Appendix_D_ MMAFinalTitleIIFederalRegister

Friday,

January 28, 2005

Part III

Department of
Health and Human
Services
Centers for Medicare & Medicaid Services
42 CFR Parts 417 and 422
Medicare Program; Establishment of the
Medicare Advantage Program; Final Rule

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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 417 and 422
CMS–4069–F
RIN 0938–AN06

Medicare Program; Establishment of
the Medicare Advantage Program
Centers for Medicare &
Medicaid Services (CMS), HHS.
ACTION: Final rule.
AGENCY:

This final rule implements
provisions of the Social Security Act
(the Act) establishing and regulating the
Medicare Advantage (MA) program. The
MA program was enacted in Title II of
The Medicare Prescription Drug,
Improvement, and Modernization Act of
2003 (MMA) (Pub. L. 108–173) on
December 8, 2003. The MA program
replaces the Medicare+Choice (M+C)
program established under Part C of title
XVIII of the Act, while retaining most
key features of the M+C program.
The MA program attempts to broadly
reform and expand the availability of
private health plan options to Medicare
beneficiaries.
This final rule responds to public
comments on a proposed rule published
on August 3, 2004 (FR 69 46866).
EFFECTIVE DATE: These regulations are
effective March 22, 2005 except for the
following changes which will become
effective on January 1, 2006:
amendment of § 417.600(b); removal of
§ 417.602 through § 417.638; and
amendments to § 417.832(d); and
§ 417.840.
SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Eligibility, Election, and Enrollment—
Lynn Orlosky, 410–786–9064 or Randy
Brauer, (410) 786–1618.
Benefits and Beneficiary Protections—
Frank Szeflinski, 303–844–7119.
Quality Improvement Program—Tony
Hausner, 410–786–1093.
Submission of Bids, Premiums, and
Plan Approval—Anne Hornsby, 410–
786–1181.
Payments to MA Organizations—
Anne Hornsby, 410–786–1181.
Special Rules for MA Regional
Plans—Marty Abeln, 410–786–1032.
Contracts with MA Organizations—
Mark Smith, 410–786 8015.
Beneficiary Appeals—Chris Gayhead,
410–786–6429.
General Information—410–786–1296.
SUPPLEMENTARY INFORMATION: Copies: To
order copies of the Federal Register
containing this document, send your

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request to: New Orders, Superintendent
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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. Relevant Legislation
1. Balanced Budget Act of 1997
2. Medicare, Medicaid, and SCHIP
Balanced Budget Refinement Act of
1999 and the Medicare, Medicaid,
and SCHIP Benefits Improvement
and Protection Act of 2000
3. Medicare Prescription Drug,
Improvement, and Modernization
Act of 2003 (MMA)
C. Codification of Regulations
D. Organizational Overview of Part
422
II. Analysis of and Responses to Public
Comments
A. Overview
1. Comments on the August 3, 2004
Proposed Rule
2. Organization of the Final Rule
B. General Comments
1. Administrative Procedure Act

(APA) Issues

2. Other General Comments
III. Provisions of the Proposed Rule,
Analysis of and Responses to
Comments on the Proposed Rule, and
Final Decisions
IV. Provisions of the Final Rule
V. Collection of Information
Requirements
VI. Regulatory Impact Analysis
Regulations Text
Acronyms
Because of the many terms to which
we refer by acronym in this final rule,

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we are listing the acronyms used and
their corresponding terms in
alphabetical order below:
ABN
ACR
ACRP
ADL
AHRQ
AI/AN
ALJ
APA
BBA
BBRA

BIPA

CAH
CCPs
CMPs
CORF
DSH
EGPH
EOC
ESRD
FEHB
FFS
FI
HCPP
HHA
HMO
HOS
ICF/MR
IHS
IPA
ISAR
I/T/U
LEP
LMRP
M+C
MA
MA-PD
MAC
MCOs
MMA
MSA
MYBE
OACT
OPM
PACE
P4P
PCP
PDP
PFFS
POS
PPOs
PSOs
QI
QIO
RFB
SAE
SEP
SHIP

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Advance beneficiary notice
Adjusted Community Rate
Adjusted Community Rate Proposal
Activities of Daily Living
Agency for Healthcare Research
and Quality
American Indian and Alaska Native
Administrative law judge
Administrative Procedure Act
Balanced Budget Act of 1997
Medicare, Medicaid and SCHIP
[State Children’s Health Insur­
ance Program] Balanced Budget
Refinement Act of 1999, (Pub. L.
106–113)
Medicare, Medicaid, and SCHIP
Benefits Improvement and Pro­
tection Act of 2000 (Pub L. 105–
33)
Critical Access Hospitals
Coordinated Care Plans
Competitive Medical Plans
Comprehensive outpatient rehabili­
tation facility
Disproportionate Share Hospital
Employer and Union Group Health
Plans
Evidence of coverage
End-Sage Renal Disease
Federal Employees Health Benefits
Fee-for-Service plans
Fiscal Intermediaries
Health care prepayment plan
Home health agency
Health Maintenance Organizations
Health Outcomes Survey
Intermediate Care Facilities for
Mentally Retarded
Indian Health Service
Independent Physician Association
Intra-Service Area Rate
Indian Health Service, Tribal and
Urban Health Program
Limited English Proficiency
Local Medical Review Policy
Medicare+Choice
Medicare Advantage
Medicare Advantage Prescription
Drug
Medicare Appeals Council
Managed Care Organizations
Medicare Prescription Drug, Im­
provement, and Modernization
Act of 2003
Medical Savings Account
Mid-year Benefit Enhancement
Office of the Actuary
Office of Personnel Management
Program All-Inclusive Care for the
Elderly
Pay for Performance
Primary Care Physician
Prescription Drug Plan
Private Fee-For-Service
Point of Service
Preferred Provider Organizations
Provider Sponsored Organizations
Quality Improvement
Quality Improvement Organization
Religious Fraternal Benefit
Service Area Expansion
Special Election Period
State Health Insurance Programs

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SNF
SNPs

Skilled Nursing Facility
Special Needs Plans

I. Background
A. Medicare Prescription Drug,
Improvement, and Modernization Act of
2003
The Medicare Prescription Drug,
Improvement, and Modernization Act of
2003 (MMA) (Pub. L. 108–173) was
enacted on December 8, 2003. Title II of
the MMA makes important changes to
the current Medicare+Choice (M+C)
program by replacing it with a new
Medicare Advantage (MA) program
under Part C of Medicare. On August 3,
2004, we published a proposed rule in
the Federal Register (69 FR 46866) that
set forth the provisions that would
implement Title II of the MMA.
Beginning in 2006, the MA program is
designed to:
• Provide for regional plans that may
make private plan options available to
many more beneficiaries, especially
those in rural areas.
• Expand the number and type of
plans provided for, so that beneficiaries
can choose from Health Maintenance
Organizations (HMOs), Preferred
Provider Organization (PPO) plans (the
most popular type of employersponsored plan), Fee-for-Service (FFS)
plans, and Medical Savings Account
(MSA) plans, if available where the
beneficiary lives.
• Enrich the range of benefit choices
available to enrollees including
improved prescription drug benefits,
other benefits not covered by original
Medicare, and the opportunity to share
in savings where MA plans can deliver
benefits at lower costs.
• Provide incentives to plans, and
add specialized plans to coordinate and
manage care in ways that
comprehensively serve those with
complex and disabling diseases and
conditions.
• Use open season competition
among MA plans to
improve service, improve benefits,
invest in preventive care, and hold costs
down in ways that attract enrollees.
• Enhance and stabilize payments to
organizations, improve program design,
introduce new flexibility for plans, and
reduce impediments to plan
participation.
• Advance the goal of improving
quality and increasing
efficiency in the overall health care
system. Medicare is the largest payer of
health care in the world. Medicare can
drive changes in the entire health care
system.
With these new and improved
choices, Medicare beneficiaries, like

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Federal employees and retirees in the
Federal Employees Health Benefits
(FEHB) Program, will have the
opportunity to obtain improved
benefits, improved services, and
reduced costs. However, beneficiaries
will still be able to remain in traditional
Medicare (referred to throughout as
‘‘original’’ Medicare), enhanced by the
new Part D drug benefit. All will have
the opportunity to switch among plans,
or to or from original Medicare, during
the annual election period (or ‘‘open
season’’) in November and December.
Over time, participating plans will be
under continued competitive pressure
to improve their benefits, reduce their
premiums and cost sharing, and
improve their networks and services, in
order to gain or retain enrollees. In
addition, we expect plans to use
integrated health plan approaches such
as disease prevention, disease
management, and other care
coordination techniques. In doing so,
integrated plans that combine the
original Parts A and B of Medicare and
the new Part D drug benefit and apply
these innovative techniques must pass
on savings that may result from these
care coordination techniques to the
enrollee through reduced premiums or
additional benefits.
Beginning in 2006, payments for local
and regional MA plans will be based on
competitive bids rather than
administered pricing. MA organizations
will submit an annual aggregate bid
amount for each MA plan. An aggregate
plan bid is based upon the MA
organization’s determination of
expected costs in the plan’s service area
for the national average beneficiary for
providing non-drug benefits (that is,
original Medicare (Part A and Part B)
benefits), Part D basic prescription
drugs, and supplemental benefits if any
(including reductions in cost sharing).
Our payment to an MA organization for
an MA plan’s coverage of original
Medicare benefits depends on the
relationship of the plan’s basic A/B bid
to the plan benchmark. For a plan with
a basic A/B bid below its benchmark,
we will pay the MA organization the
basic A/B bid amount, adjusted by the
individual enrollee’s risk factor, plus
the rebate amount. (The rebate is 75
percent of the difference between the
plan bid and benchmark, and is used to
provide mandatory supplemental
benefits or reductions in Part B or Part
D premiums. The government retains
the other 25 percent.) For a plan with
a bid equal to or above its benchmark,
we will pay the MA organization the
plan benchmark, adjusted by the
individual enrollee’s risk factor. In
addition, we would pay the bid amount,

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if any, for Part D basic coverage. The
MMA also requires other adjustments to
payments. See the subpart G preamble
for a discussion of the geographic IntraService Area Rate (ISAR) adjustment
and the government premium
adjustment (referred to in the MMA as
the ‘‘adjustment relating to risk
adjustment’’).
We will be able to negotiate bid
amounts with plans in a manner similar
to negotiations conducted by the Office
of Personnel Management(OPM) with
FEHB plans. We will work with plans
to ensure benefit packages meet the
needs of our population and that
information is made available to
beneficiaries so that they can make
decisions about which plans best meet
their needs.
Finally, in conjunction with the new
drug benefit required under Title I of
MMA, which is addressed in separate
rulemaking found in part 423, changes
made in the MMA to the M+C program
(now called the MA program) are
intended to bring about broad-based
improvements to the Medicare
program’s benefit structure, including
improved prescription drug coverage
under the MA program. Organizations
offering local and regional coordinated
care MA plans must offer at least one
plan with the Medicare prescription
drug benefit or an actuarially equivalent
drug benefit.
In addition to the changes because of
the MMA, we identified many areas in
the proposed rule where we believed we
could prevent or reduce unnecessary
burden, duplication, or complexity
either in interpreting the new MMA
provisions or in modifying existing
rules to accommodate MA reforms.
B. Relevant Legislation
1. Balanced Budget Act of 1997
Section 4001 of the Balanced Budget
Act of 1997 (BBA) (Pub. L. 105–33)
added sections 1851 through 1859 to the
Social Security Act (the Act)
establishing a new Part C of the
Medicare program, known as the
Medicare+Choice (M+C) program.
Under section 1851(a)(1) of the Act,
every individual entitled to Medicare
Part A and enrolled under Medicare Part
B, except for individuals with end-stage
renal disease (ESRD), could elect to
receive benefits either through the
original Medicare program or an M+C
plan, if one was offered where he or she
lived.
The primary goal of the M+C program
was to provide Medicare beneficiaries
with a wider range of health plan
choices through which to obtain their
Medicare benefits. The BBA authorized

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us to contract with private organizations
offering a variety of private health plan
options for beneficiaries, including both
traditional managed care plans (such as
those offered by HMOs that had been
offered under section 1876 of the Act),
and new options that were not
previously authorized. Four types of
M+C plans were authorized under the
new Part C, as follows:
• M+C coordinated care plans,
including HMOs (with or without point­
of-service options (POS)), provider
sponsored organizations (PSOs), and
PPOs.
• M+C MSA plans (combinations of a
high deductible M+C health insurance
plan and a contribution to an M+C
MSA).
• M+C private fee-for-service (PFFS)
plans.
• M+C religious and fraternal benefit
(RFBs)plans.
The BBA changed the payment
methodology to Medicare health plans
and initially afforded beneficiaries more
choice of plans nationally. However,
payment rates grew modestly in relation
to the costs health plans incurred,
resulting in fewer health plans
participating in the M+C program,
decreased choice of plans available to
beneficiaries, and fewer extra benefits
available to enrollees. Although there
were large payment increases in rural
areas as a result of the BBA provisions,
access to Medicare coordinated care
plans declined significantly in rural
areas after 1997.
To implement these changes, we
published an interim final rule in the
Federal Register on June 26, 1998 (63
FR 34968); a final rule on February 17,
1999 (64 FR 7968); and a final rule with
comment on June 29, 2000 (65 FR
40170).
2. Medicare, Medicaid, and SCHIP
Balanced Budget Refinement Act of
1999 and the Medicare, Medicaid, and
SCHIP Benefits Improvement and
Protection Act of 2000
The Medicare, Medicaid, and SCHIP
Balanced Budget Refinement Act of
1999, Pub. L. 106–113 (BBRA) amended
the M+C provisions of the BBA. Many
of these amendments were reflected in
the June 29, 2000 final rule with
comment period. In addition, the
Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection
Act of 2000, Pub. L. 106–554 (BIPA),
enacted December 21, 2000, further
amended the M+C provisions of the
BBA and BBRA. A final rule containing
BIPA provisions was published in the
Federal Register on March 22, 2002 (67
FR 13278), as well as on August 22,
2003 (68 FR 50855).

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These laws enacted subsequent to the
BBA made incremental changes to M+C
payments and provided financial
incentives to plans to participate in the
M+C program. While these efforts
helped stabilize the M+C program, they
did not generally improve plan
participation in the M+C program nor
did they increase overall beneficiary
enrollment or access to plans in rural
areas.
3. Medicare Prescription Drug,
Improvement, and Modernization Act of
2003 (MMA)
The specific sections of Part C of the
Social Security Act that were impacted
by the MMA are as follows:
Section 1851—Eligibility, election
and enrollment.
Section 1852—Benefits and
beneficiary protections.
Section 1853—Payments to MA
organizations.
Section 1854—Premiums.
Section 1855—Organizational and
financial requirements for MA
organizations.
Section 1856—Establishment of
standards.
Section 1857—Application
procedures and contracts with MA
organizations.
Section 1858—Special rules for MA
regional plans [added by the MMA].
Section 1859—Definitions;
Miscellaneous provisions.
This final rule addresses the new MA
provisions in Title II of MMA. The
requirement in 1858(a)(2)(D) of the Act
to conduct a market survey and analysis
before establishing MA regions took
place concurrent with the publication of
the MA proposed rules. The
announcement of the establishment of
the MA and Prescription Drug Plan
(PDP) regions occurred on December 6,
2004. The regions may be found at http:/
/cms.hhs.gov/medicarereform/
mmaregions.
Provisions of the MMA addressed in
this final rule outside of Title II of the
MMA include Section 722—Medicare
Advantage Quality Improvement
Program, of Title VII. Quality
improvement provisions in this final
rule may be found under Subpart D—
Quality Assurance.
C. Codification of Regulations
The final provisions set forth here are
codified in 42 CFR Part 422, The
Medicare Advantage Program.
The regulations for managed care
organizations (MCOs) that contract with
CMS under cost contracts will continue
to be located in 42 CFR part 417, Health
Maintenance Organizations,
Competitive Medical Plans, and Health
Care Prepayment Plans.

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D. Organizational Overview of Part 422
The MMA amended the existing
provisions of the Medicare statute found
in Part C of Title XVIII, sections 1851
through 1859 of the Act, and added a
new section 1858 to the Act. This final
rule covers a wide range of topics
included in the existing part 422,
including eligibility and enrollment,
benefits and beneficiary protections,
payment, contracting requirements, and
grievances and appeals. We have
generally retained the organization of
the sections from part 422, except for
reordering subparts F and G to place the
bidding and payment provisions in
sequential order.
Where the MMA did not amend
existing statute, this final rule does not
set forth unchanged regulations text
from the previous part 422. Thus, this
final rule contains only the necessary
revisions to existing part 422. In some
subparts of part 422, the only changes
are in nomenclature, that is, the
replacement of M+C references with MA
references. The regulations in that
subpart H are not set forth in this final
rule. The subparts with substantive
changes are as follows:
Subpart A—General provisions,
establishment of the Medicare
Advantage Program, definitions, types
of MA plans, and cost-sharing in
enrollment-related costs (user fees).
Subpart B—Requirements concerning
beneficiary eligibility, election, and
enrollment and disenrollment
procedures.
Subpart C—Requirements concerning
benefits, access to services, coverage
determinations, and application of
special benefit rules to PPOs and
regional plans.
Subpart D—Quality improvement
program, chronic care improvement
program requirements, and quality
improvement projects.
Subpart E—Relationships with
providers.
Subpart F—Submission of bids,
premiums, and related information and
plan approval.
Subpart G—Payments for MA
organizations.
Subpart I—Organization compliance
with State law and preemption by
Federal law.
Subpart J—Special rules for MA
regional plans, including the
establishment of MA regions,
stabilization fund, and risk sharing.
Subpart K—Application and contract
requirements for MA organizations.
Subpart L—Effect of change of
ownership or leasing of facilities during
term of contract.

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Subpart M—Beneficiary grievances,
organization determinations, and
appeals.
Subpart N—Medicare contract
determinations and appeals.
Subpart O—Intermediate sanctions.
Each of these subparts is discussed
below in section II of this preamble.

2. Organization of the Final Rule
In this final rule, we address all
comments received on the proposed
rule. We are addressing issues according
to the numerical order of the relative
regulation sections.

II. Analysis of and Responses to Public
Comments

1. Administrative Procedure Act (APA)
Issues
We received several comments on
various aspects of the rulemaking
process, as discussed below:
Comment: One commenter suggested
that we waive the APA provision that
requires at least 30 days notice prior to
a final regulation becoming effective in
order to allow applicants applying to
become specialized MA plans for
special needs individuals, or ‘‘SNPs,’’ to
have the new requirements apply as
soon as possible. The commenter made
this recommendation in the event that
this final regulation was not issued prior
to the MMA statutory deadline for
issuing a final regulation for SNPs that
was 1 year following the date of
enactment, or December 8, 2004.
Response: The first two categories of
special needs individuals,
institutionalized persons and dual
eligibles, were specified in the statute,
and we have already begun working
with plans wishing to become
specialized MA plans for these
categories of special needs individuals.
We discuss in subpart A below our
approach to allowing for the additional
category of special needs individuals—
those with severe or disabling chronic
conditions. This final rule will take
effect March 22, 2005, except where
otherwise noted. We do not believe it is
necessary to waive the 30-day notice
period because it likely will take longer
than the 30-day period for a plan’s
application and approval process to
occur. However, we intend to work with
applicants who wish to offer specialized
MA plans to ensure that the approval
process is as efficient and timely as
possible.
Comment: We received a number of
comments on the timing of the
regulation and the short timeframe
between issuance of the final regulation
and preparation of applications and bids
early in 2005 for contract year 2006.
One commenter stated that the time
required to re-contract with its
commercial provider networks to ensure
that the PPO contracts contain the
Medicare required language and rate
structure that are reflective of CMS
reimbursements, is substantial. The
commenter indicated that it needed
more time to build the system
infrastructure to support a new systems

A. Overview
1. Comments on the August 3, 2004
Proposed Rule
We received 186 items of
correspondence containing more than a
thousand specific comments on the
August 3, 2004 proposed rule.
Commenters included MCOs and other
industry representatives, representatives
of physicians and other health care
professionals, beneficiary advocacy
groups, representatives of hospital and
other providers, insurance companies,
employers, States, accrediting and peer
review organizations, members of the
Congress, Indian Health Service (HIS),
Indian Health Service, Tribal and Urban
Health Programs (I/T/U), American
Indians and Alaska Natives (AI/AN),
and others. Consistent with the scope of
the August 3, 2004 proposed rule, most
of the comments addressed multiple
issues, often in great detail. We received
many comments expressing concerns
unrelated to the proposed rule. Some
commenters expressed concerns about
Medicare unrelated to the MA program,
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 August 3, 2004
proposed rule we will be unable to
address comments and concerns that are
unrelated to the proposed rule. Listed
below are the six areas of the proposed
regulation that generated the most
concern:
• Bidding and Payment.
• Access issues, including network
adequacy and access providers,
including rural providers.
• Specialized Medicare Advantage
Plans.
• Establishment of MA Regions.
• Eligibility and enrollment issues,
including disenrollment for failure to
pay cost sharing and lock in.
In addition, we received many
comments on the proposed rule relating
to Part 417 for Health Maintenance
Organizations; Competitive Medical
Plans, and Health Care Prepayment
Plans that contract with CMS under cost
contracts. A discussion of those
comments may be found separately at
that Part.

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B. General Comments

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platform than would be required for
commercial enrollees. The commenters
suggested that plans may have to limit
the number of regions in which they
participate because of the short
timeframes between issuance of the
regulation and the application filing
deadline.
Response: We agree that working
within the statutory constraints of the
MMA, including the relatively short
period of about 13 months between
enactment of the legislation and
issuance of final regulations, there is
little time between issuance of the
regulation and the preparation of
applications and bids in 2005 for
contract year 2006. With respect to the
short time frame in applications and
submission of bids, please refer to the
comments and responses related to
bidding at § 422.254 and § 422.502
related to application requirements. Our
goal beginning on the date of enactment
of the MMA was to issue final
regulations as soon as possible so that
prospective MA plans would have the
necessary information to be able to
make business decisions before bids are
due mid 2005.
Comment: Several commenters
recommended that CMS issue a final
rule with comment period prior to
implementation of the final rules. The
commenters expressed concern that
certain aspects of the proposed rule that
would impact rural providers have not
been specified in sufficient detail. One
commenter recommended that CMS
conduct a second notice of proposed
rulemaking incorporating changes from
the first round of comments and
allowing for public comment on the
additional details that are currently
under development, or issue the
regulations on an interim basis with a
second comment period on the
additional, important details that are
currently under development or that
reflect decisions made following this
round of comments.
Response: Under the APA, we are
required to provide the public with the
opportunity to review and comment
upon proposed regulations. We have
done this through the publication of the
August 3, 2004 proposed rule and its
corresponding comment period. We
believe that allowing for a second round
of comments or publishing interim
regulations would make it difficult for
MA organizations wishing to offer MA
plans in 2006 to prepare to meet the
new requirements imposed by the MMA
and implemented by this final rule.
2. Other General Comments
Comment: A number of commenters
stated that the final regulation must

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address the unique state of AI/AN
people and the Indian health program.
In particular, these comments raise
concerns about the implications of the
proposed rules on the Indian health care
delivery system. For example, there is
concern that the proposed rules will
jeopardize significant revenues the
Indian health system now collects from
Medicaid for ‘‘dual eligibles,’’ that is,
those individuals who are eligible for
both Medicare and Medicaid. They ask
for substantial modifications to the
proposed rules to enable voluntary
enrollment by AI/AN populations in
MA plans. Some of the suggested
modifications include: (1) encouraging
MA enrollment by AI/AN by removing
financial barriers, such as waiving AI/
AN cost sharing for all plans; (2)
ensuring that I/T/U Health Programs are
held harmless financially, and are fully
reimbursed for covered services
provided to AI/AN who enroll in a MA
plan.
Response: We appreciate the
numerous comments that provided
information on unique health needs for
the AI/AN populations. As noted
elsewhere, we are implementing the
MMA statute through this rulemaking.
We do not have the flexibility to include
language that would carve out a subset
of Medicare beneficiaries, such as AI/
AN populations, if it is not provided for
in statutory language. Specific
comments raised by the AI/AN and I/T/
U organizations will be addressed in the
respective subparts under which the
comments were submitted. In general,
however, we believe that the newly
created regional plans will create new
choices for the AI/AN populations, and
that access to MA plans will be
improved. Similarly, because MA
regional plans must reimburse for all
covered benefits in and out of network,
IHS facilities may receive
reimbursement for out of network care
provided to a regional MA plan AI/AN
beneficiary by that MA regional plan.
Under provisions designed to protect
the Medicare program from fraud and
abuse, a broad waiver of beneficiary cost
sharing of the type the commenter
requests would not be permitted.
However, we make no statement
regarding the applicability of existing
statutory and regulatory provisions that
may allow for the waiver of cost sharing
in certain cases.
Comment: One commenter
recommended that CMS develop and
conduct educational and informational
activities on the differences in the
various MA options, particularly in
areas where there are choices of original
Medicare, managed care plans, PPOs,
MSAs and PPFs plans. The commenter

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believes that there is a potential for
confusion and error for beneficiaries
with so many choices.
Response: We agree that strong
outreach to beneficiaries about their
new choices of MA plans, as well as the
drug benefit, is critical to the success of
these new programs. We will be
devoting more resources to providing
new information and education on the
new plan choices and drug benefit.
Comment: We received a number of
general comments on specialized MA
plans for special needs individuals,
sometimes referred to as ‘‘SNPs’’ or
‘‘special needs plans’’. Comments
relating to definitions of SNPs may be
found in subpart A and comments on
enrollment may be found in subpart B
below. Among the general comments
was a suggestion to disseminate a set of
guiding principles for SNPs and further
refine them as experience increases. We
also received a comment that network
adequacy for SNPs should be evaluated
to ensure timely, accessible, and
appropriate care and that all necessary
specialists are represented. Further, it
was suggested that the provider network
should be broad enough to ensure that
vulnerable populations served have
timely access to all necessary specialists
required to address special needs.
Additionally, several commenters
stated that CMS should incorporate into
regulation the authority to waive or
modify MA requirements that conflict
with the intent of the SNP provision.
Finally, some commenters requested
that CMS provide guidance with regard
to the States’ role in developing and
approving SNPs for dual eligibles. It was
recommended that CMS give states
maximum flexibility in using waiver
authority to integrate Medicare and
Medicaid benefits for dual eligibles
under SNP programs. A commenter
suggested that CMS consult with State
Medicaid agencies where Home and
Community-based waivers are operating
before allowing these populations to be
enrolled in SNPs because this could add
to the cost and complexity of providing
services.
Response: We provided Interim
Guidance for SNPs in the 2005 Call
Letter in June 2004 and will provide
additional operational guidance for
SNPs after publication of the final rule.
Interim guidance may be obtained at
www.cms.hhs.gov/healthplans/
specialneedsplans/qaspecneeds06­
23.pdf. Consistent with current policy
for network adequacy for MA plans as
found at § 422.112, we will require that
MA organizations submit information
about their provider network and will
review this information as part of the
application and approval process to

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ensure that timely, accessible, and
appropriate care is provided. We will be
particularly interested in the availability
of care designed to address the needs of
the enrolled special needs population.
While the MMA allows SNPs to limit
enrollment to a defined population, as
described in § 422.52, the law does not
provide for waiver of other MA
requirements for SNPs. We encourage
States and MA plans to work
cooperatively in developing programs to
serve dual eligibles and will help to
coordinate these efforts where
appropriate. We believe that SNPs can
be appropriate for care and services to
those in the community and lead to the
coordination of the complex services
they need.
Finally, we note that program
oversight is an essential government
function that is an integral component
of implementing the MA program.
Throughout this rulemaking, we refer to
government activity necessary to
implement this section, which includes
program oversight authority.
III. Provisions of the Proposed Rule,
Analysis of and Responses to
Comments on the Proposed Rule, and
Final Decisions
Part 417—Health Maintenance
Organizations, Competitive Medical
Plans, and Health Care Prepayment
Plans
Subpart J–Qualifying Conditions for
Medicare Contracts Extension of
Reasonable Cost Contracts (§ 417.402)
Authority for cost HMOs/CMPs (cost
plans) was due to expire on December
31, 2004. Section 234 of the MMA
provides an initial extension of cost
plans through December 31, 2007. It
also provides for a continued extension
of cost plans beyond December 31,
2007, under specific conditions.
Effective for contract years beginning
on or after January 1, 2008, cost plans
may be extended where there are fewer
than two coordinated care plan-model
MA plans of the same type available to
Medicare beneficiaries in the same
service area. Both of the ‘‘competing’’
MA plans of the same type must meet
minimum enrollment requirements for
the entire previous year in order to
trigger mandatory cost plan non-renewal
or service area reduction. We
interpreted the statute to require cost
plan service area reduction where there
are two or more MA plans of the same
type meeting minimum enrollment
requirements competing for Medicare
members in a portion of the cost plan’s
service area. We asked for comment on
our interpretation in the proposed rule
related to mandatory service area
reductions, saying that an alternative

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reading of section 234 of the MMA
might permit renewal of a cost plan in
all parts of its service area until there
was competition from two (or more) MA
coordinated care plans throughout the
cost plan’s service area. After reviewing
comments and responding (below), we
are adopting the proposed policy as
final.
At § 417.402, we proposed to permit
existing cost plans to expand their
service areas through September 1,
2006. Thereafter, service area expansion
applications by cost HMOs/CMPs will
be initially evaluated and accepted only
when there are not two or more MA
plans of the same type meeting
minimum enrollment requirements in
the area in which the cost plan proposes
to expand. After reviewing comments
and responding (below), we are
adopting the proposed policy as final.
We received the following comments
on the proposed provisions for subpart
J of part 417 and have provided our
responses:
Comment: Many commenters
supported the non-renewal of cost
HMOs/CMPs as proposed in the
proposed rule. These commenters made
reference to the statutory and
Conference Committee Report language
that indicated the Congressional intent
that cost plans are to be required to
operate under the same provisions as
other private plans to the extent other
private plans are willing to enter the
cost plan’s service area. Many other
commenters objected to the partial nonrenewal proposal made in the proposed
rule. Many stated that competition from
MA coordinated care plans was more
likely in urban areas, where most cost
plan enrollment is concentrated. These
commenters stated that even where
there is no MA coordinated care plan
competition in rural areas, the viability
of a cost plan without an urban ‘‘core’’
would likely be threatened. To the
extent CMS non-renewed cost plans in
urban areas, the financial viability of the
organization offering the cost plan
would be undermined in rural areas as
well because of the loss of economies of
scale. Such a result would be contrary,
these commenters said, to an underlying
concept of the MMA, which is to
increase choices for Medicare
beneficiaries in rural areas. Finally,
many of these commenters stated that
continuity of care would be needlessly
lost for members in urban areas enrolled
in cost plans that were partly nonrenewed, because the members would
be forced to change Medicare plans and
providers.
Response: We generally support the
notion of continuity of care. However,
we believe that when competing MA

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coordinated care plans are available in
an area that will be non-renewed for a
cost plan, non-renewed cost members
are able to continue to receive services
from current providers through either
enrollment in one of the competing MA
coordinated care plans or by returning
to FFS Medicare. We recognize that
when a cost plan is non-renewed in an
urban area with MA coordinated care
plan competition, the financial viability
of the cost plan in rural areas without
MA coordinated care plan competition
may be undermined. However, we
believe that allowing a cost plan to
continue to compete for members in
areas of MA competition would unfairly
undermine the financial viability of the
competing MA coordinated care plans.
Therefore, we have not modified our
regulation. We believe that this
interpretation is consistent with the
statutory intent that cost plans will not
be permitted to compete for new
members under different provisions
from those applicable to other private
plans that have entered the cost plan’s
service area.
Comment: Some commenters stated
that the proposed regulation text at
§ 417.402(c)(1) and (2) did not specify
what kind of ‘‘year’’ was meant—
calendar year, 12 month period, or
something else. All of these commenters
also recommended that CMS specify in
regulation text that the ‘‘year’’ referred
to is a calendar year.
Response: We agree with this
comment and have modified the
regulation text to specify that the ‘‘year’’
in question is a calendar year. This is
consistent with the statute, in that MA
and cost plan offerings are for calendar
years. To the extent that competition
has been present for the entire previous
calendar year, it should mean the
calendar year immediately prior to the
year in which the cost plan will be
required to non-renew in a portion of its
service area or have its contract nonrenewed.
Comment: Many commenters
recommended that CMS distinguish
between the meaning of ‘‘plan’’ within
the section 1876 cost program and the
meaning of ‘‘plan’’ within the MA
program. Under the section 1876 cost
program, each CMS-contracting HMO/
CMP is allowed to offer a single
Medicare cost ‘‘plan’’—see section
1876(c)(2)(A)(I) of the Act. On the other
hand, under the MA program, each
CMS-contracting MA organization is
permitted to offer many MA ‘‘plans’’—
see § 422.4(b).
Response: We disagree with the
commenters. Section 234 of the MMA
expressly provides that a cost contract
may not be extended or renewed for a

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service area if such service area during
the previous year was within the service
area of two or more coordinated care
plans of the same type (that is, regional
or local) that meet the relevant
enrollment requirements. Because a
single MA organization may offer two
different MA coordinated care plans
within a cost plan’s service area, a
single MA organization can trigger the
non-renewal of the cost contract, if the
other requirements of Section
1876(h)(5)(C)(ii) of the Act are met.
Comment: Several commenters
submitted comments stating that
specialized MA plans for special needs
individuals (special needs plans or
SNPs) (defined at § 422.2) should not
count in the MA coordinated care plan
competition tests in § 417.402(c)(1)
through (3), because they are not
available to the general public and
therefore not a true test of the
availability of MA coordinated care
plans in the service area of a cost plan.
Response: We agree with the
commenter that the Congress intended
to permit cost plans to remain in place
in an area until the enrollees in that cost
plan have at least two local or two
regional MA plan options to choose
from in the area. Because in many cases
cost enrollees would not be eligible to
enroll in a SNP, we do not believe that
the existence of a SNP in a service area
should automatically count as an option
available in that service area. We note
that the statute refers to a cost plan’s
service area being within the ‘‘service
area’’ of two local or regional MA plans.
The MA regulations at § 422.2 define a
plan’s service area as an area within
which an MA-eligible individual may
enroll in a particular MA plan offered
by an MA organization. Although a
SNP’s service area is open to all
individuals in the service area who are
in the special needs category served by
the plan, it may not be open generally
to MA-eligible individuals (for example,
if it is a SNP that exclusively, rather
than disproportionately, enrolls special
needs individuals). For this reason, we
believe that a cost plan may not be
‘‘within the service area’’ of a SNP, as
this term is used in the competition test,
in some cases. We will therefore apply
the competition test on a case-by-case
basis with respect to SNPs. If the SNP
is an option available to the cost plan’s
enrollees, and the SNP meets the
requirements of section 1876(h)(5)(C)(ii)
of the Act and § 417.402(c), it will be
taken into account in determining
whether the cost plan may be renewed.
Similar considerations apply to MA
plans that exclusively enroll employer/
labor group members under authority
provided in section 1857(i) of the Act

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and § 422.106(c) and (d). To the extent
the employer/labor group MA plan is
available to the cost plan’s enrollees,
and the MA plan meets the
requirements of section 1876(h)(C)(ii) of
the Act and § 417.402(c), it will be taken
into account in determining whether the
cost plan may be renewed. Thus, we
will also apply the competition test on
a case-by-case basis with respect to
employer/labor group MA plans.
Comment: One commenter suggested
that implicit in the ‘‘competition’’ tests
was the fact that the MA coordinated
care plans that caused the non-renewal
in a portion of the service area, or that
caused the non-renewal of the cost plan
in its entire service area, would be
available in the coming year. The
commenter was concerned that CMS
might enforce this section of the cost
regulations, even if one of the MA plans
used in establishing the ‘‘competition’’
threshold were non-renewing or
withdrawing from the service area in the
year in which enforcement would occur.
Response: Because such a result
would be contrary to statutory intent,
CMS will not proceed with enforcement
when fewer than two MA coordinated
care plans will be offered to Medicare
beneficiaries in the affected area at the
time of enforcement.
Comment: One commenter asked
CMS to state its clear intent in
regulatory text that we will allow cost
plans to expand service areas after
September 1, 2006.
Response: As we said in the preamble
of the proposed rule and repeated in
this preamble: ‘‘We will permit existing
cost plans to expand their service areas
through September 1, 2006. Thereafter,
service area expansion applications by
cost HMOs/CMPs will be initially
evaluated and accepted only when there
are not two or more MA plans of the
same type meeting minimum
enrollment requirements in the area in
which the cost plan proposes to
expand.’’ We specifically included the
first sentence in regulation text at
§ 417.402(b). However, service area
expansions are not guaranteed after that
date. Please note that the regulation text
at § 417.402(b) specifically authorizing
service area expansions through
September 1, 2006, does not preclude
them thereafter. Additionally, the new
language replaces identical language in
this section of the regulation (and which
language first appeared in section 634 of
the Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection
Act of 2000 (BIPA)) which provided
service area expansion authority for cost
plans through September 1, 2003. The
commenter should note that we have
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BIPA and in our regulations to be
permissive in this area, rather than
proscriptive. We will continue to apply
it permissively in this area to the extent
that the conditions for non-renewal
under Section 1876(h)(5)(C) and
§ 417.402(c) are not present.
Subpart Q—Beneficiary Appeals
Changes to subpart Q are addressed in
the preamble discussion for subpart M,
which deals with appeals policy for MA
plans, cost plans and HCPPs.
A. Subpart A—General Provisions
(§ 422.1)
1. Conforming Changes
Subpart A of the August 3, 2004
proposed rule set forth several general
and conforming changes dictated by
MMA. Below is a summary of the
provisions in subpart A. (For a broader
discussion of the provisions, please
refer to our proposed rule.) The
provisions are as follows:
• Section § 422.1 lists the statutory
authority that is implemented in part
422. In § 422.1, we have added the new
section 1858 of the Act that pertains to
‘‘Special rule for MA Regional Plans.’’
• We removed provisions relating to
application requirements and evaluation
and determination procedures in § 422.6
and § 422.8 and added them to
§ 422.501 and § 422.502 of subpart K, so
that all application and contracting
information is in one place.
• We redesignated and amended
§ 422.10 as § 422.6 and amended newly
redesignated § 422.6. Section 422.6
(formerly § 422.10) described the user
fees associated with the Medicare
Beneficiary Education and Information
Campaign, required under section
1857(e)(2) of the Act.
2. Definitions (§ 422.2)
The majority of the proposed changes
in subpart A concerned new, revised,
and obsolete definitions for the new MA
Program in § 422.2. The MMA required
several new and broad definitions; ‘‘MA
regional plans,’’ ‘‘specialized MA
plans,’’ ‘‘ACR,’’ ‘‘Additional benefits,’’
‘‘Adjusted community rate,’’ and
‘‘M+C’’ obsolete after 2006.
In proposed § 422.2, we also revised
several existing definitions to make
them consistent with the MMA statute.
For example, Mandatory supplemental
benefits are redefined to incorporate
language reflecting that these benefits
may be paid for through premiums and
cost sharing or through the application
of a rebate, or both. Therefore,
mandatory supplemental benefits are
defined as health care services not
covered by Medicare that an MA

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enrollee must purchase as part of an MA
plan. Benefits may include reductions
in cost sharing for benefits under the
original Medicare FFS program, and are
paid for in the form of premiums and
cost sharing, or by an application of the
beneficiary rebate rule in section
1854(b)(1)(C)(ii)(I) of the Act, or both.
However, optional supplemental
benefits retained the same definition as
under the M+C program as health
services not covered by Medicare that
are purchased at the option of the MA
enrollee and paid for in full, directly by
(or on behalf of) the Medicare enrollee,
in the form of premiums or cost-sharing.
(Throughout the regulation, the phrase
‘‘supplemental benefits’’ refers to both
mandatory and optional supplemental
benefits.) The terms ‘‘mandatory
supplemental’’ and ‘‘optional
supplemental’’ are used when referring
specifically to one of the types of
supplemental benefits.
We removed ‘‘additional benefits’’
from the definition of ‘‘basic benefits’’
because MA plans will no longer offer
additional benefits. In addition, we
replaced the word ‘‘ACR’’ process with
the words ‘‘annual bidding’’ process in
the definition of ‘‘benefits’’ to reflect the
new bidding process for submission and
approval of benefits. Finally, we revised
the definition of ‘‘service area’’ to
incorporate the concept of the new MA
regional plan’s service area that consists
of an entire region.
Under section 1851(a)(2)(A) of the
Act, two new types of coordinated care
plans were established; MA Regional
plans, which are regional PPO plans,
and specialized MA plans for special
needs individuals, or SNPs. We defined
an ‘‘MA local area’’ as a county or other
area specified by us because it is
important to distinguish an MA local
area from an MA region. We defined an
‘‘MA regional plan’’ because it is a new
type of coordinated care plan choice for
beneficiaries. While PPOs first became a
choice for beneficiaries under the BBA,
they operated as ‘‘local’’ plans on a
county (including multi-county) or
partial county basis. The MA regional
plan functions like a local PPO but must
serve an entire region.
A regional MA plan’s service area is
one or more entire MA regions; thus, we
defined an ‘‘MA regional plan’’ as a
private health plan that operates as a
PPO, but serves an entire CMSdesignated region. Local PPOs that may
offer MA plans under the MA program,
the regional PPOs must have a network
of contracting providers that have
agreed to a specific reimbursement for
covered benefits that are offered by the
MA regional plan, and must also
provide for reimbursement for all

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covered benefits regardless of whether
the covered benefits are provided
through the network providers or
outside of the network.
We defined an ‘‘MA local plan’’ as
one that is not an MA regional plan.
Also defined under part 422 are the
‘‘Prescription Drug Sponsor,’’ ‘‘PDP,’’
and a ‘‘MA Prescription Drug (MA-PD)
plan.’’ A sponsor must be a private
entity that meets our requirements and
standards. PDP sponsors may offer
multiple plans throughout the country
or in a region, but sponsors must submit
an individual bid for each plan.
An MA-PD plan is an MA plan that
also provides qualified prescription
drug coverage as found in Part D of the
Act. An organization offering a
coordinated care MA plan must have an
MA-PD plan in each of the service areas
in which it operates, as required under
section 1860D 21(a)(1) and (2) of Part D
of the Act.
In section 1859(b)(6)(A) of the Act,
specialized MA plans for special needs
individuals or SNPs are defined to be
MA plans that exclusively serve special
needs individuals defined in section
1859(b)(6)(B) of the Act. The
establishment of specialized MA plans
allows MA plans to exclusively enroll
special needs individuals in MA plans
that have targeted clinical programs for
these individuals.
Section 1859(b)(6)(B) of the Act
identifies three types of special needs
individual as: (1) institutionalized
individuals; (2) individuals entitled to
medical assistance under a State plan
under Title XIX; and (3) other
individuals with severe or disabling
chronic conditions as the Secretary
determines would benefit from
enrollment in a SNP plan.
Comment: One commenter supported
a broad definition that tracks section
1859(b)(6) of the Act in order to provide
CMS with the flexibility needed to
approve a wide range of proposals to
meet the unique needs of special
populations and expand their choices.
Response: We agree with the
commenter. We are providing general
guidelines in our regulations in order to
maintain the flexibility to approve a
wide range of proposals, while also
protecting the interests of special needs
beneficiaries.
The Secretary may also designate an
MA plan as a specialized MA plan for
special needs individuals, ‘‘SNP,’’ if the
plan ‘‘disproportionately’’ serves special
needs individuals.
Comment: Several commenters
responded to the question in the
proposed rule as to whether CMS
should allow specialized MA plans that
disproportionately enroll special needs

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individuals, or ‘‘disproportionate
percentage’’ plans and how they should
be defined. Most commenters supported
including ‘‘disproportionate
percentage’’ plans in the definition of
SNPs. One of the reasons given was to
allow married beneficiaries, or children
of special needs individuals, to enroll in
the same plan as the spouse or parent,
even if only one individual meets the
definition of a special needs individual.
Many commenters suggested that
CMS not establish detailed criteria to
define disproportionate percentage,
particularly at the outset. It was felt that
enrollment thresholds might act as a
barrier to plan participation and limit
choices available to Medicare
beneficiaries. Some commenters
suggested that CMS identify ‘‘exclusive’’
and ‘‘disproportionate’’ plans at the
time of each application. Some
commenters recommended that the
criteria be national, not regional or
local.
Several commenters agreed that the
criteria should be quantitative, for
example, an MA plan risk score in the
upper quintile of all MA plans, or a
frailty score in the upper quintile of all
MA plans as measured by Activities of
Daily Living (ADL) scores on the Health
Outcomes Survey (HOS).
Some commenters recommended that
a ‘‘disproportionate percentage’’ SNP
enroll fifty (50) percent or more special
needs individuals. Another commenter
suggested that SNPs remain exclusive,
but if plans were able to enroll those
without special needs, at least eightyfive (85) percent of the plan’s enrollees
should be individuals with special
needs. Another commenter stated that
requiring an upper limit of more than
seventy-five (75) percent of special
needs individuals would be
problematic. One commenter believes
that ‘‘redesignated’’ SNPs, that is,
regular MA plans that become SNPs, be
allowed to continue enrolling nonspecial needs individuals as long as
overall enrollment contains a higher
proportion of special needs individuals
than exist in the plan’s service area. One
commenter suggested that—(1) an
annual certification and compliance
process; (2) that new plans have a 3-year
startup period to attain the threshold,
and (3) that CMS annually publish risk
score distributions. Another commenter
recommended that non-exclusive plans
be defined as having a higher than
average enrollment of one or more of the
special needs individuals groups as
estimated for MA plans and/or the FFS
population.
Response: We agree that a special
needs individual’s family members may
want to join the same plan. We

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acknowledge that MA plans do not have
to be exclusive to provide quality
specialized programs for special needs
individuals. We received a wide range
of recommendations for defining a
‘‘disproportionate percentage’’ SNP. We
acknowledge that there are numerous
ways to define and identify
disproportionate percentage SNPs and
agree with those commenters who felt
the parameters should not be overly
restrictive, particularly at the outset.
SNPs are a new type of coordinated care
plan and we believe that plans and CMS
might not anticipate all factors that
should be considered in determining an
acceptable percentage. We also want to
encourage plans to develop programs to
more effectively care for special needs
individuals. In order to ensure
flexibility, and take into consideration
the experience gained by plans and
CMS as SNPs mature, we will define a
‘‘disproportionate percentage’’ SNP as
one that enrolls a greater proportion of
the target group (dually eligible,
institutionalized, or those with a
specified chronic illness or disability) of
special needs individuals than occur
nationally in the Medicare population
based on data acceptable to CMS. We
will provide further guidance as to what
data sources may be used to determine
a national percentage for a special needs
group being targeted by the
disproportionate percentage plan. Under
our authority as provided in section
231(d) of the MMA, we are revising the
definition of specialized MA plan to
include ‘‘disproportionate percentage’’
plans.
Comment: Several comments were
received regarding how CMS should
identify those with severe or disabling
chronic conditions that would make
them eligible for enrollment in a SNP.
Several commenters suggested using
broad flexibility, reflecting the language
in section 1858(b)(6) of the Act. Other
commenters recommended that SNPs
should serve as laboratories for
developing population-based
management protocols, not singledisease State management protocols for
diagnoses that could be well-served by
a standard MA plan. Another
commenter recommended limiting
enrollment to those with late-stage
chronic conditions, those with co­
morbidities, adult disabled, and frail
elderly. Some commenters suggested
basing the definition on conditions for
which alternate care delivery models,
such as disease management and
evidence-based medicine, exist, and
also take into consideration conditions
that are expensive and prevalent for

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there to be savings and risk-management
potential.
Commenters also recommended that
conditions should be those associated
with recognized quality measures, so
that CMS may carefully monitor
specialized MA plans. None of the
commenters objected to including those
individuals who are not
institutionalized but require an
equivalent level of care. ESRD, diabetes,
congestive heart failure, Alzheimer’s
and other dementias along with one or
more other serious conditions, HIV/
AIDs, and frail elderly and adult
disabled with multiple chronic
conditions requiring complex medical
management were among the specific
conditions suggested for specialized MA
plans.
Another commenter suggested that on
an interim basis CMS restrict the
definition to those who are nursing
home certifiable, as defined by each
State; ESRD patients; and those
diagnosed with AIDs, and, in the
meantime, collect ADL data through the
Health Outcomes Survey (HOS) and use
this measure in conjunction with
Activities of Daily Living (ADL)
measures to identify high-risk groups.
Other commenters suggested additional
detailed formulas for identifying groups
eligible for specialized MA plans.
Response: Because this is a new
‘‘untested’’ type of MA plan, we are not
setting forth in regulation a detailed
definition of severe and disabling
chronic condition that might limit plan
flexibility. We will review and evaluate
proposals for specialized MA plans that
serve severe or disabling chronic disease
categories, including HIV/AIDs, on a
case-by-case basis. Among the criteria to
be considered will be the
appropriateness of the target population,
the existence of clinical programs or
special expertise to serve the target
population, and whether the proposal
discriminates against ‘‘sicker’’ members
of the target population.
Other Comments on § 422.2
We requested comments on § 422.2 on
the development of an HIV/AIDS
special needs plan that would address
the special health needs, including
prescription drugs, of the Medicareeligible population living with HIV/
AIDS.
We received several comments
supportive of the development of an
HIV/AIDS special needs plan.
Therefore, we will consider this type of
plan application to become a special
needs plan for Medicare-eligible
individuals living with HIV/AIDs.
For purposes of specialized MA plans,
we proposed to define

