Individuals
423.771 Basis and Scope.
423.772 Definitions.
423.773 Requirements for eligibility.
423.774 Eligibility determinations,
redeterminations, and applications.
423.780 Premium subsidy.
423.782 Cost-sharing subsidy.
423.800 Administration of subsidy
program.
Subpart Q—Guaranteeing Access to a
Choice of Coverage (Fallback prescription
drug plans)
423.851 Scope.
423.855 Definitions.
423.859 Assuring access to a choice of
coverage.
423.863 Submission and approval of bids.
423.867 Rules regarding premiums.
423.871 Contract terms and conditions.
423.875 Payments to fallback prescription
drug plans.
Subpart R—Payments to Sponsors of
Retiree Prescription Drug Plans
423.880 Basis and scope.
423.882 Definitions.
423.884 Requirements for qualified retiree
prescription drug plans.
423.886 Retiree drug subsidy amounts.
423.888 Payment methods, including
provision of necessary information.
423.890 Appeals.
423.892 Change of Ownership.
423.894 Construction.
Subpart S—Special Rules for StatesEligibility Determinations for Subsidies and
General Payment Provisions
423.900 Basis and scope.
423.902 Definitions.
423.904 Eligibility determinations for lowincome subsidies.
423.906 General payment provisions.
423.907 Treatment of territories.
423.908 Phased-down State contribution to
drug benefit costs assumed by Medicare.
423.910 Requirements.
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 A—General Provisions
§ 423.1 Basis and scope.

(a) Basis. (1) This part is based on the
indicated provisions of the following
sections of the Social Security Act:
1860D–1. Eligibility, enrollment, and
information.
1860D–2. Prescription drug benefits.
1860D–3. Access to a choice of
qualified prescription drug coverage.
1860D–4. Beneficiary protections for
qualified prescription drug coverage.
1860D–11. PDP regions; submission of
bids; plan approval.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

1860D–12. Requirements for and
contracts with prescription drug plan
(PDP) sponsors.
1860D–13. Premiums; late enrollment
penalty.
1860D–14. Premium and cost-sharing
subsidies for low-income individuals.
1860D–15. Subsidies for Part D
eligible individuals for qualified
prescription drug coverage.
1860D–16. Medicare Prescription
Drug Account in the Federal
Supplementary Medical Insurance Trust
Fund.
1860D–21. Application to Medicare
Advantage program and related
managed care programs.
1860D–22. Special rules for
Employer-Sponsored Programs
1860D–23. State pharmaceutical
assistance programs.
1860D–24. Coordination requirements
for plans providing prescription drug
coverage.
1860D–31. Medicare prescription
drug discount card and transitional
assistance program.
1860D–41. Definitions; treatment of
references to provisions in Part C.
1860D–42. Miscellaneous provisions.
(2) The following specific sections of
the Medicare Modernization Act also
address the prescription drug benefit
program:
Sec. 102 Medicare Advantage
conforming amendments.
Sec. 103 Medicaid amendments.
Sec. 104 Medigap.
Sec. 109 Expanding the work of
Medicare Quality Improvement
Organizations to include Parts C and D.
(b) Scope. This part establishes
standards for beneficiary eligibility,
access, benefits, protections, and lowincome subsidies in Part D, as well as
establishes standards and sets forth
requirements, limitations, procedures
and payments for organizations
participating in the Voluntary Medicare
Prescription Drug Program.
§ 423.4

Definitions.

The following definitions apply to
this part, unless the context indicates
otherwise:
Actuarial equivalence means a state of
equivalent value demonstrated through
the use of generally accepted actuarial
principles and in accordance with
section 1860D–11(c) of the Act and with
CMS actuarial guidelines.
Brand name drug means a drug for
which an application is approved under
section 505(c) of the Federal Food, Drug,
and Cosmetic Act (21 USC 355(c)),
including an application referred to in
section 505(b)(2) of the Federal Food,
Drug and Cosmetic Act (21 USC
355(b)(2)).

PO 00000

Frm 00335

Fmt 4701

Sfmt 4700

4527

Cost plan means a plan operated by a
Health Maintenance Organization
(HMO) or Competitive Medical Plan
(CMP) in accordance with a costreimbursement contract under section
1876(h) of the Act.
Eligible fallback entity or fallback
entity is defined at § 423.855.
Fallback prescription drug plan is
defined at § 423.855.
Formulary means the entire list of Part
D drugs covered by a Part D plan.
Full-benefit dual eligible individual
has the meaning given the term at
§ 423.772, except where otherwise
provided.
Generic drug means a drug for which
an application under section 505(j) of
the Federal Food, Drug, and Cosmetic
Act (21 USC 355(j)) is approved.
Group health plan is defined at
§ 423.882.
Insurance risk means, for a
participating pharmacy, risk of the type
commonly assumed only by insurers
licensed by a State and does not include
payment variations designed to reflect
performance-based measures of
activities within the control of the
pharmacy, such as formulary
compliance and generic drug
substitutions, nor does it include
elements potentially in the control of
the pharmacy (for example, labor costs
or productivity).
MA stands for Medicare Advantage,
which refers to the program authorized
under Part C of title XVIII of the Act.
MA plan has the meaning given the
term in § 422.2 of this chapter.
MA-PD plan means an MA plan that
provides qualified prescription drug
coverage.
Medicare prescription drug account
means the account created within the
Federal Supplementary Medical
Insurance Trust Fund for purposes of
Medicare Part D.
Monthly beneficiary premium means
the amount calculated under § 423.286
for Part D plans other than fallback
prescription drug plans, and
§ 423.867(a) for fallback prescription
drug plans.
PACE Plan means a plan offered by a
PACE organization.
PACE organization is defined in
§ 460.6 of this chapter.
Part D eligible individual means an
individual who meets the requirements
at § 423.30(a).
Part D plan (or Medicare Part D plan)
means a prescription drug plan, an MA­
PD plan, a PACE Plan offering qualified
prescription drug coverage, or a cost
plan offering qualified prescription drug
coverage.
Part D plan sponsor or Part D sponsor
refers to a PDP sponsor, MA

E:\FR\FM\28JAR2.SGM

28JAR2

4528

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

organization offering a MA-PD plan, a
PACE organization offering a PACE plan
including qualified prescription drug
coverage, and a cost plan offering
qualified prescription drug coverage.
PDP region means a prescription drug
plan region as determined by CMS
under § 423.112.
PDP sponsor means a
nongovernmental entity that is certified
under this part as meeting the
requirements and standards of this part
that apply to entities that offer
prescription drug plans. This includes
fallback entities.
Prescription drug plan or PDP means
prescription drug coverage that is
offered under a policy, contract, or plan
that has been approved as specified in
§ 423.272 and that is offered by a PDP
sponsor that has a contract with CMS
that meets the contract requirements
under subpart K of this part. This
includes fallback prescription drug
plans.
Service area (Service area does not
include facilities in which individuals
are incarcerated.) means for —
(1) A prescription drug plan, an area
established in § 423.112(a) within which
access standards under § 423.120(a) are
met;
(2) An MA-PD plan, an area that
meets the definition of MA service area
as described in § 422.2 of this chapter,
and within which access standards
under § 423.120(a) are met;
(3) A fallback prescription drug plan,
the service area described in
§ 423.859(b);
(4) A PACE plan offering qualified
prescription drug coverage, the service
area described in § 460.22 of this
chapter; and
(5) A cost plan offering qualified
prescription drug coverage, the service
area defined in § 417.1 of this chapter.
Subsidy-eligible individual means a
full subsidy eligible individual (as
defined at § 423.772) or other subsidy
eligible individual (as defined at
§ 423.772).
Tiered cost-sharing means a process
of grouping Part D drugs into different
cost sharing levels within a Part D
sponsor’s formulary.
§ 423.6 Cost-sharing in beneficiary
education and enrollment-related costs.

The requirements of section
1857(e)(2) of the Act and § 422.6 of this
chapter with regard to the payment of
fees established by CMS for cost sharing
of enrollment related costs apply to PDP
sponsors under Part D.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Subpart B—Eligibility and Enrollment.
§ 423.30 Eligibility and enrollment.

(a) General rule. (1) An individual is
eligible for Part D if he or she:
(i) Is entitled to Medicare benefits
under Part A or enrolled in Medicare
Part B; and
(ii) Lives in the service area of a Part
D plan, as defined under § 423.4.
(2) Except as provided in paragraphs
(b), (c), and (d) of this section, an
individual is eligible to enroll in a PDP
if:
(i) The individual is eligible for Part
D in accordance with paragraph (a)(1) of
this section;
(ii) The individual resides in the
PDP’s service area; and
(iii) The individual is not enrolled in
another Part D plan.
(3) Retroactive Part A or Part B
determinations. Individuals who
become entitled to Medicare Part A or
enrolled in Medicare Part B for a
retroactive effective date are Part D
eligible as of the month in which a
notice of entitlement Part A or
enrollment in Part B is provided.
(b) Coordination with MA plans. A
Part D eligible individual enrolled in a
MA-PD plan must obtain qualified
prescription drug coverage through that
plan. MA enrollees are not eligible to
enroll in a PDP, except as follows:
(1) A Part D eligible individual is
eligible to enroll in a PDP if the
individual is enrolled in a MA private
fee-for-service plan (as defined in
section 1859(b)(2) of the Act) that does
not provide qualified prescription drug
coverage; and
(2) A Part D eligible individual is
eligible to enroll in a PDP if the
individual is enrolled in a MSA plan (as
defined in section 1859(b)(3) of the Act).
(c) Enrollment in a PACE plan. A Part
D eligible individual enrolled in a PACE
plan that offers qualified prescription
drug coverage under this Part must
obtain such coverage through that plan.
(d) Enrollment in a cost-based HMO
or CMP. A Part D eligible individual
enrolled in a cost-based HMO or CMP
(as defined under part 417 of this
chapter) that elects to receive qualified
prescription drug coverage under such
plan is ineligible to enroll in another
Part D plan. A Part D eligible individual
enrolled in a cost-based HMO or CMP
offering qualified prescription drug
coverage is eligible to enroll in a PDP if
the individual does not elect to receive
qualified prescription drug coverage
under the cost-based HMO or CMP and
otherwise meets the requirements of
paragraph (a)(2) of this section.

PO 00000

Frm 00336

Fmt 4701

Sfmt 4700

§ 423.32 Enrollment process.

(a) General rule. A Part D eligible
individual who wishes to enroll in a
PDP may enroll during the enrollment
periods specified in § 423.38, by filing
the appropriate enrollment form with
the PDP or through other mechanisms
CMS determines are appropriate.
(b) Enrollment form or CMS-approved
enrollment mechanism. The enrollment
form or CMS-approved enrollment
mechanism must comply with CMS
instructions regarding content and
format and must have been approved by
CMS as described in § 423.50.
(i) The enrollment must be completed
by the individual and include an
acknowledgement by the beneficiary for
disclosure and exchange of necessary
information between the U.S.
Department of Health and Human
Services (or its designees) and the PDP
sponsor. Individuals who assist
beneficiaries in completing the
enrollment, including authorized
representatives, must indicate they have
provided assistance and their
relationship to the beneficiary.
(ii) Part D eligible individuals
enrolling or enrolled in a Part D plan
must provide information regarding
reimbursement for Part D costs through
other insurance, group health plan or
other third-party payment arrangement,
and consent to the release of the
information provided by the individual
on other insurance, group health plan or
other third-party payment arrangements,
as well as any other information on
reimbursement of Part D costs collected
or obtained from other sources, in a
form and manner approved by CMS.
(c) Timely process an individual’s
enrollment request. A PDP sponsor must
timely process an individual’s
enrollment request in accordance with
CMS enrollment guidelines and enroll
Part D eligible individuals who are
eligible to enroll in its plan under
§ 423.30(a) and who elect to enroll or
are enrolled in the plan during the
periods specified in § 423.38.
(d) Notice requirement. The PDP
sponsor must provide the individual
with prompt notice of acceptance or
denial of the individual’s enrollment
request, in a format and manner
specified by CMS.
(e) Maintenance of enrollment. An
individual who is
enrolled in a PDP remains enrolled in
that PDP until one of the following
occurs:
(i) The individual successfully enrolls
in another PDP or MA-PD plan;
(ii) The individual voluntarily
disenrolls from the PDP;

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
(iii) The individual is involuntary
disenrolled from the PDP in accordance
with § 423.44(b)(2);
(iv) The PDP is discontinued within
the area in which the individual resides;
or
(iv) The individual is enrolled after
the initial enrollment, in accordance
with § 423.34(c).
(f) Enrollees of cost-based HMOs or
CMPs and PACE. Individuals enrolled
in a cost-based HMO or CMP plan (as
defined in part 417 of this chapter) or
PACE (as defined in § 460.6 of this
chapter) that offers prescription drug
coverage under this part as of December
31, 2005, remain enrolled in that plan
as of January 1, 2006, and receive Part
D benefits offered by that plan until one
of the conditions in § 423.32(e) are met.
§ 423.34 Enrollment of full-benefit dual
eligible individuals.

(a) General rule. CMS must ensure the
enrollment into Part D plans full-benefit
dual eligible individuals who fail to
enroll in a Part D plan.
(b) Definition of full-benefit dual
eligible individual. For purposes of this
section, a full-benefit dual eligible
individual means an individual who is:
(1) Determined eligible by the State
for—
(i) Medical assistance for full-benefits
under title XIX of the Act for the month
under any eligibility category covered
under the State plan or comprehensive
benefits under a demonstration under
section 1115 of the Act. ; or
(ii) Medical assistance under section
1902(a)(10)(C) of the Act (medically
needy) or section 1902(f) of the Act
(States that use more restrictive
eligibility criteria than are used by the
SSI program) for any month if the
individual was eligible for medical
assistance in any part of the month.
(2) Eligible for Part D in accordance
with § 423.30(a).
(c) Enrolling a full-benefit duel
eligible individual. Notwithstanding
§ 423.32(e), during the annual
coordinated election period, CMS may
enroll a full-benefit dual eligible
individual in another PDP if CMS
determines that the further enrollment
is warranted.
(d) Automatic enrollment rules. (1)
General rule. CMS must automatically
enroll 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 that does
not exceed the low-income premium
subsidy amount (as defined in
§ 423.780(b)). In the event that there is
more than one PDP in an area with a

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

monthly beneficiary premium at or
below the low-income premium subsidy
amount, individuals must be enrolled in
such PDPs on a random basis.
(2) Individuals enrolled in an MSA
plan or one of the following that does
not offer a Part D benefit. Full-benefit
dual eligible individuals enrolled in an
MA Private Fee For Service (PFFS) plan
or cost-based HMO or CMP that does
not offer qualified prescription drug
coverage or an MSA plan and who fail
to enroll in a Part D plan must be
automatically enrolled into a PDP plan
as described in paragraph (d)(1) of this
section.
(e) Declining enrollment and
disenrollment. Nothing in this section
prevents a full-benefit dual eligible
individual from—
(1) Affirmatively declining enrollment
in Part D; or
(2) Disenrolling from the Part D plan
in which the individual is enrolled and
electing to enroll in another Part D plan
during the special enrollment period
provided under § 423.38.
(f) Effective date of enrollment.
Enrollment of full-benefit dual eligible
individuals under this section must be
effective as follows:
(1) January 1, 2006 for individuals
who are full-benefit dual eligible
individuals as of December 31, 2005;
(2) The first day of the month the
individual is eligible for Part D under
§ 423.30(a)(1) for individuals who are
Medicaid eligible and subsequently
become newly eligible for Part D under
§ 423.30(a)(1) on or after January 1,
2006; and
(3) For individuals who are eligible
for Part D under § 423.30(a)(1) and
subsequently become newly eligible for
Medicaid on or after January 1, 2006,
enrollment is effective as soon as
practicable after being identified as a
newly full-benefit dual eligible
individual, in a process to be
determined by CMS.
§ 423.36 Disenrollment process.

(a) General rule. An individual may
disenroll from a PDP during the periods
specified in § 423.38 by enrolling in a
different PDP plan, submitting a
disenrollment request to the PDP in the
form and manner prescribed by CMS, or
filing the appropriate disenrollment
request through other mechanisms as
determined by CMS.
(b) Responsibilities of the PDP
sponsor. The PDP sponsor must—
(1) Submit a disenrollment notice to
CMS within timeframes CMS specifies;
(2) Provide the enrollee with a notice
of disenrollment as CMS determines
and approves; and

PO 00000

Frm 00337

Fmt 4701

Sfmt 4700

4529

(3) File and retain disenrollment
requests for the period specified in CMS
instructions.
(c) Retroactive disenrollment. CMS
may grant retroactive disenrollment in
the following cases:
(1) There never was a legally valid
enrollment; or
(2) A valid request for disenrollment
was properly made but not processed or
acted upon.
§ 423.38 Enrollment periods.

(a) Initial enrollment period for Part
D—Basic rule. The initial enrollment
period is the period during which an
individual is first eligible to enroll in a
Part D plan.
(1) In 2005. An individual who is first
eligible to enroll in a Part D plan on or
prior to January 31, 2006, has an initial
enrollment period from November 15,
2005 through May 15, 2006.
(2) February 2006. An individual who
is first eligible to enroll in a Part D plan
in February 2006 has an initial
enrollment period from November 15,
2005 through May 31, 2006.
(3) March 2006 and subsequent
months. (i) Except as provided in
paragraph (a)(3)(ii) and (a)(3)(iii) of this
section, the initial enrollment period for
an individual who is first eligible to
enroll in a Part D plan on or after March
2006 is the same as the initial
enrollment period for Medicare Part B
under § 407.14 of this chapter.
(ii) Exception. For those individuals
who are not eligible to enroll in a Part
D plan at any time during their initial
enrollment period for Medicare Part B,
their initial enrollment period under
this Part is the 3 months before
becoming eligible for Part D, the month
of eligibility, and the three months
following eligibility to Part D.
(iii) An individual who becomes
entitled to Medicare Part A or enrolled
in Part B for a retroactive effective date
has an initial enrollment period under
this Part beginning with the month in
which notification of the Medicare
determination is received and ending on
the last day of the third month following
the month in which the notification was
received.
(b) Annual coordinated election
period. (1) For 2006. This period begins
on November 15, 2005 and ends on May
15, 2006.
(2) For 2007 and subsequent years.
For coverage beginning 2007 or any
subsequent year, the annual coordinated
election period is November 15th
through December 31st for coverage
beginning the following calendar year.
(c) Special enrollment periods. A Part
D eligible individual may enroll in a
PDP or disenroll from a PDP and enroll

E:\FR\FM\28JAR2.SGM

28JAR2

4530

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

in another PDP or MA-PD plan (as
provided at § 422.62(b) of this chapter),
as applicable, at any time under any of
the following circumstances:
(1) The individual involuntarily loses
creditable prescription drug coverage or
such coverage is involuntarily reduced
so that it is no longer creditable
coverage as defined under § 423.56(a).
Loss of credible prescription drug
coverage due to failure to pay any
required premium is not considered
involuntary loss of the coverage.
(2) The individual was not adequately
informed, as required by standards
established by CMS under § 423.56, that
he or she has lost his or her creditable
prescription drug coverage, that he or
she never had credible prescription drug
coverage, or the coverage is
involuntarily reduced so that it is no
longer creditable prescription drug
coverage.
(3) The individual’s enrollment or
non-enrollment in a Part D plan is
unintentional, inadvertent, or erroneous
because of the error, misrepresentation,
or inaction of a Federal employee, or
any person authorized by the Federal
government to act on its behalf.
(4) The individual is a full-benefit
dual eligible individual as defined
under section 1935(c)(6) of the Act.
(5) The individual elects to disenroll
from a MA-PD plan and elects coverage
under Medicare Part A and Part B in
accordance with § 422.62(c) of this
chapter.
(6) The PDP sponsor’s contract is
terminated by the PDP sponsor or by
CMS, as provided under § 423.507
through § 423.510, or the PDP plan is no
longer offered in the area when the
individual resides.
(7) The individual is no longer
eligible for the PDP because of a change
in his or her place of residence to a
location outside of the PDP region(s) in
which the PDP is offered.
(8) The individual demonstrates to
CMS, in accordance with guidelines
issued by CMS, that—
(i) The PDP sponsor offering the PDP
substantially violated a material
provision of its contract under this part
in relation to the individual, including,
but not limited to the following—
(A) Failure to provide the individual
on a timely basis benefits available
under the plan;
(B) Failure to provide benefits in
accordance with applicable quality
standards; or
(C) The PDP (or its agent,
representative, or plan provider)
materially misrepresented the plan’s
provisions in marketing the plan to the
individual.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(ii) The individual meets other
exceptional circumstances as CMS may
provide.
§ 423.40 Effective dates.

(a) Initial enrollment period. (1) An
enrollment made prior to the month of
entitlement to Part A or enrollment in
Part B is effective the first day of the
month the individual is entitled to or
enrolled in Part A or enrolled in Part B.
(2) Except as otherwise provided
under § 423.34(f), an enrollment made
during or after the month of entitlement
to Part A or enrollment in Part B is
effective the first day of the calendar
month following the month in which
the enrollment in Part D is made.
(3) If the individual is not eligible to
enroll in Part D on the first day of the
calendar month following the month in
which the election to enroll in Part D is
made, the enrollment in Part D is
effective the first day of the month the
individual is eligible for Part D.
(4) In no case is an enrollment in Part
D effective before January 1, 2006 or
before entitlement to Part A or
enrollment Part B.
(b) Annual coordinated election
periods. (1) General rule. Except as
provided under paragraph (b)(2) of this
section, for an enrollment or change of
enrollment in Part D made during an
annual coordinated election period as
described in § 423.38(b), the coverage or
change in coverage is effective as of the
first day of the following calendar year.
(2) Exception for January 1, 2006
through May 15, 2006. Enrollment
elections made during the annual
coordinated election period between
January 1, 2006 and May 15, 2006 are
effective the first day of the calendar
month following the month in which
the enrollment in Part D is made.
(c) Special enrollment periods. For an
enrollment or change of enrollment in
Part D made during a special enrollment
period specified in § 423.38(c), the
effective date is determined by CMS,
which, to the extent practicable, is
determined in a manner consistent with
protecting the continuity of health
benefits coverage.
§ 423.44 Involuntary disenrollment by the
PDP.

(a) General rule. Except as provided in
paragraphs (b) through (d) of this
section, a PDP sponsor may not—
(1) Involuntarily disenroll an
individual from any PDP it offers; or
(2) Orally or in writing, or by any
action or inaction, request or encourage
an individual to disenroll.
(b) Basis for disenrollment. (1)
Optional involuntary disenrollment. A
PDP sponsor may disenroll an

PO 00000

Frm 00338

Fmt 4701

Sfmt 4700

individual from a PDP it offers in any
of the following circumstances:
(i) Any monthly premium is not paid
on a timely basis, as specified under
paragraph (d)(1) of this section; or
(ii) The individual has engaged in
disruptive behavior, as specified under
paragraph (d)(2) of this section.
(2) Required involuntary
disenrollment. A PDP sponsor must
disenroll an individual from a PDP it
offers in any of the following
circumstances:
(i) The individual no longer resides in
the PDP’s service area.
(ii) The individual loses eligibility for
Part D.
(iii) Death of the individual.
(iv) The PDP sponsor’s contract is
terminated by CMS
or by a PDP or through mutual
consent. The PDP sponsor must
disenroll affected enrollees in
accordance with the procedures for
disenrollment set forth at § 423.507
through § 423.510.
(v) The individual materially
misrepresents
information, as determined by CMS,
to the PDP sponsor that the individual
has or expects to receive reimbursement
for third-party coverage.
(c) Notice requirement. (1) If the
disenrollment is for any of the reasons
specified in paragraphs (b)(1), (b)(2)(i),
or (b)(2)(iv) of this section (that is, other
than death or loss of Part D eligibility,
the PDP sponsor must give the
individual timely notice of the
disenrollment with an explanation of
why the PDP is planning to disenroll the
individual.
(2) Notices for reasons specified in
paragraphs (b)(1) through (b)(2)(i) and
(b)(2)(iii) of this section must—
(i) Be provided to the individual
before submission of the disenrollment
notice to CMS; and
(ii) Include an explanation of the
individual’s right to file a grievance
under the PDP’s grievance procedures.
(d) Process for disenrollment. (1)
Monthly PDP premiums that are not
paid timely. A PDP sponsor may
disenroll an individual from the PDP for
failure to pay any monthly premium
under the following circumstances:
(i) The PDP sponsor can demonstrate
to CMS that it made reasonable efforts
to collect the unpaid premium amount.
(ii) The PDP sponsor gives the
enrollee notice of
disenrollment that meets the
requirements set forth in paragraph (c)
of this section.
(iii) Reenrollment in the PDP. If an
individual is
disenrolled from the PDP for failure to
pay monthly PDP premiums, the PDP

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
sponsor has the option to decline future
enrollment by the individual in any of
its PDPs until the individual has paid
any past premiums due to the PDP
sponsor.
(2) Disruptive behavior. (i) Definition.
A PDP enrollee is disruptive if his or her
behavior substantially impairs the plans
ability to arrange or provide for services
to the individual or other plan members.
An individual cannot be considered
disruptive if the behavior is related to
the use of medical services or
compliance (or noncompliance) with
medical advice or treatment.
(ii) Basis of disenrollment for
disruptive behavior. A PDP may
disenroll an individual whose behavior
is disruptive as defined in
§ 423.44(d)(2)(i) only after the PDP
sponsor meets the requirements
described in this section and after CMS
has reviewed and approved the request.
(iii) Effort to resolve the problem. The
PDP sponsor must make a serious effort
to resolve the problems presented by the
individual, including providing
reasonable accommodations, as
determined by CMS, for individuals
with mental or cognitive conditions,
including mental illness, Alzheimers
disease, and developmental disabilities.
In addition, the PDP sponsor must
inform the individual of the right to use
the PDP’s grievance procedures. The
individual has a right to submit any
information or explanation that he or
she may wish to the PDP.
(iv) Documentation. The PDP sponsor
must document the enrollee’s behavior,
its own efforts to resolve any problems,
as described in paragraph (d)(2)(iii) of
this section, and any extenuating
circumstances. The PDP sponsor may
request from CMS the ability to decline
future enrollment by the individual. The
PDP sponsor must submit this
information and any documentation
received by the individual to CMS.
(v) CMS review of the proposed
disenrollment. CMS reviews the
information submitted by the PDP
sponsor and any information submitted
by the individual (which the PDP
sponsor has submitted to CMS) to
determine if the PDP sponsor has
fulfilled the requirements to request
disenrollment for disruptive behavior. If
the PDP sponsor has fulfilled the
necessary requirements, CMS reviews
the information and make a decision to
approve or deny the request for
disenrollment, including conditions on
future enrollment, within 20 working
days. During the review, CMS ensures
that staff with appropriate clinical or
medical expertise reviews the case
before making a final decision. The PDP
sponsor is required to provide a

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

reasonable accommodation, as
determined by CMS, for the individual
in exceptional circumstances that CMS
deems necessary. CMS notifies the PDP
sponsor within 5 working days after
making its decision.
(vi) Exception for fallback
prescription drug plans. CMS reserves
the right to deny a request from a
fallback prescription drug plan as
defined in § 423.855 to disenroll an
individual for disruptive behavior.
(vii) Effective date of disenrollment. If
CMS permits a PDP to disenroll an
individual for disruptive behavior, the
termination is effective the first day of
the calendar month after the month in
which the PDP gives the individual
written notice of the disenrollment that
meets the requirements set forth in
paragraph (c) of this section.
(3) Loss of Part D eligiblity. If an
individual is no longer eligible for Part
D, CMS notifies the PDP that the
disenrollment is effective the first day of
the calendar month following the last
month of Part D eligibility.
(4) Death of the individual. If the
individual dies,
disenrollment is effective the first day
of the calendar month following the
month of death.
(5) Individual no longer resides in the
PDP service area—Basis for
disenrollment. The PDP must disenroll
an individual if the individual notifies
the PDP that he or she has permanently
moved out of the PDP service area.
(6) Plan termination. (i) When a PDP
contract terminates as provided in
§ 423.507 through § 423.510, the PDP
sponsor must give each affected PDP
enrollee notice of the effective date of
the plan termination and a description
of alternatives for obtaining prescription
drug coverage under Part D, as specified
by CMS.
(ii) The notice must be sent before the
effective date of the plan termination or
area reduction, and in the timeframes
specified by CMS.
(7) Misrepresentation of third-party
reimbursement.
(i) If CMS determines an individual
has materially misrepresented
information to the PDP sponsor as
described under § 423.44(b)(2)(v), the
termination is effective the first day of
the calendar month after the month in
which the PDP sponsor gives the
individual written notice of the
disenrollment that meets the
requirements set forth in paragraph (c)
of this section.
(ii) Reenrollment in the PDP. Once an
individual is disenrolled from the PDP
for misrepresentation of third party
reimbursement, the PDP sponsor has the
option to decline future enrollment by

PO 00000

Frm 00339

Fmt 4701

Sfmt 4700

4531

the individual in any of its PDPs for a
period of time CMS specifies.
§ 423.46 Late enrollment penalty.

(a) General. A Part D eligible
individual must pay the late penalty
described under § 423.286(d)(3) if there
is a continuous period of 63 days or
longer at any time after the end of the
individual’s initial enrollment period
during which the individual meets all of
the following conditions:
(1) The individual was eligible to
enroll in a Part D plan;
(2) The individual was not covered
under any
creditable prescription drug coverage;
and
(3) The individual was not enrolled in
a Part D plan.
(b) [Reserved]
§ 423.48 Information about Part D.

Each Part D plan must provide, on an
annual basis, and in a format and using
standard terminology that CMS may
specify in guidance, the information
necessary to enable CMS to provide to
current and potential Part D eligible
individuals the information they need to
make informed decisions among the
available choices for Part D coverage.
§ 423.50 Approval of marketing materials
and enrollment forms.

(a) CMS review of marketing
materials. (1) Except as provided in
paragraph (a)(2) and (a)(3) of this
section, a Part D plan may not distribute
any marketing materials (as defined in
paragraph (b) of this section), 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 paragraph (c) of this section; and
(ii) CMS does not disapprove the
distribution of the material or form.
(2) If the Part D sponsor is deemed by
CMS to meet certain performance
requirements established by CMS, the
Part D sponsor may distribute
designated marketing materials 5 days
following their submission to CMS.
(3) Prior to distribution, the Part D
sponsor submits and certifies that for
certain types of marketing materials it
followed all applicable marketing
guidelines, or for certain other
marketing materials that it used,
without modification, proposed model
language as specified by CMS.
(b) Definition of marketing materials.
Marketing materials include any

E:\FR\FM\28JAR2.SGM

28JAR2

4532

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

informational materials targeted to
Medicare beneficiaries which—
(1) Promote the Part D plan.
(2) Inform Medicare beneficiaries that
they may enroll, or remain enrolled in
a Part D plan.
(3) Explain the benefits of enrollment
in a Part D plan, or rules that apply to
enrollees.
(4) Explain how Medicare services are
covered under a Part D plan, including
conditions that apply to such coverage.
(c) Examples of marketing materials.
Examples of marketing materials
include, but are not limited to—
(1) General audience materials such as
general circulation brochures,
newspapers, magazines, television,
radio, billboards, yellow pages, or the
Internet.
(2) Marketing representative materials
such as scripts or outlines for
telemarketing or other presentations.
(3) Presentation materials such as
slides and charts.
(4) Promotional materials such as
brochures or leaflets, including
materials for circulation by third parties
(for example, physicians or other
providers).
(5) Membership communication
materials such as membership rules,
subscriber agreements, member
handbooks and wallet card instructions
to enrollees.
(6) Letters to members about
contractual changes; changes in
providers, premiums, benefits, plan
procedures etc.
(7) Membership or claims processing
activities.
(d) Guidelines for CMS review. In
reviewing marketing material or
enrollment forms under paragraph (a) of
this section, CMS determines (unless
otherwise specified in additional
guidance) that the marketing materials—
(1) 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—
(i) 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.
(ii) Adequate written explanation of
the grievance and appeals process,
including differences between the two,
and when it is appropriate to use each.
(iii) Any other information necessary
to enable beneficiaries to make an
informed decision about enrollment.
(2) Notify the general public of its
enrollment period in an appropriate
manner, through appropriate media,
throughout its service area.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(3) 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.
(4) Are not materially inaccurate or
misleading or otherwise make material
misrepresentations.
(5) For markets with a significant nonEnglish speaking population, provide
materials in the language of these
individuals.
(e) Deemed approval. If CMS has not
disapproved the distribution of a
marketing materials or 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.
(f) Standards for Part D marketing. (1)
In conducting
marketing activities, a Part D plan
may not—
(i) 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.
(ii) 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.
(iii) Solicit Medicare beneficiaries
door-to-door.
(iv) 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.
(v) 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.

PO 00000

Frm 00340

Fmt 4701

Sfmt 4700

(vi) Accept Part D plan enrollment
forms in provider offices, pharmacies or
other places where health care is
delivered.
(vii) Employ Part D plan names that
suggest that a plan is not available to all
Medicare beneficiaries.
(viii) Engage in any other marketing
activity prohibited by CMS in its
marketing guidance.
(2) In its marketing, the Part D
organization must—
(i) 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.
(ii) 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.
§ 423.56 Procedures to determine and
document creditable status of prescription
drug coverage.

(a) Definition. Creditable prescription
drug coverage means any of the
following types of coverage listed in
paragraph (b) of this section only if the
actuarial value of the coverage equals or
exceeds the actuarial value of defined
standard prescription drug coverage as
demonstrated through the use of
generally accepted actuarial principles
and in accordance with CMS actuarial
guidelines.
(b) Types of coverage. The following
coverage is considered creditable if it
meets the definition provided in
paragraph (a) of this section:
(1) Prescription drug coverage under a
PDP or MA-PD plan.
(2) Medicaid coverage under title XIX
of the Act or under a waiver under
section 1115 of the Act.
(3) Coverage under a group health
plan, including the Federal employees
health benefits program, and qualified
retiree prescription drug plans as
defined in section 1860D–22(a)(2) of the
Act.
(4) Coverage under State
Pharmaceutical
Assistance Programs (SPAP) as
defined at § 423.454.
(5) Coverage of prescription drugs for
veterans, survivors and dependents
under chapter 17 of title 38, U.S.C.
(6) Coverage under a Medicare
supplemental policy (Medigap policy)
as defined at § 423.205.
(7) Military coverage under chapter 55
of title 10,
U.S.C., including TRICARE.
(8) Individual health insurance
coverage (as defined in section
2791(b)(5) of the Public Health Service
Act) that includes coverage for

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
outpatient prescription drugs and that
does not meet the definition of an
excepted benefit (as defined in section
2791(c) of the Public Health Service
Act).
(9) Coverage provided by the medical
care program of the Indian Health
Service, Tribe or Tribal organization, or
Urban Indian organization (I/T/U).
(10) Coverage provided by a PACE
organization.
(11) Coverage provided by a costbased HMO or CMP under part 417 of
this chapter.
(12) Coverage provided through a
State High-Risk Pool as defined under
42 CFR 146.113(a)(1)(vii).
(13) Other coverage as the Secretary
may determine appropriate.
(c) General disclosure requirements.
With the exception of PDPs and MA-PD
plans under § 423.56(b)(1) and PACE or
cost-based HMO or CMP that provide
qualified prescription drug coverage
under this Part, each entity that offers
prescription drug coverage under any of
the types described in § 423.56(b), must
disclose to all Part D eligible individuals
enrolled in or seeking to enroll in the
coverage whether the coverage is
creditable prescription drug coverage.
(d) Disclosure of non-creditable
coverage. In the case that the coverage
of the type described in § 423.56(b) is
not creditable prescription drug, the
disclosure described in paragraph (c) of
this section to Part D eligible
individuals must also include:
(1) The fact that the coverage is not
creditable prescription drug coverage, as
provided by CMS;
(2) That there are limitations on the
periods in a year in which the
individual may enroll in Part D plans;
and
(3) That the individual may be subject
to a late enrollment penalty, as
described under § 423.46.
(e) Disclosure to CMS. With the
exception of PDPs and MA-PD plans
under § 423.56(b)(1) and PACE or costbased HMO or CMP that provide
qualified prescription drug coverage
under this Part, all other entities listed
under paragraph (b) of this section must
disclose whether the coverage they
provide is creditable prescription drug
coverage to CMS in a form and manner
described by CMS.
(f) Notification content and timing
requirements. The disclosure
notification to Part-D eligible
individuals required in § 423.56(c) and
(d) must be provided in a form and
manner prescribed by CMS. Notices
must be provided, at minimum, at the
following times:

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(1) Prior to an individual’s initial
enrollment period for Part D, as
described under § 423.38(a);
(2) Prior to the effective date of
enrollment in the prescription drug
coverage and upon any change that
affects whether the coverage is
creditable prescription drug coverage;
(3) Prior to the commencement of the
Annual Coordinated Election Period
that begins on November 15 of each
year, as defined in § 423.38(b); and
(4) Upon request by the individual.
(g) When an individual is not
adequately informed of coverage. If an
individual establishes to CMS that he or
she was not adequately informed that
his or her prescription drug coverage
was not creditable prescription drug
coverage, the individual may apply to
CMS to have the coverage treated as
creditable prescription drug coverage for
purposes of applying the late penalty
described in § 423.46.
Subpart C—Benefits and Beneficiary
Protections.
§ 423.100

Definitions.