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‘‘institutionalized’’ in the proposed rule
as residing in a long-term care facility
for more than 90 days as determined by
the presence of a 90-day assessment in
the Minimum Data Set (MDS).
Comment: Several commenters
suggested that the 90-day residence
requirement (as determined by a 90-day
assessment in the minimum data set) be
modified. One commenter suggested
determining institutional status based
on the discharge potential at admission.
Another commenter suggested changing
the requirement to 30 days. One
commenter did not object to 90 days,
but recommended changing the
language to allow CMS to approve
exceptions in case the institution failed
to perform the assessment. In addition,
one commenter suggested that
‘‘institutionalized’’ also include those
residing in Intermediate Care Facilities
for the Mentally Retarded (ICF/MR).
Several commenters recommended that
those living in the community while
requiring an institutional level of care
be considered institutionalized.
Response: In response to comments,
we are clarifying and broadening the
definition of institutionalized for
purposes of defining a special needs
individual to take into consideration
those with chronic mental conditions
and other chronic conditions. For
purposes of defining a special needs
individual, ‘‘institutionalized’’ means
residing in or expected to reside in a
long-term care facility which is a skilled
nursing facility (SNF) as defined in
section 1819(a) of the Act; a nursing
facility (NF) as defined in section
1919(a) of the Act; a SNF/NF; an
intermediate care facility for the
mentally retarded (ICF/MR) as defined
in section 1905(d) of the Act; or an
inpatient psychiatric facility as defined
in section 1861(f) of the Act for 90 days
or longer.
A SNP may enroll special needs
individuals prior to a 90-day stay based
on an assessment of the potential for a
stay of that length as long as the
assessment is of a type approved by
CMS.. For example, a SNP for
individuals with serious mental
conditions may show us that the State
requires a plan of care or similar
assessment prepared by a health
professional upon admission. We
recognize that this definition is not the
same as the definition of
‘‘institutionalized individual’’ in 42 CFR
§ 423.772. That provision is an income
and resource-based definition for the
purpose of determining Part D
premiums and cost-sharing subsidies for
low-income individuals. The term
‘‘institutionalized’’ as used for purposes
of defining a special needs individual

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under this Part is for the purpose of
identifying a vulnerable population that
might benefit from enrollment into a
SNP. We also wish to clarify that our
definition of institutionalized for
purposes of defining a special needs
individual does not relate to the MA
payment methodology.
For purposes of SNPs, we may also
consider as institutionalized those
individuals living in the community but
requiring a level-of-care equivalent to
that of those individuals in the
aforementioned long term care facilities.
We believe that 90 days is the most
appropriate and accurate timeframe for
determining long-term residence in an
institution. We base this on information
we collected showing that, once a
beneficiary is institutionalized for 90 or
more days, it is less likely that that
individual will return to a community
setting. However, SNPs may enroll
institutionalized beneficiaries based on
a CMS-approved assessment (as
described in further operational
guidance following publication of this
rule) showing the beneficiary is
expected to reside in the institution for
90 days or more. Given the latitude
provided under the disproportionate
percentage criteria, we do not think that
the 90-day definition for
institutionalized will adversely affect
specialized MA plans’ ability to enroll
eligible beneficiaries.
Comment: Several commenters
supported the proposed approach to
require all specialized MA plans to
provide Part D coverage.
Response: We agree with the
commenters, especially in light of the
fact that special needs individuals in
particular need access to prescription
drugs to manage and control their severe
or disabling chronic conditions.
Therefore, we are including the Part D
coverage requirement for all specialized
MA plans at § 422.2 in the definition of
a specialized MA Plan.
Comment: One commenter
recommended that CMS change the
definition of PDP as it is incorrect and
not consistent with the Medicare
Prescription Drug Benefit Program
proposed rule.
Response: We agree with the
recommended change to the definitions
of PDP and PDP sponsor found at
§ 422.2. To avoid any confusion, we are
revising the definitions in Title II to
cross-reference the definitions of PDP
and PDP sponsor found in part 423, the
Medicare Prescription Drug Benefit.
Comment: Several commenters
recommended that CMS make a revision
to the basic benefits definition found at
§ 422.2 to add ‘‘including covered
services received through an IHS

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Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
program.’’ Other commenters
recommended that CMS add to the
special needs individual definition ‘‘AI/
IN are exempt from mandatory
enrollment in Title XIX plans but would
qualify for optional enrollment in an AI/
AN specialized need plan.’’
Response: We do not believe there is
a statutory basis in the MMA to include
non-covered Medicare services received
through an IHS program in the
definition of basic benefits. We also do
not believe it is necessary to include a
specific reference to Medicare covered
services provided through an IHS
program in the definition of basic
benefits. If a service is a covered service,
it is already included in the definition.
Therefore, we are not making the
requested change. Similarly, the MMA
does not authorize us to revise the
definition of special needs individual as
suggested. The statute defines special
needs individuals who are defined as
those who are Medicaid,
institutionalized or those with severe or
disabling chronic conditions. Clearly,
AI/AN individuals who fit any of those
definitions could choose to enroll in a
specialized MA plan if one were offered
in their area. The suggested change to
the definition of special needs
individuals to add optional enrollment
in an AI/AN specialized MA plan
suggests that some AI/AN organizations
may be interested in offering a
specialized MA plan. Under the statute,
a specialized MA plan must be open to
all eligible Medicare beneficiaries who
are within the class of special needs
individuals the plan serves. We see no
statutory basis for allowing a plan to
limit enrollment only to AI/AN
Medicare beneficiaries. Conceptually,
supplemental benefits could be offered
in the specialized MA plan to assist
chronically ill enrollees to prevent or
treat illnesses that affect AI/AN
populations and others enrolled in the
plan. As described at § 422.501, a
prospective SNP would need to submit
an application to CMS detailing its plan
for treating those with severe or
disabling chronic conditions. Finally,
we would note that we are not adding
language exempting AI/AN from
mandatory enrollment in Title XIX
plans as it is not within the scope of this
rulemaking. We note however, that
under sections 1115 and 1915(b) of the
Act, mandatory enrollment under
Medicaid for such populations is
permitted.
Comment: Several commenters
suggested that CMS add a new
definition to § 422.2 to afford
specialized MA plans the status of
regional MA plans for most purposes
(including special rules and incentives

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applicable to regional MA plans),
without having to cover multiple States.
The commenters suggested that plans
may be reluctant to take on multiple
State regions with enrollment limited to
Medicaid eligibles in the region.
Response: As described in section
1858(a)(1) of the Act and as reflected in
§ 422.455(a), a MA plan must cover an
entire region, including offering
enrollment to all eligible Medicare
beneficiaries within that region whether
the region is a single State or multiple
State area. Therefore, a special needs
plan may receive the stabilization fund
payments and other incentives for its
participation as a regional plan only if
the plan would comply with all
requirements in section 1858 of the Act
applicable to Regional MA plans. This
means, that it would have to be open to
enrollment for every member of the
special needs category in the entire
region in question, meet access
standards for the individuals in all areas
of the region, market to all areas of the
region, and offer uniform benefits and
cost-sharing in all areas of the region.
Comment: A commenter
recommended that CMS revise the
definition of service area as found in
§ 422.2. The commenter indicated that
as proposed, the language of § 422.2
appears to have established a lower
standard for approval of regional PPO
service areas. The commenter
recommended that CMS separately
define service area requirements for
HMOs and PPOs and that the
requirements for approval of a PPO
apply to both local and regional PPO
plans alike.
The commenter also recommended
that CMS consider the more flexible
design of a PPO and in turn allow for
more flexibility with respect to service
area approval. The commenter
understands that local PPOs are not
required to cover an entire region, but
also indicated that it is difficult even in
small States to meet the availability and
accessibility requirements by the time
the service area application is due.
Response: We appreciated the
comment to clarify this definition as we
found it had been improperly numbered
and created some confusion. Therefore,
we have renumbered the sub-definitions
and included language that makes clear
that we may consider whether the
contracting provider network meets the
access and availability standards set
forth in § 422.112, for all MA
coordinated care plans and network MA
MSA plans. We also have made
technical corrections because the
distinction between non-network and
network MSA plans is no longer
applicable, as discussed in further detail

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below. We believe this change will
further reduce confusion.
3. Types of MA Plans (§ 422.4)
The MA program is intended to
provide beneficiaries access to a wider
array of private health plan choices than
under the M+C program and to increase
the number of areas in which private
health care options are available to
Medicare beneficiaries. Entities can
contract with us to provide five general
categories or types of plans: (1) local
MA coordinated care plans; (2) MA
MSA plans; (3) MA PFFS plans; (4)
regional PPO coordinated care plans;
and (5) specialized MA coordinated care
plans.
In the August 3, 2004 proposed rule,
we proposed to clarify that the PPO
definition that was in existence before
(defined by the BBRA) was solely for
purposes of the application of the more
limited quality assurance requirements.
For PPO-type plans that are offered by
MA organizations that are licensed or
organized under State law as HMOs, the
quality assurance requirements that
apply to all other coordinated care plans
in section 1852(e) of the Act also apply
to those PPO-type plans.
Effective January 1, 2006, MA
organizations that offer MA local plans
that are PPOs will need to provide only
for the collection, analysis, and
reporting of data that permit the
measurement of health outcomes and
other indices of quality insofar as
services are furnished by providers that
have contracted with the MA
organization under those PPO plans.
However, a local PPO offered by an MA
organization that is licensed or
organized under State law as an HMO
will be required to meet the normal data
collection, analysis, and reporting
requirements. We proposed to modify
the definition of PPOs in § 422.4 to
account for this more limited
interpretation of State licensure
requirements and modified headings in
§ 422.152(b) and (e).
Under section 233 of the MMA, MA
organizations are authorized to offer
MSA plans as a permanent option.
MMA also eliminated the limits
imposed on MSA plans by the BBA,
including a time limit on enrollment
and a limit on the number of
beneficiaries who could enroll in the
plans, and exempted MSA plans from
certain quality assurance requirements
that the BBA applied to ‘‘network’’ MSA
plans.
To conform with MMA’s changes to
MSAs, we proposed to delete the
descriptions of the M+C network MSA
plan and M+C non-network MSA plan
as different types of plans at

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§ 422.4(a)(2)(ii), since the distinction
between network and non-network
MSAs for the purpose of quality
assurance requirements was no longer
applicable. As noted above, we are
making similar changes to the definition
of service area at § 422.2.
We are making a technical correction
to the final MA regulation. Our current
regulations at § 422.2 read ‘‘Religious
and Fraternal Benefit (RFB) Society.’’
We are amending the definition of
‘‘Religious and Fraternal Benefit (RFB)
Society’’ by removing the words
‘‘Religious and fraternal’’ and adding
the words ‘‘Religious fraternal’’ in their
place. We are making this change to the
definition as it is potentially confusing
and is not consistent with the statutory
definition of ‘‘Religious Fraternal
Benefit Society’’ at section 1859(e)(3) of
the Social Security Act. We are also
making a technical change to § 422.4(a)
to clarify that RFB Society plans may be
any type of MA plan, and are not
restricted to being a type of coordinated
care plan only, as implied by the
inclusion of ‘‘RFBs’’ exclusively in
§ 422.4(a)(1)(iii). Thus, we are removing
the reference to RFBs from that section.
We also are deleting the word
‘‘network’’ from the parenthetical at the
end of § 422.4(a)(1)(iii) because the
distinction between network and nonnetwork MSAs no longer applies.
Comment: Many commenters
suggested that CMS more clearly
coordinate between the Medicare
Prescription Drug Benefit Rule at part
423 and the MA Program Rule at part
422.
Response: In response to this
comment, we are making several
changes to clarify the interaction
between Part C and Part D. Specifically,
we are clarifying the language at § 422.4
on types of MA plans and Part D
prescription drug coverage. We are
adding a new paragraph (c), Rule for
MA Plans’ Part D Coverage. This
paragraph clarifies the requirements for
MA coordinated care plans, MA MSAs,
and MA PFFS plans by stating that a
coordinated care plan must offer
qualified Part D coverage meeting the
requirements in § 423.104 in that plan
or in another MA plan in that area. We
also added language that MSAs cannot
offer drug coverage, other than that
required under Parts A and B of Title
XVIII of the Act. Finally, we added
language that MA organizations offering
PFFS plans can choose to offer qualified
Part D coverage meeting the requirement
in § 423.104 in that plan.
Comment: One commenter
recommended that CMS clarify the
language at § 422.4(a)(1)(v). The
commenter wants to ensure that an

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organization that wants to apply as a
local HMO, but does not have an HMO
license in its State, but is otherwise
licensed as a risk-bearing entity in its
State, will not be considered a PPO and
thus subject to the 2-year moratorium on
local PPOs as found at section 221(a)(2)
of the MMA and proposed at § 422.451.
Response: We do not believe that a
clarification of § 422.4(a)(1)(v) is
required as § 422.400 already provides
that an MA organization must be
licensed under State law, or otherwise
authorized to operate under State law,
as a risk-bearing entity (as defined in
§ 422.2) eligible to offer health
insurance or health benefits coverage in
each State in which it offers one or more
MA plans. Therefore, an organization
that wishes to apply as a local MA plan
HMO and has a State-risk bearing
license would be considered an HMO
and not be considered as a local MA
plan PPO nor subject to the PPO
moratorium described at § 422.451.
However, a plan would have to market
itself as an HMO or an HMO with a POS
option. A plan could not market itself as
a PPO because of the potential for
confusion.
Comment: Several commenters
recommended that CMS include new
language in the final regulation that
ensures that the type of denial of
covered services as described in the
Government Accountability Office
(GAO) report entitled ‘‘Medicare
Demonstration PPOs: Financial and
Other Advantages for Plans, Few
Advantages for Beneficiaries (GAO–04–
960)’’ never happens again. One
commenter, also referring to the GAO
report, expressed concern that the
Agency is not effectively enforcing
current law, based on the recent GAO
findings.
Response: In response to the GAO
evaluation, we agreed to implement the
GAO recommendation for us to instruct
Medicare PPO Demonstration plan
participants to remove impermissible
restrictions on an enrollee’s access to
providers for all covered plan benefits.
We are committed to assuring that local
and regional PPOs provide
reimbursement for all covered benefits
regardless of whether the benefits are
provided within the network of
providers as found in § 422.4(a)(1)(v).
Comment: Several commenters
recommended that CMS require noncontracted providers to accept Medicare
fees as payment in full with no balance
billing to the beneficiary. The
commenters believe that this approach
will protect beneficiaries from excessive
payment liability for out of network
services.

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Response: As discussed in further
detail in subpart C of the preamble to
this final rule, there are several existing
limitations on balance billing that apply
to protect Medicare beneficiaries
regardless of whether they are enrolled
in an MA plan. Further, under existing
rules, beneficiaries may not be held
liable for more than the amount of out­
of-network cost sharing for the service
specified in the plan. For these reasons,
we do not believe the changes requested
by the commenter are necessary.
Comment: Several commenters
supported the amendment found in the
proposed rule that clarifies that a plan
licensed as an HMO may still become a
PPO under its HMO license as long as
the State allows the HMO to offer a PPO
under its HMO license. However, the
commenters suggested that CMS revise
§ 422.4(a)(1)(v) in the following two
ways: (1) clarify that PPOs may establish
before authorization requirements for
services obtained out-of-network that
would allow for a review based on
medical appropriateness; and (2) modify
the provision to indicate that PPOs are
not obligated to make available out of
network certain types of programs, like
health and wellness programs, for
which no non-network counterpart is
available.
The commenters also recommended
that CMS clarify that only original
Medicare benefits must be covered both
in and out of network and that covered
benefits that are not part of original
Medicare need not be covered out of
network. The commenters opposed
CMS’ requirement that for 2005, PPO
plans must offer all benefits both in and
out of network. The commenters stated
that many plans in the private sector
and in the FEHB program limit out-of­
network coverage for some services. The
commenters believe that requiring
coverage of all non-original Medicare
benefits in and out of network implies
that there is a standard allowance or
price reference upon which to base
payments for these services. The
commenters also suggest that there are
no balance billing protections for the
beneficiary who seeks care out of
network. The commenter expressed
similar concerns around the Medicare
drug benefit and the lack of specificity
regarding coverage of non-original
Medicare benefits. The commenter also
believe that covering certain benefits out
of network (for example, disease
management, 24-hour advice nurse
lines, and wellness programs) will pose
a significant challenge.
Response: To respond to the first
recommended change to
§ 422.4(a)(1)(v)requesting that MA plans
be allowed to impose pre-authorization

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requirements on out-of-network care by
PPOs, section 1852(e)(3)(A)(iv)(II) of the
Act states that a PPO plan must provide
for reimbursement for all covered
benefits, regardless of whether the
benefits are provided within the plan’s
network of providers. Similarly, section
1859(b)(4)(B) of the Act, which defines
MA regional PPOs, includes the same
requirement to provide for
reimbursement for all covered benefits
regardless of whether the benefits are
provided within the network of
providers. These provisions indicate the
Congress’s clear intent to ensure that
PPOs provide coverage for all plancovered benefits both in and out of
network. Further, although other
coordinated care plans may include
mechanisms to control utilization, such
as referrals from gatekeepers for an
enrollee to receive services within the
plan, the definition of PPO contained in
sections 1852(e)(3)(A)(iv) and
1859(b)(4)(b) of the Act indicates that
local and regional PPOs may not use
similar mechanisms, such as preauthorization, to restrict enrollee access
to out-of-network services. However,
there are several ways PPOs can
appropriately seek to promote the use of
in-network services. For example, PPOs
may encourage beneficiaries to notify
them before seeking care out of network,
so that care is coordinated in and out of
network. PPO plans may offer
incentives to beneficiaries to provide
notice of their intent to seek out-of­
network services by discounting out-of­
network cost sharing when beneficiaries
provide notice before receiving services.
Further, MA organizations are required
to have procedures for making
determinations of whether an enrollee is
entitled to receive a health service and
the amount that the enrollee will be
required to pay for the service. Thus, a
PPO plan enrollee and provider may
seek an advance determination of
coverage before receiving the service,
and we encourage PPO enrollees to avail
themselves of this option.
On the commenters’ request to clarify
in § 422.4(a)(1)(v) that only original
Medicare benefits must be covered in
and out of network, we believe that the
clear language in the statute at section
1859(b)(4)(B) of the Act relating to
regional MA plans and section
1852(e)(3)(A)(iv)(II) of the Act relating to
local PPOs, does not permit us to limit
the requirement that PPOs provide for
reimbursement for all plan-covered
benefits both in and out of network.
Therefore, we are not modifying the
definition of PPOs at § 422.4(a)(1)(v).
However, to respond to some of the
concerns raised in the comment, we

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again note that plans can reduce the
regular cost sharing for out-of-network
benefits for beneficiaries who
voluntarily seek pre-authorization for
those benefits. As described by another
response to comment above, we disagree
with the commenter that there are no
balance billing protections for
beneficiaries. There are limitations on
balance billing to protect beneficiaries
regardless of whether they are involved
in an MA plan or not. Finally, on the
issue of benefits, such as nurse advice
lines, which plans believe should not be
made available out of network, we
believe that as a practical matter, most
of these types of benefits will be
unattainable out of network because
they are designed to be provided
exclusively to plan members.
Additional discussion of these types of
out-of-network benefits can be found in
the subpart C preamble.
Comment: Comments were received
on § 422.4(a)(1)(v). Several commenters
suggested that CMS address perceived
inconsistencies in licensing
requirements for PPOs as compared to
HMOs by confirming the scope of State
licensure requirements that apply to
entities offering MA PPO plans, as State
licensing laws may restrict an HMO’s
ability to offer a PPO plan.
Response: We do not believe there are
inconsistencies. All MA plans must be
licensed by the State as a risk-bearing
entity. State law controls whether the
MA organization is licensed or
authorized to offer the type of MA plan
it proposes to offer. As we explained in
the preamble discussion in subpart A of
the proposed rule, the fact that MA
organizations offering local PPOs that
are (or are not) licensed as HMOs is
pertinent to the MA program solely for
purposes of the application of quality
improvement standards in section
1852(e) of the Act, and has no specific
bearing on whether an MA organization
has State authority under applicable
State law to offer an HMO or PPO under
the MA program. Whether an MA
organization (licensed either as an HMO
or otherwise) can offer a specific type of
MA plan continues to rest upon whether
the organization has State licensure or
authority to offer such a type of MA
plan.
Comment: One commenter requested
that CMS consider enabling the PFFS
model as an option under the regional
preferred provider organization
structure. The PFFS model in the MA
program enables broader geographic
coverage without the specific provider
contracting requirements. This option
could expand participation in the
regional program by enhancing
participation and access in rural areas

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without specific provider contracting
access requirements as is currently
available under the existing MA PFFS
plans.
Response: Since a PFFS plan is not
defined as a type of coordinated care
plan under section 1851(a)(2)(A)(i) of
the Act, it would not be possible to
allow an MA organization to offer a
PFFS plan as an MA regional plan.
Additionally, MA PFFS plans are
defined at section 1859(b)(2) of the Act,
while MA regional plans are defined at
section 1859(b)(4) of the Act. The
definitions are mutually exclusive.
Comment: A few commenters asked
whether SNPs could be any type of
coordinated care plan.
Response: We believe that section
1851(a)(2)(A)(ii) of the Act clearly states
that SNPs can be any type of
coordinated care plan.
4. Expansion of the Beneficiary
Education and Information Campaign
‘‘User Fees’’ (§ 422.6, formerly § 422.10)
The last section of subpart A
contained regulations implementing the
user fees provided for in section
1857(e)(2) of the Act. MMA expanded
the user fee to include PDP sponsors as
well as MA plans as contributors. The
expansion of the user fee recognizes the
increased Medicare beneficiary
education activities that we would
require around the new prescription
drug benefit.
As before, the user fee would pay for
the ongoing costs of the national
beneficiary education campaign that
includes developing and disseminating
print materials, the 1–800 telephone
line, community based outreach to
support 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).
As indicated in the proposed rule and
in this final rule (§ 422.6), in fiscal year
2006 and thereafter, the MMA
authorizes up to $200,000,000, reduced
by the fees collected from MA
organizations and PDP sponsors in that
fiscal year. (The total amount is not
indexed in any way.) In each year, the
total amount of collected user fees may
not exceed the estimated costs in the
fiscal year for carrying out the
enrollment and dissemination of
information activities in the MA and
Part D prescription drug programs or the
applicable portions of $200,000,000,
whichever is less.
These user fee provisions establish
the applicable aggregate contribution
portions for MA organizations and PDP

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sponsors. The applicable portion of the
user fee for MA organizations will be
based on the total proportion of
expenditures for Medicare Part C as well
as for payments under Part D that are
made to MA organizations as a percent
of Title XVIII expenditures. The PDP
sponsor’s applicable portion is the
estimate of the total proportion of
expenditures under Title XVIII that are
attributable to expenditures made to
PDP sponsors for prescription drugs
under Part D. The fees charged to
individual MA plans and PDP sponsors
would continue to be determined by
CMS. These fees are calculated by a
percent of plan’s revenue to avoid over­
burdening smaller plans.
Comment: One commenter supported
CMS’ efforts to increase user fees to
support beneficiary education. The
commenter recommended that CMS
collect the entire amount authorized
under the statute and work with the
Congress to either index it or otherwise
lift the cap if needed to adequately
inform beneficiaries about the new
complexities with private plans.
Response: The changes the
commenter requested are beyond the
scope of this rulemaking. We do not
intend for the user fee to be exclusively
for education on MA plans. We
anticipate that the user fee will also be
used on the new Part D drug benefit,
which we believe will consume a large
portion of the user fees, due to the
newness of the benefit.
Comment: Two commenters believe
that there is insufficient funding of the
SHIP program and recommended that
CMS use a portion of the MA and PDP
user fees to support SHIPs.
Response: Early in the
implementation of the M+C program,
SHIPs received some funding from the
user fee. However, for the last several
years, SHIP funding has been a specific
line item appropriation by the Congress.
We have some discretion regarding how
the user fees are spent in terms of
beneficiary education, so it is possible
for SHIPs to get some of their funding
from the user fee. However, decisions
on how to spend user fees are internal
management decisions relating to
resource allocation, and therefore will
not be included in this regulation.
Comment: One commenter
recommended that beneficiary
educational materials be shared with
Congressional committees of
jurisdiction prior to releasing them.
Response: The timelines for providing
education materials are limited.
Although we do not intend to seek
Congressional authorization before the
release of the education materials, the
materials will comply with the

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provisions of the statute and
regulations, and we will make every
effort to ensure that they are useful to
beneficiaries in making their choices.
CMS’ Office of Legislation works closely
with the Congressional offices to ensure
that they are aware of and have open
access to copies of various educational
materials either before or in the same
timeframe as their constituents to help
with education and outreach activities.
Comment: One commenter expressed
concern that the funds used to educate
beneficiaries may be more focused on
explaining the array of choices and not
focused enough on encouraging
beneficiaries to actually make a choice.
The commenter encouraged CMS to
work directly with experienced plans to
conduct information campaigns that
result in significant Part D uptake rates
for PDPs and MA-PDs. The commenter
was concerned that beneficiaries may be
confused by the changes beginning in
2006.
Response: We appreciate the
commenter’s suggestion for us to work
with experienced plans to conduct
information campaigns that could
expand enrollment in MA-PDs and
PDPs beginning in 2006 (especially in
light of the new options that will be
available at that time). We expect to
engage a strong network of experienced
plans, providers, and other stakeholders
and partners to provide input and
feedback on beneficiary education plans
and to provide specific suggestions on
ways to communicate the changes that
will occur in the MA program in 2006.
Comment: One commenter believes
that CMS will require the resources,
both financial and human, to help
beneficiaries make choices about benefit
and plan options that appropriately
reflect their needs and preferences. The
commenter recommended that CMS
bolster programs such as one-on-one
counseling, which beneficiaries prefer,
and to design beneficiary materials in
formats that make information easy to
interpret and understand. The
commenter also recommended that CMS
create information resources, such as
the 1–800 number, but also help
beneficiaries understand the
information that is being presented.
Response: We agree that we will have
to continue to educate beneficiaries on
MA program changes in a way that
helps the beneficiary to understand the
program and understand what type of
Medicare plan would best suit his or her
individual health and financial needs.
We routinely test education and
outreach products with beneficiaries
during development to ensure that they
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understandable to the appropriate target
audiences.
Comment: A commenter indicated
that there are high costs to I/T/U for
MMA implementation costs related to
outreach, education and enrollment of
an AI/AN individual. The commenter
encouraged CMS to acknowledge the
need for funding that is specifically
directed to local I/T/U to support these
activities where the work is done and
where bearing the costs is the most
difficult. The commenter believes that
unlike other Medicare populations, AI/
AN beneficiaries are unlikely to enroll
in MA plans without specific
information from their I/T/U.
Response: We agree that education
and outreach efforts should be tailored
to the needs of specific populations
interested in enrolling in MA plans, to
the greatest extent possible. We will
continue our collaboration with the IHS
and other partners to identify the most
effective ways to reach beneficiaries in
the AI/AN population.
Subpart B—Eligibility, Election and
Enrollment
We proposed generally to retain the
same eligibility, election and enrollment
rules that currently apply to the
Medicare Advantage program. We
received numerous comments on this
subpart in response to the August 2004
proposed rule. These comments and our
responses are presented below.
1. Eligibility to Elect an MA Plan
(§ 422.50)
In this section, we specified the
following:
• Reference to an ‘‘MA plan’’
includes both MA local and MA
regional plans, unless specifically noted
otherwise in the text.
• We reserve the authority to allow
additional optional mechanisms for
elections (for example, website
enrollment) to provide a more efficient
and simplified election process for
beneficiaries and partner organizations.
Comment: Several commenters
supported the proposal to retain the
authority to allow additional optional
MA election mechanisms, stating that
this change will promote the
development of more efficient and
simplified processes for beneficiaries.
One commenter requested clarification
that any such alternate election
mechanism would be optional for
individual MA organizations to use.
Another commenter supported the
change, but stated that CMS should not
mandate that MA organizations accept
electronic elections.
Response: The revision made to this
section is intended only to permit us to

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approve alternate optional election
mechanisms (in addition to paper
election forms) in the future. We
anticipate that such mechanisms will be
available at the option of each MA
organization. Furthermore, we believe it
is important to clarify that, as other
election mechanisms are approved and
implemented, we do not intend to
permit MA organizations to require
beneficiaries to use any such election
mechanism. We will require all MA
organizations to establish a minimum
standard process, which, at this time,
will be a paper process, and will be
made available to prospective enrollees
and plan members in conjunction with
any optional election mechanism. In the
future, as technology evolves, another
process may be a more appropriate
minimum standard. To ensure that these
points are clear, we are amending
§ 422.50(a)(5) to provide that
beneficiaries may make elections by
completing an enrollment form or by
completing another CMS-approved
election mechanism offered by the MA
organization.
Comment: One commenter requested
that CMS clarify the use of alternate
election mechanisms with respect to
employer or union group MA plans.
Response: Section 422.50 applies
equally to all beneficiaries making MA
elections and therefore applies to those
individuals making an election to or
from an MA plan sponsored by an
employer or union as well. Current
processes already established in our
manual guidance for MA plans offered
by employer or union groups are not
changed by this revision.
Subpart B—Eligibility, Election and
Enrollment
2. Eligibility to Elect a Special Needs
MA Plan (§ 422.52)
Section 231 of the MMA authorized
the creation of a new type of MA
coordinated care plan, called a
‘‘Specialized MA Plan for Special Needs
Individuals.’’ These plans will be
referred to throughout as SNPs.
We believe the new requirements
regarding SNPs are primarily intended
to encourage more choices for certain
populations by allowing organizations
that specialize in the treatment of
beneficiaries with particular needs to
have MA contracts. These organizations
could provide and coordinate services
for these individuals and would be
permitted to limit plan enrollment to
such individuals, or to a certain
proportion of such individuals. This
provision could encourage organizations
to develop new products in the
marketplace by giving them the

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opportunity to develop expertise in
efficiently serving special needs
populations. Our overall policy goal
will be to allow MA organizations as
much flexibility as possible (within
defined parameters), while maintaining
beneficiary protections.
SNPs may restrict enrollment solely to
those who are entitled to Medicaid
(dually eligible), institutionalized
individuals who meet the definition in
§ 422.2, and/or beneficiaries who have a
severe or disabling condition, as defined
by the Secretary in regulations. Section
231 of the MMA also gives the Secretary
the authority by regulation to designate
certain MA plans as SNPs if they
‘‘disproportionately serve(s) special
needs individuals.’’ Special needs
individuals are defined in § 422.2.
In the proposed rule, we asked for
comment as to whether SNPs should be
allowed to exclusively enroll certain
subgroups of those categories of special
needs individuals described in
§ 422.52(b)(1) and § 422.52(b)(2) (dual
eligible or institutionalized
beneficiaries) and, if so, what categories
would be appropriate.
The MMA gave us the authority to
waive section 1851(a)(3)(B) of the Act,
which precludes beneficiaries with
ESRD from enrolling in MA plans. In
the proposed rule, we solicited
comments as to whether we should
waive this section of the Act and
whether beneficiaries with ESRD should
be considered to meet the requirement
for special needs status.
We also have the authority to apply to
SNPs a provision under section
1894(c)(4) of the Act that applies to
enrollees in the Program of All-Inclusive
Care for the Elderly (PACE). This
section provides for deemed continued
eligibility in certain situations.
Specifically, it allows an beneficiary
enrolled in a PACE plan who no longer
meets the eligibility criteria, but who
can reasonably be expected to, in the
absence of continued coverage under
the PACE plan, meet the criteria of the
plan within a period of time not to
exceed 6 months. In the proposed rule,
we proposed applying this provision to
individuals enrolled in SNPs who
longer meet a plan’s unique eligibility
criteria, who can reasonably expected to
meet the plans criteria within a period
of time not to exceed 6 months.
In the proposed rule, we provided in
§ 422.52(e) that individuals who are
enrolled in MA plans that are
subsequently designated as SNPs would
be ‘‘grandfathered,’’ that is, allowed to
continue to be enrolled or choose to
elect another MA plan during
appropriate election periods provided to
all MA eligible individuals. We

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proposed this based on the belief that
the Congress did not intend for
individuals already enrolled in an MA
plan to be involuntarily disenrolled.
However, we also invited comment on
an alternative approach wherein any
non-special needs individuals in an MA
plan that is subsequently designated as
an SNP would have to be involuntarily
disenrolled. In this situation, we
proposed to establish, through further
operational guidance, an SEP for these
individuals. Statutory language also
provided that a newly designated MA
plan may restrict future enrollment of
individuals to those specialized
individuals it intends to serve.
We also indicated in the proposed
rule that, if we did allow
‘‘grandfathered’’ members to remain in
the SNP, we would distinguish them
from those individuals who join a new
SNP and then lose their special needs
status on other than a temporary basis.
Those special needs individuals would
be involuntarily disenrolled after losing
their special needs status (and after any
period of deemed continued eligibility,
if appropriate) and receiving proper
notice. SNPs that exclusively enroll
special needs individuals would be
required to inform individuals before
their initial enrollment that they could
only remain enrolled in the plan for as
long as they were considered special
needs individuals as defined by CMS.
Comment: One commenter felt that
CMS should not allow SNPs to
exclusively enroll certain subgroups of
dual eligible or institutionalized
beneficiaries. The commenter’s rationale
was that requiring MA organizations to
accept all dual eligibles into its
specialized MA plan would maintain
the integrity of the dual-eligible risk
pool and prevent the offering of an SNP
plan to those who are the least poor
(and presumably, most healthy) segment
of duals. On the other hand, several
commenters suggested that CMS allow
SNPs that would enroll subgroups of
dual eligibles if supported by a State
Medicaid agency. The vast majority of
commenters supported allowing SNPs
to serve subsets of both the dual eligible
and institutionalized populations.
The most prevalent rationale for
allowing subsets of dual eligibles was to
allow States to develop specialized
Medicaid programs to compliment
Medicare coverage by SNPs. Most
commenters described the difficulties
and complexities of serving all dual
eligibles as impediments and
disincentives to developing a program
to coordinate Medicaid managed care
programs with Medicare. If required to
serve all dual eligible beneficiaries, MA
organizations would have to offer

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Medicaid-covered benefits, such as
long-term care, to individuals who are
not eligible for full Medicaid benefits.
One commenter stated that allowing
subsets of dual eligibles would also
facilitate transitioning full dual eligibles
from Medicaid prescription coverage to
Medicare Part D coverage in 2006.
Another commenter suggested that CMS
clarify that plans must uniformly offer
the same set of benefits to all classes of
dual eligibles as provided under the
State’s Medicaid program. Several
commenters recommended that CMS let
the MA organization propose eligibility
criteria and then evaluate its plan,
delivery systems, and related programs,
possibly modifying them as part of the
review and approval process. Some
commenters noted the significant
investment of time and resources
required to develop targeted clinical
programs for different subgroups with
different, complex conditions.
Commenters also suggested allowing
specific subsets, including full benefit
dual eligibles, the frail elderly, those
who are nursing home certifiable,
children or adults with physical
disabilities, developmental disabilities
or mental impairments, and communitybased or institutional individuals.
Two commenters recommended that
CMS not include subsets of duals in the
third category of specialized MA plan
eligibles, those with severe or disabling
conditions. The rationale given was that
the identifying characteristics of subsets
of duals are not appropriately described
within the third category and these
individuals should remain in the second
category.
Once commenter recommended
allowing organizations to serve other
subgroups of Medicaid eligible and
institutionalized if there is a pervasive
justification based on common
characteristics of the subgroup, that is,
institutionalized beneficiaries in a
specified network of nursing homes.
Several commenters stated that
adverse selection would be mitigated by
phase-in of risk adjustment because
payment would take into consideration
the individual’s disease category.
Response: Consistent with the
majority of these comments, we do not
intend to adopt a regulation that would
preclude MA organizations from
offering SNPs to appropriate subsets of
the population in a plan service area,
including subsets within the SNP
populations identified in the statute.
Thus, in the interest of facilitating the
coordinated delivery of Medicare and
Medicaid services, we will consider
requests for SNPs that serve certain
subsets of dual eligibles and
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by-case basis. Subsets of those two
categories will be included in category
one and category two respectively,
rather than in the third category of
special needs individuals, those with
chronic or disabling conditions. In
addition, because of the unique nature
of some plans serving the
institutionalized and dual eligibles, we
will also consider subsets based on
common characteristics, such as a
specific network of facilities and
Medicaid eligibility. We will provide
further operational guidance following
publication of this rule.
Comment: The MMA allows for the
enrollment of ESRD beneficiaries in
SNPs designed for this population. One
commenter said that CMS should delay
enrollment of ESRD beneficiaries in MA
plans until results of CMS’ capitated
ESRD Disease Management
demonstration are available. The
commenter also objected to allowing
ESRD patients to enroll in managed care
because, in the commenter’s view,
managed care plans disrupt existing
relationships between patients and
health care providers. The commenter
expressed concerns that an ESRD
patient who drops or declines Medigap
insurance to join a managed care plan
would permanently be locked into the
managed care plan and could not switch
to Original Medicare, since ESRD would
make him/her ineligible for Medigap
coverage. The remainder of those
commenting on permitting ESRD SNPs
supported the proposal.
Response: Individuals with ESRD may
choose to receive care under an MA
plan for a variety of reasons, including
coordination of care and lower out-of­
pocket costs. Anecdotal experience with
the MA program has shown that MA
enrollees with ESRD generally remain
enrolled in their plan, or join another
existing plan if the one in which they
are enrolled terminates. We believe that
these beneficiaries should have the
option of enrolling in an MA plan, if
they so desire. Therefore, we will
amend § 422.50(a)(2) by adding
language to allow SNPs to serve ESRD
individuals.
In order to mitigate the commenter’s
concerns, we would require that, prior
to enrollment in an MA SNP, the
organization notify potential enrollees
that enrollment is fully optional and of
the potential impact that their
enrollment could have on their Medigap
rights. In addition, MA Organizations
will be required to provide clear and
accurate provider information for
potential enrollees so they may
determine whether their current
providers are part of the specialized MA
plan’s network.

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Comment: Many commenters
supported the proposed approach at
§ 422.52(e) to allow individuals already
enrolled in an MA plan that we
subsequently designate as an SNP to
remain enrolled or be allowed to elect
another other MA plan. Most of these
commenters also recommended that
CMS allow for a Special Election Period
(SEP) to facilitate selecting a new MA
plan or Original Medicare. Several
commenters remarked on the need to
maintain adequate enrollment levels
once an SNP gains a new designation.
None of the commenters supported the
alternative proposal under which nonspecial needs individuals would have to
be involuntarily disenrolled if their MA
plan became an SNP.
Response: We will allow members of
MA plans that are subsequently
‘‘redesignated’’ as SNPs to be
‘‘grandfathered,’’ that is, remain
enrolled in that plan indefinitely. These
individuals may not be involuntarily
disenrolled on the basis of not meeting
the definition of special needs
individual. However, once a
grandfathered individual voluntarily
disenrolls from the SNP, he or she
would not be eligible to reenroll in that
SNP unless he or she meets the
definition of special need individual.
We will establish an SEP for these
individuals for exceptional
circumstances in further operational
guidance. An SNP that chooses to
exclusively enroll special needs
individuals will not be considered a
‘‘disproportionate share’’ SNP, as
defined in § 422.2, on the basis of
serving ‘‘grandfathered’’ members.
Comment: Many commenters
supported not requiring plans to
involuntarily disenroll beneficiaries
who lose their special needs plan
eligibility if it is reasonable to assume
that they would again meet the special
needs eligibility criteria within a certain
period as determined by CMS. Some
commenters stated that it is not
uncommon for beneficiaries to have
temporary lapses in eligibility,
particularly in situations where a dual
eligible loses Medicaid eligibility due to
a temporary change in financial
circumstances or failure to provide
information for recertification. The
commenters generally believed that
continued eligibility leads to continuity
of care and improved clinical outcomes.
Two commenters requested an
additional 6-month ‘‘grace period’’
(commenter’s terminology) for
individuals who lose their eligibility as
well as retroactive payments for their
care in the event that eligibility is
established retroactively.

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One commenter recommended that
CMS continue funding Part D and other
benefits for the entire ‘‘30-day notice
period’’ (commenter’s terminology)
regardless of an individual’s eligibility
to enroll in a SNP.
One commenter requested continued
eligibility for ‘‘exclusive’’ as well as
‘‘non-exclusive’’ plans (commenter’s
terminology), including MA plans that
may temporarily fall below the required
threshold for the special needs
designation.
Response: We believe that the
Congress’ goal was to encourage
continuity of care for these at-risk
individuals and that a period of deemed
continued eligibility for a minimum of
30 days but no longer than 6 months is
reasonable for beneficiaries who are
likely to regain eligibility. The 6-month
period is consistent with the PACE
language at § 460.160, which provides
that a participant may be deemed to
continue to be eligible if, in the absence
of continued coverage, the participant
reasonably would be expected to meet
the requirement within the next 6
months. However, we will not include
‘‘in the absence of continued coverage’’
in § 422.52(d).
Our rationale is that this appears to
reference ineligibility due to a health
condition that could deteriorate without
plan membership. In the case of an SNP
for dual eligibles, a lapse in SNP
eligibility could be due to a lapse of
Medicaid eligibility, and such eligibility
may be based on the beneficiary’s
financial circumstances, not his or her
health condition.
The MA organization may choose any
length of time from 30 days through 6
months for deemed continued eligibility
as long as it applies this period
consistently among all members in its
plan and fully informs its members of
this time period. Further guidance on
applying deemed eligibility will be
provided in operational instructions
following publication of this regulation.
We believe that the ‘‘30-day notice
period’’ referred to by one commenter is
from our interim guidance for SNPs,
issued as part of its 2005 Call Letter.
This guidance established a 30-day
minimum timeframe for continued
eligibility for an SNP enrollee who loses
his or her special needs status. This
individual is a member during the
period of deemed continued eligibility
and until his or her disenrollment
becomes effective. Payments will
continue on the enrollee’s behalf until
the period of deemed continued
eligibility ends and the enrollee is
involuntarily disenrolled. Retroactive
payment will not be necessary in these
instances.

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All SNPs, including ‘‘disproportionate
percentage’’ SNPs, as defined in § 422.2,
may apply the deemed eligibility
provision. Deemed eligibles would be
counted toward the number of special
needs individuals enrolled in the SNP
rather than toward the number of nonspecial needs individuals.
Comment: Several commenters
supported allowing SNPs to disenroll
enrollees who no longer meet the
special needs eligibility criteria. Two
commenters wanted SNPs to have the
choice of whether to continue to
provide Medicare services to
individuals who lose special needs
status. Another commenter supported
involuntary disenrollment for exclusive
MA SNPs only, stating that this
requirement would hinder
disproportionate SNPs’ ability to
maintain enrollment at or above the
regulatory threshold.
Response: In our interim guidance
and our proposed rule, we interpreted
the statutory phrase ‘‘exclusively serves
special needs individuals’’ to mean that
the plan is exclusively marketed to
special needs individuals and
exclusively enrolls special needs
individuals. This interpretation allowed
us to permit existing non-special needs
enrollees to remain enrolled in an MA
plan that changed its status to an SNP.
Thus, under this definition, existing
enrollees who did not enroll when the
plan was an SNP would not be affected
by the plan definition, and we do not
believe they should be disenrolled.
Moreover, the existence of such
enrollees does not preclude the plan
from remaining a plan that ‘‘exclusively
serves≥(that is, markets to and enrolls)
special needs individuals. As noted
above, however, an individual who
enrolls in an SNP as a special needs
enrollee is different, since he or she
would have no expectation of being
enrolled in that plan if he or she were
not in the special needs category. The
case of an SNP that has never had nonSNP enrollees is also different, as any
enrollee that it markets to or enrolls
would have to be a special needs
enrollee, if it is an ‘‘exclusive’’ plan.
In order to address these latter
situations, we will add a new part (iv)
to § 422.74(b)(2) to show that in these
cases loss of special needs status (and of
deemed continued eligibility, if
applicable) is a basis for required
disenrollment from an SNP that enrolls
only special needs individuals.
We have the authority to waive
minimum enrollment requirements as
necessary. Therefore, we do not
envision the minimum enrollment
requirements adversely affecting
disproportionate share SNPs.