As used in this part, unless otherwise
specifiedActual cost means 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 § 423.124(a).
Affected enrollee means a Part D
enrollee who is currently taking a
covered Part D drug that is either being
removed from a Part D plan’s formulary,
or whose preferred or tiered cost-sharing
status is changing.
Alternative prescription drug coverage
means coverage of Part D drugs, other
than standard prescription drug
coverage that meets the requirements of
§ 423.104(e). The term alternative
prescription drug coverage must be
either—
(1) Basic alternative coverage
(alternative coverage that is actuarially
equivalent to defined standard coverage,
as determined through processes and
methods established under
§ 423.265(d)(2)); or
(2) Enhanced alternative coverage
(alternative coverage that meets the
requirements of § 423.104(f)(1)).
Basic prescription drug coverage
means coverage of Part D drugs that is
either standard prescription drug
coverage or basic alternative coverage.
Bioequivalent has the meaning given
such term in section 505(j)(8) of the
Food, Drug, and Cosmetic Act.
Contracted pharmacy network means
pharmacies, including retail, mail-order,

PO 00000

Frm 00341

Fmt 4701

Sfmt 4700

4533

and institutional pharmacies, under
contract with a Part D sponsor to
provide covered Part D drugs at
negotiated prices to Part D enrollees.
Covered Part D drug means a Part D
drug that is included in a Part D plan’s
formulary, or treated as being included
in a Part D plan’s formulary as a result
of a coverage determination or appeal
under § 423.566, § 423.580, and
§ 423.600, § 423.610, § 423,620, and
§ 423.630, and obtained at a network
pharmacy or an out-of-network
pharmacy in accordance with § 423.124.
Dispensing fees means costs that­
(1) Are incurred at the point of sale
and pay for costs in excess of the
ingredient cost of a covered Part D drug
each time a covered Part D drug is
dispensed;
(2) Include only pharmacy costs
associated with ensuring that possession
of the appropriate covered Part D drug
is transferred to a Part D enrollee.
Pharmacy costs include, but are not
limited to, any reasonable costs
associated with a pharmacist’s time in
checking the computer for information
about an individual’s coverage,
performing quality assurance activities
consistent with § 423.153(c)(2),
measurement or mixing of the covered
Part D drug, filling the container,
physically providing the completed
prescription to the Part D enrollee,
delivery, special packaging, and
overhead associated with maintaining
the facility and equipment necessary to
operate the pharmacy. In the case of
pharmacies owned and operated by a
Part D plan itself, notwithstanding
number (3) of this definition, dispensing
fees are understood to be the equivalent
of all reasonable costs discussed in the
previous sentence, including the
salaries of pharmacists and other
pharmacy workers as well as the costs
associated with maintaining the
pharmacy facility and equipment
necessary to operate the pharmacy; and
(3) Do not include administrative
costs incurred by the Part D plan in the
operation of the Part D benefit,
including systems costs for interfacing
with pharmacies.
Government-funded health program
means any program established,
maintained, or funded, in whole or in
part, by the Government of the United
States, by the government of any State
or political subdivision of a State, or by
any agency or instrumentality of any of
the foregoing, which uses public funds,
in whole or in part, to provide to, or pay
on behalf of, an individual the cost of
Part D drugs, including any of the
following:
(1) An approved State child health
plan under title XXI of the Act

E:\FR\FM\28JAR2.SGM

28JAR2

4534

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

providing benefits for child health
assistance that meets the requirements
of section 2103 of the Act;
(2) The Medicaid program under title
XIX of the Act or a waiver under section
1115 of the Act;
(3) The veterans’ health care program
under Chapter 17 of title 38 of the
United States Code;
(4) The Indian Health Service program
under the Indian Health Care
Improvement Act under Chapter 18 of
title 25 of the United States Code; and
(5) Any other government-funded
program whose principal activity is the
direct provision of health care to
persons.
Group health plan, for purposes of
applying the definition of incurred costs
in § 423.100, has the meaning given
such term in 29 U.S.C. 1167(1), but
specifically excludes a personal health
savings vehicle, as used in this subpart.
Incurred costs means costs incurred
by a Part D enrollee for covered Part D
drugs —
(1) That are not paid for under the
Part D plan as a result of application of
any annual deductible or other costsharing rules for covered Part D drugs
prior to the Part D enrollee satisfying the
out-of-pocket threshold under
§ 423.104(d)(5)(iii), including any price
differential for which the Part D enrollee
is responsible under § 423.124(b); 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
§ 423.454); or
(iii) Under § 423.782.
Insurance means a health plan that
provides, or pays the cost of Part D
drugs, including, but not limited to, any
of the following:
(1) Health insurance coverage (as
defined in 42 U.S.C. 300gg–91(b)(1));
(2) A Medicare Advantage plan (as
described under section 1851(a)(2) of
the Act); and
(3) A PACE organization (as defined
under sections 1894(a)(3) and
1934(a)(13) of the Act)
but specifically excluding a personal
health savings vehicle.
I/T/U pharmacy means a pharmacy
operated by the Indian Health Service,
an Indian tribe or tribal organization, or
an urban Indian organization, all of

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

which are defined in section 4 of the
Indian Health Care Improvement Act, 25
U.S.C. 1603.
Long-term care facility means a
skilled nursing facility as defined in
section 1819(a) of the Act, or a medical
institution or nursing facility for which
payment is made for an institutionalized
individual under section 1902(q)(1)(B)
of the Act.
Long-term care pharmacy means a
pharmacy owned by or under contract
with a long-term care facility to provide
prescription drugs to the facility’s
residents.
Long-term care network pharmacy
means a long-term care pharmacy that is
a network pharmacy.
Negotiated prices means 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.
Network pharmacy means a licensed
pharmacy that is under contract with a
Part D sponsor to provide covered Part
D drugs at negotiated prices to its Part
D plan enrollees.
Non-preferred pharmacy means a
network pharmacy that offers covered
Part D drugs at negotiated prices to Part
D enrollees at higher cost-sharing levels
than apply at a preferred pharmacy.
Or otherwise means through a
government-funded health program.
Out-of-network pharmacy means a
licensed pharmacy that is not under
contract with a Part D sponsor to
provide negotiated prices to Part D plan
enrollees.
Part D drug means—
(1) Unless excluded under number (2)
of this definition, any of the following
if used for a medically accepted
indication (as defined in section
1927(k)(6) of the Act)—
(i) A drug that may be dispensed only
upon a prescription and that is
described in sections 1927(k)(2)(A)(i)
through (iii) of the Act;
(ii) A biological product described in
sections 1927(k)(2)(B)(i) through (iii) of
the Act;
(iii) Insulin described in section
1927(k)(2)(C) of the Act;
(iv) Medical supplies associated with
the injection of insulin, including
syringes, needles, alcohol swabs, and
gauze; or
(v) A vaccine licensed under section
351 of the Public Health Service Act.
(2) Does not include—
(i) Drugs for which payment as so
prescribed and dispensed or

PO 00000

Frm 00342

Fmt 4701

Sfmt 4700

administered to an individual is
available for that individual under Part
A or Part B (even though a deductible
may apply, or even though the
individual is eligible for coverage under
Part A or Part B but has declined to
enroll in Part A or Part B); and
(ii) Drugs or classes of drugs, or their
medical uses, which may be excluded
from coverage or otherwise restricted
under Medicaid under sections
1927(d)(2) or (d)(3) of the Act, except for
smoking cessation agents.
Person means a natural person,
corporation, mutual company,
unincorporated association, partnership,
joint venture, limited liability company,
trust, estate, foundation, not-for-profit
corporation, unincorporated
organization, government or
governmental subdivision or agency.
Personal health savings vehicle means
a vehicle through which individuals can
set aside their own funds to pay for
health care expenses, including covered
Part D drugs, on a tax-free basis
including any of the following—
(1) A Health Savings Account (as
defined under section 220 of the
Internal Revenue Code);
(2) A Flexible Spending Account (as
defined in section 106(c)(2) of the
Internal Revenue Code) offered in
conjunction with a cafeteria plan under
section 125 of the Internal Revenue
Code; and
(3) An Archer Medical Savings
Account (as defined under section 223
of the Internal Revenue Code);
but specifically excluding a Health
Reimbursement Arrangement (as
described under Internal Revenue
Ruling 2002–41 and Internal Revenue
Notice 2002–45)
Plan allowance means the amount
Part D plans that offer coverage other
than defined standard coverage may use
to determine their payment and Part D
enrollees’ cost-sharing for covered Part
D drugs purchased at an out-of-network
pharmacy or in a physician’s office in
accordance with the requirements of
§ 423.124(b).
Preferred drug means a covered Part
D drug on a Part D plan’s formulary for
which beneficiary cost-sharing is lower
than for a non-preferred drug in the
plan’s formulary.
Preferred pharmacy means a network
pharmacy that offers covered Part D
drugs at negotiated prices to Part D
enrollees at lower levels of cost-sharing
than apply at a non-preferred pharmacy
under its pharmacy network contract
with a Part D plan.
Qualified prescription drug coverage
means any standard prescription drug
coverage or alternative prescription drug
coverage

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Retail pharmacy means any licensed
pharmacy that is not a mail order
pharmacy from which Part D enrollees
could purchase a covered Part D drug
without being required to receive
medical services from a provider or
institution affiliated with that
pharmacy.
Required prescription drug coverage
means coverage of Part D drugs under
an MA-PD plan that consists of either—
(1) Basic prescription drug coverage;
or
(2) Enhanced alternative coverage,
provided there is no MA monthly
supplemental beneficiary premium (as
defined under section 1854(b)(2)(C) of
the Act) applied under the plan due to
the application of a credit against the
premium of a rebate under § 422.266(b)
of this chapter.
Rural means a five-digit ZIP code in
which the population density is less
than 1,000 individuals per square mile.
Standard prescription drug coverage
means coverage of Part D drugs that
meets the requirements of § 423.104(d).
The term standard prescription drug
coverage must be either—
(1) Defined standard coverage
(standard prescription drug coverage
that provides for cost-sharing as
described in § 423.104(d)(2)(i)(A) and
(d)(5)(i)); or
(2) Actuarially equivalent standard
coverage (standard prescription drug
coverage that provides for cost-sharing
as described in § 423.104(d)(2)(i)(B) or
cost-sharing as described in
§ 423.104(d)(5)(ii), or both).
Suburban means a five-digit ZIP code
in which the population density is
between 1,000 and 3,000 individuals
per square mile.
Supplemental benefits means benefits
that meet the requirements of
§ 423.104(f)(1)(ii).
Therapeutically equivalent refers to
drugs that are rated as therapeutic
equivalents under the Food and Drug
Administration’s most recent
publication of ‘‘Approved Drug
Products with Therapeutic Equivalence
Evaluations.’’
Third party payment arrangement
means any contractual or similar
arrangement under which a person has
a legal obligation to pay for covered Part
D drugs.
Urban means a five-digit ZIP code in
which the population density is greater
than 3,000 individuals per square mile.
Usual and customary (U&C) price
means the price that an out-of-network
pharmacy or a physician’s office charges
a customer who does not have any form
of prescription drug coverage for a
covered Part D drug.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

§ 423.104 Requirements related to
qualified prescription drug coverage.

(a) General. Subject to the conditions
and limitations set forth in this subpart,
a Part D sponsor must provide enrollees
with coverage of the benefits described
in paragraph (c) of this section. The
benefits may be provided directly by the
Part D sponsor or through arrangements
with other entities. CMS reviews and
approves these benefits consistent with
§ 423.272, and using written policy
guidelines and requirements in this part
and other CMS instructions.
(b) Availability of prescription drug
plans. A PDP sponsor offering a
prescription drug plan must offer that
plan to all Part D eligible beneficiaries
residing in the plan’s service area.
(c) Types of benefits. The coverage
provided by a Part D plan must be
qualified prescription drug coverage.
(d) Standard prescription drug
coverage. Standard prescription drug
coverage includes access to negotiated
prices as described under paragraph
(g)(1) of this section, provides coverage
of Part D drugs, and must meet the
following requirements
(1) Deductible. An annual deductible
equal to—
(i) For 2006. $250; or
(ii) For years subsequent to 2006. The
amount specified in this paragraph for
the previous year, increased by the
annual percentage increase specified in
paragraph (d)(5)(iv) of this section, and
rounded to the nearest multiple of $5.
(2) Cost-sharing under the initial
coverage limit.
(i) 25 Percent coinsurance.
Coinsurance for actual costs for covered
Part D drugs covered under the Part D
plan above the annual deductible
specified in paragraph (d)(1) of this
section, and up to the initial coverage
limit under paragraph (d)(3) of this
section, that is—
(A) Equal to 25 percent of actual cost;
or
(B) Actuarially equivalent to an
average expected coinsurance of no
more than 25 percent of actual cost, as
determined through processes and
methods established under § 423.265(c)
and (d).
(ii) Tiered copayments. A Part D plan
providing actuarially equivalent
standard coverage may apply tiered
copayments, provided that any tiered
copayments are consistent with
paragraph (d)(2)(i)(B) of this section and
are approved as described in
§ 423.272(b)(2).
(3) Initial coverage limit. The initial
coverage limit is equal to—
(i) For 2006. $2,250.
(ii) For years subsequent to 2006. The
amount specified in this paragraph for

PO 00000

Frm 00343

Fmt 4701

Sfmt 4700

4535

the previous year, increased by the
annual percentage increase specified in
paragraph (d)(5)(iv) of this section, and
rounded to the nearest multiple of $10.
(4) Cost-sharing between the initial
coverage limit and the annual out-of­
pocket threshold. Coinsurance for costs
for covered Part D drugs above the
initial coverage limit described in
paragraph (d)(3) of this section and
annual out-of-pocket threshold
described in paragraph (d)(5)(iii) of this
section that is equal to 100 percent of
actual costs.
(5) Protection against high out-of­
pocket expenditures. (i) After an
enrollee’s incurred costs exceed the
annual out-of-pocket threshold
described in paragraph (d)(5)(iii) of this
section, cost-sharing equal to the greater
of—
(A) Copayments. (1) In 2006, $2 for a
generic drug or preferred drug that is a
multiple source drug (as defined in
section 1927(k)(7)(A)(i) of the Act) and
$5 for any other drug; and
(2) For subsequent years, the
copayment amounts specified in this
paragraph for the previous year
increased by the annual percentage
increase described in paragraph
(d)(5)(iv) of this section and rounded to
the nearest multiple of 5 cents; or
(B) Coinsurance. Coinsurance of five
percent of actual cost.
(ii) As determined through processes
and methods established under
§ 423.265(c) and (d), a Part D plan may
substitute for cost-sharing under
paragraph (d)(5)(i) of this section an
amount that is actuarially equivalent to
expected cost-sharing under paragraph
(d)(5)(i) of this section.
(iii) Annual out-of-pocket threshold.
For purposes of this part, the annual
out-of-pocket threshold equals—
(A) For 2006. $3,600.
(B) For years subsequent to 2006. The
amount specified in this paragraph for
the previous year, increased by the
annual percentage increase specified in
paragraph (d)(5)(iv) of this section, and
rounded to the nearest multiple of $50.
(iv) Annual percentage increase. The
annual percentage increase for each year
is equal to the annual percentage
increase in average per capita aggregate
expenditures for Part D drugs in the
United States for Part D eligible
individuals and is based on data for the
12-month period ending in July of the
previous year.
(e) Alternative prescription drug
coverage. Alternative prescription drug
coverage includes access to negotiated
prices as described under paragraph
(g)(1) of this section, provides coverage
of Part D drugs, and must meet the
following requirements—

E:\FR\FM\28JAR2.SGM

28JAR2

4536

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

(1) Has an annual deductible that does
not exceed the annual deductible
specified in paragraph (d)(1) of this
section;
(2) Imposes cost-sharing no greater
than that specified in paragraphs
(d)(5)(i) or (ii) of this section once the
annual out-of-pocket threshold
described in paragraph (d)(5)(iii) of this
section is met;
(3) Has a total or gross value that is
at least equal to the total or gross value
of defined standard coverage.
(4) Has an unsubsidized value that is
at least equal to the unsubsidized value
of standard prescription drug coverage.
For purposes of this subparagraph, the
unsubsidized value of coverage is the
amount by which the actuarial value of
the coverage exceeds the actuarial value
of the subsidy payments under
§ 423.782 for the coverage; and
(5) Provides coverage that is designed,
based upon an actuarially representative
pattern of utilization, to provide for the
payment, for costs incurred for covered
Part D drugs, that are equal to the initial
coverage limit under paragraph (d)(3) of
this section, of an amount equal to at
least the product of ­
(i) The amount by which the initial
coverage limit described in paragraph
(d)(3) of this section for the year exceeds
the deductible described in paragraph
(d)(1) of this section; and
(ii) 100 percent minus the
coinsurance percentage specified in
paragraph (d)(2)(i) of this section.
(f) Enhanced alternative coverage. (1)
Enhanced alternative coverage must
meet the requirements under paragraph
(e) of this section and includes­
(i) Basic prescription drug coverage,
as defined in § 423.100; and
(ii) Supplemental benefits, which
include­
(A) Coverage of drugs that are
specifically excluded as Part D drugs
under paragraph (2)(ii) of the definition
of Part D drug under § 423.100; or
(B) Any of the following changes or
combination of changes that increase
the actuarial value of benefits under the
Part D plan above the actuarial value of
defined standard prescription drug
coverage, as determined through
processes and methods established
under § 423.265—
(1) A reduction in the annual
deductible described in paragraph (d)(1)
of this section;
(2) A reduction in the cost-sharing
described in paragraphs (d)(2) or (d)(5)
of this section, or
(3) An increase in the initial coverage
limit described in paragraph (d)(3) of
this section.
(C) Both the coverage described in
paragraph (f)(1)(ii)(A) of this section and

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

the changes or combination of changes
described in paragraph (f)(1)(ii)(B) of
this section.
(2) Restrictions on the offering of
enhanced alternative coverage by PDP
sponsors. A PDP sponsor may not offer
enhanced alternative coverage in a
service area unless the PDP sponsor also
offers a prescription drug plan in that
service area that provides basic
prescription drug coverage.
(3) Restrictions on the offering of
enhanced alternative coverage by MA
organizations. Effective January 1, 2006,
an MA organization—
(i) May not offer an MA coordinated
care plan, as defined in § 422.4 of this
chapter, in an area unless either that
plan (or another MA plan offered by the
MA organization in that same service
area) includes required prescription
drug coverage; and
(ii) May not offer prescription drug
coverage (other than that required under
Parts A and B of title XVIII of the Act)
to an enrollee—
(A) Under an MSA plan, as defined in
§ 422.2 of this chapter; or
(B) Under another MA plan (including
a private fee-for-service plan, as defined
in § 422.4 of this chapter) unless the
drug coverage under the other plan
provides qualified prescription drug
coverage and unless the requirements of
paragraph (f)(3)(i) of this section are
met.
(4) Restrictions on the offering of
enhanced alternative coverage by cost
plans.
(i) A cost plan that elects to offer
qualified prescription drug coverage
may offer enhanced alternative coverage
as an optional supplemental benefit
under § 417.440(b)(2)(ii) of this chapter
only if the cost plan also offers basic
prescription drug coverage. An enrollee
in the cost plan may, at the individual’s
option, elect whether to receive
qualified prescription drug coverage
under the cost plan and, if so, whether
to receive basic prescription drug
coverage or, if offered by the cost plan,
enhanced alternative coverage.
(ii) A cost plan that offers qualified
prescription drug coverage as an
optional supplemental benefit under
§ 417.440(b)(2)(ii) of this chapter may
not offer prescription drug coverage that
is not qualified prescription drug
coverage. A cost plan that does not offer
qualified prescription drug coverage
under § 417.440(b)(2)(ii) of this chapter
may offer prescription drug coverage
that is not qualified prescription drug
coverage under § 417.440(b)(2)(i) of this
chapter.
(g) Negotiated prices. (1) Access to
negotiated prices. A Part D sponsor is
required to provide its Part D enrollees

PO 00000

Frm 00344

Fmt 4701

Sfmt 4700

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.
(2) Interaction with Medicaid best
price. Prices negotiated with a
pharmaceutical manufacturer, including
discounts, subsidies, rebates, and other
price concessions, for covered Part D
drugs by the following entities are not
taken into account in establishing
Medicaid’s best price under section
1927(c)(1)(C) of the Act—
(i) A Part D plan, as defined in
§ 423.4; or
(iii) A qualified retiree prescription
drug plan (as defined in § 423.882) for
Part D eligible individuals.
(3) Disclosure. (i) A Part D sponsor is
required to disclose to CMS data on
aggregate negotiated price concessions
obtained from pharmaceutical
manufacturers, as well as data on
aggregate negotiated price concessions
obtained from pharmaceutical
manufacturers that are passed through
to beneficiaries, via pharmacies and
other dispensers, in the form of lower
subsidies paid by CMS on behalf of lowincome individuals described in
§ 423.782, or in the form of lower
monthly beneficiary premiums or lower
covered Part D drug prices at the point
of sale.
(ii) Information on negotiated prices
disclosed to CMS under paragraph (g)(3)
of this section is protected under the
confidentiality provisions applicable
under section 1927(b)(3)(D) of the Act.
(4) Audits. CMS and the Office of the
Inspector General may conduct periodic
audits of the financial statements and all
records of Part D sponsors pertaining to
any qualified prescription drug coverage
they may offer under a Part D plan.
§ 423.112 Establishment of prescription
drug plan service areas.

(a) Service area for prescription drug
plans. The service area for a
prescription drug plan other than a
fallback prescription drug plan consists
of one or more PDP regions as
established under paragraphs (b) and (c)
of this section.
(b) Establishment of PDP regions. (1)
General. CMS establishes PDP regions
in a manner consistent with the
requirements for the establishment of
MA regions as described at § 422.455 of
this chapter.
(2) Relation to MA regions. To the
extent practicable, PDP regions are the
same as MA regions. CMS may establish

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
network may be supplemented by nonretail pharmacies, including pharmacies
offering home delivery via mail-order
and institutional pharmacies, provided
the requirements of paragraph (a)(1) of
this section are met.
(4) Access to home infusion
pharmacies. A Part D plan’s contracted
pharmacy network must provide
adequate access to home infusion
pharmacies consistent with written
policy guidelines and other CMS
instructions.
(5) Access to long-term care
pharmacies. A Part D plan must offer
standard contracting terms and
conditions, including performance and
service criteria for long-term care
pharmacies that CMS specifies, to all
§ 423.120 Access to covered Part D drugs.
long-term care pharmacies in its service
(a) Assuring pharmacy access. (1)
area. The plan must provide convenient
Standards for convenient access to
access to long-term care pharmacies
network pharmacies. Except as provided consistent with written policy
in paragraph (a)(7) of this section, a Part guidelines and other CMS instructions.
D plan must have a contracted
(6) Access to I/T/U pharmacies. A
pharmacy network consisting of retail
Part D plan must offer standard
pharmacies sufficient to ensure that for
contracting terms and conditions
beneficiaries residing in each State in a
conforming to the model addendum that
prescription drug plan’s service area(as
CMS develops, to all I/T/U pharmacies
defined in § 423.112(a)), each State in a
in its service area. The plan must
regional MA-PD plan’s service area (as
provide convenient access to I/T/U
defined in § 422.2 and § 422.455(a) of
pharmacies consistent with written
this chapter), a local MA-PD plan’s
policy guidelines and other CMS
service area (as defined in § 422.2 of this instructions.
chapter), or a cost plan’s geographic area
(7) Waiver of pharmacy access
(as defined in § 417.401 of this chapter), requirements. CMS waives the
the following requirements are satisfied: requirements under paragraph (a)(1) of
(i) At least 90 percent of Medicare
this section in the case of—
beneficiaries, on average, in urban areas
(i) An MA-PD plan or cost plan (as
served by the Part D plan live within 2
described in section 1876(h) of the Act)
miles of a network pharmacy that is a
that provides its enrollees with access to
retail pharmacy or a pharmacy
covered Part D drugs through
described under paragraph (a)(2) of this
pharmacies owned and operated by the
section;
MA organization or cost plan, provided
(ii) At least 90 percent of Medicare
the organization’s or plan’s pharmacy
beneficiaries, on average, in suburban
network meets the access standard set
areas served by the Part D plan live
forth under § 422.112 of this chapter for
within 5 miles of a network pharmacy
an MA plan, or § 417.416(e) of this
that is a retail pharmacy or a pharmacy
chapter for a cost plan.
described under paragraph (a)(2) of this
(ii) An MA private fee-for-service plan
section; and
described in § 422.4 of this chapter
(iii) At least 70 percent of Medicare
that—
beneficiaries, on average, in rural areas
(A) Offers qualified prescription drug
served by the Part D plan live within 15 coverage; and
miles of a network pharmacy that is a
(B) Provides plan enrollees with
retail pharmacy or a pharmacy
access to covered Part D drugs
described under paragraph (a)(2) of this
dispensed at all pharmacies, without
section.
regard to whether they are contracted
(2) Applicability of some non-retail
network pharmacies and without
pharmacies to standards for convenient charging cost-sharing in excess of that
access. Part D plans may count I/T/U
described in § 423.104(d)(2) and (d)(5).
pharmacies and pharmacies operated by
(8) Pharmacy network contracting
Federally Qualified Health Centers and
requirements. In establishing its
Rural Health Centers toward the
contracted pharmacy network, a Part D
standards for convenient access to
sponsor offering qualified prescription
network pharmacies in paragraph (a)(1)
drug coverage—
(i) Must contract with any pharmacy
of this section.
(3) Access to non-retail pharmacies. A that meets the Part D plan’s standard
terms and conditions; and
Part D plan’s contracted pharmacy
PDP regions that are not the same as MA
regions if CMS determines that the
establishment of these regions improves
access to prescription drug plan benefits
for Part D eligible individuals.
(c) Authority for territories. CMS
establishes a PDP region or regions for
States that are not within the 50 States
and the District of Columbia.
(d) Revision of PDP regions. CMS may
revise the PDP regions established
under paragraphs (b) and (c) of this
section.
(e) Regional or national plan. Nothing
in this section prevents a prescription
drug plan from being offered in two or
more PDP regions in their entirety or in
all PDP regions in their entirety.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

PO 00000

Frm 00345

Fmt 4701

Sfmt 4700

4537

(ii) May not require a pharmacy to
accept insurance risk as a condition of
participation in the Part D plan’s
contracted pharmacy network.
(9) Differential cost-sharing for
preferred pharmacies. A Part D sponsor
offering a Part D plan that provides
coverage other than defined standard
coverage may reduce copayments or
coinsurance for covered Part D drugs
obtained through a preferred pharmacy
relative to the copayments or
coinsurance applicable for such drugs
when obtained through a non-preferred
pharmacy. Such differentials are taken
into account in determining whether the
requirements under § 423.104(d)(2) and
(d)(5) and § 423.104(e) are met. Any
cost-sharing reduction under this
section must not increase CMS
payments to the Part D plan under
§ 423.329.
(10) Level playing field between mailorder and network pharmacies. A Part D
sponsor must permit its Part D plan
enrollees to receive benefits, which may
include a 90-day supply of covered Part
D drugs, at any of its network
pharmacies that are retail pharmacies. A
Part D plan may require an enrollee
obtaining a covered Part D drug at a
network pharmacy that is a retail
pharmacy to pay any higher cost-sharing
applicable to that covered Part D drug
at the network pharmacy that is a retail
pharmacy instead of the cost-sharing
applicable to that covered Part D drug
at the network pharmacy that is a mailorder pharmacy.
(b) Formulary requirements. A Part D
sponsor that uses a formulary under its
qualified prescription drug coverage
must meet the following requirements—
(1) Development and revision by a
pharmacy and therapeutic committee. A
Part D sponsor’s formulary must be
developed and reviewed by a pharmacy
and therapeutic committee that—
(i) Includes a majority of members
who are practicing physicians and/or
practicing pharmacists.
(ii) Includes at least one practicing
physician and at least one practicing
pharmacist who are independent and
free of conflict relative to­
(A) The Part D sponsor and Part D
plan; and
(B) Pharmaceutical manufacturers.
(iii) Includes at least one practicing
physician and one practicing
pharmacist who are experts regarding
care of elderly or disabled individuals.
(iv) Bases clinical decisions on the
strength of scientific evidence and
standards of practice, including
assessing peer-reviewed medical
literature, pharmacoeconomic studies,
outcomes research data, and other such

E:\FR\FM\28JAR2.SGM

28JAR2

4538

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

information as it determines
appropriate.
(v) Considers whether the inclusion of
a particular Part D drug in a formulary
or formulary tier has any therapeutic
advantages in terms of safety and
efficacy.
(vi) Reviews policies that guide
exceptions and other utilization
management processes, including drug
utilization review, quantity limits,
generic substitution, and therapeutic
interchange.
(vii) Evaluates and analyzes treatment
protocols and procedures related to the
plan’s formulary at least annually
consistent with written policy
guidelines and other CMS instructions.
(viii) Documents in writing its
decisions regarding formulary
development and revision and
utilization management activities.
(ix) Meets other requirements
consistent with written policy
guidelines and other CMS instructions.
(2) Provision of an adequate benefit. A
Part D plan’s formulary must­
(i) Except as provided in paragraph
(b)(2)(ii) of this section, include within
each therapeutic category and class of
Part D drugs at least two Part D drugs
that are not therapeutically equivalent
and bioequivalent, with different
strengths and dosage forms available for
each of those drugs, except that only
one Part D drug must be included in a
particular category or class of covered
Part D drugs if the category or class
includes only one Part D drug.
(ii) Include at least one Part D drug
within a particular category or class of
Part D drugs to the extent the Part D
plan demonstrates, and CMS approves,
the following­
(A) That only two drugs are available
in that category or class of Part D drugs;
and
(B) That one drug is clinically
superior to the other drug in that
category or class of Part D drugs.
(iii) Include adequate coverage of the
types of drugs most commonly needed
by Part D enrollees, as recognized in
national treatment guidelines.
(iv) Be approved by CMS consistent
with § 423.272(b)(2).
(3) Transition Process. A Part D
sponsor must provide for an appropriate
transition process for new enrollees
prescribed Part D drugs that are not on
its Part D plan’s formulary. The
transition policy must meet
requirements consistent with written
policy guidelines and other CMS
instructions.
(4) Limitation on changes in
therapeutic classification. Except as
CMS may permit to account for new
therapeutic uses and newly approved

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Part D drugs, a Part D sponsor may not
change the therapeutic categories and
classes in a formulary other than at the
beginning of each plan year.
(5) Provision of notice regarding
formulary changes
(i) Prior to removing a covered Part D
drug from its Part D plan’s formulary, or
making any change in the preferred or
tiered cost-sharing status of a covered
Part D drug, a Part D sponsor must
provide at least 60 days notice to CMS,
State Pharmaceutical Assistance
Programs (as defined in § 423.454),
entities providing other prescription
drug coverage (as described in
§ 423.464(f)(1)), authorized prescribers,
network pharmacies, and pharmacists
prior to the date such change becomes
effective, and must either—
(A) Provide direct written notice to
affected enrollees at least 60 days prior
to the date the change becomes
effective; or
(B) At the time an affected enrollee
requests a refill of the Part D drug,
provide such enrollee with a 60 day
supply of the Part D drug under the
same terms as previously allowed, and
written notice of the formulary change.
(ii) The written notice must contain
the following information­
(A) The name of the affected covered
Part D drug;
(B) Whether the plan is removing the
covered Part D drug from the formulary,
or changing its preferred or tiered costsharing status;
(C) The reason why the plan is
removing such covered Part D drug from
the formulary, or changing its preferred
or tiered cost-sharing status;
(D) Alternative drugs in the same
therapeutic category or class or costsharing tier and expected cost-sharing
for those drugs; and
(E) The means by which enrollees
may obtain a coverage determination
under § 423.566 or exception under
§ 423.578.
(iii) Part D sponsors may immediately
remove from their Part D plan
formularies covered Part D drugs
deemed unsafe by the Food and Drug
Administration or removed from the
market by their manufacturer without
meeting the requirements of paragraphs
(b)(5)((i) of this section. Part D sponsors
must provide retrospective notice of any
such formulary changes to affected
enrollees, CMS, State Pharmaceutical
Assistance Programs (as defined in
§ 423.454), entities providing other
prescription drug coverage (as described
in § 423.464(f)(1)), authorized
prescribers, network pharmacies, and
pharmacists consistent with the
requirements of paragraphs (b)(5)(ii)(A),

PO 00000

Frm 00346

Fmt 4701

Sfmt 4700

(b)(5)(ii)(B), (b)(5)(ii)(C), and (b)(5)(ii)(D)
of this section.
(6) Limitation on formulary changes
prior to the beginning of a contract year.
Except as provided under paragraph
(b)(5)(iii) of this section, a Part D
sponsor may not remove a covered Part
D drug from its Part D plan’s formulary,
or make any change in the preferred or
tiered cost-sharing status of a covered
Part D drug on its plan’s formulary,
between the beginning of the annual
coordinated election period described in
§ 423.38(b) and 60 days after the
beginning of the contract year associated
with that annual coordinated election
period.
(7) Provider and patient education. A
Part D sponsor must establish policies
and procedures to educate and inform
health care providers and enrollees
concerning its formulary.
(c) Use of standardized technology. A
Part D sponsor must issue and reissue,
as necessary, a card or other type of
technology that its enrollees may use to
access negotiated prices for covered Part
D drugs as provided under § 423.104(g).
The card or other technology must
comply with standards CMS establishes.
§ 423.124 Special rules for out-of-network
access to covered Part D drugs at out-of­
network pharmacies.

(a) Out-of-network access to covered
part D drugs. (1) Out-of-network
pharmacy access. A Part D sponsor must
ensure that Part D enrollees have
adequate access to covered Part D drugs
dispensed at out-of-network pharmacies
when the enrollees—
(i) Cannot reasonably be expected to
obtain such drugs at a network
pharmacy; and
(ii) Do not access covered Part D drugs
at an out-of-network pharmacy on a
routine basis.
(2) Physician’s office access. A Part D
sponsor must ensure that Part D
enrollees have adequate access to
vaccines and other covered Part D drugs
appropriately dispensed and
administered by a physician in a
physician’s office.
(b) Financial responsibility for out-of­
network access to covered Part D drugs.
A Part D sponsor that provides its Part
D enrollees with coverage other than
defined standard coverage may require
its Part D enrollees accessing covered
Part D drugs as provided in paragraph
(a) of this section to assume financial
responsibility for any differential
between the out-of-network pharmacy’s
(or provider’s) usual and customary
price and the Part D sponsor’s plan
allowance, consistent with the
requirements of § 423.104(d)(2)(i)(B) and
§ 423.104(e).

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
(c) Limits on out-of-network access to
covered Part D. A Part D sponsor must
establish reasonable rules to
appropriately limit out-of-network
access to covered Part D drugs.
§ 423.128 Dissemination of Part D plan
information.

(a) Detailed description. A Part D
sponsor must disclose the information
specified in paragraph (b) of this section
in the manner specified by CMS.—
(1) To each enrollee of a Part D plan
offered by the Part D sponsor under this
part;
(2) In a clear, accurate, and
standardized form; and
(3) At the time of enrollment and at
least annually thereafter.
(b) Content of Part D plan description.
The Part D plan description must
include the following information about
the qualified prescription drug coverage
offered under the Part D plan—
(1) Service area. The plan’s service
area.
(2) Benefits. The benefits offered
under the plan, including­
(i) Applicable conditions and
limitations.
(ii) Premiums.
(iii) Cost-sharing (such as
copayments,
deductibles, and coinsurance), and
cost-sharing for subsidy eligible
individuals.
(iv) Any other conditions associated
with receipt or use of benefits.
(3) Cost-sharing. A description of how
a Part D eligible individual may obtain
more information on cost-sharing
requirements, including tiered or other
copayment levels applicable to each
drug (or class of drugs), in accordance
with paragraph (d) of this section.
(4) Formulary. Information about the
plan’s formulary, including­
(i) A list of drugs included on the
plan’s formulary;
(ii) The manner in which the
formulary (including any tiered
formulary structure and utilization
management procedures used)
functions;
(iii) The process for obtaining an
exception to a plan’s formulary or tiered
cost-sharing structure; and
(iv) A description of how a Part D
eligible individual may obtain
additional information on the
formulary, in accordance with
paragraph (d) of this section.
(5) Access. The number, mix, and
distribution (addresses) of network
pharmacies from which enrollees may
reasonably be expected to obtain
covered Part D drugs and how the Part
D sponsor meets the requirements of
§ 423.120(a)(1) for access to covered Part
D drugs;

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(6) Out-of-network coverage.
Provisions for access to covered Part D
drugs at out-of-network pharmacies,
consistent with § 423.124(a).
(7) Grievance, coverage
determinations, and appeals
procedures. All grievance,
reconsideration, exceptions, coverage
determination, reconsideration,
exceptions, and appeal rights and
procedures required under § 423.564 et.
seq.
(8) Quality assurance policies and
procedures. A description of the quality
assurance policies and procedures
required under § 423.153(c), as well as
the medication therapy management
program required under § 423.153(d).
(9) Disenrollment rights and
responsibilities.
(10) Potential for contract termination.
The fact that a Part D sponsor may
terminate or refuse to renew its contract,
or reduce the service area included in
its contract, and the effect that any of
those actions may have on individuals
enrolled in a Part D plan;
(c) Disclosure upon request of general
coverage information, utilization, and
grievance information. Upon request of
a Part D eligible individual, a Part D
sponsor must provide the following
information—
(1) General coverage information.
General coverage information,
including—
(i) Enrollment procedures.
Information and instructions on how to
exercise election options under this
part;
(ii) Rights. A general description of
procedural rights (including grievance,
coverage determination,
reconsideration, exceptions, and
appeals procedures) under this part;
(iii) Benefits. (A) Covered services
under the Part D plan;
(B) Any beneficiary cost-sharing, such
as deductibles, coinsurance, and
copayment amounts, including costsharing for subsidy eligible individuals;
(C) Any maximum limitations on out­
of-pocket expenses;
(D) The extent to which an enrollee
may obtain benefits from out-of-network
providers;
(E) The types of pharmacies that
participate in the Part D plan’s network
and the extent to which an enrollee may
select among those pharmacies; and
(F) The Part D plan’s out-of-network
pharmacy access policy.
(iv) Premiums;
(v) The Part D plan’s formulary;
(vi) The Part D plan’s service area;
and
(vii) Quality and performance
indicators for benefits under the Part D
plan as determined by CMS.

PO 00000

Frm 00347

Fmt 4701

Sfmt 4700

4539

(2) The procedures the Part D sponsor
uses to control utilization of services
and expenditures.
(3) The number of disputes, and the
disposition in the aggregate, in a manner
and form described by CMS. These
disputes are categorized as—
(i) Grievances according to § 423.564;
(ii) Appeals according to § 423.580 et.
seq.; and
(iii) Exceptions according to
§ 423.578.
(4) Financial condition of the Part D
sponsor, including the most recently
audited information regarding, at a
minimum, a description of the financial
condition of the Part D sponsor offering
the Part D plan.
(d) Provision of specific information.
Each Part D sponsor offering qualified
prescription drug coverage under a Part
D plan must have mechanisms for
providing specific information on a
timely basis to current and prospective
enrollees upon request. These
mechanisms must include—
(1) A toll-free customer call center
that—
(i) Is open during usual business
hours.
(ii) Provides customer telephone
service, including to pharmacists, in
accordance with standard business
practices.
(2) An Internet website that—
(i) Includes, at a minimum, the
information required in paragraph (b) of
this section.
(ii) Includes a current formulary for
its Part D plan, updated at least
monthly.
(iii) Provides current and prospective
Part D enrollees with at least 60 days
notice regarding the removal or change
in the preferred or tiered cost-sharing
status of a Part D drug on its Part D
plan’s formulary.
(3) The provision of information in
writing, upon request.
(e) Claims information. A Part D
sponsor must furnish directly to
enrollees, in the manner specified by
CMS and in a form easily
understandable to such enrollees, a
written explanation of benefits when
prescription drug benefits are provided
under qualified prescription drug
coverage. The explanation of benefits
must—
(1) List the item or service for which
payment was made and the amount of
the payment for each item or service.
(2) Include a notice of the individual’s
right to request an itemized statement.
(3) Include the cumulative, year-to­
date total amount of benefits provided,
in relation to—
(i) The deductible for the current year.
(ii) The initial coverage limit for the
current year.

E:\FR\FM\28JAR2.SGM

28JAR2

4540

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

(iii) The annual out-of-pocket
threshold for the current year.
(4) Include the cumulative, year-to­
date total of incurred costs to the extent
practicable.
(5) Include any applicable formulary
changes for which Part D plans are
required to provide notice as described
in § 423.120(b)(5).
(6) Be provided during any month
when prescription drug benefits are
provided under this part, including for
covered Part D spending between the
initial coverage limit described in
§ 423.104(d)(3) and the out-of-pocket
threshold described in
§ 423.104(d)(5)(iii).
§ 423.132 Public disclosure of
pharmaceutical prices for equivalent drugs.

(a) General requirements. Except as
provided under paragraph (c) of this
section, a Part D sponsor must require
a pharmacy that dispenses a covered
Part D drug to inform an enrollee of any
differential between the price of that
drug and the price of the lowest priced
generic version of that covered Part D
drug that is therapeutically equivalent
and bioequivalent and available at that
pharmacy, unless the particular covered
Part D drug being purchased is the
lowest-priced therapeutically equivalent
and bioequivalent version of that drug
available at that pharmacy.
(b) Timing of notice. Subject to
paragraph (d) of this section, the
information under paragraph (a) of this
section must be provided after the drug
is dispensed at the point of sale or, in
the case of dispensing by mail order, at
the time of delivery of the drug.
(c) Waiver of public disclosure
requirement. CMS waives the
requirement under paragraph (a) of this
section in the case of—
(1) An MA private fee-for-service plan
described in § 422.4 of this chapter
that—
(i) Offers qualified prescription drug
coverage and provides plan enrollees
with access to covered Part D drugs
dispensed at all pharmacies, without
regard to whether they are contracted
network pharmacies; and
(ii) Does not charge additional costsharing for access to covered Part D
drugs dispensed at out-of-network
pharmacies.
(2) An out-of-network pharmacy;
(3) An I/T/U network pharmacy;
(4) A network pharmacy that is
located in any of the U.S. territories; and
(5) Other circumstances where CMS
deems compliance with the
requirements of paragraph (a) of this
section to be impossible or
impracticable.
(d) Modification of timing
requirement. CMS modifies the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

requirement under paragraph (b) of this
section as follows—
(1) For long-term care network
pharmacies, which must meet the
requirement in paragraph (a) of this
section by providing such information
to Part D plans for inclusion in the
written explanations of benefits
required under § 423.128(e); and
(2) Under other circumstances where
CMS deems compliance with the
requirement under paragraph (b) of this
section to be impossible or
impracticable.
§ 423.136 Privacy, confidentiality, and
accuracy of enrollee records.

For any medical records or other
health and enrollment information it
maintains with respect to enrollees, a
PDP sponsor must establish procedures
to do the following—
(a) Abide by all Federal and State
laws regarding confidentiality and
disclosure of medical records, or other
health and enrollment information. The
PDP sponsor must safeguard the privacy
of any information that identifies a
particular enrollee and have procedures
that specify—
(1) For what purposes the information
is used within the organization; and
(2) To whom and for what purposes
it discloses the information outside the
organization.
(b) Ensure that medical information is
released only in accordance with
applicable Federal or State law, or
under court orders or subpoenas.
(c) Maintain the records and
information in an accurate and timely
manner.
(d) Ensure timely access by enrollees
to the records and information that
pertain to them.
Subpart D—Cost Control and Quality
Improvement Requirements for Part D
Plans
§ 423.150

Scope.

This subpart sets forth the
requirements relating to the following:
(a) Drug utilization management
programs, quality assurance measures
and systems, and medication therapy
management programs (MTMP) for Part
D sponsors.
(b) Consumer satisfaction surveys of
Part D plans.
(c) Electronic prescription program.
(d) Quality improvement organization
(QIO) activities.
(e) Compliance deemed on the basis
of accreditation.
(f) Accreditation organizations.
(g) Procedures for the approval of
accreditation
organizations as a basis for deeming
compliance.

PO 00000

Frm 00348

Fmt 4701

Sfmt 4700

§ 423.153 Drug utilization management,
quality assurance, and medication therapy
management programs (MTMPs).

(a) General rule. Each Part D sponsor
must have established, for covered Part
D drugs furnished through a Part D plan,
a drug utilization management program,
quality assurance measures and
systems, and an MTMP as described in
paragraphs (b), (c), and (d) of this
section.
(b) Drug utilization management. A
Part D sponsor must have established a
reasonable and appropriate drug
utilization management program that—
(1) Includes incentives to reduce costs
when medically appropriate;
(2) Maintains policies and systems to
assist in preventing over-utilization and
under-utilization of prescribed
medications; and
(3) Provides CMS with information
concerning the procedures and
performance of its drug utilization
management program, according to
guidelines specified by CMS.
(c) Quality assurance. A Part D
sponsor must have established quality
assurance measures and systems to
reduce medication errors and adverse
drug interactions and improve
medication use that include all of the
following—
(1) Representation that network
providers are required to comply with
minimum standards for pharmacy
practice as established by the States.
(2) Concurrent drug utilization review
systems, policies, and procedures
designed to ensure that a review of the
prescribed drug therapy is performed
before each prescription is dispensed to
an enrollee in a sponsor’s Part D plan,
typically at the point-of-sale or point of
distribution. The review must include,
but not be limited to,
(i) Screening for potential drug
therapy problems due to therapeutic
duplication.
(ii) Age/gender-related
contraindications.
(iii) Over-utilization and underutilization.
(iv) Drug-drug interactions.
(v) Incorrect drug dosage or duration
of drug therapy. (vi) Drug-allergy
contraindications.
(vii) Clinical abuse/misuse.
(3) Retrospective drug utilization
review systems, policies, and
procedures designed to ensure ongoing
periodic examination of claims data and
other records, through computerized
drug claims processing and information
retrieval systems, in order to identify
patterns of inappropriate or medically
unnecessary care among enrollees in a
sponsor’s Part D plan, or associated with
specific drugs or groups of drugs.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
(4) Internal medication error
identification and reduction systems.
(5) Provision of information to CMS
regarding its quality assurance measures
and systems, according to guidelines
specified by CMS.
(d) Medication therapy management
program (MTMP).
(1) General rule. A Part D sponsor
must have established a MTMP that—
(i) Is designed to ensure that covered
Part D drugs prescribed to targeted
beneficiaries described in paragraph
(d)(2) of this section are appropriately
used to optimize therapeutic outcomes
through improved medication use;
(ii) Is designed to reduce the risk of
adverse events, including adverse drug
interactions, for targeted beneficiaries
described in paragraph (d)(2) of this
section;
(iii) May be furnished by a pharmacist
or other qualified provider; and
(iv) May distinguish between services
in ambulatory and institutional settings.
(2) Targeted beneficiaries. Targeted
beneficiaries for the MTMP described in
paragraph (d)(1) of this section are
enrollees in the sponsor’s Part D plan
who —
(i) Have multiple chronic diseases;
(ii) Are taking multiple Part D drugs;
and
(iii) Are likely to incur annual costs
for covered Part D drugs that exceed a
predetermined level as specified by the
Secretary.
(3) Use of experts. The MTMP must be
developed in cooperation with licensed
and practicing pharmacists and
physicians.
(4) Coordination with care
management plans. The MTMP must be
coordinated with any care management
plan established for a targeted
individual under a chronic care
improvement program (CCIP) under
section 1807 of the Act. A Part D
sponsor must provide drug claims data
to CCIPs for those beneficiaries that are
enrolled in CCIPs in a manner specified
by CMS.
(5) Considerations in pharmacy fees.
An applicant to become a Part D
sponsor must—
(i) Describe in its application how it
takes into account the resources used
and time required to implement the
MTMP it chooses to adopt in
establishing fees for pharmacists or
others providing MTMP services for
covered Part D drugs under a Part D
plan.
(ii) Disclose to CMS upon request the
amount of the management and
dispensing fees and the portion paid for
MTMP services to pharmacists and
others upon request. Reports of these
amounts are protected under the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

provisions of section 1927(b)(3)(D) of
the Act.
(6) MTMP reporting. A Part D sponsor
must provide CMS with information
regarding the procedures and
performance of its MTMP, according to
guidelines specified by CMS.
(e) Exception for private fee-for­
service MA plans offering qualified
prescription drug coverage. In the case
of an MA plan described in § 422.4(a)(3)
of this chapter providing qualified
prescription drug coverage, the
requirements under paragraphs (b) and
(d) of this section do not apply.
§ 423.156 Consumer satisfaction surveys.