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Comment: One commenter
recommended that CMS allow MA SNPs
to charge an enrollee for benefits no
longer covered by the State or Federal
cost-sharing arrangements and to
terminate coverage for nonpayment of
premiums or cost sharing.
Response: An SNP is the same as any
other MA plan with respect to rules
governing the charges that may be
imposed on enrollees. Enrollees may be
charged for benefits that would not
otherwise be covered by Medicare.
Under § 422.74(d)(1), coverage may be
terminated for a failure to pay
premiums. As discussed below in
connection with disenrollment for
disruptive behavior, a failure to pay cost
sharing is not in itself a basis for
disenrollment.
Comment: Two commenters asked for
clarification of whether the regulation
refers to Special Needs Health Plans or
the Special Needs Health Options.
Response: The regulation refers to a
‘‘Specialized MA plan for special needs
individuals’’ (SNPs), as created by
Section 231 of the MMA.
3. Continuation of Enrollment for MA
Local Plans (§ 422.54)
The MMA limits the offering of MA
plan continuation areas to MA local
plans only and we made this
conforming change at § 422.54. We
received no comments on this section
and adopted the conforming changes as
proposed.
4. Enrollment in an MA MSA Plan
(§ 422.56)
Section 233 amended the Act to
eliminate the cap on the number of
individuals that may enroll in MA MSA
plans removed the existing deadline for
enrolling in such a plan. Because this
deadline had already passed without
anyone enrolling in an MSA plan, the
original MSA plan provisions had
become a nullity. The effect of section
233 was to make the authority to offer
MSA plans permanent and unlimited.
This change is reflected at § 422.56,
along with new language allowing the
Secretary to permit enrollment in MSAs
by enrollees of other Federal. We
included this language to reflect the fact
that, under the statute, such enrollment
could be authorized contingent on the
adoption of new policies by the OPM.
Comment: Two commenters suggested
deleting the language authorizing the
Secretary to permit enrollment in MSAs
by enrollees of the Federal programs
specified. Both commenters contended
that it was unlikely that OPM would
ever be able to certify that MSA
enrollment would not raise costs in the
FEHB, Veterans’ Administration, or

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TRICARE programs and that,
accordingly, the inclusion of this
language is unnecessary.
Response: The statute at section
1851(b)(2) provides for the potential for
such individuals to become eligible to
enroll in an MSA plan. Therefore, our
clarification of § 422.56(b) supporting
this provision is appropriate.
5. Election Process (§ 422.60)
In proposed § 422.60, we set forth
changes that would allow other election
and notice mechanisms other than
paper forms or written documents. We
also clarified that MA organizations may
submit requests to restrict enrollment
for capacity reasons to CMS at any time
during the year.
Comment: Two commenters
supported the conforming revisions to
§ 422.60 permitting us to approve
alternate election mechanisms, as
discussed in the comments on proposed
§ 422.50(a)(5). The commenters also
approved of the clarification to
§ 422.60(b) regarding requests for
enrollment limits due to capacity
reasons.
Response: We adopt these revisions as
proposed.
Comment: One commenter suggested
that CMS make further amendments to
the regulatory text to ensure that the
current options we have established for
individuals to elect MA plans sponsored
by employer or union groups are
retained, including the policy that
documentation may be retained by an
employer or union group rather than the
MA plan.
Response: As discussed above, we are
confident that the proposed revisions
provide us with sufficient flexibility to
foster innovative election processes that
use modern technology for all
individuals, not just employer or union
groups. Therefore, it is not necessary to
reiterate that these alternative
enrollment mechanisms are also
available to employers or union groups.
We will continue to retain current
policy for employer or union group
elections in our operational guidance
and as an option for MA organizations.
Comment: One commenter suggested
that CMS require MA and MA-PD plans
to accept AI/AN enrollees even if a plan
has received CMS approval to close
enrollment for capacity reasons.
Response: The ability to request a
capacity limit is an important element
of the MA program that helps ensure
that plan enrollees will have sufficient
access to needed providers and services.
CMS’ approval of a capacity limit
request indicates that we agree with the
requesting MA organization that its
defined network of providers is

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sufficient to deliver health care only to
a limited number of plan members.
Thus, we do not permit the MA
organization to enroll any individual
beyond the capacity limit of a given
plan, and we do not believe it would be
appropriate to undermine this
protection by waiving capacity limits for
the AI/AN population or any other
group.
Comment: Two commenters requested
that CMS modify the regulations to
more clearly allow for what the
commenter referred to as ‘‘passive
elections.’’
Response: The elections to which the
commenters are referring are those in
which an individual is informed that
the process for making an election of a
particular plan is taking no action,
while other options are exercised by
declaring an affirmative intent to elect
that option. CMS have limited such a
process to situations when it can be
reasonably concluded that an individual
will clearly want to enroll in the MA
plan offered by the same organization.
We do not believe that a regulatory
change is needed to continue to allow
such elections. The revisions made to
§ 422.50(a)(5) and the conforming
revisions to § 422.60 provide us with
appropriate flexibility to define and
approve MA election mechanisms,
including allowing such ‘‘passive
elections’’ as described above in specific
limited circumstances.
6. Election of Coverage Under an MA
Plan (§ 422.62)
Similar to the election periods in
place in past years, the MA Annual
Coordinated Election Period will run
from November 15 through December 31
of each year. For 2006, the annual
coordinated election period is extended
through May 15, 2006.
Based on our interpretation of the
MMA, we proposed revising § 422.62 to
ensure that an individual who is newly
eligible for MA has the full opportunity
to elect an MA plan as part of their
Initial Coverage Election Period. In
developing the proposed rule, we
determined that the intent of the
Congress was to provide for an initial
coverage election period for MA that
ends on the later of the day it would end
under pre-MMA rules or the last day of
the Medicare Part B initial enrollment
period. This approach extends an
individual’s MA initial election period
in some instances, and never reduces or
eliminates it.
Through 2005, the Open Enrollment
Period extends throughout the year,
providing unlimited opportunities for
MA eligible beneficiaries to enroll in,
disenroll from, and or change

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enrollment in an MA plan. This change
was reflected in § 422.62(a)(3) of our
proposed regulations.
Section 1851(e)(2)(B)(1) of the Act
was revised to establish that the open
enrollment period in 2006 will be the
first 6 months of the year. In addition,
individuals who are newly eligible for
MA in 2006 are provided an open
enrollment period that consists of the
first 6 months the individual is MA
eligible, but cannot extend past
December 31, 2006.
Under revised section 1851(e)(2)(C)(i)
of the Act, the open enrollment period
for 2007 and subsequent years will be
the first 3 months of each year. In
addition, individuals who first become
MA eligible during 2007 and subsequent
years will be provided an open
enrollment period that consists of the
first 3 months the individual is MA
eligible, not to extend past December 31,
2006. Although this specific period does
not extend past December 31, 2006, it is
important to remember that all
individuals will be provided a 3-month
open enrollment period from January
through March 2007, as discussed in
this section.
Section 1851(e)(2)(C) of the Act limits
a change of election made during an
open enrollment period in 2006 and
later years to the same type of plan in
which the individual making the
election is already enrolled.
Specifically, an individual in an MA
plan that does not provide drug
coverage may change only to another
similar MA plan, or to original
Medicare, but may not enroll in an MA
plan that provides Part D coverage, or
enroll in a Part D plan. Similarly, an
individual enrolled in an MA plan that
includes Part D coverage may enroll
only in another MA plan with Part D
coverage, or change to original Medicare
coverage with an election of a Part D
plan. As noted in the proposed rule, we
clarified a conflict between clause I and
II of section 1851(e)(2)(C)(iii) of the Act.
Clause (I) of section 1851(e)(2)(C)(iii)
states that an individual who is
‘‘enrolled in an MA plan that does
provide qualified prescription drug
coverage,’’ may only elect a plan that
does not provide that coverage. A literal
reading of this language would be in
direct conflict with clause (II) of that
same section, which says that an
individual who is enrolled in an MA
plan that provides qualified prescription
drug coverage may not enroll in an MA
plan that provides no Part D coverage.
This contradiction, plus (1) the fact
that section 1851(e)(2)(C)(iii)(I) of the
Act refers to a ‘‘another’’ MA plan that
‘‘does not’’ provide Part D coverage, (2)
the fact that clause (I) is contrasted with

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clause (II) with the word ‘‘or’’, and (3)
committee report language, make it clear
that the word ‘‘not’’ was inadvertently
omitted from the first clause of section
1851(e)(2)(C)(iii) of the Act.
Comment: Numerous commenters
opposed the ‘‘lock-in’’, that is, the
statutory provisions that limit
beneficiaries from choosing a different
type of coverage to certain times of the
year. Several commenters stated that
these provisions severely limit the
choice of beneficiaries. Others
commented that implementing lock-in
under the MA program at the initiation
of the new Part D program would be
confusing to beneficiaries. Commenters
also noted that such a provision would
have a negative impact on the MA
organizations, by making it difficult to
maintain a dedicated sales staff and
increasing the administrative costs and
burden of educating beneficiaries about
both Part D and MA changes.
Response: The provisions that limit
the times in which an individual may
change his or her election were
originally created by the BBA, and were
to become effective during 2002.
However, because of subsequent
statutory changes, these provisions have
never taken full effect (except for a
temporary period during 2002). These
provisions were modified by the MMA
to incorporate the Part D prescription
drug benefit and the statute is clear on
their applicability. Thus, we have no
authority to modify these requirements.
Comment: One commenter suggested
that CMS develop appropriate
procedures to administer these election
restrictions and inform organizations as
to what type of plan an individual is
eligible to elect (for example, an MA
only or an MA-PD plan). Another
commenter recommended that the
organization have access to information
about whether an individual is eligible
to elect a certain plan, both in advance
of an enrollment application and upon
receipt of an enrollment application.
Response: We understand that we will
need to maintain data history of the
number of times an individual has made
an election during a specific election
period, as well as the type of plan an
individual is eligible to elect. Such
information will be necessary in order
to determine whether an individual is
eligible to elect an MA plan at a given
time. We will work with plans to
establish a reliable process to determine
the eligibility of an individual based on
these requirements.
Comment: Several commenters
responded to the request for comments
on the provision that an enrollee may
only change to the same type of plan
(either with drug coverage or without)

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during the open enrollment period.
Some commenters opposed the
interpretation that restricts a beneficiary
from switching plans, even when life
circumstances had changed. Others
supported the interpretation and
indicated that such a provision
reinforced the overall integrity of the
program. Others believe that we need to
maintain flexibility with employersponsored plans.
Response: After review of the
statutory provisions and the comments,
we believe that the Congress clearly
intended that a beneficiary may obtain
or discontinue Part D coverage ONLY
during the annual coordinated election
period that begins in November each
year. Notwithstanding SEPs established
by the statute and in our regulations and
subsequent guidance, it is only during
the Annual Coordinated Election Period
that all Medicare beneficiaries are free
to elect among all available options,
whether original Medicare, MA plans,
MA-PD plans or PDPs. The statutory
provisions governing Part D in 1860D–
1 do not provide for an open enrollment
period that would allow beneficiaries to
elect the prescription drug benefit
outside of the AEP. Permitting
beneficiaries to discontinue Part D
coverage at any time during the year,
without a corresponding election period
to enroll in such coverage, could result
in a gap in coverage that may result in
a late enrollment penalty. Therefore, we
believe that it is appropriate to interpret
the statute to require that individuals
may not make an election that would
result in adding or dropping
prescription drug coverage except
during the annual election period.
Comment: One commenter
recommended that CMS clarify how the
annual coordinated election period and
the open enrollment period will be
administered in 2006, since these
periods overlap from January 2006
through May 15, 2006.
Response: In 2006, we envision that
the annual coordinated election period
will provide each individual with the
ability to choose either an MA plan or
original Medicare, with or without drug
coverage. The open enrollment period
will provide individuals the
opportunity to change their election
from the MA program to original
Medicare (or vice versa), but not to
obtain or discontinue drug coverage. We
will provide information about these
election periods in beneficiary
materials, such as the Medicare & You
Handbook.
Comment: A few commenters
submitted comments regarding the
special election periods (SEPs), as
described at § 422.62(b). One

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4605

commenter asked if CMS expected to
apply the SEPs established under the
M+C program to the MA program.
Another commenter requested
confirmation that the current SEP for
PACE enrollees (described in manual
guidance) would be applied to the MA
program. One commenter suggested that
CMS consider an exception to the Open
Enrollment Period for SNPs and for
individuals eligible for both Medicare
and Medicaid.
In addition, a commenter asked CMS
to consider the creation of an SEP for
beneficiaries in markets with MA
market penetration rates below 20
percent; such an SEP would allow time
for educating beneficiaries on MA plans
and how they operate. Many
commenters submitted comments on
establishing SEPs for special needs
plans. The commenters generally
approved of a permissive special
election period policy to allow special
needs individuals to change plans at
any time. Others believe that the
enrollment periods established in
§ 422.62 do not provide sufficient
opportunity for beneficiaries to enroll in
a special needs plan.
Response: We have historically
included in our regulations those SEPs
that have been specifically named in the
statute, and established SEPs for
exceptional circumstances in our
operational guidance. We will review
the SEPs in current MA guidance and
consider their applicability for the MA
program in 2006, as well as consider
new SEPs that may be necessary to
coordinate the new Part D program. We
appreciate the suggestions provided by
the commenters and will consider these
in developing guidance following
publication of the rule.
Comment: Several commenters
addressed the AI/AN population and
the need to modify the regulations to
allow AI/AN individuals to switch
between MA or MA-PD at various times
rather than be limited to changing only
at certain times during the year.
Response: We recognize the need to
coordinate between the IHS, Tribe, or
Tribal organization, or Urban Indian (I/
T/U) programs. We have the authority to
recognize certain circumstances as
exceptional and provide special election
periods. Providing such exceptions,
however, would not always benefit an
individual, as we discussed in our
response to a previous comment under
§ 422.50 regarding capacity limits. Such
limits are necessary to ensure that
health plans have the appropriate
number of providers and are able to
provide access to all beneficiaries
enrolled in their plan. As discussed in
the previous comment regarding

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establishment of SEPs in operational
guidance, we are not establishing any
non-statutory SEPs in the regulation, but
retain the authority to establish an SEP
in the future under exceptional
conditions. This same policy applies to
the AI/AN population.
7. Coordination of Enrollment and
Disenrollment through MA
Organizations (§ 422.66)
In keeping with our proposed
clarification at § 422.50(a)(5) regarding
election mechanisms other than, and in
addition to, paper forms, we proposed
conforming changes at § 422.66. We also
proposed similar changes in § 422.66(b)
to provide for a more efficient notice
process, including eliminating the
requirement for MA plans to send a
copy of the individual’s disenrollment
request back to the individual.
Section 1860D–21(b) provides the
Secretary with the authority to
implement default enrollment rules at
1851(c)(3)(A)(ii) for the MA-PD
program, which begins in 2006. This
provision permits the establishment of
procedures whereby an individual
currently enrolled in a health plan
offered by an MA organization at the
time of his or her Initial Coverage
Election Period is deemed to have
elected an MA-PD plan offered by the
organization if he or she does not elect
to receive coverage other than through
that organization. In our proposed rule,
we discussed the requirement for
individuals to make affirmative
elections upon becoming entitled to
Medicare as provided under § 422.66.
Affirmative elections may ensure that
individuals have the ability to remain
with the organization that offers their
health plan and protects beneficiary
choice by requiring an individual to
make an affirmative election. However,
based upon comments received, we will
revise the regulatory language to retain
the ability to allow for default
enrollment, as discussed in our
responses below.
At § 422.66(e) we also proposed to
add language that implemented new
rules for continuing MA coverage for
individuals enrolled in MA plans as of
December 31, 2005. Under section
1860D–21(b)(2), individuals enrolled in
an MA plan that, as of December 31,
2005, provides any prescription drug
coverage would be deemed to be
enrolled in an MA-PD plan offered by
that same organization as of January 1,
2006. If an individual is enrolled with
an MA organization that offers more
than one MA plan that includes drug
coverage, and is enrolled in one of those
plans as of December 31, 2005, the
individual would be deemed to have

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elected to remain enrolled in that plan
on January 1, 2006 if it becomes an MA­
PD plan on that date. An individual
enrolled in an MA-PD plan on
December 31 of a year would be deemed
to elect to remain enrolled in that plan
on January 1 of the following year (that
is, the next day).
Comment: Several comments were
received regarding the revisions to the
disenrollment process described above.
Several commenters supported the
change in language allowing optional
mechanisms for disenrollment elections.
Several commenters also supported the
elimination of the requirement that
organizations return a copy of the
disenrollment request to the individual.
Response: We received no opposing
comments to these provisions and adopt
these provisions as proposed.
Comment: One commenter
recommended that CMS clarify that MA
plan members who have selected
prescription drug coverage as an
optional supplemental benefit, and are
receiving such benefits as of December
31, 2005, will be deemed to have
enrolled in an MA-PD plan.
Response: Individuals who are
enrolled in an MA that offers any
prescription drug coverage, including
coverage offered as an optional
supplemental benefit, as of December
31, 2005, will be deemed to have
enrolled into an MA-PD plan offered by
that organization.
Comment: Several commenters stated
that additional information is needed to
implement the deemed enrollment
provision for MA enrollees who do not
make an affirmative election into an
MA-PD plan. If the MA organization
offers more than one MA-PD plan, it is
unclear into which plan the individual
will be deemed enrolled.
Response: We will provide further
guidance to MA organizations on this
issue, as we do at the end of each
contract year through our plan ‘‘cross­
walk’’ guidance. Under this guidance,
the existing policy, under which the MA
organization may designate the plan that
is ‘‘continuing’’ into the next year,
would apply to this situation.
Comment: Several commenters
supported and opposed the
implementation of default enrollment
rules as discussed at section
1851(c)(3)(A)(ii) of the Act for the MA­
PD program.
Several commenters support
implementing the default enrollment
provision and believe that it would
simplify the enrollment process for
beneficiaries. They believe that such a
process could be coupled with
advanced notice that would also give
the member the opportunity to ‘‘opt­

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out’’ of the ‘‘default’’ enrollment. Other
commenters stated that the MA
organization should have the option of
applying ‘‘default’’ enrollment in certain
situations, for example, with its
employer group members. Commenters
stated that if the MA organization chose
to implement the option, each
beneficiary would also be provided the
option to decline prior to enrollment.
Several commenters opposed default
enrollment and supported requiring an
affirmative election by the beneficiary.
These commenters believe that a default
enrollment process would be difficult
and confusing for beneficiaries. They do
not believe that beneficiaries should be
‘‘defaulted’’ into the same health plan
that provided pre-Medicare coverage.
Many commenters recommended that
MA plans obtain accurate information
from prospective enrollees through the
affirmative election process, and,
without such a process, MA plans may
not have up-to-date information about
the beneficiary. Finally, there are those
who neither support nor oppose the
default enrollment process, but instead
suggest that we modify the regulatory
language to allow us to implement such
a provision in the future.
Response: The commenters raise
several good points regarding the
implications of default enrollment. The
intent of default enrollment is not to
reduce beneficiary choice, but rather to
ensure continuity of care. At this time,
we will retain the flexibility to
implement this provision through future
instructions and guidance to MA
organizations. We do not envision
mandating that organizations use
default procedures, but instead would
give organizations the option of
implementing such a process for its
enrollees. Any such process would
require that advance notice be provided
to an individual, and that affected
individuals have the ability to ‘‘opt out’’
of such an enrollment. We believe that
we can achieve the same flexibility
provided with respect to default
enrollment that exists at
§ 422.60(b)(3)(c), which allows for
elections using alternative mechanisms.
Thus, we have revised proposed
§ 422.66(d)(5) to allow us to offer default
enrollment as an option in the future, in
a form and manner specified by CMS.
Comment: One commenter suggested
that, rather than prohibit default
enrollment, CMS should develop a
method to allow enrollees in an MA
plan with or without prescription drug
coverage, who do not make an election
by December 31, 2005 to remain with
their current MA organization in an
MA-PD plan. Another commenter
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individuals enrolled in an MA plan
without drugs who do not make a plan
election into an MA-PD plan for January
1, 2006 will be defaulted into original
Medicare.
Response: The statute provides for an
individual in an MA plan with drug
coverage on December 31, 2005, to be
deemed enrolled in an MA-PD plan as
of January 1, 2006. However, the statute
does not allow an individual who is in
an MA-only plan that continues in
January 2006 to be deemed to make an
MA-PD election. The statute is clear that
those individuals will remain in an MAonly plan unless those individuals take
an action to elect an MA-PD plan.
Pursuant to section 1861(b)(3) of the
Act, individuals may be deemed to have
elected Original Medicare only if the
MA-only plan in which they are
enrolled is terminated. Thus, in general,
we would not be defaulting MA plan
members into original Medicare.
Comment: Several commenters
recommended that CMS coordinate the
enrollment of full benefit dual eligible
individuals. A few commenters
suggested that CMS apply the default
enrollment provisions for dual eligible
individuals who have not otherwise
elected an MA-PD or PDP into an MA­
PD that is administered by an MA
organization that operates the Medicaid
managed care organization in which the
individual is enrolled. Another
commenter supports the inclusion of
sufficient flexibility in our regulations
to enable us to develop solutions that
best meet the needs of beneficiaries and
are coordinated with the MA
organizations.
Response: As discussed above, we
will consider requests to adopt such
default enrollment processes only with
respect to a newly-Medicare eligible
individual who is enrolled with an
organization as a Medicaid enrollee at
the time he or she becomes eligible for
Medicare. In such a case, the individual
could be considered by default to have
elected that organization for purposes of
Medicare benefits upon the individual’s
becoming eligible for Medicare. The
default authority in 1851(c)(3)(A)(ii) of
the Act would not, however, permit an
individual to be considered by default
to have elected an MA-PD plan if he or
she was already a Medicare beneficiary
and had elected not to receive Medicare
benefits through an MA organization.
Therefore, we decline to enroll by
default existing full-benefit dual eligible
individuals into an MA-PD if they are
currently in Original Medicare and only
receive Medicaid benefits through that
organization. We will continue to
evaluate alternatives to facilitate
enrollment in Part D for this population.

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Comment: Several commenters
suggest that each MA plan that becomes
an MA-PD plan send a notice to their
enrollees that the enrollees will be
automatically enrolled in the MA-PD
plan unless they choose to change
plans. Further, it is suggested that CMS
create a model letter for this purpose.
Response: MA plans are required to
send out notices in October of every
year to their members, also known as
the annual notice of change (ANOC). We
will revise the language in the ANOC for
MA plans to provide to members in
October 2005 in order to reflect this
policy.
Comment: Several commenters
recommend that CMS establish a default
enrollment process for AI/AN if a
certain plan meets AI/AN needs.
Response: CMS recognizes the need to
coordinate between the I/T/U programs.
Given the new regulatory language at
§ 422.66(d)(5), which allows us to offer
default enrollment as an option to MA
organizations, we could consider
requests by MA organizations to offer
default enrollment to the AI/AN
population in the case of newlyMedicare eligible individuals who are
enrolled in a non-Medicare product of
an MA organization at the time they
become Medicare eligible.
8. Effective Dates of Coverage and
Change of Coverage (§ 422.68)
To coordinate the effective date of
elections with the 2006 special annual
coordinated election period (to be held
November 15, 2005 through May 15,
2006), section 1851(f)(3) of the Act was
amended by the MMA to provide that
the effective date of elections for the
annual coordinated election period does
not apply during the 2006 special
annual election period, when
enrollment will be effective on the first
day of the month following the month
in which an election is made. We
proposed to revise § 422.68(b) to
provide for this coordination and to
make the effective date of elections in
the annual coordinated election period
for 2006 that are made in 2006 (that is,
from January 1 through May 15, 2006)
the first day of the calendar month
following the month in which the
election is made. We received no
comments on this section and adopted
the proposed language as final.
9. Disenrollment by the MA
Organization (§ 422.74)
Under the current regulations at
§ 422.74(d)(1), MA plans are required to
provide, at a minimum, a 90-day grace
period before disenrolling individuals
for failure to pay plan premiums. Thus,
MA plans must maintain enrollment for

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individuals who do not pay their
premiums for more than 90 days.
We proposed to provide greater
flexibility to MA organizations by
replacing the 90-day grace period in
§ 422.74(d)(1) with the long-standing
approach under § 417.460(c)(1), which
governs disenrollment from HMOs with
cost contracts under section 1876.
Under this proposal, we would instead
specify that a disenrollment could be
effectuated no sooner than 1 month
from the date the premium was due.
We have also proposed revisions to
the regulations at § 422.74(d)(2)
regarding disenrollment of an
individual for disruptive behavior. Our
goal was to create a more objective
definition that is based upon an
individual’s behavior, rather than upon
the application of such subjective terms
as ‘‘unruly,’’ ‘‘abusive,’’ and
‘‘uncooperative.’’ We also recognized
that, in revising this definition, we
needed to strike a balance that would
ensure all individuals are afforded
protection from unwarranted
disenrollment actions while protecting
the health and safety of all those
concerned including the individual. The
best solution is to create a definition of
disruptive behavior based on objective
criteria, ensure that MA organizations
make serious efforts to resolve problems
with beneficiaries who are disruptive,
and to require MA organizations to
make ‘‘reasonable accommodations’’ for
vulnerable beneficiaries, including
those with serious mental illness.
Furthermore, we will ensure that CMS
staff with appropriate clinical or
medical expertise will be involved in
the review of the MA organization’s
request before we make a final decision.
We will work with organizations that
ask to disenroll these individuals on a
case-by-case basis to ensure that they
are not left without Part D coverage. We
will also remove the provision for an
expedited disenrollment we had
proposed and ensure that MA
organizations provide due process
before disenrolling an individual.
Comment: Several commenters
supported the proposed revisions to
§ 422.74(d)(1) regarding procedures for
involuntary disenrollment for failure to
pay plan premiums. Other commenters
opposed these revisions as ‘‘overly
broad’’ and felt the lack of a specific
time frame could be a disadvantage for
plan enrollees.
Response: Our proposed changes to
this section were intended to provide
flexibility for MA organizations in
addressing the issue of plan members
who fail to pay required plan premiums.
Under the existing rule, MA
organizations were obligated to provide

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all plan benefits to an individual who
has failed to pay required plan
premiums for a full 90-day period. This
period often exceeded 90 days because
the notice requirements we imposed fell
after the end of the 90-day period, but
must still be met by the organization
before the individual could be
disenrolled. Our experience and
feedback from MA organizations
indicated that these requirements, while
intended to protect beneficiaries
enrolled in MA plans, may instead
artificially inflate plan premiums
because MA organizations are required
to continue to provide services to these
beneficiaries for up to 4 months, even
though they have not paid the required
plan premiums.
After reviewing the comments and
feedback we received on the proposed
rule, we determined that it would be
prudent to include a minimum grace
period in the revisions we are making to
address this issue. Therefore, we have
revised this section to include a 1­
month grace period during which an
enrollee who has failed to pay required
premiums must be notified of the
impending disenrollment action and
afforded the opportunity to pay past due
premiums in full or under payment
terms agreed upon by the beneficiary
and the MA organization, as the
organization allows. This period will
begin on the first day of the month for
which the premium was unpaid. For
example, the grace period for a March
premium will begin March 1st and, if
the organization does not receive
payment by March 31st, the individual
will be disenrolled effective April 1st.
We will provide specific time frames for
required notices in additional guidance
to ensure beneficiaries have adequate
time to respond before disenrollment
takes effect. Since we are establishing
this 1-month grace period as a minimum
requirement, MA organizations still
have the option of lengthening this
period.
Comment: Three commenters
suggested that CMS allow MA
organizations to ‘‘move’’ or ‘‘default’’
plan members who have failed to pay
premiums in one MA plan to another
MA plan in the same organization that
is offered at a lower or no premium, so
that beneficiaries do not suffer an
interruption in MA benefits.
Response: This suggestion is
inconsistent with the statute. Section
1851(g)(3)(C)(i) of the Act clearly
provides that individuals who are
disenrolled from an MA plan for failing
to pay premiums are deemed to have
elected original Medicare.
Comment: Several commenters
submitted comments on the proposed

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revisions to § 422.74(d)(2) concerning
the disenrollment of individuals who
exhibit disruptive behavior. Some
commenters supported the proposed
approach, noting that the inability to
effectuate such disenrollment has been
an ongoing issue for MA plans. Other
commenters recommended that CMS
further clarify the meaning of the term
‘‘decision-making capacity,’’ and one
commenter in particular suggested that
CMS adopt a definition based on legal
conservatorship.
Several commenters, on the other
hand, expressed concern that the
expanded definition of disruptive
behavior does not adequately protect
individuals whose behavior is induced
by a mental illness, a medical condition,
or certain prescribed drugs. These
commenters were concerned about the
loss of protection for individuals with
diminished mental capacity. Several
commenters expressed concern that the
definition of disruptive behavior was
overly subjective, particularly the use of
terms such as ‘‘unruly’’, ‘‘abusive’’ and
‘‘uncooperative.’’
Response: In the final rule, we aim to
strike a balance between allowing MA
organizations to disenroll individuals
who exhibit disruptive behavior and
creating adequate protections for
individuals who face involuntary
disenrollment from a plan. Since the
statute (at section 1851(g)(3)(B)(ii) of the
Act) permits an MA organization to
disenroll an individual who engages in
disruptive behavior, we must establish a
process for allowing these types of
disenrollments. At the same time, we
recognize that such a process must
include adequate safeguards for
individuals whose disruptive behavior
is due to mental illness or a medical
condition, especially in light of the
crucial importance of prescription drug
therapy for these individuals. It is also
important to recognize that some
prescription drug therapies may well
induce such behavior.
Therefore, we are revising our
proposed definition of disruptive
behavior in § 422.74(d)(2)(i) of the final
rule to focus on the behavior that
substantially impairs the plan’s ability
to arrange or provide care for the
individual or other plan members. We
recognized that terms such as ‘‘unruly’’,
‘‘abusive’’, ‘‘uncooperative’’, as well as
an assessment of the enrollee’s
‘‘decision-making capacity’’ are
subjective terms that make reviewing
and approving such requests difficult.
In addition, we agree with
commenters that arranging or providing
care for individuals with mental illness,
cognitive impairments such as
Alzheimer’s disease or other dementias,

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and medical conditions and treatments
that may cause disruptive behavior
warrants special consideration.
Therefore, we are revising
§ 422.74(d)(2)(v) to also require MA
organizations to provide a ‘‘reasonable
accommodation’’ to individuals in such
exceptional circumstances that we deem
necessary. Such accommodations could
include providing the individual with a
SEP to choose another plan, or requiring
the plan to maintain the individual’s
enrollment until the end of the year,
when the individual could choose
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 CMS’ existing
review and approval process required
under § 422.74(d)(2)(v). The regulations
(at § 422.74(d)(2)(iii)), will continue to
require that that before an organization
can request to disenroll a member for
disruptive behavior, it first must make
a serious effort to resolve the problems
presented by the individual’s behavior,
including the use of the organization’s
grievance procedures. The MA
organization must then document the
individual’s behavior, its own efforts to
resolve the problem, and the use or
attempted use of its internal grievance
procedures.
We believe that these policies will
achieve the twin goals of permitting
involuntary disenrollment when
appropriate due to an individual’s
disruptive behavior, while also
establishing necessary protections for
beneficiaries in certain circumstances.
Comment: One commenter stated that
the proposed rule denies protection to
individuals who comply with medical
advice by trying an on-formulary drug
instead of the drug originally prescribed
or by seeing their primary care
physician rather than a specialist and
subsequently experience an adverse
reaction that triggered the disruptive
behavior. Another commenter believed
that, in cases where an individual is
unstable, disruptive behavior could be
related to unsuccessful attempts to find
the proper medication or due to a plan’s
step therapy requirement.
Response: We agree with the
commenter, and clarify in the final rule
at § 422.74(d)(2)(i) that an individual’s
behavior 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. For
example, an individual who chooses to
disregard medical advice, such as not
heeding the advice to stop using tobacco
products, is not exhibiting disruptive
behavior.

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Comment: Several commenters
supported the flexibility afforded by
allowing MA organizations to limit reenrollment for individuals who are
disenrolled for disruptive behavior. One
commenter however, opposed the
provision on the grounds that
prohibiting an individual from re­
enrolling in a plan for a specified period
could cause undue harm.
Response: In the proposed rule, we
specified that, under § 422.74(d)(2)(vi),
an MA organization had the option to
decline future enrollment by an
individual who had been disenrolled for
disruptive behavior. Although a
prohibition on re-enrollment would still
be possible under this final rule, we are
not leaving this matter to the discretion
of the MA organization. Instead, we are
providing that an organization must
request any future conditions on reenrollment with their disenrollment
request. We will then review each
request on a case-by-case basis,
consistent with § 422.75(d)(2)(v).
Comment: Several commenters
submitted mix comments on the
proposed expedited disenrollment
process. Some commenters felt that the
expedited process undermines the
standards and requirements that are in
place to protect beneficiaries, while
other commenters supported the greater
flexibility in cases where such behavior
poses an immediate threat of health or
safety to others.
Response: We believe that all
individuals facing involuntary
disenrollment for disruptive behavior
must have sufficient opportunity, as
provided by the notice requirements, to
change their behavior and/or grieve the
MA organization’s decision to request
involuntary disenrollment from CMS.
Although we recognize that threatening
behavior is a real, if rare, problem, we
do not believe that expedited
disenrollment is the appropriate
remedy. Rather, we would recommend
either a medical approach or, if
warranted, a law enforcement solution
for truly threatening situations.
Therefore we are removing this
provision from the final regulation.
Comment: One commenter
recommended that the process for
disenrolling AI/AN from MA
organizations that contract with the HIs,
an Indian Tribe or Tribal organization,
or an I/T/U include direct
communication with the I/T/U entity
with adequate documentation of and
steps taken to resolve the problem as
well as adequate timelines.
Response: MA organizations have the
statutory authority at Section
1851(g)(3)(B)(ii) of the Act to disenroll
an individual from a plan if the

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individual has engaged in disruptive
behavior and are required to provide
sufficient notice to the individual in
accordance with the timeframes
specified in manual instructions.
Because an individual is an enrollee of
MA plan, the individual’s relationship
with the plan is primary. The MA
organization, not the health care
provider, is obligated to communicate
with the individual or the individual’s
authorized representative as defined
under State law. We believe that a
provision requiring consultation with I/
T/U entities would not be within the
scope of the authority in section
1851(g)(3)(B)(ii) of the Act.
Comment: Several commenters
submitted comments on whether
nonpayment of cost-sharing should
constitute disruptive behavior. Many
commenters supported this
interpretation, noting the negative
impact that non-payment of cost sharing
has on an MA organization’s ability to
provide or arrange for services for the
individual. These commenters generally
recommended that CMS establish a
clear and uniform process for plans to
follow. Another commenter suggested
that such disenrollments be permitted
only for certain types of services that
represent significant portions of a
member’s overall cost-sharing
responsibility. One commenter
suggested that CMS establish a
threshold of $2,000 of outstanding cost
sharing, including two or more failures
to pay cost sharing.
Other commenters, however, opposed
including nonpayment of cost sharing as
a basis for disenrollment. Some
commenters stated that this policy
would be discriminatory, placing very
ill patients with high medical costs at a
severe disadvantage and leading plans
to cherry pick healthier patients.
Another commented that CMS needed
to take into account an individual who
experiences a change in circumstances
that may affect his or her ability to pay
cost sharing.
Several commenters raised questions
about how CMS would treat low-income
individuals. Some commenters were
supportive of a low-income exception
for such disenrollments, while other
commenters noted the administrative
difficulty in applying the exception,
since plans do not have mechanisms in
place to determine beneficiary income
levels or intervene on behalf on the
enrollee with the provider.
Response: We appreciate the feedback
provided on whether the nonpayment of
cost-sharing should constitute
disruptive behavior. We continue to
believe that disenrollment for failure to
pay cost-sharing may be disruptive

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under certain circumstances. At the
same time, we believe that all the
protections, such as notice requirements
and case-by-case CMS review, should
apply in these situations. Thus, we are
not ruling out such disenrollment in
certain cases, and we will consider
these comments in developing guidance
for the disruptive behavior provisions.
Comment: Other commenters
recommended that CMS institute
specific protections for individuals
facing involuntary disenrollment,
including an appeals process.
Response: Although we agree with the
commenter that CMS 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, they may contact the MA
organization. We provide assistance to
MA organizations to handle beneficiary
inquiries and complaints regarding
enrollment through staff assigned to
each MA organization. We envision a
similar process being established under
the PDP program.
10. Approval of Marketing Materials and
Election Forms (§ 422.80)
We proposed to codify at
§ 422.80(a)(3) the ‘‘file-and- use’’
program already in place. This
provision recognizes an MA
organization’s consistent compliance
with marketing guidelines by providing
for streamlined approval of marketing
materials submitted by that
organization. Organizations that have
demonstrated to us that they continually
meet a specified standard of
performance are allowed to have certain
types of marketing materials deemed to
be approved by us if they are not
disapproved within 5 days of
submission to us for prior approval. In
addition, the time frames under
§ 422.80(e)(5) were made consistent
with those provided under
§ 422.80(a)(1). Lastly, we proposed
clarifying changes to the discussion of
prohibited marketing activities for MA
plans.
Comment: Several commenters
submitted comments regarding the ‘‘file­
and-use’’ provisions. Many commenters
supported incorporating this provision
into the regulation and suggested that
CMS consider even further flexibility as
plans transition to the new Part D
benefit in 2006. One commenter in
support of the provision did note,

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however, that small plans are more
affected by the process since these plans
submit fewer materials and a smaller
number of errors impact their ability to
participate. This commenter
recommended that CMS consider this
issue with regard to smaller
organizations.
Many commenters opposed this
provision and believe that the provision
weakens the marketing rules and that
MA organizations have not
demonstrated that they deserve such a
process. Given the new upcoming
options and diversity of plan benefits,
many believe stronger marketing
requirements are needed. They were
concerned that this process would
perpetuate the perceived inconsistency
in the marketing material approval
process within CMS. Others were
concerned that the short timeframe for
CMS to review and approve would
result in essentially CMS ‘‘rubber
stamping’’ materials. One commenter
suggested that plans present all
marketing materials at least 30 days
before proposed distribution.
Response: The ‘‘file-and-use’’ program
streamlines the marketing review
process while assuring that beneficiaries
marketing materials are of a high quality
and clarity. While we understand the
concerns raised by smaller
organizations, this program was
developed to be available to those MA
organizations that demonstrate they can
consistently achieve a high level of
performance with respect to producing
accurate and clear marketing materials
over a sustained period of time,
regardless of the size of the
organization.
It is also important to note that there
are marketing materials that are not
‘‘eligible’’ to be considered under this
program. Any marketing materials that
describe benefits, cost sharing or plan
rules are not eligible for the file-and-use
status.
We retain the right to rescind file-and­
use status from an MA organization if
the organization fails to meet the rigid
standards of compliance laid out in the
file-and-use guidelines. We do not
believe that the beneficiary is at greater
risk as a result of the file-and-use
program, but may actually benefit from
being able to receive certain educational
and outreach materials in a timely
manner.
In response to the commenters
seeking greater marketing flexibility, we
also are providing in § 422.80(a)(2) of
this final rule for organizations that are
not currently eligible for the file-and-use
method to use this method with respect
to materials that pose the lowest risk of
confusing or misleading beneficiaries.

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With respect to these materials, any MA
organization may follow the file-and-use
procedures if it certifies that it followed
all applicable marketing guidelines, or
that it used, without modification,
model language specified by CMS.
Comment: One commenter expressed
disappointment that CMS retained the
prohibition on door-to-door solicitation.
The commenter did not believe that
retaining this ban was justified and the
ban is outdated, since it was added 20
years ago when this activity was more
difficult to monitor.
Response: We understand the need by
MA plans to have additional flexibility
in developing their marketing strategies.
The purpose of this prohibition was to
provide beneficiaries with appropriate
beneficiary protections. Some
individuals may not welcome
unsolicited visits or may not be
prepared to discuss their options, yet
may feel pressured to do so. Given the
complexity of the new programs and the
upcoming limitations when individuals
are able to make choices in their
coverage, as well as increased
competition, we believe that prohibition
of door-to-door solicitation remains to
be in the best interest of the beneficiary.
Comment: One commenter did not
believe the regulatory language
addressed the CMS timeline for review
when materials are submitted after
CMS’ initial 45-day review period.
Current guidance allows for an
additional 45-day review period for
CMS to review a document after it has
been resubmitted. The commenter
recommends instituting a 10-day review
period for resubmitted materials.
Response: We appreciates this
feedback and will take this under
further consideration.
Comment: One commenter supported
the extension of file and use to SNPs.
Response: Since SNPs are MA plans,
all MA rules will apply to SNPs unless
otherwise provided by us. Therefore,
SNPs will qualify to participate in the
file-and-use program provided the
necessary requirements are met.
Comment: Several comments
requested clarification from CMS that
outreach workers employed by tribal
and IHS facilities will continue to be
encouraged to provide information
about Medicare alternatives to the AI/
AN elderly and this outreach would not
fall under the prohibition against doorto-door marketing.
Response: We appreciate these
concerns and will work with Tribal and
IHS organizations to find solutions that
both meet the needs of the AI/AN
population and satisfy the requirements
of the MA program.

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Subpart C—Benefits and Beneficiary
Protections
In the areas of benefits and
beneficiary protections, we proposed
regulatory reforms based on our
program experience, as well as
provisions implementing new
requirements in the MMA. We tried to
integrate new requirements in the MMA
with existing regulations, while at the
same time removing impediments in the
existing rules that have tended to stifle
innovation by M+C organizations. We
believe our proposals addressed the
paramount task of ensuring that
beneficiaries continue to be fully
informed and protected in their receipt
of essential health care services under
the Medicare program.
The regulatory reforms we proposed
included: (1) New beneficiary
protections related to receipt of covered
health care services from contracted
providers; (2) revisions to the rules
limiting beneficiary cost sharing related
to emergency episodes; (3) new rules
affording additional protections to MA
regional plans enrollees; (4) incentives
for MA organizations to offer MA
regional plans that would serve all
beneficiaries in all areas; (5) the
elimination of administratively
burdensome requirements on MA
organizations that are duplicative of
other activities already conducted by us;
and (6) the elimination of a number of
unnecessary, duplicative, or overly
burdensome access to care provisions.
We received hundreds of comments
on subpart C from approximately 150
commenters in response to our August
3, 2004 proposed rule. Below we
provide a brief summary of the
proposed provisions and respond to
public comments. (For a broader
discussion of the proposed provisions,
please refer to our proposed rule.)
1. General Requirements (§ 422.100)
MA MSAs are ‘‘high deductible’’ MA
plans and are defined at section
1859(b)(3) of the Act. Until the
deductible is met, the MA MSA enrollee
is generally responsible for payment for
all covered services. Once the MA MSA
deductible is met, the MA organization
offering the MSA plan is responsible for
payment of 100 percent of the expenses
related to covered services. In both
cases, whether it is the enrollee or the
MA organization offering the MSA that
assumes responsibility for payment,
providers and other entities are required
to accept the amount that FFS would
have paid (including permitted
beneficiary cost sharing) as payment in
full.

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Section 233(c) of the MMA amended
the Act to include enrollees in MSA
plans offered by an MA organization
with MA coordinated care plans as
having protection from balance billing
by noncontracting providers. In our
proposed rule, we stated that for
covered services provided to an MA
MSA plan enrollee, a physician or other
entity that does not have a contract with
an MA MSA plan must now accept as
payment in full the amount they could
have collected had the individual not
been enrolled in the MA MSA plan.
In the proposed rule, we specified
that:
• The proposed provision applied to
physicians and other entities. (Note that
‘‘providers of services,’’ as defined in
section 1861(u) of the Act, are similarly
restricted from balance billing MA MSA
enrollees under section 1866(a)(1)(O) of
the Act.)
• In cases in which Medicare
participating physicians do not have an
agreement with an MA organization in
place governing the amount of payment,
they must accept the amount they
would have received under FFS
Medicare as payment in full (including
permitted beneficiary cost sharing).
• In cases in which Medicare non­
participating physicians do not have an
agreement with an MA organization in
place governing the amount of payment,
they also must accept the amount they
would have received under FFS
Medicare as payment in full (including
permitted beneficiary cost sharing).
(Medicare non-participating physicians
are permitted to accept assignment on a
case by case basis. For non-assigned
claims, Medicare non-participating
physicians are subject to the ‘‘limiting
charge.’’)
These FFS charge limits have always
applied to the charges that providers
and other entities could impose when
providing covered services to enrollees
in MA coordinated care plans and
private FFS plans, when there is no
agreement with an MA organization in
place governing the payment amount.
The MMA added the same protections
for MA MSA plan enrollees and we
proposed conforming changes in
subpart C and at § 422.214.
In addition to the new MA MSA
‘‘charge’’ protections, we proposed
amending § 422.100 to provide for other
changes for purposes of administrative
simplification and clarification:
• We deleted the parenthetical
‘‘(other than an M+C MSA plan)’’ from
the first sentence of § 422.100(b)(2) and
replaced it with ‘‘(and an MA MSA
plan, after the annual deductible in
§ 422.103(d) has been met).’’

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• We modified the reference to
‘‘additional benefits’’ in § 422.100(c), as
those benefits are no longer applicable
to MA plans offered on or after January
1, 2006.
• We removed § 422.100(e) because it
was duplicative, and we made the
necessary redesignation changes.
• We removed the reference to
operational policy letters in § 422.100(f).
• We added ‘‘or encourage
disenrollment’’ to § 422.100(f)(2), after
‘‘discourage enrollment,’’ as one of the
prohibitions on the design of benefit
packages.
Comment: One commenter
recommended that CMS clarify whether
the proposed provider rules will now
require providers accepting Medicare
assignment to limit their charges to 100
percent of Medicare allowable costs for
members of an MA MSA plan.
Response: The protections from
physician balance billing that are
described in section 1848(g) of the Act
apply to all Medicare beneficiaries,
including those enrolled in any type of
MA plan. This includes enrollees of MA
MSA plans. This means that for a
Medicare participating physician, for
instance, the billed charges cannot
exceed the Medicare participating fee
schedule amount for a Medicarecovered service. For Medicare non­
participating physicians that do not
accept Medicare assignment in a
specific case, the charges cannot exceed
115 percent of the Medicare non­
participating fee schedule amount for a
Medicare-covered service.
Similarly, for providers of services, as
defined at section 1861(u) of the Act,
the participation agreement with
Medicare requires the provider to accept
the FFS payment amount as payment in
full for services provided to Medicare
beneficiaries, including those enrolled
in any type of MA plan (see section
1866(a)(1)(O) of the Act).
Comment: A few commenters stated
that CMS should clarify regulatory
language to require MA plans to include
statutory add-on payments under FFS
Medicare to the noncontracting provider
payments they are required to make
under § 422.100(b)(2). Some
commenters specifically mentioned
such add-on payments (for example,
DSH, outliers, GME, and IME payments)
as part of the total payment amount that
the provider would have received under
original Medicare, and also including
the balance billing permitted under Part
A and Part B. Some commenters
specifically mentioned the ‘‘special’’
hospital category payments for sole
community hospitals, Medicare
dependent hospitals, and critical access
hospitals. Another commenter

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4611

recommended that CMS clarify this
‘‘new’’ provision and asked why CMS
made a distinction between providers of
services, physicians, and other entities.
Response: This section of the
regulation has been in place since the
original M+C interim final regulation
was published on June 26, 1998. In our
August3, 2004 proposed rule, we simply
added the billing protections for MA
MSAs based on the amendment to
section 1852(k)(1) of the Act provided in
section 233(c) of the MMA. Otherwise,
the distinction between providers of
services, physicians, and other entities
is statutory and based on the fact that
noncontracting providers of services are
required to accept Medicare payment
rates from MA organizations based on
section 1866(a)(1)(O) of the Act, while
noncontracting physicians and other
entities are required to accept Medicare
payment rates from MA organizations
based on section 1852(k) of the Act.
Additionally, we believe our
regulation already requires FFS ‘‘add­
on’’ payments (including those to both
providers of services, physicians, and
other entities), because they are
generally considered part of the FFS
payment that an MA organization must
make to noncontracting providers,
physicians, and other entities for
covered services. However, an MA
organization is not required to include
IME and GME payments to
noncontracting hospital providers to the
extent the hospital providers receive
IME and GME payments for MA plan
enrollees directly from the fiscal
intermediary (see § 422.214(b)). The
fiscal intermediary’s direct payments to
hospitals of IME and GME amounts for
MA enrollees are based on sections
1886(d)(11) and 1886(h)(3)(D) of the
Act, respectively. Finally,
§ 422.100(b)(2) references the balance
billing permitted under Part A and Part
B of Medicare, which represents the
maximum required payment due from
the MA organization, less applicable
MA enrollee cost sharing.
Comment: Several commenters
recommended that CMS adopt blanket
policies that would require MA and
MA-PD plans to pay I/T/U facilities that
serve AI/AN in a special manner.
Among other proposals, these
commenters suggested that CMS require
MA organizations to waive cost sharing
for AI/AN and that CMS require MA
organizations to pay the ‘‘full IHS
Medicaid’’ rate to I/T/U facilities, or that
we establish other special payment
methodologies related to MA
reimbursement to I/T/U facilities.
Response: We are implementing the
MMA statute through this rulemaking.
The MMA did not provide for special

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treatment under the MA program for AI/
AN beneficiaries. For this reason, we do
not see a statutory basis to apply
different rules to a subset of Medicare
beneficiaries, such as AI/AN
populations. In general, however, we
believe that MA regional plans will
create new choices for beneficiaries,
including AI/AN populations, and that
access to MA plans will be improved.
Similarly, because MA regional plans
must reimburse for all covered benefits
in and out of network, IHS facilities may
receive reimbursement for out-of­
network care provided to an MA
regional plan AI/AN enrollee that they
may otherwise not have been entitled to
under the M+C program. However, the
rate of reimbursement actually paid to
an I/T/U facility for an AI/AN enrollee
will vary based on the type of plan, type
of service, and the plan-required level of
enrollee cost sharing. For instance, for
emergency department services, an MA
plan enrollee’s cost sharing would be
limited to $50 and the MA organization
(regardless of plan type) would be
responsible for payment of the rest of
the billed amount, up to the full
Medicare rate. Similarly, an I/T/U, for
an AI/AN MA PPO enrollee, could
expect MA organization reimbursement
for routine covered services provided to
such an enrollee, although the amount
of reimbursement directly provided by
the MA organization would be limited
to the full Medicare rate, less applicable
enrollee cost sharing.
Finally, a broad waiver of beneficiary
cost sharing of the type the commenters
requested would not be permitted under
provisions designed to protect the
Medicare program from fraud and
abuse. However, existing statutory and
regulatory provisions may allow for the
waiver of cost sharing in certain cases.
Comment: One commenter suggested
that CMS require pre-approval before
permitting an MA organization to adopt
a local coverage determination for an
MA regional plan under § 422.101(b)(4).
This commenter also suggested that
CMS require public comment on the
choice of local coverage determination
by an MA organization for either a local
MA plan under § 422.101(b)(3) or an
MA regional plan under § 422.101(b)(4).
Response: We do not interpret the
statute at section 1858(g) to require CMS
pre-approval of the local coverage
determination an MA organization
sponsoring an MA regional plan selects
to apply to all enrollees of the MA
regional plan. The statutory provision
also does not include a requirement for
public notice, but rather allows the MA
organization to elect to have a local
coverage determination apply to all
enrollees of the MA regional plan. The

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MA organization must comply with
applicable statutory and regulatory
requirements in making such election,
including the requirement, discussed
below, that all local coverage
determinations of the contractor
selected by the MA organization be
applied to the MA regional plan’s
enrollees.
Comment: One commenter
recommended that CMS clarify whether
or not MA organizations are required to
provide all Medicare covered benefits in
the MA plans they offer to Medicare
beneficiaries. This commenter had
specific concerns related to outpatient
occupational therapy and whether a
home visit by an occupational therapist
to evaluate for safety and function post
stroke, for instance, is a Medicare
benefit that MA organizations have to
offer enrollees of MA plans.
Response: Occupational therapy is a
Medicare-covered outpatient benefit
under section 1861(s)(2)(D) of the Act.
Under section 1852(a) of the Act, an MA
organization must provide all benefits
under the original Medicare FFS
program option. Therefore, MA plans
must cover all services covered under
Medicare Parts A and B.
Comment: One commenter stated that
CMS is directed to ‘‘replace’’ Medicare
carriers and fiscal intermediaries with
Medicare Administrative Contractors
(MACs) by section 911 of the MMA. The
commenter asked what impact such a
‘‘replacement’’ would have on MA
plans, which will likely cover larger
areas than current FFS contractors.
Response: Transition from Medicare
carrier and fiscal intermediary
contractors to MACs is to occur between
2005 and 2011. We have modified the
regulatory language in § 422.101(b)(3) to
account for the transition to MACs by
removing specific reference to Medicare
carriers and fiscal intermediaries. We
expect the impact this ‘‘replacement’’
will have on MA plans related to this
section of the regulation will be
insignificant. To the extent MACs will
cover larger geographic areas than
current FFS contractors, and to the
extent MACs will apply local coverage
determinations across those larger
geographic areas, the opportunity for
MA organizations to elect to apply
uniform coverage rules in
§ 422.101(b)(3) or (b)(4) will also be
likely to decline.
2. Requirements Relating to Basic
Benefits (§ 422.101)
Section 221 of the MMA added a new
section 1858(g) to the Act that provided
for a special rule related to the way local
coverage determinations (for example,
‘‘local medical review policies,’’ or

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‘‘LMRPs’’) will be applied by MA
regional plans. MA regional plans are
permitted to elect any one of the local
coverage determinations that applies to
original Medicare FFS beneficiaries in
any part of an MA region to apply to its
enrollees in all parts of the MA region.
Based on our interpretation of the
statute, we proposed at § 422.101(b)(4)
that an MA regional plan, if it chooses
this option, must elect a single FFS
contractor’s local coverage
determination that it will apply to all
members of an MA regional plan. The
MA organization would not be
permitted to select local coverage
policies from more than one FFS
contractor that it would apply to all
members of an MA regional plan.
Comment: A number of commenters
recommended that CMS clarify the
proposed language in § 422.101(b)(4).
Some commenters recommended that
CMS ensure that the understanding
comported with ‘‘the common
understanding’’ that regional plans can
select coverage determinations issued
by different intermediaries and carriers
within the region. Some commenters
also suggested that CMS extend the
same flexibility to local MA plans.
Others suggested that CMS allow MA
organizations that sponsored multiple
local MA plans to apply one FFS
contractor’s coverage determinations to
its entire MA population.
Response: We disagree with the
commenters who have requested the
ability to select coverage determinations
of multiple intermediaries or carriers
within a region. As we stated in the
proposed rule, our interpretation of
section 1858(g) of the Act is that an MA
regional plan exercising this option
must elect a single FFS contractor group
of local coverage determinations or
policies that it will apply to all members
of an MA regional plan and that an MA
regional plan may not select local
coverage policies from more than one
FFS contractor. We are adopting this
interpretation in the final rule.
The reason for this interpretation is
two-fold. First, to the extent that local
carrier and intermediary medical
directors apply uniform experience to a
broad range of coverage policies, it
would be inappropriate to allow
selection of a specific coverage policy
from one carrier medical director and a
different coverage policy on a different
medical item or service from another
carrier medical director. Second, to the
extent that local carrier and
intermediary coverage policies are
generally statements of non-coverage,
restricted coverage, or conditions for
receipt of a specific health care item or
service, it would be inappropriate to

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allow an MA regional plan to adopt
coverage policies issued by more than
one carrier or intermediary. This
interpretation would permit MA
regional plans to deny coverage for what
would otherwise be Medicare-covered
services at a frequency and under
conditions that no individual FFS
beneficiary would ever face. For
example, carrier ‘‘X’’ might have
decided that Medicare coverage was not
available for ‘‘A’’ in a local coverage
area. Carrier ‘‘Y’’ might have decided
that Medicare coverage was not
available for ‘‘B’’ in a local area. In such
a situation, were we to permit an MA
regional plan to adopt the coverage
policies of both carrier X and carrier Y,
an MA plan enrollee of that regional
plan would not have coverage for either
A or B, while original FFS enrollees
residing in carrier X’s service area
would have coverage for B, and those
residing in carrier Y’s service area
would have coverage for A. Therefore,
to emphasize these points and to correct
the apparently common
misunderstanding mentioned in the
comment, we are modifying the
language in § 422.101(b)(4). Further, the
statutory language will not permit an
extension to local MA plans of the
requirement we are codifying in
regulation at § 422.101(b)(4). Local MA
plans whose service areas encompass
more than one local coverage policy
area will continue to be required to
follow rules previously established for
them in § 422.101(b)(3) based on
statutory authority at section
1852(a)(2)(C) of the Act.
Finally, we respond to the
commenters that asked whether an MA
organization could apply a single FFS
contractor’s coverage determinations to
its entire MA population and across
local MA plans. Such a policy would
not be in accord with the statute, which
is specific as to both local and MA
regional plans. The selection of a
uniform coverage determination policy
for both MA local and regional plans is
available only at the plan level.
Comment: A commenter
recommended that CMS revise the
regulation at § 422.101(b)(4) in order to
permit MA organizations that offer MA
regional plans in more than one MA
region to apply local coverage policies
across regional boundaries.
Response: We are interpreting section
1858(g) of the Act as generally
preventing such an interpretation or
revision to the regulation. The statute
specifically allows MA regional plans to
apply coverage policies only from ’any
part of such region.’’ It would only be
where one FFS contractor had a uniform
coverage policy that straddled two

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regions, and where an MA organization
offered MA regional plans in both of
those regions, that such a result would
be possible.
Comment: A commenter
recommended that CMS allow an MA
organization offering multiple local MA
plans to apply the rule in § 422.101(b)(3)
across MA local plans, or if local MA
plans could adopt the new rule in
§ 422.101(b)(4) related to MA regional
plans.
Response: The specific language at
section 1851(a)(2)(C) of the Act is clear
in not permitting such an interpretation
or revision to the regulation. The statute
specifically allows an MA organization
sponsoring a local MA plan to apply the
coverage determination most beneficial
to enrollees from the service area of that
local MA plan to all enrollees of that
local MA plan, and subjects that to preCMS review before implementation.
Comment: A number of commenters
pointed out the difficulty
noncontracting providers will have
ascertaining the local coverage policy
that will apply to a specific MA regional
plan enrollee. Some commenters
suggested that CMS require MA regional
plans to notify both enrollees and
potential noncontracting providers of
the LMRP that will apply to specific MA
regional plan enrollees. Others stated
that providers are most familiar with
LMRPs that apply in the area in which
they primarily practice medicine or
provide services and that it will be
difficult, if not impossible, to know
whether a specific service will be
covered for a specific MA regional plan
enrollee when LMRPs are applied from
different, and possibly remote,
geographic areas. Some commenters
pointed out the potential impact this
would have on MA regional plan
enrollees who could incur financial
liability for services that are otherwise
Medicare-covered in the geographic
location in which they are provided.
Many commenters stated that the
problems related to knowing what
LMRP applies to a specific MA regional
plan enrollee are compounded by the
fact that MA regional plan enrollees, as
MA PPO enrollees, have the right to
access all covered benefits (albeit at
potentially higher cost sharing) from
out-of-network providers.
Response: We have added a new
paragraph to the regulation at
§ 422.101(b)(5) that will require MA
organizations that elect to apply local
coverage policies uniformly across a
local MA plan’s service area, or across
an MA regional plan’s service area, to
inform enrollees and potential
providers, including through the
Internet, of the applicable local coverage

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4613

policy that applies to the MA plan
enrollees. This means that MA
organizations choosing to avail
themselves of the option of applying
uniform LMRPs to a local or regional
MA plan must create a web site upon
which to post links to or copies of the
applicable LMRPs. We believe that this
requirement will not create a significant
burden on MA organizations and will
provide convenient access for both
providers and enrollees to such
information. We are also making a
conforming change to § 422.111(f)(11)
that requires MA organizations to notify
providers through the Internet that such
an election has occurred and what local
coverage policy will apply to MA plan
members.
We proposed to add a new
§ 422.101(d) to provide for new costsharing requirements mandated by
MMA related to MA regional plans.
There were three specific requirements:
1. MA regional plans, to the extent
they apply deductibles, are required to
have only a single deductible related to
combined Medicare Part A and Part B
services. Applicability of the single
deductible may be differential for
specific in-network services and may
also be waived for preventative services
or other items and services.
2. MA regional plans are required to
have a catastrophic limit on beneficiary
out-of-pocket expenditures for innetwork benefits under the original
Medicare FFS program.
3. MA regional plans are required to
have a total catastrophic limit on
beneficiary out-of-pocket expenditures
for in-network and out-of-network
benefits under the original Medicare
FFS program. (This total out-of-pocket
catastrophic limit, which would apply
to both in-network and out-of-network
benefits under original Medicare, could
be higher than the in-network
catastrophic limit, but may not increase
the limit applicable to in network
services.)
MA regional plans would be
responsible for tracking these
beneficiary out-of-pocket limits and for
notifying members when they have been
met. We also proposed to require MA
regional plans to track and limit
incurred rather than paid out-of-pocket
expenses.
Comment: Many commenters
recommended that CMS explain the
significance of requiring MA regional
plans to track ‘‘incurred’’ rather than
paid expenses related to the deductible
and caps on beneficiary cost sharing.
Response: There are two reasons for
requiring MA regional plans to track
incurred rather than paid beneficiary
cost-sharing expenses. The first is that

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we foresee a potential for disputes
arising between providers and MA
organizations related to the ‘‘full’’
reimbursement the MA organization
will owe, once a cap had been met. If
‘‘full’’ reimbursement were not required
until cost sharing had been paid (rather
than incurred), then disputes might
arise over what amount a beneficiary
had actually paid in cost sharing, and
when. Administratively, it is more
feasible and less burdensome for plans
to track incurred cost-sharing amounts
than amounts actually paid, if for no
other reason than the latter would
require a feedback mechanism to the
MA organization whenever an enrollee
makes a payment of cost sharing.
Second, it is possible that in many
instances a beneficiary will be unable to
pay full cost sharing for a service at the
time of service. Many MA organizations,
for instance, require inpatient hospital
copays of more than $100 per day, even
when in-network hospitals are used.
Beneficiaries might need to pay cost
sharing to providers over a period of
time. Such delays in the actual payment
of cost sharing should not affect the MA
organization’s responsibility for timely
payment of claims.
Comment: A number of commenters
recommended that CMS require MA
organizations to make deductible and
out-of-pocket information readily
available to providers to facilitate billing
at the time of service. Some commenters
suggested requiring MA organizations to
send notices of additional financial
liability to enrollees on a monthly basis.
Others suggested requiring that a
standardized notice be used to ensure
consistent reporting across all plans.
Commenters also suggested requiring
MA organizations to post enrollee
deductible and catastrophic cap
information on the Internet, so
providers could easily and quickly
determine enrollee liability at the time
of service.
In addition, commenters suggested
that CMS require MA organizations
offering MA regional plans to provide
information on deductible and out-of­
pocket limits related to specific MA
regional plan enrollees to hospitals,
similar to the method by which
hospitals are notified of Medicare
beneficiary eligibility and Part A
deductible status under the original FFS
system. Others suggested that we
require MA organizations offering MA
regional plans to supply deductible and
catastrophic cap information when
health care providers and/or hospitals
notify the MA organization that an MA
plan member has presented for services.
Response: In response to these
comments, we have modified

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§ 422.101(d)(4) to indicate that
notification to providers of enrollee
status related to a deductible (if any)
and catastrophic caps is also required.
To the extent an MA regional plan
enrollee is not aware of his or her
deductible and/or cap status, the
enrollee or a provider should have
reasonable access to such information at
the time of service.
Comment: A number of commenters
recommended that CMS add a special
provision for AI/AN to § 422.101(d) that
would have the affect of requiring all
MA regional plans to provide ‘‘full
reimbursement’’ to all I/T/U facilities
that treated enrollees of that MA
regional plan.
Response: The MMA did not provide
for special treatment under the MA
program for AI/AN beneficiaries. For
this reason, we do not see a statutory
basis to apply different rules to a subset
of Medicare beneficiaries, such as AI/
AN populations.
Comment: A commenter generally
supported the requirement at
§ 422.101(d)(4) that MA regional plans
will be responsible for tracking the
incurred beneficiary cost sharing related
to the deductible and the catastrophic
caps on beneficiary out-of-pocket
expenses. The commenter expressed
disappointment that a specific dollar
amount or limit had not been set related
to the caps on out-of-pocket expenses in
§ 422.101(d)(2) and (d)(3). The
commenter also asked that we provide
a definition of ‘‘incurred’’ costs that
ensures that all cost sharing, whether
paid by the beneficiary, or on his or her
behalf, is counted and tracked.
Response: We did not establish
maximum deductible or cap-levels in
regulation, since the statute does not set
such limits. We interpret the statute to
allow for flexibility in plan design,
within the constraints of statutory
language, to promote competition.
However, under our authority at section
1852(b) of the Act to disallow the
offering of an MA plan where we
determine that the plan design or its
benefits are likely to substantially
discourage enrollment by certain MA
eligible individuals, we will review
deductible and cap-levels to ensure that
they do not substantially discourage
enrollment. Additionally, as required by
section 1854(e)(4) of the Act, beginning
in 2006 (and for all MA plans other than
MSA plans), the actuarial value of the
deductible, coinsurance, and
copayments applicable on average to
individuals enrolled in an MA plan
related to benefits under the original
Medicare program may not exceed the
actuarial value of the deductibles,
coinsurance, and copayments that

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would be applicable on average to FFS
Medicare enrollees related to benefits
under the original Medicare program.
As provided for in statute at section
1852(a)(1)(B)(ii) and in our regulation at
§ 422.101(e)(2), while the catastrophic
limit on in-network receipt of benefits
under the original Medicare program
applies to the overall cost-sharing limit
that an MA regional plan can impose
per § 422.256(b)(3), the out-of-network
catastrophic limit is not likewise
constrained.
Finally and related to the tracking of
incurred costs, we will require MA
regional plans to track incurred as
opposed to paid enrollee cost sharing.
We will require MA regional plans to
provide reimbursement to providers for
covered services once the deductible or
caps have been incurred regardless of
who has actually paid the cost sharing,
or for that matter, regardless of whether
the deductible or other cost sharing has
been paid at all. An MA organization
with financial liability to reimburse a
provider for covered services may not
delay reimbursement until an enrollee
first pays deductible or cost-sharing
amounts.
The MMA also added a new section
1859(b)(4) to the Act requiring MA
regional plans to provide
reimbursement for all covered benefits,
regardless of whether the benefits are
provided within or outside of the
network of contracted providers. As
PPOs, MA regional plans are permitted
to impose differential cost sharing
related to non-emergency services
received from non-network providers.
To the extent differential cost sharing is
part of the benefit package, the MA
regional plan will generally be
responsible for its portion of payment to
a non-network provider, and the
enrollee will be responsible for the
remainder, up to the limits discussed
above. We accommodated these
requirements in the proposed rule at
§ 422.101(e).
MA PPO Benefits
We received many comments on
§ 422.101(d) and (e) related to the
benefits and cost-sharing protections
enrollees in MA regional plans can
expect to receive. We also received
comments specifically related to the
definition of MA PPOs provided at
§ 422.4(a)(1)(v), which we responded to
in the subpart A preamble above.
Because of the interaction of the
statutory and regulatory definitions of
PPO (for both local MA plans and MA
regional plans, which are offered as
PPOs), and the benefits they must
provide, we address a number of
comments related to MA PPO benefits

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in this section of the preamble that have
a close bearing on the definition of MA
PPOs.
As we stated in the subpart A
preamble of the August 3, 2004
proposed rule: ‘‘Section 520(a)(3) of the
Medicare, Medicaid and SCHIP
Balanced Budget Refinement Act of
1999 (BBRA) added section
1852(e)(2)(D) of the Act and defined
PPO plans under the MA program for
purposes of quality assurance
requirements. As we discussed in the
preamble to the final rule with comment
period titled, ‘‘Medicare Program;
Medicare+Choice,’’ published on June
29, 2000 (65 FR 41070), the definition
of PPOs at section 1852(e)(2)(D) of the
Act was explicitly for purposes of
applying quality assurance requirements
in 1852(e)(2)(B) of the Act and was
limited in its applicability to paragraph
(2) of section 1852(e) of the Act. Before
the enactment of the BBRA, PPOs had
been treated under the M+C statute and
regulations in the same manner as all
other M+C coordinated care plans for
purposes of applying quality assurance
requirements. In the June 29, 2000 final
rule with comment period, we
incorporated this new definition into
the M+C regulations at § 422.4 and by
revising § 422.152.
The PPO plan definition added by
section 520 of the BBRA included three
elements, they were as follows: (1) has
a network of providers that have agreed
to a contractually specified
reimbursement for covered benefits with
the organization offering the plan; (2)
provides for reimbursement for all
covered benefits regardless of whether
those benefits are provided within the
network of providers; and (3) is offered
by an organization that is not licensed
or organized under State law as a health
maintenance organization.
Because the definition of PPO plan in
section 1852(e)(2)(D) of the Act only
applies for the limited purpose of
eligibility for PPO quality improvement
requirements, we do not believe that the
limitations in this definition should
have been set forth in a generally
applicable definition of PPO plan in
§ 422.4, as is currently the case. We
propose to clarify in regulation that it is
solely for purposes of the application of
the more limited quality assurance
requirements in section 1852(e)(2)(B) of
the Act that PPOs must be offered by
MA organizations that are not licensed
or organized under State law as a HMO.
For PPO-type plans that are offered by
MA organizations that are licensed or
organized under State law as HMOs, the
quality assurance requirements that
apply to all other coordinated care plans

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in section 1852(e) of the Act also apply
to those PPO type plans.’’
Based on this better interpretation of
section 520(a)(3) of the BBRA, we
proposed to modify the third element
(related to State licensure) of the
definition of MA PPO plan at § 422.4 to
read as follows: ‘‘A PPO plan is a plan
that has a network of providers that
have agreed to a contractually specified
reimbursement for covered benefits with
the organization offering the plan;
provides for reimbursement for all
covered benefits regardless of whether
the benefits are provided within the
network of providers; and, only for
purposes of quality assurance
requirements in § 422.152(e), is offered
by an organization that is not licensed
under State law as an HMO.’’
We also proposed to define MA
regional plan at § 422.2 based on the
definition in section 1859(b)(4) of the
Act, which was added by section 221(b)
of the MMA. The first and second
elements of the definition of MA
regional plan at section 1859(b)(4)(A)
and (B) of the Act are identical to the
first two elements of the definition of
MA PPO plan at sections
1852(e)(3)(A)(iv)(I) and (II) of the Act ,
which was added by section 722(a) of
the MMA. Note that the definition of
MA PPO plan in section
1852(e)(3)(A)(iv)(I) of the Act is
identical the definition of MA PPO plan
that had appeared at section
1852(e)(2)(D) of the Act, as added by
section 520(a)(3) of the BBRA.
Therefore, the statute requires that both
local MA PPOs and MA regional plans
(which are offered as PPOs) must
provide reimbursement for all covered
benefits regardless of whether such
benefits are provided within the
network of providers.
Comment: Although some
commenters supported, as a beneficiary
protection, the fact that MA regional
plans are required to provide
reimbursement for all covered benefits,
regardless of whether those benefits are
provided within or outside the network
of contracted providers. Many
commenters suggested that statutory
language requiring PPOs to provide
reimbursement for all covered benefits
should simply mean that PPOs need to
provide out-of-network coverage for
Medicare Part A and Part B services.
The commenters also stated that they
believe the statute never intended out­
of-network coverage to apply to
supplemental benefits, which are not
part of the original Medicare benefit
package.
Response: We disagree. The
placement of the definition and other
requirements related to MA regional

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4615

plans in the MMA is instructive in this
regard. As we noted earlier, section
221(b) of the MMA added the definition
of MA regional plan, which includes the
second element of the definition, ‘‘that
provides for reimbursement for all
covered benefits regardless of whether
such benefits are provided within such
network of providers,’’ at section
1859(b)(4)(B) of the Act. Section 221(c)
of the MMA establishes ‘‘Rules for MA
Regional Plans’’ by inserting a new
section 1858 into the Act. In both,
section 1858(b)(1) of the Act related to
the single deductible that MA regional
plans are permitted to apply, and
section 1858(b)(2) of the Act related to
the catastrophic limits that MA regional
plans must apply, the statute is clear in
stating that only ‘‘benefits under the
original Medicare FFS program’’ are
included. Where the intent is to limit
application of MA plan requirements to
only benefits under the original
Medicare program (Parts A and B), the
statute states such a limitation. Because
no such limitation appears in either
section 1852(e)(3)(A)(iv) of the Act,
related to all PPOs, nor in section
1859(b)(4) of the Act, related to MA
regional plans, we cannot apply such a
limitation in the regulations.
Comment: Several commenters stated
that benefits such as gym, eyewear,
dental discounts, discounts on hearing
aids, massage, acupuncture, weight
control programs, or health-related
magazines are unavailable out-of­
network because as a practical matter,
such benefits and discounts are
negotiated and offered to MA
organizations primarily in consideration
of the guaranteed volume the exclusive
service provider believes it will receive.
Many commenters stated that, to the
extent such discounted benefits are
available from out-of-network service
providers, the basis for the negotiated
discount (guaranteed volume) becomes
null and void.
One commenter stated that discount
arrangements such as these, which
secure a larger volume of business for
the entity providing the discount,
provide financial profits and are a
common business model not limited to
the world of health insurance. The
commenter also stated that in these
arrangements, there is typically no
payment by the plan, and no cost
sharing by the enrollee.
Response: Although we fully support
discounts and volume purchasing where
appropriate, it is important to note that
discounts are not benefits under the MA
program unless they meet the definition
of ‘‘benefits’’ contained in the
regulations. The definition of MA
benefits is found at § 422.2 and reads as

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follows: ‘‘Benefits are health care
services that are intended to maintain or
improve the health status of enrollees,
for which the MA organization incurs a
cost or liability under an MA plan (not
solely an administrative processing
cost). Benefits are submitted and
approved through the annual bidding
process.’’ Note that unless an MA
organization actually pays for a health
care item or service, the item or service
is not a ‘‘benefit’’ of the MA plan.
Therefore, negotiated discounts for
services for which the plan incurs no
cost or liability are not MA benefits, and
are not subject to the requirement that
PPOs provide reimbursement for all
benefits, whether or not they are
provided within the network of
providers. That said, it is important to
note that we have termed these types of
negotiated discounts ‘‘value added
items and services,’’ which are
discussed in Chapter 3 (Marketing) of
the CMS Medicare Managed Care
Manual.
Comment: Some commenters stated
that MA organizations frequently
subcapitate ancillary provider networks
(such as dental providers) and that such
subcapitated arrangements make it
difficult for the MA organization to
provide reimbursement for all benefits,
in- and out-of-network.
Response: The statute is clear that all
MA organizations offering PPOs (local
and regional) must provide
reimbursement for all plan benefits inand out-of-network. A number of MA
organizations subcapitate Independent
Practice Associations (IPAs), PhysicianHospital Organizations (PHOs), and
similar subnetworks of providers, for
most (or all) original Medicare Part B
and/or Part A services. Such
subcapitation arrangements are
permitted within the MA program,
subject to § 422.208 (the physician
incentive plan requirements and
limitations) and other statutory and
regulatory provisions. However, to the
extent an MA organization wants to
offer a PPO (either local or regional), it
will also need to make arrangements for
providing reimbursement for all out-of­
network benefits in such a subcapitated
environment, or it will need to make
arrangements with its subcapitated
contractors for providing reimbursement
for out-of-network benefits directly.
Two points need to be made. First, the
cost sharing that an enrollee will be
required to pay when obtaining covered
benefits out-of-network can be higher
than the cost sharing that applies when
services are obtained in-network.
Second, to the extent that subcapitated
arrangements make the provision of
reimbursement for all benefits out-of­

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network impractical, an MA
organization might consider offering an
HMOPOS product, where out-of­
network coverage and reimbursement
can be limited in a number of ways.
Comment: Commenters stated that it
would be impossible for plans to
provide reimbursement for out-of­
network receipt of benefits such as 24­
hour nurse hotline services or disease
management services.
Response: These services are not
likely to be available from out-of­
network providers because of the
unique nature of the services and the
integration between the plan and the
service provider necessary for the
delivery of such services. To illustrate,
a provider of in-network disease
management services to a plan’s
enrollees is likely to need access to plan
and patient information in order to
provide services to enrollees. An out-of­
network disease management services
provider would not have such access,
and so would be unlikely to be able to
provide the service out-of-network.
Finally, to the extent that such services
are available without cost sharing from
in-network providers, the imposition of
cost sharing of any amount for their
receipt out-of-network should deter
virtually all enrollees from seeking them
out-of-network.
Comment: Some commenters pointed
out the difficulty inherent in requiring
MA-PDs that are offered as PPOs to
provide reimbursement for mail-order
drugs or Part D (prescription drug)
benefits received by enrollees from out­
of-network providers.
Response: As a practical matter, an
MA PPO plan that offers Part D coverage
as an MA-PD will need to provide out­
of-network coverage of Part D drugs
consistent with the requirements of the
Part D program and the regulations at
part 423.
Comment: A commenter stated that
further complications might arise were
CMS to interpret ancillary services (for
example, dental and eyewear) as being
services subject to the catastrophic limit
on out-of-pocket expenses. The concern
was that once an enrollee has met the
out-of-network cap, cost sharing would
no longer act as a deterrent to the
unrestricted and ‘‘free’’ access by PPO
enrollees to these benefits from out-of­
network providers.
Response: The statute and our
implementing regulations at
§ 422.101(d)(2) and (d)(3) are clear in
limiting application of the catastrophic
caps to Part A and Part B benefits. To
the extent dental or eyewear benefits of
an MA PPO plan are not also original
Medicare benefits, cost sharing can
continue to apply, even after the out-of­

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network additional catastrophic limit in
§ 422.101(d)(3) has been met.
Comment: A number of commenters
recommended that we revise the
proposed rule to clarify that MA
regional plans may establish prior
authorization requirements for services
obtained out-of-network and that both
MA regional plans and local PPOs
should be permitted to offer certain
services only through network
providers, where, for instance, the
services have unique characteristics.
The commenters stated that private
sector PPO benefits are commonly
offered in this manner. Therefore, the
commenters believe that by providing
this flexibility, CMS would allow the
offering of MA PPO plans and benefits
in a comparable manner to those
generally available to consumers, and
that this will make it possible for them
to continue to offer certain services that
add value for beneficiaries.
Response: Although we support the
offering of added value to beneficiaries
where possible, as we have previously
discussed, there is a clear statutory
requirement that all covered benefits of
an MA PPO plan (regional or local) must
be available out-of-network. The statute
provides a definition of PPO that may
not, in all respects, conform with
business models that might be present
(or even prevalent) in the commercial
sector. Unlike plans serving commercial
populations, the Medicare program is
primarily intended to serve aged and
vulnerable beneficiary populations.
Therefore, the dynamics of the MA
program may not match those in the
commercial market. Also, for all MA
plans they offer, MA organizations are
required to follow FFS coverage rules
related to items and services covered
under FFS Medicare. Although MA
organizations are permitted to adopt a
single local coverage policy that will
apply to all enrollees in an MA plan, in
accordance with § 422.101(b), MA
organizations are not permitted to
impose a more stringent test related to
medical necessity determinations for
Medicare-covered services than the one
that applies under the FFS program.
For items and services not covered by
Medicare that the MA organization
provides under section 1852(a)(3) of the
Act, similar considerations apply. In
other words, to the extent and under the
conditions that a non-Medicare
supplemental benefit would be available
to a plan enrollee within the network of
providers, such a service would also
need to be available to an MA PPO
enrollee out-of-network. That is not to
say that differential cost sharing cannot
be applied to out-of-network receipt of
covered services, nor does it mean that

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out-of-network cost sharing cannot be
differentially applied to specific
services or types of services. We believe
that MA organizations offering MA
PPOs (both local and regional) can
accomplish their business strategies
while still working within the statute.
For instance, an MA PPO can warn
enrollees that to the extent that an item
or service is not a covered benefit of the
plan, the enrollee would be required to
pay the full cost of the service. This
warning might have the desired effect of
encouraging the enrollee to call the MA
plan before seeking care out-of-network,
as a means of ensuring that a specific
item or service is actually a covered
benefit of the plan. Similarly, for
specific services for which the plan has
established substantial out-of-network
cost sharing, the enrollee can be
encouraged to contact the plan for preauthorization that would reduce cost
sharing. For instance, for out-of-network
receipt of a specific inpatient hospital
service the normal cost sharing might be
40 percent of charges. To the extent an
enrollee or provider calls and receives
plan pre-authorization for a specific out­
of-network hospitalization of this type,
the MA plan might reduce enrollee
liability to 20 percent (or less) of
charges. MA PPOs must be able to
provide coverage and medical necessity
determinations to enrollees (and
providers) before the enrollee receives
out-of-network services. This will act as
a beneficiary protection.
A prudent enrollee will have reason
to ensure that such services are
medically necessary and covered by the
plan before self-referring to out-of­
network providers. Similarly, a prudent
provider will have a means of ensuring
that plan coverage will be provided.
However, the idea that a gatekeeper
must provide a referral or that an MA
plan must pre-authorize a service before
it will be covered at all, or that such a
referral or plan pre-authorization is a
necessary condition for receipt of any
medically necessary out-of-network
plan covered service is not in accord
with the statutory language pertaining to
MA PPOs.
Our belief is that the statute precludes
requiring a medical necessity
determination, a plan pre-certification
or pre-authorization, or a coverage
decision before receiving a covered
service out-of-network. As long as an
MA PPO enrollee is willing to pay the
higher cost sharing associated with out­
of-network care, there can be no
additional barrier to receipt of plan
covered benefits. If an MA organization
offering an MA PPO is particularly
concerned with over-utilization or
inappropriate utilization of services (or

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of a particular service) out-of-network,
the organization has the authority to
impose relatively high out-of-network
cost sharing overall, or related to a
specific service. Also note that to the
extent a referral or plan preauthorization has been provided for innetwork care, the enrollee has the right
to use the referral or plan preauthorization for receipt of the same
care out-of-network (with applicable
out-of-network cost sharing).
Comment: A commenter
recommended that CMS offer alternative
regional PPO product designs, which
the commenter called ‘‘Performance
Risk PPOs.’’ The commenter included a
proposal that would, offer plan
incentives for higher quality, better
customer service and benefits, improved
outcomes and program savings, and
penalize plans that do not perform well
on these measures. The commenter
explained that such a model would offer
a range of out-of-network benefits, but
not all Medicare-covered services would
be available out-of-network. In addition,
the commenter stated that although
referrals would not be required for
accessing out-of-network care, precertification might be required.
Response: Under the definitions of
regional PPO contained in the MMA,
the MA regional plan must provide for
reimbursement for all covered benefits,
regardless of whether such benefits are
provided within the plan’s network of
providers. Therefore, a plan of the type
that the commenter proposes would not
meet the statutory definition of MA
regional plan. Further, as we have stated
above, plan pre-certification or preauthorization may not be a necessary
condition for receipt of out-of-network
covered services.
3. Supplemental Benefits (§ 422.102)
In the August 3, 2004 proposed rule,
we stated that an MA plan could reduce
cost sharing below the actuarial value
specified in section 1854(e)(4)(B) of the
Act as a mandatory supplemental
benefit. Beginning in 2006, an MA plan
can reduce the cost sharing that applies
to plan members below the actuarial
value of the cost sharing that would
apply to those members if they were
enrolled in the original Medicare
program. This amount is not just the
limit on the amount of cost sharing that
an enrollee can be charged in the plan’s
bid for Medicare Part A and Part B
services (and for which and when such
plan cost sharing exceeds FFS cost
sharing, a supplemental premium is
necessary), but it also expresses the
value of the bid-based cost sharing
when the bid is below the benchmark.
When we reference section 1854(e)(2)(B)

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4617

of the Act in § 422.102(a)(4), we are
referring to the latter value, not the
former. This reduction in cost sharing
can be included as a mandatory
supplemental benefit and was proposed
at § 422.102(a)(4).
We also proposed the following
conforming changes to § 422.102:
• We removed the reference to
‘‘additional benefits,’’ as those benefits
are no longer applicable to MA plans
offered on or after January 1, 2006.
• We removed the reference to
operational policy letters (OPLs) in
§ 422.102(a)(3), as guidelines related to
benefits that had been contained in
OPLs have been incorporated into
regulation, into the Medicare Managed
Care Manual, or into other instructions.
We received no comments on this
section, so we finalize it as proposed.
4. Benefits Under an MA MSA Plan
(§ 422.103)
For clarification purposes, we
proposed to remove the extraneous
word ‘‘under’’ from paragraph (a) of
§ 422.103.
We received no comments on this
section, so we finalize it as proposed.
5. Special Rules for Self-Referral and
Point of Service Option (§ 422.105)
‘‘Point of Service’’ (POS) is an option
in some plans that allows enrollees to
obtain non-network services, with the
plan providing some limited level of
reimbursement for such services. To
clarify an issue that has created
confusion for both beneficiaries and MA
organizations, we proposed to clarify at
§ 422.105 that if an MA organization
does not offer a POS benefit to members
of a plan (or if it offers a POS benefit
as an optional supplemental benefit and
the member has not selected that
benefit), the member cannot be
financially liable for more than the
normal in-plan cost sharing for covered
items or services from contracted
providers.
We stated that we believed that
indemnifying the Medicare member in
such a situation conforms with normal
industry practice and also clarified our
long-standing policy that members
cannot be held financially liable when
contracting providers fail to follow or
adhere to plan referral or preauthorization policies before providing
covered services. If a plan member
insisted on receiving what would
otherwise be covered services from a
contracted provider (but for the lack of
a referral or plan pre-authorization),
then the contracted provider would be
required to inform the member that
those services would not be covered
under the plan. We proposed to require

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the provider to document the medical
record as to why the services are
medically necessary but not available
through the plan.
In addition, an MA regional plan
might choose to provide for a POS-LIKE
benefit where beneficiary cost sharing
would be less than it would otherwise
be for non-network provider services,
but where it still might be greater than
it would be for in-network provider
services, if an enrollee follows preauthorization, pre-certification, or pre­
notification rules before receiving out­
of-network services. Note that such preauthorization, pre-certification, or pre­
notification cannot be a necessary
condition for receipt of, or required MA
plan reimbursement for, out-of-network
covered services by a PPO enrollee;
however, it can act as a financial
incentive (by lowering the normal out­
of-network cost sharing that would
otherwise apply) to an enrollee to
voluntarily participate.
In this final rule, the title of this
section is being changed to emphasize
the fact that it contains not only rules
related to POS options or benefits, but
that it also contains a rule related to
enrollee self-referral to plan contracted
providers in all MA plans.
Comment: Many commenters
recommended that we clarify the
meaning of the introductory statement
proposed to § 422.105(a). Other
commenters suggested that the
statement was misplaced, because the
proposed regulation would apply to
plans with and without POS offerings.
Others commenters stated that in plans
in which a POS option was provided as
a mandatory supplemental benefit, the
introductory statement we proposed to
add would have no effect and would
therefore be confusing.
Response: We agree with the
comments regarding potential confusion
and have renamed the title of this
section of the regulation and
reorganized it to indicate that it covers
not only POS offerings, but that it also
applies to all situations in which an MA
plan member self-refers to a plancontracting provider, whether or not a
POS benefit is involved.
Comment: One commenter stated that
while some types of services may not be
covered under any circumstances, other
services might not be covered by an MA
plan because they are not medically
necessary or appropriate for the
enrollee. The commenter suggested that
CMS clarify the applicability of the
introductory statement to circumstances
in which a service does not meet
coverage criteria based on medical
necessity.

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Response: Many commenters
responded to our request for comment
in the subpart M preamble of the August
3, 2004 proposed rule related to whether
or not we should permit or require (and
under what circumstances) advance
beneficiary notices (ABNs) to be issued
by network or non-network providers to
MA plan enrollees. Many of the
commenters opposed such a
requirement as being overly intrusive on
the patient and doctor relationship and
other commenters supported it as being
a valid and necessary beneficiary
protection. We address the specific
comments related to ABNs in the
subpart M preamble of this rule.
Although we decided not to
incorporate an ABN requirement into
the MA program at this time, we believe
that there is an important beneficiary
protection at stake, especially in light of
the projected growth in MA PPO
enrollment due to the advent of the MA
regional plan program. MA
organizations have a responsibility to
ensure that contracting physicians and
providers know whether specific items
and services are covered in the MA plan
in which their patients are enrolled. If
a network physician provides a service
or directs an MA beneficiary to another
provider to receive a plan covered
service without following the plan’s
internal procedures (such as obtaining
the appropriate plan pre-authorization),
then the beneficiary should not be
penalized to the extent the physician
did not follow plan rules. MA plan
enrollees cannot be held to a higher
standard than plan contracting
providers. To the extent a contracting
provider performs a service or refers a
patient for health care services that an
enrollee reasonably believes would be
covered services of the plan, then an
MA plan enrollee cannot be liable for
more than applicable plan cost sharing
for those services. To the extent an MA
organization does not properly inform
contracted providers, or to the extent an
MA contracted provider does not
properly enforce referral procedures,
then to that same extent, an MA plan
enrollee cannot be held financially
liable for the organization’s or
provider’s failure. Under its contract
with the MA organization, a provider is
contractually bound to look solely to the
MA organization for reimbursement for
covered services (see § 422.502(g)(1) and
§ 422.502(i)(3)). Similarly, MA
organizations are required to
communicate clear and consistent
coverage guidelines and medical
management procedures to contracting
physicians (see § 422.202(b)).
Comment: Some commenters
recommended that CMS be more

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flexible and not require the network
contracted physician or provider to
document the medical record as to why
the items or services were medically
necessary but not available through the
plan. These commenters suggested that
it was inflexible to require that such
documentation appear only in the
medical record.
Response: We agree with this
comment that it was overly proscriptive
to require that such documentation
could only appear in the medical record
and will permit flexibility regarding
where such information is documented.
We have added language at the end of
§ 422.105(a) that does not specify where
such documentation must reside.
Comment: A few commenters asked
us to clarify the issue of the provider’s
ability to bill the beneficiary, if all
actions specified in § 422.105(a) have
taken place. Commenters stated that the
clarification should specify the
conditions under which they are
permitted to bill a beneficiary. One
commenter asked whether the rules
established in this section of the
regulation also apply to hospitals and
other types of contracted providers.
Response: The intent of our revision
to § 422.105 is to clarify a beneficiary
protection and not necessarily to clarify
under what conditions an MAcontracting provider may or may not bill
an MA plan enrollee. As mentioned
above, all contracting providers are
bound to look solely to the MA
organization for reimbursement for
services covered under the MA plan in
which a Medicare beneficiary is
enrolled. To the extent an MAcontracting provider provides a noncovered service to an MA enrollee, then
payment for such a service is not
generally within the regulatory purview
of the MA program.
However, where the enrollee is
notified in advance by the contracted
provider that a service will not be
covered unless the beneficiary receives
a referral or takes some other action, and
that notification is documented, and the
beneficiary receives the service without
obtaining the referral or taking the
necessary action, then the enrollee can
be billed and may be held financially
liable for the service. Additionally, even
if a beneficiary is informed (either
verbally or in writing) that a specific
service will not be covered by the MA
plan in which the beneficiary is
enrolled, that beneficiary is entitled to
appeal such a determination, whether or
not the service is actually provided after
such notification. Finally, § 422.105(a)
applies to all contracted providers,
including physicians, hospitals, and
other provider types.

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Comment: One commenter suggested
that CMS was proposing an odd and
fundamentally misguided rule
governing members of MA plans who
self-refer. Another commenter stated
that the requirement was unnecessary,
inflexible, and burdensome for
contracted providers. The first
commenter stated that the proposed rule
contradicted fundamental managed care
principles and that the proposed rule
would shift payment responsibility from
the self-referring member to the
contracted provider and/or the MA
organization.
The first commenter asserted that
enrollees who self-refer should be
required to pay the entire cost of the
service and should not be rewarded by
having to pay only the normal, innetwork cost sharing. The second
commenter stated that both contracting
providers and MA plan enrollees are
well aware when there is a requirement
to secure a referral from a PCP before
receipt of specialty care. Finally, both
commenters stated that the proposed
rule was flawed by not contemplating,
or providing exceptions for, situations
in which the service is not covered by
the MA plan in which the individual is
enrolled, or situations in which the
service is not medically necessary.
Response: We do not agree. The
language in § 422.105 states that only
covered items and services are subject to
the regulatory provision. Covered plan
services do not include services that are
inappropriate or not medically
necessary for a specific individual in a
specific situation. The intent of the
regulatory provision is to limit patient
liability in situations where a contracted
provider provides a covered service, but
for which certain technical, non­
medical conditions of coverage have not
been met.
Although we agree that the enrollee
should not be ‘‘rewarded’’ for failing to
follow proper plan pre-authorization or
referral procedures, we also believe that
the contracted provider and the MA
organization also should not be
‘‘rewarded’’ by shifting financial
responsibility to the enrollee for covered
services that are actually the financial
responsibility of the MA organization.
The contracting provider is, or should
be, aware of the MA plan’s technical
requirements for referral and/or plan
pre-authorization related to covered
services. If the contracted provider
believes the covered service is
medically necessary, then the
contracted provider needs to explain the
plan referral/pre-authorization process
and should consider assisting the
enrollee in obtaining necessary plan
pre-service documentation. Finally, the

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contracted provider needs to inform the
enrollee in instances when a service
will not be covered unless the enrollee
obtains a referral or plan preauthorization and in which that enrollee
will have full financial liability absent
such referral or pre-authorization.
6. Coordination of Benefits With
Employer Group Health Plans and
Medicaid (§ 422.106)
Section 222(j) of the MMA revised
section 1857(i) of the Act in order to
facilitate employer sponsorship of MA
plans. The MMA allowed us to waive or
modify requirements that hinder the
design of, the offering of, or the
enrollment in an MA plan offered
directly by an employer, a labor
organization, or the trustees of a fund
established by one or more employers or
labor organizations to furnish benefits to
the entity’s employees, former
employees, or members or former
members of labor organizations. Section
222(j) of the MMA further stated that
such an employer-labor organization
sponsored MA plan may restrict
enrollment to individuals who are
beneficiaries and participants in such a
plan. We proposed a new § 422.106(d)
to account for this new statutory
authority. (The August 3, 2004 proposed
rule also contained a number of
clarifying, conforming, and editorial
changes to this section.)
Comment: One commenter
recommended that CMS use the
authority provided in section 1857(i)(2)
of the Act to waive requirements related
to MA regional plans. The commenter
wanted to know if CMS would permit
employer/labor sponsored MA plans
that have been created for the sole
enrollment of the sponsors’ own
employees, retirees, or members to
participate in the MA regional plan
stabilization fund or in risk-sharing
through risk corridors, both described in
regulation at § 422.458. The commenter
was concerned that these special
‘‘incentive’’ payments for organizations
sponsoring MA regional plans were
primarily intended to foster the growth
of MA regional plans for the enrollment
of all eligible Medicare beneficiaries,
and that it would be inappropriate to
make such special payments to
organizations offering plans that are
only available for enrollment to
employer/labor group members.
Response: We agree and have
exercised this discretion under section
1857(i) of the Act to waive program
requirements that facilitate employer/
labor group enrollment. For instance,
we have waived the requirement that
MA organizations offer MA plans for
enrollment to all Medicare Part A and

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4619

Part B enrollees, and have allowed MA
organizations to create plans that
exclusively enroll employer/labor group
members. We will continue to do so.
However, we will not waive the
‘‘general’’ enrollment requirement that
MA plans enroll all MA eligible
individuals (see section 1851(a)(1)(A) of
the Act) for either MA organizations or
for employer/labor MA plan sponsors, if
these entities seek to offer an MA
regional plan solely to employer/labor
group members.
Comment: The same commenter
asked whether specialized MA plans for
special needs individuals could be
offered as MA regional plans.
Response: The statute is clear in
saying that specialized MA plans for
special needs individuals can be offered
as any type of MA coordinated care plan
(see section 1851(a)(2)(A)(ii) of the Act).
MA regional plans are a type of MA
coordinated care plan (see section
1851(a)(2)(A)(i) of the Act).
Comment: One commenter asked
whether CMS would exercise the waiver
authority under section 1857(i) of the
Act in order to allow MA organizations
to offer non-actuarially equivalent
prescription drug coverage to MA plan
enrollees who do not purchase Part D.
Response: We will not. Section
1860D–21(a)(1)(B)(ii) of the Act states
that MA organizations may not offer
prescription drug coverage (other than
that required under Parts A and B of
Medicare) to an MA plan enrollee
unless it is qualified Part D prescription
drug coverage.
Comment: One commenter asked if
CMS would use the waiver authority to
provide for special enrollment or
conversion of enrollment rules for
Medicaid beneficiaries enrolled in
special needs plans, similar to what
CMS have provided for employer/labor
group members.
Response: As previously stated, we
have waived the requirement that MA
organizations offer MA plans for
enrollment to all Medicare Part A and
Part B enrollees, and have allowed MA
organizations to create plans that
exclusively enroll employer/labor group
members. The authority for such
waivers is contained in section 1857(i)
of the Act and does not apply to
individuals entitled to Medicaid. Note
that section 1857(i) of the Act waiver
authority is exclusive in its application
to employees or former employees of an
employer, or members or former
members of a union, or a combination
thereof. Waivers for individuals entitled
to Medicaid are not provided for under
the waiver authority in section 1857(i)
of the Act. SNPs for Medicaid eligibles
are authorized in section 231 of the

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MMA. Finally, note that § 422.106(a)
and (b) do not discuss employer/labor
groups in the context of section 1857(i)
waiver authority. Regulations related to
employer/labor group waiver authority
are exclusively discussed in § 422.106(c)
and (d).
Comment: A number of commenters
asked whether CMS would apply the
new waiver authority in section
222(j)(2) of the MMA to AI/AN
beneficiaries. The commenters stated
that such a waiver might permit I/T/Us
to sponsor MA plans exclusively
designed for AI/AN beneficiaries.
Response: Section 222(j)(2) of the
MMA added a new paragraph to the Act
at section 1857(i)(2). This new provision
created the opportunity for directlysponsored employer/labor group MA
plans. Section 1857(i) of the Act waiver
authority is exclusive in its application
to employees or former employees of an
employer, or members or former
members of a union, or a combination
thereof. Waivers for AI/AN beneficiaries
are not provided for under the waiver
authority provided in section 1857(i) of
the Act.
Comment: One commenter, in relation
to a comment on § 422422.560 through
§ 422.626 (subpart M), recommended
that CMS include benefits that are
separately negotiated between the MA
organization and an employer/labor
group in the benefits governed by the
MA regulations and therefore subject to
the MA appeals and grievance
processes.
Response: This comment has been
addressed at greater length in the
subpart M preamble. However, it is
important to note that for purposes of
subpart C, separately negotiated benefits
between MA organizations and
employer groups, labor organizations,
and Medicaid (and as discussed in
§ 422.106(a)(a) and (b)) are not part of
any MA plan. Such employer/labor/
Medicaid benefits are discussed only in
terms of the fact that they complement
the benefits of an MA plan.
Comment: A commenter requested
CMS to clarify that employer groups or
labor organizations that become MA
organizations may retain the services of
entities to assist in the development and
operation of the employer-sponsored
MA plan. The commenter asked CMS to
implement the waiver authority under
Section 1857(i)(2) of the Act in a way
that does not inadvertently hinder the
efficient operation of support services
for employer groups and labor
organizations.
Response: We agree with the
commenter that our waiver authority
under 1857(i)(2) of the Act should be
applied to allow employers and labor

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organizations to offer MA plans through
arrangements with entities (such as
existing MA organizations) that will
facilitate the offering and efficient
operation of such MA plans. We have
revised § 422.106(d) to clarify this point
and to clarify that, as provided in
section 1857(i)(2) of the Act, we may
exercise this authority on our own
initiative as well as upon written
request from an applicant. In each case,
as specified in § 422.106(d)(3), our
waivers and modifications will apply to
all similarly situated MA plans.
Comment: A few commenters asked
for specific waivers. Some commenters
recommended waivers already
provided, such as a waiver that would
allow MA organizations to create
separate MA plans solely for employer/
labor group members.
Response: As we have done in the
past, we will continue to provide
specifics on approved waivers in
guidance and in direct communication
with waiver recipients, rather than in
formal rulemaking.
7. Medicare Secondary Payer (MSP)
Procedures (§ 422.108)
Section 232 of MMA amended section
1856(b)(3) of the Act to remove all
ambiguity related to State authority over
the MA program. The Congressional
intent is now unambiguous in
prohibiting States from exercising
authority over MA plans in any area
other than State licensing laws and State
laws relating to plan solvency. We
proposed to amend § 422.108(f) to
remove language that suggests States
can limit the amount an MA
organization can recover from liable
third parties under Medicare secondary
payer procedures.
We received no comments on this
section, so we finalize it as proposed.
8. Effect of National Coverage
Determinations (NCDs) (§ 422.109)
Section 1853(c)(7) of the Act requires
us to ‘‘adjust’’ MA payments when a
national coverage determination (NCD)
or legislative change in benefits will
result in a significant increase in costs
to MA organizations sponsoring MA
plans. We historically interpreted what
constituted ‘‘significant’’ costs in
regulation at § 422.109, where the costs
of a coverage change are considered
‘‘significant’’ if either the average cost of
providing the service exceeds a
specified threshold, or the total cost for
providing the service exceeds an
aggregate cost threshold.
In a final rule published in the
Federal Register on August 22, 2003 (68
FR 50839), we amended § 422.109 to
refine the definition of ‘‘significant’’

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cost to include a new test. By adding a
new paragraph at the end of
§ 422.109(a)(2), we provided that, for
purposes of determining whether to
make an additional payment adjustment
under § 422.256, the tests for reaching
the ‘‘significant’’ cost threshold were to
include the aggregate costs of all NCDs
and legislative changes in benefits made
in the prior calendar year.
Under that new test, the ‘‘average
cost’’ of every NCD and legislative
change in benefits for the contract year
would have been added together. If the
sum of these average amounts exceeded
the threshold under § 422.109(a)(l), then
an adjustment to payment would have
been made in the following contract
year under § 422.256 to reflect this
‘‘significant’’ cost. Alternatively, if the
costs of the NCDs and legislative
changes in benefits, in the aggregate,
exceeded the level set forth in
§ 422.109(a)(2), an adjustment to
payment would also have been made
under § 422.256 on that basis.
Among the reasons for the above
change was that even when the
‘‘significant’’ cost threshold had been
met under the existing definition, the
methodology then employed for making
a payment adjustment under section
1853(c)(7) of the Act did not result in an
adjustment in the capitation rate in
those counties with the ‘‘minimum’’
update rate (the ‘‘2 percent minimum
update’’ counties paid under section
1853(c)(l)(C) of the Act.) In accordance
with section 1853(c) of the Act, the CMS
Office of the Actuary (OACT) used the
annual growth rate to update only the
floor and blended rates, so the
‘‘minimum’’ 2 percent update rate,
which was 102 percent of the prior
year’s rate, did not reflect the costs of
new benefits effective in the middle of
the previous payment year. Therefore,
we decided that payments in counties in
which payment was based on the
‘‘minimum’’ 2 percent update rate were
not appropriately adjusted to reflect
new coverage costs as required by
section 1853(c)(7) of the Act.
The MMA changed the ‘‘minimum’’
percentage payment prong of the former
M+C payment methodology by adding a
new basis for a minimum update. The
‘‘minimum’’ percentage increase rate is
changed, effective January 2004, as
follows: Instead of being set at 102
percent of the prior year’s rate, the
minimum increase rate will now be the
greater of 102 percent of the prior year’s
rate, or the annual MA growth
percentage. This means that under the
MMA payment methodology, the
minimum percentage increase will now
reflect the cost of mid-year NCDs and
legislative changes in benefits. These