CMS conducts consumer satisfaction
surveys of Part D plan enrollees similar
to the surveys it conducts of MA
enrollees under § 422.152 (b) of this
chapter.
§ 423.159 Electronic prescription program.

(a) [Reserved]
(b) [Reserved]
(c) Requirement. Part D sponsors must
support and comply with electronic
prescription standards relating to
covered Part D drugs for Part D enrollees
developed by CMS once final standards
are effective.
(d) Promotion of electronic
prescribing by MA-PD plans. An MA
organization offering an MA-PD plan
may provide for a separate or
differential payment to a participating
physician that prescribes covered Part D
drugs in accordance with electronic
prescription standards, including initial
standards and final standards
established by CMS once final standards
are effective. Any payments must be in
compliance with applicable Federal and
State laws related to fraud and abuse,
including the physician self-referral
prohibition (section 1877 of the Act)
and the Federal anti kickback statute
(section 1128B(b) of the Act).
§ 423.162 Quality improvement
organization activities.

(a) General rule. Quality improvement
organizations (QIOs) are required to
offer providers, practitioners, and Part D
sponsors quality improvement
assistance pertaining to health care
services, including those related to
prescription drug therapy, in
accordance with contracts established
with the Secretary.
(b) Collection of information.
Information collected, acquired, or
generated by a QIO in the performance
of its responsibilities under this section
is subject to the confidentiality
provisions of part 480 of this chapter.
Part D sponsors are required to provide
specified information to CMS for

PO 00000

Frm 00349

Fmt 4701

Sfmt 4700

4541

distribution to the QIOs as well as
directly to QIOs.
(c) Applicability of QIO
confidentiality provisions. The
provisions of part 480 of this chapter
apply to Part D sponsors in the same
manner as such provisions apply to
institutions under part 480 of this
chapter.
§ 423.165 Compliance deemed on the
basis of accreditation.

(a) General rule. A Part D sponsor is
deemed to meet all of the requirements
of any of the areas described in
paragraph (b) of this section if—
(1) The Part D sponsor is fully
accredited (and periodically
reaccredited) for the standards related to
the applicable area under paragraph (b)
of this section by a private, national
accreditation organization approved by
CMS; and
(2) The accreditation organization
uses the standards approved by CMS for
the purposes of assessing the Part D
sponsor’s compliance with Medicare
requirements.
(b) Deemable requirements. The
requirements relating to the following
areas are deemable:
(1) Access to covered drugs, as
provided under § 423.120 and § 423.124.
(2) Drug utilization management
programs, quality assurance measures
and systems, and MTMPs as provided
under § 423.153.
(3) Privacy, confidentiality, and
accuracy of enrollee records, as
provided under § 423.136.
(4) A program to protect against fraud,
waste and abuse, as described in
§ 423.504(b)(4)(vi)(H).
(c) Effective date of deemed status.
The date the Part D sponsor is deemed
to meet the applicable requirements is
the later of the following:
(1) The date the accreditation
organization is approved by CMS.
(2) The date the Part D sponsor is
accredited by the accreditation
organization.
(d) Obligations of deemed Part D
sponsors. A Part D sponsor deemed to
meet Medicare requirements must—
(1) Submit to surveys by CMS to
validate its accreditation organization’s
accreditation process; and
(2) Authorize its accreditation
organization to release to CMS a copy of
its most recent accreditation survey,
together with any survey-related
information that CMS may require
(including corrective action plans and
summaries of unmet CMS
requirements).
(e) Removal of deemed status. CMS
removes part or all of a Part D sponsor’s
deemed status for any of the following
reasons—

E:\FR\FM\28JAR2.SGM

28JAR2

4542

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

(1) CMS determines, on the basis of its
own investigation, that the Part D
sponsor does not meet the Medicare
requirements for which deemed status
was granted.
(2) CMS withdraws its approval of the
accreditation organization that
accredited the Part D sponsor.
(3) The Part D sponsor fails to meet
the requirements of paragraph (d) of this
section.
(f) Enforcement authority. CMS
retains the authority to initiate
enforcement action against any Part D
sponsor that it determines, on the basis
of its own survey or the results of an
accreditation survey, no longer meets
the Medicare requirements for which
deemed status was granted.
§ 423.168 Accreditation organizations.

(a) Conditions for approval. CMS may
approve an accreditation organization
for a given standard under this part if
the organization meets the following
conditions:
(1) In accrediting Part D sponsors and
Part D plans, it applies and enforces
standards that are at least as stringent as
Medicare requirements for the standard
or standards in question.
(2) It complies with the application
and reapplication procedures set forth
in § 423.171.
(3) It ensures that—
(i) Any individual associated with it,
who is also associated with an entity it
accredits, does not influence the
accreditation decision concerning that
entity;
(ii) The majority of the membership of
its governing body is not comprised of
managed care organizations, Part D
sponsors or their representatives; and
(iii) Its governing body has a broad
and balanced representation of interests
and acts without bias.
(b) Notice and comment. (1) Proposed
notice. CMS publishes a notice in the
Federal Register whenever it is
considering granting an accreditation
organization’s application for approval.
The notice­
(i) Announces CMS’s receipt of the
accreditation organization’s application
for approval;
(ii) Describes the criteria CMS uses in
evaluating the application; and
(iii) Provides at least a 30-day
comment period.
(2) Final notice. (i) After reviewing
public comments, CMS publishes a final
notice in the Federal Register indicating
whether it has granted the accreditation
organization’s request for approval.
(ii) If CMS grants the request, the final
notice specifies the effective date and
the term of the approval that may not
exceed 6 years.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(c) Ongoing responsibilities of an
approved accreditation organization.
An accreditation organization approved
by CMS must undertake the following
activities on an ongoing basis:
(1) Provide to CMS in written form
and on a monthly basis all of the
following:
(i) Copies of all accreditation surveys,
together with any survey-related
information that CMS may require
including corrective action plans and
summaries of unmet CMS
requirements).
(ii) Notice of all accreditation
decisions.
(iii) Notice of all complaints related to
deemed Part D sponsors.
(iv) Information about any Part D
sponsor against which the accrediting
organization has taken remedial or
adverse action, including revocation,
withdrawal, or revision of the Part D
sponsor’s accreditation. (The
accreditation organization must provide
this information within 30 days of
taking the remedial or adverse action.)
(v) Notice of any proposed changes in
its accreditation standards or
requirements or survey process. If the
organization implements the changes
before or without CMS approval, CMS
may withdraw its approval of the
accreditation organization.
(2) Within 30 days of a change in CMS
requirements, submit the following to
CMS—
(i) An acknowledgment of CMS’s
notification of the change.
(ii) A revised crosswalk reflecting the
new requirements.
(iii) An explanation of how the
accreditation organization plans to alter
its standards to conform to CMS’s new
requirements, within the timeframes
specified in the notification of change it
receives from CMS.
(3) Permit its surveyors to serve as
witnesses if CMS takes an adverse
action based on accreditation findings.
(4) Within 3 days of identifying, in an
accredited Part D sponsor, a deficiency
that as determined by the accrediting
organization poses immediate jeopardy
to the plan’s enrollees or to the general
public, give CMS written notice of the
deficiency.
(5) Within 10 days of CMS’s notice of
withdrawal of approval, give written
notice of the withdrawal to all
accredited Part D sponsors.
(6) On an annual basis, provide
summary data specified by CMS that
relate to the past year’s accreditation
activities and trends.
(d) Continuing Federal oversight of
approved accreditation organizations.
Specific criteria and procedures for
continuing oversight and for

PO 00000

Frm 00350

Fmt 4701

Sfmt 4700

withdrawing approval of an
accreditation organization include the
following:
(1) Equivalency review. CMS
compares the accreditation
organization’s standards and its
application and enforcement of those
standards to the comparable CMS
requirements and processes when—
(i) CMS imposes new requirements or
changes its survey process;
(ii) An accreditation organization
proposes to adopt new standards or
changes in its survey process; or
(iii) The term of an accreditation
organization’s approval expires.
(2) Validation review. CMS or its
agent may conduct a survey of an
accredited organization, examine the
results of the accreditation
organization’s own survey, or attend the
accreditation organization’s survey to
validate the organization’s accreditation
process. At the conclusion of the
review, CMS identifies any
accreditation programs for which
validation survey results indicate—
(i) A 20 percent rate of disparity
between certification by the
accreditation organization and
certification by CMS or its agent on
standards that do not constitute
immediate jeopardy to patient health
and safety if unmet;
(ii) Any disparity between
certification by the accreditation
organization and certification by CMS or
its agent on standards that constitute
immediate jeopardy to patient health
and safety if unmet; or
(iii) That, regardless of the rate of
disparity, there are widespread or
systematic problems in an
organization’s accreditation process that
accreditation no longer provides
assurance that the Medicare
requirements are met or exceeded.
(3) Onsite observation. CMS may
conduct an onsite inspection of the
accreditation organization’s operations
and offices to verify the organization’s
representations and assess the
organization’s compliance with its own
policies and procedures. The onsite
inspection may include, but is not
limited to the following:
(i) Reviewing documents.
(ii) Auditing meetings concerning the
accreditation process.
(iii) Evaluating survey results or the
accreditation status decision-making
process.
(iv) Interviewing the organization’s
staff.
(4) Notice of intent to withdraw
approval. If an equivalency review,
validation review, onsite observation, or
CMS’s daily experience with the
accreditation organization suggests that

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
the accreditation organization is not
meeting the requirements of this
subpart, CMS gives the organization
written notice of its intent to withdraw
approval.
(5) Withdrawal of approval. CMS may
withdraw its approval of an
accreditation organization at any time if
CMS determines that—
(i) Deeming, based on accreditation,
no longer guarantees that the Part D
sponsor meets the requirements for
offering qualified prescription drug
coverage, and failure to meet those
requirements may jeopardize the health
or safety of Medicare enrollees and
constitute a significant hazard to the
public health; or
(ii) The accreditation organization has
failed to meet its obligations under this
section or under § 423.165 or § 423.171.
(6) Reconsideration of withdrawal of
approval. An accreditation organization
dissatisfied with a determination to
withdraw CMS approval may request a
reconsideration of that determination in
accordance with subpart D of part 488
of this chapter.
§ 423.171 Procedures for approval of
accreditation as a basis for deeming
compliance.

(a) Required information and
materials. A private, national
accreditation organization applying for
approval must furnish to CMS all of the
following information and materials
(when reapplying for approval, the
organization need furnish only the
particular information and materials
requested by CMS):
(1) The types of Part D plans and
sponsors that it reviews as part of its
accreditation process.
(2) A detailed comparison of the
organization’s accreditation
requirements and standards with the
Medicare requirements (for example, a
crosswalk).
(3) Detailed information about the
organization’s survey process, including
the following:
(i) Frequency of surveys and whether
surveys are announced or unannounced.
(ii) Copies of survey forms, and
guidelines and instructions to
surveyors.
(iii) Descriptions of—
(A) The survey review process and the
accreditation status decision making
process;
(B) The procedures used to notify
accredited Part D sponsors of
deficiencies and to monitor the
correction of those deficiencies; and
(C) The procedures used to enforce
compliance with accreditation
requirements.
(4) Detailed information about the
individuals who perform surveys for the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

accreditation organization, including
the—
(i) Size and composition of
accreditation survey teams for each type
of plan reviewed as part of the
accreditation process;
(ii) Education and experience
requirements surveyors must meet;
(iii) Content and frequency of the inservice training provided to survey
personnel;
(iv) Evaluation systems used to
monitor the performance of individual
surveyors and survey teams; and
(v) Organization’s policies and
practice for the participation, in surveys
or in the accreditation decision process
by an individual who is professionally
or financially affiliated with the entity
being surveyed.
(5) A description of the organization’s
data management and analysis system
for its surveys and accreditation
decisions, including the kinds of
reports, tables, and other displays
generated by that system.
(6) A description of the organization’s
procedures for responding to and
investigating complaints against
accredited organizations, including
policies and procedures regarding
coordination of these activities with
appropriate licensing bodies and
ombudsmen programs.
(7) A description of the organization’s
policies and procedures for the
withholding or removal of accreditation
for failure to meet the accreditation
organization’s standards or
requirements, and other actions the
organization takes in response to
noncompliance with its standards and
requirements.
(8) A description of all types (for
example, full or partial) and categories
(for example, provisional, conditional,
or temporary) of accreditation offered by
the organization, the duration of each
type and category of accreditation, and
a statement identifying the types and
categories that serve as a basis for
accreditation if CMS approves the
accreditation organization.
(9) A list of all currently accredited
Part D sponsors and MA organizations
and the type, category, and expiration
date of the accreditation held by each of
them.
(10) A list of all full and partial
accreditation surveys scheduled to be
performed by the accreditation
organization as requested by CMS.
(11) The name and address of each
person with an ownership or control
interest in the accreditation
organization.
(b) Required supporting
documentation. A private, national
accreditation organization applying or

PO 00000

Frm 00351

Fmt 4701

Sfmt 4700

4543

reapplying for approval also must
submit the following supporting
documentation—
(1) A written presentation that
demonstrates its ability to furnish CMS
with electronic data in CMS compatible
format.
(2) A resource analysis that
demonstrates that it’s staffing, funding,
and other resources are adequate to
perform the required surveys and
related activities.
(3) A statement acknowledging that,
as a condition for approval, it agrees to
comply with the ongoing responsibility
requirements of § 423.168(c).
(c) Additional information. If CMS
determines that it needs additional
information for a determination to grant
or deny the accreditation organization’s
request for approval, it notifies the
organization and allows time for the
organization to provide the additional
information.
(d) Onsite visit. CMS may visit the
accreditation organization’s offices to
verify representations made by the
organization in its application,
including, but not limited to, review of
documents and interviews with the
organization’s staff.
(e) Notice of determination. CMS
gives the accreditation organization,
within 210 days of receipt of its
completed application, a formal notice
that—
(1) States whether the request for
approval is granted or denied;
(2) Gives the rationale for any denial;
and
(3) Describes the reconsideration and
reapplication procedures.
(f) Withdrawal. An accreditation
organization may withdraw its
application for approval at any time
before it receives the formal notice
specified in paragraph (e) of this
section.
(g) Reconsideration of adverse
determination. An accreditation
organization that has received a notice
of denial of its request for approval may
request a reconsideration in accordance
with subpart D of part 488 of this
chapter.
(h) Request for approval following
denial. (1) Except as provided in
paragraph (h)(2) of this section, an
accreditation organization that has
received notice of denial of its request
for approval may submit a new request
if it—
(i) Has revised its accreditation
program to correct the deficiencies on
which the denial was based.
(ii) Can demonstrate that the Part D
sponsors that it has accredited meet or
exceed applicable Medicare
requirements; and

E:\FR\FM\28JAR2.SGM

28JAR2

4544

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

(iii) Resubmits the application in its
entirety.
(2) An accreditation organization that
has requested reconsideration of CMS’
denial of its request for approval may
not submit a new request until the
reconsideration is administratively
final.
Subpart E—[Reserved]
Subpart F—Submission of Bids and
Monthly Beneficiary Premiums; Plan
Approval
§ 423.251

Scope.

This section sets forth the
requirements and limitations on
submission, review, negotiation and
approval of competitive bids for
prescription drug plans and MA-PD
plans; the calculation of the national
average bid amount; and the
determination of enrollee premiums.
§ 423.258

Definitions.

For the purposes of this subpart, the
following definitions apply:
Full risk plan means a prescription
drug plan that is not a limited risk plan
or a fallback prescription drug plan.
Limited risk plan means a
prescription drug plan that provides
basic prescription drug coverage and for
which the PDP sponsor includes a
modification of risk level described in
§ 423.265(d) in its bid submitted for the
plan. This term does not include a
fallback prescription drug plan.
Standardized bid amount means, for
a prescription drug plan that provides
basic prescription drug coverage, the
PDP approved bid; for a prescription
drug plan that provides supplemental
prescription drug coverage, the portion
of the PDP approved bid that is
attributable to basic prescription drug
coverage; for a MA-PD plan, the portion
of the accepted bid amount that is
attributable to basic prescription drug
coverage.
§ 423.265 Submission of bids and related
information.

(a) Eligibility for bidding. An
applicant may submit a bid to become
a Part D plan sponsor.
(b) Bid submission. Not later than the
first Monday in June, each potential Part
D sponsor must submit bids and
supplemental information described in
this section for each Part D plan it
intends to offer in the subsequent
calendar year.
(c) Basic rule for bid. Each potential
Part D sponsor must submit a bid and
supplemental information in a format to
be specified by CMS for each Part D
plan it offers. Each bid must reflect a
uniform benefit package, including

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

premium (except as provided for the
late enrollment penalty described in
§ 423.286(d)(3)) and all applicable cost
sharing, for all individuals enrolled in
the plan. Each bid must reflect the
applicant’s estimate of its average
monthly revenue requirements to
provide qualified prescription drug
coverage (including any supplemental
coverage) for a Part D eligible individual
with a national average risk profile for
the factors described in § 423.329(b)(1).
(1) Included costs. The bid includes
costs (including administrative costs
and return on investment/profit) for
which the plan is responsible in
providing basic and supplemental
benefits.
(2) Excluded costs. The bid does not
include costs associated with payments
by the enrollee for deductible, co­
payments, coinsurance, and liability
above the plan allowance in the case of
out-of-network claims, payments
projected to be made by CMS for
reinsurance, or any other costs for
which the sponsor is not responsible.
(3) Actuarial valuation. The bid must
be prepared in accordance with CMS
actuarial guidelines based on generally
accepted actuarial principles. A
qualified actuary must certify the plan’s
actuarial valuation (which may be
prepared by others under his or her
direction or review), and must be a
member of the American Academy of
Actuaries to be deemed qualified.
Applicants may use qualified outside
actuaries to prepare their bids.
(d) Specific requirements for bids. The
bid and supplemental information
submission must include the following
information:
(1) Coverage. A description of the
coverage to be provided under the plan,
including any supplemental coverage
and the deductible and other cost
sharing.
(2) Actuarial value of bid
components. The applicant must
provide the following information on
bid components, as well as actuarial
certification that the values are
calculated according to CMS guidelines
on actuarial valuation, including
adjustment for the effect that providing
alternative prescription drug coverage
(rather than defined standard
prescription drug coverage) has on drug
utilization, if applicable.
(i) The actuarial value of the qualified
prescription drug coverage to be offered
under each plan for a Part D eligible
individual with a national average risk
profile for the factors described in
§ 423.329(b)(1) and the basis for the
estimate.
(ii) The portion of the bid attributable
to basic prescription drug coverage and

PO 00000

Frm 00352

Fmt 4701

Sfmt 4700

the portion (if any) attributable to
supplemental benefits.
(iii) The assumptions regarding
reinsurance amounts payable under
§ 423.329(c) used in calculating the bid.
(iv) The assumptions regarding lowincome cost-sharing payable under
§ 423.329(d) used in calculating the bid.
(v) The amount of administrative
costs and return on investment or profit
included in the bid.
(3) Service area. A description of the
service area of the plan.
(4) Level of risk assumed. For a
potential Part D sponsor, the level of
risk assumed in the bid specified in
paragraph (e) of this section.
(5) Plan Average Risk Score. An
estimate of the plan’s average
prescription drug risk score (as
established under § 423.329(b)) for all
projected enrollees for purposes of risk
adjusting any supplemental premium.
(6) Additional information.
Additional information CMS requests to
support bid amounts and facilitate
negotiation.
(e) Special rule for PDP sponsors. Bids
for all plans offered by a potential PDP
sponsor in a region, but not those of
potential MA organizations offering
MA-PD plans, PACE organizations
offering PACE plans including qualified
prescription drug coverage, and costbased HMOs or CMPs offering section
1876 cost plans including qualified
prescription drug coverage, may include
a uniform modification of the amount of
risk assumed (based on a process to be
specified) as described in one or more
of the following paragraphs. Any such
modification applies to all plans offered
by the PDP sponsor in a PDP region.
(1) Increase in Federal percentage
assumed in initial risk corridor. An
equal percentage point increase in the
percents applied for costs between the
first and second threshold limits under
§ 423.336(b)(2)(i) and (b)(2)(ii)(A) and
§ 423.336 (b)(3)(i) and (b)(3)(ii)(A). This
provision does not affect the application
of a higher percentage for plans in 2006
or 2007 under § 423.336(b)(2)(iii).
(2) Increase in Federal percentage
assumed in second risk corridor. An
equal percentage point increase in the
percents applied for costs above the
second threshold upper limit or below
the second threshold upper limit under
paragraphs § 423.336(b)(2)(ii)(B) and
(b)(3)(ii)(B).
(3) Decrease in size of risk corridors.
A decrease in the size of the risk
corridors by means of reductions in the
threshold risk percentages specified in
§ 423.336(a)(2)(ii)(A) and/or (a)(2)(ii)(B).
(f) Special rule for fallback
prescription drug plans. Fallback
prescription drug plan bids are not

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
subject to the rules in this section. They
must follow requirements specified in
§ 423.863.
§ 423.272 Review and negotiation of bid
and approval of plans submitted by
potential Part D sponsors.

(a) Review and negotiation regarding
information, terms and conditions. CMS
reviews the information filed under
§ 423.265(c) in order to conduct
negotiations regarding the terms and
conditions of the proposed bid and
benefit plan. In addition to its general
negotiating authority under section
1860D–11(d)(2)(A) of the Act, CMS has
authority similar to that of the Director
of the Office of Personnel Management
for health benefit plans under Chapter
89 of title 5, U.S.C..
(b) Approval of proposed plans. CMS
approves the Part D plan only if the plan
and the Part D sponsor offering the plan
comply with all applicable CMS Part D
requirements, including those related to
the provision of qualified prescription
drug coverage and actuarial
determinations.
(1) Application of revenue
requirements standard. CMS approves a
bid submitted under § 423.265 only if it
determines that the portions of the bid
attributable to basic and supplemental
prescription drug coverage are
supported by the actuarial bases
provided and reasonably and equitably
reflect the revenue requirements (as
used for purposes of section 1302(8)(C)
of the Public Health Service Act) for
benefits provided under that plan, less
the sum (determined on a monthly per
capita basis) of the actuarial value of the
reinsurance payments under section
§ 423.329(c).
(2) Plan design. (i) CMS does not
approve a bid if it finds that the design
of the plan and its benefits (including
any formulary and tiered formulary
structure) or its utilization management
program are likely to substantially
discourage enrollment by certain Part D
eligible individuals under the plan.
(ii) If the design of the categories and
classes within a formulary is consistent
with the model guidelines (if any)
established by the United States
Pharmacopeia, the formulary categories
and classes alone will not be found to
discourage enrollment.
(iii) A plan that adopts the categories
and classes discussed in paragraph
(b)(2)(ii) of this section may
nevertheless be found to discourage
enrollment because it excludes specific
drugs from the formulary.
(c) Limited risk plans. (1) Application
of limited risk plans. There is no limit
on the number of full risk plans that
CMS approves under paragraph (b) of

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

this section. CMS approves a limited
risk plan in accordance with paragraphs
(c)(2) and (c)(3) of this section only if
the access requirements under § 423.859
are not otherwise met for a PDP region.
(2) Maximizing assumption of risk.
CMS gives priority in approval for those
limited risk plans bearing the highest
level of risk, but may take into account
the level of the bids submitted by the
plans and is not required to accept the
limited risk plan with the highest
assumption of risk. In no case does CMS
approve a limited risk plan under which
the modification of risk level provides
for no (or a minimal) level of financial
risk.
(3) Limited exercise of authority. CMS
approves only the minimum number of
limited risk plans needed to meet the
access requirements.
(d) Special rules for private fee-for­
service (PFFS) plans that offer
prescription drug coverage. PFFS plans
(as defined at § 422.4(a)(3)) choosing to
offer prescription drug coverage are
subject to all MA-PD bid submission
and approval requirements applicable to
MA-PD plans with the following
exceptions:
(1) Exemption from negotiations.
These plans are exempt from the review
and negotiation process in paragraph (a)
of this section, and are not held to the
revenue requirements standard in
paragraph (b)(1) of this section.
(2) Requirements regarding negotiated
prices. These plans are not required to
provide access to negotiated prices.
However, if they do, they must meet the
applicable requirements of § 423.104(h).
(3) Modification of pharmacy access
standard and disclosure requirement. If
the plan provides coverage for drugs
purchased from all pharmacies, without
charging additional cost sharing and
without regard to whether they are
network pharmacies, § 423.120(a) and
§ 423.132 requiring certain network
access standards and the disclosure of
the availability of lower cost
bioequivalent generic drugs does not
apply to the plan.
(e) Special rule for plans with
standardized bids sufficiently below the
national average monthly bid to result
in a negative premium. In the event of
a negative premium, as described in
§ 423.286(d)(1), CMS negotiates the
incorporation of the negative premium
amount into the bid as either a
reduction in the supplemental premium
if the Part D plan already submitted a
bid with an enhanced alternative
benefit, or CMS requires the addition of
new enhanced alternative benefit of no
less value than the amount of the
negative premium.

PO 00000

Frm 00353

Fmt 4701

Sfmt 4700

4545

§ 423.279 National average monthly bid
amount.

(a) Bids included. For each year
(beginning with 2006) CMS computes a
national average monthly bid amount
from approved bids submitted under
§ 423.265 in order to calculate the base
beneficiary premium, as provided in
§ 423.286(c). The national average
monthly bid amount is equal to a
weighted average of the standardized
bid amounts for each prescription drug
plan (not including fallbacks) and for
each MA-PD plan described in section
1851(a)(2)(A)(i) of the Act. The
calculation does not include bids
submitted by MSA plans, MA private
fee-for-service plans, specialized MA
plans for special needs individuals,
PACE programs under section 1894, and
contracts under reasonable cost
reimbursement contracts under section
1876(h) of the Act.
(b) Calculation of weighted average.
(1) The national average monthly bid
amount is a weighted average, with the
weight for each plan equal to a
percentage with the numerator equal to
the number of Part D eligible
individuals enrolled in the plan in the
reference month (as defined in
§ 422.258(c)(1) of this chapter) and the
denominator equal to the total number
of Part D eligible individuals enrolled in
a reference month in all Part D plans
except MSA plans, fallbacks, MA
private fee-for-service plans, specialized
MA plans for special needs individuals,
PACE programs under section 1894, and
contracts under reasonable cost
reimbursement contracts under section
1876(h) of the Act.
(2) For purposes of calculating the
monthly national average monthly bid
amount for 2006, CMS assigns equal
weighting to PDP sponsors (other than
fallback entities) and assigns MA-PD
plans included in the national average
bid a weight based on prior enrollment
(new MA-PD plans are assigned zero
weight).
(c) Geographic adjustment. (1) Upon
the development of an appropriate
methodology, the national average
monthly bid amount for Part D plans
will be adjusted to take into account
differences in prices for Part D drugs
among PDP regions.
(2) CMS does not apply any
geographic adjustments if CMS
determines that price variations among
PDP regions are negligible.
(3) CMS applies any geographic
adjustment in a budget neutral manner
so as to not result in a change in the
aggregate payments that may have been
made if CMS had not applied an
adjustment.

E:\FR\FM\28JAR2.SGM

28JAR2

4546

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

(4) CMS does not apply any
geographic adjustment until an
appropriate methodology is developed.
§ 423.286 Rules regarding premiums.

(a) General rule. Except as provided in
paragraphs (d)(3) and (e) of this section,
and with regard to employer group
waivers, the monthly beneficiary
premium for a Part D plan in a PDP
region is the same for all Part D eligible
individuals enrolled in the plan. The
monthly beneficiary premium for a Part
D plan is the base beneficiary premium,
as determined in paragraph (c) of this
section, adjusted as described in
paragraph (d) of this section for the
difference between the bid and the
national average monthly bid amount,
any supplemental benefits and for any
late enrollment penalties.
(b) Beneficiary premium percentage.
The beneficiary premium percentage for
any year is a fraction, the—
(1) Numerator of which is 25.5
percent; and
(2) Denominator of which is as
follows:
(i) 100 percent minus the percentage
established in paragraph (b)(2)(ii) of this
section.
(ii) The percentage established in this
paragraph equals:
(A) The total reinsurance payments
that CMS estimates will be paid under
§ 423.329(c) for the coverage year;
divided by—
(B) The amount estimated under
paragraph (b)(2)(ii)(A) of this section for
the year plus total payments that CMS
estimates will be paid to Part D plans
that are attributable to the standardized
bid amount during the year, taking into
account amounts paid by both CMS and
enrollees.
(c) Base beneficiary premium. The
base beneficiary premium for a Part D
plan for a month is equal to the product
of the—
(1) Beneficiary premium percentage as
specified in paragraph (b) of this
section; and
(2) National average monthly bid
amount (computed under § 423.279) for
the month.
(d) Adjustments to base beneficiary
premium. The base beneficiary
premium may be adjusted to reflect any
of the following scenarios, if applicable.
(1) Adjustment to reflect difference
between bid and national average bid. If
the amount of the standardized bid
amount exceeds the adjusted national
average monthly bid amount, the
monthly base beneficiary premium is
increased by the amount of the excess.
If the amount of the adjusted national
average monthly bid amount exceeds
the standardized bid amount, the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

monthly base beneficiary premium is
decreased by the amount of the excess.
If the amount of the adjusted national
average monthly bid amount exceeds
the standardized bid amount by an
amount greater than the base beneficiary
premium and results in a negative
premium, then the beneficiary premium
is zero, and the excess amount is
applied to supplemental Part D benefits
as described in § 423.272(e).
(2) Increase for supplemental
prescription drug benefits. The portion
of the Part D plan approved bid that is
attributable to supplemental
prescription drug benefits increases the
beneficiary premium. This
supplemental portion of the bid may be
adjusted to reflect the average risk of
enrollees in the plan as determined
based on negotiations between CMS and
the Part D sponsor offering the plan.
(3) Increase for late enrollment
penalty. The base beneficiary premium
for a Part D enrollee subject to the late
enrollment penalty is increased by the
amount of any late enrollment penalty.
(i) Late enrollment penalty amount.
The penalty amount for a Part D eligible
individual for a continuous period of
eligibility (as provided in § 423.46(a)) is
the greater of—
(A) An amount that CMS determines
is actuarially sound for each uncovered
month in the same continuous period of
eligibility; or
(B) 1 percent of the base beneficiary
premium (computed under paragraph
(c) of this section) for each uncovered
month in the period.
(ii) Special rule for 2006 and 2007. In
2006 and 2007 the penalty amount
discussed in paragraph (d)(3) of this
chapter equals the amount referenced in
paragraph (d)(3)(i)(B) of this section
unless another amount is specified in a
separate issuance based on available
analysis or other information as
determined by the Secretary.
(e) Decrease in monthly beneficiary
premium for low-income assistance. The
monthly beneficiary premium may be
eliminated or decreased in the case of a
subsidy-eligible individual under
§ 423.780.
(f) Special rules for fallback
prescription drug plans. The monthly
beneficiary premium charged under a
fallback prescription drug plan is
calculated under § 423.867(a) and not
under this section, except that enrollees
in fallback prescription drug plans are
subject to late enrollment penalties
under paragraph (d)(3) of this section
and fallback prescription drug plan
premiums are reduced or eliminated in
the case of a subsidy-eligible individual,
as described in paragraph (e) of this
section.

PO 00000

Frm 00354

Fmt 4701

Sfmt 4700

§ 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
§ 422.262(f) of this chapter.
(b) Crediting of late enrollment
penalty. CMS estimates and specifies
the portion of the late enrollment
penalty imposed under § 423.286(d)(3)
attributable to increased actuarial costs
assumed by the Part D sponsor and not
taken into account through risk
adjustment provided under
§ 423.329(b)(1) or through reinsurance
payments under § 423.329(c)) as a result
of the late enrollment.
(c) Collection of late enrollment
penalty. (1) Collection through
withholding. In the case of a late
enrollment penalty that is collected by
the government from a Part D eligible
individual in the manner described in
§ 422.262(f)(1) of this chapter, CMS pays
only the portion of the late enrollment
penalty described in paragraph (b) of
this section to the Part D sponsor
offering the Part D plan in which the
individual is enrolled.
(2) Collection by plan. In the case of
a late enrollment penalty collected from
a Part D eligible individual in a manner
other than the manner described in
§ 422.262(f)(1) of this chapter, CMS
reduces payments otherwise made to
the Part D plan by an amount equal to
the portion of the late enrollment
penalty.
(d) Special rule for fallback plans.
This section does not apply to fallback
prescription drug plans. The fallback
plans follow the requirements set forth
in § 423.867(b).
Subpart G—Payments to Part D Plan
Sponsors For Qualified Prescription
Drug Coverage
§ 423.301

Scope.

This subpart sets forth rules for the
calculation and payment of CMS direct
and reinsurance subsidies for Part D
plans; the application of risk corridors
and risk-sharing adjustments to
payments; and retroactive adjustments
and reconciliations to actual enrollment
and interim payments. This subpart
does not apply to fallback entities or
fallback prescription drug plans.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
§ 423.308 Definitions and terminology.

For the purposes of this subpart, the
following definitions applyActually 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 reducedprice 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 by the Part D sponsor for
the drug.
Allowable reinsurance costs means
the subset of gross covered prescription
drug costs actually paid that are
attributable to basic prescription drug
coverage for covered Part D drugs only
and that are actually paid by the Part D
sponsor or by (or on behalf of) an
enrollee under the Part D plan. 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 costs determined to be
attributable to increased utilization over
the standard prescription drug coverage
as the result of the insurance effect of
enhanced alternative coverage in
accordance with CMS guidelines on
actuarial valuation.
Allowable risk corridor costs means
the subset of actually paid costs for
covered Part D drugs (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 under the Part D
plan. Costs must be based upon
imposition of the maximum amount of
copayments permitted under § 423.782.
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.
Coverage year means a calendar year
in which covered Part D drugs are
dispensed if the claim for those drugs
(and payment on the claim) is made not
later than 3 months after the end of the
year

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Gross covered prescription drug costs
means those actually paid costs
incurred under a Part D plan, excluding
administrative costs, but including
dispensing fees during the coverage year
and costs relating to the deductible.
They equal­
(1) All reimbursement paid by a Part
D sponsor to a pharmacy (or other
intermediary) or to indemnify an
enrollee when the reimbursement is
associated with an enrollee obtaining
drugs under the Part D plan; plus
(2) All amounts paid under the Part D
plan by or on behalf of an enrollee (such
as the deductible, coinsurance, costsharing, or amounts between the initial
coverage limit and the out-of-pocket
threshold) in order to obtain drugs
covered under the Part D plan. These
costs are determined regardless of
whether the coverage under the plan
exceeds basic prescription drug
coverage.
Target amount for any Part D plan
equals the total amount of payments
(from both CMS and by or on behalf of
enrollees) to that plan for the coverage
year for all standardized bid amounts as
risk adjusted under § 423.329(b)(1), less
the administrative expenses (including
return on investment) assumed in the
standardized bids.
§ 423.315 General payment provisions.

(a) Source of payments. CMS
payments under this section are made
from the Medicare Prescription Drug
Account.
(b) Monthly payments. CMS provides
a direct subsidy in the form of advance
monthly payments equal to the Part D
plan’s standardized bid, risk adjusted
for health status as provided in
§ 423.329(b), minus the monthly
beneficiary premium as determined in
§ 423.286.
(c) Reinsurance subsidies. CMS
provides reinsurance subsidy payments
described in § 423.329(c) on a monthly
basis during a year based on either
estimated or incurred allowable
reinsurance costs as provided under
§ 423.329(c)(2)(i), and final
reconciliation to actual allowable
reinsurance costs as provided in
§ 423.343(c).
(d) Low-income subsidies. CMS makes
payments for premium and cost sharing
subsidies, including additional coverage
above the initial coverage limit, on
behalf of certain subsidy-eligible
individuals as provided in § 423.780
and § 423.782. CMS provides lowincome cost-sharing subsidy payments
described in § 423.782 through interim
payments of amounts as provided under
§ 423.329(d)(2)(i) and reconciliation to

PO 00000

Frm 00355

Fmt 4701

Sfmt 4700

4547

actual allowable reinsurance costs as
provided in § 423.343(d).
(e) Risk-sharing arrangements. CMS
may issue lump-sum payments or adjust
monthly payments in the following
payment year based on the relationship
of the Part D plan’s adjusted allowable
risk corridor costs to predetermined risk
corridor thresholds in the coverage year
as provided in § 423.336.
(f) Retroactive adjustments and
reconciliations. CMS reconciles
payment year disbursements with
updated enrollment and health status
data, actual low-income cost-sharing
costs and actual allowable reinsurance
costs as provided in § 423.343.
(g) Special rules for private fee-for­
service plans.
(1) Application of reinsurance. For
private fee-for-service plans (as defined
by § 422.4(a)(3) of this chapter) offering
qualified prescription drug coverage,
CMS determines the amount of
reinsurance payments as provided
under § 423.329(c)(3).
(2) Exemption from risk corridor
provisions. The provisions of § 423.336
regarding risk sharing do not apply.
§ 423.322 Requirement for disclosure of
information.

(a) Payment conditional upon
provision of information. Payments to a
Part D sponsor are conditioned upon
provision of information to CMS that is
necessary to carry out this subpart, or as
required by law.
(b) Restriction on use of information.
Officers, employees and contractors of
the Department of Health and Human
Services may use the information
disclosed or obtained in accordance
with the provisions of this subpart only
for the purposes of, and to the extent
necessary in, carrying out this subpart
including, but not limited to,
determination of payments and
payment-related oversight and program
integrity activities. This restriction does
not limit OIG’s authority to fulfill the
Inspector General’s responsibilities in
accordance with applicable Federal law.
§ 423.329 Determination of payments.

(a) Subsidy payments. (1) Direct
subsidy. CMS makes a direct subsidy
payment for each Part D eligible
beneficiary enrolled in a Part D plan for
a month equal to the amount of the
plan’s approved standardized bid,
adjusted for health status (as determined
under § 423.329(b)(1)), and reduced by
the base beneficiary premium for the
plan (as determined under § 423.286(c)
and adjusted in § 423.286(d)(1)). The
direct subsidy payment may be
increased by the excess amount of a

E:\FR\FM\28JAR2.SGM

28JAR2

4548

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

negative premium as described in
§ 423.286(d)(1), if applicable.
(2) Subsidy through reinsurance. CMS
makes reinsurance subsidy payments as
provided under paragraph (c) of this
section.
(3) Low-income cost-sharing subsidy.
CMS makes low-income cost-sharing
subsidy payments as provided under
paragraph (d) of this section.
(b) Health status risk adjustment. (1)
Establishment of risk factors. CMS
establishes an appropriate methodology
for adjusting the standardized bid
amount to take into account variation in
costs for basic prescription drug
coverage among Part D plans based on
the differences in actuarial risk of
different enrollees being served. Any
risk adjustment is designed in a manner
so as to be budget neutral in the
aggregate to the risk of the Part D
eligible individuals who enroll in Part D
plans.
(2) Considerations. In establishing the
methodology under paragraph (b)(1) of
this section, CMS takes into account the
similar methodologies used under
§ 422.308(c) of this chapter to adjust
payments to MA organizations for
benefits under the original Medicare feefor-service program option.
(3) Data collection. In order to carry
out this paragraph, CMS requires—
(i) PDP sponsors to submit data
regarding drug claims that can be linked
at the individual level to Part A and Part
B data in a form and manner similar to
the process provided under § 422.310 of
this chapter and other information as
CMS determines necessary; and
(ii) MA organizations that offer MA­
PD plans to submit data regarding drug
claims that can be linked at the
individual level to other data that the
organizations are required to submit to
CMS in a form and manner similar to
the process provided under § 422.310 of
this chapter and other information as
CMS determines necessary.
(4) Publication. At the time of
publication of risk adjustment factors
under § 422.312(a)(1)(ii) of this chapter,
CMS publishes the risk adjusters
established under this paragraph of this
section for the upcoming calendar year.
(c) Reinsurance payment amount. (1)
General rule. The reinsurance payment
amount for a Part D eligible individual
enrolled in a Part D plan for a coverage
year is an amount equal to 80 percent
of the allowable reinsurance costs
attributable to that portion of gross
covered prescription drug costs incurred
in the coverage year after the individual
has incurred true out-of-pocket costs
that exceed the annual out-of-pocket
threshold specified in
§ 423.104(d)(5)(iii).

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(2) Payment method. Payments under
this section are based on a method that
CMS determines.
(i) Payments during the coverage year.
CMS establishes a payment method by
which payments of amounts
under this section are made on a
monthly basis during a year based on
either estimated or incurred allowable
reinsurance costs.
(ii) Final payments. CMS reconciles
the payments made during the coverage
year to final actual allowable
reinsurance costs as provided in
§ 423.343(c).
(3) Special rules for private fee-for­
service Plans offering prescription drug
coverage. CMS determines the amount
of reinsurance payments for private feefor-service plans as defined by
§ 422.4(a)(3) of this chapter offering
qualified prescription drug coverage
using a methodology that—
(i) Bases the amount on CMS’ estimate
of the amount of the payments that are
payable if the plan were an MA-PD plan
described in section 1851(a)(2)(A)(i) of
the Act; and
(ii) Takes into account the average
reinsurance payments made under
§ 423.329(c) for populations of similar
risk under MA-PD plans described in
section 1851(a)(2)(A)(i) of the Act.
(d) Low-income cost sharing subsidy
payment amount.
(1) General rule. The low-income costsharing subsidy payment amount on
behalf of a low-income subsidy eligible
individual enrolled in a Part D plan for
a coverage year is the amount described
in § 423.782.
(2) Payment method. Payments under
this section are based on a method that
CMS determines.
(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
§ 423.265(d)(2)(iv) and negotiated and
approved under § 423.272.
(ii) Final payments. CMS reconciles
the interim payments to actual incurred
low-income cost-sharing costs as
provided in § 423.343(d).
§ 423.336 Risk-sharing arrangements.