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costs are now automatically built into
the annual MA growth percentage and
will no longer require an additional
adjustment under § 422.256.
As a result of these MMA changes to
the MA payment methodology we
proposed in the August 3, 2004
proposed rule to remove the portion of
§ 422.109(a)(2) after § 422.254(f).
We also proposed clarifying language
in § 422.254(f) and § 422.109(c)(3).
We received no comments on this
section, so we finalize it as proposed.
9. Discrimination Against Beneficiaries
Prohibited (§ 422.110)
We proposed to correct § 422.110(b) to
bring it into conformance with
§ 422.50(a)(3)(ii). Specifically, we
proposed to modify the language of
§ 422.110(b) to state that if an MA
organization chose to apply the rule in
§ 422.50(a)(3)(ii), and allowed
individuals who are enrolled in a health
plan at the time of first entitlement to
Medicare, but residing outside the MA
plan’s service area to remain enrolled,
the MA plan must also allow this for
individuals with ESRD.
We also proposed to remove
§ 422.110(c), since it is duplicative of a
requirement now appearing in
§ 422.502(h).
We received no comments on this
section, so we finalize it as proposed.
10. Disclosure Requirements (§ 422.111)
Section 1851(d)(2)(A) of the Act and
§ 422.111(d)(2) establish disclosure
requirements. MA plans must provide
notice to plan members of impending
changes to plan benefits, premiums, and
copays in the coming year so that plan
members will be in the best position to
make an informed choice on continued
enrollment in or disenrollment from
that plan. We proposed to amend this
section to reflect that notice must be
provided at least 2 weeks before the
Annual Coordinated Election Period
commences, instead of listing a specific
date in order to provide flexibility in the
event that the beginning date of the
Annual Coordinated Election Period
changes in the future.
We also proposed to remove
§ 422.111(f)(4), as the requirement to
provide information on Medigap and
Medicare Select plans is a Secretarial
responsibility under section
1851(d)(2)(A)(i) and (d)(3)(D) of the Act
and is to occur as part of the ‘‘open
season notification’’ required by section
1851(d)(2)(A) of the Act.
In addition to an ‘‘open season’’
notification, information on Medigap
and Medicare Select is available yearround from the Federally funded SHIP
and the 1–800 MEDICARE telephone

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number. Both the local SHIP and the 1–
800 MEDICARE telephone numbers are
prominently displayed in MA plan
literature. In addition, we stated that we
would continue to require MA plans to
publicize the availability of information
on Medigap, Medicare Select, and other
MA plans through appropriate CMS
information channels (for example,
www.Medicare.gov, 1–800–MEDICARE).
This not only would remove an
unnecessary administrative burden, but
also would ensure that reliable,
accurate, and complete information is
made available to those seeking it.
To accomplish the above proposed
changes, we proposed conforming
organizational changes to § 422.111. We
also proposed the following disclosure
requirement changes:
• We removed the requirement that
MAs and MSAs provide comparative
information related to other MA plans.
• To prevent what might otherwise be
the unreasonable result that MA
regional or national plans would be
required to provide comprehensive lists
of contracting providers to all enrollees,
we modified paragraph (b)(3). (We
specifically proposed to require MA
organizations, however, to provide
information on contracted providers in
other parts of the plan’s service area
upon request in § 422.111(f)(10). Note
that we changed the specific wording of
this paragraph to more plainly express
our intent and in response to comments,
as described in further detail below.)
• We modified paragraph (b)(3) to
read: ‘‘The number, mix, and
distribution (addresses) of providers
from whom enrollees may reasonably be
expected to obtain services;≥
• We added a new paragraph (f)(10),
which reads: ‘‘The names, addresses,
and phone numbers of contracted
providers from whom the enrollee may
obtain in-network coverage in other
parts of the service area.’’
• At § 422.111(b)(11), we proposed to
require MA regional plans to provide
members an annual description (at the
time of enrollment and annually
thereafter) of the catastrophic stop-loss
coverage and single deductible (if any)
applicable under the plan.
• We changed the existing paragraph
(f)(11) (the new paragraph (f)(9)) related
to supplemental benefits.
• We also said that we were
considering a requirement that all MA
organizations sponsoring MA plans
would be required to maintain planspecific information on Internet web
sites. We discuss this in more detail
below.
In § 422.112(a)(1)(ii), we provide an
‘‘exception’’ to the requirement in
§ 422.112(a)(1) related to contracted

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4621

provider networks in MA regional
plans. We received a number of
comments on this ‘‘exception’’ and
address them later in this section of the
preamble. We also explain later in this
preamble why we are establishing a new
beneficiary notification requirement
related to enrollees of MA regional
plans in § 422.111(b)(3)(ii). This new
MA regional plan notification
requirement is intended to parallel a
similar OPM requirement imposed on
the FEHB Blue Cross and Blue Shield
Basic Option plan, which addresses
similar circumstances and situations
encountered by Federal employees and
annuitants when seeking health care.
We have added a new paragraph to
the regulation at § 422.101(b)(5) that
will require MA organizations that elect
to apply local coverage policies
uniformly across a local MA plan’s
service area, or across an MA regional
plan’s service area, to inform enrollees
and potential providers of the
applicable local coverage policy that
applies to the MA plan enrollees. We
make conforming changes to § 422.111.
Comment: A commenter
recommended that CMS explicitly state
in the disclosure requirements related to
MA plans that there were additional
disclosure requirements under Part D
with which MA-PD plans would also
need to comply.
Response: We accept this comment.
Although such a requirement is implicit
in § 422.111(a)(2), where we require MA
plans to disclose the ‘‘benefits offered
under the plan,’’ we will explicitly state
the requirement at § 422.111(a)(2). To
the extent an MA plan offers Part D to
its MA enrollees as an MA-PD plan, it
will also be required to follow the
disclosure requirements in § 423.128
related to the disclosure of its Part D
offering.
Comment: A commenter
recommended that CMS more directly
address the ‘‘free access’’ MA enrollees
have to Medicare hospice services and
the fact that MA enrollees have the right
to continue to receive non-hospice
services, unrelated to the terminal
illness, from the MA plan. The
commenter wanted to ensure that MA
enrollees knew that they could continue
to receive from the MA plan nonhospice services unrelated to the
terminal illness, as long as enrollees
remain members of the plan.
Response: We do not believe a
specific disclosure requirement of the
type the commenter requests is
necessary because our existing
regulations already require disclosure of
Medicare hospice availability, rules
related to receipt of care, and financial
responsibility, in § 422.111(b)(2)(iii) and

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§ 422.320(a) (formerly codified at
§ 422.266(a)). Otherwise, because nonhospice benefits of an MA plan continue
to be available after hospice election
and while an individual remains
enrolled in an MA plan, such
availability must be disclosed under
§ 422.111(b)(2).
Comment: Several commenters
recommended that CMS require MA
organizations to inform beneficiaries
about their benefits or restrictions on
those benefits. For example, one
commenter suggested providing
information on the average number and
type of home health visits per episode
that were covered by an MA plan during
the prior year and beneficiaries’ average
cost sharing; the names of home health
providers in the plan’s network and the
number of years the provider has
operated as a Medicare home health
agency.
Response: We agree that disclosure of
MA plan benefits continues to be an
important feature that permits
beneficiaries to make informed
decisions on enrollment. As previously
stated, MA plans are obligated to
disclose information on benefits,
including applicable conditions and
limitations on their receipt, the plan
premiums, and the cost sharing related
to specific benefits when obtained both
in- and out-of-network. We also require
MA organizations to disclose
information on the number, mix, and
distribution (including addresses) of
providers from whom enrollees may
obtain services. These disclosure
requirements are described in regulation
at § 422.111 and have not materially
changed. Although MA plans are not
required to specify the average number
of visits or types of visits per episode
from the prior year, as the comment
suggests, the plans are required to
provide all covered home health
services, which include, at a minimum,
the Medicare FFS level of benefits. We
will not require MA plans to specify the
number of years a home health agency
has operated, nor the other specifics that
the comment suggests because this
would impose an additional burden
upon plans that we think in
unnecessary in light of the existing ways
in which beneficiaries can obtain such
information.
The requirement that a plan disclose
the name(s) and address(es) of the
contracting home health agency or
agencies is already set forth in our
regulations at § 422.111(b)(3),
redesignated as subparagraph (i). The
additional information about which the
commenter suggests requiring
disclosure may be available, upon
request, from either the MA plan or

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through a direct request to the
contracting home health agency or
agencies.
Comment: Several commenters noted
the deletion of the word ‘‘written’’ from
the first sentence of § 422.111(e). One
commenter stated that removing the
word might allow an MA organization
to meet this disclosure requirement by
simply posting information on its web
site.
Response: The deletion of the word
‘‘written’’ was unintentional. We have
reinserted it in the regulations text at
§ 422.111(e). We will continue to
require MA organizations to make a
good faith effort to notify members in
writing of changes in provider networks.
Comment: A commenter
recommended that we convey the
language in § 422.111(f)(10). The
commenter asked if the intent of
paragraph (f)(10) was to complement the
requirement in § 422.111(b)(3)(i) that
routine disclosure of contracting
providers was limited to those from
whom an enrollee would ‘‘reasonably be
expected to obtain services.’’ The
commenter suggested that the language
in paragraph (f)(10) was imprecise, if
that was our intent, since it required
disclosure, upon request, of other
providers ‘‘in other areas,’’ although we
may have actually meant to convey the
disclosure, upon request, of contracted
providers ‘‘in other parts of the service
area.’’
Response: We agree with this
comment and have corrected the
language in § 422.111(f)(10). Our intent
was to make information on the
availability of other contracted
providers in other parts of the service
area of the MA plan available to plan
enrollees upon request, to the extent
such information was not provided at
the time of enrollment, because of the
large geographic area encompassed
within the service area of the MA plan.
Comment: Some commenters opposed
the deletion of § 422.111(f)(7)(i) through
(iv) that eliminates the requirement that
MA PFFS and MSAs plans provide
comparative information related to other
MA plans that are available in the
geographic area in which the PFFS and
MSAs plans are offered. These
commenters stated that potential MA
enrollees should be able to easily see
how these plans compare to other MA
plans and original FFS Medicare.
Response: We agree that individuals
considering enrollment in an MA MSA
or PFFS plan should have comparative
information regarding their choices for
receiving Medicare coverage. All MA
plans, including MA MSA and PFFS
plans, must continue providing
comparative information on FFS

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Medicare through pre-enrollment
materials including the Summary of
Benefits. The Summary of Benefits
contains a matrix that provides a
comprehensive comparison of the
benefits of an MA plan with the benefits
of original FFS Medicare. As we
discussed in the August 3, 2004
proposed rule, we believe that the
Medicare and You Handbook in
conjunction with other CMS
information channels (such as the 1–800
MEDICARE call center and direct
beneficiary counseling provided
through federal SHIP grants to the
states) provides the best opportunity for
Medicare beneficiaries considering MA
plan enrollment to receive clear,
impartial, and complete information on
the choices available to them. Therefore,
we will delete these requirements, as
they represent an unnecessary
administrative burden on MA MSA and
PFFS plans.
Comment: Some commenters
suggested including a provision in
§ 422.111(e) that would allow AI/AN to
switch to another MA plan whenever
there is a change to the provider
network of the MA plan in which the
AI/AN is enrolled.
Response: We cannot accommodate
this request because there is no statutory
basis for differentiating between AI/AN
and non-AI/AN beneficiaries. However,
to the extent that conditions in
§ 422.62(b), where special election
periods are discussed, are present for
any MA plan enrollee, the opportunity
to switch plans or to return to original
FFS Medicare is available.
Comment: One commenter
recommended that CMS remove the
annual requirement for distribution of
network provider directories. The
commenter stated that for a vast
majority of enrollees, the provider
directory is not referenced and the
information could more reasonably be
made available on an ‘‘as requested’’
basis after initial provision upon
enrollment.
Response: Under section 1852(c)(1)(C)
of the Act, MA organizations are
required to provide annually, in clear,
accurate and standardized form,
detailed information about the number,
mix and distribution of plan providers.
We have interpreted this requirement in
regulations to include annual disclosure
of plan providers’ addresses.
Comment: Most commenters
supported the new language in
§ 422.111(b)(3)(i). A few commenters
recommended that CMS define or
explain the statement, ‘‘MA
organizations would be responsible for
providing the number, mix and
addresses ‘‘of providers from whom

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enrollees may reasonably be expected to
obtain services.’’ One commenter
suggested that the language was unclear,
subject to broad interpretation and
would result in confusion and an
inconsistent application by MA
organizations.
Response: We believe that the
standard of ‘‘reasonable’’ disclosure of
network providers is both appropriate
and sufficiently clear within our current
regulatory standards. We believe that
MA organizations are in the best
position to determine what would be
‘‘reasonable’’ in this context, based on
service usage and community patterns
of care. In order to preserve flexibility
for MA organizations to provide
information appropriate to the needs of
their enrollees, we do not intend to
change the proposed language in
§ 422.111.
Comment: A number of commenters
recommended that CMS apply special
disclosure requirements to AI/AN
beneficiaries, stating that such special
disclosure requirements should include
a right by AI/AN beneficiaries to select
another MA plan at any time without
penalty.
Response: We cannot accommodate
this request because there is no statutory
basis for differentiating between AI/AN
and non-AI/AN beneficiaries.
Internet
In the August 3, 2004 proposed rule,
we asked for comments on whether or
not we should require all MA
organizations for all MA plans they offer
to set up an Internet web site that would
make basic MA plan information and
materials available to interested
Medicare beneficiaries and other
parties. The basic information and
materials could include the Evidence of
Coverage, the Summary of Benefits, and
information (names, addresses, phone
numbers, specialty) on the network of
contracted providers. Those Internet
materials and information would
duplicate materials already produced in
print format and made available by MA
organizations relative to the MA plans
they offer.
Comment: Many commenters stated
that it would be difficult for providers
to know whether an MA organization
had chosen to adopt one of the uniform
coverage policies in § 422.101(b)(3),
related to local MA plans, or
§ 422.101(b)(4)—related to MA regional
plans.
Response: As we discuss at more
length earlier in this preamble related to
§ 422.101(b)(3) and (b)(4), we agree with
this comment and therefore have added
a requirement at § 422.111(f)(11) that
MA organizations must make uniform

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coverage policies related to an MA plan
readily available to members and
providers, including through the
Internet.
Comment: Many commenters were
supportive of the proposed requirement
that all MA organizations provide basic
materials, such as the Evidence of
Coverage, Summary of Benefits, and
information (names, addresses, phone
numbers, specialty) on the network of
contracted providers. Some commenters
suggested that CMS not be overly
prescriptive in the requirements for
what MA organizations post to a web
site. Some suggested that the provision
of information over the Internet should
relieve MA organizations of their
responsibility to provide identical
information to enrollees in hard-copy
format. One commenter suggested that
CMS make plan enrollees ‘‘opt-in,’’ if
they want plan information sent to their
homes.
Other commenters stated that most
Medicare beneficiaries do not have
access to the Internet, and that
regardless of whether an MA
organization provides plan information
electronically, we should continue to
require MA organizations to send
enrollees required information through
the mail. One commenter stated that it
did not want its member handbook or
Evidence of Coverage to appear on the
Internet. The commenter stated that it
would prefer to have the documents
available only to members. Other
commenters stated that requiring an MA
organization to duplicate materials such
as the Evidence of Coverage or the
Summary of Benefits on the Internet
would be administratively redundant,
costly, and burdensome to maintain.
One commenter suggested leaving the
decision on an Internet web site to the
discretion of the MA organization. This
commenter stated that although it
supports use of the Internet, MA
organizations should not be required to
post specific documents to the Internet,
since they are already provided to
enrollees in hard copy.
Response: Based on these comments,
we will be as flexible as possible, while
still ensuring that beneficiaries receive
the information necessary to make
informed choices. We will require MA
organizations exercising options under
§ 422.101(b)(3) or (b)(4) to communicate,
via the Internet and through other
means, the fact that a specific local
coverage determination is in effect for
its plan members. We have placed this
requirement at § 422.111(f)(11). Use of
the Internet in this way will ensure that
potential providers have access to plan
coverage information to the extent that
it differs from the Medicare coverage

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policy in the geographic area in which
the provider is actually treating an MA
plan enrollee. Similarly, we will require
MA organizations that have Internet
web sites to post the Evidence of
Coverage, the Summary of Benefits, and
information on the network of
contracted providers at § 422.111(f)(12).
Because we apply this requirement only
to organizations that otherwise maintain
Internet web sites, we do not believe
that such a requirement is overly
burdensome or that it will entail a
significant administrative effort. In
addition, because the Evidence of
Coverage and the Summary of Benefits
do not change during the course of a
calendar year, maintaining or updating
the information in them will be a oncea-year activity, which will coincide with
the update of the hard copy version of
these documents. Updating of the
provider directory might entail
additional administrative effort;
however, to the extent that MA
organizations are already required to
update provider information in written
materials, we do not believe that
extending this requirement to an
electronic version of the same document
would entail a great deal of additional
administrative effort.
In response to the commenters that
asked if the use of Internet versions of
required documents would eliminate (or
mitigate) the requirement for hard copy
documents, we have added a final
sentence to § 422.111(f)(12) that states
that we will maintain our current
requirement that MA organizations
provide to enrollees written, hard copy
materials providing information at the
time of enrollment and annually
thereafter as required by § 422.112(a)
and (b). Most Medicare beneficiaries do
not routinely use the Internet. To the
extent they do and do not wish to
receive hard copy plan materials, they
can and will indicate such a preference.
In response to commenters who did not
believe it appropriate to post plan
materials to the Internet, we respond
that we believe it is an important feature
of beneficiary choice to be fully
informed regarding the benefits and
features of an MA plan before
enrollment. Plan materials, including
the Evidence of Coverage, the Summary
of Benefits, and a list of contracting
providers are essential pre-enrollment
materials that allow Medicare
beneficiaries an opportunity to compare
MA plans and to make an informed
decision on enrollment.
11. Access to Services (§ 422.112)
There are no new access standards for
MA regional plans, and existing MA
standards will generally apply. We

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reviewed our existing regulatory
requirements related to network
adequacy and proposed to remove some
that are either duplicative or, in our
view, overly onerous. We stated we
expected competition to be the best
method for ensuring network adequacy,
as enrollees will favor and enroll in
plans with more extensive networks and
tend to avoid those without.
Furthermore, Medicare beneficiaries can
always choose to remain enrolled in the
original Medicare FFS program.
We proposed to remove or modify
some the requirements from § 422.112 of
the regulation, none of which were
required by statute, and some of which
became unnecessary as they were
replaced or superseded by requirements
in the MMA:
• We proposed to delete
§ 422.112(a)(4), because we believed it
would be redundant to suggest a
specific approach to quality
improvement activities in the context of,
and as a means of ensuring, enrollee
access to care. After reviewing and
responding to comments (below), we
will implement as proposed and delete
§ 422.112(a)(4).
• We proposed to remove the written
standards requirements in
§ 422.112(a)(7) since they were
duplicative of other provisions in the
regulation. Based on a comment we
received, we will not delete the
requirement.
In the final rule we make editorial
corrections to § 422.112(a) heading and
introductory text to remove reference to
‘‘network M+C MSA plans’’ and
‘‘additional’’ services, neither of which
terms have relevance in the MA
program.
Comment: We received a few
comments related to our proposal to
remove requirements in § 422.112(a)(7).
One commenter asked us to articulate
what tools, other than written standards,
an MA plan should use to ensure
adequate access to medically necessary
health care items and services. Other
commenters objected to removal of
written standards.
Response: Written standards are
simply one aspect of an MA coordinated
care plan’s guarantee of access to care.
Such written standards do not, in and
of themselves, constitute a sufficient
guarantee of access to care. To the
extent that written standards are not
enforced, they guarantee little. However,
we agree with the commenters and
believe that the requirement for written
standards will, at the very least, prompt
plans to affirmatively address and
memorialize how they intend to provide
access to care. In light of the comments
we received and upon further

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consideration, we will retain the
requirement for written access standards
in § 422.112(a)(7).
Comment: One commenter
recommended that CMS modify the
rules to create waivers that would allow
ESRD patients to be referred to
nephrologists, dialysis centers, or
vascular surgeons who are out-of­
network if the patient prefers another
physician or center, or if the referring
nephrologist believes that the vascular
access outcomes would be better with
the out-of-network surgeon. The
commenter also suggested allowing selfreferrals to specialists, such as allowing
ESRD patients to self-refer to
nephrologists, dialysis centers, or
vascular surgeons who were out-of­
network. Another commenter suggested
including certain benefits in the MA
benefit package, such as medical
nutrition therapy (MNT) benefits for
diabetes and renal diseases.
Response: To respond to the first
comment on the provision of benefits to
ESRD beneficiaries out-of-network,
PPOs are a type of coordinated care
plan, as described in § 422.4(a)(1)(iii),
that are required to provide
reimbursement for all covered benefits
regardless of whether they are provided
in- or out-of-network. Therefore, a
beneficiary with ESRD who is enrolled
in an MA PPO plan may go out-of­
network for all covered services, albeit
with a potentially higher cost-sharing
liability. Coordinated care plans are
permitted to use mechanisms to control
utilization, such as requiring referrals
from a ‘‘gatekeeper’’ PCP, before an
enrollee can receive in-network
specialty services at in-network cost
sharing levels, as codified in regulations
at § 422.4(a)(1)(ii)and § 422.112(a)(2).
Therefore, access to a specialist at innetwork cost-sharing levels can
generally be limited to contracted
providers in coordinated care plans.
When an individual beneficiary chooses
a coordinated care plan, information is
available about the availability of
providers, including specialists, and
under what conditions they are
available in-network. Information on the
routine availability of out-of-network
care (either because the plan is an
HMOPOS or a PPO, for instance) is also
provided at the time of enrollment and
annually thereafter. On the second point
related to requiring MNT benefits for
diabetes and renal diseases in MA
plans, we remind the commenter that all
MA plans are required to include all
Medicare FFS benefits in their MA plan
benefit packages.
Comment: One commenter
recommended that CMS require all MA
plans to include podiatric physicians in

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their networks to ensure that the
necessary and vital services provided by
these physicians continue to be
available to patients. The commenter
stated that § 422.205(a) prohibits MA
organizations from discriminating
against providers on the basis of license
or certification.
Response: We do not see a basis for
requiring MA organizations to contract
with a specific provider type. As the
commenter stated, our existing
regulations prohibit discrimination on
the basis of license or certification.
Further, our existing regulations, as
amended in this final rule, require MA
organizations to ensure that covered
services are available and accessible
within an MA plan’s network consistent
with applicable access standards.
However, § 422.205(b), which is not
being amended in this rule, allows MA
organizations to refuse to grant
participation to health care
professionals in excess of the number
necessary to meet the needs of an MA
plan’s enrollees (with the exception of
PFFS plans).
Comment: One commenter agreed that
the requirements in § 422.112(a)(4) are
duplicative of the proposed chronic care
improvement requirements in
§ 422.152(c), and therefore generally
agreed that it should be deleted.
However, the commenter also stated
that deletion of requirements at
§ 422.112(a)(4) should be made
contingent on our addition of a
requirement in § 422.152(c) that chronic
care improvement programs be based on
objective and evidence-based criteria,
such as clinical practice guidelines.
Response: We address comments
related to § 422.152(c) in the subpart D
section of the preamble (below).
Because chronic care improvement
programs will be regulated under the
provisions in subpart D of the 42 CFR
part 422, we believe it remains
appropriate to delete regulatory
requirements concerning complex or
serious medical conditions from
§ 422.112(a)(4).
Comment: One commenter asked
whether access to covered MA plan
services can be denied, if the MA plan
enrollee does not pay plan required cost
sharing at the time of service.
Response: The MA organization’s
responsibility for provision of plan
covered services supersedes the
member’s responsibility for payment of
cost sharing at the time of service.
Therefore, the MA organization cannot
deny provision of a medically necessary
covered service for want of the payment
of applicable cost sharing at the time of
service.

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Comment: One commenter stated that
CMS should add a provision in the
regulation that would apply section
1861(s)(2)(H) of the Act to MA plans
offered by MA organizations.
Response: We do not agree. Both
section 1861(s)(2)(H)(i) and (ii) of the
Act are specific in their applicability to
contracts under section 1876 of the Act.
Contracts with MA organizations for
MA plans are under section 1857 of the
Act.
Continuity of Care
Section 422.112(b) requires all MA
organizations for all MA plans they offer
to ensure continuity of care through
integration of health care services.
Additional requirements in
§ 422.112(b)(1) through (b)(6) require
specific methods by which MA
organizations are to ensure an effective
continuity and integration of health care
services. Although all of the enumerated
services and processes are clearly
desirable, it is not as clear that the
responsibility for them is appropriately
or reasonably placed on organizations
whose business is primarily insurance
coverage. Although it may be reasonable
to expect coordinated care plans to
undertake these coordination,
continuity, and integration
requirements, it is less clear that MA
PFFS plans, MSAs, and (to a lesser
extent) local PPO plans and MA
regional plans (which will be offered as
PPOs) should also be expected to. One
might argue that continuity of care rules
cannot apply in the same manner to MA
plans in which the enrollee is free to
choose his or her own providers without
restraint, such as MSAs and PFFS plans.
We stated that we were considering
eliminating most of the requirements in
§ 422.112(b) for MSAs and PFFS plans.
We also stated that we were considering
eliminating or modifying many of the
requirements in § 422.112(b) for local
PPOs and regional MA plans. Finally,
we stated that we were considering the
continued appropriateness of these
continuity of care standards for all other
coordinated care plans. We specifically
welcomed input on the extent to which
requirements similar to those in
§ 422.112(b)(1) through (b)(6) are
established for commercial health
insurers offering HMOs, PPOs or
indemnity plans.
Based on comments we received, we
will continue to apply existing
continuity of care requirements in
§ 422.112(b)(1) through (b)(6), but we
will limit their scope of applicability to
coordinated care plans and then only to
the services provided and coordinated
by contracted, network providers.

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Comment: Many commenters
provided input on this issue. A large
number of commenters stated that
continuity of care and integration of
services is a key aspect of managed care.
To the extent the original FFS Medicare
program has been perceived to be
deficient in this aspect of health care
delivery, many commenters believe that
CMS should ensure that a similar
‘‘failure’’ in managed care is not
allowed. A number of commenters
supported the removal of continuity of
care requirements related to MA MSA
and PFFS plans in recognition of the
fact that these types of MA plans are
primarily in the business of paying
claims and not in the business of
coordinating health care through
contracted networks of health care
providers. Other commenters stated that
it was especially for MA plans that did
not have contracted provider networks,
such as PFFS plans or MSA plans, that
continuity of care requirements were
most needed.
Some commenters agreed with CMS
proposal to eliminate and/or reduce
continuity of care requirements for open
network MA plans, such as PFFS plans
and PPO plans. Other commenters
suggested removing all continuity of
care requirements for all MA plans,
saying that such requirements were
duplicative of QI program activities
required under section 1852(e) of the
Act.
Response: Based on the comments,
and because PPOs operate as both
coordinated care plans and ‘‘open
network’’ plans at the same time, we
will modify this portion of the
regulation. We will specify in
§ 422.112(b) that the enumerated
coordination of care requirements in
§ 422.112(b)(1) through (6) are
applicable only to coordinated care
plans. We will also limit applicability of
coordination of care requirements to
only contracting, in-network providers,
thus limiting applicability for MA PPOs
to only those services provided by
contracted providers. We believe such
an approach strikes the appropriate
balance between the need for
coordination and continuity of care and
the burden associated with seeking to
undertake such activities in the absence
of contractual relationships with
providers.
Finally, we do not agree that
continuity of care requirements are
duplicative of QI program activities
required under section 1852(e) of the
Act. QI activities will generally and
primarily be focused on individuals
with multiple or severe chronic
conditions. Access to an initial health
assessment, on the other hand, as

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4625

provided in § 422.112(b)(4)(i), should
include all enrollees of an MA
coordinated care plan, and not only
those with multiple or severe chronic
conditions.
Comment: A few commenters stated
that CMS appeared to be deleting a
paragraph (i) from paragraph (b)(4) in
the regulations text at § 422.112, but had
no corresponding discussion in the
preamble of the proposed rule.
Response: We thank the commenters
for identifying this oversight and have
corrected the regulations text related to
§ 422.112(b)(4) to show that none of the
subparagraphs is to be deleted and that
renumbering is unnecessary.
Access ‘‘Exception’’ for MA Regional
Plans
The MMA created a special access
rule for MA regional plans in the form
of an ‘‘essential hospital’’ payment.
Section 1858(h) of the Act and
implementing regulations related to
‘‘essential hospitals’’ are discussed in
greater detail later in this section of the
preamble.
We noted that in attempting to create
region-wide networks, MA regional
plans will be forced to bargain with
hospitals that may be the only hospital
(or the only hospital with a particular
service or services) in a broad area. We
believed that such a hospital would
have a ‘‘monopoly power’’ in
negotiating with plans that are, in effect,
forced to contract with it in order to
secure an adequate network of
contracted providers with which to
serve anticipated Medicare enrollees.
The MMA attempted to partly address
this situation through a provision that
would make limited funds available to
supplement payments to such ‘‘essential
hospitals.’’ We proposed an additional
special access requirement that also
would only apply to MA regional plans
at § 422.112(a)(1)(ii).
In § 422.112(a)(1)(ii), we proposed an
‘‘exception’’ to the normal access
requirements that would otherwise
apply to MA regional plans by adding
language that provided for a relaxation
of comprehensive network adequacy
requirements, but only to the extent that
beneficiaries were not put ‘‘at risk’’ for
high cost sharing related to services
received from non network providers.
We believed that flexibility did not need
to apply on a plan-wide basis, but rather
could be applied in a county or a
portion of a region where, for example,
the MA regional plan was unable to
secure contracts with an adequate
number of a specific type of provider or
providers to satisfy our comprehensive
network adequacy requirements that

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would otherwise apply to coordinated
care plan models.
We considered two forms of
beneficiary cost sharing. One was the
cost sharing related to a specific item or
service—for instance, a hospital
coinsurance charge. Another was the
‘‘catastrophic limits’’ that MA regional
plans must apply to original Medicare
FFS benefits. MA regional plans are
required to provide reimbursement for
all covered benefits regardless of
whether those benefits are received from
network providers (see section
1859(b)(4)(B) of the Act and the new
§ 422.101(e)(1)). MA regional plans are
also required to apply a catastrophic
out-of-pocket limit on beneficiary cost
sharing for covered in-network services
and another on all covered services (in
and out-of-network). See section
1858(b)(2)(B) of the Act and the new
§ 422.101(d)(2) and (d)(3).
We proposed to permit MA regional
plans with lower out-of-network cost
sharing to have less robust networks of
contracted providers and to permit MA
regional plans with more robust
networks of contracted providers to
impose higher cost sharing charges for
out-of-network services. This was
because to the extent the plans’
networks were robust, we would not
expect beneficiary access to be unduly
limited by higher cost-sharing
requirements when care was sought
from non-network providers. However,
for plans with less robust networks, we
proposed to limit the plans’ ability to
impose higher cost-sharing
requirements for out-of-network care.
We believed that higher cost-sharing
requirements imposed by plans with
limited provider networks could unduly
limit access and that more equitable
cost-sharing requirements would serve
as a safety valve to ensure that
beneficiary access is not compromised.
We discussed various methods for
testing the robustness of MA regional
plan provider networks. Along similar
lines, we would require MA regional
plans with a less robust network of
contracted providers to have
‘‘catastrophic limits’’ on out-of-pocket
expenditures for in-network and for all
services that are closer in value. For
plans with more robust contracted
networks, we would allow the innetwork and total ‘‘catastrophic limits’’
to differ to a greater degree.
Based on the comments we received
and which we respond to (below), we
will not be prescribing specific levels of
cost sharing based on robustness of
contracted provider networks. Rather,
we will require MA organizations
sponsoring MA regional plans to ensure
enrollees have access to in-network

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levels of cost sharing for covered
services. We will require MA
organizations sponsoring MA regional
plans to reduce cost sharing to innetwork levels for the receipt of out-of­
network services in cases in which
covered services cannot be readily
obtained from contracted, network
providers.
In this part of the preamble of the
proposed rule we also discussed the
OPM requirement imposed on the FEHB
Blue Cross and Blue Shield Basic
Option plan, which addresses similar
circumstances and situations
encountered by Federal employees and
annuitants when seeking health care.
We stated that the ‘‘exception’’ process
related to access to care requirements
for MA regional plans might require the
MA regional plan enrollee to contact the
sponsoring MA organization when
seeking a specific service that is not
otherwise available from a contracted
provider. We are adopting that proposal.
We will require MA organizations
sponsoring MA regional plans to
designate a non-contracted provider
from whom (or from which) the enrollee
can obtain covered services at network
cost-sharing levels, to the extent that
such services are not available and
accessible from a contracted, network
provider. Alternatively, the MA
organization can allow the enrollee to
seek the service from any qualified
provider and guarantee that in-network
cost sharing limits will apply. We have
established a new beneficiary
notification requirement related to
enrollees of MA regional plans in
§ 422.111(b)(3)(ii). We add this
requirement to ensure that the access
‘‘exception’’ in § 422.112(a)(1)(ii) does
not disadvantage beneficiaries seeking
in-network care.
Comment: Several commenters were
received on this proposed provision.
Many of the commenters suggested that
the ‘‘exception’’ should also apply to all
local MA coordinated care plans, or
even all local MA plans, while others
suggested limiting it to local and MA
regional PPOs.
Response: Local MA plans of all types
have discretion to limit their service
areas based on their network of
contracted providers. Unlike local MA
plans, MA regional plans are required,
as a condition of offering an MA
regional plan, to include the entire
geographic area of an MA region in the
service area of the plan. In some ways,
the ‘‘exception’’ we provide at
§ 422.112(a)(1)(ii) for MA regional plans
is comparable to the ‘‘partial county’’
provision provided for local MA plans
in the service area definition at § 422.2.
Under § 422.2, we permit an MA

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organization to contract with CMS for a
local MA plan where the organization
has a contracted network in only a
portion of a county and when such a
‘‘partial county’’ is necessary,
nondiscriminatory, in the best interests
of the beneficiaries and where other
conditions are met. We will also permit
MA organizations to contract with CMS
for an MA regional plan where
beneficiaries are not put ‘‘at risk’’ even
though the MA organization does not
have contracts with robust networks of
providers throughout the MA region.
For these reasons, it is both
inappropriate and unnecessary to
provide such an ‘‘exception’’ for local
MA plans.
Comment: Other commenters were
opposed to allowing an ‘‘exception’’ to
the normal access to care requirements
to any MA coordinated care plan,
including MA regional plans. One
commenter suggested limiting the
‘‘exception’’ to only an initial start-up
period, the first contract year, for
instance even for MA regional plans.
Response: As noted above, we believe
the ‘‘exception’’ we proposed for MA
regional plan access to care
requirements is essential to foster the
growth of the MA regional plan
program, a goal consistent with the
Congressional intent in creating the
program. We are concerned that in the
absence of this ‘‘exception,’’ the
provisions we discuss below related to
beneficiary access to ‘‘essential
hospitals’’ would not be sufficient to
allow MA regional plans to meet access
to care requirements for coordinated
care plans.
The ‘‘exception’’ we provide at
§ 422.112(a)(1)(ii) is necessary because
‘‘essential hospitals’’ will not be
contracting with MA organizations for
MA regional plan members, but will be
a necessary part of the MA regional
plan’s network in order for the MA
regional plan to meet the applicable
provider access requirements under
section 1852 of the Act. Section
422.112(a)(1)(ii) acknowledges that
some providers, such as ‘‘essential
hospitals,’’ will not have a contract, but
will be considered part of the network
because they will be providers at which
beneficiaries can seek care at in-network
cost sharing levels. We do not believe it
is appropriate to limit the ‘‘exception’’
to an initial start-up period, particularly
because the ‘‘essential hospital’’
provision is not so limited. On the other
hand, we agree that it would be
appropriate to annually evaluate the
‘‘subsection d’’ hospitals that have been
designated as ‘‘essential hospitals’’ by
MA regional plans to ensure that the

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conditions that permitted such
designation continue to exist.
Therefore, we have added a
requirement at § 422.112(c)(7) under
which we will evaluate the continued
applicability of ‘‘essential hospital’’
status on an annual basis at the time of
annual contract renewal. Please see
below for a more extensive discussion of
‘‘essential hospitals.’’
Comment: A few commenters
suggested that CMS subject MA
organizations offering MA regional
plans to review by external entities and
the general public to ensure that MA
regional plans meet community access
standards.
Response: We do not believe a
mandatory external review of network
adequacy is appropriate because the
delay and burden associated with such
a process could negate the competitive
and market forces that the Congress
intended should apply in the regional
MA program. Ultimately, such a result
could have the very effect the
commenters are seeking to avoid, an
adverse impact on beneficiary access.
Section 1852(e)(4) of the Act provides
for a private accreditation organization’s
external review of MA organizations in
specific areas, including access to
services. Nothing in section 1852(e)(4)
can be construed as imposing
mandatory external review on an MA
organization of the type the commenters
propose. Otherwise, the time frame
between an organization’s submission of
an application for an MA contract year
and CMS’ approval or denial of that
application would be too short to permit
sufficient time for a formal, public
comment period.
Comment: Many commenters
expressed concern that CMS seemed to
be relaxing the community access
standards with the ‘‘exception’’ process
we provided for MA regional plans in
§ 422.112(a)(1)(ii). Some commenters
stated that to the extent CMS will pay
MA regional plans more through various
mechanisms, such as the ‘‘stabilization’’
fund, risk corridors in 2006 and 2007,
and the new MA payment formula,
therefore CMS also has reason to hold
them to the same access standards to
which CMS holds local MA plans. Other
commenters supported the ‘‘exception’’
process and suggested that it be
extended to local MA PPOs.
Response: As we have previously
said, we will not permit local MA
coordinated care plans to take advantage
of the ‘‘exception’’ process in
§ 422.112(a)(1)(ii). The exception
process is necessary precisely because
we will require MA regional plans to
meet community access standards. We
explained in the proposed rule that to

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the extent an MA regional plan is
unable to secure contracts with specific
providers in specific areas of an MA
region, beneficiaries would nonetheless
be protected from excessive out-of­
network cost sharing. In other words, it
is exactly because we will continue to
enforce community access standards
that we will require MA regional plans
to reduce cost sharing to in-network
levels where covered services cannot be
readily obtained from contracted,
network providers. We establish a new
beneficiary notification requirement
related to enrollees of MA regional
plans in § 422.111(b)(3)(ii) to reinforce
this concept.
Comment: Some commenters stated
that CMS should require hospitals to
treat MA regional plan enrollees when
they are offered the Medicare FFS
payment rate that is payable under
section 1886 of the Act by an MA
regional plan, as long as in-network cost
sharing levels are applied to enrollees
that seek care at such non-contracting
hospitals. One commenter stated that
sole community hospitals, or hospitals
serving medically underserved areas or
non-urban areas should be required to
treat MA regional plan enrollees if they
refused to contract for FFS rates. One
commenter recommended that CMS
reevaluate the non-discrimination
obligation of hospitals under the
Medicare program and suggested that
CMS establish a policy that would
promote access to services at hospitals
participating in the Medicare program
on the same basis for all Medicare
beneficiaries, regardless of whether they
are MA enrollees or receiving coverage
under the Medicare FFS program. One
commenter recommended that CMS
develop further regulations that would
require providers to treat MA patients in
all cases, even for elective services.
Response: We do not necessarily agree
that we should establish a policy that
would require Medicare participating
hospitals to treat MA enrollees or to
contract with MA organizations under
specific terms or conditions. Were we to
establish a specific price relative to FFS
inpatient hospital payment rates as a
baseline that would compel a hospital to
treat MA plan enrollees, for instance, we
would also be administering inpatient
hospital pricing. We do not believe that
a requirement to treat for an
administered price is consistent with
the overall intent of the MMA to
increase plan choices for Medicare
beneficiaries through competitive
market forces. However, we
acknowledge that MA provider
contracting, especially in areas where
there are few available providers, is a
concern. We will continue to evaluate

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4627

our current authorities outside of the
MMA as a means of ensuring reasonable
access at reasonable prices to medical
services for all Medicare enrollees,
including those electing to receive their
coverage through an MA plan.
Comment: Some commenters stated
that the ‘‘exception’’ CMS proposed in
§ 422.112(a)(1)(ii) would tend to put
providers at a disadvantage vis-a`-vis MA
regional plans. The commenters stated
that MA regional plans would offer
reimbursement rates below FFS rates
and as such, unilaterally dictate the
terms of the contract. The commenters
stated that this would be unfair to
physicians and other providers. The
commenters also stated that this would
create an unfair playing field, especially
because MA regional plan enrollees in
such an area would then be required to
go out-of-network at higher cost sharing
levels, to receive covered medically
necessary care.
Response: We disagree. MA regional
plans will be required to make all
covered services available at in-network
cost sharing levels, even if an MA
regional plan fails to reach mutually
agreeable contracting terms with a
specific provider or group of providers.
In other words, MA regional plan
enrollees will have access to medically
necessary covered health services at innetwork cost sharing levels. The MA
regional plan must meet the access
requirements either through contracted
providers or through the ‘‘exception’’
process discussed above. Because
section 1852(a)(2) of the Act requires
MA organizations that use a contracted
network to pay non-contracting
providers at the Medicare FFS rate, once
the MA regional plan enrollee pays innetwork cost sharing, the MA
organization will be financially
responsible for the rest.
Comment: One commenter stated that
CMS should adopt URAC, NCQA or
JACHO standards related to MA PPO
network adequacy requirements and
privacy of beneficiary information
requirements. The commenter stated
that for network adequacy requirements
and privacy requirements, as for all
other federal regulatory requirements, to
the extent that any accreditation
standard of any of the three accrediting
bodies applies to the same activity,
compliance should be deemed for the
PPO to be in compliance with the
federal requirement.
Response: We do not necessarily
agree. Under section 1852(e)(4) of the
Act, when a private accrediting
organization applies and enforces
certain enumerated requirements that
meet or exceed CMS standards, CMS
can deem that an MA plan has met such

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requirements. These enumerated
requirements include access
requirements under section 1852(d) of
the Act and confidentiality
requirements under section 1852(h) of
the Act. To the extent the one of the
three named parties has applied to CMS
and been approved in accordance with
statutory and regulatory requirements to
be a private accrediting organization for
external review of PPO access and/or
confidentiality requirements, then
deeming would be permissible. Note,
however, that this deeming mechanism
applies only for the purposes of CMS’
enforcement of this regulation and
neither CMS’ enforcement of the
regulation nor accreditation by an
accrediting body supersedes the
jurisdiction of the HHS Office for Civil
Rights to enforce the HIPAA privacy
rule.
Comment: One commenter asked
whether the access ‘‘exception’’ in
§ 422.112(a)(1)(ii) for MA regional plans
would preempt State licensing laws
related to HMO access requirements.
Response: MA regional plans are
offered as PPOs and not HMOs. We
responded to a similar inquiry in the
June 2000 M+C final rule with comment
(65 FR 40257). An entity does not have
to have a commercial license of the
same type of MA plan it seeks to offer
under the MA program. Rather, the
entity must demonstrate that it is
authorized by the State to assume the
risk involved in offering the type of plan
it wishes to offer. Thus, an entity that
is licensed by the State to assume risk
commercially as an HMO would need to
demonstrate that it is authorized by the
State to offer a PPO product. The access
standards that would apply to such an
MA product would be the MA PPO
access standards.
Comment: Two commenters stated
that CMS should rely on MA regional
plans to demonstrate access to covered
services throughout their service areas
at in-network cost sharing amounts and
that should CMS continue to review
cost sharing levels to ensure that they
are not discriminatory.
Response: We agree with this
comment and will continue to review
cost sharing levels as a means of
ensuring beneficiary access to care and
that cost sharing is not discriminatory.
When we evaluate access to care for an
MA regional plan that relies, in part, on
the ‘‘exception’’ in § 422.112(a)(1)(ii),
we will evaluate the means by which
the MA regional plan proposes to ensure
that access requirements are met. Such
means might include the designation of
‘‘essential hospitals’’ in accordance with
§ 422.112(c), the designation of other
noncontracting providers from which an

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MA plan enrollee can obtain covered
plan services at in-network cost sharing
levels (including the catastrophic limit
described in § 422.101(d)(2)) in a timely
manner, and the manner in which MA
regional plan enrollees will be notified
as to how they can secure in-network
cost sharing when covered services are
not readily available from contracted
providers, in accordance with
§ 422.111(b)(3)(ii).
Unlike local coordinated care plans,
such as MA local HMOs and MA local
PPOs, where we have historically
required comprehensive contracted
networks of providers as a condition for
meeting our access requirements, we
will allow MA regional plans to contract
with CMS with less robust networks of
contracted providers. As long as an
entity proposing to offer an MA regional
plan pays noncontracted providers at
the Medicare FFS rate, and as long as
they can guarantee access through such
payment to non-contracting providers,
and as long as they limit enrollee cost
sharing liability to in-network levels,
then we will contract with such an
entity for an MA regional plan as long
as other non-access requirements are
met.
Comment: One commenter stated that
the ‘‘exception’’ at § 422.112(a)(1)(ii) is
not in the best interest of beneficiaries
and that neither the preamble nor the
regulation text in the proposed rule said
how promptly an MA regional plan
would be required to respond to a
request for access to non-network
sources of care, or the basis upon which
such a request could be denied, or the
penalty to the MA regional plan for not
acting in a timely manner on such a
request, or finally, what recourse the
member would have if a denial or nonresponse from the MA regional plan
occurred.
Response: An MA regional plan
would be required to provide assurances
of reasonable response times, if it
proposed to use the ‘‘exception’’ in
§ 422.112(a)(1)(ii) in such a manner.
Reasonable response times proposed by
the MA regional plan would need to be
consistent with community patterns of
care. Where a routine or follow-up
specialist visit might ordinarily be
available within 30 days, an MA
regional plan would be expected to
respond in such a manner that the MA
regional plan enrollee could secure
covered specialist services within a
similar time frame. Similarly, as part of
the MA plan’s disclosure to both CMS
and an MA regional plan enrollee, we
would require a full explanation of the
denial process (where services are
readily available from contracting
providers, for instance) and the appeal

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process the enrollee should follow in
cases of disagreement. The potential
penalty to the MA regional plan for not
acting in a timely manner on such a
request is explained in our current
regulation at § 422.750 and § 422.758 for
a violation of § 422.752(a)(1) and
§ 422.510(a)(10), respectively.
Essential Hospitals
We proposed at § 422.112(c) that if an
MA organization certifies that it was
unable to reach an agreement with an
‘‘essential hospital,’’ under specific
circumstances we are authorized to pay
additional amounts to that hospital from
the Federal Hospital Insurance Trust
Fund. This additional payment to the
‘‘essential hospital’’ is in addition to
and does not affect the normal monthly
MA payment that we would make to the
MA organization. The MA organization
must provide assurances that it will
make payment to the hospital for
inpatient hospital services in an amount
not less than the amount that would be
payable under section 1886 of the Act
and the ‘‘essential hospital’’ must
demonstrate to our satisfaction that the
amounts normally payable under
section 1886 of the Act are less than the
hospital’s costs for providing services to
MA regional plan enrollees.
Comment: A number of general
comments were received on potential
contracting difficulties between rural
providers and health plans. On the one
hand, several commenters were
concerned that MA organizations
offering MA regional plans would not
make a ‘‘good faith’’ effort to contract
with hospitals, especially hospitals
located in rural areas. On the other
hand, several commenters suggested
that MA organizations offering MA
regional plans in areas with limited
competition could be ‘‘held up’’ for non­
competitive or predatory payment rates
as a condition of securing a contract
with a specific provider. The
commenters on both sides
recommended various solutions, such as
mandating the method by which MA
organizations offering MA regional
plans could show they have made a
‘‘good faith’’ effort to contract with
providers.
Response: In response to comments
that an MA regional plan should be
required to show that it made a ‘‘good
faith’’ effort to contract with an
‘‘essential hospital,’’ we added a
requirement at § 422.112(c)(3) that the
MA regional plan will need to establish
its ‘‘good faith’’ effort by showing that
the designated hospital refused to
contract after it was offered a payment
rate no less than the amount the