(a) Portion of total payments to a Part
D sponsor subject to risk. (1) Adjusted
allowable risk corridor costs. For
purposes of this paragraph, the term
adjusted allowable risk corridor costs
means—
(i) The allowable risk corridor costs
for the Part D plan for the coverage year,
reduced by—
(ii) The sum of—
(A) The total reinsurance payments
made under § 423.329(c) to the Part D

PO 00000

Frm 00356

Fmt 4701

Sfmt 4700

sponsor of the Part D plan for the year;
and
(B) The total non-premium subsidy
payments made under § 423.782 to the
Part D sponsor of the Part D plan for the
coverage year.
(2) Establishment of risk corridors. (i)
Risk corridors. For each year, CMS
establishes a risk corridor for each Part
D plan. The risk corridor for a plan for
a coverage year is equal to a range as
follows:
(A) First threshold lower limit. The
first threshold lower limit of the
corridor is equal to—
(1) The target amount for the plan;
minus
(2) An amount equal to the first
threshold risk percentage for the plan
(as determined under paragraph
(a)(2)(ii)(A) of this section) of the target
amount.
(B) Second threshold lower limit. The
second threshold lower limit of the
corridor is equal to—
(1) The target amount for the plan;
minus
(2) An amount equal to the second
threshold risk percentage for the plan
(as determined under paragraph
(a)(2)(ii)(B) of this section) of the target
amount.
(C) First threshold upper limit. The
first threshold upper limit of the
corridor is equal to the sum of—
(1) The target amount; and
(2) An amount equal to the first
threshold risk percentage for the plan
(as determined under paragraph
(a)(2)(ii)(A) of this section) of the target
amount.
(D) Second threshold upper limit. The
second threshold upper limit of the
corridor is equal to the sum of—
(1) The target amount; and
(2) An amount equal to the second
threshold risk percentage for the plan
(as determined under paragraph
(a)(2)(ii)(B) of this section) of the target
amount.
(ii) First and second threshold risk
percentage defined. (A) First threshold
risk percentage. Subject to paragraph
(a)(2)(iii) of this section, the first
threshold risk percentage is for—
(1) 2006 and 2007, 2.5 percent;
(2) 2008 through 2011, 5 percent; and
(3) 2012 and subsequent years, a
percentage CMS establishes, but in no
case less than 5 percent.
(B) Second threshold risk percentage.
Subject to paragraph (a)(2)(iii) of this
section, the second threshold risk
percentage is for—
(1) 2006 and 2007, 5.0 percent;
(2) 2008 through 2011, 10 percent
(3) 2012 and subsequent years, a
percentage CMS establishes that is
greater than the percent established for

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
the year under paragraph (a)(2)(ii)(A)(3)
of this section, but in no case less than
10 percent.
(iii) Reduction of risk percentage to
ensure two Plans in an area. In
accordance with § 423.265(e), a PDP
sponsor may submit a bid that requests
a decrease in the applicable first or
second threshold risk percentages or an
increase in the percents applied under
paragraph (b) of this section. Only a PDP
sponsor may request a reduction of risk
under this paragraph. An MA
organization offering an MA-PD plan, a
PACE program offering qualified
prescription drug coverage, and a costbased HMO or CMP offering qualified
prescription drug coverage may not
request a reduction of risk under this
paragraph.
(3) Plans at risk for entire amount of
supplemental prescription drug
coverage. A Part D sponsor that offers a
Part D plan that provides supplemental
prescription drug benefits is at full
financial risk for the provision of the
supplemental benefits.
(b) Payment adjustments. (1) No
adjustment if adjusted allowable risk
corridor costs within risk corridor. If the
adjusted allowable risk corridor costs
for the Part D plan for the coverage year
are at least equal to the first threshold
lower limit of the risk corridor
(specified in paragraph (a)(2)(i)(A) of
this section) but not greater than the
first threshold upper limit of the risk
corridor (specified in paragraph
(a)(2)(i)(C) of this section) for the Part D
plan for the coverage year, CMS makes
no payment adjustment.
(2) Increase in payment if adjusted
allowable risk corridor costs above
upper limit of risk corridor.
(i) Costs between first and second
threshold upper limits. If the adjusted
allowable risk corridor costs for the Part
D plan for the year are greater than the
first threshold upper limit, but not
greater than the second threshold upper
limit, of the risk corridor for the Part D
plan for the year, CMS increases the
total of the payments made to the Part
D sponsor offering the Part D plan for
the year under this section by an
amount equal to 50 percent (or, for 2006
and 2007, 75 percent or 90 percent if the
conditions described in paragraph
(b)(2)(iii) of this section are met for the
year) of the difference between the
adjusted allowable risk corridor costs
and the first threshold upper limit of the
risk corridor.
(ii) Costs above second threshold
upper limits. If the adjusted allowable
risk corridor costs for the Part D plan for
the year are greater than the second
threshold upper limit of the risk
corridor for the Part D plan for the year,

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

CMS increases the total of the payments
made to the Part D sponsor offering the
Part D plan for the year under this
section by an amount equal to the sum
of—
(A) 50 percent (or, for 2006 and 2007,
75 percent or 90 percent if the
conditions specified in paragraph
(b)(2)(iii) of this section are met for the
year) of the difference between the
second threshold upper limit and the
first threshold upper limit; and
(B) 80 percent of the difference
between the adjusted allowable risk
corridor costs and the second threshold
upper limit of the risk corridor.
(iii) Conditions for application of
higher percentage for 2006 and 2007.
The conditions specified in this
paragraph are met for 2006 or 2007 if
CMS determines for the year that—
(A) At least 60 percent of Part D plans
to which this paragraph applies have
adjusted allowable risk corridor costs
for the Part D plan for the year that are
more than the first threshold upper limit
of the risk corridor for the Part D plan
for the year; and
(B) Such plans represent at least 60
percent of Part D eligible individuals
enrolled in any Part D plan.
(3) Reduction in payment if adjusted
allowable risk corridor costs below
lower limit of risk corridor.
(i) Costs between first and second
threshold lower limits. If the adjusted
allowable risk corridor costs for the Part
D plan for the coverage year are less
than the first threshold lower limit, but
not less than the second threshold lower
limit, of the risk corridor for the Part D
plan for the coverage year, CMS reduces
the total of the payments made to the
Part D plan for the coverage year under
this section by an amount (or otherwise
recovers from the Part D sponsor an
amount) equal to 50 percent (or, for
2006 and 2007, 75 percent) of the
difference between the first threshold
lower limit of the risk corridor and the
adjusted allowable risk corridor costs.
(ii) Costs below second threshold
lower limit. If the adjusted allowable
risk corridor costs for the Part D plan for
the coverage year are less the second
threshold lower limit of the risk corridor
for the Part D plan for the coverage year,
CMS reduces the total of the payments
made to the Part D sponsor for the
coverage year under this section by an
amount (or otherwise recovers from the
Part D sponsor an amount) equal to the
sum of—
(A) 50 percent (or, for 2006 and 2007,
75 percent) of the difference between
the first threshold lower limit and the
second threshold lower limit; and
(B) 80 percent of the difference
between the second threshold upper

PO 00000

Frm 00357

Fmt 4701

Sfmt 4700

4549

limit of the risk corridor and the
adjusted allowable risk corridor costs.
(c) Payment methods. CMS makes
payments after a coverage year after
obtaining all of the cost data
information in paragraph (c)(1) of this
section necessary to determine the
amount of payment. CMS will not make
payments under this section if the Part
D sponsor fails to provide the cost data
information in paragraph (c)(1) of this
section.
(1) Submission of cost data. Within 6
months of the end of a coverage year,
the Part D sponsor must provide the
information that CMS requires.
(2) Lump sum and adjusted monthly
payments. CMS at its discretion makes
either lump-sum payments or adjusts
monthly payments in the following
payment year based on the relationship
of the plan’s adjusted allowable risk
corridor costs to the predetermined risk
corridor thresholds in the coverage year,
as determined under this section.
(d) No effect on monthly premium. No
adjustment in payments made by reason
of this section may affect the monthly
beneficiary premium for qualified
prescription drug coverage.
§ 423.343 Retroactive adjustments and
reconciliations.

(a) Application of enrollee
adjustment. The provisions of
§ 422.308(f) of this chapter apply to
payments to Part D sponsors under this
section in the same manner as they
apply to payments to MA organizations
under section 1853(a) of the Act.
(b) Health status. CMS makes
adjustments to payments made under
§ 423.329(a)(1) to account for updated
health status risk adjustment data as
provided under § 422.310(g)(2) of this
chapter. CMS may recover payments
associated with health status
adjustments if the Part D sponsor fails
to provide the information described in
§ 423.329(b)(3).
(c) Reinsurance. CMS makes final
payment for reinsurance after a coverage
year after obtaining all of the
information necessary to determine the
amount of payment.
(1) Submission of cost data. Within 6
months of the end of a coverage year,
the Part D sponsor must provide the
information that CMS requires.
(2) Payments. CMS at its discretion
either makes lump-sum payments or
adjusts monthly payments throughout
the remainder of the payment year
following the coverage year based on the
difference between monthly reinsurance
payments made during the coverage
year and the amount payable in
§ 423.329(c) for the coverage year. CMS
may recover payments made through a

E:\FR\FM\28JAR2.SGM

28JAR2

4550

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

lump sum recovery or by adjusting
monthly payments throughout the
remainder of the coverage year if the
monthly reinsurance payments made
during the coverage year exceed the
amount payable under § 423.329(c) or if
the Part D sponsor does not provide the
data in paragraph (c)(1) of this section.
(d) Low-income cost-sharing subsidy.
CMS makes final payment for lowincome cost-sharing subsidies after a
coverage year after obtaining all of the
information necessary to determine the
amount of payment.
(1) Submission of cost data. Within 6
months of the end of a coverage year,
the Part D sponsor must provide the
information that CMS requires.
(2) Payments. CMS at its discretion
either makes lump-sum payments or
adjusts monthly payments throughout
the remainder of the payment year
following the coverage year based on the
difference between interim low-income
cost-sharing subsidy payments and total
low-income cost-sharing subsidy costs
eligible for subsidy under § 423.782
submitted by the plan for the coverage
year. CMS may recover payments made
through a lump sum recovery or by
adjusting monthly payments throughout
the remainder of the coverage year if
interim low-income cost-sharing
subsidy payments exceed the amount
payable under § 423.782 or if the Part D
sponsor does not provide the data in
paragraph (d)(1) of this section. In the
event adequate data is not provided for
risk corridor costs, CMS assumes that
the Part D plan’s adjusted allowable risk
corridor costs are 50 percent of the
target amount.
§ 423.346

Reopening.

(a) CMS may reopen and revise an
initial or reconsidered final payment
determination (including a
determination on the final amount of
direct subsidy described in
§ 423.329(a)(1), final reinsurance
payments described in § 423.329(c), the
final amount of the low income subsidy
described in § 423.329(d), or final risk
corridor payments as described in
§ 423.336)—
(1) For any reason, within 12 months
from the date of the notice of the final
determination to the Part D sponsor
(2) After that 12-month period, but
within 4 years after the date of the
notice of the initial or reconsidered
determination to the Part D sponsor,
upon establishment of good cause for
reopening; or
(3) At any time, in instances of fraud
or similar fault of the Part D sponsor or
any subcontractor of the Part D sponsor.
(b) For purposes of this section, CMS
will find good cause if—

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(1) New and material evidence that
was not readily available at the time the
final determination was made is
furnished;
(2) A clerical error in the computation
of payments was made; or
(3) The evidence that was considered
in making the determination clearly
shows on its face that an error was
made.
(c) For purposes of this section, CMS
will not find good cause if the only
reason for reopening is a change of legal
interpretation or administrative ruling
upon which the final determination was
made.
(d) A decision not to reopen under
this section is final and is not subject to
review.
§ 423.350 Payment appeals.

(a) Payment determinations. (1)
Payment methods subject to appeal. If
CMS did not apply its stated payment
methodology correctly, a Part D sponsor
may appeal the following:
(i) The reconciled health status risk
adjustment of the direct subsidy as
provided in § 423.343(b).
(ii) The reconciled reinsurance
payments under § 423.343(c).
(iii) The reconciled final payments
made for low-income cost sharing
subsidies provided in § 423.343(d); or
(iv) Final risk-sharing payments made
under § 423.336).
(2) Payment information not subject
to appeal. Payment information
submitted to CMS under § 423.322 and
reconciled under § 423.343 is final and
may not be appealed nor may the
appeals process be used to submit new
information after the submission of
information necessary to determine
retroactive adjustments and
reconciliations.
(b) Request for reconsideration. (1)
Time for filing a request. The request for
reconsideration must be filed within 15
days from the date of the notice of the
adverse determination.
(2) Content of request. The request for
reconsideration must specify the
findings or issues with which the Part
D sponsor disagrees and the reasons for
the disagreements. Excluding new
payment information, the request for
reconsideration may include additional
documentary evidence the sponsor
wishes CMS to consider.
(3) Conduct of informal written
reconsideration.
In conducting the reconsideration,
CMS reviews the payment
determination, the evidence and
findings upon which it was based, and
any other written evidence submitted by
the Part D sponsor or by CMS before
notice of the reconsidered
determination is made.

PO 00000

Frm 00358

Fmt 4701

Sfmt 4700

(4) Decision of the informal written
reconsideration. CMS informs the
sponsor of the decision orally or
through electronic mail. CMS sends a
written decision to the Part D sponsor
on the sponsor’s request.
(5) Effect of CMS informal written
reconsideration.
A reconsideration decision, whether
delivered orally or in writing, is final
and binding unless a request for hearing
is filed in accordance with paragraph (c)
of this section, or it is revised in
accordance with § 423.346.
(c) Right to informal hearing. A Part
D sponsor dissatisfied with the CMS
reconsideration decision is entitled to
an informal hearing as provided in this
section.
(1) Manner and timing for request. A
request for a hearing must be made in
writing and filed with CMS within 15
days of the date the Part D sponsor
receives the CMS reconsideration
decision.
(2) Content of request. The request for
informal hearing must include a copy of
the CMS reconsideration decision (if
any) and must specify the findings or
issues in the decision with which the
Part D sponsor disagrees and the reasons
for the disagreements.
(3) Informal hearing procedures. (i)
CMS provides written notice of the time
and place of the informal hearing at
least 10 days before the scheduled date.
(ii) The hearing are conducted by a
CMS hearing officer who neither
receives testimony nor accepts any new
evidence that was not presented with
the reconsideration request. The CMS
hearing officer is limited to the review
of the record that was before CMS when
CMS made both its initial and
reconsideration determinations.
(iii) If CMS did not issue a written
reconsideration decision, the hearing
officer may request, but not require, a
written statement from CMS or its
contractors explaining CMS’
determination, or CMS or its contractors
may, on their own, submit the written
statement to the hearing officer. Failure
of CMS to submit a written statement
does not result in any adverse findings
against CMS and may not in any way be
taken into account by the hearing officer
in reaching a decision.
(4) Decision of the CMS hearing
officer. The CMS hearing officer decides
the case and sends a written decision to
the Part D sponsor, explaining the basis
for the decision.
(5) Effecting of hearing officer
decision. The hearing officer decision is
final and binding, unless the decision is
reversed or modified by the
Administrator in accordance with
paragraph (d) of this section.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
(d) Review by the Administrator. (1) A
Part D sponsor that has received a
hearing officer decision upholding a
CMS initial or reconsidered
determination may request review by
the Administrator within 15 days of
receipt of the hearing officer’s decision.
(2) The Administrator may review the
hearing officer’s decision, any written
documents submitted to CMS or to the
hearing officer, as well as any other
information included in the record of
the hearing officer’s decision and
determine whether to uphold, reverse or
modify the hearing officer’s decision.
(3) The Administrator’s determination
is final and binding.
Subpart H—[Reserved]
Subpart I—Organization Compliance
with State Law and Preemption by
Federal Law
§ 423.401 General requirements for PDP
sponsors.

(a) General requirements. Each PDP
sponsor of a prescription drug plan
must meet the following requirements:
(1) Licensure. Except in cases where
there is a waiver as specified at
§ 423.410 or § 423.415, the sponsor is
organized and licensed under State law
as a risk bearing entity eligible to offer
health insurance or health benefits
coverage in each State in which it offers
a prescription drug plan. If not
otherwise licensed, the sponsor obtains
certification from the State that the
organization meets a level of financial
solvency and other standards as the
State may require for it to operate as a
PDP sponsor.
(2) Assumption of financial risk for
unsubsidized coverage. The PDP
sponsor assumes financial risk on a
prospective basis for benefits that it
offers under a prescription drug plan
and that is not covered under section
1860D–15(b) of the Act.
(b) Reinsurance permitted. The PDP
sponsor may obtain insurance or make
other arrangements for the cost of
coverage provided to any enrollee to the
extent that the sponsor is at risk for
providing the coverage.
(c) Solvency for unlicensed sponsors.
In the case of a PDP sponsor that is not
described in § 423.401(a)(1) and for
which a waiver is approved under
§ 423.410 or § 423.415, the sponsor must
meet the requirements in § 423.420.
§ 423.410 Waiver of certain requirements
to expand choice.

(a) Authorizing waiver. In the case of
an entity that seeks to offer a
prescription drug plan in a State, CMS
waives the licensure requirement at

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

§ 423.401(a)(1), which requires that the
entity be licensed in that State if CMS
determines, based on the application
and other evidence presented, that any
of the grounds for approval of the
application described in paragraphs (b),
(c), or (d) of this section are met.
(b) Grounds for approval of waivers.
Subject to the waiver requirements
specified in § 423.410(e), waivers may
be granted under any of the following
conditions:
(1) Failure to act on licensure
application on a timely basis. The State
failed to complete action on the
licensing application within 90 days of
the date that the State received a
substantially complete application.
(2) Denial of application based on
discriminatory treatment. The State
denied the license application on either
of the following bases—­
(i) The State imposed material
requirements,
procedures, or standards (other than
solvency requirements) not generally
applied by the State to other entities
engaged in a substantially similar
business; or
(ii) The State required, as a condition
of licensure, that the organization offer
any product or plan other than a
prescription drug plan.
(3) Denial of application based on
application of solvency requirements.
The State denied the licensure
application, in whole or in part, on the
basis of the PDP sponsor’s failure to
meet solvency requirements and
(i) The solvency requirements are
different from the solvency standards
CMS establishes in accordance with
§ 423.420; or
(ii) CMS determines that the State
imposed, as a condition of licensing,
any documentation or information
requirements relating to solvency that
are different from the standards CMS
establishes in accordance with
§ 423.420.
(4) Grounds other than those required
by Federal Law. The application by a
State of any grounds other than those
required under Federal law.
(c) Waiver when licensing process not
in effect. The grounds for approval
specified in paragraph (b)(1) of this
section are deemed met if CMS
determines that the State does not have
a licensing process in effect for PDP
sponsors.
(d) Special waiver for plan years
beginning before January 1, 2008. For
plan years beginning before January 1,
2008, if the State has a prescription drug
plan or PDP sponsor licensing process
in effect, CMS grants a waiver upon a
demonstration that an applicant to
become a PDP sponsor has submitted a

PO 00000

Frm 00359

Fmt 4701

Sfmt 4700

4551

fully completed application for
licensure to the State.
(e) Waiver requirements. The
following rules apply to waiver
applications or waivers granted under
this section.
(1) Treatment of waiver. The waiver
applies only to that State, is effective for
36 months, and cannot be renewed.
(2) Prompt action on application.
CMS grants or denies a waiver
application under this section within 60
days after CMS determines that a
substantially complete waiver
application is received by CMS.
(3) A State that does not have a PDP
sponsor. In the case of a State that does
not have a PDP sponsor licensing
process, the 36 month limitation on the
waiver discussed in paragraph (e)(1) of
this section does not apply, and the
waiver may continue in effect for a
given State as long as CMS determines
that the State does not have a PDP
sponsor licensing process in effect, and
the PDP sponsor meets the solvency
standards of § 423.420(a).
§ 423.415 Temporary waivers for entities
seeking to offer a prescription drug plan in
more than one State in a region

(a) General rule. Subject to paragraphs
(b) and (c) of this section, if an applicant
seeking to become a PDP sponsor
wishes to operate in more than one State
in a region, and is licensed as a risk
bearing entity in at least one State in the
region, then the applicant may receive
a temporary regional plan waiver for the
States in which it is not licensed.
(b) Filing of application. The
applicant must demonstrate to the
satisfaction of CMS that it filed the
necessary licensure applications with
each State in the region for which it
does not already have State licensure,
except that no application is necessary
if CMS determines that the State does
not have a licensing process for
potential PDP sponsors.
(c) Processing of application for
temporary waiver. The Secretary
determines the time period appropriate
for the timely processing of the
application for temporary waiver.
(d) Time limit for temporary waiver.
The temporary waiver expires at the end
of time period that the Secretary
determines is appropriate for timely
processing of the application by the
State or States, but in no case is a waiver
extend beyond the end of the calendar
year.
§ 423.420 Solvency standards for nonlicensed entities.

(a) Establishment and publication.
CMS establishes and publishes
reasonable financial solvency and

E:\FR\FM\28JAR2.SGM

28JAR2

4552

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

capital adequacy standards for entities
specified in paragraph (b) of this
section.
(b) Compliance with standards. A
PDP sponsor that is not licensed by a
State and for which a waiver application
is approved by CMS under § 423.410 or
§ 423.415 must maintain reasonable
financial solvency and capital adequacy
in accordance with the standards
established by CMS under paragraph (a)
of this section.
§ 423.425 Licensure does not substitute
for or constitute certification.

The fact that a Part D sponsor is State
licensed or has a waiver application
approved under § 423.410 or § 423.415
does not deem the sponsor to meet other
requirements imposed under this part
for a Part D sponsor.
§ 423.440 Prohibition of State imposition
of premium taxes; relation to State laws.

(a) Federal preemption of State law.
The standards established under this
part supersede any State law or
regulation (other than State licensing
laws or State laws relating to plan
solvency) for Part D plans offered by
Part D plan sponsors..
(b) State premium taxes prohibited.
(1) Basic rule. No premium tax, fee, or
other similar assessment may be
imposed by any State, the District of
Columbia, the Commonwealth of Puerto
Rico, the Virgin Islands, Guam, and
American Samoa, the Mariana Islands or
any of their political subdivisions or
other governmental authorities for any
payment CMS makes on behalf of Part
D plan or enrollees under this part
(including the direct subsidy,
reinsurance payments, and risk corridor
payments); or for any payment made to
Part D plans by a beneficiary or by a
third party on behalf of a beneficiary.
(2) Construction. Nothing in this
section may be construed to exempt any
Part D plan sponsor from taxes, fees, or
other monetary assessments related to
the net income or profit that accrues to,
or is realized by, the organization from
business conducted under this part, if
that tax, fee, or payment is applicable to
a broad range of business activity.
Subpart J—Coordination of Part D
Plans With Other Prescription Drug
Coverage
§ 423.452

Scope.

This section sets forth the application
of Part D rules to Part C plans;
establishes waivers for MA-PD plans,
employer-sponsored group prescription
drug plans, cost plans, and PACE
organizations; and establishes
requirements for coordination of
benefits with State Pharmaceutical

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Assistance Programs and other
providers of prescription drug coverage.
§ 423.454

Definitions.

For purposes of this part, the
following definitions apply—
Employer-sponsored group
prescription drug plan means
prescription drug coverage offered to
retirees who are Part D eligible
individuals under employment-based
retiree health coverage (as defined in
§ 423.882) approved by CMS as a
prescription drug plan.
State Pharmaceutical Assistance
Program (SPAP) means a State program
that meets the requirements described
under § 423.464(e)(1).
§ 423.458 Application of Part D rules to
certain Part D plans on and after January
1, 2006.

(a) Relationship to Part C. Except as
otherwise provided in this Part, the
requirements of this Part apply to
prescription drug coverage provided by
MA-PD plans offered by MA
organizations beginning on or after
January 1, 2006.
(b) MA waiver. CMS waives any
provision of this Part otherwise
applicable to MA-PD plans or MA
organizations under paragraph (a) of this
section to the extent CMS determines
that the provision duplicates, or is in
conflict with, provisions otherwise
applicable to the MA organizations or
MA-PD plans under Part C of Medicare,
or as may be necessary in order to
improve coordination of this part with
the benefits under Part C.
(1) Application of waiver. Any waiver
or modification granted by CMS under
this section applies to any other
similarly situated organization offering
or seeking to offer a MA-PD plan that
meets the conditions of the waiver.
(2) Request for waivers. Organizations
offering or
seeking to offer a MA-PD plan may
request from CMS in writing—
(i) A waiver of those requirements
under this part otherwise applicable to
the MA-PD plan or MA organization
under paragraph (a) of this section that
are duplicative of, or that are in conflict
with, provisions otherwise applicable to
the MA-PD plan, proposed MA-PD plan,
or a MA organization under Part C of
Medicare.
(ii) A waiver of a requirement under
this part otherwise applicable to the
MA-PD plan or MA organization under
paragraph (a) of this section, if such
waiver improves coordination of
benefits provided under Part C of
Medicare with benefits under this Part.
(c) Employer group waiver. (1)
General rule. CMS may waive or modify

PO 00000

Frm 00360

Fmt 4701

Sfmt 4700

any requirement under this part that
hinders the design of, the offering of, or
the enrollment in an employersponsored group prescription drug plan,
including authorizing the establishment
of separate premium amounts for
enrollees of the employer-sponsored
group prescription drug plan and
limitations on enrollment in such plan
to Part D eligible individuals
participating in the sponsor’s
employment-based retiree health
coverage. Any entity seeking to offer,
sponsor, or administer an employersponsored group prescription drug plan
may request, in writing, a waiver or
modification of additional requirements
under this Part that hinder its design of,
the offering of, or the enrollment in,
such employer-sponsored group
prescription drug plan.
(2) Use of waiver. Waivers or
modifications approved by CMS under
this section apply to any similarly
situated entity seeking to offer, sponsor,
or administer an employer-sponsored
group prescription drug plan, meeting
the conditions of the waiver or
modification.
(d) Other waivers. CMS waives any
provision of this Part as applied to a
cost plan (as defined in § 417.401 of this
chapter) or PACE organization (as
defined in § 460.6 of this chapter) that
offers qualified prescription drug
coverage under Part D to the extent CMS
determines that the provision
duplicates, or is in conflict with,
provisions otherwise applicable to the
cost plan under section 1876 of the Act
or provisions applicable to PACE
organizations under sections 1894 and
1934 of the Act, or as necessary in order
to improve coordination of this Part
with the benefits offered by cost plans
or PACE organizations.
(1) Application of waiver. Any waiver
or modification granted by CMS under
this paragraph applies to any other
similarly situated organization offering
or seeking to offer qualified prescription
drug coverage as a cost plan under
section 1876 of the Act or as a PACE
organization under sections 1894 and
1934 of the Act.
(2) Request for waivers. Cost plans or
PACE organizations seeking to offer
qualified prescription drug coverage
may request from CMS in writing­
(i) A waiver of those requirements
under this part otherwise applicable to
cost plans or PACE organizations that
are duplicative of, or that are in conflict
with, provisions otherwise applicable to
cost plans or PACE organizations.
(ii) A waiver of a requirement under
this part otherwise applicable to cost
plans or PACE organizations, if such
waiver improves coordination of

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
benefits provided by the cost plan under
section 1876 of the Act, or by the PACE
organization under section 1934 of the
Act, with the benefits under Part D.
§ 423.462 Medicare secondary payer
procedures.

The provisions of § 422.108 of this
chapter regarding Medicare secondary
payer procedures apply to Part D
sponsors and Part D plans (with respect
to the offering of qualified prescription
drug coverage) in the same way as they
apply to MA organizations and MA
plans under Part C of title XVIII of the
Act, except all references to MA
organizations and MA plans are
considered references to Part D sponsors
and Part D plans.
§ 423.464 Coordination of benefits with
other providers of prescription drug
coverage.

(a) General rule. A Part D plan must
permit SPAPs (described in paragraph
(e)(1) of this section) and entities
providing other prescription drug
coverage (described in paragraph (f)(1)
of this section) to coordinate benefits
with such plan. A Part D plan must
comply with all administrative
processes and requirements established
by CMS to ensure effective exchange of
information and coordination between
such plan and SPAPs and entities
providing other prescription drug
coverage for—
(1) Payment of premiums and
coverage; and
(2) Payment for supplemental
prescription drug benefits as described
in § 423.104(f)(1)(ii)(including payment
to a Part D plan on a lump sum per
capita basis) for Part D eligible
individuals enrolled in the Part D plan
and the SPAP or entity providing other
prescription drug coverage.
(b) Medicare as primary payer. The
requirements of this subpart do not
change or affect the primary or
secondary payer status of a Part D plan
and a SPAP or other prescription drug
coverage. A Part D plan is always the
primary payer relative to a State
Pharmaceutical Assistance Program.
(c) User fees. CMS may impose user
fees on Part D plans for the transmittal
of information necessary for benefit
coordination in accordance with
administrative processes and
requirements established by CMS to
ensure effective exchange of information
and coordination between a Part D plan
and SPAPs and entities providing other
prescription drug coverage in a manner
similar to the manner in which user fees
are imposed under section 1842(h)(3)(B)
of the Act, except that CMS may retain
a portion of user fees to defray its costs

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

in carrying out such procedures. CMS
will not impose user fees under this
subpart on a SPAP or entities providing
other prescription drug coverage.
(d) Cost management tools. The
requirements of this subpart do not
prevent a Part D sponsor from using cost
management tools (including
differential payments) under all
methods of operation.
(e) Coordination with State
Pharmaceutical Assistance Programs.
(1) Requirements to be a State
Pharmaceutical Assistance Program
(SPAP). A State program is considered
to be a State Pharmaceutical Assistance
Program for purposes of this part if it­
(i) Provides financial assistance for
the purchase or provision of
supplemental prescription drug
coverage or benefits on behalf of Part D
eligible individuals;
(ii) Provides assistance to Part D
eligible individuals in all Part D plans
without discriminating based upon the
Part D plan in which an individual
enrolls;
(iii) Meets the benefit coordination
requirements specified in this subpart;
(iv) Does not follow or adopt rules
that change or affect the primary payer
status of a Part D plan.
The definition of SPAP excludes State
Medicaid programs, section 1115
demonstration programs, and any other
program where program funding is from
Federal grants, awards, contracts,
entitlement programs, or other Federal
sources of funding; and
(v) Provides supplemental drug
coverage to individuals based on
financial need, age, or medical
condition, and not based on current or
former employment status.
(2) Use of a single card. A card that
is issued under § 423.120(c) for use
under a Part D plan may also be used
in connection with coverage of benefits
provided under a SPAP and, in such a
case, may contain an emblem or symbol
indicating such connection.
(3) Construction. Nothing in this
subpart requires a SPAP to coordinate
with, or provide financial assistance to
enrollees in, any Part D plan.
(f) Coordination with other
prescription drug coverage. (1)
Definition of other prescription drug
coverage. Entities that provide other
prescription drug coverage include any
of the following:
(i) Medicaid programs. A State plan
under title XIX of the Act, including
such a plan operating under a waiver
under section 1115 of the Act, if it meets
the requirements of paragraph (e)(1)(ii)
of this section.
(ii) Group health plans.

PO 00000

Frm 00361

Fmt 4701

Sfmt 4700

4553

(iii) FEHBP. The Federal Employee
Health Benefits Program under chapter
89 of title 5, United States Code.
(iv) Military coverage (including
TRICARE). Coverage under chapter 55
of title 10, United States Code.
(v) Indian Health Service. Coverage
under Chapter 18 of title 28 of the
United States Code.
(vi) Federally qualified health centers.
Federally qualified health centers as
defined under section 1861(aa)(4) of the
Act.
(vii) Rural health centers. Rural health
centers as defined under section
1861(aa)(2) of the Act.
(viii) Other prescription drug
coverage. Other health benefit plans or
programs that provide coverage or
financial assistance for the purchase or
provision of Part D drugs on behalf of
Part D eligible individuals as CMS may
specify.
(2) Treatment under out-of-pocket
rule. A Part D plan must exclude
expenditures for covered Part D drugs
made by insurance or otherwise, a group
health plan, or other third party
payment arrangements, including
expenditures by plans offering other
prescription drug coverage for purposes
of determining whether a Part D plan
enrollee has satisfied the out-of-pocket
threshold provided under
§ 423.104(d)(5)(iii). A Part D enrollee
must disclose all these expenditures to
a Part D plan in accordance with
requirements under § 423.32(b)(ii).
(3) Imposition of fees. A Part D
sponsor may not impose fees on SPAPs
and entities offering other prescription
drug coverage that are unrelated to the
cost of the coordination of benefits.
(4) Authority to recover expenditures
due to incorrect information on true out­
of-pocket costs. In the event that a Part
D plan learns that it has made an
erroneous payment due to inaccurate or
incomplete information on the
satisfaction of the out-of-pocket
threshold under § 423.104(d)(5)(iii), that
plan is authorized to recover such costs
directly from the Part D enrollee on
whose behalf the costs were incurred. A
Part D enrollee must reimburse the Part
D plan for payment made for these
costs.
Subpart K—Application Procedures
and Contracts with Part D plan
sponsors
§ 423.500

Scope.

This subpart sets forth application
procedures and contracts with Part D
plans: application procedures and
requirements; contract terms;
procedures for termination of contracts;
reporting by Part D plans. For purposes

E:\FR\FM\28JAR2.SGM

28JAR2

4554

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

of this subpart, Medicare Advantage
(MA) organizations offering Part D plans
follow the requirements of part 422 of
this chapter for MA organizations,
except in cases where the requirements
for the qualified prescription drug
coverage involve additional
requirements.
§ 423.501

Definitions

For purposes of this subpart, the
following definitions apply:
Business transaction means any of the
following kinds of transactions:
(1) Sale, exchange, or lease of
property.
(2) Loan of money or extension of
credit.
(3) Goods, services, or facilities
furnished for a monetary consideration,
including management services, but not
including—
(i) Salaries paid to employees for
services performed in the normal course
of their employment; or
(ii) Health services furnished to the
Part D plan sponsor’s enrollees by
pharmacies and other providers, by Part
D plan sponsor staff, medical groups, or
independent practice associations, or by
any combination of those entities.
Downstream entity means any party
that enters into a written arrangement,
acceptable to CMS, below the level of
the arrangement between a Part D plan
sponsor (or applicant) and a first tier
entity. These written arrangements
continue down to the level of the
ultimate provider of both health and
administrative services.
First tier entity means any party that
enters into a written arrangement,
acceptable to CMS, with a Part D plan
sponsor or applicant to provide
administrative services or health care
services for a Medicare eligible
individual under Part D.
Party in interest means the following:
(1) Any director, officer, partner, or
employee responsible for management
or administration of a Part D plan
sponsor.
(2) Any person who is directly or
indirectly the beneficial owner of more
than 5 percent of the organization’s
equity; or the beneficial owner of a
mortgage, deed of trust, note, or other
interest secured by and valuing more
than 5 percent of the organization.
(3) In the case of a PDP sponsor
organized as a nonprofit corporation, an
incorporator or member of the
corporation under applicable State
corporation law.
(4) Any entity in which a person
specified in paragraphs (1), (2), or (3) of
this definition—
(i) Is an officer, director, or partner; or

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(ii) Has the kind of interest described
in paragraphs (1), (2), or (3) of this
definition.
(5) Any person that directly or
indirectly controls, is controlled by, or
is under common control with the Part
D plan sponsor.
(6) Any spouse, child, or parent of an
individual specified in paragraphs (1),
(2), or (3) of this definition.
Related entity means any entity that is
related to the PDP sponsor by common
ownership or control and—
(1) Performs some of the Part D plan
sponsor’s management functions under
contract or delegation;
(2) Furnishes services to Medicare
enrollees under an oral or written
agreement; or
(3) Leases real property or sells
materials to the Part D plan sponsor at
a cost of more than $2,500 during a
contract period.
Significant business transaction
means any business transaction or series
of transactions of the kind specified in
the above definition of business
transaction that, during any fiscal year
of the Part D plan sponsor, have a total
value that exceeds $25,000 or 5 percent
of the PDP sponsor’s total operating
expenses, whichever is less.
§ 423.502 Application requirements.

(a) Scope. This section sets forth
application requirements for an entity
that seeks a determination from CMS
that it is qualified to contract as a
sponsor of a Part D plan.
(b) Completion of an application. (1)
In order to obtain a determination on
whether it meets the requirements to
become a Part D plan sponsor, an entity,
or an individual authorized to act for
the entity (the applicant), must
complete a certified application in the
form and manner required by CMS,
including the following:
(i) Documentation of appropriate State
licensure or State certification that the
entity is able to offer health insurance
or health benefits coverage that meets
State-specified standards as specified in
subpart I of this part; or
(ii) A Federal waiver as specified in
subpart I of this part.
(2) The authorized individual must
describe thoroughly how the entity is
qualified to meet the requirements
described in this part.
(c) Responsibility for making
determinations. (1) CMS is responsible
for determining whether an entity is
qualified to contract as a Part D plan
sponsor and meets the requirements of
this part.
(2) A CMS determination that an
entity is qualified to act as a Part D plan
sponsor is distinct from the bid

PO 00000

Frm 00362

Fmt 4701

Sfmt 4700

negotiations that occur under subpart F
of part 423 and such negotiations are
not subject to the appeals provisions
included in subpart N of this part.
(d) Disclosure of application
information under the Freedom of
Information Act. An applicant
submitting material that he or she
believes is protected from disclosure
under 5 USC 552, the Freedom of
Information Act, or because of
exemptions provided in 45 CFR part 5
(the Department’s regulations providing
exemptions to disclosure), must label
the material ‘‘privileged’’ and include
an explanation of the applicability of an
exemption specified in 45 CFR part 5.
§ 423.503 Evaluation and determination
procedures for applications to be
determined qualified to act as a sponsor.

(a) Basis for evaluation and
determination. (1) CMS evaluates an
entity’s application on the basis of
information contained in the
application itself and any additional
information that CMS obtains through
on-site visits, publicly available
information, and any other appropriate
procedures.
(2) After evaluating all relevant
information, CMS determines whether
the application meets the applicable
requirements specified in § 423.504 and
§ 423.505.
(b) Use of information from a prior
contracting period. If a Part D plan
sponsor fails to comply with the terms
of a previous year’s contract (or in the
case of a fallback entity, the previous 3­
year contract) with CMS under title
XVIII of the Act, or fails to complete a
corrective action plan during the term of
the contract, CMS may deny an
application based on the applicant’s
failure to comply with that prior
contract with CMS even if the applicant
currently meets all of the requirements
of this part..
(c) Notice of determination. Except for
fallback entities, which are governed
under subpart Q of this part, CMS
notifies each applicant that applies to be
determined qualified to contract as a
Part D plan sponsor, under this part, of
its determination on the application and
the basis for the determination. The
determination may be one of the
following:
(1) Approval of application. If CMS
approves the application, it gives
written notice to the applicant,
indicating that it qualifies to contract as
Part D plan sponsor.
(2) Intent to deny. (i) If CMS finds that
the applicant does not appear qualified
to contract as a Part D plan sponsor and/
or has not provided enough information
to evaluate the application, it gives the

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
applicant notice of intent to deny the
application and a summary of the basis
for this preliminary finding.
(ii) Within 10 days from the date of
the notice, the applicant may respond in
writing to the issues or other matters
that were the basis for CMS’s
preliminary finding and may revise its
application to remedy any defects CMS
identified.
(3) Denial of application. If CMS
denies the application, it gives written
notice to the applicant indicating—
(i) That the applicant is not qualified
to contract as a Part D sponsor under
Part D of title XVIII of the Act;
(ii) The reasons why the applicant
does is not so qualified; and
(iii) The applicant’s right to request
reconsideration in accordance with the
procedures specified in subpart N.
(d) Oversight of continuing
compliance. (1) CMS oversees a Part D
plan sponsor’s continued compliance
with the requirements for a Part D plan
sponsor.
(2) If a Part D plan sponsor no longer
meets those requirements, CMS
terminates the contract in accordance
with § 423.509.
§ 423.504 General provisions.

(a) General rule. Subject to the
provisions at § 423.265(a)(1) concerning
submission of bids, to enroll
beneficiaries in any Part D drug plan it
offers and be paid on behalf of Part D
eligible individuals enrolled in those
plans, a Part D plan sponsor must enter
into a contract with CMS. The contract
may cover more than one Part D plan.
(b) Conditions necessary to contract
as a Part D plan sponsor. Any entity
seeking to contract as a Part D plan
sponsor must—
(1) Complete an application as
described in § 423.502 demonstrating
that the entity has the capability to meet
the requirements of this Part, including
those listed in § 423.505.
(2) Be organized and licensed under
State law as a risk bearing entity eligible
to offer health insurance or health
benefits coverage in each State in which
it offers a Part D plan, or have secured
a Federal waiver, as described in
subpart I of this part. (Fallback entity
applicants need not be licensed as riskbearing entities, nor are they required to
obtain State licensure demonstrating
that the applicant is eligible to offer
health insurance or health benefits
coverage in each State in which it
applies to operate.)
(3) Meet the minimum enrollment
requirements of § 423.512(a) unless
waived under § 423.512(b).
(4) Have administrative and
management arrangements satisfactory

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

to CMS, as demonstrated by at least the
following:
(i) A policy making body that
exercises oversight and control over the
Part D plan sponsor’s policies and
personnel to ensure that management
actions are in the best interest of the
organization and its enrollees.
(ii) Personnel and systems sufficient
for the Part D plan sponsor to organize,
implement, control, and evaluate
financial and marketing activities, the
furnishing of prescription drug services,
the quality assurance, medical therapy
management, and drug and or
utilization management programs, and
the administrative and management
aspects of the organization.
(iii) At a minimum, an executive
manager whose appointment and
removal are under the control of the
policy making body.
(iv) A fidelity bond or bonds,
procured and maintained by the Part D
sponsor, in an amount fixed by its
policymaking body but not less than
$100,000 per individual, covering each
officer and employee entrusted with the
handling of its funds. The bond may
have reasonable deductibles, based
upon the financial strength of the Part
D plan sponsor.
(v)Insurance policies or other
arrangements, secured and maintained
by the Part D plan sponsor and
approved by CMS to insure the Part D
plan sponsor against losses arising from
professional liability claims, fire, theft,
fraud, embezzlement, and other casualty
risks.
(vi) A compliance plan that consists
of the following—
(A)Written policies, procedures, and
standards of conduct articulating the
organization’s commitment to comply
with all applicable Federal and State
standards.
(B)The designation of a compliance
officer and compliance committee
accountable to senior management.
(C)Effective training and education
between the compliance officer and
organization employees, contractors,
agents, and directors.
(D)Effective lines of communication
between the compliance officer and the
organization’s employees, contractors,
agents, directors, and members of the
compliance committee.
(E)Enforcement of standards through
well-publicized disciplinary guidelines.
(F) Procedures for effective internal
monitoring and auditing.
(G) Procedures for ensuring prompt
responses to detected offenses and
development of corrective action
initiatives relating to the organization’s
contract as a Part D plan sponsor.

PO 00000

Frm 00363

Fmt 4701

Sfmt 4700

4555

(1) If the Part D sponsor discovers
evidence of misconduct related to
payment or delivery of prescription
drug items or services under the
contract, it must conduct a timely,
reasonable inquiry into that conduct;
(2) The Part D sponsor must conduct
appropriate corrective actions (for
example, repayment of overpayments
and disciplinary actions against
responsible individuals) in response to
the potential violation referenced above.
(H) A comprehensive fraud and abuse
plan to detect, correct, and prevent
fraud, waste, and abuse. This fraud and
abuse plan should include procedures
to voluntarily self-report potential fraud
or misconduct related to the Part D
program to the appropriate government
authority.
(5) Not have non-renewed a contract
under § 423.507 within the past 2 years
unless—
(i) During the 6-month period,
beginning on the date the entity notified
CMS of the intention to non-renew the
most recent previous contract, there was
a change in the statute or regulations
that had the effect of increasing Part D
sponsor payments in the payment area
or areas at issue; or
(ii) CMS has otherwise determined
that circumstances warrant special
consideration.
(6) For a full risk or limited risk PDP
applicant, not submitted a bid or offered
a fallback prescription drug plan in
accordance with the following rules.
(i) CMS does not contract with a
potential PDP sponsor for the offering of
a full risk or limited risk prescription
drug plan in a PDP region for a year if
the applicant—
(A) Submitted a bid under § 423.863
for the year (as the first year of a
contract period under § 423.863 to offer
a fallback prescription drug plan in any
PDP region;
(B) Offers a fallback prescription drug
plan in any PDP region during the year;
or
(C) Offered a fallback prescription
drug plan in that PDP region during the
previous year.
(ii) Construction. For purposes of this
paragraph (b)(6), an entity is treated as
submitting an application to become
qualified to contract as a full risk or
limited risk PDP sponsor, if the entity is
acting as a subcontractor for an integral
part of the drug benefit management
activities of a full risk or limited risk
PDP sponsor or applicant. The previous
sentence does not apply to entities that
are subcontractors of an MA
organization except insofar as the MA
organization is applying to act as a full
risk or limited risk PDP sponsor.

E:\FR\FM\28JAR2.SGM

28JAR2

4556

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

(c) Contracting authority. CMS may
enter into contracts under this part, or
in order to carry out this part, without
regard to Federal and Departmental
acquisition regulations set forth in Title
48 of the CFR and provisions of law or
other regulations relating to the making,
performance, amendment, or
modification of contracts of the United
States if CMS determines that those
provisions are inconsistent with the
efficient and effective administration of
the Medicare program.
(d) Protection against fraud and
beneficiary protections. (1) CMS
annually audits the financial records
(including, but not limited to, data
relating to Medicare utilization and
costs, including allowable reinsurance
and risk corridor costs as well as low
income subsidies and other costs) under
this part of at least one-third of the Part
D sponsors offering Part D drug plans.
(2) Each contract under this section
must provide that CMS, or any person
or organization designated by CMS, has
the right to—
(i) Inspect or otherwise evaluate the
quality, appropriateness, and timeliness
of services performed under the Part D
plan sponsor’s contract;
(ii) Inspect or otherwise evaluate the
facilities of the Part D sponsor when
there is reasonable evidence of some
need for the inspection; and
(iii) Audit and inspect any books,
contracts, and records of the Part D plan
sponsor that pertain to—
(A) The ability of the organization or
its first tier or downstream providers to
bear the risk of potential financial
losses; or
(B) Services performed or
determinations of amounts payable
under the contract.
(e) Severability of contracts. The
contract must provide that, upon CMS’
request—
(1) The contract could be amended to
exclude any State-licensed entity, or a
Part D plan specified by CMS; and
(2) A separate contract for any
excluded plan or entity must be deemed
to be in place when a request is made.
§ 423.505 Contract provisions.

(a) General rule. The contract between
the Part D plan sponsor and CMS must
contain the provisions specified in
paragraph (b) of this section.
(b) Requirements for contracts. The
Part D plan sponsor agrees to—
(1) All the applicable requirements
and conditions set forth in this part and
in general instructions.
(2) Accept new enrollments, make
enrollments effective, process voluntary
disenrollments, and limit involuntary
disenrollments, as provided in subpart
B of this part.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(3) Comply with the prohibition in
§ 423.34(a) on discrimination in
beneficiary enrollment.
(4) Provide the basic prescription drug
coverage as defined under § 423.100
and, to the extent applicable,
supplemental benefits as defined in
§ 423.100. (Fallback entities may offer
only standard prescription drug
coverage as specified in § 423.855.)
(5) Disclose information to
beneficiaries in the manner and the
form specified by CMS under § 423.128.
(6) Operate quality assurance, cost
and utilization management, medication
therapy management, and support eprescribing as required under subpart D
of this part.
(7) Comply with all requirements in
subpart M of this part governing
coverage determinations, grievances,
and appeals, and formulary exceptions.
(8) Comply with the reporting
requirements in § 423.514 and the
requirements in § 423.329(b) for
submitting drug claims and related
information to CMS for its use in risk
adjustment calculations.
(9) Provide CMS with the information
CMS determines is necessary to carry
out payment provisions in subpart G of
this part (or for fallback entities, the
information necessary to carry out the
payment provisions in subpart Q of this
part).
(10) Allow CMS to inspect and audit
any books and records of a Part D plan
sponsor that pertain to the information
regarding costs provided to CMS under
paragraph (b)(9) of this section, or, if a
fallback entity, the information
submitted under subpart Q.
(11) Be paid under the contract in
accordance with the payment rules in
subpart G of this part, or, if a fallback
entity, in accordance with the payment
rules of subpart Q of this part.
(12) Except for fallback entities,
submit a future year’s bid, including all
required information on premiums,
benefits, and cost-sharing, by any
applicable due date, as provided in
subpart F so that CMS and the Part D
plan sponsor may conduct negotiations
regarding the terms and conditions of
the proposed bid and benefit plan
renewal.
(13) Permit CMS to determine that it
is not qualified to renew its contract or
that its contract may be terminated in
accordance with this subpart and
subpart N of this part. (Subpart N
applies to fallback entities only to the
extent a fallback contract is terminated.)
(14) Comply with the confidentiality
and enrollee record accuracy specified
in § 423.136.
(15) Comply with State law and
preemption by Federal law

PO 00000

Frm 00364

Fmt 4701

Sfmt 4700

requirements described in subpart I of
this part.
(16) Comply with the coordination
requirements with SPAPs and plans that
provide other prescription drug
coverage as described in subpart J of this
part.
(17) Provide benefits by means of
point of service systems to adjudicate in
a drug claims in a timely and efficient
manner in compliance with CMS
standards, except when necessary to
provide access in underserved areas, I/
T/U pharmacies (as defined in
§ 423.100), and long-term care
pharmacies (as defined in § 423.100).
(18) To agree to have a standard
contract with reasonable and relevant
terms and conditions of participation
whereby any willing pharmacy may
access the standard contract and
participate as a network pharmacy.
(c) Communication with CMS. The
Part D plan sponsor must have the
capacity to communicate with CMS
electronically in accordance with CMS
requirements.
(d) Maintenance of records. The Part
D plan sponsor agrees to maintain, for
10 years, books, records, documents,
and other evidence of accounting
procedures and practices that­
(1) Are sufficient to do the following:
(i) Accommodate periodic auditing of
the financial records (including data
related to Medicare utilization, costs,
and computation of the bid of part D
plan sponsors).
(ii) Enable CMS to inspect or
otherwise evaluate the quality,
appropriateness, and timeliness of
services performed under the contract
and the facilities of the organization.
(iii) Enable CMS to audit and inspect
any books and records of the Part D plan
sponsor that pertain to the ability of the
organization to bear the risk of potential
financial losses, or to services
performed or determinations of amounts
payable under the contract.
(iv) Except for fallback entities,
properly reflect all direct and indirect
costs claimed to have been incurred and
used in the preparation of the Part D
plan sponsor’s bid and necessary for the
calculation of gross covered prescription
drug costs, allowable reinsurance costs,
and allowable risk corridor costs (as
defined in § 423.308).
(v) Except for fallback entities,
establish the basis for the components,
assumptions, and analysis used by the
Part D plan in determining the actuarial
valuation of standard, basic alternative,
or enhanced alternative coverage offered
in accordance with the CMS guidelines
specified in § 423.265(c)(3).
(2) Include records of the following:

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
(i) Ownership and operation of the
Part D sponsor’s financial, medical, and
other record keeping systems.
(ii) Financial statements for the
current contract period and 10 prior
periods.
(iii) Federal income tax or
informational returns for the current
contract period and 10 prior periods.
(iv) Asset acquisition, lease, sale, or
other actions.
(v) Agreements, contracts, and
subcontracts.
(vi) Franchise, marketing, and
management agreements.
(vii) Matters pertaining to costs of
operations.
(viii) Amounts of income received by
source and payment.
(ix) Cash flow statements.
(x) Any financial reports filed with
other Federal programs or State
authorities.
(xi) All prescription drug claims for
the current contract period and 10 prior
periods.
(xii) All price concessions (including
concessions offered by manufacturers)
for the current contract period and 10
prior periods accounted for separately
from other administrative fees.
(e) Access to facilities and records.
The Part D plan sponsor agrees to the
following:
(1) HHS, the Comptroller General, or
their designee may evaluate, through
inspection or other means—
(i) The quality, appropriateness, and
timeliness of services furnished to
Medicare enrollees under the contract;
(ii) The facilities of the Part D plan
sponsor; and
(iii) The enrollment and
disenrollment records for the current
contract period and 10 prior periods.
(2) HHS, the Comptroller General, or
their designees may audit, evaluate, or
inspect any books, contracts, medical
record s, patient care documentation,
and other records of the Part D plan
sponsor, related entity(s), contractor(s),
subcontractor(s), or its transferee that
pertain to any aspect of services
performed, reconciliation of benefit
liabilities, and determination of
amounts payable under the contract, or
as the Secretary may deem necessary to
enforce the contract.
(3) The Part D plan sponsor agrees to
make available, for the purposes
specified in paragraph (d) of this
section, its premises, physical facilities
and equipment, records relating to its
Medicare enrollees, and any additional
relevant information that CMS may
require.
(4) HHS, the Comptroller General, or
their designee’s right to inspect,
evaluate, and audit extends through 10

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

years from the end of the final contract
period or completion of audit,
whichever is later unless—
(i) CMS determines there is a special
need to retain a particular record or
group of records for a longer period and
notifies the Part D plan sponsor at least
30 days before the normal disposition
date;
(ii) There is a termination, dispute, or
allegation of fraud or similar fault by the
Part D plan sponsor, in which case the
retention may be extended to 6 years
from the date of any resulting final
resolution of the termination, dispute,
or fraud or similar fault; or
(iii) CMS determines that there is a
reasonable possibility of fraud or similar
fault, in which case CMS may inspect,
evaluate, and audit the Part D plan
sponsor at any time.
(f) Disclosure of information. The Part
D plan sponsor agrees to submit to
CMS—
(1) Certified financial information that
must include the following:
(i) Information as CMS may require
demonstrating that the organization has
a fiscally sound operation.
(ii) Information as CMS may require
pertaining to the disclosure of
ownership and control of the Part D
plan sponsor.
(2) All information to CMS that is
necessary for CMS to administer and
evaluate the program and to
simultaneously establish and facilitate a
process for current and prospective
beneficiaries to exercise choice in
obtaining prescription drug coverage.
This information includes, but is not
limited to:
(i) The benefits covered under a Part
D plan.
(ii) The Part D plan monthly basic
beneficiary premium and Part D plan
monthly supplemental beneficiary
premium, if any, for the plan. Fallback
entities submit the monthly beneficiary
premium for standard prescription drug
coverage.
(iii) The service area of each plan.
(iv) Plan quality and performance
indicators for the benefits under the
plan including—
(A) Disenrollment rates for Medicare
enrollees electing to receive benefits
through the plan for the previous 2
years;
(B) Information on Medicare enrollee
satisfaction;
(C) The recent records regarding
compliance of the plan with
requirements of this part, as determined
by CMS; and
(D) Other information determined by
CMS to be necessary to assist
beneficiaries in making an informed
choice regarding Part D plans.

PO 00000

Frm 00365

Fmt 4701

Sfmt 4700

4557

(v) Information about beneficiary
appeals and their disposition, and
formulary exceptions.
(vi) Information regarding all formal
actions, reviews, findings, or other
similar actions by States, other
regulatory bodies, or any other
certifying or accrediting organization.
(vii) Information on other matters that
CMS may require, including, but not
limited to, program monitoring and
oversight, performance measures,
quality assessment, research and
evaluation, CMS outreach activities,
payment-related oversight*, and fraud,
abuse, and waste*, as specified in CMS
guidelines.
(viii) Any other information deemed
necessary to CMS for the administration
or evaluation of the Medicare program.
(3)To its enrollees, all informational
requirements under § 423.128 and, upon
an enrollee’s request, the financial
disclosure information required under
§ 423.128(c)(4).
(g) Beneficiary financial protections.
The Part D plan sponsor agrees to
comply with the following
requirements:
(1) Each Part D plan sponsor must
adopt and maintain arrangements
satisfactory to CMS to protect its
enrollees from incurring liability for
payment of any fees that are the legal
obligation of the Part D sponsor. To
meet this requirement, the Part D plan
sponsor must—
(i) Ensure that all contractual or other
written arrangements prohibit the
sponsor’s contracting agents from
holding any beneficiary enrollee liable
for payment of any such fees; and
(ii) Indemnify the beneficiary enrollee
for payment of any fees that are the legal
obligation of the Part D plan sponsor for
covered prescription drugs furnished by
non-contracting pharmacists, or that
have not otherwise entered into an
agreement with the Part D plan sponsor,
to provide services to the organization’s
beneficiary enrollees.
(2) In meeting the requirements of this
paragraph, other than the provider
contract requirements specified in
paragraph (g)(1)(i) of this section, the
Part D plan sponsor may use—
(i) Contractual arrangements;
(ii) Insurance acceptable to CMS;
(iii) Financial reserves acceptable to
CMS; or
(iv) Any other arrangement acceptable
to CMS.
(h) Requirements of other laws and
regulations.
The Part D plan sponsor agrees to
comply with­
(1) Federal laws and regulations
designed to prevent fraud, waste, and
abuse, including, but not limited to

E:\FR\FM\28JAR2.SGM

28JAR2

4558

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

applicable provisions of Federal
criminal law, the False Claims Act (32
U.S.C. §§ 3729 et seq.), and the antikickback statute (section 1128B(b) of the
Act).
(2) HIPAA Administrative
Simplification rules at 45 CFR parts 160,
162, and 164.
(i) Relationship with related entities,
contractors, and subcontractors. (1)
Notwithstanding any relationship(s) that
the Part D plan sponsor may have with
related entities, contractors, or
subcontractors, the Part D sponsor
maintains ultimate responsibility for
adhering to and otherwise fully
complying with all terms and
conditions of its contract with CMS.
(2) The Part D plan sponsor agrees to
require all related entities, contractors,
or subcontractors to agree that—
(i) HHS, the Comptroller General, or
their designees have the right to inspect,
evaluate, and audit any pertinent
contracts, books, documents, papers,
and records of the related entity(s),
contractor(s), or subcontractor(s)
involving transactions related to CMS’
contract with the Part D plan sponsor;
and
(ii) HHS’, the Comptroller General’s,
or their designee’s right to inspect,
evaluate, and audit any pertinent
information for any particular contract
period exists through 10 years from the
final date of the contract period or from
the date of completion of any audit,
whichever is later.
(3) All contracts or written
arrangements between Part D plan
sponsors and pharmacies or other
providers, related entities, contractors,
subcontractors, first tier and
downstream entities must contain the
following:
(i) Enrollee protection provisions that
provide, consistent with paragraph
(g)(1) of this section, arrangements that
prohibit pharmacies or other providers
from holding an enrollee liable for
payment of any fees that are the
obligation of the Part D plan sponsor.
(ii) Accountability provisions that
indicate that the Part D sponsor may
delegate activities or functions to a
pharmacy, related entity, contractor, or
subcontractor only in a manner
consistent with requirements set forth at
paragraph (i)(4) of this section.
(iii) A provision requiring that any
services or other activity performed by
a related entity, contractor,
subcontractor, or first-tier or
downstream entity in accordance with a
contract or written agreement are
consistent and comply with the Part D
plan sponsor’s contractual obligations.
(4) If any of the Part D plan sponsors’
activities or responsibilities under its

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

contract with CMS is delegated to other
parties, the following requirements
apply to any related entity, contractor,
subcontractor, or pharmacy:
(i) Written arrangements must specify
delegated activities and reporting
responsibilities.
(ii) Written arrangements must either
provide for revocation of the delegation
activities and reporting responsibilities
described in paragraph (i)(4)(i) of this
section or specify other remedies in
instances when CMS or the Part D plan
sponsor determine that the parties have
not performed satisfactorily.
(iii) Written arrangements must
specify that the Part D plan sponsor on
an ongoing basis monitors the
performance of the parties.
(iv) All contracts or written
arrangements must specify that the
related entity, contractor, or
subcontractor must comply with all
applicable Federal laws, regulations,
and CMS instructions.
(5) If the Part D plan sponsor
delegates selection of its prescription
drug providers to another organization,
the Part D sponsor’s written
arrangements with that organization
must state that the CMS-contracting Part
D plan sponsor retains the right to
approve, suspend, or terminate any such
arrangement.
(j) Additional contract terms. The Part
D plan sponsor agrees to include in the
contract other terms and conditions as
CMS may find necessary and
appropriate in order to implement
requirements in this part.
(k) Certification of data that
determine payment.
(1) General rule. As a condition for
receiving a monthly payment under
subpart G of this part (or for fallback
entities, payment under subpart Q of
this part),, the Part D plan sponsor
agrees that its chief executive officer
(CEO), chief financial officer (CFO), or
an individual delegated the authority to
sign on behalf of one of these officers,
and who reports directly to the officer,
must request payment under the
contract on a document that certifies
(based on best knowledge, information,
and belief) the accuracy, completeness,
and truthfulness of all data related to
payment. The data may include
specified enrollment information,
claims data, bid submission data, and
other data that CMS specifies.
(2) Certification of enrollment and
payment information. The CEO, CFO, 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 each
enrollee for whom the organization is

PO 00000

Frm 00366

Fmt 4701

Sfmt 4700

requesting payment is validly enrolled
in a program offered by the organization
and the information CMS relies on in
determining payment is accurate,
complete, and truthful and acknowledge
that this information will be used for the
purposes of obtaining Federal
reimbursement.
(3) Certification of claims data. The
CEO, CFO, or an individual delegated
with 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 claims data it
submits under § 423.329(b)(3) (or for
fallback entities, under § 423.871(f)) are
accurate, complete, and truthful and
acknowledge that the claims data will
be used for the purpose of obtaining
Federal reimbursement. If the claims
data are generated by a related entity,
contractor, or subcontractor of a Part D
plan sponsor, the entity, contractor, or
subcontractor must similarly certify
(based on best knowledge, information,
and belief) the accuracy, completeness,
and truthfulness of the data and
acknowledge that the claims data will
be used for the purposes of obtaining
Federal reimbursement.
(4) Certification of bid submission
information. The CEO, CFO, 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 in its bid submission and
assumptions related to projected
reinsurance and low income cost
sharing subsidies is accurate, complete,
and truthful and fully conforms to the
requirements in § 423.265.
(5) Certification of allowable costs for
risk corridor and reinsurance
information. The CEO, CFO, 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 § 423.308, is accurate, complete, and
truthful and fully conforms to the
requirements in § 423.336 and § 423.343
and acknowledge that this information
will be used for the purposes of
obtaining Federal reimbursement.
(6) Certification of Accuracy of Data
for Price Comparison. The CEO, CFO, 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

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
price comparison is accurate, complete,
and truthful.
§ 423.506 Effective date and term of
contract.

(a) Effective date. The contract is
effective on the date specified in the
contract between the Part D plan
sponsor and CMS.
(b) Term of contract. Each contract is
for a period of 12 months.
(c) Qualification to renew a contract.
In accordance with § 423.507 of this
subpart, an entity is determined
qualified to renew its contract annually
only if—
(1) CMS informs the Part D plan
sponsor that it is qualified to renew its
contract; and
(2) The Part D plan sponsor has not
provided CMS with a notice of intention
not to renew.
(d) Renewal of contract contingent on
reaching agreement on the bid.
Although a Part D plan sponsor may be
determined qualified to renew its
contract under this section, if the
sponsor and CMS cannot reach
agreement on the bid under subpart F,
no renewal takes place, and the failure
to reach agreement is not subject to the
appeals provisions in subpart N of this
part.
(e) The provisions of this section do
not apply to fallback entities.
§ 423.507 Nonrenewal of contract.

(a) Nonrenewal by a Part D plan
sponsor. (1) Except for fallback entities,
a Part D plan sponsor may elect not to
renew its contract with CMS, effective at
the end of the term of the contract for
any reason provided it meets the
timeframes for doing so set forth in
paragraphs (a)(2) and (a)(3) of this
section.
(2) If a Part D plan sponsor does not
intend to renew its contract, it must
notify—
(i) CMS in writing by the first Monday
of June in the year in which the contract
ends;
(ii) Each Medicare enrollee, at least 90
days before the date on which the
nonrenewal is effective. This notice
must include a written description of
alternatives available for obtaining
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 90
days before the end of the current
calendar year, 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.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(3) If a Part D plan sponsor does not
renew a contract under this paragraph
(a), CMS cannot enter into a contract
with the organization for 2 years unless
there are special circumstances that
warrant special consideration, as
determined by CMS.
(4) If a Part D plan sponsor does not
renew a contract under this paragraph
(a), it must ensure the timely transfer of
any data or files.
(b) CMS decision that a Part D plan
sponsor is not qualified to renew. (1)
Except for fallback entities, CMS may
determine that a Part D plan sponsor is
not qualified to renew its contract for
any of the following reasons:
(i) The reasons listed in § 423.509(a)
that also permit CMS to terminate the
contract.
(ii) The Part D plan sponsor has
committed any of the acts in § 423.752
that support the imposition of
intermediate sanctions or civil money
penalties under § 423.750.
(2) Notice of decision. CMS provides
notice of its decision of whether a Part
D plan sponsor is qualified to renew its
contract as follows:
(i) To the Part D plan sponsor by May
1 of the current contract year.
(ii) If CMS decides that a Part D plan
sponsor is not qualified to renew its
contract, to the Part D plan sponsor’s
Medicare enrollees by mail at least 90
days before the end of the current
calendar year.
(iii) If CMS determines that the Part
D plan sponsor is not qualified to renew
its contract, to the general public at least
90 days before the end of the current
calendar year, 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.
(iv) The notice provisions in
paragraphs (b)(2)(ii) and (iii) of this
section also apply in cases where a nonrenewal results because CMS and the
Part D plan sponsor are unable to reach
agreement on the bid under subpart F.
(3) Notice of appeal rights. CMS gives
the Part D plan sponsor written notice
of its right to appeal the decision that
the sponsor is not qualified renew its
contract in accordance with
§ 423.642(b).
§ 423.508 Modification or termination of
contract by mutual consent.

(a) General rule. A contract may be
modified or terminated at any time by
written mutual consent.
(b) Notification of termination. If the
contract is terminated by mutual
consent, the Part D plan sponsor must
provide notice to its Medicare enrollees
and the general public as provided in
paragraph (c) of this section.

PO 00000

Frm 00367

Fmt 4701

Sfmt 4700

4559

(c) Notification of modification. If the
contract is modified by mutual consent,
the Part D plan sponsor must notify its
Medicare enrollees of any changes that
CMS determines are appropriate for
notification within timeframes specified
by CMS.
(d) Timely transfer of data and files.
If a contract is terminated under
paragraph (a) of this section, the Part D
plan sponsor must ensure the timely
transfer of any data or files.
§ 423.509 Termination of contract by CMS.

(a) Termination by CMS. CMS may
terminate a contract for any of the
following reasons if the Part D
sponsor—
(1) Failed substantially to carry out
the terms of its contract with CMS;
(2) Is carrying out its contract with
CMS in a manner that is inconsistent
with the effective and efficient
implementation of this part;
(3) No longer meets the requirements
of this part for being a contracting
organization;
(4) There is credible evidence that the
Part D sponsor committed or
participated in false, fraudulent, or
abusive activities affecting the Medicare
program, including submission of false
or fraudulent data;
(5) Experiences financial difficulties
so severe that its ability to provide
necessary prescription drug coverage is
impaired to the point of posing an
imminent and serious risk to the health
of its enrollees, or otherwise fails to
make services available to the extent
that a risk to health exists;
(6) Substantially fails to comply with
the requirements in subpart M of this
part relating to grievances and appeals;
(7) Fails to provide CMS with valid
risk adjustment, reinsurance and risk
corridor related data as required under
§ 423.322 and § 423.329 (or, for fallback
entities, fails to provide the information
in § 423.871(f)).
(8) Substantially fails to comply with
the service access requirements in
§ 423.120;
(9) Substantially fails to comply with
the marketing requirements in
§ 423.128;
(10) Substantially fails to comply with
the coordination with plans and
programs that provide prescription drug
coverage as described in subpart J of this
part; or
(11) Substantially fails to comply with
the cost and utilization management,
quality improvement, medication
therapy management and fraud, abuse
and waste program requirements as
specified in subparts D and K of this
part.
(b) Notice of termination. If CMS
decides to terminate a contract for

E:\FR\FM\28JAR2.SGM

28JAR2

4560

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

reasons other than the grounds specified
in paragraph (a)(4) or (a)(5) of this
section, it gives notice of the
termination as follows:
(1) Termination of contract by CMS.
(i) CMS notifies the Part D plan in
writing 90 days before the intended date
of the termination.
(ii) The Part D plan sponsor notifies
its Medicare enrollees of the termination
by mail at least 30 days before the
effective date of the termination.
(iii) The Part D plan sponsor notifies
the general public of the termination at
least 30 days before the effective date of
the termination 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.
(iv) If a Part D plan sponsor’s contract
is terminated under paragraph (a) of this
section, it must ensure the timely
transfer of any data or files.
(2) Immediate termination of contract
by CMS. (i) For terminations based on
violations specified in paragraph (a)(4)
or paragraph (a)(5) of this section, CMS
notifies the Part D plan sponsor in
writing that its contract is terminated
effective the date of the termination
decision by CMS. If termination is
effective in the middle of a month, CMS
has the right to recover the prorated
share of the prospective monthly
payments made to the Part D sponsor
covering the period of the month
following the contract termination.
(ii) CMS notifies the Part D plan
sponsor’s Medicare enrollees in writing
of CMS’s decision to terminate the Part
D plan sponsor’s contract. This notice
occurs no later than 30 days after CMS
notifies the plan of its decision to
terminate the Part D plan sponsor’s
contract. CMS simultaneously informs
the Medicare enrollees of alternative
options for obtaining qualified
prescription drug coverage, including
alternative PDP sponsors and MA-PDs
in a similar geographic area.
(iii) CMS notifies the general public of
the termination no later than 30 days
after notifying the plan of CMS’s
decision to terminate the Part D plan
sponsor’s contract. This notice is
published in one or more newspapers of
general circulation in each community
or county located in the Part D plan
sponsor’s service area.
(c) Corrective action plan. (1) General
rule. Before terminating a contract for
reasons other than the grounds specified
in paragraph (a)(4) or (a)(5) of this
section, CMS provides the Part D plan
sponsor with reasonable opportunity to
develop and receive CMS approval of a
corrective action plan to correct the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

deficiencies that are the basis of the
proposed termination.
(2) Exception. If a contract is
terminated under paragraph (a)(4) or
(a)(5) of this section, the Part D plan
sponsor does not have the opportunity
to submit a corrective action plan.
(d) Appeal rights. If CMS decides to
terminate a contract, it sends written
notice to the Part D plan sponsor
informing it of its termination appeal
rights in accordance with § 423.642.
§ 423.510 Termination of contract by the
Part D sponsor.

(a) Cause for termination. The Part D
plan sponsor may terminate its contract
if CMS fails to substantially carry out
the terms of the contract.
(b) Notice of termination. The Part D
plan sponsor must give advance notice
as follows:
(1) To CMS, at least 90 days before the
intended date of termination. This
notice must specify the reasons why the
Part D sponsor is requesting contract
termination.
(2) To its Medicare enrollees, at least
60 days before the termination effective
date. This notice must include a written
description of alternatives available for
obtaining qualified prescription drug
coverage within the services area,
including alternative PDPs, MA-PDPs,
and original Medicare and must receive
CMS approval.
(3) To the general public, at least 60
days before the termination effective
date by publishing a CMS-approved
notice in one or more newspapers of
general circulation in each community
or county located in the Part D plan
sponsor’s geographic area.
(c) Effective date of termination. The
effective date of the termination is
determined by CMS and is at least 90
days after the date CMS receives the
Part D plan sponsor’s notice of intent to
terminate.
(d) CMS’s liability. CMS’s liability for
payment to the Part D plan sponsor ends
as of the first day of the month after the
last month for which the contract is in
effect.
(e) Effect of termination by the
organization. CMS does not enter into
an agreement with an organization that
has terminated its contract within the
preceding 2 years unless there are
circumstances that warrant special
consideration, as determined by CMS.
(f) Timely transfer of data and files. If
a contract is terminated under
paragraph (a) of this section, the Part D
plan sponsor must ensure the timely
transfer of any data or files.

PO 00000

Frm 00368

Fmt 4701

Sfmt 4700

§ 423.512 Minimum enrollment
requirements.

(a) Basic rule. Except as provided in
paragraph (b) of this section, CMS does
not enter into a contract under this
subpart unless the organization meets
the following minimum enrollment
requirement:
(1) At least 5,000 individuals are
enrolled for the purpose of receiving
prescription drug benefits from the
organization; or
(2) At least 1,500 individuals are
enrolled for purposes of receiving
prescription drug benefits from the
organization and the organization
primarily serves individuals residing
outside of urbanized areas as defined in
§ 412.62(f) of this chapter;
(3) Except as provided for in
paragraph (b) of this section, a Part D
plan sponsor must maintain a minimum
enrollment as defined in paragraphs
(a)(1) and (a)(2) of this section for the
duration of its contract.
(b) Minimum enrollment waiver. CMS
waives the requirement of paragraphs
(a)(1) and (a)(2) of this section during
the first contract year for a sponsor in
a region.
§ 423.514 Reporting requirements.

(a) Required information. Each Part D
plan sponsor must have an effective
procedure to develop, compile,
evaluate, and report to CMS, to its
enrollees, and to the general public, at
the times and in the manner that CMS
requires, statistics indicating the
following—
(1) The cost of its operations.
(2) The patterns of utilization of its
services.
(3) The availability, accessibility, and
acceptability of its services.
(4) Information demonstrating that the
Part D plan sponsor has a fiscally sound
operation.
(5) Other matters that CMS may
require.
(b) Significant business transactions.
Each Part D plan sponsor must report to
CMS annually, within 120 days of the
end of its fiscal year (unless, for good
cause shown, CMS authorizes an
extension of time), the following:
(1) A description of significant
business transactions, as defined in
§ 423.501, between the Part D plan
sponsor and a party in interest,
including the following:
(i) Indication that the costs of the
transactions listed in paragraph (c) of
this section do not exceed the costs that
would be incurred if these transactions
were with someone who is not a party
in interest; or
(ii) If they do exceed, a justification
that the higher costs are consistent with

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
prudent management and fiscal
soundness requirements.
(2) A combined financial statement
for the Part D plan sponsor and a party
in interest if either of the following
conditions is met:
(i) Thirty five percent or more of the
costs of operation of the Part D sponsor
go to a party in interest.
(ii) Thirty five percent or more of the
revenue of a party in interest is from the
Part D plan sponsor.
(c) Requirements for combined
financial statements. (1) The combined
financial statements required by
paragraph (b)(2) of this section must
display in separate columns the
financial information for the Part D plan
sponsor and each of the parties in
interest.
(2) Inter-entity transactions must be
eliminated in the consolidated column.
(3) The statements must be examined
by an independent auditor in
accordance with generally accepted
accounting principles and must include
appropriate opinions and notes.
(4) Upon written request from a Part
D plan sponsor showing good cause,
CMS may waive the requirement that
the organization’s combined financial
statement include the financial
information required in this paragraph
(c) of this section for a particular entity.
(d) Reporting and disclosure under
Employee Retirement Income Security
Act of 1974 (ERISA). (1) For any
employees’ health benefits plan that
includes a Part D plan sponsor in its
offerings, the PDP sponsor must furnish,
upon request, the information the plan
needs to fulfill its reporting and
disclosure obligations (for the particular
PDP sponsor) under the Employee
Retirement Income Security Act of 1974
(ERISA).
(2) The PDP sponsor must furnish the
information to the employer or the
employer’s designee, or to the plan
administrator, as the term
‘‘administrator’’ is defined in ERISA.
(e) Loan information. Each Part D plan
sponsor must notify CMS of any loans
or other special financial arrangements
it makes with contractors,
subcontractors and related entities.
(f) Enrollee access to information.
Each Part D plan sponsor must make the
information reported to CMS under this
section available to its enrollees upon
reasonable request.
§ 423.516 Prohibition of midyear
implementation of significant new
regulatory requirements.

CMS may not implement, other than
at the beginning of a calendar year,
regulations under this section that
impose new, significant regulatory

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

requirements on a PDP sponsor or a
prescription drug plan.
Subpart L—Effect of Change of
Ownership or Leasing of Facilities
During Term of Contract
§ 423.551 General provisions.

(a) Change of ownership. The
following constitute a change of
ownership:
(1) Partnership. The removal,
addition, or substitution of a partner,
unless the partners expressly agree
otherwise as permitted by applicable
State law, constitutes a change of
ownership.
(2) Asset transfer. Transfer of
substantially all the assets of the
sponsor to another party constitutes a
change of ownership.
(3) Corporation. The merger of the
PDP sponsor’s corporation into another
corporation or the consolidation of the
PDP sponsor’s organization with one or
more other corporations, resulting in a
new corporate body.
(b) Change of ownership, exception.
Transfer of corporate stock or the merger
of another corporation into the PDP
sponsor’s corporation, with the PDP
sponsor surviving, does not ordinarily
constitute change of ownership.
(c) Advance notice requirement. (1) A
PDP sponsor that has a Medicare
contract in effect under § 423.502 and is
considering or is negotiating a change in
ownership must notify CMS at least 60
days before the anticipated effective
date of the change. The PDP sponsor
must also provide updated financial
information and a discussion of the
financial and solvency impact of the
change of ownership on the surviving
organization.
(2) If the PDP sponsor fails to give
CMS the required notice in a timely
manner, it continues to be liable for
payments that CMS makes to it on
behalf of Medicare enrollees after the
date of change of ownership.
(d) Novation agreement defined. A
novation agreement is an agreement
among the current owner of the PDP
sponsor, the prospective new owner,
and CMS that—
(1) Is embodied in a document
executed and signed by all 3 parties;
(2) Meets the requirements of
§ 423.552; and
(3) Recognizes the new owner as the
successor in interest to the current
owner’s Medicare contract.
(e) Effect of change of ownership
without novation agreement. Except to
the extent provided in paragraph (c)(2)
of this section, the effect of a change of
ownership without a novation
agreement is that—

PO 00000

Frm 00369

Fmt 4701

Sfmt 4700

4561

(1) The existing contract becomes
invalid; and
(2) If the new owner wishes to
participate in the Medicare program, it
must apply for, and enter into, a
contract in accordance with subpart K of
this part.
(f) Effect of change of ownership with
novation agreement. If the PDP sponsor
submits a novation agreement that
meets the requirements of § 423.552 and
CMS signs it, the new owner becomes
the successor in interest to the current
owner’s Medicare contract under
§ 423.502.
§ 423.552 Novation agreement
requirements.

(a) Conditions for CMS approval of a
novation agreement. CMS approves a
novation agreement if the following
conditions are met:
(1) Advance notification. The PDP
sponsor notifies CMS at least 60 days
before the date of the proposed change
of ownership. The PDP sponsor also
provides CMS with updated financial
information and a discussion of the
financial and solvency impact of the
change of ownership on the surviving
organization.
(2) Advance submittal of agreement.
The PDP sponsor submits to CMS, at
least 30 days before the proposed
change of ownership date, three signed
copies of the novation agreement
containing the provisions specified in
paragraph (b) of this section, and one
copy of other relevant documents
required by CMS.
(3) CMS’s determination. When
reviewing a novation agreement, CMS
makes a determination concerning the
following:
(i) The proposed new owner is in fact
a successor in interest to the contract.
(ii) Recognition of the new owner as
a successor in interest to the contract is
in the best interest of the Medicare
program.
(iii) The successor organization meets
the requirements to qualify as a PDP
sponsor under subpart K of this part.
(b) Provisions of a novation
agreement. A valid novation agreement
requires the following:
(1) Assumption of contract
obligations. The new owner must
assume all obligations under the
contract.
(2) Waiver of right to reimbursement.
The previous owner must waive its
rights to reimbursement for covered
services furnished during the rest of the
current contract period.
(3) Guarantee of performance. The
previous owner must—
(i) Guarantee performance of the
contract by the new owner during the
contract period; or

E:\FR\FM\28JAR2.SGM

28JAR2

4562

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

(ii) Post a performance bond that is
satisfactory to CMS.
(4) Records access. The previous
owner must agree to make its books and
records and other necessary information
available to the new owner and to CMS
to permit an accurate determination of
costs for the final settlement of the
contract period.
§ 423.553 Effect of leasing of a PDP
sponsor’s facilities.

(a) General effect of leasing. If a PDP
sponsor leases all or part of its facilities
to another entity, the other entity does
not acquire PDP sponsor status under
section 1860D–12(b) of the Act.
(b) Effect of lease of all facilities. (1)
If a PDP sponsor leases all of its
facilities to another entity, the contract
terminates.
(2) If the other entity wishes to
participate in Medicare as a PDP
sponsor, it must apply for and enter into
a contract in accordance with § 423.502.
(c) Effect of partial lease of facilities.
If the PDP sponsor leases part of its
facilities to another entity, its contract
with CMS remains in effect while CMS
surveys the PDP sponsor to determine
whether it continues to be in
compliance with the applicable
requirements and qualifying conditions
specified in subpart K of this part.
Subpart M—Grievances, Coverage
Determinations, and Appeals
§ 423.560

Definitions.

As used in this subpart, unless the
context indicates otherwise—
Appeal means any of the procedures
that deal with the review of adverse
coverage determinations made by the
Part D plan sponsor on the benefits
under a Part D plan the enrollee believes
he or she is entitled to receive,
including delay in providing or
approving the drug coverage (when a
delay would adversely affect the health
of the enrollee), or on any amounts the
enrollee must pay for the drug coverage,
as defined in § 423.566(b). These
procedures include redeterminations by
the Part D plan sponsor,
reconsiderations by the independent
review entity, ALJ hearings, reviews by
the Medicare Appeals Council (MAC),
and judicial reviews.
Appointed representative means an
individual either appointed by an
enrollee or authorized under State or
other applicable law to act on behalf of
the enrollee in obtaining a coverage
determination or in dealing with any of
the levels of the appeals process. Unless
otherwise stated in this subpart, the
appointed representative has all of the
rights and responsibilities of an enrollee

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

in obtaining a coverage determination or
in dealing with any of the levels of the
appeals process, subject to the rules
described in part 422, subpart M of this
chapter.
Drug Use means an enrollee is
receiving the drug in the course of
treatment, including time off if it is part
of the treatment.
Enrollee means a Part D eligible
individual who has elected or has been
enrolled in a Part D plan.
Grievance means any complaint or
dispute, other than one that involves a
coverage determination, expressing
dissatisfaction with any aspect of the
operations, activities, or behavior of a
Part D plan sponsor, regardless of
whether remedial action is requested.
Physician has the meaning given the
term in section 1861(r) of the Act.
Projected value means the charges
incurred by the enrollee and future
charges that are incurred within 12
months from the date the request for
coverage determination or exception is
received by the plan. Projected value
includes enrollee co-payments, all
expenditures incurred after an enrollee’s
expenditures exceed the initial coverage
limit, and expenditures paid by other
entities.
Reconsideration means a review of an
adverse coverage determination by an
independent review entity (IRE), the
evidence and findings upon which it
was based, and any other evidence the
enrollee submits or the IRE obtains.
Redetermination means a review of an
adverse coverage determination by a
Part D plan sponsor, the evidence and
findings upon which it is based, and
any other evidence the enrollee submits
or the Part D plan sponsor obtains.
§ 423.562 General provisions.

(a) Responsibilities of the Part D plan
sponsor. A Part D plan sponsor must
meet all of the following requirements.
(1) A Part D plan sponsor, for each
Part D plan that it offers, must establish
and maintain—
(i) A grievance procedure as described
in § 423.564 for addressing issues that
do not involve coverage determinations;
(ii) A procedure for making timely
coverage determinations, including
determinations on requests for
exceptions to a tiered cost-sharing
structure or to a formulary; and
(iii) Appeal procedures that meet the
requirements of this subpart for issues
that involve coverage determinations.
(2) A Part D plan sponsor must ensure
that all enrollees receive written
information about the—
(i) Grievance and appeal procedures
that are available to them through the
Part D plan sponsor; and

PO 00000

Frm 00370

Fmt 4701

Sfmt 4700

(ii) Complaint process available to the
enrollee under the QIO process as set
forth under section 1154(a)(14) of the
Act.
(3) A Part D plan sponsor must
arrange with its network pharmacies to
post or distribute notices instructing
enrollees to contact their plans to obtain
a coverage determination or request an
exception if they disagree with the
information provided by the pharmacist.
(4) In accordance with subpart K of
this part, if the Part D plan sponsor
delegates any of its responsibilities
under this subpart to another entity or
individual through which the Part D
plan sponsor provides covered benefits,
the Part D plan sponsor is ultimately
responsible for ensuring that the entity
or individual satisfies the relevant
requirements of this subpart.
(b) Rights of enrollees. In accordance
with the provisions of this subpart,
enrollees have all of the following rights
under Part D plans:
(1) The right to have grievances
between the enrollee and the Part D
plan sponsor heard and resolved by the
plan sponsor, as described in § 423.564.
(2) The right to a timely coverage
determination by the Part D plan
sponsor, as specified in § 423.566 and
§ 423.568, including the right to request
from the Part D plan sponsor an
exception to its tiered cost-sharing
structure or formulary, as specified in
§ 423.578.
(3) The right to request from the Part
D plan sponsor an expedited coverage
determination, as specified in § 423.570.
(4) If dissatisfied with any part of a
coverage determination, all of the
following appeal rights:
(i) The right to a redetermination of
the adverse coverage determination by
the Part D plan sponsor, as specified in
§ 423.580.
(ii) The right to request an expedited
redetermination, as provided under
§ 423.584.
(iii) If, as a result of a redetermination,
a Part D plan sponsor affirms, in whole
or in part, its adverse coverage
determination, the right to a
reconsideration or expedited
reconsideration by an independent
review entity (IRE) contracted by CMS,
as specified in § 423.600.
(iv) If the IRE affirms the plan’s
adverse coverage determination, in
whole or in part, the right to an ALJ
hearing if the amount in controversy
meets the requirements in § 423.610.
(v) If the ALJ affirms the IRE’s adverse
coverage determination, in whole or in
part, the right to request MAC review of
the ALJ hearing decision, as specified in
§ 423.620.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
(vi) If the MAC affirms the ALJ’s
adverse coverage determination, in
whole or in part, the right to judicial
review of the hearing decision if the
amount in controversy meets the
requirements in § 423.630.
(c) When other regulations apply.
Unless this subpart provides otherwise,
the regulations in part 422, subpart M of
this chapter (concerning the
administrative review and hearing
processes under titles II and XVIII, and
representation of parties under title
XVIII of the Act) and any interpretive
rules or CMS rulings issued under these
regulations, apply under this subpart to
the extent they are appropriate.
(d) Relation to ERISA Requirements.
Consistent with section 1860D–22(b) of
the Act, provisions of this subpart may,
to the extent applicable under the
regulations adopted by the Secretary of
Labor, apply to claims for benefits under
group health plans subject to the
Employee Retirement Income Security
Act.
§ 423.564 Grievance procedures.