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hospital would receive under section
1886(d) of the Act.
We agree that in certain rural areas,
difficulties may arise in obtaining
contracts that will satisfy the providers
or the health plans, or both. However,
we do not have the statutory authority
to mandate contracts between MA plans
or providers, or to intervene in contract
negotiations. Section 1854(a)(6)(B)(iii) of
the Act prohibits us from intruding in
the contractual relationships between
MA organizations and health care
providers. This prohibition is intended
to ensure that free market conditions
continue to promote competition and
efficiency in the MA program. We
believe that it is clear that the Congress
provided incentives for MA regional
plans in the form of additional
payments through the stabilization fund
and risk sharing in 2006 and 2007,
neither of which is provided for local
MA plans.
Additionally, the Congress also
provided for payments for
noncontracting acute care hospitals that
provide inpatient hospital services to
MA regional plan enrollees through the
‘‘essential hospitals’’ authority. As
stated previously, we believe
competition will be the best method of
ensuring network adequacy because
enrollees will favor and enroll in plans
with more extensive networks and tend
to avoid those without. Competition
will also allow the more efficient health
care providers to offer discounted rates
to MA organizations, which will, in turn
be able to pass these savings on to
enrollees in the form of additional
health care items and services or
reduced premiums.
Finally, we believe enrollees will be
attracted to MA organizations that
contract with efficient providers,
because costs will be lower. Clearly, the
competitive forces are more complex
than we can address in this forum. We
have been careful not to disturb the new
competitive balance created by the
MMA related to MA regional plans.
Our access standards are found at
§ 422.112, § 422.114, and in other
sections of subpart C of the MA
regulation. These standards must be met
before an MA organization will be
allowed to offer an MA plan in an area.
Continuing compliance with these
requirements is an essential condition of
maintaining an MA contract. For
instance, CMS has the authority,
provided at § 422.502(a)(3)(ii) and
§ 422.512(a), to deny an application or
to terminate a contract if an MA
organization fails to establish or
maintain adequate access to care for
Medicare beneficiaries. In order to meet
access standards, MA organizations

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offering coordinated care plans will
generally need to secure contracts that
they have negotiated with health care
providers. This will require an effort by
both parties to ensure a choice of health
plans with strong provider networks
that will be available to all beneficiaries,
including those residing in rural areas.
Comment: One commenter stated that
in the State in which it operates, the
contracts it has with hospitals for all
lines of business (Medicare, Medicaid,
and commercial) cause it to pay more on
the Medicare side, that cost-shifting
occurs from its Medicare line of
business to its commercial line of
business. The commenter expressed
concern that to the extent the ‘‘essential
hospital’’ provision permits an MA
regional plan to ‘‘deem’’ a hospital into
the MA regional plan’s network, that it
provides an unfair competitive
advantage to MA regional plans. The
commenter also suggested permitting
hospitals to select a single Medicare
contractor (section 1876 cost, MA local
or regional plan) with which to contract,
and through such a contract
‘‘immunize’’ itself from all other MA
regional plans’ attempts to designate it
as an ‘‘essential hospital.’’
Response: We do not believe it would
be appropriate or reasonable to so allow
a hospital to ‘‘immunize’’ itself from
designation as an ‘‘essential hospital’’
by any MA regional plan. To the extent
we accepted or adopted such an
interpretation, we would also be
nullifying the very intent of the
‘‘essential hospital’’ statutory provision.
The intent of this provision is, simply
put, to ensure access to hospital care for
regional MA plan enrollees. The
opening clause of section 1858(h)(1) of
the Act is instructive in this regard: ‘‘For
purposes of enabling MA organizations
that offer MA regional plans to meet
applicable provider access requirements
under section 1852 with respect to such
plans.’’ Additionally, as we provide for
in regulation at § 422.112(c), before a
hospital can be designated as an
‘‘essential hospital’’ by an MA regional
plan, there must be a showing by
convincing evidence that such a
hospital is uniquely able satisfy the
access requirements for the MA regional
plan. If we were to limit designation of
a specific hospital as an ‘‘essential
hospital’’ to the first PPO in an MA
region, we would also likely limit MA
regional plan competition in all MA
regions with rural areas to a single MA
regional plan per region. Such a result
clearly was not the intent of the statute.
In addition, the ‘‘essential hospital’’
provision partly addresses hospital
financing issues, to the extent that we
will pay additional costs to ‘‘essential

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4629

hospitals,’’ up to the amount provided
in statute at section 1858(h)(3) of the
Act. Thus, the MA organization would
not bear these additional costs for MA
regional plan enrollees.
Comment: One commenter asked for
clarification on how payment will work
under the ‘‘essential hospital’’
provision. While the statute is clear, the
commenter stated, that the additional
payment is limited to inpatient services,
it is unclear to the commenter whether
add-ons such as medical education or
disproportionate share payments will
also be made to ‘‘essential hospitals.’’
The commenter recommended that CMS
encourage or even require plans to
provide additional reimbursement to
include these amounts, which are
available under inpatient PPS, to
qualifying hospitals because they would
be available if the beneficiary were
enrolled in FFS Medicare.
Response: IME and GME payments
will continue to be made by the
Medicare fiscal intermediaries (FIs) to
all appropriate hospitals for all
Medicare beneficiaries (including MA
plan enrollees). Disproportionate Share
Hospital (DSH) payments are part of the
normal FFS reimbursement amount and
will be the responsibility of the MA
regional plan, to the extent it is making
a payment under § 422.100(d)(2),
because, by definition, ‘‘essential
hospitals’’ are defined as noncontracting
hospitals per section 1858(h)(1) of the
Act. In our regulation at § 422.112(c), we
clarify that ‘‘essential hospitals’’ are
always noncontracting with the specific
MA regional plan involved.
Comment: Some commenters
suggested that to the extent an MA
regional plan offers to pay a hospital no
less than the amount that would be
payable to the hospital under section
1886 of the Act, that CMS consider this
to be evidence that the MA regional
plan has made a ‘‘good faith’’ effort to
contract with the hospital.
Response: We agree with the
commenters and have established the
FFS payment level as the baseline for
MA regional MA plans in establishing
that they have made a ‘‘good faith’’
effort to contract with an ‘‘essential
hospital’’ at § 422.112(c)(3).
Comment: Many commenters
recommended that CMS specify in
regulation exactly how the ‘‘essential
hospital’’ provision will work and
whether or not (and how) it would
apply to critical access hospitals
(CAHs). Other commenters cautioned
CMS not to disrupt the competitive
balance between MA organizations and
hospitals related to MA plan
contracting. Many commenters also
recommended that CMS clearly explain

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that CAHs are not ‘‘essential hospitals’’
as defined in the MMA. Other
commenters stated that CAHs are
indeed essential providers and have
been designated as such under the FFS
Medicare program. Some commenters
suggested requiring MA regional plans
to pay CAHs the ‘‘interim’’ Medicare
rate in effect at the time the service was
furnished.
In addition, one commenter stated
that such an ‘‘interim’’ payment rate
would put parties at risk that such a
payment would be more (or less) than
actual costs. The commenter also
suggested that CMS devise a means of
ensuring that MA regional plans are
properly advised on the ‘‘interim’’
payment rate, should CMS accept the
commenter’s proposal. Still other
commenters stated that CMS should not
permit MA organizations to bargain in
‘‘bad faith’’ with hospitals. However,
other commenters stated that CMS
should not permit hospitals to bargain
in ‘‘bad faith’’ with MA organizations.
In general, all expressed concern and
cautioned CMS not to upset the delicate
balance of competition and pointed to
the scarce resources and fragile financial
condition of health care delivery in
rural areas.
Generally, CMS was asked not to
undermine the already precarious
condition of rural providers, including
rural health clinics, CAHs and others,
while at the same time we were
encouraged to increase the availability
of MA plans in rural areas. One
commenter recommended that CMS put
in a ‘‘hold harmless’’ or ‘‘cost­
reimbursement’’ requirement for
insurers that contract with critical
access hospitals. The commenter was
concerned that as more Medicare
beneficiaries opt for participation in
private insurance plans, unless CAHs
receive adequate funding for the
services they provide, their continued
existence (and consequently continued
access to medical care for the
beneficiaries they serve) will be greatly
jeopardized. Another commenter
suggested that CMS require MA plans to
provide reimbursement to CAHs using a
cost-based methodology similar to that
required under FFS Medicare.
Another commenter stated that as
more Medicare beneficiaries enroll in
MA plans that do not contract with
CAHs, the marginal costs (per Medicare
beneficiary) at CAHs will rise and so,
consequently, will Medicare payments
per FFS beneficiary to CAHs. A few
commenters suggested extending the
‘‘essential hospital’’ payment to local
MA plans. Other commenters called on
CMS to require MA plans to pay claims
from noncontracting providers in a

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‘‘timely’’ manner and under the same
rules that apply to original FFS claims
processors, the Medicare carriers and
intermediaries.
In addition, several commenters
expressed confusion with the following
sentence from the subpart C preamble to
the August 3, 2004 proposed rule: ‘‘In a
specific case, the actual payment to an
’essential hospital’ from the Federal
Hospital Insurance Trust Fund would be
the sum of the difference between the
amount that would have been paid to
the hospital under section 1886 of the
Act and the amount of payment that
would’’ have been paid for those
services had the ‘‘essential hospital’’
been a critical access hospital.’’
Response: We will address the last
comment first. We need to clarify that
the quoted sentence from the subpart C
preamble of the August 3, 2004
proposed rule simply echoes the
statutory language at section
1858(h)(2)(A) of the Act. The intent of
the statutory ‘‘essential hospital’’
provision and the implementing
regulation at § 422.112(c) is to provide
an additional payment to the ‘‘essential
hospital’’ of up to 101 percent of its
actual costs for providing inpatient
services to a specific MA regional plan
enrollee. In other words, there was
never an intent to designate or allow a
CAH to become an ‘‘essential hospital’’
for purposes of the MA regional plan
program. The definition of ‘‘essential
hospital’’ in the statute prevents such an
outcome. Section 1858(h)(4) of the Act
is clear in defining an ‘‘essential
hospital’’ as a ‘‘subsection (d) hospital,’’
as that term is defined at section
1886(d)(1)(B) of the Act. CAHs are not
included in this definition and therefore
can never be ‘‘essential hospitals’’ for
purposes of an MA regional plan offered
by an MA organization.
In § 422.112(c)(1), we are clear in
limiting the applicability of the
‘‘essential hospital’’ provision in a
similar manner to only hospitals
defined in section 1886(d) of the Act,
and thus excluding CAHs. We have
addressed concerns related to
maintaining a ‘‘competitive balance’’
previously in our responses in this
section of the preamble. We cannot
intrude in the contracting relationships
between MA organizations and
providers because the statute prohibits
us from doing so at section
1854(a)(6)(B)(iii) of the Act.
Additionally, to the extent the statute
provides the additional ‘‘essential
hospital’’ payment only for inpatient
hospital services provided by 1886(d)
hospitals to MA regional plan enrollees,
we cannot extend its applicability to
local MA plans of any type.

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Comment: One commenter suggested
that CMS maintain a comprehensive
and accessible database of Medicare FFS
reimbursement rates for all providers
and allow MA plans access to the
database so they would be better
equipped to make the correct and full
payment to out-of-network providers.
The commenter also stated that there
should be penalties or sanctions for
plans that habitually under-pay out-of­
network noncontracting providers. The
commenter also suggested that CMS
require MA organizations to follow FFS
timely payment rules, including accrual
of interest when claims are not paid in
a timely manner. Some commenters
stated that the additional difficulties
inherent in paying CAHs timely and
correctly, explaining that CAHs are paid
on a ‘‘cost plus’’ basis.
Response: We provide public access
to the FFS fee schedules and
reimbursement rates. We also assists
MA organizations in pricing claims for
out-of-network providers by making
‘‘Grouper/Pricer’’ software and other
Medicare claims’’ pricing tools available
to them. However, with payment rates
and computations varying by provider
type, locality, provider ID, and service,
and with the potential that an MA plan
enrollee might access covered
emergency services in any part of the
United States, the task of correctly
applying fee schedules that are
generally updated on a quarterly basis
can be daunting. When one considers
the low volume of such claims that an
MA organization would expect to
receive and the administrative effort
involved in correctly pricing them, one
begins to understand that simply
making such data and systems available
to MA organizations does not ensure
that correct payment calculations will
always occur. We already have the
authority to apply penalties and
sanctions to MA plans that habitually
fail to pay out-of-network
noncontracting providers in a timely
manner (see, for instance, § 422.520).
MA organizations are required to follow
the same timely payment requirements
related to con-contracting provider
claims, including interest penalties, that
apply to FFS carriers and
intermediaries.
Although MA organizations are
required to pay noncontracting
providers the amount that would
otherwise be payable under original
Medicare (§ 422.100(b)(2), and although
Medicare providers are required to
accept from noncontracting MA
organizations the amount original
Medicare would have made (§ 422.214),
the amount original Medicare pays to
CAHs is paid on a periodic interim

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basis, is cost-based, and is subject to
cost settlement. Additionally, section
405(c) of the MMA provides for
development of alternative timing
methods for the periodic interim
payments already made to CAHs for
inpatient services. This provision will
further complicate the computation of
amounts due CAHs under Medicare and
will represent an additional
administrative burden on MA
organizations offering MA regional
plans that will need to pay
noncontracting CAHs based on a
number of unique and changing factors.
Similarly, to the extent CAHs are
located in areas served by MA regional
plans, they would potentially suffer a
disruption in the normal cash-flow
provided for them through periodic
interim payments in the Act, even were
MA regional plans able to provide
correct reimbursement amounts in a
timely manner. Although timely
reimbursement for claims received from
noncontracting providers by MA
organizations is already required (see
§ 422.520(a), the timely claims-payment
standard (claims must be paid within 30
or 60 days, depending on whether they
are clean claims), is not a substitute for
the guaranteed cash-flow related to
periodic interim payments made by the
Medicare FFS intermediary to CAHs.
Additionally, to the extent CAHs
settle costs with CMS related to services
they provide to Medicare beneficiaries,
MA organization computation of
payments due CAHs is further
complicated, because of the potential
difference between the Medicare interim
payment and the final settlement.
In light of the special status provided
to CAHs in section 1820 of the Act and
implementing regulations, and in
recognition of the unique status of CAHs
related to access to care for FFS
beneficiaries, we also note a special
concern for them related to the MA
program and specifically to MA regional
plans. While we are constrained by the
non-interference clause in section
1854(a)(6)(B)(iii) of the Act from
requiring MA organizations to contract
with CAHs, or from requiring contracts
voluntarily entered into with CAHs to
specify the level or manner of
reimbursement, we will increase our
level of monitoring of CAHs. For
instance, we might review MA regional
plan payment to non-contracting CAHs
during our routine biennial monitoring
visits. We will use our authority in
section 1857(f)(2) of the Act when
needed to ensure MA organization
compliance with existing non-contractor
timely payment requirements. We do
not interpret the statute to permit CMS
enforcement of contracts voluntarily

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entered in to by MA organizations and
health care providers. Although our
regulations require that all MA
organization contracts with providers
and suppliers contain a prompt
payment provision (see § 422.520(b)),
details of such prompt payment
provisions and enforcement thereof
would be as specified in the contract.
Comment: One commenter requested
clarification regarding the ‘‘essential
hospital’’ payment from the HI Trust
Fund. The ‘‘essential hospital’’ must
demonstrate that the amount of the MA
plan payment is less than the cost of
providing services to MA regional plan
enrollees. The commenter asked
whether this additional payment is
equivalent to the full PPS rate, or to cost
(which may be greater than the PPS
rate), or cost plus one percent (because
of the reference to CAHs at section
1858(h)(2)(A)) of the Act. The
commenter also recommended that CMS
provide guidance on how the hospital
will demonstrate it is eligible for an
‘‘essential hospital’’ payment. The
commenter is concerned that the
procedures that we establish not be too
cumbersome so that the additional
reimbursement is not sufficient to
compensate for the reporting effort.
Response: The ‘‘essential hospital’’
will need to establish that its actual
costs for providing inpatient care to a
specific MA regional plan enrollee
actually exceeded the amount that is
normally paid under FFS Medicare. The
amount normally paid under FFS
Medicare is the PPS payment normally
made to the ‘‘subsection d’’ hospital
under Part A of the Act for similar
inpatient hospital services provided to
an original FFS Medicare beneficiary.
As we have already discussed in this
part of the preamble related to
§ 422.100, the normal PPS payment (less
the amounts paid by the fiscal
intermediary under sections 1886(d)(11)
and 1886(h)(3)(D) of the Act) will be the
responsibility of the MA organization
sponsoring the MA regional plan in
which the beneficiary is enrolled. Thus,
after the normal FFS amount has been
paid to the ‘‘essential hospital,’’ the
‘‘essential hospital’’ can seek additional
funding from CMS for up to 101 percent
of the inpatient costs it actually
incurred in treating a specific MA
regional plan enrollee. The availability
of funds to make such an additional
payment to ‘‘essential hospitals’’ is
limited by section 1858(h)(3) of the Act.
We have clarified in the regulatory text
in § 422.112(c)(6) that we will pay from
funds appropriated in section 1858(h)(3)
of the Act until such funds are
exhausted. In other words, we will pay
based on the order in which claims from

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‘‘essential hospitals’’ are received.
Finally, we have prescribed in
regulation the method through which an
‘‘essential hospital’’ will establish that
its costs for treating a specific MA
regional plan enrollee exceeded the
normal PPS payment amount. We will
use the principles of reasonable cost
reimbursement in part 412 of this
chapter to determine whether costs in a
specific case exceed the normal PPS
payment amount in an individual case.
To the extent an ‘‘essential hospital’’
can show, using methods of reasonable
cost reimbursement, that the amount it
reasonably expended in its treatment of
an MA regional plan enrollee exceeded
the normal PPS reimbursement amount
for inpatient services, then CMS will
make an additional payment to the
‘‘essential hospital,’’ limited by the
statutorily appropriated amount in
section 1858(h)(3). The statute initially
authorizes $25,000,000 in 2006 and
increases the annual amount available
for ‘‘essential hospital’’ payments in
subsequent years by the market basket
percentage increase as defined in
section 1886(b)(3)(B)(iii) of the Act.
Comment: One commenter
recommended that CMS eliminate
ambiguity and to clearly define which
types of hospitals are eligible for
‘‘essential hospital’’ designation.
Response: Our regulation indicates
that any ‘‘subsection (d)’’ hospital can
qualify as an ‘‘essential hospital.’’ The
regulation mirrors the statute in this
respect. Note that ‘‘subsection (d)’’
hospitals are defined in statute at
section 1886(d)(1)(B) of the Act and
refer to hospitals paid under a
‘‘prospective’’ (PPS) method. We have
added language to § 422.112(c)(1) to
clarify this issue. Also note that we have
further defined ‘‘essential hospital’’ in
regulation text at § 422.112(a)(4) as one
where there is no competing Medicare
participating hospital in the area to
which MA regional plan enrollees could
reasonably be referred for inpatient
hospital care. We believe MA
organizations are in the best position to
determine what is ‘‘reasonable’’ in this
context, based on service usage and
community patterns of care. However,
we will evaluate such claims based on
standards that will include: an
evaluation of the ownership and control
of other hospitals in the area; the normal
patterns of community access; the
physical proximity of other inpatient
facilities; the referral patterns to
inpatient facilities in the area; and other
factors pertinent to the analysis.
Comment: A number of commenters
recommended that CMS apply special
rules to I/T/U hospitals so that all
hospitals operated by I/T/U or the

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Indian Health Service would be
considered ‘‘essential hospitals.’’
Response: We cannot accommodate
this request because there is no statutory
basis for including all hospitals
operated by Tribes or the Indian Health
Service as ‘‘essential hospitals.’’ Section
1858(h) of the Act is explicit in defining
‘‘essential hospitals’’ as subsection (d)
hospitals as defined in section 1886(d)
of the Act. To the extent a Tribal or IHS
hospital is designated by an MA
regional plan under section 1858(h)(1)
of the Act and to the extent all other
conditions in section 1858(h) of the Act
are present, then such a hospital can be
an ‘‘essential hospital.’’
Comment: Some commenters
recommended that CMS establish rules
for ‘‘essential hospitals’’ that would
require them to participate in the
utilization management, discharge
planning or quality improvement
programs of the MA plans of the
enrollees they treat.
Response: We will not separately
establish such requirements related to
‘‘essential hospitals.’’ As ‘‘subsection d’’
hospitals, ‘‘essential hospitals’’ are
already required to meet quality
assurance, discharge planning and
utilization management standards
applicable to Medicare participating
hospitals.
Comment: One commenter asked who
would be responsible for the ‘‘essential
hospital’’ payment, once the annual
allocation specified in section
1858(h)(3) of the Act has been
exhausted.
Response: In response to this
comment, we have clarified this section
of the regulation to say that once
‘‘essential hospital’’ payments exceed
the limit prescribed in statute in a
calendar year, no additional ‘‘essential
hospital’’ payment will be due from any
party. The statute is clear in allocating
up to $25,000,000 for calendar year
2006 and a similar amount, adjusted for
inflation, in subsequent years. We will
make appropriate payments from the
Part A Trust Fund on a ‘‘first come-first
served’’ basis. We have specified these
requirements in regulation at
§ 422.112(c)(6). Once the amount
authorized in statute has been
exhausted in a calendar year, no
additional ‘‘essential hospital’’ payment
is due nor can one be made by us for
inpatient hospital services received by
an MA regional plan enrollee in that
calendar year.
Comment: One commenter asked if
the in-network cost sharing requirement
would still apply to services received in
an ‘‘essential hospital,’’ even after the
‘‘essential hospital’’ allocation has been
exhausted.

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Response: To the extent an ‘‘essential
hospital’’ is needed to meet the access
requirements in § 422.112, we have
added a requirement at § 422.112(c)(7)
that in-network cost sharing applies to
covered inpatient services received by
an MA regional plan enrollee in an
‘‘essential hospital.’’ This is consistent
with the ‘‘exception’’ in
§ 422.112(a)(1)(ii) and the beneficiary
notification requirement in
§ 422.111(b)(3)(ii). The requirement for
an MA regional plan to provide, or
reimburse for, medically necessary
inpatient hospital care (and to limit
member liability to in-network cost
sharing levels when reimbursing an
‘‘essential hospital’’) is independent of
the ‘‘essential hospital’’ payment
provision. Section 422.112(c)(7), where
cost sharing is limited to in-network
amounts for covered inpatient care
reimbursed to an ‘‘essential hospital’’ by
an MA organization for an MA regional
plan member, applies even when
§ 422.112(c)(6) does not. Even if no
‘‘essential hospital’’ payment is due per
§ 422.112(c)(6) because conditions in
§ 422.112(c)(5) are not met (rather than
due to exhaustion of the ‘‘essential
hospital’’ annual allocation), in-network
cost sharing for covered inpatient
services at an ‘‘essential hospital’’ is still
required. In other words, once a hospital
is designated as an ‘‘essential hospital’’
by the plan, in-network cost sharing
applies regardless of whether an
‘‘essential hospital’’ payment is due or
paid.
Comment: One commenter said that
to the extent the ‘‘exception’’ in
422.112(a)(1)(ii) is used, that not only
normal per service in-network cost
sharing should apply to services so
obtained, but also that the in-network
catastrophic limit on Medicare A/B
services in § 422.101(d)(2) should also
apply.
Response: We agree and reference the
in-network catastrophic cost sharing
limit in § 422.101(d)(2) as an additional
limit on MA regional plan enrollee cost
sharing liability in § 422.112(c)(7) when
covered inpatient care is received at an
‘‘essential hospital.’’
Comment: One commenter asked
whether we would permit or require
MA regional plans to list ‘‘essential
hospitals’’ in their provider directories.
The commenter said that allowing an
MA regional plan to so list ‘‘essential
hospitals’’ would be inappropriate
because such marketing would provide
the hospitals with an advantage that
should only accrue to contracting
providers. We received a number of
comments from other parties that
objected to the listing of ‘‘essential
hospitals’’ in MA regional plan provider

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directories on the basis that such a
listing would provide the MA regional
plan with an advantage that should only
accrue to MA regional plans that
actually have the ‘‘essential hospital’’
under contract.
Response: While we generally concur
with both commenters that neither party
is entitled to an undue advantage, MA
regional plans are required to provide
enrolled members a provider directory
on an annual basis in accordance with
§ 422.111(a)(3). Note that as part of that
requirement a description of any out-of­
network coverage is also required. So,
while it would not be permitted to list
‘‘essential hospitals’’ in an MA regional
plan’s provider directory as if they were
contracting providers, it is also true that
a description of their status as ‘‘essential
hospitals’’ would be required.
12. Special Rules For Ambulance
Services, Emergency Services, and
Urgently Needed Services, and
Maintenance and Post-Stabilization Care
Services (§ 422.113)
We proposed to modify
§ 422.113(b)(2)(v) to clarify that the $50
limit for ‘‘emergency services’’ applies
only to the emergency department, and
that while the limit on cost-sharing for
‘‘post-stabilization’’ care at
§ 422.113(c)(2)(iv) continues to apply,
its application would always begin
upon inpatient admission. Thus,
emergency cost-sharing limits would
shift from being tied to the type of
service (emergency services) to being
tied to the site of service (emergency
department). We believe that making
this clarification retained cost-sharing
limits for both emergency services and
post-stabilization care, while
eliminating the unanticipated
complexities and administrative burden
previously associated with this section
of the regulation.
Comment: A number of comments
supported the clarification that the $50
limit on cost sharing for emergency
services applied only to emergency
department services. Commenters
supported the notion that once an MA
enrollee is admitted to a hospital,
normal hospital cost-sharing levels
apply, even if the inpatient admission
originates from the emergency
department. On the other hand, many
commenters recommended that CMS
reexamine the $50 limit itself. Some
commenters recommended that CMS set
the limit higher (at $75, $100 or higher)
and other commenters recommended
that CMS index the emergency
department cost-sharing limit for
inflation.
Response: We believe that the $50
limit on cost sharing for emergency

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department services continues to
provide the appropriate financial
disincentive to MA plan enrollees not to
frivolously use emergency rooms in
non-emergency situations. For instance,
there is no MA plan currently imposing
cost sharing for in-network physician
office visits that approach $50.
Similarly, MA organizations are
permitted to deny emergency
department services as medically
unnecessary, to the extent that the
member can be shown to have acted in
‘‘bad faith’’ or not as a ‘‘prudent
layperson’’ in presenting at an
emergency room for non-emergency
services.
Finally, we do not set forth in
regulation the maximum amount an MA
organization can impose in cost sharing
for receipt of urgently needed services.
Because we have restricted the
applicability of the $50 limit on enrollee
cost sharing to emergency department
services, we believe we have
appropriately balanced the financial
interests of MA organizations and MA
plan enrollees requiring emergency
services.
13. Access to Services Under an MA
Private Fee-For-Service Plan (§ 422.114)
Section 211(j) of the MMA allows MA
PFFS plans to charge higher co-pays to
members who receive services outside
of a PFFS plan’s contracted network.
This provision does not apply to PFFS
plans that meet access requirements
solely through ‘‘deemed’’ networks as
defined in § 422.114(a)(2)(i). We
proposed to add a new paragraph (c) to
account for section 211(j) of the MMA.
We received no comments on this
section, so we finalize as proposed.
14. Return to Home Skilled Nursing
Facility (§ 422.133)
We proposed to extend the provisions
in § 422.133 (Return to home skilled
nursing facility) to SNF services
provided in cases in which an MA
organization elects, as permitted under
§ 422.101(c), to provide Medicare
covered SNF care in the absence of a
prior qualifying hospital stay. In such an
instance, we proposed to require that an
individual who would be eligible under
section 1852(l) of the Act for admission
to a ‘‘home SNF’’ upon discharge from
a hospital stay, would nonetheless
retain his or her right to receive ‘‘home
SNF’’ benefits in the absence of such a
hospital stay.
We proposed to deem that a hospital
discharge has always occurred before an
admission for SNF services, and
therefore provide all MA enrollees full
rights to the ‘‘home SNF’’ benefit.

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We received no comments on this
section, so we finalize as proposed.
Subpart D—Quality Improvement
Program
1. Overview
The MMA amended section 1852(e) of
the Act in a number of significant ways
that will affect how MA organizations
pursue their quality improvement
activities. Below we summarize the
proposed provisions and respond to the
public comments. (For a more in-depth
discussion of the provisions, please
refer to the preamble to the proposed
rule.)
Quality Improvement Program
(§ 422.152)
To reflect the Congressional intent to
refocus the section on quality
improvement, rather than quality
assurance, we changed the heading of
§ 422.152 to ‘‘Quality improvement
program.’’ Proposed § 422.152 specified
that each plan (except MA PFFS and
MSA plans) offered by an MA
organization must have an ongoing
quality improvement program and that
a chronic care program must be a part
of this program.
We believe that the broad
requirements in proposed § 422.152(d)
for QI projects did not present an undue
burden for MA organizations, as these
organizations have significant
experience in carrying out such projects
under the current § 422.152(d)
requirements that we believe are more
prescriptive than those we proposed in
the August 2004 proposed rule.
Our previous quality improvement
requirements for M+C coordinated care
plans focused on attaining improvement
in specific clinical topics and included
specific performance measures for
improvement. As a result of the MMA
amendments, we proposed that MA
organizations have the flexibility to
shape their QI efforts to the needs of
their enrolled population. In addition,
we continue, based on our
interpretation of section 1852(e)(3)(B)(i)
of the Act, to require MA coordinated
care plans to collect, analyze, and report
their performance using measurements
outlined by us or to participate in
surveys administered by us (for
example, HEDIS, HOS, and/or CAHPS).
Proposed § 422.152(b)(4) would
require MA local PPO plans that are
offered by an organization that is
licensed or organized under State law as
a HMO, to follow the same quality
improvement requirements as other MA
coordinated care plans.

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A. General Comments
Comment: A number of commenters
made a variety of general comments
about the proposed rule. These
comments include: (1) require that plans
disseminate educational materials to
beneficiaries; (2) require that all plans
review all problems that come to their
attention; (3) CMS should recommend
that plans seek Quality Improvement
Organization (QIO) technical assistance;
(4) require plans to have physician
advisory committees, and that these
committees advise CMS on performance
measures; and (5) CMS should begin to
provide information on MA quality
starting in 2006.
Response: MA plans are responsible
for ensuring that beneficiaries are fully
informed of the benefits covered under
the contract as part of its marketing
material, evidence of coverage, and
summary of benefits. We do not have
any requirements that plans conduct
educational programs. While the
dissemination of educational materials
may be worthwhile in improving health
outcomes, we do not believe it should
be mandatory. Most plans already
provide QI, for example, in marketing
materials. Furthermore, we post HEDIS
and CAHPS data on the
www.Medicare.gov web site. To the
extent an MA plan decides to furnish
educational materials to its enrollees,
the plan is responsible for the type of
information it wishes to furnish, and it
is in the best position to determine
which information is most appropriate
for the enrolled population.
We agree with the commenter that
plans should review all problems that
are brought to their attention.
Depending on the nature, extent, and
substance of the problems, an MA plan
may implement immediate corrective
action, or may need to implement more
systemic changes to address the
identified problem.
We agree with the commenters and
encourage plans to seek technical
assistance from QIOs. Plans should
review the current scope of work to
determine the areas for which the QIOs
can provide assistance; a draft outline of
the 8th scope of work is available on our
web site. Plans that seek QIO assistance
will receive it on both Part C and Part
D services.
We disagree with the commenters that
propose that we require physician
advisory committees. We do not believe
this is necessary because most plans
already have Medical Director
committees that advise plans on QI
measures. Moreover, at the national
level, we have a physician advisory

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committee. These bodies should ensure
an appropriate level of physician input.
We agree with the commenters with
respect to our providing information on
quality measures. HEDIS and CAHPS
data are already on our website
(www.Medicare.gov), and the data has
been available for several years
Comment: Several commenters stated
that CMS should include PFFS and
MSAs in all of the QI requirements.
However, there were also commenters
that supported the exclusion of these
plans.
Response: Because section 722(a) of
the MMA specifically exempts these
types of plans from the majority of QI
requirements, we have excluded them
from the same requirements in the
regulations. These plans, however, must
meet the following requirements:
maintain health information systems;
ensure information from providers is
reliable and complete; make all
collected information available to us’
conduct quality reviews; and take
corrective action for all problems that
come to their attention.
Comment: Several commenters have
recommended that we provide payment
incentives to MA plans for providing
better quality care, also known as pay
for performance (P4P).
Response: We agree with the
commenters concerning the merits of
P4P. We are very interested in this
approach and believe that we should
pay not just for providing a service but
for results. P4P should stimulate care
that is efficient and effective for every
patient while eliminating waste. We are
currently working on four P4P
demonstration projects. These are as
follows:

Premier Perspective system as of March
31, 2003.

The Premier Hospital Quality Incentive
Demonstration

The Physician Group Practice (PGP)
Demonstration.
The PGP Demonstration rewards
physicians for improving the quality
and efficiency of health care services
delivered to Medicare FFS beneficiaries.
Mandated by Section 412 of the Benefits
Improvement and Protection Act of
2000, the PGP Demonstration seeks to
encourage coordination of Part A and
Part B services, reward physicians for
improving health outcomes, and
promote efficiency through investment
in administrative structure and process.
Under the 3-year demonstration,
physician groups will be paid on a FFS
basis and may earn a bonus from
savings derived from improvements in
patient management. Annual
performance targets will be established
for each participating physician group
equal to the average Part A and Part B
expenditures of beneficiaries assigned to

The Premier Hospital Quality
Incentive Demonstration is a 3-year
project that will recognize and provide
financial rewards to hospitals that
demonstrate high quality performance
in a number of areas of acute care. The
demonstration involves a CMS
partnership with Premier Inc., a
nationwide organization of not-for-profit
hospitals, and will reward participating
top performing hospitals by increasing
their payment for Medicare patients.
Through the Premier Hospital Quality
Incentive Demonstration, we aim to see
a significant improvement in the quality
of inpatient care by awarding bonus
payments to hospitals for high quality in
several clinical areas, and by reporting
extensive quality data on our web site.
Participation in the demonstration is
voluntary and open to hospitals in the

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Section 646—Medicare Health Care
Quality Demonstration Program.
The MMA mandates a 5-year
demonstration program to examine
factors that encourage the delivery of
improved patient care quality, including
financial incentives, appropriate use of
best practice guidelines, examination of
service variation and outcomes
measurement, shared decision making
between providers and patients,
appropriate use of culturally and
ethnically sensitive care, and related
financial effects associated with these
factors. In the demonstration, Medicare
may provide benefits not otherwise
covered, but may not deny services that
are otherwise covered against the
wishes of beneficiaries. The
demonstration is required to be budget
neutral.
Section 649—Medicare Care
Management Performance
Demonstration.
The MMA mandates a 3-year
demonstration program where
physicians will be paid to adopt and use
health information technology and
evidence-based outcome measures to
promote continuity of care, stabilize
medical conditions, prevent or
minimize acute exacerbations of chronic
conditions, and reduce adverse health
outcomes. The statute limits the
program to four sites meeting eligibility
criteria. Payment can vary based on
performance; however total payments
must be budget neutral. QIOs could help
enroll physicians, evaluate their
performance, and provide technical
assistance.

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the group during a base period, adjusted
for health status and expenditure
growth.
We are also paying close attention to
P4P for managed care plans. We are
aware that MEDPAC has developed
proposals along these lines in its June
2004 report. Furthermore, many private
sector organizations are sponsoring such
projects. See, for example, a
compendium developed by The
Leapfrog Group
(www.leapfroggroup.org). In addition,
the Agency for Healthcare Research and
Quality (AHRQ) has sponsored an
evidence based report entitled
‘‘Strategies to Support Quality-based
Purchasing: A Review of the Evidence,’’
published in fall 2004, which includes
managed care plans. Finally, we have a
contract with the Institute of Medicine
to study P4P, which will also address
managed care.
B. Measures
This portion of the discussion
addresses measures for all MA plans. A
specific discussion of measures for
PPOs appears below.
Comment: Several commenters stated
that CMS should include measure
reporting requirements in regulations.
Response: Based on past experience,
we disagree with the commenters
recommending that we include specific
measure reporting systems in the
regulation. We believe it is a better
approach to provide specific guidance
through the Medicare managed care
manual rather than including specific
requirements in the regulation. In this
way, we have the flexibility to
implement appropriate changes in the
measure systems and individual
measures in a more timely manner. The
industry and accreditation
organizations, are constantly making
changes to these reporting systems.
Thus, having more flexibility to change
measures as well as add and delete
measurements systems allows us to be
more responsive to the state of the art
as to measurement systems.
Comment: A commenter stated that
performance assessment data is
outdated and that CMS should not use
HOS to rank plans because there is no
benchmark.
Response: We disagree with the
commenter. HEDIS, CAHPS, and HOS
are updated on a regular basis. We
recognize that there are no benchmarks
currently available and therefore use
relative ranking in the performance
assessment data system. Benchmarks
also refer to standards or minimum
performance levels.
Comment: A commenter stated that
CMS should use a standardized core set

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of performance measures, clinical and
non-clinical that are applied to all MA
plans. The commenter suggested that
CMS not require MA plans to
demonstrate that QI program size and
scope are proportionate to plan size.
Response: In general, we agree with
the commenter that a standardized set of
measures should be used across all plan
types because it allows the greatest
comparison among plans. The one
exception as discussed later, is that we
have decided to allow some variation in
the early stages of the PPO program as
compared to the HMO program. As also
noted, MMA specifies a different set of
requirements for PFFS plans and MSAs.
Comment: One commenter stated that
CMS should compare quality measures
of MA plans to those for the FFS
Medicare program.
Response: On the www.Medicare.gov
website, we provide consumer
assessment data from CAHPS on FFS
Medicare and the MA plans, as well as
a comparison of an Original Medicare
rate (on State and national levels)
compared to the MA health plan rates
on the HEDIS measure—Access to
Ambulatory Health Services.
Comment: A commenter suggested
that CMS reduce the burden on plans by
reducing the number of measures or by
conducting HEDIS by telephone.
Response: We agree that it is
important to minimize the MA plans’
reporting burden and do so by using
data submission tools, systems, and
processes that are consistent with
HEDIS reporting for the plan’s
commercial lines of business.
We believe that it is not appropriate,
however, to collect HEDIS measures by
phone because information collected by
phone is less reliable.
C. Special Needs Plans (SNPs)
Comment: Many commenters
suggested that CMS develop special
measures for specialized MA plans for
SNPs. Several commenters suggested
that CMS use the ACOVE measures
developed by Rand. They further
suggested that quality oversight should
take into account the populations being
served by the SNP. In addition, they
suggested that CMS should ensure that
SNPs have comprehensive and
coordinated care.
Response: We agree with the
commenters and have already indicated
to several demonstration plans that have
institutionalized populations and are
converting to SNPs that HEDIS and HOS
will not be required. Instead we will
work with them to identify measures
that are similar to the national nursing
home quality measures reported on the
Nursing Home Compare website at

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www.medicare.gov and the CHSRA
quality indicators, both of which are
derived from the Minimum Data Set
(MDS). SNPs for dual eligibles will be
required to meet the requirements of
other MA plans. We are also willing to
explore special measures with other
types of SNPs.
We are certainly open to considering
the ACOVE measures and will explore
their feasibility. As to other aspects of
quality oversight, we will apply the
same basic types of quality requirements
for all MA plans but take into account
beneficiary needs for SNPs. As to
comprehensive and coordinated care,
SNPs will need to meet chronic care
improvement program (CCIP)
requirements.
Comment: A commenter
recommended that SNPs should not
serve dialysis patients. The commenter
stated that CMS cannot monitor the
quality of care provided to dialysis
patients in managed care plans because
dialysis providers do not bill Medicare
for services to MA beneficiaries, thus,
the ESRD Clinical Performance
Measures data, which are extracted from
billing information, are not available.
Response: We appreciate the concerns
expressed by the commenter and will
definitely take them into consideration.
We anticipate that will be able to collect
the data. However, at this time, we have
not determined with certainty that we
can and share the commenter’s concern
that we not approve the plans unless we
can collect the data. In Subpart A of this
preamble, we indicate that we are not
setting forth a detailed definition of
severe and disabling chronic condition
for purposes of the definition of special
needs individuals, and we will review
and evaluate SNP proposals on a caseby-case basis. This evaluation will take
into consideration whether we can
collect sufficient quality of care
monitoring data.
D. Report to the Congress
Comment: Some commenters
expressed concern that CMS could not
add measures without issuing a Report
to the Congress as required under
Section 1852(e)(3)(A). They suggested
that because of several of the unique
populations that might be served in
SNPs, that CMS extend the Report to the
Congress, and that CMS form an expert
panel, enhance clinical knowledge on
high risk populations, disseminate best
practices, enhance coordination care,
and refine payment to support
outcomes.
Response: As indicated in the
proposed rule, we interpret that this
requirement does not prevent us from
making changes within each of the

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4635

existing measurement systems, such as
HEDIS. Further, although we need to
submit a Report to the Congress to add
new systems, we do not interpret this to
mean that we need the Congressional
approval before we proceed to
implement new systems.
E. Types of performance measures
Comment: A commenter suggested
that CMS develop clearly defined,
nationally recognized quality measures
based on objective criteria for all facets
of the Medicare program to truly
achieve the MMA’s goal of offering
Medicare beneficiaries a meaningful
choice. It is feasible that the measures
be based on pharmaceutical
information, medical claims, and other
routine administrative information
already easily accessible across the
Medicare program.
Response: We will be pursuing the
development of the measures and will
take into consideration the commenter’s
suggestion.
2. Chronic Care Improvement Program
Requirements (§ 422.152(c))
At proposed § 422.152(c), we would
require that MA plans develop criteria
for a chronic care improvement
program. The criteria must–
• Include methods for identifying MA
enrollees with multiple or sufficiently
severe chronic conditions who would
benefit from participating in a chronic
care improvement program; and
• Provide mechanisms for monitoring
MA enrollees that are participating in
the chronic care improvement program.
Comment: A commenter
recommended that CMS use the
standard definition of disease
management adopted by the Disease
Management Association of America
(DMAA) for the CCIP. The commenter
also recommended that the CCIP be
population based and that CMS focus on
congestive heart failure (CHF), diabetes,
and chronic obstructive pulmonary
disease (COPD). They further suggested
that CCIPs be accredited, and be
evaluated on clinical quality,
beneficiary and provider satisfaction,
and impact on cost. Other commenters
recommended that CMS provide
maximum flexibility for plans as to
these requirements. A commenter
suggested that plans can identify
patients from claims, self-reports, by
providers, socio-economic data
primarily using existing measures, for
example, HEDIS to monitor plus other
evidence-based measures. A commenter
also suggested plans should use clinical
variables, for example, weight, use of
ACE inhibitors, health and functional
status, emergency room and hospital

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use, satisfaction, total costs, as measures
for CCIP.
Response: We certainly encourage
plans to consider the definition
provided by Disease Management
Association of America (DMAA), as well
as the other aspects of the programs
developed by DMAA. However, we
believe it is premature to provide more
prescriptive requirements. We will look
for information on the CCIP pilot under
section 721 of the MMA as well as the
early stages of the MA plans’
implementation of this section 722 CCIP
to shape guidance for this component of
the program.
3. QI Projects (§ 422.152(d))
While we proposed to delete many of
the prescriptive requirements for QI
projects that appeared in § 422.152(d),
we still retained the basic requirements
of the projects including the collection,
analysis, and reporting of data. We
believed, though, that MA plans should
have the ability to select topic areas and
proposed deleting the requirements of
including the entire relevant population
and having to do both national and
statewide projects.
In proposed § 422.152(d)(1), we
would require that QI projects be
initiatives that include the entire
organization and focus on clinical and
non clinical areas. The projects would
need to follow the current quality
improvement process. We retained the
provisions that QI projects must
measure performance, and the
interventions must be system-wide and
include the establishment or alteration
of practice guidelines. In addition, we
propose to require that the projects
focus on improving performance for the
Medicare population and involve
systemic and periodic follow-up on the
effect of the interventions. To ensure
that the measures (or quality indicators)
used in QI projects are reliable and
relevant for improving the health care
and services furnished to MA enrollees,
we proposed in § 422.152(d)(2) to
require that the quality indicators be
objective, clearly and unambiguously
defined, and based on current clinical
knowledge or health services research.
The measures must also be capable of
measuring outcomes, such as changes in
health status, functional status, and
enrollee satisfaction, or valid proxies of
those outcomes. Likewise, we proposed
in § 422.152(d)(3)to require that the data
used in an MA plan’s QI projects be
valid and reliable and based on systemic
ongoing collection and analysis of
information. We also proposed in
§ 422.152(d)(4) that the interventions
achieve demonstrable improvement.

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Finally, in § 422.152(d)(5), we
proposed to retain the requirement that
MA plans report the status and results
of their projects when requested by us.
We believe that this reporting and
review burden would be much smaller
than the process used in the M+C
program. We intend to provide further
guidance on the reporting requirements
later.
Comment: A commenter stated that QI
should involve more than measure,
intervene, and remeasure. The
commenter also stated that it should set
performance expectations, collect and
analyze data, identify undesirable
events, develop interventions, collect
data to monitor improvement, and
require that all plans meet the same QI
requirements.
Response: We agree that all HMOS
and PPOs should have to meet the same
basic requirements as to QI projects, and
the regulation requires this. However,
although we will encourage plans to
adopt the commenter’s other
recommended steps, we do not believe
that it is necessary to build them into
mandatory requirements. The
requirements that we have already
specified should be sufficient, and to
add additional requirements will create
unnecessary burden.
A. National projects
Comment: A commenter requested
that CMS provide guidance to plans on
the meaning of ’encouraging’ physicians
to participate in quality improvement
initiatives. The commenter also
proposed that CMS provide plans with
the flexibility to design and conduct QI
projects based on topics relevant to the
plan’s population. However, the
commenter stated that CMS should
continue to provide suggestions and
examples of topics for QI projects that
are relevant to the Medicare population.
The commenter also suggested that CMS
should provide guidance regarding
meaning of ‘‘sustained improvement,’’
and consider evaluating clinical and
non-clinical performance improvement
using HEDIS and CAHPS 3.0H results.
Response: As to encouraging
physicians to participate in QI projects,
we recommend plans to coordinate their
efforts with their providers. Some
possible options are that the plans will
send letters to their providers
encouraging participation or pay them a
bonus. This will be up to the plans. As
indicated, we will provide suggestions
as to topics for plan consideration and
guidance on these topics. We will give
further consideration to the suggestion
of using HEDIS and CAHPS for
evaluating QI projects.