(a) General rule. Each Part D plan
sponsor must provide meaningful
procedures for timely hearing and
resolving grievances between enrollees
and the Part D plan sponsor or any other
entity or individual through whom the
Part D plan sponsor provides covered
benefits under any Part D plan it offers.
(b) Distinguished from appeals.
Grievance procedures are separate and
distinct from appeal procedures, which
address coverage determinations as
defined in § 423.566(b). Upon receiving
a complaint, a Part D plan sponsor must
promptly determine and inform the
enrollee whether the complaint is
subject to its grievance procedures or its
appeal procedures.
(c) Distinguished from the quality
improvement organization complaint
process. Under section 1154(a)(14) of
the Act, the quality improvement
organization (QIO) must review
enrollees’ written complaints about the
quality of services they have received
under the Medicare program. This
process is separate and distinct from the
grievance procedures of the Part D plan
sponsor. For quality of care issues, an
enrollee may file a grievance with the
Part D plan sponsor, file a written
complaint with the QIO, or both. For
any complaint submitted to a QIO, the
Part D plan sponsor must cooperate
with the QIO in resolving the complaint.
(d) Method for filing a grievance. (1)
An enrollee may file a grievance with
the Part D plan sponsor either orally or
in writing.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(2) An enrollee must file a grievance
no later than 60 days after the event or
incident that precipitates the grievance.
(e) Grievance disposition and
notification. (1) The Part D plan sponsor
must notify the enrollee of its decision
as expeditiously as the case requires,
based on the enrollee’s health status, but
no later than 30 days after the date the
Part D plan sponsor receives the oral or
written grievance.
(2) The Part D plan sponsor may
extend the 30-day timeframe by up to 14
days if the enrollee requests the
extension or if the Part D plan sponsor
justifies a need for additional
information and documents how the
delay is in the interest of the enrollee.
When the Part D plan sponsor extends
the deadline, it must immediately notify
the enrollee in writing of the reason(s)
for the delay.
(3) The Part D plan sponsor must
inform the enrollee of the disposition of
the grievance in accordance with the
following procedures:
(i) All grievances submitted in writing
must be responded to in writing.
(ii) Grievances submitted orally may
be responded to either orally or in
writing, unless the enrollee requests a
written response.
(iii) All grievances related to quality
of care, regardless of how the grievance
is filed, must be responded to in
writing. The response must include a
description of the enrollee’s right to file
a written complaint with the QIO. For
any complaint submitted to a QIO, the
Part D plan sponsor must cooperate
with the QIO in resolving the complaint.
(f) Expedited grievances. A Part D
plan sponsor must respond to an
enrollee’s grievance within 24 hours if
the complaint involves a refusal by the
Part D plan sponsor to grant an
enrollee’s request for an expedited
coverage determination under § 423.570
or an expedited redetermination under
§ 423.584, and the enrollee has not yet
purchased or received the drug that is
in dispute.
(g) Record keeping. The Part D plan
sponsor must have an established
process to track and maintain records on
all grievances received both orally and
in writing, including, at a minimum, the
date of receipt, final disposition of the
grievance, and the date that the enrollee
was notified of the disposition.
§ 423.566 Coverage determinations.

(a) Responsibilities of the Part D plan
sponsor. Each Part D plan sponsor must
have a procedure for making timely
coverage determinations in accordance
with the requirements of this subpart
regarding the prescription drug benefits
an enrollee is entitled to receive under

PO 00000

Frm 00371

Fmt 4701

Sfmt 4700

4563

the plan, including basic prescription
drug coverage as specified in § 423.100
and supplemental benefits as specified
in § 423.104(f)(1)(ii), and the amount,
including cost sharing, if any, that the
enrollee is required to pay for a drug.
The Part D plan sponsor must have a
standard procedure for making
determinations, in accordance with
§ 423.568, and an expedited procedure
for situations in which applying the
standard procedure may seriously
jeopardize the enrollee’s life, health, or
ability to regain maximum function, in
accordance with § 423.570.
(b) Actions that are coverage
determinations. The following actions
by a Part D plan sponsor are coverage
determinations:
(1) A decision not to provide or pay
for a Part D drug (including a decision
not to pay because the drug is not on the
plan’s formulary, because the drug is
determined not to be medically
necessary, because the drug is furnished
by an out-of-network pharmacy, or
because the Part D plan sponsor
determines that the drug is otherwise
excludable under section 1862(a) of the
Act if applied to Medicare Part D) that
the enrollee believes may be covered by
the plan;
(2) Failure to provide a coverage
determination in a timely manner, when
a delay would adversely affect the
health of the enrollee;
(3) A decision concerning an
exceptions request under § 423.578(a);
(4) A decision concerning an
exceptions request under § 423.578(b);
or
(5) A decision on the amount of cost
sharing for a drug.
(c) Who can request a coverage
determination. Individuals who can
request a standard or expedited
coverage determination are—
(1) The enrollee;
(2) The enrollee’s appointed
representative, on behalf of the enrollee;
or
(3) The prescribing physician, on
behalf of the enrollee.
§ 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 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
supporting statement.
(b) Timeframe for requests for
payment. When a party makes a request

E:\FR\FM\28JAR2.SGM

28JAR2

4564

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

for payment, the Part D plan sponsor
must notify the enrollee of its
determination no later than 72 hours
after receipt of the request.
(c) Written notice for denials by a Part
D plan sponsor. If a Part D plan sponsor
decides to deny a drug benefit, in whole
or in part, it must give the enrollee
written notice of the determination.
(d) Form and content of the denial
notice. The notice of any denial under
paragraph (c) of this section must—
Use approved notice language in a
readable and understandable form;
State the specific reasons for the
denial;
Inform the enrollee of his or her right
to a redetermination;
(i) For drug coverage denials, describe
both the standard and expedited
redetermination processes, including
the enrollee’s right to, and conditions
for, obtaining an expedited
redetermination and the rest of the
appeals process;
(ii) For payment denials, describe the
standard redetermination process and
the rest of the appeals process; and
Comply with any other notice
requirements specified by CMS.
(e) Effect of failure to meet the
adjudicatory timeframes. If the Part D
plan sponsor fails to notify the enrollee
of its determination in the appropriate
timeframe under paragraphs (a) or (b) of
this section, the failure constitutes an
adverse coverage determination, and the
plan sponsor must forward the
enrollee’s request to the IRE within 24
hours of the expiration of the
adjudication timeframe.
§ 423.570 Expediting certain coverage
determinations.

(a) Request for expedited
determination. An enrollee or an
enrollee’s prescribing physician may
request that a Part D plan sponsor
expedite a coverage determination
involving issues described in
§ 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 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 may
provide oral or written support for an
enrollee’s request for an expedited
determination.
(c) How the Part D plan sponsor must
process requests. The Part D plan
sponsor must establish and maintain the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

following procedures for processing
requests for expedited determinations:
(1) An efficient and convenient means
for accepting oral or written requests
submitted by enrollees or prescribing
physicians.
(2) A method for documenting all oral
requests and maintaining the
documentation in the case file; and
(3) A means for issuing prompt
decisions on expediting a
determination, based on the following
requirements:
(i) For a request made by an enrollee,
provide an expedited determination if it
determines 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.
(ii) For a request made or supported
by an enrollee’s prescribing physician,
provide an expedited determination if
the physician 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
§ 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
supporting statement.
(2) Give the enrollee and prescribing
physician prompt oral notice of the
denial that—
(i) Explains that the Part D plan
sponsor must process the request using
the 72 hour timeframe for standard
determinations;
(ii) Informs the enrollee of the right to
file an expedited grievance if he or she
disagrees with the decision by the Part
D plan sponsor not to expedite;
(iii) Informs the enrollee of the right
to resubmit a request for an expedited
determination with the prescribing
physician’s support; and
(iv) Provides instructions about the
plan’s grievance process and its
timeframes.
(3) Subsequently deliver, within 3
calendar days, equivalent written
notice.
(e) Actions on accepted requests for
expedited determination. If a Part D
plan sponsor grants a request for
expedited determination, it must make
the determination and give notice in
accordance with § 423.572.

PO 00000

Frm 00372

Fmt 4701

Sfmt 4700

§ 423.572 Timeframes and notice
requirements for expedited coverage
determinations.

(a) Timeframe for determinations 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 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
supporting statement.
(b) Confirmation of oral notice. If the
Part D plan sponsor first notifies an
enrollee of an adverse expedited
determination orally, it must mail
written confirmation to the enrollee
within 3 calendar days of the oral
notification.
(c) Content of the notice of expedited
determination.
(1) The notice of any expedited
determination must state the specific
reasons for the determination in
understandable language.
(2) If the determination is not
completely favorable to the enrollee, the
notice must—
(i) Inform the enrollee of his or her
right to a redetermination;
(ii) Describe both the standard and
expedited redetermination processes,
including the enrollee’s right to request,
and conditions for obtaining, an
expedited redetermination, and the rest
of the appeal process; and
(iii) Comply with any other
requirements specified by CMS.
(d) Effect of failure to meet the
adjudicatory timeframes. If the Part D
plan sponsor fails to notify the enrollee
of its determination in the timeframe
specified in paragraph (a) of this
section, the failure constitutes an
adverse coverage determination, 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.
§ 423.576 Effect of a coverage
determination.

The coverage determination is
binding on the Part D plan sponsor and
the enrollee unless it is reviewed and
revised under § 423.580 through
§ 423.630 or is reopened and revised
under § 423.634.
§ 423.578 Exceptions process.

(a) Requests for exceptions to a plan’s
tiered cost-sharing structure. Each Part
D plan sponsor that provides
prescription drug benefits for Part D

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
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 statement under
paragraph (a)(4) of this section.
(1) The exceptions procedures must
address situations where a formulary’s
tiering structure changes during the year
and an enrollee is using a drug affected
by the change.
(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 under paragraph
(a)(4) of this section.
(ii) Consideration of whether the
requested Part D drug that is the subject
of the exceptions request is the
therapeutic equivalent, as defined in
§ 423.100, of any other drug on the
plan’s formulary.
(iii) Consideration of the number of
drugs on the plan’s formulary that are in
the same class and category as the
requested prescription drug that is the
subject of the exceptions request.
(3) An enrollee or the enrollee’s
prescribing physician may file a request
for an exception.
(4) A prescribing physician must
provide an oral or written supporting
statement that the preferred drug for the
treatment of the enrollee’s condition—
(i) Would not be as effective for the
enrollee as the requested drug;
(ii) Would have adverse effects for the
enrollee; or
(iii) Both paragraphs (a)(4)(i) and
(a)(4)(ii) of this section apply.
(5) If the physician provides an oral
supporting statement, the Part D plan
sponsor may require the physician 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 to provide
additional supporting medical
documentation as part of the written
follow-up.
(6) In no case is a Part D plan sponsor
required to cover a non-preferred drug
at the generic drug cost-sharing level if
the plan maintains a separate tier
dedicated to generic drugs.
(7) If a Part D plan sponsor maintains
a formulary tier in which it places very
high cost and unique items, such as
genomic and biotech products, the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

sponsor may design its exception
process so that very high cost or unique
drugs are not eligible for a tiering
exception.
(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 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.
(1) The plan’s formulary exceptions
process must address each of the
following circumstances:
(i) Situations where a formulary
changes during the year, and situations
where an enrollee is already using a
given drug.
(ii) Continued coverage of a particular
Part D prescription drug that the Part D
plan sponsor is discontinuing coverage
on the formulary for reasons other than
safety or because the Part D prescription
drug cannot be supplied by or was
withdrawn from the market by the
drug’s manufacturer.
(iii) An exception to a plan’s coverage
policy that causes a Part D prescription
drug not to be covered because of cost
utilization tools, such as a requirement
for step therapy, dosage limitations, or
therapeutic substitution.
(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 determination
made under paragraph (b)(5) of this
section;
(ii) A process for gathering and
comparing applicable medical and
scientific evidence on the safety and
effectiveness of the requested nonformulary drug with the formulary drug
for the enrollee, including safety
information generated by an
authoritative government body; and
(iii) A description of the cost-sharing
scheme that will be applied when

PO 00000

Frm 00373

Fmt 4701

Sfmt 4700

4565

coverage is provided for a nonformulary drug.
(3) If the Part D plan sponsor covers
a non-formulary drug, the cost(s)
incurred by the enrollee for that drug
are treated as being included for
purposes of calculating and meeting the
annual out-of-pocket threshold.
(4) An enrollee, the enrollee’s
appointed representative, or the
prescribing physician (on behalf of the
enrollee) may file a request for an
exception.
(5) A prescribing physician 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—
(i) All of the covered Part D drugs on
any tier of a plan’s formulary for
treatment for the same condition would
not be as effective for the enrollee as the
non-formulary drug, would have
adverse effects for the enrollee, or both;
(ii) The prescription drug
alternative(s) listed on the formulary or
required to be used in accordance with
step therapy requirements—
(A) Has been ineffective in the
treatment of the enrollee’s disease or
medical condition or, based on both
sound clinical evidence and medical
and scientific evidence and the known
relevant physical or mental
characteristics of the enrollee and
known characteristics of the drug
regimen, is likely to be ineffective or
adversely affect the drug’s effectiveness
or patient compliance; or
(B) Has caused or based on sound
clinical evidence and medical and
scientific evidence, is likely to cause an
adverse reaction or other harm to the
enrollee; or
(iii) The number of doses that is
available under a dose restriction for the
prescription drug has been ineffective in
the treatment of the enrollee’s disease or
medical condition or, based on both
sound clinical evidence and medical
and scientific evidence and the known
relevant physical or mental
characteristics of the enrollee and
known characteristics of the drug
regimen, is likely to be ineffective or
adversely affect the drug’s effectiveness
or patient compliance.
(6) If the physician provides an oral
supporting statement, the Part D plan
sponsor may require the physician to
subsequently provide a written
supporting statement. The Part D plan
sponsor may require the prescribing
physician to provide additional
supporting medical documentation as
part of the written follow-up.
(c) Requirements for exceptions. (1)
General rule. A decision by a Part D

E:\FR\FM\28JAR2.SGM

28JAR2

4566

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

plan sponsor concerning an exceptions
request under this section constitutes a
coverage determination as specified at
§ 423.566.
(2) When a Part D plan sponsor does
not make a timely decision. If the Part
D plan sponsor fails to make a decision
on an exceptions request and provide
notice of the decision within the
timeframe required under § 423.568(a)
or § 423.572(a), as applicable, the failure
constitutes an adverse coverage
determination, 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.
(3) When a tiering exceptions request
is approved. Whenever an exceptions
request made under § 423.578(a) is
approved, the Part D plan sponsor must
provide coverage for the approved
prescription drug at the cost-sharing
level that applies for preferred drugs,
and 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—
(i) The enrollee’s prescribing
physician continues to prescribe the
drug;
(ii) The drug continues to be
considered safe for treating the
enrollee’s disease or medical condition;
and
(iii) The enrollment period has not
expired. If an enrollee renews his or her
membership after the plan year, the plan
may choose to continue coverage into
the subsequent plan year.
(4) When a non-formulary exceptions
request is approved. Whenever an
exceptions request made under
§ 423.578(b) is approved—
(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 continues to prescribe the
drug;
(B) The drug continues to be
considered safe for treating the
enrollee’s disease or medical condition;
and
(C) The enrollment period has not
expired. If an enrollee renews his or her
membership after the plan year, the plan
may choose to continue coverage into
the subsequent plan year.
(ii) The Part D plan sponsor must not
establish a special formulary tier or co­
payment or other cost-sharing
requirement that is applicable only to

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

prescription drugs approved for
coverage under this section.
(iii) An enrollee may not request a
tiering exception for a non-formulary
prescription drug approved under
§ 423.578(b).
(d) Notice regarding formulary
changes. Whenever a Part D plan
sponsor removes a covered part D drug
from its formulary or makes any changes
in the preferred or tiered cost-sharing
status of such a drug, the Part D plan
sponsor must provide notice in
accordance with § 423.120(b)(5).
(e) Limitation of the exceptions
procedures to Part D drugs. Nothing in
this section may be construed to allow
an enrollee to use the exceptions
processes set out in this section to
request or be granted coverage for a
prescription drug that does not meet the
definition of a Part D drug.
(f) Implication of the physician’s
supporting statement. Nothing in this
section should be construed to mean
that the physician’s supporting
statement required for an exceptions
request will result in an automatic
favorable determination.

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.
§ 423.584 Expediting certain
redeterminations.

(a) Who may request an expedited
redetermination. An enrollee or an
enrollee’s prescribing physician may
request that a Part D plan sponsor
expedite a redetermination that involves
the issues specified in § 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
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.
§ 423.580 Right to a redetermination.
(2) A prescribing physician may
An enrollee who has received a
provide oral or written support for an
coverage determination (including one
enrollee’s request for an expedited
that is reopened and revised as
redetermination.
described in § 423.634) may request that
(c) How the Part D plan sponsor must
it be redetermined under the procedures process requests. The Part D plan
described in § 423.582, which address
sponsor must establish and maintain the
requests for a standard redetermination. following procedures for processing
An enrollee or an enrollee’s prescribing
requests for expedited redetermination:
physician (acting on behalf of an
(1) Handling of requests. The Part D
enrollee) may request an expedited
plan sponsor must establish an efficient
redetermination specified in § 423.584.
and convenient means for individuals to
submit oral or written requests,
§ 423.582 Request for a standard
document all oral requests in writing,
redetermination.
and maintain the documentation in the
(a) Method and place for filing a
case file.
request. An enrollee must ask for a
(2) Prompt decision making. The Part
redetermination by making a written
D plan sponsor must promptly decide
request with the Part D plan sponsor
whether to expedite the redetermination
that made the coverage determination.
or follow the timeframe for standard
The Part D plan sponsor may adopt a
redetermination based on the following
policy for accepting oral requests.
requirements:
(b) Timeframe for filing a request.
(i) For a request made by an enrollee,
Except as provided in paragraph (c) of
the Part D plan sponsor must provide an
this section, an enrollee must file a
expedited redetermination if it
request for a redetermination within 60
determines that applying the standard
calendar days from the date of the
timeframe for making a redetermination
notice of the coverage determination.
may seriously jeopardize the life or
(c) Extending the time for filing a
health of the enrollee or the enrollee’s
request. (1) General rule. If an enrollee
ability to regain maximum function.
shows good cause, the Part D plan
(ii) For a request made or supported
sponsor may extend the timeframe for
by a prescribing physician, the Part D
filing a request for redetermination.
plan sponsor must provide an expedited
(2) How to request an extension of
timeframe. If the 60-day period in which redetermination if the physician
indicates that applying the standard
to file a request for a redetermination
timeframe for conducting a
has expired, an enrollee may file a
redetermination may seriously
request for redetermination and
jeopardize the life or health of the
extension of time frame with the Part D

PO 00000

Frm 00374

Fmt 4701

Sfmt 4700

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
enrollee or the enrollee’s ability to
regain maximum function.
(d) Actions following denial of a
request. If a Part D plan sponsor denies
a request for expedited redetermination,
it must take the following actions:
(1) Make the determination within the
7-day timeframe established in
§ 423.590(a). The 7-day period begins
the day the Part D plan sponsor receives
the request for expedited
redetermination.
(2) Give the enrollee prompt oral
notice of the denial that—
(i) Explains that the Part D plan
sponsor processes the enrollee’s request
using the 7-day timeframe for standard
redetermination;
(ii) Informs the enrollee of the right to
file an expedited grievance if he or she
disagrees with the decision by the Part
D plan sponsor not to expedite;
(iii) Informs the enrollee of the right
to resubmit a request for an expedited
redetermination with the prescribing
physician’s support; and
(iv) Provides instructions about the
expedited grievance process and its
timeframes.
(3) Subsequently deliver, within three
calendar days, equivalent written
notice.
(e) Action following acceptance of a
request. If a Part D plan sponsor grants
a request for expedited redetermination,
it must conduct the redetermination and
give notice in accordance with
§ 423.590(d).
§ 423.586 Opportunity to submit evidence.

The Part D plan sponsor must provide
the enrollee or the prescribing
physician, 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 of the
conditions for submitting the evidence.
§ 423.590 Timeframes and responsibility
for making redeterminations.

(a) Standard redetermination—
request for covered drug benefits. (1) If
the Part D plan sponsor makes a
redetermination that is completely
favorable to the enrollee, the Part D plan
sponsor must notify the enrollee in
writing of its redetermination (and
effectuate it in accordance with
§ 423.636(a)(1)) as expeditiously as the
enrollee’s health condition requires, but
no later than 7 calendar days from the
date it receives the request for a
standard redetermination.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(2) If the Part D plan sponsor makes
a redetermination that affirms, in whole
or in part, its adverse coverage
determination, it must notify the
enrollee in writing of its
redetermination as expeditiously as the
enrollee’s health condition requires, but
no later than 7 calendar days from the
date it receives the request for a
standard redetermination.
(b) Standard redetermination—
request for payment. (1) If the Part D
plan sponsor makes a redetermination
that is completely favorable to the
enrollee, the Part D plan sponsor must
issue its redetermination (and effectuate
it in accordance with § 423.636(a)(2)) no
later than 7 calendar days from the date
it receives the request for
redetermination.
(2) If the Part D plan sponsor affirms,
in whole or in part, its adverse coverage
determination, it must notify the
enrollee in writing of its
redetermination no later than 7 calendar
days from the date it receives the
request for redetermination.
(c) Effect of failure to meet timeframe
for standard redeterminations. If the
Part D plan sponsor fails to provide the
enrollee with a redetermination within
the timeframes specified in paragraphs
(a) or (b) 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.
(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 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.
(2) How the Part D plan sponsor must
request additional information. If the
Part D plan sponsor must receive
medical information, the Part D plan
sponsor must request the necessary
information within 24 hours of the
initial request for an expedited
redetermination. Regardless of whether
the Part D plan sponsor requests
additional information, the Part D plan
sponsor is responsible for meeting the
timeframe and notice requirements.
(e) Failure to meet timeframe for
expedited redetermination. If the Part D
plan sponsor fails to provide the
enrollee or the prescribing physician, as
appropriate, with the results of its
expedited redetermination within the
timeframe described in paragraph (d) of
this section, the failure constitutes an

PO 00000

Frm 00375

Fmt 4701

Sfmt 4700

4567

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) Who must conduct the review of an
adverse coverage determination. (1) A
person or persons who were not
involved in making the coverage
determination must conduct the
redetermination.
(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.
(g) Form and content of an adverse
redetermination notice. The notice of
any adverse determination under
paragraphs (a)(2) or (b)(2) of this section
must—
(1) Use approved notice language in a
readable and understandable form;
(2) State the specific reasons for the
denial;
(3) Inform the enrollee of his or her
right to a reconsideration;
(i) For adverse drug coverage
redeterminations, describe both the
standard and expedited reconsideration
processes, including the enrollee’s right
to, and conditions for, obtaining an
expedited reconsideration and the rest
of the appeals process;
(ii) For adverse payment
redeterminations, describe the standard
reconsideration process and the rest of
the appeals process; and
(4) Comply with any other notice
requirements specified by CMS.
§ 423.600 Reconsideration by an
independent review entity (IRE).

(a) An enrollee who is dissatisfied
with the redetermination of a Part D
plan sponsor has a right to a
reconsideration by an independent
review entity that contracts with CMS.
An enrollee must file a written request
for reconsideration with the IRE within
60 days of the date of the
redetermination by the Part D plan
sponsor.
(b) When an enrollee files an appeal,
the IRE is required to solicit the views
of the prescribing physician. The IRE
may solicit the views of the prescribing
physician orally or in writing. A written
account of the prescribing physician’s
views (prepared by either the
prescribing physician or IRE, as

E:\FR\FM\28JAR2.SGM

28JAR2

4568

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

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 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.
(d) The independent review entity
must conduct the reconsideration as
expeditiously as the enrollee’s health
condition requires but must not exceed
the deadlines applicable in § 423.590,
including those deadlines that are
applicable when a request for an
expedited reconsideration is received
and granted.
(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
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.
§ 423.602 Notice of reconsideration
determination by the independent review
entity.

(a) Responsibility for the notice. When
the IRE makes its reconsideration
determination, it is responsible for
mailing a notice of its determination to
the enrollee and the Part D plan
sponsor, and for sending a copy to CMS.
(b) Content of the notice. The notice
must—
(1) State the specific reasons for the
IRE’s decision in understandable
language;
(2) If the reconsideration
determination is adverse (that is, does
not completely reverse the adverse
coverage determination by the Part D
plan sponsor), inform the enrollee of his
or her right to an ALJ hearing if the
amount in controversy meets the
threshold requirement under § 423.610;
(3) Describe the procedures that must
be followed to obtain an ALJ hearing;
and
(4) Comply with any other
requirements specified by CMS.
§ 423.604 Effect of a reconsideration
determination.

A reconsideration determination is
final and binding on the enrollee and

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

the Part D plan sponsor, unless the
enrollee files a request for a hearing
under the provisions of § 423.612.
§ 423.610 Right to an ALJ hearing.

(a) If the amount remaining in
controversy after the IRE
reconsideration meets the threshold
requirement established annually by the
Secretary, an enrollee who is
dissatisfied with the IRE reconsideration
determination has a right to a hearing
before an ALJ.
(b) If the basis for the appeal is the
refusal by the Part D plan sponsor to
provide drug benefits, CMS uses the
projected value of those benefits to
compute the amount remaining in
controversy. The projected value of a
Part D drug or drugs shall include any
costs the enrollee could incur based on
the number of refills prescribed for the
drug(s) in dispute during the plan year.
(c) Aggregating appeals to meet the
amount in controversy. (1) Enrollee.
Two or more appeals may be aggregated
by an enrollee to meet the amount in
controversy for an ALJ hearing if—
(i) The appeals have previously been
reconsidered by an IRE;
(ii) The request for ALJ hearing lists
all of the appeals to be aggregated and
each aggregated appeal meets the filing
requirement specified in § 423.612(b);
and
(iii) The ALJ determines that the
appeals the enrollee seeks to aggregate
involve the delivery of prescription
drugs to a single enrollee.
(2) Multiple enrollees. Two or more
appeals may be aggregated by multiple
enrollees to meet the amount in
controversy for an ALJ hearing if—
The appeals have previously been
reconsidered by an IRE;
The request for ALJ hearing lists all of
the appeals to be aggregated and each
aggregated appeal meets the filing
requirement specified in § 423.612(b);
and
The ALJ determines that the appeals
the enrollees seek to aggregate involve
the same prescription drug.
§ 423.612 Request for an ALJ hearing.

(a) How and where to file a request.
The enrollee must file a written request
for a hearing with the entity specified in
the IRE’s reconsideration notice.
(b) When to file a request. Except
when an ALJ extends the timeframe as
provided in part 422, subpart M of this
chapter, the enrollee must file a request
for a hearing within 60 days of the date
of the notice of an IRE reconsideration
determination. The time and place for a
hearing before an ALJ will be set in
accordance with § 405.1020 of this
chapter.

PO 00000

Frm 00376

Fmt 4701

Sfmt 4700

(c) Insufficient amount in controversy.
(1) If a request for a hearing clearly
shows that the amount in controversy is
less than that required under § 423.610,
the ALJ dismisses the request.
(2) If, after a hearing is initiated, the
ALJ finds that the amount in
controversy is less than the amount
required under § 423.610, the ALJ
discontinues the hearing and does not
rule on the substantive issues raised in
the appeal.
§ 423.620 Medicare Appeals Council (MAC)
review.

An enrollee who is dissatisfied with
an ALJ hearing decision may request
that the MAC review the ALJ’s decision
or dismissal. The regulations under part
422, subpart M of this chapter regarding
MAC review apply to matters addressed
by this subpart, to the extent applicable.
§ 423.630 Judicial review.

(a) Review of ALJ’s decision. The
enrollee may request judicial review of
an ALJ’s decision if—
(1) The MAC denied the enrollee’s
request for review; and
(2) The amount in controversy meets
the threshold requirement established
annually by the Secretary.
(b) Review of MAC decision. The
enrollee may request judicial review of
the MAC decision if it is the final
decision of CMS and the amount in
controversy meets the threshold
established in paragraph (a)(2) of this
section.
(c) How to request judicial review. In
order to request judicial review, an
enrollee must file a civil action in a
district court of the United States in
accordance with section 205(g) of the
Act. (See part 422, subpart M of this
chapter, for a description of the
procedures to follow in requesting
judicial review.)
§ 423.634 Reopening and revising
determinations and decisions.

(a) A coverage determination or
redetermination made by a Part D plan
sponsor, a reconsideration made by the
independent review entity specified in
§ 423.600, or the decision of an ALJ or
the MAC that is otherwise final and
binding may be reopened and revised by
the entity that made the determination
or decision, under the rules in part 422,
subpart M of this chapter.
(b) The filing of a request for
reopening does not relieve the Part D
plan sponsor of its obligation to make
payment or provide benefits as specified
in § 423.636 or § 423.638.
(c) Once an entity issues a revised
determination or decision, the revisions
made by the decision may be appealed.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
(d) A decision not to reopen by the
Part D plan sponsor or any other entity
is not subject to review.
§ 423.636 How a Part D plan sponsor must
effectuate standard redeterminations,
reconsiderations, or decisions.

(a) Reversals by the Part D plan
sponsor. (1) Requests for benefits. If, on
redetermination of a request for benefit,
the Part D plan sponsor reverses its
coverage determination, the Part D plan
sponsor must authorize or provide the
benefit under dispute as expeditiously
as the enrollee’s health condition
requires, but no later than 7 calendar
days from the date it receives the
request for redetermination.
(2) Requests for payment. If, on
redetermination of a request for
payment, the Part D plan sponsor
reverses its coverage determination, the
Part D plan sponsor must authorize
payment for the benefit within 7
calendar days from the date it receives
the request for redetermination, and
make payment no later than 30 calendar
days after the date the plan sponsor
receives the request for redetermination.
(b) Reversals other than by the Part D
plan sponsor. (1) Requests for benefits.
If, on appeal of a request for benefit, the
determination by the Part D plan
sponsor is reversed in whole or in part
by the independent review entity, or at
a higher level of appeal, the Part D plan
sponsor must authorize or provide the
benefit under dispute within 72 hours
from the date it receives notice reversing
the determination. The Part D plan
sponsor must inform the independent
review entity that the Part D plan
sponsor has effectuated the decision.
(2) Requests for payment. If, on appeal
of a request for payment, the
determination by the Part D plan
sponsor is reversed in whole or in part
by the independent review entity, or at
a higher level of appeal, the Part D plan
sponsor must authorize payment for the
benefit within 72 hours, but make
payment no later than 30 calendar days
from the date it receives notice reversing
the coverage determination. The Part D
plan sponsor must inform the
independent review entity that the Part
D plan sponsor has effectuated the
decision.
§ 423.638 How a Part D plan sponsor must
effectuate expedited redeterminations or
reconsiderations.

(a) Reversals by the Part D plan
sponsor. If, on an expedited
redetermination of a request for benefits,
the Part D plan sponsor reverses its
coverage determination, the Part D plan
sponsor must authorize or provide the
benefit under dispute as expeditiously

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

as the enrollee’s health condition
requires, but no later than 72 hours after
the date the Part D plan sponsor
receives the request for redetermination.
(b) Reversals other than by the Part D
plan sponsor. If the expedited
determination or expedited
redetermination for benefits by the Part
D plan sponsor is reversed in whole or
in part by the independent review
entity, or at a higher level of appeal, the
Part D plan sponsor must authorize or
provide the benefit under dispute as
expeditiously as the enrollee’s health
condition requires but no later than 24
hours from the date it receives notice
reversing the determination. The Part D
plan sponsor must inform the
independent review entity that the Part
D plan sponsor has effectuated the
decision.
Subpart N—Medicare Contract
Determinations and Appeals
§ 423.641 Contract determinations.

This subpart establishes the
procedures for reviewing the following
contract determinations:
(a) A determination that an entity is
not qualified to enter into a contract
with CMS under Part D of title XVIII of
the Act.
(b) A determination not to authorize
a renewal of a contract with a PDP
sponsor in accordance with
§ 423.507(b).
(c) A determination to terminate a
contract with a PDP sponsor in
accordance with § 423.509.
(d) Fallback entities are governed
under subpart Q of this part, and are not
subject to this subpart, except to the
extent a fallback prescription drug plan
contract is terminated by CMS.
§ 423.642 Notice of contract determination.

(a) When CMS makes a contract
determination under § 423.641, it gives
the PDP sponsor written notice.
(b) The notice specifies the—
(1) Reasons for the determination; and
(2) PDP sponsor’s right to request
reconsideration.
(c) For CMS-initiated terminations,
CMS mails notice 90 days before the
anticipated effective date of the
termination. For terminations based on
initial determinations described at
§ 423.509(a)(4) or (a)(5), CMS
immediately notifies the PDP sponsor of
its decision to terminate the
organization’s PDP contract.
(d) When CMS determines that it is
not going to authorize a contract
renewal, CMS mails the notice to the
PDP sponsor by May 1 of the current
contract year.

PO 00000

Frm 00377

Fmt 4701

Sfmt 4700

4569

§ 423.643 Effect of contract determination.

The contract determination is final
and binding unless—
(a) The determination is reconsidered
in accordance with § 423.644 through
§ 423.649;
(b) A timely request for a hearing is
filed under § 423.651; or
(c) The reconsideration decision is
revised as a result of a reopening under
§ 423.668.
§ 423.644 Reconsideration: Applicability.

(a) Reconsideration is the first step for
appealing a contract determination
specified in § 423.641.
(b) CMS reconsiders the specified
determinations if the contract applicant
or the PDP sponsor files a written
request in accordance with § 423.645.
§ 423.645 Request for reconsideration.

(a) Method and place for filing a
request. A request for reconsideration
must be made in writing and filed with
any CMS office.
(b) Time for filing a request. The
request for reconsideration must be filed
within 15 days from the date of the
notice of the initial determination.
(c) Proper party to file a request. Only
an authorized official of the contract
applicant or PDP sponsor that was the
subject of a contract determination may
file the request for reconsideration.
(d) Withdrawal of a request. The PDP
sponsor or contract applicant who filed
the request for a reconsideration may
withdraw it at any time before the
notice of the reconsidered
determination is mailed. The request for
withdrawal must be in writing and filed
with CMS.
§ 423.646 Opportunity to submit evidence.

CMS provides the PDP sponsor or
contract applicant and the CMS official
or officials who made the contract
determination reasonable opportunity,
not to exceed the timeframe in which a
PDP sponsor chooses to request a
hearing as described at § 423.651, to
present as evidence any documents or
written statements that are relevant and
material to the matters at issue.
§ 423.647 Reconsidered determination.

A reconsidered determination is a
new determination that—
(a) Is based on a review of the contract
determination, the evidence and
findings upon which that was based,
and any other written evidence
submitted before notice of the
reconsidered determination is mailed,
including facts relating to the status of
the PDP sponsor subsequent to the
contract determination; and
(b) Affirms, reverses, or modifies the
initial determination.

E:\FR\FM\28JAR2.SGM

28JAR2

4570

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

(c) Any favorable redetermination,
including those resulting from a hearing
or Administrator review, must be made
by July 15 for the contract in question
to be effective on January of the
following year.
§ 423.648 Notice of reconsidered
determination.

(a) CMS gives the PDP sponsor or
contract applicant written notice of the
reconsidered determination.
(b) The notice—
(1) Contains findings for the contract
applicant’s qualifications to enter into,
or the PDP sponsor’s qualifications to
remain under, a contract with CMS
under Part D of the Act;
(2) States the specific reasons for the
reconsidered determination; and
(3) Informs the PDP sponsor or
contract applicant of its right to a
hearing if it is dissatisfied with the
determination.
§ 423.649 Effect of reconsidered
determination.

A reconsidered determination is final
and binding unless a request for a
hearing is filed in accordance with
§ 423.651 or it is revised in accordance
with § 423.668.
§ 423.650 Right to a hearing.

The following parties are entitled to a
hearing:
(a) A contract applicant that is
determined in a reconsidered
determination to be unqualified to enter
into a contract with CMS under Part D
of title XVIII of the Act.
(b) A PDP sponsor whose contract
with CMS is terminated or is not
renewed as a result of a contract
determination as provided in § 423.641.
§ 423.651 Request for hearing.

(a) Method and place for filing a
request. A request for a hearing must be
made in writing and filed by an
authorized official of the contract
applicant or PDP sponsor that was the
party to the determination under appeal.
The request for a hearing must be filed
with any CMS office.
(b) Time for filing a request. A request
for a hearing must be filed within 15
days after the date of the reconsidered
determination.
(c) Parties to a hearing. The parties to
a hearing must be—
(1) The parties described in § 423.650;
(2) At the discretion of the hearing
officer, any interested parties who make
a showing that their rights may be
prejudiced by the decision to be
rendered at the hearing; and
(3) CMS.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

§ 423.652 Postponement of effective date
of a contract determination when a request
for a hearing for a contract determination is
filed timely.

(a) CMS postpones the proposed
effective date of the contract
determination to terminate a contract
with a PDP sponsor until a hearing
decision is reached and affirmed by the
Administrator following review under
§ 423.666 in instances where a PDP
sponsor requests review by the
Administrator; and
(b) CMS extends the current contract
at the end of the contract period (in the
case of a determination not to renew)
only—
(1) If CMS finds that an extension of
the contract is consistent with the
purpose of this part; and
(2) For the period as CMS and the
PDP sponsor agree.
(c) Exception: A contract terminated
in accordance with § 423.509(a)(4) or
(a)(5) is immediately terminated and is
not postponed if a hearing is requested.
§ 423.653 Designation of hearing officer.

CMS designates a hearing officer to
conduct the hearing. The hearing officer
need not be an ALJ.
§ 423.654 Disqualification of hearing
officer.

(a) A hearing officer may not conduct
a hearing in a case in which he or she
is prejudiced or partial to any party or
has any interest in the matter pending
for decision.
(b) A party to the hearing who objects
to the designated hearing officer must
notify that officer in writing at the
earliest opportunity.
(c) The hearing officer must consider
the objections, and may, at his or her
discretion, either proceed with the
hearing or withdraw.
(1) If the hearing officer withdraws,
CMS designates another hearing officer
to conduct the hearing.
(2) If the hearing officer does not
withdraw, the objecting party may, after
the hearing, present objections and
request that the officer’s decision be
revised or a new hearing be held before
another hearing officer. The objections
must be submitted in writing to CMS.
§ 423.655 Time and place of hearing.

(a) The hearing officer fixes a time
and place for the hearing, which is not
to exceed 30 days from the receipt of the
request for the hearing, and sends
written notice to the parties. The notice
also informs the parties of the general
and specific issues to be resolved and
information about the hearing
procedure.
(b) The hearing officer may, on his or
her own motion, or at the request of a

PO 00000

Frm 00378

Fmt 4701

Sfmt 4700

party, change the time and place for the
hearing. The hearing officer may
adjourn or postpone the hearing.
(c) The hearing officer gives the
parties reasonable notice of any change
in time or place of hearing, or of
adjournment or postponement.
§ 423.656 Appointment of representatives.

A party may appoint as its
representative at the hearing anyone not
disqualified or suspended from acting as
a representative before the Secretary or
otherwise prohibited by law.
§ 423.657 Authority of representatives.

(a) A representative appointed and
qualified in accordance with § 423.656,
on behalf of the represented party—
(1) Gives or accepts any notice or
request pertinent to the proceedings set
forth in this subpart;
(2) Presents evidence and allegations
as to facts and law in any proceedings
affecting that party; and
(3) Obtains information to the same
extent as the party.
(b) A notice or request sent to the
representative has the same force and
effect as if it is sent to the party.
§ 423.658 Conduct of hearing.

(a) The hearing is open to the parties
and to the public.
(b) The hearing officer inquires fully
into all the matters at issue and receives
in evidence the testimony of witnesses
and any documents that are relevant
and material.
(c) The hearing officer provides the
parties an opportunity to enter any
objection to the inclusion of any
document.
(d) The hearing officer decides the
order in which the evidence and the
arguments of the parties are presented
and the conduct of the hearing.
§ 423.659

Evidence.

The hearing officer rules on the
admissibility of evidence and may
admit evidence that is inadmissible
under rules applicable to court
procedures.
§ 423.660

Witnesses.

(a) The hearing officer may examine
the witnesses.
(b) The parties or their representatives
are permitted to examine their witnesses
and cross-examine witnesses of other
parties.
§ 423.661

Discovery.

(a) Prehearing discovery is permitted
upon timely request of a party.
(b) A request is timely if it is made
before the beginning of the hearing.
(c) A reasonable time for inspection
and reproduction of documents is
provided by order of the hearing officer.

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
(d) The hearing officer’s order on all
discovery matters is final.

§ 423.668 Reopening of contract or
reconsidered determination or decision of a
hearing officer or the Administrator.

§ 423.662

(a) Initial or reconsidered
determination. CMS may reopen and
revise an initial or reconsidered
determination upon its own motion
within 1 year of the date of the notice
of determination.
(b) Decision of hearing officer. A
decision of a hearing officer that is
unfavorable to any party and is
otherwise final may be reopened and
revised by the hearing officer upon the
officer’s own motion within 1 year of
the notice of the hearing decision.
Another hearing officer designated by
CMS may reopen and revise the
decision if the hearing officer who
issued the decision is unavailable.
(c) Decision of Administrator. A
decision by the Administrator that is
otherwise final may be reopened and
revised by the Administrator upon the
Administrator’s own motion within 1
year of the notice of the Administrator’s
decision.
(d) Notices. (1) The notice of
reopening and of any revisions
following the reopening is mailed to the
parties.
(2) The notice of revision specifies the
reasons for revisions.

Prehearing.

The hearing officer may schedule a
prehearing conference if he or she
believes that a conference may more
clearly define the issues.
§ 423.663 Record of hearing.

(a) A complete record of the
proceedings at the hearing is made and
transcribed and made available to all
parties upon request.
(b) The record may not be closed until
a hearing decision is issued.
§ 423.664 Authority of hearing officer.

In exercising his or her authority, the
hearing officer must comply with the
provisions of title XVIII and related
provisions of the Act, the regulations
issued by the Secretary, and general
instructions issued by CMS in
implementing the Act.
§ 423.665 Notice and effect of hearing
decision.

(a) As soon as practical after the close
of the hearing, the hearing officer issues
a written decision that—
(1) Is based upon the evidence of
record; and
(2) Contains separately numbered
findings of fact and conclusions of law.
(b) The hearing officer provides a
copy of the hearing decision to each
party.
(c) The hearing decision is final and
binding unless it is reversed or modified
by the Administrator following review
under § 423.666, or reopened and
revised in accordance with § 423.668.

§ 423.669 Effect of revised determination.

The revision of a contract or
reconsidered determination is binding
unless a party files a written request for
hearing of the revised determination in
accordance with § 423.651.
Subpart O—Intermediate Sanctions

§ 423.666 Review by the Administrator.

§ 423.750 Kinds of sanctions.

(a) Request for review by the
Administrator. A PDP sponsor that
receives a hearing decision upholding a
contract termination determination may
request review by the Administrator
within 15 days of receiving the hearing
decision as provided under § 423.665(b).
(b) Review by the Administrator. The
Administrator must review the hearing
officer’s decision, and determine, based
upon this decision, the hearing record,
and any written arguments submitted by
the PDP sponsor, whether the
termination decision must be upheld,
reversed, or modified.
(c) Decision by the Administrator. The
Administrator issues a written decision,
and furnishes the decision to the PDP
sponsor requesting review.

(a) The following intermediate
sanctions and civil money penalties
may be imposed:
(1) Civil money penalties ranging
from $10,000 to $100,000 depending
upon the violation.
(2) Suspension of enrollment of
Medicare beneficiaries.
(3) Suspension of payment to the Part
D sponsor for Medicare beneficiaries
who enroll.
(4) Suspension of all Part D plan
marketing activities to Medicare
beneficiaries for the Part D plan subject
to the intermediate sanctions.
(b) The enrollment, payment, and
marketing sanctions continue in effect
until CMS is satisfied that the
deficiency on which the determination
was based is corrected and is not likely
to recur.

§ 423.667 Effect of Administrator’s
decision.

A decision by the Administrator
under section § 423.666(c) is final and
binding unless it is reopened and
revised in accordance with § 423.668.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

§ 423.752 Basis for imposing sanctions.

(a) All intermediate sanctions. For the
violations listed below, we may impose
one, or more, of the sanctions specified

PO 00000

Frm 00379

Fmt 4701

Sfmt 4700

4571

in § 423.750(a)(2), (a)(3) or (a)(4) on any
Part D sponsor that has a contract in
effect. The Part D sponsor may also be
subject to other applicable remedies
available under law.
(1) Fails substantially to provide, to a
Part D plan enrollee, medically
necessary services that the organization
is required to provide (under law or
under the contract) to a Part D plan
enrollee, and that failure adversely
affects (or is substantially likely to
adversely affect) the enrollee.
(2) Imposes on Part D plan enrollees
premiums in excess of the monthly
basic and supplemental beneficiary
premiums permitted under section
1860D–1 et seq. of the Act and subpart
F of this part.
(3) Acts to expel or refuses to reenroll
a beneficiary in violation of the
provisions of this part.
(4) Engages in any practice that may
reasonably be expected to have the
effect of denying or discouraging
enrollment of individuals whose
medical condition or history indicates a
need for substantial future medical
services.
(5) Misrepresents or falsifies
information that it furnishes—
(i) To CMS; or
(ii) To an individual or to any other
entity under the Part D drug benefit
program.
(6) Employs or contracts with an
individual or entity who is excluded
from participation in Medicare under
section 1128 or 1128A of the Act (or
with an entity that employs or contracts
with an excluded individual or entity)
for the provision of any of the following:
(i) Health care.
(ii) Utilization review.
(iii) Medical social work.
(iv) Administrative services.
(b) Suspension of enrollment and
marketing. If CMS makes a
determination that could lead to a
contract termination under § 423.509(a),
CMS may instead impose the
intermediate sanctions in § 423.750(a)(2)
and (a)(4).
§ 423.756 Procedures for imposing
sanctions.

(a) Notice of sanction and opportunity
to respond.
(1) Notice of sanction. Before
imposing the intermediate sanctions
specified in paragraph (c) of this
section, CMS—
(i) Sends a written notice to the Part
D sponsor stating the nature and basis
of the proposed sanction; and
(ii)Sends the Office of the Inspector
General a copy of the notice.
(2) Opportunity to respond. CMS
allows the Part D sponsor 15 days from

E:\FR\FM\28JAR2.SGM

28JAR2

4572

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

receipt of the notice to provide evidence
that it has not committed an act or failed
to comply with the requirements
described in § 423.752, as applicable.
CMS may allow a 15-day addition to the
original 15 days upon receipt of a
written request from the Part D sponsor.
To be approved, the request must
provide a credible explanation of why
additional time is necessary and be
received by CMS before the end of the
15-day period following the date of
receipt of the sanction notice. CMS does
not grant an extension if it determines
that the Part D sponsor’s conduct poses
a threat to an enrollee’s health and
safety.
(b) Informal reconsideration. If,
consistent with paragraph (a)(2) of this
section, the Part D sponsor submits a
timely response to CMS’ notice of
sanction, CMS conducts an informal
reconsideration that—
(1) Consists of a review of the
evidence by an CMS official who did
not participate in the initial decision to
impose a sanction; and
(2) Gives the Part D sponsor a concise
written decision setting forth the factual
and legal basis for the decision that
affirms or rescinds the original
determination.
(c) Specific sanctions. If CMS
determines that a Part D sponsor has
acted or failed to act as specified in
§ 423.752 and affirms this determination
in accordance with paragraph (b) of this
section, CMS may—
(1) Require the Part D sponsor to
suspend acceptance of applications
made by Medicare beneficiaries for
enrollment in the sanctioned plan
during the sanction period;
(2) In the case of a violation under
§ 423.752(a), suspend payments to the
Part D sponsor for Medicare
beneficiaries enrolled in the sanctioned
plan during the sanction period; and
(3) Require the Part D sponsor to
suspend all marketing activities for the
sanctioned plan to Medicare enrollees.
(d) Effective date and duration of
sanctions. (1) Effective date. Except as
provided in paragraph (d)(2) of this
section, a sanction is effective 15 days
after the date that the organization is
notified of the decision to impose the
sanction or, if the Part D sponsor seeks
reconsideration in a timely manner
under paragraph (b) of this section, on
the date specified in the notice of CMS’
reconsidered determination.
(2) Exception. If CMS determines that
the Part D sponsor’s conduct poses a
serious threat to an enrollee’s health and
safety, CMS may make the sanction
effective on a date before issuance of
CMS’ reconsidered determination.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(3) Duration of sanction. The sanction
remains in effect until CMS notifies the
Part D sponsor that CMS is satisfied that
the basis for imposing the sanction is
corrected and is not likely to recur.
(e) Termination by CMS. In addition
to or as an alternative to the sanctions
described in paragraph (c) of this
section, CMS may decline to authorize
the renewal of an organization’s contract
in accordance with § 423.507(b)(2) and
(b)(3), or terminate the contract in
accordance with § 423.509.
(f) Civil money penalties. (1) If CMS
determines that a Part D sponsor has
committed an act or failed to comply
with a requirement described in
§ 423.752, CMS notifies the OIG of this
determination, and also notifies OIG
when CMS reverses or terminates a
sanction imposed under this part.
(2) In the case of a violation described
in § 423.752(a), or a determination
under § 423.752(b) based upon a
violation under § 423.509(a)(4)
(involving fraudulent or abusive
activities), in accordance with the
provisions of part 1003 of this chapter,
the OIG may impose civil money
penalties on the Part D sponsor in
accordance with part 1003 of this
chapter in addition to, or in place of, the
sanctions that CMS may impose under
paragraph (c) of this section.
(3) In the case of a determination
under § 423.752(b) other than a
determination based upon a violation
under § 423.509(a)(4), CMS may impose
civil money penalties on the Part D
sponsor in the amounts specified in
§ 423.758 in addition to, or in place of,
the sanctions that CMS may impose
under paragraph (c) of this section.
§ 423.758 Maximum amount of civil money
penalties imposed by CMS.

If CMS makes a determination under
§ 423.509(a), as described in
§ 423.752(b), excepting those
determinations under § 423.509(a)(4),
CMS may impose civil money penalties,
in addition to, or in place of, the
sanctions that CMS may impose under
§ 423.756(c), in the following amounts:
(a) 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 plan enrollees—up to
$25,000 for each determination.
(b)For each week that a deficiency
remains uncorrected after the week in
which the Part D sponsor receives CMS’
notice of the determination—up to
$10,000 per week.
(c)If CMS makes a determination that
a Part D sponsor has terminated its
contract with CMS other than in a
manner described in § 423.510 and that

PO 00000

Frm 00380

Fmt 4701

Sfmt 4700

the sponsor has therefore failed to
substantially carry of the terms of the
contract, $250 per Medicare enrollee
from the terminated Part D plan or plans
at the time the Part D sponsor
terminated its contract, or $100,000,
whichever is greater.
§ 423.760 Other applicable provisions.

The provisions of section 1128A of
the Act (except paragraphs (a) and (b))
apply to civil money penalties under
this subpart to the same extent that they
apply to a civil money penalty or
procedure under section 1128A of the
Act.
Subpart P—Premiums and CostSharing Subsidies for Low-Income
Individuals
§ 423.771 Basis and scope.

(a) Basis. This subpart is based on
section 1860D–14 of the Act.
(b) Scope. This subpart sets forth the
requirements and limitations for
payments by and on behalf of lowincome Medicare beneficiaries who
enroll in a Part D plan.
§ 423.772

Definitions.

For purposes of this subpart, the
following definitions apply:
Applicant means the Part D eligible
individual applying for the subsidies
available to subsidy eligible individuals
under this subpart.
Family size means the applicant, the
spouse who is living in the same
household, if any and the number of
individuals who are related to the
applicant or applicants, who are living
in the same household and who are
dependent on the applicant or the
applicant’s spouse for at least one-half
of their financial support.
Federal poverty line (FPL) has the
meaning given that term in section
673(2) of the Community Services Block
Grant Act (42 USC 9902(2)), including
any revision required by that section.
Full-benefit dual eligible individual
means an individual who, for any
month—
(1) Has coverage for the month under
a prescription drug plan under Part D of
title XVIII, or under an MA-PD plan
under Part C of title XVIII; and
(2) Is determined eligible by the State
for medical assistance for full benefits
under title XIX for the month under any
eligibility category covered under the
State plan or comprehensive benefits
under a demonstration under section
1115 of the Act. (This does not include
individuals under Pharmacy Plus
program demonstrations or under a
section 1115 demonstration that
provides pharmacy-only benefits to

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
these individuals.). It also includes any
individual who is determined by the
State to be eligible for medical
assistance under section 1902(a)(10)(C)
of the Act (medically needy) or section
1902(f) of the Act (States that use more
restrictive eligibility criteria than are
used by the SSI program) of the Act for
any month if the individual was eligible
for medical assistance in any part of the
month.
Full subsidy means the subsidies
available to full subsidy eligible
individuals under § 423.780(a) and
§ 423.782(a).
Full subsidy eligible individuals
means individuals meeting the
eligibility requirements under
§ 423.773(b).
Income means income as described
under section 1905(p)(1) of the Act
without use of any more liberal
disregards under section 1902(r)(2) of
the Act (that is, as defined by section
1612 of the Act). This definition
includes the income of the applicant
and spouse who is living in the same
household, if any, regardless of whether
the spouse is also an applicant.
Institutionalized individual means a
full-benefit dual eligible individual who
is an inpatient in a medical institution
or nursing facility for which payment is
made under Medicaid throughout a
month, as defined under section
1902(q)(1)(B) of the Act.
Other subsidy eligible individuals
means those individuals meeting the
eligibility requirements under
§ 423.773(d).
Personal representative for purposes
of this subpart means —
(1) An individual who is authorized
to act on behalf of the applicant;
(2) If the applicant is incapacitated; or
incompetent, someone acting
responsibly on their behalf, or
(3)An individual of the applicant’s
choice who is requested by the
applicant to act as his or her
representative in the application
process.
Resources means liquid resources of
the applicant (and, if married, his or her
spouse who is living in the same
household), such as checking and
savings accounts, stocks, bonds, and
other resources that can be readily
converted to cash within 20 days, that
are not excluded from resources in
section 1613 of the Act, and real estate
that is not the applicant’s primary
residence or the land on which the
primary residence is located.
State means for purposes of this
subpart each of the 50 States and the
District of Columbia.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

§ 423.773 Requirements for eligibility

(a) Subsidy eligible individual. A
subsidy eligible individual is a Part D
eligible individual residing in a State
who is enrolled in, or seeking to enroll
in a Part D plan and meets the following
requirements:
(1) Has income below 150 percent of
the FPL applicable to the individual’s
family size.
(2) Has resources at or below the
resource thresholds set forth in
§ 423.773(b)(2) or (d)(2).
(b) Full subsidy eligible individual. A
full subsidy eligible individual is a
subsidy eligible individual who—
(1) Has income below 135 percent of
the FPL applicable to the individual’s
family size; and
(2)Has resources that do not exceed—
(i) For 2006, 3 times the amount of
resources an individual may have and
still be eligible for benefits under the
Supplemental Security Income (SSI)
program under title XVI of the Act
(including the assets or resources of the
individual’s spouse).
(ii) For subsequent years, the amount
of resources allowable for the previous
year under this paragraph (b)(2)
increased by the annual percentage
increase in the consumer price index
(all items, U.S. city average) as of
September of that previous year,
rounded to the nearest multiple of $10.
The nearest multiple are rounded up if
it is equal to or greater than $5 and
down if it is less than $5.
(c)(1) Individuals treated as full
subsidy eligible. An individual must be
treated as meeting the eligibility
requirements for full subsidy eligible
individuals under paragraph (b) of this
section if the individual is a—
(i) Full-benefit dual eligible
individual;
(ii) Recipient of SSI benefits under
title XVI of the Act; or
(iii) Eligible for Medicaid as a
Qualified Medicare Beneficiary (QMB),
Specified Low Income Medicare
Beneficiary (SLMB), or a Qualifying
Individual (QI) under a State’s plan.
(2) CMS notifies an individual treated
as a full subsidy eligible under this
paragraph (c) of this section that he or
she does not need to apply for the
subsidies available under this subpart,
and is deemed eligible for a full subsidy
for a period up to one year.
(d) Other low-income subsidy
individuals. Other low-income subsidy
individuals are subsidy eligible
individuals who—
(1) Have income less than 150 percent
of the FPL applicable to the individual’s
family size; and
(2) Have resources that do not
exceed—

PO 00000

Frm 00381

Fmt 4701

Sfmt 4700

4573

(i) For 2006, $10,000 if single or
$20,000 if married (including the assets
or resources of the individual’s spouse).
(ii) For subsequent years, the resource
amount
allowable for the previous year under
this paragraph (d)(2), increased by the
annual percentage increase in the
consumer price index (all items, U.S.
city average) as of September of the
previous year, rounded to the nearest
multiple of $10. The nearest multiple
will be rounded up if it is equal to or
greater than $5 and down if it is less
than $5.
§ 423.774 Eligibility determinations,
redeterminations, and applications.

(a) Determinations of whether an
individual is a subsidy eligible
individual. Determinations of eligibility
for subsidies under this subpart are
made by the State under its State plan
under title XIX of the Act if the
individual applies with the Medicaid
agency, or if the individual applies with
the Social Security Administration
(SSA), the Commissioner of Social
Security in accordance with the
requirements of section 1860D–14(a)(3)
of the Act.
(b) Effective date of initial eligibility
determinations. Initial eligibility
determinations are effective beginning
with the first day of the month in which
the individual applies, but no earlier
than January 1, 2006 and remain in
effect for a period not to exceed 1 year.
(c) Redeterminations and appeals of
low-income subsidy eligibility.
(1) Redeterminations and appeals of
low-income subsidy eligibility
determinations—eligibility
determinations made by States.
Redeterminations and appeals of lowincome subsidy eligibility
determinations by States must be made
in the same manner and frequency as
the redeterminations and appeals are
made under the State’s plan.
(2) Redeterminations and appeals of
low-income subsidy eligibility—
eligibility determinations made by
Commissioner of Social Security.
Redeterminations and appeals of
eligibility determinations made by the
Commissioner will be made in the
manner specified by the Commissioner
of Social Security.
(d) Application requirements. (1) In
order for applications for the subsidies
under this subpart to be considered
complete, applicants or personal
representatives applying on the
individual’s behalf, must—
(i) Complete all required elements of
the application; (ii) Provide any
statements from financial institutions,

E:\FR\FM\28JAR2.SGM

28JAR2

4574

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

as requested, to support information in
the application; and
(iii) Certify, under penalty of perjury
or similar sanction for false statements,
as to the accuracy of the information
provided on the application form.
(2) Multiple applications. If the
individual or his or her personal
representative has previously filed an
application with the State or SSA which
seeks subsidy eligibility for any portion
of the eligibility period covered by a
subsequent application, the later
application is void if the individual has
received a positive subsidy
determination on that earlier
application from the State or SSA.
§ 423.780 Premium subsidy.

(a) Full subsidy eligible individuals.
Full subsidy eligible individuals are
entitled to a premium subsidy equal to
100 percent of the premium subsidy
amount.
(b) Premium subsidy amount.
(1) The premium subsidy amount is
equal to an amount which is the lesser
of:
(i) Under the Part D plan selected by
the beneficiary, the monthly beneficiary
premium for a Part D plan other than a
MA-PD plan that is basic prescription
drug coverage, the portion of the
monthly beneficiary premium
attributable to basic prescription drug
coverage for a Part D plan other than a
MA-PD plan that is enhanced
alternative coverage, or the MA monthly
prescription drug beneficiary premium
as defined under section 1854(b)(2)(B)
of the Act, or
(ii) The greater of the low-income
benchmark premium amount for a PDP
region as determined under paragraph
(b)(2) of this section or the lowest
monthly beneficiary premium for a
prescription drug plan that offers basic
prescription drug coverage in the PDP
region.
(2) Calculation of the low-income
benchmark premium amount. (i) The
low-income benchmark premium
amount for a PDP region is a weighted
average of the premium amounts
described in this paragraph (b)(2)(ii) of
this section , with the weight for each
PDP and MA-PD plan equal to a
percentage, the numerator being equal
to the number of Part D eligible
individuals enrolled in the plan in the
reference month (as defined in
§ 422.258(c)(1) of this chapter) and the
denominator equal to the total number
of Part D eligible individuals enrolled in
all PDP and MA-PD plans (but not
including PACE, private fee-for-service
plans or 1876 cost plans)in a PDP region
in the reference month.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(ii) Premium amounts: The premium
amounts used to calculate the lowincome benchmark premium amount
are as follows:
(A) The monthly beneficiary premium
for a PDP that is basic prescription drug
coverage;
(B) The portion of the monthly
beneficiary premium attributable to
basic prescription drug coverage for a
PDP that is enhanced alternative
coverage; or,
(C)The MA monthly prescription drug
beneficiary premium (as defined under
section 1854(b)(2)(B) of the Act) for a
MA-PD plan.
(c) Special rule for 2006 to weight the
low-income benchmark premium. For
purposes of calculating the low-income
benchmark premium amount for 2006,
CMS assigns equal weighting to PDP
sponsors (including fallback entities)
and assigns MA-PD plans a weight
based on prior enrollment. New MA-PD
plans are assigned a zero weight. PACE,
private fee-for-service plans and 1876
cost plans are not included.
(d) Other low-income subsidy eligible
individuals—sliding scale premium.
Other low-income subsidy eligible
individuals are entitled to a premium
subsidy based on a linear sliding scale
ranging from 100 percent of the
premium subsidy amount described in
paragraph (b) of this section as follows:
(1) For individuals with income at or
below 135 percent of the FPL applicable
to their family size, the full premium
subsidy amount.
(2) For individuals with income
greater than 135 percent but at or below
140 percent of the FPL applicable to the
family size, a premium subsidy equal to
75 percent of the premium subsidy
amount.
(3) For individual with income greater
than 140 percent but at or below 145
percent of the FPL applicable to the
family size a premium subsidy equal to
50 percent of the premium subsidy
amount.
(4) For individuals with income
greater than 145 percent but below 150
percent of FPL applicable to the family
size a premium subsidy equal to 25
percent of the premium subsidy
amount.
(e) Premium subsidy for late
enrollment penalty. Full subsidy eligible
individuals who are subject to late
enrollment penalties under § 423.46 are
entitled to an additional premium
subsidy equal to 80 percent of the late
enrollment penalty for the first 60
months during which the penalty is
imposed and 100 percent of their late
enrollment penalty thereafter.

PO 00000

Frm 00382

Fmt 4701

Sfmt 4700

§ 423.782 Cost-sharing subsidy.

(a) Full subsidy eligible individuals.
Full subsidy eligible individuals are
entitled to the following:
(1) Elimination of the annual
deductible under § 423.104(d)(1).
(2) Reduction in cost-sharing for all
covered Part D drugs covered under the
PDP or MA-PD plan below the out-of­
pocket limit (under § 423.104),
including Part D drugs covered under
the PDP or MA-PD plan obtained after
the initial coverage limit (under
§ 423.104(d)(4)), as follows:
(i) Except as provided under
paragraphs (a)(2)(ii) and (a)(2)(iii) of this
section, copayment amounts not to
exceed the copayment amounts
specified in § 423.104(d)(5)(A). This
applies to both:
(A) those full-benefit dual eligible
individuals who are not
institutionalized and who have income
above 100 percent of the Federal
poverty line applicable to the
individual’s family size and
(B) those individuals who have
income under 135 percent of the Federal
poverty line applicable to the
individual’s family size who meet the
resources test described at
§ 423.773(b)(2).
(ii) Full-benefit dual eligible
individuals who are institutionalized
have no cost-sharing for covered Part D
drugs covered under their PDP or MA­
PD plans.
(iii) Full-benefit dual eligible
individuals with incomes that do not
exceed 100 percent of the Federal
poverty line applicable to the
individual’s family size are subject to
cost-sharing for covered Part D drugs
equal to the lesser of:
(A) A copayment amount of not more
than $1 for a generic drug or preferred
drugs that are multiple source (as
defined under section 1927(k)(7)(A)(i) of
the Act) or $3 for any other drug in
2006, or for years after 2006 the
amounts specified in this paragraph
(a)(2)(iii)(A) for the percentage increase
in the Consumer Price Index, rounded
to the nearest multiple of 5 cents or 10
cents, respectively; or
(B) The copayment amount charged to
other individuals under this paragraph
(a)(2)(i) of this section.
(3) Elimination of all cost-sharing for
covered Part D drugs covered under the
PDP or MA-PD plan above the out-of­
pocket limit (under § 423.104(d)(5)).
(b) Other low-income subsidy eligible
individuals. Other low-income subsidy
eligible individuals are entitled to the
following:
(1) In 2006, reduction in the annual
deductible to $50. This amount is
increased each year beginning in 2007

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
by the annual percentage increase in
average per capita aggregate
expenditures for Part D drugs, rounded
to the nearest multiple of $1.
(2) Fifteen percent coinsurance for all
covered Part D drugs obtained after the
annual deductible under the plan up to
the out-of-pocket limit (under
§ 423.104(d)(5)(iii)).
(3) For covered Part D drugs above the
out-of-pocket limit (under
§ 423.104(d)(5)(iii)), in 2006,
copayments not to exceed $2 for a
generic drug or preferred drugs that are
multiple source drugs (as defined under
section 1927(k)(7)(A)(i) of the Act) and
$5 for any other drug. For years
beginning in 2007, the amounts
specified in section paragraph (b)(3) for
the previous year increased by the
annual percentage increase in average
per capita aggregate expenditures for
covered Part D drugs, rounded to the
nearest multiple of 5 cents.
§ 423.800 Administration of subsidy
program.

(a) Notification of eligibility for lowincome subsidy. CMS notifies the Part D
sponsor offering the Part D plan, in
which a subsidy eligible individual is
enrolled, of the individual’s eligibility
for a subsidy under this section and the
amount of the subsidy.
(b) Reduction of premium or costsharing by PDP sponsor or organization.
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.
(c) Reimbursement for cost-sharing
paid before notification of eligibility for
low-income subsidy. The Part D sponsor
offering the Part D plan must reimburse
subsidy eligible individuals, and
organizations paying cost-sharing on
behalf of such individuals, any excess
premiums and cost-sharing paid by such
individual or organization after the
effective date of the individual’s
eligibility for a subsidy under this
subpart.
Subpart Q—Guaranteeing Access to a
Choice of Coverage (Fallback
Prescription Drug Plans)
§ 423.851

Scope.

This subpart sets forth—the rights of
beneficiaries to a choice of at least two
sources of qualified prescription drug
coverage; requirements and limitations

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

on the bid submission, review and
approval of fallback prescription drug
plans, and the determination of enrollee
premium and plan payments for these
plans.
§ 423.855

Definitions.

As used in this subpart, unless
specified otherwiseActual costs means the subset of
prescription drug costs (not including
administrative costs or return on
investment, but including costs directly
related to the dispensing of covered Part
D drugs during the year) that are
attributable to standard benefits only
and that are incurred and actually paid
by the sponsor or organization under the
plan.
Actually paid has the same meaning
described in § 423.308.
Eligible fallback entity or fallback
entity means an entity that, for a
particular contract period­
(1) Is a PDP sponsor that does not
have to be a risk-bearing entity (or, if
applying to become a fallback entity, an
entity that meets all the requirements to
become a Part D plan sponsor except
that it does not have to be a risk-bearing
entity); and
(2) Does not submit a risk bid under
§ 423.265 for offering a prescription
drug plan for any PDP region for the
first year of that contract period. An
entity is treated as submitting a risk bid
if the entity is acting as a subcontractor
for an integral part of the drug benefit
management activities of an entity that
is or applies to become a non-fallback
PDP sponsor. An entity is not treated as
submitting a bid if it is a subcontractor
of an MA organization, unless that
organization is acting as or applies to
become a non-fallback PDP sponsor for
a prescription drug plan.
Fallback prescription drug plan
means a prescription drug plan (PDP)
offered by a fallback entity that-­
(1) Offers only defined standard or
actuarially equivalent standard
prescription drug coverage as defined in
§ 423.100;
(2) Provides access to negotiated
prices, including discounts from
manufacturers; and
(3) Meets all other requirements
established for prescription drug plans,
except as otherwise specified by CMS in
this subpart or in separate guidance.
Qualifying plan means a full-risk or
limited-risk prescription drug plan, as
defined in § 423.258, or an MA-PD plan
described in section 1851(a)(2)(A)(i) of
the Act, that provides required
prescription drug coverage, as defined
in § 423.100 An MA-PD plan must be
open for enrollment and not operating
under a capacity waiver to be counted

PO 00000

Frm 00383

Fmt 4701

Sfmt 4700

4575

as a qualifying plan. A PDP must not be
operating under a restricted enrollment
waiver, such as those that may be
granted to special needs plans or
employer group plans, in order to be
counted as a qualifying plan in an area.
§ 423.859 Assuring access to a choice of
coverage.

(a) Choice of at least 2 qualifying
plans in each area. Each Part D eligible
individual must have available a choice
of enrollment in at least 2 qualifying
plans (as defined in § 423.855) in the
area in which the individual resides.
This requirement is not satisfied if only
one entity offers all the qualifying plans
in the area. At least 1 of the 2 qualifying
plans must be a prescription drug plan.
(b) Fallback service area. (1) For
coverage year. Before the start of each
coverage year CMS determines if Part D
eligible individuals residing in a PDP
region have access to a choice of
enrollment in a minimum of 2
qualifying plans, as described in
paragraph (a) of this section. If CMS
determines that Part D eligible
individuals in a PDP region, or some
portion of the region, do not have
available a choice of enrollment in a
minimum of two qualified plans, CMS
designates the region or portion of a
region as a fallback service area. Each
Part D eligible individual in a fallback
service area is given the opportunity to
enroll in a fallback prescription drug
plan.
(2) For mid-year changes. If a contract
with a qualifying plan is terminated in
the middle of a contract year (as
provided for in § 423.508, § 423.509, or
§ 423.510), CMS determines if Part D
eligible individuals residing in the
affected PDP region still have access to
a choice of enrollment in a minimum of
2 qualifying plans, as described in
paragraph (a) of this section. If CMS
determines that Part D eligible
individuals in a PDP region, or some
portion of the region, no longer have
available a choice of enrollment in a
minimum of two qualifying plans, CMS
designates the region or portion of a
region as a fallback service area.
(c) Access to coverage in the
territories. CMS may waive or modify
the requirements of this part if-­
(1) CMS determines that waiver or
modification is necessary to secure
access to qualified prescription drug
coverage for Part D eligible individuals
residing in a State other than the 50
States or the District of Columbia; or
(2) An entity seeking to become a
prescription drug plan in an area such
as a territory, other than the 50 States
or the District of Columbia requests
waiver or modification of any Part D

E:\FR\FM\28JAR2.SGM

28JAR2

4576

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

requirement in order to provide
qualified prescription drug coverage.
§ 423.863 Submission and approval of
bids.

(a) Submission of Bids. (1) Solicitation
of bids. Separate from the risk bidding
process under § 423.265, CMS solicits
bids from eligible fallback entities for
the offering in all fallback service areas
in one or more PDP regions of a fallback
prescription drug plan during the
contract period specified in
§ 423.871(b).
(2) Timing of bids. CMS determines
when to solicit bids for 2006 so that
potential fallback prescription drug
plans have enough time to prepare a
bid. After that, bids are solicited on 3
year cycles, or annually thereafter as
needed to replace contractors between
contracting cycles.
(3) Format of bid. CMS specifies the
form and manner in which fallback bids
are submitted in separate guidance to
bidders.
(b) Negotiation and acceptance of
bids.
(1) General rule. Except as provided
in this section, the provisions of
§ 423.272 apply for the approval or
disapproval of fallback prescription
drug plans. CMS enters into contracts
under this paragraph with eligible
fallback entities for the offering of
approved fallback prescription drug
plans in potential fallback service areas.
(2) Flexibility in risk assumed and
application of fallback prescription drug
plan. In order to ensure access in an
area in accordance with § 423.859(a),
CMS may approve limited risk plans
under § 423.272(c) for that area. If the
access requirement is still not met after
applying § 423.272(c), CMS provides for
the offering of a fallback prescription
drug plan in that area.
(3) Limitation of 1 Plan for all fallback
service areas in a PDP region. All
fallback service areas in any PDP region
for a contract period must be served by
the same fallback prescription drug
plan.
(4) Competitive procedures. CMS uses
competitive procedures (as defined in
section 4(5) of the Office of Federal
Procurement Policy Act (41 U.S.C.
403(5)) to enter into a contract under
this paragraph. The provisions of
section 1874A(d) of the Act apply to a
contract under this section in the same
manner as they apply to a contract
under that section.
(5) Timing of contracts. CMS approves
a fallback prescription drug plan for a
PDP region in a manner so that, if there
are any fallback service areas in the
region for a year, the fallback
prescription drug plan is offered at the

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

same time as prescription drug plans are
otherwise offered. In the event of mid­
year changes and as required by
§ 423.859(b)(2), CMS approves a fallback
prescription drug plan for a PDP region
in a manner so that the fallback
prescription drug plan is offered within
90 days of notice.
(6) No national fallback prescription
drug plan. CMS may not enter into a
contract with a single fallback entity for
the offering of fallback prescription drug
plans throughout the United States.
§ 423.867 Rules regarding premiums.

(a) Monthly beneficiary premium.
Except as provided in § 423.286(d)(3)
(relating to late enrollment penalty) and
subject to subpart P (relating to lowincome assistance), the monthly
beneficiary premium under a fallback
prescription drug plan must be uniform
for all fallback service areas in a PDP
region. It must equal 25.5 percent of
CMS’s estimate of the average monthly
per capita actuarial cost, including
administrative expenses, of providing
coverage in the PDP region based on
similar expenses of prescription drug
plans that are not fallback prescription
drug plans.
(b) Special rule for collection of
premiums in fallback prescription drug
plans. In the case of a fallback
prescription drug plan, the provisions of
§ 423.293 (b) concerning payments of
the late enrollment penalty to the PDP
sponsor do not apply and the monthly
beneficiary premium is collected in the
manner specified in § 422.262(f)(1) of
this chapter, or paid directly to the
fallback entity by the beneficiary if there
are either no benefits, or insufficient
benefits available to be collected in the
manner specified under § 422.262(f)(1)
of this chapter. The amount of any
premiums collected by the fallback
entity is deducted from management
fees due from CMS.
§ 423.871 Contract terms and conditions.

(a) General. Except as may be
appropriate to carry out the
requirements of this section, the terms
and conditions of contracts with eligible
fallback entities offering fallback
prescription drug plans are the same as
the terms and conditions of contracts at
§ 423.504 and § 423.505 for Part D plans.
(b) Period of contract. A contract with
a fallback entity for fallback service
areas for a PDP region is in effect for a
period of 3 years. However, a fallback
prescription drug plan may be offered
for any year within the contract period
for a particular area only if the area is
a fallback service area for that year.
(c) Entity not permitted to market or
brand fallback prescription drug plans.

PO 00000

Frm 00384

Fmt 4701

Sfmt 4700

Notwithstanding any other provisions of
this part, an eligible fallback entity with
a contract under this part may not
engage in any marketing or branding of
a fallback prescription drug plan.
(d) Performance measures. CMS
issues guidance establishing
performance measures for fallback
prescription drug plans based on the
following:
(1) Types of performance measures.
Performance measures include at least
measures for each of the following:
(i) Costs. The entity contains costs to
the Medicare Prescription Drug Account
and to Part D eligible individuals
enrolled in a fallback prescription drug
plan offered by the entity through
mechanisms such as generic
substitution and price discounts.
(ii) Quality programs. The entity
provides the enrollees in its fallback
prescription drug plan with quality
programs that avoid adverse drug
reactions, monitor for appropriate
utilization, and reduce medical errors.
(iii) Customer service. The entity
provides timely and accurate delivery of
services and pharmacy and beneficiary
support services.
(iv) Benefit administration and claims
adjudication. The entity provides
efficient and effective benefit
administration and claims adjudication.
(2) Development of performance
measures. CMS establishes detailed
performance measures for use in
evaluating fallback entity performance
and determination of certain
management fees based on criteria from
historical performance, application of
acceptable statistical measures of
variation to fallback entity and PDP
sponsor (other than fallback entities)
experience nationwide during a base
period, or changing program emphases
or requirements.
(e) Payment terms. A contract
approved with a fallback entity includes
terms for payment for-­
(1) The actual costs of covered Part D
drugs provided to Part D eligible
individuals enrolled in a fallback
prescription drug plan offered by the
entity; and
(2) Management fees that consist of
administrative costs and return on
investment and are tied to the
performance measures established by
CMS for the management,
administration, and delivery of the
benefits under the contract as provided
under paragraph (d) of this section.
(f) Requirement for the submission of
information. Each contract for a fallback
prescription drug plan requires an
eligible fallback entity offering a
fallback prescription drug plan to
provide CMS with the information CMS

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
determines is necessary to carry out the
payment provisions under subpart G or
under this subpart, or as required by
law. Information disclosed to determine
Medicare payment or reimbursement to
the fallback entity may be used by the
officers, employees and contractors of
the Department of Health and Human
Services only for the purposes of, and to
the extent necessary in, determining
such payment or reimbursement. This
restriction does not limit CMS or OIG
authority to conduct audits and
evaluations necessary to ensure accurate
and correct payment and to otherwise
oversee Medicare reimbursement
(g) Amendment to reflect changes in
service area. The contract may be
amended by CMS at any time as needed
to reflect the exact regions or counties
where the fallback plan are required to
operate within the contracted service
area(s).
§ 423.875 Payment to fallback plans.

The amount payable for a fallback
prescription drug plan is the amount
determined under the contract for the
plan in accordance with § 423.871(e).
Subpart R—Payments to Sponsors of
Retiree Prescription Drug Plans
§ 423.880 Basis and scope.

(a) Basis. This subpart is based on
section 1860D–22 of the Act, as
amended by section 101 of the Medicare
Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA).
(b) Scope. This section implements
the statutory requirement that a subsidy
payment be made to sponsors of
qualified retiree prescription drug plans.
§ 423.882

Definitions.

For the purposes of this subpart, the
following definitions apply:
Allowable retiree costs, in accordance
with section 1860D–22(a)(3)(C)(i) of the
Act, means gross covered retiree planrelated prescription drug costs that are
actually paid (net any manufacturer or
pharmacy discounts, chargebacks,
rebates, and similar price concessions)
by either the qualified retiree
prescription drug plan or the qualifying
covered retiree (or on the qualifying
covered retiree’s behalf).
Benefit option means a particular
benefit design, category of benefits, or
cost-sharing arrangement offered within
a group health plan.
Employment-based retiree health
coverage means coverage of health care
costs under a group health plan based
on an individual’s status as a retired
participant in the plan, or as the spouse
or dependent of a retired participant.
The term includes coverage provided by

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

voluntary insurance coverage, or
coverage as a result of a statutory or
contractual obligation.
Gross covered retiree plan-related
prescription drug costs, or gross retiree
costs means, for a qualifying covered
retiree who is enrolled in a qualified
retiree prescription drug plan during a
plan year, non-administrative costs
incurred under the plan for Part D drugs
during the year, whether paid for by the
plan or the retiree, including costs
directly related to the dispensing of Part
D drugs.
Group health plans include plans as
defined in section 607(1) of ERISA, 29
U.S.C. § 1167(1). They also include the
following plans:
(1) A Federal or State governmental
plan, which is a plan providing medical
care that is established or maintained
for its employees by the Government of
the United States, by the government of
any State or political subdivision of a
State (including a county or local
government), or by any agency or
instrumentality or any of the foregoing,
including a health benefits plan offered
under chapter 89 of Title 5, United
States Code (the Federal Employee
Health Benefit Plan (FEHBP)).
(2) A collectively bargained plan,
which is a plan providing medical care
that is established or maintained under
or by one or more collective bargaining
agreements.
(3) A church plan, which is a plan
providing medical care that is
established and maintained for its
employees or their beneficiaries by a
church or by a convention or association
of churches that is exempt from tax
under section 501 of the Internal
Revenue Code of 1986 (26 U.S.C. 501).
(4) An account-based medical plan
such as a Health Reimbursement
Arrangement (HRA) as defined in
Internal Revenue Service Notice 2002–
45, 2002–28 I.R.B. 93, a health Flexible
Spending Arrangement (FSA) as defined
in Internal Revenue Code (Code) section
106(c)(2), a health savings account
(HSA) as defined in Code section 223,
or an Archer MSA as defined in Code
section 220, to the extent they are
subject to ERISA as employee welfare
benefit plans providing medical care (or
would be subject to ERISA but for the
exclusion in ERISA section 4(b), 29
U.S.C.§ . § 1003(b), for governmental
plans or church plans).
Part D drug is defined in § 423.100 of
this part.
Part D eligible individual is defined in
§ 423.4 of this part.
Qualified retiree prescription drug
plan means employment-based retiree
health coverage that meets the
requirements set forth in § 423.884 of

PO 00000

Frm 00385

Fmt 4701

Sfmt 4700

4577

this chapter for a Part D eligible
individual who is a retired participant
or the spouse or dependent of a retired
participant under the coverage.
Qualifying covered retiree means a
Part D eligible individual who is: a
participant or the spouse or dependent
of a participant; covered under
employment-based retiree health
coverage that qualifies as a qualified
retiree prescription drug plan; and not
enrolled in a Part D plan. For this
purpose, the determination of whether
an individual is covered under
employment-based retiree health
coverage is made by the sponsor in
accordance with the rules of its plan.
For purposes of this subpart, however,
an individual is presumed not to be
covered under employment-based
retiree health coverage if, under the
Medicare Secondary Payer rules in
§ 411.104 of this chapter and related
CMS guidance, the person is considered
to be receiving coverage by reason of
current employment status. The
presumption applies whether or not the
Medicare Secondary Payer rules
actually apply to the sponsor. For this
purpose, a sponsor also may treat a
person receiving coverage under its
qualified retiree prescription drug plan
as the dependent of a qualifying covered
retiree in accordance with the rules of
its plan, regardless of whether that
person constitutes the qualifying
covered retiree’s dependent for Federal
or State tax purposes.
Retiree drug subsidy amount, or
subsidy payment, means the subsidy
amount paid to sponsors of qualified
retiree prescription drug coverage under
§ 423.886(a).
Standard prescription drug coverage
is defined in § 423.100 of this part.
Sponsor is a plan sponsor as defined
in section 3(16)(B) of the Employee
Retirement Income Security Act of 1974
(ERISA), 29 U.S.C. 1002(16)(B), except
that, in the case of a plan maintained
jointly by one employer and an
employee organization and for which
the employer is the primary source of
financing, the term means the employer.
Sponsor agreement means an
agreement by the sponsor to comply
with the provisions of this subpart.
§ 423.884 Requirements for qualified
retiree prescription drug plans.