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Comment: Some commenters
recommended that CMS require plans to
participate in national projects.
Response: The MMA specifically
deleted the requirement for national
projects. We interpret the Congress’s
deletion of this requirement as an
indication of its intent that participation
in national projects not be required.
Therefore, we are not requiring the
projects, and we believe the best
alternative is to encourage plans to
participate voluntarily in our proposed
national projects.
B. Racial-ethnic QI projects
Comment: Some commenters opposed
elimination of the racial-ethnic QI
projects, while one commenter
supported its removal.
Response: The MMA specifically
eliminated this requirement. Again, we
interpret the Congress’s deletion of this
requirement as indicating its intent that
plans not be required to pursue these
types of projects. However, we
encourage plans to consider pursuing
such projects voluntarily. We have a
current racial-ethnic national project
that started in 2003 and will not be
completed until 2005. We will share
results of this project when it is
completed. Lovelace Clinic Foundation
was selected by us to develop two
cultural competency guides through an
AHRQ Integrated Delivery System
Network Funding task order. The first
manual, ‘‘Providing Oral Linguistic
Services: A Guide for Managed Care
Plans,’’ provides a practical step-by-step
process for the improvement of oral
language services to patients with
limited English proficiency (LEP). The
second manual, ‘‘Planning Culturally
and Linguistically Appropriate Services:
A Guide for Managed Care Plans,’’
assists health plans in assessing the
ethnically diverse populations they may
serve, and assessing the cultural
competency of the managed care plan.
Lovelace recently completed a report
‘‘Evaluation of Usefulness of CLAS
Guides to M+CO Plans’’ which is
available from AHRQ.
C. Performance levels
Comment: A commenter suggested
that CMS set guidelines on the
minimum percent of enrollees that are
identified and managed. Others opposed
the removal of requirements as to
minimum performance levels, sustained
improvement, and clinical-nonclinical
requirements and external review.
Response: We retain our view from
the proposed rule that plans should
select topics areas that best meet their
needs rather than being required to
select both clinical and nonclinical

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topics. We do not believe that it is
appropriate for us to specify minimum
percent identified and minimum
performance level. In the preamble
discussion to § 422.152(d), we proposed
not to define demonstrable
improvement, but indicated that we
would look for some movement in the
quality indicator in an upward or
downward direction as appropriate.
MMA eliminated the requirement that
MA organizations contract with QIOs
(external review organizations) to
review appeals. However, QIOs are still
involved in all appeals that they
currently conduct such as hospital and
nursing home discharges. Elimination of
this requirement just means that the MA
plans do not need to contract with the
QIOs or other external review
organizations.
D. Project selection
Comment: A commenter suggested
that CMS require all plans to participate
in QI projects, as long as the projects are
based on data to which the plan has
reasonable access. When developing QI
and data collection requirements, the
commenter suggested consideration of
the plan’s experience in conducting the
activities. Further, the commenter
recommended using a standardized core
set of performance measures, clinical
and non-clinical that are applied to all
Medicare Advantage plans. Commenters
also stated that CMS should not require
MA plans to demonstrate that QI
program size and scope are
proportionate to plan size.
Response: We believe that plans
should take these suggestions into
consideration, but we are not requiring
them. We agree that we should not
require MA plans to demonstrate that QI
program size and scope are
proportionate to plan size. To do so will
place unnecessary restrictions on plans
and would be inconsistent with what
we understand to be the Congressional
intent to allow for more flexibility in
this area.
4. Requirements for MA Regional Plans
and MA Local Plans
Section 1852(e)(3)(A)(ii) of the Act
provided for us to establish separate
regulatory requirements for MA regional
plans relating to the collection, analysis,
and reporting of data that permit the
measurement of health outcomes and
other indices of quality. Section
1852(e)(3)(A)(ii) of the Act further
provided that these requirements for
MA regional plans could not exceed the
requirements established for MA local
plans that are PPO plans.
In § 422.152(e)(1), we proposed a
definition for the term ‘‘local PPO plan’’

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as used in this section. The other
requirements in this paragraph were the
requirements that apply to PPOs under
current regulations.
In § 422.152(f), we retained the
provisions that address health
information systems, QI program
review, and remedial action. MA
organizations will be required, for all
the MA plans they offer, to maintain a
health information system that collects,
analyzes, and integrates the data
necessary to implement their QI
program. The organization will also be
required to ensure that the information
it receives from providers of services is
reliable and complete. In addition, for
each plan, there must be in effect a
process for formal evaluation, at least
annually, of the impact and
effectiveness of its quality improvement
program.
Finally, for each plan it offers, we
proposed that an MA organization will
be required to correct all problems that
come to its attention through internal
surveillance, complaints, or other
mechanisms. As noted above, as a result
of MMA we also made conforming
changes to remove the provision that
each MA organization’s quality
assurance program include a separate
focus on racial and ethnic minorities
and the requirement that for each plan
it operated the MA organization would
have an agreement with an external
quality review and improvement
organization.
The MMA provided that all the part
D (Voluntary Prescription Drug Benefit)
requirements are to be included as
among those that could be deemed to be
met through accreditation, and we
accordingly proposed to add this
provision to the list of deemable
requirements in § 422.156(b).
Comment: Many commenters
recommended that CMS use the same
metrics across plan types. Others
commenters recommended that CMS
develop future plans to make PPOs
comparable to HMOs. They suggested
that CMS convene key stakeholders to
develop measures. They further
suggested that CMS set goals and
timetables for implementing the same
measures across plan types.
Response: For the most part, we will
have uniform reporting requirements for
HMOs and PPOs. For instance, we will
require both types of plans to submit
HEDIS and HOS data. Further, we will
administer the CAHPS survey to both
types of plans. The HEDIS measures
will differ between the two plan types,
as PPOs will not be required to submit
HEDIS measures that require medical
record review, because they have
difficulty obtaining medical records

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from out-of-network providers.
However, for PPOs, many of the HEDIS
measures are available from
administrative records. We are working
with NCQA and other experts, MA
organizations and other stakeholders to
identify which HEDIS measures are
most appropriate for quality
performance measurement in PPO
plans.
We held an open door forum on
December 10, 2004, to receive input
from the public on the HEDIS measures
for PPOs. We expect to publish a final
set of measures for field testing in
January 2005. Materials from the open
door forum can be found at http://
www.cms.hhs.gov/healthplans/
performance/. We expect to field test
these measures in the Spring 2005, and
we expect to finalize them in Fall 2005.
In addition, we expect to disseminate
the final list of measures for reporting,
with detailed instructions, in the MA
Manual in Fall 2005. In the near future,
we expect that additional HEDIS
measures that require PPOs to capture
and submit data from medical records
will also be required for reporting. We
desire to measure performance and
compare plans on as many dimensions
of care as possible, so we plan to move
progressively toward having all relevant
HEDIS measures reported while
allowing PPOs the opportunity to
develop the capacity to collect
information that requires medical record
review.
After we implement NCQA’s
recommendations on HEDIS measures
for PPOs, we will make an assessment
of the possibility of making HEDIS
reporting even more comparable
between HMOs and PPOs
5. Deeming § 422.154
We did not have a discussion on
deeming in the preamble nor proposed
changes to the regulation text.
Nevertheless, we did receive comments
on this section and are responding to
those comments.
Comment: Commenters suggested that
CMS allow the American Association of
PPOs (AAPPO) to be an Accreditation
Organization (AO)and that CMS allow
disease management associations to be
AOs.
Response: Any organization that
wants approval as an AO for PPOs must
meet our AO requirements for PPOs.
Subpart E—Relationships with
Providers (§ 422.210)
The MMA made very limited changes
to existing MA program requirements
concerning MA organization
relationships with providers. Since
these aspects of the program have

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worked well, we generally proposed to
keep the existing provisions of subpart
E as they were. The only exceptions, are
modifications to the physician incentive
plan requirements to reflect changes
made by MMA to section 1852(j)(4) of
the Act.
Below is a summary of the proposed
provisions in this subpart that were
proposed in the August 3, 2004
proposed rule:
• We proposed to remove
§ 422.208(h) that required that, where a
physician incentive plan places
physicians at substantial financial risk,
M+C organizations conduct ‘‘periodic
surveys of both individuals enrolled and
individuals previously enrolled with the
organization to determine the degree of
access of such individuals to services
provided by the organization and
satisfaction with the quality of such
services.’’
• We proposed to revise § 422.210 to
eliminate the requirement that
information on physician incentive
plans be disclosed to CMS.
Comment: A commenter supported
the changes made to the reporting
requirements in the August 22, 2003
final rule (68 FR 50855). Other
commenters requested that CMS require
plans to submit assurances that they are
in compliance with the requirements.
Response: The MMA specifically
requires that MA plans provide
assurances to us that they are in
compliance with the physician
incentive plan requirements. We
specified this requirement in the
regulation text of the proposed rule at
§ 422.210 and have retained it in this
final rule. Further details on the
assurances will be provided in
subsequent guidance. As noted in the
preamble of the proposed rule, the
reporting requirement had already been
eliminated in a final rule published on
August 22, 2003 (68 FR 50855). The
assurances required by MMA are a new
requirement that helps to ensure that
plans are meeting the various regulatory
requirements of the physician incentive
plan section. Plans must provide
information on their physician incentive
plans when requested by us.
Subpart F—Submission of Bids,
Premiums, and Related Information and
Plan Approval
Under the current MA regulations,
subpart F addresses payments to MA
organizations, and subpart G discusses
beneficiary premiums and cost sharing.
Given the substantial revisions that the
MMA makes to pricing and payment
rules for MA organizations, we
proposed to generally replace these
subparts in their entirety. Subpart F will

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MA statutory non-drug monthly bid
amount (also called the ‘‘basic A/B
bid’’); an amount for coverage of basic
prescription drug benefits under Part D
(if applicable), and an amount for
provision of supplemental benefits, if
any.
• ‘‘Plan basic cost sharing’’ means
cost sharing that would be charged by
a plan for benefits under the original
Medicare FFS program option before
any reductions resulting from
mandatory supplemental benefits.
• ‘‘Unadjusted MA area-specific nondrug monthly benchmark amount’’ is
defined, for local MA plans serving one
county, as the county capitation rate.
For local MA plans serving multiple
counties, it is the weighted average of
county rates in a plan’s service area,
where the weights are the plan’s
projected enrollment per county.
• ‘‘Unadjusted MA region-specific
non-drug monthly benchmark amount’’
is the sum of two components: the
statutory component and the plan bid
component.
1. Basis and scope (§ 422.250)
• ‘‘MA monthly basic beneficiary
Proposed § 422.250 set forth the basis premium’’ is the amount that an MA
and scope of the revised subpart F,
plan (other than an MSA plan) charges
noting that it was based largely on
an enrollee for original Medicare
section 1854 of the Act, but included
benefits if its basic A/B bid is above the
provisions from sections 1853 and 1858 benchmark.
• ‘‘MA monthly prescription drug
of the Act. Section 422.250 indicated
beneficiary premium’’ is the base
that subpart F addressed the bidding
methodology upon which MA payments beneficiary premium, adjusted to reflect
differences between the plan bid and
will be based beginning in 2006 and
the national average bid, less the
provisions for CMS’ negotiation and
amount of rebate the MA-PD plan elects
approval of organizations’ bids.
to apply toward a reduction of the base
2. Terminology (§ 422.252)
beneficiary premium, as described in
The proposed definitions throughout
proposed § 422.266(b).
both subparts F and G were intended to
• ‘‘MA monthly supplemental
reflect the statutory definitions they
beneficiary premium’’ is the portion of
implement in a simplified manner. The
the plan bid attributable to mandatory
following terms were defined in
and/or optional supplemental health
proposed § 422.252:
care benefits described in § 422.102, less
• The ‘‘annual MA capitation rate’’ is any rebate applied to a mandatory
the county rate. As set forth at section
supplemental benefit under
1853(c)(1) of the Act, capitation rates are § 422.266(b)(2).
called ‘‘MA local area’’ rates, and
• ‘‘MA monthly MSA premium’’ is
references throughout the MMA to
the amount of the plan premium for
capitation rates are to county rates (or in coverage of benefits under the original
the case of end-stage renal disease
Medicare program through an MSA
(ESRD) enrollees, to State rates).
plan, as described in proposed
• ‘‘MA-PD plan,’’ means an MA local § 422.254(e).
or regional plan that offers prescription
As a result of our policy decision on
drug coverage under Part D of Title
the geographic ISAR adjustment,
XVIII of the Act.
presented in the G preamble discussion
• ‘‘Unadjusted MA statutory non-drug of § 422.308(d), we are making a
monthly bid amount’’ is defined as the
clarifying change to the definition of
plan’s estimate of its monthly required
MA local area at § 422.252.
revenue to provide coverage of original
3. Submission of Bids (§ 422.254)
Medicare Part A and Part B benefits.
General rule. The MMA amended
• ‘‘Monthly aggregate bid amount’’ is
defined as the total monthly plan bid for section 1854 of the Act to replace the
adjusted community rate (ACR)
coverage of an MA eligible beneficiary
proposal system currently in effect
with a nationally average risk profile.
This bid is composed of: the unadjusted under the MA program with a bid
cover provisions addressing bid
submissions and our review of bids and
subpart G will describe the methodology
and process for CMS’ payment to MA
organizations.
This subpart addresses provisions
related not only to submission, review,
and approval of bids, but also ‘‘bid-to­
benchmark’’ comparisons, including
how local and regional benchmark
amounts are determined and how
beneficiary premiums and savings are
calculated; how beneficiary savings are
used for beneficiary rebates and
Government savings; the various
premium payment options available to
beneficiaries; and the options for
distributing the beneficiary portion of
the rebate.
We received 60 comments on subpart
F in response to the August 2004
proposed rule. Below we provide a
summary of the provisions of this
subpart and respond to comments. (For
a broader discussion of the provisions,
please refer to the proposed rule.)

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submission process. Proposed
§ 422.254(a) implemented section
1854(a)(1)(A) by requiring that no later
than the first Monday in June, MA
organizations must submit bids for each
MA plan that they intend to offer in the
following year (other than MSA plans,
which have separate requirements),
beginning for contract year 2006. Plan
bids would be required to meet the
requirements specified at proposed
§ 422.254(b), and bid submissions
would be required to include the
information listed in proposed
§ 422.254(c).
Under the previous M+C program, we
permitted M+C organizations to offer
new plans mid-year and to offer mid­
year benefit enhancements to existing
benefit packages. However, in order to
maintain the integrity of the annual
bidding process mandated in statute, we
proposed that it is no longer appropriate
to allow MA organizations to enter the
program with a new plan mid-year
(including service area expansions) or to
offer mid-year enhancements to an
existing plan (which essentially
represents a redefinition of revenue
needs, that is, a new bid).
Program of All Inclusive-Care for the
Elderly (PACE) organizations and the
MMA bidding methodology. We
proposed to exempt PACE organizations
from the Title II bidding process, so
payments for PACE plans would be
based on MA capitation rates. However,
this exemption does not apply to Part D
drug coverage for PACE enrollees. PACE
plans will be required to submit bids for
providing Part D drug benefits (although
PACE bids will not be included in the
national average monthly bid amount),
as indicated in § 423.279(a).
ESRD enrollees. Section 1853(a)(1)(H)
of the Act gives us the authority to
determine if ESRD MA enrollees should
be included in the MMA bidding
process. We proposed at § 422.254(a)(2)
that ESRD enrollees be fully
incorporated into the plan’s aggregate
bid for contract year 2007 and
succeeding years. For 2006, we
proposed three options for pricing Part
C benefits for ESRD beneficiaries:
exclude ESRD costs from the basic A/B
bid and the supplemental bid pertaining
to Parts A and B benefits; exclude ESRD
costs from the basic A/B bid but include
them in the supplemental bid for A/B
benefits; and fully include End Stage
Renal Disease (ESRD) costs in the plan
bid. We invited comments on specific
proposed approaches. (We noted that
ESRD costs must be included in the Part
D bid at the outset, including the Part
D supplemental bid amount.)
We noted that regardless of whether
or not ESRD enrollee costs are included

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in the plan bid, ESRD enrollees would
be subject to the same premium and cost
sharing as other plan enrollees under
the uniformity of premiums provision in
§ 422.262(c). That is, if ESRD enrollees
were excluded from the plan bid, the
rebate (or basic beneficiary premium, for
a plan with the bid above the
benchmark) would be determined based
on costs for non-ESRD enrollees. ESRD
enrollees would be subject to cost
sharing and premium amounts based on
estimated non-ESRD enrollee costs.
Finally, we stated in the proposed rule
that if the policy chosen were to exclude
ESRD enrollees from the 2006 bids, for
any plan offering a Part B premium
reduction to MA plan enrollees, the
amount of this reduction also would be
subtracted from the payment for each
ESRD enrollee.
Comment: Two commenters disagreed
with any limitation on mid-year plan
entry (including service area
expansions) and mid-year benefit
enhancement (MYBEs). One of these
commenters asked if CMS’ proposal
were implementing statute. Another
commenter stated that new mid-year
plans should be allowed in a market if
no other competitors existed in the
market. One commenter acknowledged
that an issue may exist with offering
Part D benefits in any mid-year plan due
to the formula used to calculate
beneficiary premiums, but
recommended that plans that do not
offer Part D benefits should be allowed
to enter at any time. This commenter
added that nothing in the legislative
history of the MMA supports CMS’
position to limit mid-year plan entry
and enhancements.
Several commenters did not state an
objection to the restriction on new mid­
year plan entry, but believed service
area expansions (SAEs) should be
allowed, to expand the availability of
MA plans to Medicare beneficiaries.
Finally, a number of commenters
expressed concern that any restriction
on offering mid-year plans, including
SAEs, would undermine the ability of
MA organizations to negotiate with
employers or unions.
Response: We believe that the MMA
both supports and requires the annual
contracting methodology and the
elimination of new mid-year plans, mid­
year service area expansions and mid­
year benefit enhancements (with
exceptions that are listed below). We
will require that organizations make
their MA bid submissions once a year in
June. We are retaining in regulation the
language from the current MA
regulations at § 422.306(a)(2), which
states that if the submission is not
complete, timely, or accurate, CMS has

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the authority to impose sanctions under
subpart O of this part or may choose not
to renew the contract.
We are doing as much as possible to
support a competitive bidding process
by removing uncertainty that would
lead to inefficient bids, through
mechanisms such as the design of the
Intra-Service Area Rate (ISAR)
adjustment, our models for risk
adjustment of payments, and our policy
on what plan expenditures we will
include in risk sharing with regional
plans, which by law must serve all of an
MA region. (See the discussion on
rebatable integrated benefits in subpart
J.)
We do not believe that we should
reduce the kind of ‘‘uncertainty’’ that
comes from not knowing what products
competitors will offer. This type of
uncertainty should be a feature of a
competitive bidding system. An annual
plan bidding and entry process supports
competitive bidding by ensuring an
equal playing-field for all organizations.
For example, MA organizations should
not be able to design new plan benefit
packages open to all beneficiaries in
new service areas with post hoc
knowledge of the regional MA
benchmarks and national average drug
bid.
However, after consideration of the
public comments, we have identified
certain exceptions to the end of flow
contracting under the bidding
methodology. (Mid-year plan entry is
discussed in this comment, and MYBEs
are discussed in the following
comment.)
Mid-year plan entry. In general, we
will not allow mid-year entry of new
MA organizations, and new contracts
with MA organizations for MA plans
will be effective only on January 1 of
each year beginning on January 1, 2006.
In general, current MA organizations
may not offer new plans mid-year,
either in a current or new service area.
We will still allow for applications to be
submitted throughout the year, and we
will make an eligibility determination in
time for the next required bid submittal
date.
However, we do not wish to
discourage new plan offerings in areas
where there are no MA options for
beneficiaries. We also wish to support a
competitive bidding process, as
explained above. Therefore we will
allow certain exceptions to the policy
prohibiting new mid-year plans.
MA plans. The Part D bid is based on
a national average of plan bids for the
year, and the regional plan A/B
benchmark is partly based on the
average of regional plan bids for the
region for the year. Accordingly, to

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ensure an equal playing-field for all
organizations and maintain the integrity
of the Part D and MA regional
benchmarks, we cannot approve mid­
year regional MA plans because the
regional benchmarks are established
during bid review. We can only make
the following exceptions for local plans.
We may approve a local mid-year MA
plan whose Part D bid is not included
in the national average bid (that is, PFFS
and cost plans offering Part D benefits,
and special needs plans), if the plan will
be offered in counties where there are
no other PDPs (except fallback plans) or
MA-PD plans. We could also approve a
local mid-year MA plan that does not
offer Part D benefits, if the plan is
offered in an area with no other MA
competitors. We believe that allowing
mid-year plans could reduce the
incentive to bid competitively, so we
will carefully review applications.
PACE plans. New PACE organizations
will be allowed to offer a PACE plan
mid-year. As noted elsewhere in this
preamble, PACE plans are governed by
section 1894 of the Act. Under section
1894 of the Act, PACE plans must serve
individuals who are ‘‘nursing home
certifiable,’’ that is, require the level of
care required under the State Medicaid
plan for coverage of nursing facility
services, and PACE plans have coverage
requirements that differ from the
coverage requirements for MA and MA­
PD plans. Given the statutory
requirements for defining the PACEeligible individual, the PACE review
and approval process is an extended
process that requires intensive
coordination with States and CMS. For
this reason, new PACE plans will be
exempt from the restriction on new-mid
year plans, in order to promote
coordination of Part C and Part D
benefits with the benefits PACE plans
are required to offer under section 1894
of the Act.
Employer/union group health plans.
EGHPs not open to general enrollment
will be allowed to offer new mid-year
plans. Group health plans not open to
general enrollment include both the
‘‘800–series’’ employer-only plan and
group plans where we directly contract
with the employer/union offering an
MA product. However, an MA plan that
enrolls both individual beneficiaries
and employer/union members (in other
words, a plan open to general
enrollment) will be subject to the rule
not allowing new mid-year plans
(except under limited circumstances).
As we have done in the past, we will
publish separate guidance on employer/
union group health plans.
Comment: Several commenters
recommended that allowing mid-year

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benefit enhancements (MYBEs) would
not affect the integrity of the bidding
process, at least for original Medicare
benefits. One commenter stated that
plans sometimes find during the year
that their benefit designs contain a
problematic component, and seek to
make mid-year changes. For example,
an organization could discover that a
plan co-payment for a preventive
service was the source of widespread
enrollee dissatisfaction that the plan
would like to address, or the
organization could learn mid-year that
the cost assumptions for a particular
benefit may have been higher than
actual costs proved to be, and the plan
would like to enrich the benefits to
account for the lower costs. The
commenters believe that retaining the
flexibility to make mid-year changes to
adjust for the circumstances could be
quite beneficial to enrollees and could
be done in a way to protect the integrity
of the bidding process. This commenter
recommended that we not allow MYBEs
during the first quarter of the calendar
year to remove the incentive to
manipulate the process by bidding in
June with the intention of making later
mid-year enhancements to improve the
package. Finally, several commenters
requested that MYBEs be allowed for
employer group plans, because MA
organizations need the flexibility to
enter into contracts with employer
groups at any time during the year
because employer groups may have plan
years that differ from Medicare’s
calendar year cycle.
Response: We believe that in order to
maintain the integrity of the bidding
process, it is no longer appropriate to
allow MA organizations to offer MYBEs
at any time during the contract year, as
they would be a de facto adjustment to
the benefit packages for which bids
were submitted earlier in the year.
However, in response to public
comments, we have designed an MYBE
policy that we believe allows
beneficiaries to receive the advantage of
mid-year enhancements of non-drug
benefits while protecting the integrity of
the bidding process by reducing the
incentive to overbid in June. The
general rule is that we will allow
MYBEs to non-drug benefits only under
the following circumstances: (1) An
MYBE can be effective no earlier than
July 1 of the contract year, and no later
than September 1 of the contract year;
(2) MA organizations cannot submit
MYBE applications later than July 31 of
the contract year; and (3) 25 percent of
the value of the MYBE will be retained
by the government. The MA
organization would submit, for each

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plan or segment, a revised bid and any
supporting documentation related to the
enhancement, including information on
where the revenue requirements were
overstated in the annual June bid
submission. We will consider whether
there is a current year MYBE request
when analyzing a plan’s bid for the
following year. Continuing current
practice, we will release guidance on
the revised MYBE bid submission,
including what types of non-drug
MYBEs will be allowed and what
documentation is required, in the
annual Call Letter.
We consider this an interim policy for
the initial years of the competitive
bidding system (when drug benefit and
regional plan pricing will be new
terrain). We will review whether there
is a continuing need for this policy.
We will allow the following
exceptions to this policy of restricted
MYBEs:
PACE plans will be allowed to offer
MYBEs to non-drug benefits on a flow
basis (unrestricted MYBEs), given the
special nature of these plans and for the
reasons specified above with respect to
the ability of these plans to contract on
a flow basis. (Under sections
1894(b)(1)(A) and 1934(b)(1)(A) of the
Act, PACE plans are required to offer
enrollees a package of benefits tailored
to individual needs, as determined by
the PACE interdisciplinary team.
Because PACE enrollees may receive
additional services at any point in the
contract year, we note that an enrollee’s
access to additional benefits mid-year is
in compliance with existing PACE
statutory requirements and therefore in
a technical sense is not the same as a
mid-year expansion of benefits for MA
plans.)
Employer and union group health
plans. We recognize that employers and
unions offering group health plans
through an MA organization may
operate on different bidding and
negotiation timelines. Employer and
union group health plans not open to
general enrollment will be allowed to
offer MYBEs on a flow basis. This
includes both the ‘‘800–series’’
employer-only plan and the new type of
employer and union plan, where we
directly contract with the employer and
union offering an MA product. As noted
above, consistent with past practice, we
will publish separate guidance on
employer/union group health plans.
However, an MA plan will be subject
to the restricted MYBE rule if it is a plan
that enrolls both individuals and
employer and union members, that is, a
plan open to general enrollment.
(‘‘Plan’’ in this context refers to the
benefit offering of an MA organization

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under an MA contract. MA
organizations may offer multiple
‘‘plans’’ in a service area under one MA
contract, including a mix of plans open
to any Medicare beneficiary and plans
open only to Medicare beneficiaries
covered under an employer/union
retiree plan.). Employers would still be
free to enhance benefits mid-year for the
part of the package that is a ‘‘wrap­
around’’ to the MA plan and that is only
available to employer and union
members. However, it should be noted
that ‘‘wrap-around’’ benefits are not
technically part of the MA plan.
Comment: Several commenters were
concerned that the MA bidding process
is inappropriate for Special Needs Plans
(SNPs), given the unique elements
involved in managing the care of high
risk and high cost beneficiaries. They
compared SNPs to PACE organizations,
which we are excluding from the Part A
and B bidding process. They also
indicated that the MMA explicitly
excludes SNPs from the calculation of
the Part D national average premium,
and stated that this exclusion should be
extended to bidding for Part A and B
benefits. These commenters are
concerned that including SNPs in the
bidding process could affect
participation rates by plans, thereby
limiting access for beneficiaries to these
types of plans. A few commenters also
suggested that we could use a separate
Part A and B benchmark for SNPs in
recognition of the expanded benefits
offered the enrollees in SNPs.
Response: First, the comparison of
PACE plans to SNPs is not accurate
from a statutory perspective, because
PACE plans are governed by section
1894 of the Act, which is separate from
the statute governing the MA program.
The fact that PACE plans are governed
by a separate statutory authority gives
us the discretion to exempt PACE plans
from the MA bidding process. However,
SNPs are created under the MA statute,
at section 1859(a)(6) of the Act. SNPs
are coordinated care plans, per section
1851(a)(2)(A)(ii) of the Act. SNPs are
governed by the payment provisions
that apply to all coordinated care plans
in the MA program. Section 1854(a)(6)
of the Act requires all MA plans (other
than MSA plans) to submit aggregate
bids: a basic A/B bid, a prescription
drug bid if applicable, and a
supplemental bid, if any. Therefore,
SNPs cannot be excluded from the
bidding process. Moreover, SNP are
paid under section 1853 of the Act, the
same provision as other MA plans.
If the commenter is referring to
Medicaid benefits when referring to the
expanded benefits offered by SNP plans,
we would like to emphasize that the

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basic A/B bid is only for coverage of
original Medicare benefits.
Comment: Several commenters stated
that the actuarially equivalent costsharing requirement will cause
difficulty for SNPs serving dual eligibles
because the cost-sharing payments made
by State Medicaid agencies on behalf of
dual eligibles are not required to equal
the full Medicare cost-sharing amount.
Response: SNPs serving dual eligibles
must show in their bids a level of cost
sharing that is actuarially equivalent to
the level of cost sharing charged to these
beneficiaries under the original
Medicare program option.
Comment: Several commenters asked
whether and how the MA bidding
methodology would apply to
demonstration plans, including but not
limited to those serving dual eligibles.
Response: The application of MA
bidding rules to demonstration plans
depends on the specific demonstration
authority. Decisions about which
demonstrations will be expected to
submit bids will be announced in the
Advance Notice of Methodological
Changes for 2006 MA Payment Rates,
which we expect to publish February
18, 2005 on our website at http://
www.cms.hhs.gov/healthplans/rates/
default.asp.
Comment: Many commenters
recommended that we exclude the costs
for MA enrollees with ESRD from the
bidding methodology for 2006, both for
the Part A and B bids and the
supplemental bids. Commenters stated
that MA organizations would have
inadequate experience with the new
ESRD payment methodology to submit
sound bids in June 2005. A delay in
including these services in the bid is
also desirable to these commenters
because it removes an added degree of
complexity from the bidding process at
a time when MA organizations are
initially becoming familiar with the new
and otherwise complicated
requirements. One commenter also
stated that ESRD enrollee costs should
be omitted from both the basic A/B bid
and supplemental benefits bid because
payment for ESRD MA enrollees is
based on a different risk adjustment
methodology such that the meaning of
‘‘1.0’’ is different for ESRD than nonESRD enrollees. The commenter added
that MA plans are paid for ESRD
enrollees in accord with a different ‘‘rate
book’’ that is based upon state rates
rather than county rates.
Response: The MMA amended section
1853(a)(1)(H) of the Act to state that we
‘‘may apply’’ the competitive bidding
methodology to MA enrollees with
ESRD, with appropriate adjustments
made through application of the ESRD

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4641

risk adjustment methodology. Since
publication of the proposed rule, we
have modeled bidding and payments
under the new system, and have
developed a way to apply the bidding
method to ESRD enrollees. This
‘‘merged bid’’ method addresses
commenters’ concern that the ‘‘1.0’’
national average beneficiary does not
mean the same under the non-ESRD and
ESRD risk adjustment models. Our
method involves converting non-ESRD
and ESRD beneficiary risk scores (which
are based on different risk adjustment
models) into a common metric so that
all costs for projected enrollees can be
combined into a weighted average per
capita benchmark and a weighted
average basic A/B bid.
Therefore, beginning contract year
2007, we will require that MA
organizations include costs for ESRD
enrollees in their plan bids. As
discussed above, ESRD enrollees must
be subject to the same premium and cost
sharing as other plan enrollees under
the uniformity of premiums provision in
§ 422.262(c), for both original Medicare
benefits and supplemental benefits. For
this reason, we believe that the
estimated costs for all enrollees should
be included in plan bids. We will
explain the ‘‘merged bid’’ method in the
2006 Call Letter for 2007 contracts and
in the 2006 Instructions for Completing
the 2007 MA Plan Bid Form.
However, we have concluded that we
will not implement the merged bid
method for incorporating ESRD
beneficiary costs into plan bids for the
2006 contract year, because of the
transition blend requirement for
payments to aged and disabled MA
enrollees. While 25 percent of aged/
disabled MA payments must be based
on the demographic model and 75
percent of payments on the risk
adjustment model, 100 percent of ESRD
payments must be based on the risk
adjustment model. Under the bidding
methodology, the transition payment
blend must be reflected in the bid, since
plans are paid either their bid (plus
rebate) or part of their bid (benchmark,
with the remainder of the bid coming
from beneficiary basic premiums). We
concluded, therefore, that exclusion of
ESRD costs from plan bids for 2006
would reduce complexity in what will
be an unfamiliar bidding process.
Guidance on excluding ESRD costs from
the 2006 bid will be provided in the
2005 Instructions for Completing the
2006 MA Plan Bid Form. See the
subpart G preamble for information on
payments for ESRD enrollees.
Comment: Several commenters
recommended that we consider further
delaying inclusion of costs for ESRD

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enrollees in the basic A/B bid and
supplemental bids in years beyond
2006.
Response: We believe that, beginning
in contract year 2007, it will be feasible
to implement a merged bid methodology
for MA plans where non-ESRD and
ESRD costs are appropriately weighted
together into a single bid because 100
percent of MA bids and payments can
be based on the CMS-HCC risk
adjustment models. Moreover, the
uniformity requirement means that it is
to the MA organization’s advantage to
include ESRD enrollees in its bid. ESRD
enrollees would be subject to the costsharing rules and premium amounts
based on the plan’s estimated non-ESRD
enrollee costs. For example, if plan bids
are calculated based only on lower-cost
non-ESRD enrollees, MA organizations
would have their supplemental
premium under-funded because ESRD
beneficiaries are likely to use more of
certain supplemental benefits such as
cost-sharing reductions and drug
coverage. A significant financial impact
may result from plan pricing based only
on unit costs for services and expected
utilization for the plan’s non-ESRD
enrollees.
Bid requirements
Proposed § 422.254(a) and (b)
implement sections 1854(a)(1)(A) and
1854(a)(6)(A) of the Act, which set forth
requirements for plan bids. MA
organizations must submit an aggregate
monthly bid amount for each MA plan
the organization intends to offer. We
proposed that each bid submission for
an MA plan represents the MA
organization’s estimate of its average
monthly estimated required revenue to
provide coverage in the service area of
the plan for an MA eligible beneficiary
with a nationally average risk profile;
that is, the aggregate bid is a
standardized bid. This aggregate bid is
the sum of several amounts the plan
estimates are its revenue requirements:
(1) the ‘‘unadjusted MA statutory nondrug monthly bid,’’ to provide original
Medicare benefits (which we also call
the ‘‘basic A/B bid’’); (2) the amount to
provide basic prescription drug
coverage; and/or (3) the amount to
provide supplemental coverage, if any.
We proposed at § 422.254(b)(2) that
each bid would be for a uniform benefit
package for the service area (or service
area segment, if applicable, for local
plans). Plan premiums and all
applicable cost sharing would also be
uniform.
We stated in proposed § 422.254(b)(3)
that the bid submission contain all
estimated required revenue, including
administrative costs and return on

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investment (profit or retained earnings).
We stated that a determination that
supplemental benefits are appropriately
priced is essential for the integrity of the
bidding process. A plan could overstate
its revenue needs for covered services
with the intention of maximizing those
payments while under-pricing
supplemental benefits to make the
offering attractive to enrollees. To
prevent this kind of strategy, we
indicated that the accurate pricing of
Part A, Part B, and Part D benefits and
supplemental benefits will have equal
importance in the bid review process.
We will verify the reasonableness of
these projections as part of the bid
review process (in the same way that we
will verify the reasonableness of plans’
projections of enrollment numbers and
enrollment mix for an optional
supplemental product).
Supplemental benefits
We proposed at § 422.254(b)(3) that
when estimating required revenue, a
plan will include adjustments for the
effect that providing any non-Medicare
benefit has on utilization. We proposed
that this requirement would apply to
both mandatory and optional
supplemental benefits. In both the Title
I and Title II proposed rules, we took
the position that the basic portion of the
bid should represent basic benefits only;
it should not reflect the utilization
impact on basic benefits induced by the
presence in the benefit package of
supplemental or enhanced benefits. We
proposed that this utilization impact
should be included in the pricing of
supplemental benefits (Title II) or the
enhanced portion of the bid (Title I). We
took this position to ensure the integrity
of the bid. In other words, when a plan
offers a benefit package that includes
reductions in cost sharing, the pricing of
such a mandatory supplemental benefit
would include not only the cost of
‘‘buying down’’ the cost sharing (that is,
the estimated revenue needed to cover
the amounts enrollees would have
otherwise paid as cost sharing), but also
the cost of financing the expenditures
associated with the additional
utilization resulting from offering the
cost-sharing benefits.
We also proposed to exercise our
authority under section 1856(b) of the
Act to establish a rule prohibiting MA
organizations from offering, as optional
supplemental benefits, reductions in
Part A, Part B, and Part D cost sharing,
or enhancements to Medicare Parts A
and B benefits. Under the rule, MA
organizations will still be permitted to
offer non-Medicare benefits, for
example, dental and optical services as
optional supplemental benefits.

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We stated in proposed § 422.254(b)(4)
that the bid amount is for plan
payments only but must be based on
plan assumptions about the amount of
estimated revenue required from
enrollee cost sharing. The estimate of
plan basic cost-sharing for plan basic
benefits must reflect the requirement
that the level of cost sharing MA plans
charge to enrollees must be actuarially
equivalent to the level of cost sharing
(deductible, copayments, or
coinsurance) charged to beneficiaries
under the original Medicare program
option.
Comment: A number of commenters
disagreed with CMS’ proposal that MA
organizations develop a supplemental
bid reflecting the effects on utilization
of Part A and B services of providing
non-Medicare covered benefits. First,
most commenters stated that the
benchmark, which is the maximum
amount we will pay for coverage of Part
A and B benefits, reflects Medicare FFS
costs. Medicare carriers and
intermediaries make payments for
Medicare Part A and B services based on
fee schedules without regard to whether
the beneficiaries have supplemental
coverage. According to the commenters,
because most Medicare beneficiaries
have some form of private or
governmental supplemental coverage
that has an impact on these costs, the
MA benchmark also reflects this impact.
The commenters believe that because
‘‘induced demand’’ is already accounted
for in the benchmark, requiring plans to
shift these costs to the supplemental
benefit package would result in a
misalignment of the relationship
between the basic A/B bid and the
benchmark.
Second, several commenters
recommended that allocation of costs to
the supplemental bid may have a
tangible effect on the MA organization
and on beneficiaries. To the extent that
the MA plan’s Part A and B bid is below
the benchmark, moving these costs from
the basic A/B bid to the supplemental
bid increases the amount of savings, and
increases the supplemental premium by
the same amount. However, because we
retain 25 percent of the savings, the
rebate dollars will not fund 100 percent
of the increase in the supplemental
premium attributable to these costs.
Thus, the proposed policy is likely to
produce an increase in the aggregate
beneficiary premium. In contrast, if
utilization is included in the basic
portion of the bid, basic bids will be
higher and bid and premiums for
supplemental benefits will be lower.
Third, commenters also were
concerned that there are no existing
standards to evaluate the effect that

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providing non-Medicare benefits has on
utilization and therefore on premiums
and competition. For example, one
commenter noted that frequently there
are multiple impacts from a single
benefit change. For example, lower
primary care physician (PCP) copays
may drive higher utilization among
primary care physicians; however, it
may also help result in lower specialist,
hospital and prescription drug
utilization. Several commenters
concluded that it would be impossible
to apply this requirement uniformly and
therefore equitably.
One commenter noted another barrier
to uniform application of this
requirement: a large portion of an MA
plan’s enrollment will have
supplemental coverage through a source
other than the MA organization (for
example, Medicaid, other government
programs, employee benefit plans,
Medigap plans), and these incremental,
additional costs will necessarily be
reflected in the level of the basic A/B
bid. Therefore, this requirement would
result in an uneven playing field among
competitors. Finally, another
commenter asked where plans will
obtain data to make these adjustments
and whether additional adjustments
would be needed for potential adverse
selection.
Response: We believe that the pricing
of the supplemental benefit is critical to
the integrity of the bidding process. For
this reason, we proposed that when a
plan offers a benefit package that
includes reductions in A/B cost sharing,
the price of the supplemental benefit
would include not only the cost of
‘‘buying down’’ the cost sharing (that is,
the estimated revenue needed to cover
the amounts enrollees would have
otherwise paid as cost sharing), but also
the cost of financing the expenditures
associated with the additional
utilization resulting from offering the
cost sharing benefits. We believe it was
important to align pricing policies for
medical benefits (in the MA rule) and
drug benefits (in the Part D rule).
We recognize, however, that it can be
very difficult to disentangle the effects
of induced utilization from the effect of
plan management of utilization of
medical benefits. For Parts A and B
benefits, the effect of induced demand
may be insignificant. For example, it is
reasonable to recommend that there is
no induced demand for hospital
services or skilled nursing facility (SNF)
(additional hospital admissions)
because of plan utilization management
of those services. Thus, it is unlikely
that a change in cost sharing (up or
down) would create or reduce
utilization of hospital or SNF services.

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On the Part B side, induced demand
here may also be quite limited due to
plan utilization management. In contrast
to Part A and B benefits, there is likely
to be induced demand for Part D
benefits, especially for those individuals
who will be receiving new coverage.
Also, there is likely to be some induced
demand if supplemental benefit options
are provided that reduce the initial
deductible or fill in part of the what is
lacking in the standard Part D package.
We further recognize that there are no
universal actuarial standards for
separating these effects. Therefore, after
discussion of the public comments and
further analysis, at this time we will not
require that the non-drug portion of the
supplemental bid be adjusted to include
expenditures associated with induced
demand for Medicare-covered benefits
resulting from offering cost sharing
reductions.
Therefore, in this final rule, we are
deleting the sentence at proposed
§ 422.254(b)(3) that plan assumptions
about revenue requirements must
include adjustments for the utilization
effects of non-drug cost sharing
reductions. As we indicate in responses
to comments below, we will not
implement this aspect of estimating
revenue requirements for the Part A and
B benefits through rule making.
However, we have the authority to
refine guidance in the future on how
MA organizations should estimate their
revenue requirements under
§ 422.254(b). For the Part D benefit, the
bid amount must reflect an adjustment
for the effect that providing alternative
prescription drug coverage (rather than
defined standard drug coverage) has on
drug utilization. Costs associated with
any increased utilization must be
included in the price of the drug portion
of the supplemental bid for MA-PD
plans. (See proposed § 423.265(d)(2) and
the discussion in the F preamble of
August 3, 2004 proposed rule for the
Medicare prescription drug benefit.
As discussed below, we intend to
analyze the effects of induced demand
in the near future and will review this
policy.
Comment: One commenter suggested
that we delay implementation of this
requirement concerning pricing induced
demand in the supplemental package
for a period of 2 years (until 2008) for
both regional PPO and local plans.
Another commenter was concerned
about the short timeframe for a 2006
implementation of this proposal and
made the following suggestions for
implementation: (1) we develop a
standard data set or set of utilization
assumptions and distributions with
which to quantify the utilization impact;

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4643

and (2) plans should have the option of
using those assumptions in their bid or
plan-specific assumptions that are
actuarially justified.
Response: As indicated above, we are
withdrawing our proposal. However, we
believe that improvements can be made
in the accuracy of pricing supplemental
benefits. We intend to conduct analysis
in the near future using accumulated
bidding and payment data, because we
believe that over time it is possible to
develop factors for the MA program that
could be applied to estimate the cost of
induced demand.
Comment: Some commenters stated
that this requirement, coupled with the
actuarially equivalent cost sharing
requirement at section 1852(a)(1)(A),
would cause particular difficulty for
Special Needs plans (SNPs). Attribution
of ‘‘induced demand’’ costs to the A/B
benefit package would increase the cost
of the bid and reduce potential savings,
and shifting these costs to the
supplemental benefit package would
result in increased premium costs for
SNP beneficiaries, because SNP cost
structures may limit opportunities for
rebates. Limited rebates also could
result in cost shifting to plans or, in the
case of duals, to States that cover costsharing amounts.
Response: As noted above, we are
withdrawing this proposal. This
withdrawal applies to all MA plans,
including SNPs.
Comment: Two commenters disagreed
with our proposed rule prohibiting MA
organizations from offering, as optional
supplemental benefits, reductions in
Part A, Part B, and Part D cost sharing,
or enhancements to Medicare Parts A
and B benefits. One commenter
requested that we continue to permit the
flexibility of offering reductions of Parts
A, B, and D cost sharing as optional
supplemental benefits, because offering
separate plans requires separate bids,
system enhancement, and modification
of enrollment and eligibility procedures.
The other commenter requested that we
make an exception to this rule for
employer group plans.
Response: First, under Part D,
optional supplemental benefits do not
exist. Under § 423.265(c), we are
requiring that enhanced alternative
coverage be a uniform package for all
enrollees. Second, in terms of Part A
and Part B benefits, we would exclude
from this requirement employer and
union group health plans that are not
open to general enrollment, which
includes both the ‘‘800–series’’
employer-only plan and the new type of
employer and union plan, where we
directly contract with the employer and/
or union offering an MA product.

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However, an MA plan that enrolls both
individuals and employer and union
group health plan members (in other
words, a plan open to general
enrollment) would be subject to the
restricted optional supplemental policy.
Employers would still be free to fund
‘‘wrap-around’’ optional supplemental
benefits that would be only available to
employer/union members. The ‘‘wrap­
around’’ benefits are not technically part
of the MA plan.
MA organizations would still be able
to provide choice by offering multiple
plans within the same service area that
have different mandatory supplemental
benefits. Many MA organizations take
this route today.
Comment: Several commenters
support the proposed policy that MA
bidders submit a single bid amount in
2006 based on the blending of the
demographic and risk adjustment
payments as required under
§ 422.308(c)(2)(ii)(B). The reasons cited
are the administrative and analytic
complexity of developing two bids to be
compared against two different
benchmarks.
Response: We will provide
instructions for determining a blended
bid, in the Instructions for Completing
the MA Plan Bid Form. Information
regarding payments based on blended
bids will be provided in the Advance
Notice of Methodological Changes for
MA Payment Rates.
Actuarial equivalence
In the August 2004 proposed rule, we
discussed at length how to implement
the requirement at § 422.254(b)(4) to
determine an actuarially equivalent
amount of cost sharing. MA plans must
provide Medicare-covered benefits to
enrollees. The MMA amended section
1852(a)(1)(B) of the Act to include the
term ‘‘benefits under the original
Medicare FFS program option,’’ which
are defined as those items and services
(other than hospice care) for which
benefits are available under Parts A and
B to individuals entitled to benefits
under Part A and enrolled under Part B,
with cost-sharing for those services as
required under Parts A and B or an
actuarially equivalent level of costsharing as determined in this part.’’
(Cost sharing refers to service-specific
cost sharing for Part A and Part B
benefits; it does not include a
beneficiary premium.)
First, we discussed the current
approach, the national uniform dollar
amount. The MMA provision on
determining whether a rebate is
applicable is similar to a provision that
continues to apply to MA plans through
2005, dealing with the determination of

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‘‘excess amounts’’ used to fund extra
benefits. Before 2006, when Medicare
payments (based on administratively-set
amounts) exceed the revenue a plan
needs for providing the Medicare
benefit, the plan must ‘‘return’’ the
excess amount to enrollees in the form
of extra benefits (or cost sharing
reductions). An excess amount exists if
CMS’ average capitation payment for the
plan exceeds the adjusted community
rate, taking into account cost sharing for
Medicare services that is the
responsibility of the enrollees. Through
2005, all plans are required to use a
uniform national figure that we provide
as the amount to be subtracted from
their computed revenue needs for the
Medicare benefit package to determine
the excess amount. The uniform
national dollar amount represents our
projection of the monthly actuarial
value of Medicare coinsurance and
deductibles (that is, the amount, on
average, of cost-sharing expenses
beneficiaries incur in receiving
Medicare services across the nation).
We recognized that this approach
does not adequately recognize
geographic variations in cost sharing,
cost differences among private health
plans, and utilization and price
differences between private plans and
FFS Medicare. It distorts the statement
of revenue needs of a plan. If a plan
operates in a high-cost area, the national
actuarial value of cost sharing may
understate cost sharing in the area,
while in low cost areas, cost sharing is
overstated.
We proposed several alternative
approaches to defining an actuarially
equivalent amount of cost sharing for
the basic A/B bid amount: (1) localized
uniform dollar amount; (2) plan-specific
approach; and (3) proportional
approach. In this final rule, we also
make a clarifying change to
§ 422.254(c)(5) to reflect the statutory
requirement.
Localized uniform dollar amount
We would publish localized (for
example, county-level or MSA-level)
cost-sharing values, and an MA
organizations would determine its basic
A/B bid for a plan by subtracting the
appropriate geographically weighted
average of these cost sharing values for
the plan’s service area from the plan’s
stated revenue needs. The local cost
sharing values would be based on actual
per-beneficiary FFS cost sharing,
projected to the contract year and
standardized to a 1.0 risk score.
Plan-specific approach
The MA organization would use its
own pricing and utilization assumptions

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to determine a basic A/B bid for its plan,
as if the plan were offering Medicareonly benefits under Medicare cost
sharing rules or an actuarially
equivalent structure. A cost-sharing
structure would be actuarially
equivalent if the projected average cost
sharing as percent of the sum of average
cost sharing and projected average plan
payout equals the percentage using
Medicare’s cost-sharing rules, based on
the projected experience of the same
group and using the same pricing
assumptions. The average amount of
cost sharing and the average plan
revenue requirements for the assumed
basic A/B package would then be
adjusted to reflect cost-sharing and plan
requirements based on an enrollee with
a national average risk profile. The
adjusted plan revenue requirements
would serve as the organization’s basic
A/B bid.
Proportional approach (including
national, regional, or local proportions)
Actuarial equivalence under this
approach would be met if the ratio of a
plan’s cost sharing amount for the basic
A/B bid to the total cost of plan benefits
equals this proportion under original
Medicare. For example, if the national
average actuarial value of cost sharing
under original Medicare in a year were
16.8 percent of the total (value of cost
sharing plus value of benefits, using the
actual 1999 figure for Medicare), then an
MA plan would have to offer a basic A/
B bid based upon a plan basic costsharing amount that is 16.8 percent of
total costs. We would announce the
projected percentage of total
expenditures that represent cost sharing
in the same way that we currently
announce the national average actuarial
value of Medicare cost sharing as part of
the rate announcement for private
health plans. To address the issue of
geographic variation in cost sharing, we
proposed regional or local proportions
over national proportions. While a fixed
national proportion recognizes variation
in expenditures at the health plan level,
even within FFS Medicare there is
significant variation by area in the costsharing proportion, for example, for Part
A ranging from 13 to 20 percent in 1999
(compared to the national average of
16.8 percent).
We further proposed breaking
regional or local proportions into
service-specific proportions of cost
sharing applied to the different
categories of expenditures health plans
would have (for example, Part A versus
Part B, or further disaggregated into
inpatient, SNF, home health, physician,
and/or outpatient).