(a) General. Employment-based retiree
health coverage is considered to be a
qualified retiree prescription drug plan
if all of the following requirements are
satisfied:
(1) An actuarial attestation is
submitted in accordance with paragraph
(d) of this section. The rules for
submitting attestations as part of

E:\FR\FM\28JAR2.SGM

28JAR2

4578

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

subsidy applications are described in
paragraph (c) of this section.
(2) Part D eligible individuals covered
under the plan are provided with
creditable coverage notices in
accordance with § 423.56.
(3) Records are maintained and made
available for audit in accordance with
paragraph (f) of this section and
§ 423.888(d).
(b) Disclosure of information. The
sponsor must have a written agreement
with its health insurance issuer (as
defined in 45 CFR 160.103), or group
health plan (as applicable) regarding
disclosure of information to CMS, and
the issuer or plan must disclose to CMS,
on behalf of the sponsor, the
information necessary for the sponsor to
comply with this subpart.
(c) Application. (1) Submitting an
application. The sponsor (or its
designee) must submit an application
for the subsidy to CMS that is signed by
an authorized representative of the
sponsor. The application must be
provided in a form and manner
specified by CMS.
(2) Required information. In
connection with each application the
sponsor (either directly or through its
designee) must submit the following:
(i) Employer Tax ID Number (if
applicable).
(ii) Sponsor name and address.
(iii) Contact name and email address.
(iv) Actuarial attestation that satisfies
the standards specified in paragraph (d)
of this section and any other supporting
documentation required by CMS for
each qualified retiree prescription drug
plan for which the sponsor seeks
subsidy payments.
(v) A list of all individuals the
sponsor believes (using information
reasonably available to the sponsor
when it submits the application) are
qualifying covered retirees enrolled in
each prescription drug plan (including
spouses and dependents, if Medicareeligible), along with the information
about each person listed below in this
paragraph:
(A) Full name.
(B) Health Insurance Claim (HIC)
number or Social Security number.
(C) Date of birth.
(D) Gender.
(E) Relationship to the retired
employee.
(vi) A sponsor may satisfy paragraph
(c)(2)(v) of this section by entering into
a voluntary data sharing agreement
(VDSA) with CMS (or any other
arrangement CMS may make available).
(vii) A signed sponsor agreement.
(viii) Any other information specified
by CMS.
(3) Terms and conditions. To receive
a subsidy payment, the sponsor

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(through the signed sponsor agreement
or as otherwise specified by CMS) must
specifically accept and agree to:
(i) Comply with the terms and
conditions of eligibility for a subsidy
payment set forth in this regulation and
in any related CMS guidance;
(ii) Acknowledge that the information
in the application is being provided to
obtain Federal funds; and
(iii) Require that all subcontractors,
including plan administrators,
acknowledge that information provided
in connection with the subcontract is
used for purposes of obtaining Federal
funds.
(4) Signature by sponsor. An
authorized representative of the
requesting sponsor must sign the
completed application and certify that
the information contained in the
application is true and accurate to the
best of the sponsor’s knowledge and
belief.
(5) Timing. (i) General rule. An
application for a given plan year must
be submitted by no later than 90 days
prior to the beginning of the plan year,
unless a request for an extension has
been filed and approved under
procedures established by CMS.
(ii) Transition rule. For plan years that
end in 2006, an application must be
submitted by September 30, 2005 unless
a request for an extension has been filed
and approved under procedures
established by CMS.
(6) Updates. The sponsor (or the
designee) must provide updates to CMS
in a manner specified by CMS of the
information required in paragraph (c)(2)
of this section on a monthly basis or at
a frequency specified by CMS.
(7) Data match. Once the full
application for the subsidy payment is
submitted, CMS—
(i) Matches the names and identifying
information of the individuals
submitted as qualifying covered retirees
with the Medicare Beneficiary Database
(MBD) to determine which retirees are
Part D eligible individuals who are not
enrolled in a Part D plan.
(ii) Provides information concerning
the results of the search in paragraph
(c)(7)(i) of this paragraph (such as names
and other identifying information, if
necessary) to the sponsor (or to a
designee).
(d) Actuarial attestation-general. The
sponsor of the plan must provide to
CMS an attestation in a form and
manner specified by CMS that the
actuarial value of the retiree
prescription drug coverage under the
plan is at least equal to the actuarial
value of the defined standard
prescription drug coverage (as defined

PO 00000

Frm 00386

Fmt 4701

Sfmt 4700

at § 423.100). The attestation must meet
all of the following standards.
(1) Contents of the attestation include
the following assurances:
(i) The actuarial gross value of the
retiree prescription drug coverage under
the plan for the plan year is at least
equal to the actuarial gross value of the
defined standard prescription drug
coverage under Part D for the plan year
in question.
(ii) The actuarial net value of the
retiree prescription drug coverage under
the plan for that plan year is at least
equal to the actuarial net value of the
defined standard prescription drug
coverage under Part D for the plan year
in question.
(iii) The actuarial values must be
determined using the methodology in
paragraph (d)(5) of this section.
(2) The attestation must be made by
a qualified actuary who is a member of
the American Academy of Actuaries.
Applicants may use qualified outside
actuaries, including (but not limited to)
actuaries employed by the plan
administrator or an insurer providing
benefits under the plan. If an applicant
uses an outside actuary, the attestation
can be submitted directly by the outside
actuary or by the plan sponsor.
(3)The attestation must be signed by
a qualified actuary and must state that
the attestation is true and accurate to the
best of the attester’s knowledge and
belief.
(4) The attestation must contain an
acknowledgement that the information
being provided in the attestation is
being used to obtain Federal funds.
(5) Methodology. (i) Basis of the
attestation. The attestation must be
based on generally accepted actuarial
principles and any actuarial guidelines
established by CMS in this section or in
future guidance. To the extent CMS has
not provided guidance on a specific
aspect of the actuarial equivalence
standard under this section, an actuary
providing the attestation may rely on
any reasonable interpretation of this
section and section 1860D–22(a) of the
Act consistent with generally accepted
actuarial principles in determining
actuarial values.
(ii) Specific rules for determining the
actuarial value of the sponsor’s retiree
prescription drug coverage.
(A) The gross value of coverage under
the sponsor’s retiree prescription drug
plan must be determined using the
actual claims experience and
demographic data for Part D eligible
individuals who are participants and
beneficiaries in the sponsor’s plan,
provided that sponsors without
creditable data due to their size or other
factors, may use normative databases as

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
specified by CMS. Sponsors may use
other actuarial approaches specified by
CMS as an alternative to the actuarial
valuation specified by this paragraph
(d)(5)(ii)(A).
(B) The net value of coverage
provided under the sponsor’s retiree
prescription drug plan must be
determined by reducing the gross value
of such coverage as determined under
paragraph (d)(5)(ii)(A) of this section by
the expected premiums paid by Part D
eligible individuals who are plan
participants or their spouses and
dependents. For sponsors of plans that
charge a single, integrated premium or
contribution to their retirees for both
prescription drug coverage and other
types of medical coverage, the
attestation must allocate a portion of the
premium/contribution to prescription
drug coverage under the sponsor’s plan,
under any method determined by the
sponsor or its actuary.
(iii) Specific rules for calculating the
actuarial value of defined standard
prescription drug coverage under Part
D.
(A) The gross value of defined
standard prescription drug coverage
under Part D must be determined using
the actual claims experience and
demographic data for Part D eligible
individuals in the sponsor’s plan,
provided that sponsors without credible
data due to their size or other factors
may use normative databases as
specified by CMS. Sponsors may use
other actuarial approaches specified by
CMS as an alternative to the actuarial
valuation specified by this paragraph
(d)(5)(iii)(A).
(B) To calculate the net value of
defined standard prescription drug
coverage under Part D, the gross value
of defined standard prescription drug
coverage under Part D as determined by
paragraph (d)(5)(iii)(A) of this section is
reduced by the following amounts:
(1) The monthly beneficiary
premiums (as defined in § 423.286)
expected to be paid for standard
prescription drug coverage; and
(2) An amount calculated to reflect
the impact on the value of defined
standard prescription drug coverage of
supplemental coverage provided by the
sponsor. Sponsors may use other
actuarial approaches specified by CMS
as an alternative to the actuarial
valuation specified in this paragraph
(d)(5)(iii)(B)(2).
(C) The valuation of defined standard
prescription drug coverage for a given
plan year is based on the initial
coverage limit cost-sharing and out-of­
pocket threshold for defined standard
prescription drug coverage under Part D
in effect at the start of such plan year.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

The attestation, however, must be
submitted to CMS no later than 60 days
after the publication of the Part D
coverage limits for the upcoming
calendar year otherwise, such valuation
is based on the initial coverage limit,
cost-sharing amounts, and out-of-pocket
threshold for defined standard
prescription drug coverage under Part D
for the upcoming calendar year.
(D) Example. If a sponsor’s retiree
prescription drug plan operates under a
plan year that ends March 30, the
attestation for the year April 1, 2007–
March 30, 2008 is based on the coverage
limit, cost-sharing and out-of-pocket
threshold that apply to defined standard
prescription drug coverage under Part D
in 2007 provided the attestation is
submitted within 60 days after the
publication of the Part D coverage limits
for 2008. If the attestation is submitted
more than 60 days after the 2008
coverage limits have been published,
the 2008 coverage limits would apply.
(iv) Employment-based retiree health
coverage with two or more benefit
options. For the assurance required
under paragraph (d)(1)(i) of this section,
the assurance must be provided
separately for each benefit option for
which the sponsor requests a subsidy
under this subpart. For the assurance
required under paragraph (d)(1)(ii) of
this section, the assurance may be
provided either separately for each
benefit option for which the sponsor
provided assurances under paragraph
(d)(1)(i) of this section, or in the
aggregate for all benefit options for
which the sponsor provided assurances
under paragraph (d)(1)(i) of this section.
(6) Timing. (i) Annual submission.
The attestation must be provided
annually at the time the sponsor’s
subsidy application is submitted, or at
such other times as specified by CMS in
further guidance.
(ii) Submission following material
change. The attestation must be
provided no later than 90 days before
the implementation of a material change
to the drug coverage of the sponsor’s
plan that impacts the actuarial value of
the coverage.
(e) Disclosure of creditable
prescription drug coverage status. The
sponsor must disclose to all of its
retirees and their spouses and
dependents eligible to participate in its
plan who are Part D eligible individuals
whether the coverage is creditable
prescription drug coverage under
§ 423.56 in accordance with the
notification requirements under that
section.
(f) Access to records for audit. The
sponsor (and where applicable, its
designee) must meet the requirements of

PO 00000

Frm 00387

Fmt 4701

Sfmt 4700

4579

§ 423.888(d). Failure to comply with
§ 423.888(d) may result in nonpayment
or recoupment of all or part of a subsidy
payment.
§ 423.886 Retiree drug subsidy amounts.

(a) Amount of subsidy payment. (1)
For each qualifying covered retiree
enrolled with the sponsor of a qualified
retiree prescription drug plan in a plan
year, the sponsor receives a subsidy
payment in the amount of 28 percent of
the allowable retiree costs (as defined in
§ 423.882) in the plan year for such
retiree attributable to gross retiree costs
between the cost threshold and the cost
limit as defined in paragraph (b) of this
section. The subsidy payment is
calculated by first determining gross
retiree costs between the cost threshold
and cost limit, and then determining
allowable retiree costs attributable to the
gross retiree costs. For this purpose and
where otherwise relevant in this
subpart, plan year is the calendar,
policy, or fiscal year on which the
records of a plan are kept.
(2) Transition provision. For a
qualified retiree prescription drug plan
that has a plan year which begins in
calendar year 2005 and ends in calendar
year 2006, the subsidy for the plan year
must be determined in the following
manner. Claims incurred in all months
of the plan year (including claims
incurred in 2005) are taken into account
in determining which claims fall within
the cost threshold and cost limit for the
plan year. The subsidy amount is
determined based only on costs
incurred on and after January 1, 2006.
(b) Cost threshold and cost limit. The
following cost threshold and cost limits
apply—
(1) Subject to paragraph (b)(3) of this
section, the cost threshold under this
section is equal to $250 for plan years
that end in 2006.
(2) Subject to paragraph (b)(3) of this
section, the cost limit under this section
is equal to $5,000 for plan years that end
in 2006.
(3) The cost threshold and cost limit
specified in paragraphs (b)(1) and (b)(2)
of this section, for plan years that end
in years after 2006, are adjusted in the
same manner as the annual Part D
deductible and the annual Part D out-of­
pocket threshold are adjusted annually
under § 423.104(d)(1)(ii) and
(d)(5)(iii)(B), respectively.
§ 423.888 Payment methods, including
provision of necessary information.

(a) Basis. The provisions of § 423.301
through § 423.343, including
requirements to provide information
necessary to ensure accurate subsidy
payments, govern payment under

E:\FR\FM\28JAR2.SGM

28JAR2

4580

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

§ 423.886 except to the extent the
provisions in this section specify
otherwise.
(b) General payment rules. Payment
under § 423.886 is conditioned on
provision of accurate information. The
information must be submitted, in a
form and manner and at the times
provided in this paragraph and under
other guidance specified by CMS, by the
sponsor or its designee.
(1) Timing. Payment can be made on
a monthly, quarterly or annual basis, as
elected by the plansponsor under
guidance specified by CMS, unless CMS
determines that the options must be
restricted because of operational
limitations.
(i) Monthly or quarterly payments. If
the plan sponsor elects for payment on
a monthly or quarterly basis, it must
provide information described in
paragraph (b)(2)(i) of this section on the
same monthly or quarterly basis, or at
such time as CMS specifies.
(ii) Annual payments. If the sponsor
elects an annual payment, it must
submit to CMS actual rebate and other
price concession data within 15 months
after the end of the plan year.
(2) Submission of cost data. (i)
Monthly or quarterly payments. If the
plan sponsor elects to receive payment
on a monthly or quarterly basis, it must
submit to CMS, in a manner specified
by CMS, the gross covered retiree planrelated prescription drug costs (as
defined in § 423.882) incurred for its
qualifying covered retirees during the
payment period for which it is claiming
a subsidy payment and any other data
CMS may require. Except as otherwise
provided by CMS in future guidance,
the sponsor must also submit, using
historical data and generally accepted
actuarial principles, an estimate of the
extent to which its expected allowable
retiree costs differs from the gross
covered retiree plan-related prescription
drug costs, based on expected rebates
and other price concessions for the
upcoming plan year. The estimate must
be used to reduce the periodic payments
for the plan year. Final allocation of
price concession data must occur after
the end of the year under the
reconciliation provisions of paragraph
(b)(4) of this section
(ii) Annual payments. If the plan
sponsor elects a one-time final annual
payment, it must submit, in a manner
specified by CMS, within 15 months, or
within any other longer time limit
specified by CMS, after the end of the
plan year, the total gross covered retiree
plan-related prescription drug costs (as
defined in § 423.882) for the plan year
for which it is claiming a subsidy
payment, actual rebate and other price

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

concession data described in paragraph
(b)(1)(ii) of this section, and any other
data CMS may require. The alternative
is that the sponsor can elect an interim
annual payment, in which case it must
submit the following to CMS, at a time
and in a manner specified by CMS: the
gross covered retiree plan-related
prescription drug costs (as defined in
§ 423.882) incurred for all of its
qualifying covered retirees during the
payment period for which it is claiming
a subsidy payment; an estimate (using
historical data and generally accepted
actuarial principles) of the difference
between such gross costs and allowable
costs (based on expected rebates and
other price concessions for the
upcoming plan year); and any other data
CMS may require.
(3) Payment by CMS. CMS makes
payment after the sponsor’s submission
of the cost data at a time and in a
manner to be specified by CMS.
(4) Reconciliation. (i) Sponsors who
elect either monthly, quarterly or an
interim annual payment must submit to
CMS, within 15 months, or within any
other longer time limit specified by
CMS, after the end of its plan year, the
total gross covered retiree plan-related
prescription drug costs (as defined in
§ 423.882), in a manner specified by
CMS; actual rebate and other price
concession data for the plan year in
question; and any other data CMS may
require.
(ii) Upon receiving this data, CMS
adjusts the payments made for the plan
year in question in a manner to be
specified by CMS.
(5) Special rule for insured plans. (i)
Interim payments. Sponsors of group
health plans that provide benefits
through health insurance coverage (as
defined in 45 CFR 144.103) and that
choose either monthly payments,
quarterly payments or an interim annual
payment in paragraphs (b)(1) and (b)(2)
of this section , may elect to determine
gross covered plan-related retiree
prescription drug costs for purposes of
the monthly, quarterly or interim annual
payments based on a portion of the
premium costs paid by the sponsor (or
by the qualifying covered retirees) for
coverage of the covered retirees under
the group health plan. Premium costs
that are determined, using generally
accepted actuarial principles, may be
attributable to the gross prescription
drug costs incurred by the health
insurance issuer (as defined in 45 CFR
§ 144.103) for the sponsor’s qualifying
covered retirees, except that
administrative costs and risk charges
must be subtracted from the premium.
(ii) Final payments. At the end of the
plan year, actual gross retiree plan-

PO 00000

Frm 00388

Fmt 4701

Sfmt 4700

related prescription drug costs incurred
by the insurer (or the retiree), and the
allowable costs attributable to the gross
costs, are determined for each of the
sponsor’s qualifying covered retirees
and submitted for reconciliation after
the end of the plan year as specified in
paragraph (b)(4)of this section. The data
for the reconciliation can be submitted
directly to CMS by the insurer in a
manner to be specified by CMS. Upon
receiving this data, CMS adjusts the
payments made for the relevant plan
year in a manner to be specified by
CMS.
(c) Use of information provided.
Officers, employees and contractors of
the Department of Health and Human
Services, including the Office of
Inspector General (OIG), may use
information collected under this section
only for the purposes of, and to the
extent necessary in, carrying out this
subpart including, but not limited to,
determination of payments and
payment-related oversight and program
integrity activities, or as otherwise
required by law. This restriction does
not limit OIG authority to conduct
audits and evaluations necessary for
carrying out these regulations.
(d) Maintenance of records. (1) The
sponsor of the qualified retiree
prescription drug plan (or a designee),
as applicable, must maintain, and
furnish to CMS or the OIG upon request,
the records enumerated in paragraph
(d)(3) of this section. The records must
be maintained for 6 years after the
expiration of the plan year in which the
costs were incurred for the purposes of
audits and other oversight activities
conducted by CMS to assure the
accuracy of the actuarial attestation and
the accuracy of payments.
(2) CMS or the OIG may extend the 6­
year retention requirement for the
records enumerated in paragraph (d)(3)
of this section in the event of an ongoing
investigation, litigation, or negotiation
involving civil, administrative or
criminal liability. In addition, the
sponsor of the qualified retiree
prescription drug plan (or a designee),
as applicable, must maintain the records
enumerated in paragraph (d)(3) of this
section longer than 6 years if it knows
or should know that the records are the
subject of an ongoing investigation,
litigation or negotiation involving civil,
administrative or criminal liability.
(3) The records that must be retained
are:
(i) Reports and working documents of
the actuaries who wrote the attestation
submitted in accordance with
§ 423.884(a).
(ii)All documentation of costs
incurred and other relevant information

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
utilized for calculating the amount of
the subsidy payment made in
accordance with § 423.886, including
the underlying claims data.
(iii) Any other records specified by
CMS.
(4) CMS may issue additional
guidance addressing recordkeeping
requirements, including (but not limited
to) the use of electronic media.
§ 423.890

Appeals.

(a) Informal written reconsideration.
(1) Initial determinations. A sponsor is
entitled to an informal written
reconsideration of an adverse initial
determination. An initial determination
is a determination regarding the
following:
(i) The amount of the subsidy
payment.
(ii) The actuarial equivalence of the
sponsor’s retiree prescription drug plan.
(iii) If an enrollee in a retiree
prescription drug plan is a qualifying
covered retiree; or
(iv) Any other similar determination
(as determined by CMS) that affects
eligibility for, or the amount of, a
subsidy payment.
(2) Effect of an initial determination
regarding the retiree drug subsidy. An
initial determination is final and
binding unless reconsidered in
accordance with this paragraph (a) of
this section.
(3) Manner and timing for request. A
request for reconsideration must be
made in writing and filed with CMS
within 15 days of the date on the notice
of adverse determination.
(4) Content of request. The request for
reconsideration must specify the
findings or issues with which the
sponsor disagrees and the reasons for
the disagreements. The request for
reconsideration may include additional
documentary evidence the sponsor
wishes CMS to consider.
(5) Conduct of informal written
reconsideration. In conducting the
reconsideration, CMS reviews the
subsidy determination, the evidence
and findings upon which it was based,
and any other written evidence
submitted by the sponsor or by CMS
before notice of the reconsidered
determination is made.
(6) Decision of the informal written
reconsideration. CMS informs the
sponsor of the decision orally or
through electronic mail. CMS sends a
written decision to the sponsor on the
sponsor’s request.
(7) Effect of CMS informal written
reconsideration. A reconsideration
decision, whether delivered orally or in
writing, is final and binding unless a
request for hearing is filed in

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

accordance with paragraph (b) of this
section, or it is revised in accordance
paragraph (d) of this section.
(b) Right to informal hearing. A
sponsor dissatisfied with the CMS
reconsideration decision is entitled to
an informal hearing as provided in this
section.
(1) Manner and timing for request. A
request for a hearing must be made in
writing and filed with CMS within 15
days of the date the sponsor receives the
CMS reconsideration decision.
(2) Content of request. The request for
informal hearing must include a copy of
the CMS reconsideration decision (if
any) and must specify the findings or
issues in the decision with which the
sponsor disagrees and the reasons for
the disagreements.
(3) Informal hearing procedures.
(i)CMS provides written notice of the
time and place of the informal hearing
at least 10 days before the scheduled
date.
(ii) The hearing is conducted by a
CMS hearing officer who neither
receives testimony nor accepts any new
evidence that was not presented with
the reconsideration request. The CMS
hearing officer is limited to the review
of the record that was before CMS when
CMS made both its initial and
reconsideration determinations.
(iii) If CMS did not issue a written
reconsideration decision, the hearing
officer may request, but not require, a
written statement from CMS or its
contractors explaining CMS’
determination, or CMS or its contractors
may, on their own, submit the written
statement to the hearing officer. Failure
of CMS to submit a written statement
does not result in any adverse findings
against CMS and may not in any way be
taken into account by the hearing officer
in reaching a decision.
(4) Decision of the CMS hearing
officer. The CMS hearing officer decides
the case and sends a written decision to
the sponsor, explaining the basis for the
decision.
(5) Effect of hearing officer decision.
The hearing officer decision is final and
binding, unless the decision is reversed
or modified by the Administrator in
accordance with paragraph (c) of this
section.
(c) Review by the Administrator. (1) A
sponsor that has received a hearing
officer decision upholding a CMS initial
or reconsidered determination may
request review by the Administrator
within 15 days of receipt of the hearing
officer’s decision.
(2) The Administrator may review the
hearing officer’s decision, any written
documents submitted to CMS or to the
hearing officer, as well as any other

PO 00000

Frm 00389

Fmt 4701

Sfmt 4700

4581

information included in the record of
the hearing officer’s decision and
determine whether to uphold, reverse or
modify the hearing officer’s decision.
(3) The Administrator’s determination
is final and binding.
(d) Reopening. (1) Ability to reopen.
CMS may reopen and revise an initial or
reconsidered determination upon its
own motion or upon the request of a
sponsor:
(i) Within 1 year of the date of the
notice of determination for any reason.
(ii) Within 4 years for good cause.
(iii) At any time when the underlying
decision was obtained through fraud or
similar fault.
(2) Notice of reopening. (i) Notice of
reopening and any revisions following
the reopening are mailed to the sponsor.
(ii) Notice of reopening specifies the
reasons for revision.
(3) Effect of reopening. The revision of
an initial or reconsidered determination
is final and binding unless­
(i) The sponsor requests
reconsideration in accordance with
paragraph (a) of this section;
(ii) A timely request for a hearing is
filed under paragraph (b) of this section;
(iii) The determination is reviewed by
the Administrator in accordance with
paragraph (c) of this section; or
(iv) The determination is reopened
and revised in accordance with
paragraph (d) of this section.
(4) Good cause. For purposes of this
section, CMS finds good cause if —
(i) New and material evidence exists
that was not readily available at the time
the initial determination was made;
(ii) A clerical error in the computation
of payments was made; or
(iii) The evidence that was considered
in making the determination clearly
shows on its face that an error was
made.
(5) For purposes of this section, CMS
does not find good cause if the only
reason for reopening is a change of legal
interpretation or administrative ruling
upon which the initial determination
was made.
(6) A decision by CMS not to reopen
an initial or reconsidered determination
is final and binding and cannot be
appealed.
§ 423.892 Change of ownership.

(a) Change of ownership. Any of the
following constitutes a change of
ownership:
(1) Partnership. The removal,
addition, or substitution of a partner,
unless the partners expressly agree
otherwise as permitted by applicable
State law.
(2) Asset sale. Transfer of all or
substantially all of the assets of the
sponsor to another party.

E:\FR\FM\28JAR2.SGM

28JAR2

4582

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

(3) Corporation. The merger of the
sponsor’s corporation into another
corporation or the consolidation of the
sponsor’s organization with one or more
other corporations, resulting in a new
corporate body.
(b) Change of ownership, exception.
Transfer of corporate stock or the merger
of another corporation into the
sponsor’s corporation, with the sponsor
surviving, does not ordinarily constitute
change of ownership.
(c) Advance notice requirement. A
sponsor that has a sponsor agreement in
effect under this part and is considering
or negotiating a change in ownership
must notify CMS at least 60 days before
the anticipated effective date of the
change.
(d) Assignment of agreement. When
there is a change of ownership as
specified in paragraph (a) of this
section, and this results in a transfer of
the liability for prescription drug costs,
the existing sponsor agreement is
automatically assigned to the new
owner.
(e) Conditions that apply to assigned
agreements. The new owner to whom a
sponsor agreement is assigned is subject
to all applicable statutes and regulations
and to the terms and conditions of the
sponsor agreement.
§ 423.894

Construction.

Nothing in this part must be
interpreted as prohibiting or restricting:
(a) A Part D eligible individual who
is covered under employment-based
retiree health coverage, including a
qualified retiree prescription drug plan,
from enrolling in a Part D plan;
(b) A sponsor or other person from
paying all or any part of the monthly
beneficiary premium (as defined in
§ 423.286) for a Part D plan on behalf of
a retiree (or his or her spouse or
dependents);
(c) A sponsor from providing coverage
to Part D eligible individuals under
employment-based retiree health
coverage that is—
(1) Supplemental to the benefits
provided under a Part D plan; or
(2) Of higher actuarial value than the
actuarial value of standard prescription
drug coverage (as defined in
§ 423.104(d)); or
(d) Sponsors from providing for
flexibility in the benefit design and
pharmacy network for their qualified
retiree prescription drug coverage,
without regard to the requirements
applicable to Part D plans under
§ 423.104, as long as the requirements
under § 423.884 are met.

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

Subpart S—Special Rules for StatesEligibility Determinations for Subsidies
and General Payment Provisions.
§ 423.900 Basis and scope.

(a) Basis. This subpart is based on
sections 1935(a) through (d) of the Act
as amended by section 103 of the MMA.
(b) Scope. This subpart specifies State
agency obligations for the Part D
prescription drug benefit.
§ 423.902

Definitions.

The following definitions apply to
this subpart:
Actuarial value of capitated
prescription drug benefits is the
estimated actuarial value of prescription
drug benefits provided under a
comprehensive Medicaid managed care
plan per full-benefit dual eligible
individual for 2003, as determined
using data as the Secretary determines
appropriate. This value will be
established using data determined by
the Secretary to be the best available
among the following options:
(1) State rate setting documentation
for drug costs to the full dual eligible
population;
(2) State encounter and enrollment
record databases including cost data;
and
(3) State managed care plan-specific
financial cost data; and
(4) Other appropriate data.
Applicable growth factor for each of
2004, 2005, and 2006, is the average
annual percent change (to that year from
the previous year) of the per capita
amount of prescription drug
expenditures (as determined based on
the most recent National Total Drug
National Health Expenditure projections
for the years involved). The growth
factor for 2007 and succeeding years
will equal the annual percentage
increase in average per capita aggregate
expenditures for covered Part D drugs in
the United States for Part D eligible
individuals for the 12-month period
ending in July of the previous year, as
described in § 423.104(d)(5)(iv). CMS
provides further detail regarding the
sources of data to be used and how the
annual percentage increase will be
determined via operational guidance to
States.
Base year Medicaid per capita
expenditures are equal to the weighted
average of:
(1) The gross base year (calendar year
2003) per capita Medicaid expenditures
for prescription drugs, reduced by the
rebate adjustment factor; and
(2) The estimated actuarial value of
prescription drug benefits provided
under a comprehensive capitated
Medicaid managed care plan per full-

PO 00000

Frm 00390

Fmt 4701

Sfmt 4700

benefit dual eligible for 2003. The per
capita payments for full-benefit dual
eligibles with comprehensive managed
care and non-managed care are
weighted by the respective average
monthly full dual eligible enrollment
populations reported through the
Medicaid Statistical Information System
(MSIS).
Full-benefit dual eligible individual
means an individual who, for any
month­
(1) Has coverage for the month under
a prescription drug plan under Part D of
title XVIII, or under an MA-PD plan
under Part C of title XVIII; and
(2) Is determined eligible by the State
for medical assistance for full benefits
under title XIX for the month under any
eligibility category covered under the
State plan or comprehensive benefits
under a demonstration under section
1115 of the Act. (This does not include
individuals under Pharmacy Plus
demonstrations or under a section 1115
of the Act demonstration that provides
pharmacy only benefits to these
individuals.) It also includes any
individual who is determined by the
State to be eligible for medical
assistance under section 1902(a)(10)(C)
of the Act (medically needy) or section
1902(f) of the Act (States that use more
restrictive eligibility criteria than are
used by the SSI program) of the Act for
any month if the individual was eligible
for medical assistance in any part of the
month. For the 2003 baseline
calculations, the full-benefit dual
eligibles are those individuals reported
in MSIS as having Medicaid drug
benefit coverage and Medicare Part A or
Part B coverage. Dual eligibility status
will be established by CMS using an
algorithm that incorporates the quarterly
MSIS dual eligibility code for the
prescription fill date and the dual
eligibility code for the prior quarter.
Gross base year Medicaid per capita
expenditures are equal to the
expenditures, including dispensing fees,
made by the State and reported in MSIS
during calendar year 2003 for covered
outpatient drugs, excluding drugs or
classes of drugs, or their medical uses,
which may be excluded from coverage
or otherwise restricted under section
1860D–2 of the Act, other than smoking
cessation agents determined per fullbenefit dual eligible individual for the
individuals not receiving medical
assistance for the drugs through a
comprehensive Medicaid managed care
plan. This amount is determined based
on MSIS drug claims paid during the
four quarters of calendar year 2003 and
the corresponding dual eligibility
enrollment status of the beneficiary.
MSIS drug claims having National Drug

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Codes determined by CMS to be in the
Part D excluded drug class, and claims
having a program type code indicating
Indian Health Service or Family
Planning will be excluded from the
calculation.
Phased-down State contribution
factor for a month in 2006 is 90 percent;
in 2007 is 88 1/3 percent; in 2008 is 86
2/3 percent; in 2009 is 85 percent; in
2010 is 83 1/3 percent; in 2011 is 81 2/
3 percent; in 2012 is 80 percent; in 2013
is 78 1/3 percent; in 2014 is 76 2/3
percent; or after December 2014, is 75
percent.
Phased-down State contribution
payment refers to the States’ monthly
payment made to the Federal
government beginning in 2006 to defray
a portion of the Medicare drug
expenditures for full-benefit dual
eligible individuals whose Medicaid
drug coverage is assumed by Medicare
Part D. The contribution is calculated as
1/12th of the base year (2003) Medicaid
per capita expenditures for prescription
drugs (that is, covered Part D drugs) for
full-benefit dual eligible individuals,
(1) Multiplied by the State medical
assistance percentage;
(2) Increased for each year (beginning
with 2004 up to and including the year
involved) by the applicable growth
factor;
(3) Multiplied by the number of the
State’s full-benefit dual eligible
individuals for the given month; and
(4) Multiplied by the phased-down
State contribution factor.
Rebate adjustment factor takes into
account drug rebates and, for a State, is
equal to the ratio of the four quarters of
calendar year 2003 of aggregate rebate
payments received by the State under
section 1927 of the Act to the gross
expenditures for covered outpatient
drugs.
State medical assistance percentage
means the proportion equal to 100
percent minus the State’s Federal
medical assistance percentage,
applicable to the State for the fiscal year
in which the month occurs.
§ 423.904 Eligibility determinations for
low-income subsidies.

(a) General rule. The State agency
must make eligibility determinations
and redeterminations for low-income
premium and cost-sharing subsidies in
accordance with subpart P of part 423.
(b) Notification to CMS. The State
agency must inform CMS of cases where
eligibility is established or
redetermined, in a manner determined
by CMS.
(c) Screening for eligibility for
Medicare cost-sharing and enrollment
under the State plan. States must—

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

(1) Screen individuals who apply for
subsidies under this part for eligibility
for Medicaid programs that provide
assistance with Medicare cost-sharing
specified in section 1905(p)(3) of the
Act.
(2) Offer enrollment for the programs
under the State plan (or under a waiver
of the plan) for those meeting the
eligibility requirements.
(d) Application form and process. (1)
Assistance with application. No later
than July 1, 2005, States must make
available—
(i) Low-income subsidy application
forms;
(ii) Information on the nature of, and
eligibility requirements for, the
subsidies under this section; and
(iii) Assistance with completion of
low-income subsidy application forms.
(2) Completion of application. The
State must require an individual or
personal representative applying for the
low-income subsidy to—
(i) Complete all required elements of
the application and provide documents,
as necessary, consistent with paragraph
(d)(3) of this section; and
(ii) Certify, under penalty of perjury
or similar sanction for false statements,
as to the accuracy of the information
provided on the application form.
(3) The application process and
States. (i) States may require submission
of statements from financial institutions
for an application for low-income
subsidies to be considered complete;
and
(ii) May require that information
submitted on the application be subject
to verification in a manner the State
determines to be most cost-effective and
efficient.
(4) Other information. States must
provide CMS with other information as
specified by CMS that may be needed to
carry out the requirements of the Part D
prescription drug benefit.
§ 423.906. General payment provisions.

(a) Regular Federal matching. Regular
Federal matching applies to the
eligibility determination and
notification activities specified in
§ 423.904(a) and (b).
(b) Medicare as primary payer.
Medicare is the primary payer for
covered drugs for Part D eligible
individuals. Medical assistance is not
available to full-benefit dual eligible
individuals, including those not
enrolled in a Part D plan, for—
(1) Covered Part D drugs; or
(2) Any cost-sharing obligations under
Part D relating to covered Part D drugs.
(3) The effective date of paragraphs
(b)(1) and (b)(2) of this section is
January 1, 2006.

PO 00000

Frm 00391

Fmt 4701

Sfmt 4700

4583

(c) Non-covered drugs. States may
elect to provide coverage for outpatient
drugs other than covered Part D drugs
in the same manner as provided for nonfull benefit dual eligible individuals or
through an arrangement with a
prescription drug plan or a MA-PD plan.
§ 423.907 Treatment of territories.

(a) General rules. (1) Low-income Part
D eligible individuals who reside in the
territories are not eligible to receive
premium and cost-sharing subsidies
under subpart P of this part.
(2) A territory may submit a plan to
the Secretary under which medical
assistance is to be provided to lowincome individuals for the provision of
covered Part D drugs.
(3) Territories with plans approved by
the Secretary will receive increased
grants under section 1935(e)(3) of the
Act as described in paragraph (c) of this
section.
(b) Plan requirements. Plans
submitted to the Secretary must include
the following:
(1) A description of the medical
assistance to be
provided.
(2) The low-income population
(income less than 150
percent of the Federal poverty level)
to receive medical assistance.
(3) An assurance that no more than 10
percent of the
amount of the increased grant will be
used for administrative expenses.
(c) Increased grant amounts. The
amount of the grant provided under
section 1108 (f) of the Act as increased
by section 1108 (g) of the Act for each
territory with an approved plan for a
year is the amount in paragraph (d) of
this section multiplied by the ratio of—
(1) The number of individuals who
are entitled to benefits under Part A or
enrolled under Part B and who reside in
the territory (as determined by the
Secretary based on the most recent
available data for the beginning of the
year); and
(2) The sum of the number of
individuals in all territories in
paragraph (c)(1) of this section with
approved plans.
(d) Total grant amount. The total
grant amount is—
(1) For the last three quarters of fiscal
year 2006, $28,125,000;
(2) For fiscal year 2007, $37,500,000;
and
(3) For each subsequent year, the
amount for the prior fiscal year
increased by the annual percentage
increase described in § 423.104(d)(5)(iv).

E:\FR\FM\28JAR2.SGM

28JAR2

4584

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations

§ 423.908. Phased-down State contribution
to drug benefit costs assumed by Medicare.

This subpart sets forth the
requirements for State contributions for
Part D drug benefits based on fullbenefit dual eligible individual drug
expenditures.

§ 423.910

Requirements.

(a) General rule. Each of the 50 States
and the District of Columbia is required
to provide for payment to CMS a
phased-down contribution to defray a
portion of the Medicare drug
expenditures for individuals whose
projected Medicaid drug coverage is
assumed by Medicare Part D.

(b) State contribution payment. (1)
Calculation of payment. The State
contribution payment is calculated by
CMS on a monthly basis, as indicated in
the following chart. For States that do
not meet the quarterly reporting
requirement for the monthly enrollment
reporting, the State contribution
payment is calculated using a
methodology determined by CMS.

ILLUSTRATIVE CALCULATION OF STATE PHASED-DOWN MONTHLY CONTRIBUTION FOR 2006
Item

Illustrative Value

Source

(i)

Gross per capita Medicaid expenditures for
prescription drugs for 2003 for full-benefit
dual eligibles not receiving drug coverage
through a comprehensive Medicaid man­
aged care plan, excluding drugs not cov­
ered by Part D

$2,000

CY MSIS data

(ii)

Aggregate State rebate receipts in calendar
year 2003

$100,000,000

CMS–64

(iii)

Gross State Medicaid expenditures for pre­
scription drugs in calendar year 2003

$500,000,000

CMS–64

(iv)

Rebate adjustment factor

0.2000

(2) ÷ (3)

(v)

Adjusted 2003 gross per capita Medicaid ex­
penditures for prescription drugs for fullbenefit dual eligibles not in comprehen­
sive managed care plans

$1,600

(1) x [1- (4)]

(vi)

Estimated actuarial value of prescription
drug benefits under comprehensive
capitated managed care plans for full-ben­
efit dual eligibles for 2003

$1,500

To be Determined

(vii)

Average number of full-benefit dual eligibles
in 2003 who did not receive covered out­
patient drugs through comprehensive
Medicaid managed care plans

90,000

CY MSIS data

(viii)

Average number of full-benefit dual eligibles
in 2003 who received covered outpatient
drugs through comprehensive Medicaid
managed care plans

10,000

CY MSIS data

(ix)

Base year State Medicaid per capita ex­
penditures for covered Part D drugs for
full-benefit dual eligible individuals
(weighted average of (5) and (6))

$1,590

[(7)x(5) +
(8)x(6)]÷[(7) + (8)]

(x)

100 minus Federal Medical Assistance Per­
centage (FMAP) applicable to month of
State contribution (as a proportion)

0.4000

Federal Register

(xi)

Applicable growth factor (cumulative in­
crease from 2003 through 2006)

50.0%

NHE projections

(xii)

Number of full-benefit dual eligibles for the
month

120,000

State submitted data

(xiii)

Phased-down State reduction factor for the
month

0.9000

specified in statute

(xiv)

Phased-down State contribution for the
month

$8,586,000

1/12 x (9) x (10) x
[1+(11)] x (12) x (13)

(2) Method of payment. Payments for
the phased down State contribution

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

begins in January 2006, and are made on
a monthly basis for each subsequent

PO 00000

Frm 00392

Fmt 4701

Sfmt 4700

month. State payment must be made in
a manner specified by CMS that is

E:\FR\FM\28JAR2.SGM

28JAR2

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
similar to the manner in which State
payments are made under the State Buyin Program except that all payments
must be deposited into the Medicare
Prescription Drug Account in the
Federal Supplementary Medical
Insurance Trust Fund. The policy on
collection of the Phased-down State
contribution payment is the same as the
policy that governs collection of Part A
and Part B Medicare premiums for State
Buy-in.
(c) State Medicaid Statistical
Information System (MSIS) Reporting.
Effective with calendar year (CY) 2003
and all subsequent MSIS data
submittals, States are required to
provide accurate and complete coding
to identify the numbers and types of
Medicaid and Medicare dual eligibles.
Calendar year 2003 submittals must be
complete and must be accepted, based
on CMS’ data quality review, by
December 31, 2004.
(d) State monthly enrollment
reporting. Effective June 2005, and each
subsequent month, States must submit
an electronic file, in a manner specified
by CMS, identifying each full-benefit
dual eligible individual enrolled in the
State for each month. This file must
include specified information including

VerDate jul<14>2003

18:11 Jan 27, 2005

Jkt 205001

identifying information, a dual eligible
type code, available income data and
institutional status. The file includes
data on enrollment for the current
month, plus retroactive changes in
enrollment characteristics for prior
months. This file will be used by CMS
to establish the monthly enrollment for
those individuals with Part D drug
coverage who are also determined by
the State to be eligible for full Medicaid
benefits subject to the phased down
State contribution payment. This file is
due to CMS no later than the last day
of the reporting month. For States that
do not submit an acceptable file by the
end of the month, the phased down
State contribution for that month is
based on data deemed appropriate by
CMS.
(e) Data match. CMS performs those
periodic data matches as may be
necessary to identify and compute the
number of full-benefit dual eligible
individuals needed to establish the State
contribution payment.
(f) Rebate adjustment factor. CMS
establishes the rebate adjustment factor
using total drug expenditures made and
drug rebates received during calendar
year 2003 as reported on CMS 64
Medicaid expenditure reports for the

PO 00000

Frm 00393

Fmt 4701

Sfmt 4700

4585

four quarters of calendar year 2003 that
were received by CMS on or before
March 31, 2004. Rebates include rebates
received under the national rebate
agreement and under a State
supplemental rebate program, as
reported on CMS–64 expenditure
reports for the four quarters of calendar
year 2003.
(g) Annual per capita drug
expenditures. CMS notifies each State
no later than October 15 before each
calendar year, beginning October 15,
2005, of their annual per capita drug
payment expenditure amount for the
next year.
(Catalog of Federal Domestic
Assistance Program No. 93.773,
Medicare—Hospital Insurance; and
Program No. 93.774, Medicare
Supplementary Medical Insurance
Program)
Dated: January 10, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare &
Medicaid Services.
Dated: January 14, 2005.
Tommy G. Thompson,
Secretary of Health and Human Services.
[FR Doc. 05–1321 Filed 1–21–05; 11:19 am]
BILLING CODE 4120–01–S

E:\FR\FM\28JAR2.SGM

28JAR2