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We received a number of comments
on the issue of actuarial equivalence,
revealing a range of opinion. A few
commenters recommended the local
uniform dollar amount method, several
recommended the plan-specific method,
and some preferred the proportional
method. Some commenters did not
specify a choice but recognized the
importance of accounting for regional
variation in costs, with some expressing
concern about the plan-specific method.
Comment: One commenter stated that
CMS should retain the current uniform
absolute dollar method. However, the
commenter believes that CMS should
adjust from national to local dollar
amounts. The commenter believes that
this aspect of the program, which is
familiar to the industry, should remain
constant given substantial changes to
plan reimbursement under the MA
program and the introduction of
competitive bidding. The commenter
also recommended that the plan-specific
approach creates the possibility that the
projections will be inaccurate and result
in unfair cost-sharing burdens on
members and hospitals. Thus, the
proportional method may suffer from
the same flaw, as it also relies on plan
pricing assumptions.
The plan-specific method drew the
most commentary from those in favor of
and those opposed to this approach.
Several commenters felt the planspecific method would be the most
precise because it was based on each
plan’s own utilization and pricing
estimates, reflects the different mix of
services in managed care versus FFS
Medicare, and would be most
administratively efficient since it is
based on data readily available.
Several commenters objected to the
plan-specific method. One commenter
felt this approach would allow MA
organizations to use unreasonable
assumptions, and another commenter
objected because it would disadvantage
organizations that tightly manage care
and/or have more efficient provider
networks. Commenters objecting to the
plan-specific approach supported
beneficiary cost-sharing rules that
require the same dollar amount of cost
sharing across all affected plans in a
local geographic area rather than any
method that would allow variation by
plan.
Response: There are two basic
principles behind Section 1852(a)(1)(B)
of the Act. First, the MA program must
reflect a feature of the Medicare
program, that a certain share of the cost
of covered care is to be borne by
beneficiaries (or third parties paying on
behalf of beneficiaries), and not the
government. Therefore the MA

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enrollee’s share of costs will not be
financed by government funds in the
bidding system, unless rebate dollars are
available. Second, for competitive
bidding, the determination of whether a
rebate (bid below benchmark) or a
premium (bid above benchmark) is
applicable to a plan must be based on
an ‘‘apples-to-apples’’ comparison of the
same set of benefits (Part A and Part B
benefits) reflecting a specific costsharing structure.
Section 1852(a)(1)(B) of the Act affects
how MA organizations develop their
basic A/B bids. It does not determine
what a plan’s actual cost-sharing
structure will be, because a plan can
have an actuarial value of cost sharing
that is less than that under original
Medicare.
However, actual average per-member­
per-month (PMPM) cost sharing under
any plan offered by an organization
cannot exceed the actuarial value of the
FFS average. (This limit on actual inplan cost sharing is a continuation of
the pre-existing M+C provision except
that, unlike the earlier M+C provision,
the limit on the cost sharing does not
include the premium.) Also excluded
from this limit, and excluded from the
Part A and Part B cost-sharing
computation in the bid, is any cost
sharing for Part A and Part B benefits
that enrollees of MA regional plans
obtain from non-network providers
(because section 1852(a)(1)(B)(ii) of the
Act specifically excludes out-of-network
cost sharing (section 1858(b)(2)) from
the determination of the ‘‘actuarially
equivalent level of cost-sharing with
respect to benefits under the original
Medicare fee-for-service program
option’’). We have made a change to
§ 422.254(b)(4) to conform the
regulation to the statutory provision.
After further analysis, we do not
support the use of localized dollar
amounts. This approach shares a key
problem with the national uniform
dollar amount. An average absolute
dollar amount would be too small for
some plans in a local area or region
(leading to shortfalls in rebates that
could otherwise be used to fund
supplemental benefits), yet too large for
other plans (leading to bids lower than
a plan’s estimated revenue
requirements). In either case, the
distortion we are seeking to minimize
would remain.
We believe the proportional approach
is the best approach, based on local
proportions that are service-specific.
This approach supports the MMA goal
of making ‘‘apples to apples’’
comparisons among basic A/B bids,
which creates a level playing field
because all MA organizations in a

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market area must apply the same
standards.
This approach has the advantage over
the local uniform dollar amount because
plan pricing assumptions are built into
the total value of the benefit package.
Also, plans that efficiently manage care
would be disadvantaged by local
uniform dollar amounts because these
amounts would overstate cost-sharing
revenue, thus lowering the plan bid and
resulting in larger rebates than the plan
could actually ‘‘afford.’’
We believe the proportional approach
is more straightforward to understand
and implement than the plan-specific
approach, which is crucial in the
context of a bidding methodology that
must build in several complex
adjustments (for example, the
geographic ISAR adjustment). The plan
specific method is more precise (in that
it reflects not only plan pricing but also
plan utilization assumptions) but it is
the most complicated method because it
requires organizations to figure out the
utilization effects of a cost-sharing
structure they likely will not use in
order to determine how plan payout and
member cost sharing would change if
the package were based on original
Medicare cost sharing.
Comment: Several commenters
requested that we consider using, for
each local area or region, proportions by
service category. The commenters
believe that this refinement would yield
proportions more closely reflecting the
cost sharing associated with the mix of
services used in these areas and could,
therefore, result in a more accurate
projection of the actuarially equivalent
costs sharing in each geographic area.
Response: We agree with the
commenters and intend to incorporate
service-specific categories in the bid
pricing tool. We are considering the
following approach. Each year the
Office of Actuary (OACT) would
publish five proportions for each county
representing average FFS cost-sharing:
Part A inpatient hospitalization; Part A
SNF; Parts A & B home health; Part B
outpatient facility; Part B, all other. We
will provide guidance on the
proportional method and details on the
service proportions in the Instructions
for Completing the MA Plan Bid Form.
Comment: Two commenters also
suggested that we allow MA
organizations to choose whether to use
the plan-specific or proportional
method.
Response: We do not support the idea
of allowing MA organizations to choose
which method to use when estimating
their MA bids. This would create further
complexity in a complex bidding
process. For example, it could create

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confusion in bidding because each
method could interact differently with
the other rate and payment adjustments
required under the MMA. It also would
make it difficult for us to apply
consistent standards in our bid review
process. We want to set a single
standard that applies to all MA
organizations because we believe that is
the intent of the statute and it ensures
everyone is subject to the same rules.
Comment: Several commenters
recommended that if we select the
proportional method, the proportions
should be established for each local area
or region and also disaggregated by
service category (for example, inpatient
hospital cost sharing versus physician
cost sharing). This refinement would
yield proportions that will more closely
reflect the cost sharing associated with
the mix of services used in these areas
and could, therefore, result in a more
accurate projection of the actuarially
equivalent costs sharing in each
geographic area. If we select the
proportional method, one commenter
stated opposition to the development of
proportions based on assumptions of
how health plan enrollees generally use
services, because it would be difficult
for us to develop a distribution of
services that would be consistent with
the experience and practices of
individual plans.
Response: We agree that further
disaggregation of local or regional
proportions by service category would
result in proportions that are more
accurate. See the discussion above for
our proposed approach. Details on the
method and the proportions for 2006
will be published in the Advance Notice
of Methodological Changes for MA
Payment Rates, which we expect to be
released on February 18, 2005 on the
CMS website at http://
www.cms.hhs.gov/healthplans/rates/
default.asp
Information required
Proposed § § 422.254(c) and (d) would
implement section 1854(a)(6)(A) of the
Act by setting out the information MA
organizations must submit for
coordinated care plans and PFFS plans.
Proposed § 422.254(e) specified
information that must be submitted for
MSA plans.
Proposed § 422.254(c) established
that, in addition to submitting an
aggregate bid amount, MA organizations
must submit the proportions of the
aggregate bid attributable to coverage of
Part A and Part B benefits, Part D basic
benefits, and supplemental coverage.
They must also identify the plan type,
projected enrollment, any capacity
limits, the actuarial bases for

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determining the bid amounts and
proportions, information on the plan’s
cost sharing, including the actuarial
value of deductibles, coinsurance, and
co-payments, and information required
to calculate risk corridors for regional
plans for 2006 and 2007. Additional
information required on drug coverage
was proposed at § 423.265, which
implements section 1860D–11(b) of the
Act.
In the final rule, we added
§ 422.254(c)(9) to address information
requirements for the geographic IntraService Area Rate (ISAR) adjustment.
See the G preamble discussion of
§ 422.308(d) regarding our policy
decision on the geographic ISAR
adjustment.
Under proposed § 422.254(d), for MA
organizations required to provide a
monthly rebate because the plan bid is
less than the plan benchmark, the
organization must submit information to
us about how this rebate would be
allocated across the statutorily
mandated options specified at
§ 422.266(b). All rebate dollars must be
applied to a mandatory supplemental
benefit.
Since MA regional plans may serve
multiple regions, and each region is a
separate service area, section
1854(a)(1)(C) of the Act requires us to
encourage the offering of regional plans
by developing procedures to allow MA
organizations to file consolidated
information for multi-region MA plans
(including national plans). We believe
our new bid pricing tool will capture
MA pricing information in an efficient
manner and reduce filing burden for all
MA organizations, including those
offering national plans. Much of the
supporting documentation required for
the Adjusted Community Rate Proposal
(ACRP) will no longer be required.
Specifically, we will no longer collect
commercial pricing and corporate
financial data, and the number of costsharing categories has been reduced. In
addition, the electronic bid form
includes data elements that were filed
paper format for the ACRP process, for
example, actuarial utilization and cost
data, trends in medical expenses, and
non-medical expense projections. We
are committed to working with
organizations to reduce duplicative
information in the application, bidding,
and contracting process. For example,
we would expect that a single legal
organization offering an MA regional
plan in more than one region would
submit much the same legal and
organizational information for all
regions, with the main differences being
the provider networks. We expect the
application process to be an area where

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paperwork burden can be reduced. Ideas
for consolidating regional filings that are
under development include a master
contract, a single actuarial certification
covering multiple bids, and
consolidated supporting exhibits across
regional bids where there are common
elements (for example, the development
of manual rates). We will continue to
identify ways to consolidated filing as
the program develops.
In addition, we will apply the
projected revenue and medical expense
values (including administrative
expenses) captured by the MA bid
pricing tool to calculate the risk corridor
amounts used to determine risk-sharing
payment adjustments for regional MA
plans for contract years 2006 and 2007.
See the subpart J preamble for the
discussion of risk sharing on costs of
providing original Medicare benefits
and rebatable integrated benefits. See
the Advance Notice of Methodological
Changes for Medicare Advantage
Payment Rates for guidance on
information to submit for determination
of risk sharing payments.
Finally, section 1854(a)(6)(A)(iii) of
the Act gives us the authority to require
information in addition to that listed
above to allow us to verify the actuarial
bases for plan bids. We expect to use the
authority given us under this provision
in two ways. First, our review of an
organization’s bid submissions may
identify problems that would trigger our
request for additional, more detailed
information (for example, data the MA
organization used on average utilization
and pricing to model the expected
distribution of costs in the plan bid). We
would not want to require such detail
for every plan bid in the initial
submission, and we are confident that
forthcoming bid submission guidance
(in the annual Instructions for
Completing the MA Plan Bid Form) will
limit the occurrences of our requests for
additional data. Second, as we did with
the ACRP tool for the M+C program, we
expect to make annual updates to the
bid pricing tool. The updates may or
may not involve changes to the
information required to verify actuarial
bases of the bid. We will announce the
updates in the annual Call Letter.
Special rules for MSA plans
Proposed § 422.254(e)(2) would
implement sections 1854(a)(3) and
1854(b)(2)(D) of the Act by indicating
that bids are not required for MA MSA
plans. That is, MA organizations will
not complete the bid pricing tool
developed for non-MSA plans.
However, for MSA plans MA
organizations must file a bid submission
with information on coverage, the

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enrollment capacity, the monthly MSA
premium amount, which is the amount
of revenue the plan requires to offer
original Medicare benefits (analogous to
the basic A/B bid for other MA plans).
MA organizations must also submit the
amount of the MSA deductible, and the
beneficiary supplemental premium, if
any. MSA plans are prohibited from
offering Part D coverage (although MSA
enrollees may choose to enroll in a
prescription drug plan).
Comment: One commenter
recommended that we consider
allowing MA organizations to subsidize
the Part D premium for dual eligible
beneficiaries with revenue from the
medical benefits part of the MA-PD
plan.
Response: We believe the
commenter’s phrase ‘‘the medical
benefits part’’ is referring to Part A and
B benefits. MA organizations offering
the Part D benefit may fund a reduction
in the Part D premium with rebate
dollars, pursuant to section
1854(b)(1)(C)(ii)(II) of the Act, and as
proposed at § 422.266(b)(2). However,
the resulting premium amount must be
uniform for all members of the plan, in
accordance with section 1854(c) of the
Act. A plan may not offer an additional
premium reduction only to a subset of
members (for example, dual eligible
beneficiaries).
Comment: One commenter asked that
we clarify the ‘‘enrollment assumptions
data requirement,’’ that is, how these
assumptions will be used in
computations and how errors in them
will be corrected over time. The
commenter believes that our assumption
about a plan’s enrollment mix will be a
critical competitive factor in
determining how rebate dollars are used
to buy mandatory supplemental benefits
and/or how beneficiary premiums for
mandatory supplemental benefits are
set. Our oversight on this issue will be
vital to ensure a level playing field.
Response: See the discussion in the
subpart G preamble on the geographic
Intra-Service Area Rate (ISAR)
adjustment, which takes into account
the difference between the distribution
of enrollment across counties in the
plan’s service area assumed in the
plan’s bid and the actual geographic mix
of enrollment at the time payment is
made. Also, we will release detailed
guidance on the bidding methodology in
the Instructions for Completing the MA
Plan Bid Form and the Call Letter.
Information on the payment
methodology, including the ISAR
adjustment, will be provided in the
Advance Notice of Methodological
Changes for Medicare Advantage
Payment Rates, published annually on

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our website at http://www.cms.hhs.gov/
healthplans/rates/default.asp.
Comment: Several commenters
supported development of procedures
for MA organizations to file
consolidated bid information for multiregional plans, including national plans,
and believe that this will facilitate the
offering of regional plans.
Response: In light of the statutory
mandate to allow consolidated bids for
multi-regional plans, we are committed
to allowing bid consolidation where
appropriate. However, in order to
maintain the integrity of the bid
submission and review process, section
1854(a)(1)(A) of the Act requires MA
organizations to submit a bid for each
MA region. However, we believe our
new bid pricing tool will capture MA
pricing information in an efficient
manner and reduce filing burden for all
MA organizations, including those
offering national plans. See the
discussion above for examples of
burden reduction in the new bid pricing
tool.
Comment: A few commenters
recommended that we establish
streamlined documentation
requirements for MA organizations to
follow in supporting the actuarial basis
of their bids. The commenter requested
that these requirements strike a balance
between providing us with sufficient
information to review the bid and
ensuring that MA organizations are not
burdened with onerous requirements.
Response: We support the
commenters’ position that the
requirements built into the new bid
pricing tool and supporting
documentation should be thorough
enough to allow a fair and accurate
review of bids but should avoid undue
burden. See the discussion above
regarding the new bid pricing tool MA
organizations will use for bid
submission. Most of the supporting
documentation required for the ACRP
will no longer be required. For example,
we will no longer collect commercial
pricing and corporate financial data,
and the number of cost-sharing
categories has been reduced.
Comment: Several commenters are
interested in having bid formats,
documentation requirements for
submission and criteria for actuarial
substantiation as early as possible to
assist in the bid preparation and to
minimize the uncertainty in dealing
with employer retiree groups and other
contractors, including providers. One
commenter stated that our negotiation
and approval process will be completed
later than most plans’ rate quotes to
employer retiree groups for the
following contract year. To the extent

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that MA organizations must negotiate
changes to retiree premiums, benefit
packages and our payments after these
organizations have provided rate quotes
to employer groups, this destabilizes the
MA organization’s relationship with,
and reduces its appeal to, employer
groups. The commenter indicated that
early and clear expectations of plans’
documentation requirements for
submission would help to minimize
this.
Response: We have been working
hard to develop all aspects of the new
bidding methodology to ease the
transition for all parties. In December
2004, we released for public comment
drafts of the drug and non-drug bid
pricing tools that will, with the plan
benefit package, constitute the annual
June bid submission, with the intention
of developing the new program. We do
recognize the special circumstances
surrounding the offering of employer
and union group health plans (EGHPs),
and as noted above, we will release
separate guidance regarding EGHPs.
Comment: One commenter strongly
objected to the proposed regulatory
requirement that MA organizations that
have Part B-only enrollees submit a
separate bid for these enrollees. Some
MA organizations have only a handful
of these members and the cost of
preparing a separate bid is very
substantial. The commenter
recommended that we identify a means
for bidding organizations to submit their
Part B-only enrollee bid in conjunction
with another bid. The commenter
recommended this approach so that MA
organizations are relieved of the
administrative burdens of submitting
two bids for their enrollee population
while the underlying objectives of the
bid process are still accomplished.
Response: The requirement at
§ 422.254(f) is substantially the same
language as the previous § 422.310(a)(3)
for the M+C program. Preparation of a
separate adjusted community rate (ACR)
for Part B-only enrollees is a longstanding policy, and we do not see a
basis for changing the existing policy.
We have made editorial changes to the
text at § 422.254(f) to conform it to the
previous § 422.310(a)(3).
There are two types of Part B-only
enrollees: current members of employer
or union group health plans and Part Bonly enrollees ‘‘grandfathered’’ from
pre–1999 risk contracts. Since 1998,
only those beneficiaries who are
members of employer or union groups
have been allowed to elect a Part B-only
plan. However, section 1876(k)(2) of the
Act created ‘‘grandfathered’’ Part B-only
enrollees by permitting a Part B-only
beneficiary enrolled with an

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organization under a section 1876 risk
contract on December 31, 1998 to
continue enrollment with that
organization if that organization had
entered into an M+C contract effective
January 1, 1999.
Our operational policy has recognized
that the number of ‘‘grandfathered’’
beneficiaries has been decreasing over
time, and in the past we have provided
guidance on grandfathered enrollees in
the annual Call Letter, including an
option to simplify rate filing. Call
Letters from prior years with guidance
on grandfathered Part B-only enrollees
can be found on our website at http://
www.cms.hhs.gov/healthplans/acr/. We
will continue to provide guidance
regarding this policy in the Call Letter.
Comment: A number of commenters
asked questions about the procedures
for bidding. For example, a few
commenters asked how we will define
administrative expenses in the bid
pricing tool, and whether the definitions
will be the same for Part C and Part D.
Other examples are whether we would
allow rounding of premiums after
adjustments to the allocation of rebate
dollars, and how MSA plans could
provide risk adjustment data for
payment.
Response: As in the past, we will
address questions on the procedural
details of bidding in the Instructions for
Completing the MA Plan Bid Form and
the Call Letter.
4. Negotiation and Approval of Bids
(§ 422.256)
Authority to review and negotiate bids
The provisions in proposed § 422.256
would implement section 1854(a)(6)(B)
of the Act, which provided us with the
authority to negotiate the monthly
aggregate bid amount and the
proportions of the aggregate bid
attributable to basic benefits,
supplemental benefits, and prescription
drug benefits. The MMA grants us the
authority to negotiate bids that is
‘‘similar to’’ the statutory authority
given the Office of Personnel
Management (OPM) to negotiate with
respect to health benefits plans under
the FEHBP program.
Chapter 89 of Title 5 gives OPM broad
discretion to negotiate prices and levels
of benefits. We believe that the Congress
used ‘‘similar to’’ in the statute to
recognize the differences between the
FEHBP and the MA program. For
example, the OPM authority applies to
negotiating the level of plan benefits,
while MA plans must offer, at a
minimum, benefits covered under the
original Medicare program, which are
defined in law. Also, the authority to

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negotiate payment rates would seem to
be limited for the MA program by other
provisions of the MMA (for example,
statutory formulas for determining
benchmarks, premium and rebate
amounts, and payments to plans.)
However, MA plans are able to
modify the cost sharing for Medicare
Parts A and B benefits via supplemental
benefits. We have the authority to
negotiate the level of the supplemental
benefits as part of ensuring that the bid
is not discriminatory, as described in
section 1852(b)(1) of the Act and
implemented at proposed § 422.100(f)(2)
and § 422.110. Further, in situations
where we have questions about the
assumptions used for a plan bid, we
have the authority to negotiate with the
MA organization regarding the
appropriate assumptions and the
resulting rebate and/or supplemental
premiums, to ensure that the
supplemental bid reasonably and
equitably reflects revenue requirements.
Noninterference
As proposed under § 422.256(a)(2)
and in accordance with section
1854(a)(6)(B)(iii) of the Act, we do not
have the authority to require—(1) any
MA organization to contract with a
particular hospital, physician, or other
entity or individual to furnish items and
services under the Act; or (2) a
particular price structure for payment
under a contract to the extent consistent
with our authority. Also, as under
current law, we do not have the
authority to review or negotiate bids for
PFFS plans or any amounts submitted
by MSA plans.
Standards of bid review
Proposed § 422.256(b) implements
section 1854(a)(6)(B)(ii) and (iii) and
section 1854(e)(4) of the Act, which
together established three standards for
our review of bids. First, the bid and
proportions must be supported by the
actuarial bases, which we determine
based on information provided by the
MA organization.
Second, the bid amount and
proportions must reasonably and
equitably reflect the plan’s revenue
requirements for providing the benefit
package, as the term revenue
requirements is used for purposes of
section 1302(8) of the Public Health
Service Act. We interpreted this
reference to mean that the Congress
intends for a plan bid to reflect the
plan’s estimated required revenue in
providing coverage (including any profit
or retained earnings), and not other
factors such as the relative lack of
competition in the plan’s market area or

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the level of annual capitation rates and
benchmarks in the service area.
Third, proposed § 422.256(b)(3)
implemented section 1854(e)(4) of the
Act by providing for a limitation on
applicable cost-sharing for coordinated
care and PFFS plans: the actuarial value
of plan cost sharing ‘‘applicable on
average’’ to plan enrollees cannot
exceed the actuarial value of cost
sharing ‘‘applicable...on average’’ under
original Medicare. We interpreted
‘‘applicable’’ to mean the level of costsharing in effect after any reductions to
the level of cost sharing that a plan can
make by offering a mandatory
supplemental benefit, as specified under
section 1852(a)(1)(B) of the Act. That is,
we apply this third standard of review,
as specified under section 1854(e)(4) of
the Act, in light of both the basic A/B
bid and the application of any rebate
toward reduced cost sharing of
Medicare Parts A and B benefits
included in the supplemental bid.
We clarified that proposed
§ 422.254(b)(4), which implements the
requirement in section 1852(a)(1)(B)(i)
of the Act), that the actuarial value of
MA plan cost sharing for Medicare Part
A and Part B benefits assumed in
constructing the basic A/B bid must
equal the actuarial value of original
Medicare cost sharing, would affect how
MA organizations develop their basic A/
B bids. In contrast, the cap on actual
enrollee cost-sharing liability for
Medicare Parts A and B benefits is
established at proposed § 422.256(b)(3),
which implements the requirement in
section 1854(e)(4) of the Act. Before
2006, the sum of applicable plan cost
sharing for Part A and Part B services,
and any cost sharing for Part A and Part
B services that was collected as revenue
in the form of a premium or portion of
a premium, could not exceed the
actuarial value of cost sharing in fee-for­
service Medicare (section 1854(e)(1) of
the Act). As of 2006, any Medicare cost
sharing included in a premium (as well
as any cost sharing that is ‘‘bought
down’’ through the use of rebate dollars)
is not counted towards the limit (section
1854(e)(4)of the Act).
We further clarified that, under the
new bidding methodology, an MA
organization cannot substitute a basic
beneficiary premium for some portion of
cost sharing under original Medicare.
Section 1854(b)(2)(A)(i) of the Act
(proposed at § 422.262(a)(1)) mandated
that for plans with bids less than
benchmarks, the premium for original
Medicare benefits must be zero. Our
understanding is that Congressional
intent was to have the basic A/B bid be
for a standardized package. This means
MA organizations able to offer plans

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with Medicare-covered benefits at a
lower cost to the beneficiary than the
benchmark will have a plan with zero
premium for coverage of benefits under
original Medicare.
However, any MA organization can
choose to structure the benefit package
with a mandatory supplemental benefit
that includes a reduction in Medicare
Part A and B cost sharing. The premium
for this supplemental package, as well
as the Part D or Part B premium, can be
offset by any rebates for which the plan
is eligible. Thus, the aggregate bid
would consist of: (1) a basic A/B bid
amount for benefits available for either
zero premium or a basic premium
depending on whether the plan’s bid is
above or below the benchmark; (2) a
mandatory supplemental bid amount for
benefits available for a premium or no
premium depending on the plan’s use of
rebates (and an optional supplemental
benefit if offered); and (3) a drug bid
amount for basic benefits, also available
at a premium or no premium depending
on use of rebates.
Finally, we clarified that, under the
MMA, an MA organization is no longer
permitted to reduce the basic
beneficiary premium amounts for
original Medicare benefits by taking a
negative adjustment on additional
revenue, as was permitted under the
M+C program in the ACRP process. In
accordance with section 1854(a)(6)(B)(ii)
of the Act, plan bids must reasonably
and equitably reflect plan expected
revenue requirements. MA
organizations cannot submit plan bids
that understate their revenue
requirements for the basic A/B bid.
When the basic A/B bid amount exceeds
the benchmark amount, the difference is
required to be charged as a basic
beneficiary premium. If an MA
organization were able to waive the
plan’s basic beneficiary premium, this
would suggest that the MA organization
had overstated the plan’s expected
revenue requirements for basic benefits.
In essence, we do not have the authority
under the statute to allow MA
organizations to waive basic beneficiary
premiums for plans with basic A/B bids
greater than benchmarks.
Comment: Several commenters
requested clarification on how we
would interpret the bid review standard
that the bid amounts and proportions
must ‘‘reasonably and equitably’’ reflect
the MA plan’s revenue requirements for
providing the benefit package. Two
commenters suggested that we should
ensure that adequate flexibility is
maintained throughout the bid review
and approval process in order to allow
MA organizations to pursue legitimate
business strategies that promote the

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availability of viable choices for
beneficiaries. One commenter
recommended that we consider in its
bid review process whether an
organization is in a start-up phase and
the intensity of the marketplace
competition facing the plan. Another
commenter suggested that in reviewing
the revenue requirements of the plan,
we should take into account that a
variety of factors may affect anticipated
rates of return for MA plans. For
example, a new MA organization may
reasonably anticipate budget deficits
during its early years of operation in
order to offer competitive plans while
its fixed costs are high in relation to the
number of enrollees and its enrollment
and revenues grow toward break even.
In addition, due to differing marketplace
dynamics and other factors, the rates of
return may differ for different products.
The commenter acknowledged our
concern about the integrity of bids from
plans lacking competition in their
service area, but stated strong
opposition to any requirement we may
consider that would force plans to have
similar ‘‘rates of return’’ on Medicare
and non-Medicare products as a way to
measure bid accuracy. Also, the
commenters cautioned against having
standards that would skew actual bid
amounts in order to avoid the
appearance of not operating with
maximum efficiency.
Response: In the August 2004
proposed rule, we stated that we believe
the Congress used the phrase ‘‘similar
to’’ in section 1854(a)(6)(B)(i) of the Act
(which states that our authority to
negotiate bids is similar to OPM’s
statutory authority to negotiate
concerning health plans) to signal an
understanding that the FEHBP and MA
programs are not identical, but have
some similarities. We gave two
examples of differences between the
programs: (1) MA plans must offer
original Medicare benefits, which are
defined in law; and (2) the formulas for
determining MA rates are established in
law. We then gave an example of an area
where the OPM-like authority to
negotiate bid amounts would be
relevant to the MA program: pricing of
supplemental bids. We then discussed
the three proposed standards of bid
review: (1) bids and proportions must be
supported by actuarial bases; (2) bids
and proportions must reasonably and
equitably reflect the plan’s revenue
requirements for providing the benefit
package; and (3) the standard at section
1854(e)(4) of the Act (implemented at
proposed 422.256(b)(3)) has been met,
which limits enrollees’ liability for cost
sharing.

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4649

In addition to review of bid amounts
and proportions under these three
standards, we also are mandated to
review other aspects of the annual bid
submission. We must ensure that all
benefits are covered, per the
requirements at section 1852(a) of the
Act. Section 1852(b)(1) of the Act
requires us to review the plan benefit
design, particularly the structure of
premiums, deductibles, copayments,
and coinsurance charged to
beneficiaries to ensure it is not
discriminatory, as implemented at
§ 422.110.
With regard to review of bid amounts,
we will respond to the commenters’
questions by discussing the statutory
bases on which we formulated the first
two bid review requirements. The first
bid review standard, that bids be
supported by actuarial bases, is
mandated in two places in section
1854(a)(6)(B) of the Act. The first phrase
of section 1854(a)(6)(B)(i) of the Act
states that subject to the noninterference
clause and the exception for PFFS
plans, the Secretary has the authority to
negotiate bid amounts and proportions
under subparagraph (A), including
supplemental benefits. Section
1854(a)(6)(A) of the Act (the
subparagraph (A) reference), which
specifies what information MA
organizations should submit with their
annual bid submission, includes the
requirement that MA organizations
submit information demonstrating the
actuarial basis for determining the
monthly aggregate bid amount. In
addition, section 1854(a)(6)(B)(ii) of the
Act states that the Secretary can only
accept bids if they are supported by the
actuarial bases provided under
subparagraph (A).
Therefore, under the first review
standard we may negotiate whether or
not to accept a bid based on our
determination that the MA organization
submitted sufficient actuarial bases and
that the actuarial bases support the
submitted bid amounts and proportions.
The specific elements for which we will
require actuarial bases are not listed as
part of the regulatory text, and are
incorporated into the bid pricing tool.
However, we expect MA organizations
to submit the actuarial bases for medical
costs and administrative costs
(including return on investment) for all
components of a plan’s aggregate bid
(the basic A/B bid, the bid for basic
prescription drug coverage, and bids for
mandatory and optional supplemental
benefits). We will examine the actuarial
analyses to ensure that bids have been
prepared in accordance with our
actuarial guidelines, and properly
certified.

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The second bid review standard states
that bids must reasonably and equitably
reflect plan costs. This is also mandated
in two places in section 1854(a)(6)(B) of
the Act. The latter part of the sentence
at section 1854(a)(6)(B)(i) of the Act
states that when exercising the
requirement to negotiate regarding bid
amounts, the Secretary shall have
authority similar to the authority the
Director of OPM has under Chapter 89
of Title 5 to negotiate with respect to
health benefits under the FEHBP
program. In addition, section
1854(a)(6)(B)(ii) of the Act states that the
Secretary can only accept bids if they
reasonably and equitably reflect the
revenue requirements (as used for
purposes of section 1302(8) of the
Public Health Service Act).
We look to the FEHBP standard in 5
USC 8902(i) to interpret our authority to
review bids in a manner similar to
OPM’s statutory authority. Section
8902(i) gives OPM the authority to
require that rates should reasonably and
equitably reflect the cost of the benefit
provided. We see this provision as
imposing upon us the responsibility to
evaluate the appropriateness of the
overall bid amount and each portion of
the aggregate bid. Specifically, we
intend to evaluate the reasonableness
and appropriateness of the actuarial
assumptions made for the aggregate bid.
We would examine bids to determine
whether the revenue requirements for
coverage offered by the plan are
reasonable, including examination of
administrative costs and return on
investment (profit) for reasonableness.
(For a discussion of how we will
evaluate the reasonableness and
accurateness of the prescription drug
bid, see subpart F of the preamble in the
final rule for the Medicare prescription
drug benefit.)
There is no cap on administrative
costs under Part C (or Part D) that is
similar to the cap in effect for FEHBP
experience-rated plans. We assume that
competition among plans will generally
assure 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 we are given negotiating
authority to assure this result. The
initial review of MA bid submissions
will focus, in part, on low and high cost
outliers, and on bids in areas with little
competition. It should 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

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while an ‘‘average’’ bid could be based
on incorrect actuarial assumptions. In
summary, all bids will be reviewed for
their reasonableness, whether the bids
include outliers or not.
A plan bid submission may meet the
first review standard (because there is
sufficient actuarial information and it
supports the submitted bid amounts),
but not meet the second review standard
because a bid amount does not
reasonably and accurately reflect plan
costs.
Finally, the commenters requested
that our interpretation of the
‘‘reasonable and equitable’’ standard
allow enough flexibility for MA
organizations to pursue legitimate
business strategies. ‘‘Flexibility’’ seems
to have different meaning for different
commenters. We want to clarify that we
do not intend to measure bid accuracy
by forcing bids for Medicare products to
have the same rates of return as nonMedicare products. We do not believe
that cross-product line comparisons
would be appropriate at this time.
However, we do believe that it would
be appropriate to develop criteria for
review among Medicare products, such
as the following for employer group
health plans (EGHPs). We will release
separate guidance for EGHP plans.
Comment: Two commenters proposed
that the standards of bid review in
proposed § 422.256(b), which they see
as focusing on the statutory criteria,
should be applied to review not only of
the basic A/B bid and non-drug portion
of the supplemental bid (if any), but also
to the Part D basic bid and supplemental
drug bid (if any). The commenters’
concern is that, although the statutory
basis for review and negotiation of bids
is the same in Part C and Part D, the
discussion in the Part D proposed rule
includes broader language suggesting
that we may challenge Part D bids with
administrative costs (including rates of
return) that are higher than those of
other sponsors or MA-PD plans. In
general, the commenters opposed
standards that could lead us to require
that MA organizations reduce their bids
due to perceptions that their MA
products could be operated more
efficiently.
Response: See subpart F preamble in
the final rule for the Medicare
prescription drug benefit, which
clarifies that we are not adopting any of
the OPM regulations at this time, and
we will not apply the FEHBP concept of
a Similarly Sized Subscriber Group
(SSSG) to review of Part D bids. We
believe the preamble discussions on bid
review in the final rules for Parts C and
D are more clearly aligned.

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Comment: One commenter
recommended that we revise the
language at § 422.256(b)(2) ‘‘as the term
revenue requirements is used in section
1302(8) of the Public Health Service
Act’’ to read ‘‘as the term revenue
requirements is used for purposes of
section 1302(8) of the Public Health
Service Act.’’ This tracks the statutory
language. In addition, the commenter
recommended that we explain in the
preamble that the reference to ‘‘revenue
requirements’’ does not indirectly
require that MA organizations need to
use the adjusted community rate
methodology, which is found in that
section of the Public Health Service Act.
Response: We agree with the
commenter and have revised the
proposed language at § 422.256(b)(2).
Comment: One commenter asked us
to clarify that under the MMA bidding
methodology, MA organizations will no
longer need to include information
about commercial pricing.
Response: For the purpose of bid
submission, organizations will not be
required to submit information about
their commercial pricing experiences for
purposes of trending. However, it
should be noted that we are still
statutorily mandated to audit a
proportion of MA organizations. Within
the scope of an audit, we believe that it
is appropriate to request and review an
MA organization’s allocation of costs
between its Medicare and commercial
products in order to ensure that a
disproportionate share of the expenses
is not allocated to the MA line of
business.
Comment: One commenter
recommended that we prevent MA
plans from ‘‘cherry picking’’ healthier
beneficiaries and to review bids and
plan benefit packages to ensure they are
not discriminatory against sicker
beneficiaries. The commenter cited
studies by The Commonwealth Fund
and Medpac that confirm that some MA
plans have used co-payments and other
devices to discourage enrollment of
beneficiaries who have high utilization
of services.
Response: We will be evaluating bids
for their actuarial soundness based on
the documentation submitted by plans
to support the submitted bid amount
and associated proportions. As
mandated by the MMA (and earlier
statutory provisions), we will also be
reviewing the benefit packages of each
plan to guard against discrimination. In
addition, we will continue to follow the
standards described in the M+C final
regulation of June 2000 at § 422.110,
which prohibit an organization from
discriminating against beneficiaries by
denying, limiting or conditioning

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coverage to beneficiaries or offering of
benefits to individuals eligible to enroll
in a plan on the basis of any factor that
is related to health status (for example,
medical history or medical condition,
with limited exceptions). We will be
concerned about levels of cost sharing
for dialysis and chemotherapy drugs,
and cost sharing for medical categories
(inpatient stays, outpatient facilities,
and ambulatory surgical centers).
Negotiation process
Proposed § 422.256(a) would
implement section 1854(a)(6)(B)(i) of the
Act, which provides us the authority to
negotiate with MA organizations. We
have the authority to negotiate to ensure
that the bid is not discriminatory; and
in situations where we have questions
about the assumptions used for a plan
bid, we will negotiate with the MA
organization regarding the appropriate
assumptions and the resulting rebate
and/or supplemental premiums. We
expect that the process of bid
negotiation between CMS and an MA
organization could result in an
agreement to adjust the bid’s pricing,
utilization, and/or enrollment
assumptions. The MA organization
would resubmit the bid information for
the plan. The bid cannot be changed
unless mutually agreed upon by the MA
organization’s representatives and CMS
as a result of our review and negotiation
process.
Comment: A few commenters are
concerned that we have a uniform
process for conducting bid negotiations
to ensure that there is consistency
across negotiating teams as well as firm
deadlines for ending negotiations.
Response: We understand the
concerns about the uniformity and
timing of bid negotiations. We believe
that the bid negotiations will be
governed by the specific actuarial
review principles that will be contained
in the bid pricing tool. Bid negotiations
will have to be complete before
September in order for plans to have
sufficient time to submit their plan
benefit package materials for our
website.
Comment: One commenter wanted to
know how our deadlines for negotiation
compare with the deadlines established
by OPM for its FEHBP negotiations.
Response: OPM’s rate filing and
negotiation schedule is similar to that
proposed by CMS. Rate proposals are
due by May 31 each year, and by midAugust negotiations are generally
complete. By law, the filing deadline for
the MA program is the first Monday in
June, and we expect to conclude
negotiations by the end of August or
early September.

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Comment: Several commenters
wanted to confirm that organizations
unable to reach agreement with us
during the negotiation process will be
permitted to withdraw their bids
without penalty. The ability to
withdraw a bid is significant to avoid an
MA organization committing to
providing coverage for a year that is not
sustainable financially, potentially
jeopardizing beneficiary coverage and
the MA organization’s long term success
and viability.
Response: This issue is still under
consideration, and we will be issuing
subsequent guidance.
Comment: One commenter stated that
in the past periodically MA
organizations have identified errors in
their ACRP after submitting them to us
for the filing deadline. The commenter
requested that we retain the current
policy where MA organizations are
allowed to correct these errors after the
filing deadline and resubmit the ACRP
provided that: (1) the MA organization
can demonstrate that the information in
fact was in error; (2) it is clear that the
error was made inadvertently; and (3)
the correction is made within a
relatively short period of time following
the submission.
Response: We intend to retain the
current practice of allowing corrections
for inadvertent errors, for example,
typographical errors and certain other
types of errors that caused the
submission to fail the initial front end
edits. Guidance on this matter will be
published as part of the guidance on
filing the new bid pricing tool and Plan
Benefit Package.
Comment: One commenter requested
clarification of the timeline for bid
negotiations and finalizing benchmarks
for negotiation with providers.
Response: Regarding negotiations
with other contractors, we believe that
bidders are developing their bids on
what it will cost them to provide the
items and/or services in their plan
benefit packages and have had
discussions and negotiations with
potential contractors in order to
estimate properly in their bid
submission. In most cases where
organizations have made good faith
efforts to estimate their actual revenue
requirements with appropriate
supporting documentation, we do not
anticipate significant modifications to
bid amounts and proportions during the
negotiation phase of the process.
Rules for adjustment of rebate dollar
allocations.
In addition to other negotiated
changes, an MA organization may need
to adjust the allocation of rebate dollars

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4651

in a plan bid, and resubmit the bid. We
described several circumstances under
which we expect reallocation of rebate
dollars.
First, MA organizations must submit
their plan bids in June (including the
estimated drug premium amount) for
both local and regional MA plans before
knowing the national average monthly
bid amount for basic coverage. Given
the preliminary nature of MA
organizations’ Part D premium
submission, we expect that some rebate
allocations to Part D premium
reductions will be overestimated
(excessive allocation) or underestimated
(insufficient allocation). These
misestimates will mean some portion of
the beneficiary rebate has been credited
where it is not needed or not enough
has been credited to achieve the
premium desired. For example, if a
plan’s monthly drug premium is
determined to be $34, which is less than
the projected premium of $35 in its
initial bid submission, there was an
excessive allocation of $1 of the rebate
to fund the Part D premium reduction.
We would require the MA organization
to amend its bid submission to
reallocate the excessive $1 of rebate
credit to other mandatory supplemental
benefits. On the other hand, if the plan
monthly drug premium is determined to
be $36, which is greater than the
projected monthly premium of $35 in
the initial bid submission, there is an
insufficient allocation of $1. We would
give the MA organization the option of
reallocating $1 of rebate from another
mandatory supplemental benefit toward
the Part D premium reduction in order
to eliminate the $1 Part D premium and
return to the zero premium in the initial
bid submission.
For this reason, we anticipated that
some MA organizations will make
minor technical adjustments to the
benefit structures of their non-drug bid
amounts (that is, the basic A/B bid and
supplemental bid). The adjustments will
consist of reallocation of beneficiary
rebate dollars among a subset of the
categories allowed by law: (1) reduction
in the premium for the non-drug portion
of the mandatory supplemental package
(that is, reduction in cost sharing for
Parts A and B benefits or reduction in
the cost of additional non-Medicare
covered benefits); and (2) reduction in
the Part D and Part B premiums. No
modifications would be allowed to the
cost of the Part D supplemental benefit
(reduction in Part D cost sharing or
reduction in the cost for coverage of
drugs not covered under Part D).
Changing the reduction in Part D cost
sharing would have a domino effect. It
would have implications for projected

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reinsurance dollars, which impacts the
pricing of the bid for basic Part D
benefits, which in turn could affect the
national average monthly bid amount
and, hence, the basic beneficiary
premium, which we would have just
previously calculated and published for
the year, as required by section 1860D–
13(a)(4) of the Act.
Second, we recognized that the June
bid submission for regional MA plans
will be based on unknown benchmarks
not only for the drug premium but also
for Medicare Parts A and B benefits. As
discussed in § 422.258(c), the regionspecific benchmark amount is based, in
part, on a weighted average of the plan
bids for Medicare Part A and Part B
benefits, which we cannot calculate
until after the June bid submission. This
means that the exact amount of a plan’s
rebate is unknown and will shift to the
extent that the estimated benchmark a
plan uses to create its June basic A/B
bid amount differs from the regionspecific non-drug benchmark we
establish based on plan bids. Therefore,
regional MA plans will also be allowed
to modify the allocation of rebate
dollars, other than for Part D benefits, to
arrive at the supplemental, Part B, and
Part D premiums originally submitted.
We proposed the following rules for
the negotiation process concerning
reallocation of rebate dollars due to
excessive or insufficient allocation.
• MA plans with overestimated
allocations to Part D premium reduction
must reallocate beneficiary rebate
dollars to other mandatory
supplemental benefits and can do so
only for the purpose of achieving the
original Part D premium in their initial
bid submission.
• Local MA plans with
underestimated allocations to Part D
premium reduction have the option of
reallocating beneficiary rebate dollars
from other mandatory supplemental
benefits. However, the plan could only
reallocate rebate dollars for the purpose
of achieving the Part D premium in the
initial bid submission. In this
circumstance, plans could choose not to
adjust the new premium or reallocate
the appropriate amount to achieve the
initial premium submitted.
We proposed the following rule for
regional plans, which unlike local plans
will not know the exact amount of their
rebate dollars at the time of the June bid
submission.
• Regional MA plans may reallocate
beneficiary rebate
dollars to achieve the supplemental,
Part B, and Part D premiums in their
initial bid submission.
• Local MA plans not offering Part D
benefits (these would only be PFFS

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plans who have elected this option)
would have all the necessary
information upon which to estimate
their bid amounts for their initial June
bid submission, and, therefore, the MA
organizations would not be allowed to
modify their plan benefit structures.
Comment: A few commenters
recommended that MA organizations be
permitted to reallocate rebate dollars to
ensure that dual eligibles would not
need to pay a premium for Part D if they
enroll or remain enrolled in these MA
plans. The commenter believed that the
MA plans that would likely use this
discretion are MA Special Needs Plans
(SNPs). The success of SNPs would be
seriously undermined if their Part D
premiums exceed the applicable low
income Part D subsidy, because their
dual eligible enrollment would have an
incentive to disenroll from these plans.
Because the Part D bids of MA special
needs plans are not factored into the
national average monthly bid amount
and the low-income benchmark
premium amount, this adjustment will
have an insignificant effect on the bid
and payment process.
Response: The proposed requirement
is that reallocation of rebate dollars
during the negotiation process must
result in the supplemental, Part B, and
Part D premiums originally submitted in
June. We believe the commenter is
requesting that this requirement be
expanded to allow a change in the Part
D premium from that originally
submitted in order to allow an MA
organization to change the plan
premium to match the low income
premium subsidy level in effect for the
plan’s service area. We would allow
this. Therefore, when rebate reallocation
results in a Part D premium that differs
from that originally submitted in June,
the new premium must match the low
income premium subsidy level. The Part
D premium will have to be uniform for
every member of the plan.
Comment: One commenter supported
our proposal to limit changes to bids to
technical changes. The commenter also
questioned why MA regional plans
would be permitted to make changes in
cost sharing that would not be allowed
for MA local plans. The commenter
believes that allowing more than
technical changes from regional plans
would destabilize the level playing field
of the bidding process.
Response: Because the benchmark is
calculated for regional plans after bids
are submitted, unlike local plans,
regional plans do not have the
advantage of knowing the benchmark
for estimating their rebate, cost sharing
and premium amounts. Therefore, it is
necessary to provide additional latitude

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for regional plans that is not necessary
to provide for local plans. Our intent is
to allow appropriate redistribution of
the estimated amounts so that plans’
benchmark estimates can be reconciled
with the actual benchmark estimates
and the necessary modifications.
5. Calculation of Benchmarks
(§ 422.258)
Proposed § 422.258(a) implemented
the new section 1853(j) of the Act by
providing a description of how
benchmarks for local MA plans are
calculated. For a service area that is
entirely within an MA local area
(county), the MA area-specific non-drug
monthly benchmark amount is equal to
the monthly MA capitation rate for the
local area. For a service area that is in
more than one MA local area, the
benchmark amount is calculated as a
weighted average of the local MA
monthly capitation rates, using as
weights the projected enrollment in
each county used to calculate the bid.
Proposed § § 422.258(b) and (c)
implemented section 1858(f) of the Act
by providing a description of how
regional MA plan benchmarks are
calculated. Each MA region will have a
benchmark amount that consists of two
components: (1) the statutory
component (based on a weighted
average of local area capitation rates in
the MA region); and (2) the plan bid
component (based on the weighted
average of regional plans bids in the MA
region). The purpose of the blend will
be to be more responsive to market
conditions in the region by allowing
plan bids to influence the final
benchmark amount.
Finally, the statutory component will
be multiplied by the statutory national
market share, which is the number of
MA eligibles in the Nation who were
not enrolled in an MA plan during the
reference month (the month in the
previous year for which the most recent
data on MA eligibles is available)
divided by the total number of MA
eligibles in the nation in the reference
month. The plan-bid component will be
multiplied by the non-statutory market
share, which is the number of MA
eligible in the nation who were enrolled
in an MA plan during the reference
month divided by the total number of
MA eligible in the nation. These
components will be added to yield the
MA regional benchmark.
Comment: One commenter
recommended that we revise the first
sentence of § 422.258(c)(4) to replace the
references to ‘‘plan(s) offered in the
region’’ with ‘‘regional plans offered in
the region’’ to clarify the plan-bid
component of the regional benchmark is

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calculated based only the regional plan
bids, not all of the MA plan bids in the
region.
Response: We agree and have made
this correction. We also made technical
corrections in § 422.258(c) along the
same lines to further clarify this point.
Finally, we made another change to the
proposed rule language at
§ 422.258(c)(5)(i) to clarify further how
the plan bid component of the regional
benchmark will be calculated. In the
final rule at § 422.258(c)(5)(i), we delete
the following sentence from the
proposed regulatory text because it
states a specific calculation for
determining a plan’s share of enrollment
that is not mandated at section
1858(f)(5)(B)(iii) of the Act: ‘‘In that
case, each plan’s share will be the plan’s
projected enrollment divided by the
total projected enrollment among all
plans being offered in the region.’’ We
delete this sentence to clarify that the
statute allows us to apply a factor based
on plans’ projected enrollment but does
not mandate a particular calculation.
6. Beneficiary Premiums (§ 422.262)
Proposed § 422.262(a) would
implement section 1854(b)(2)(A) of the
Act, and described the new
methodology for calculating the MA
monthly basic beneficiary premium.
This premium will now be determined
by comparing the unadjusted statutory
non-drug bid amount (basic A/B bid) to
unadjusted benchmark amount. For an
MA plan with a basic A/B bid that is
less than the appropriate unadjusted
non-drug benchmark amount, the basic
beneficiary premium is zero. For an MA
plan with a basic A/B bid that is equal
to or greater than the unadjusted nondrug benchmark amount, the basic
beneficiary premium is the amount by
which the bid amount exceeds the
benchmark amount. All approved
premiums must be charged; that is,
plans are not allowed to waive basic
beneficiary premiums.
Proposed § 422.262(b) would
implement section 1854(d)(4) of the Act,
which specifies that MA enrollees must
be charged consolidated monthly
premiums. As intended by the Congress
and as a part of our efforts to simplify
the process for beneficiaries, an MA
enrollee will pay a single premium
consisting of the sum of all premiums a
particular plan charges its enrollees,
which will be one or more of the
following: (1) the monthly basic
beneficiary premium; (2) the monthly
supplemental premium; and (3) the MA
monthly prescription drug premium.
This process will be in addition to the
Part B premium payment process
already in place.

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We clarified that in the case of an
Medical Savings Account (MSA) plan,
there are no basic beneficiary premiums
because we instead make a deposit to
the enrollee’s MSA. MSA plans are high
deductible insurance policies, not
managed care plans. The only
beneficiary premium for an MSA plan
will be a supplemental premium.
Uniformity of premiums and costsharing.
The MMA did not change current law
regarding uniformity of premiums.
Proposed § 422.262(c) would implement
section 1854(c) of the Act, which
specifies that, with the exception
permitted under § 422.106(d), the MA
bid amount and beneficiary premiums
may not vary among individuals
enrolled in the plan. Proposed
§ 422.262(c) continues current
regulations now in subpart G at
§ 422.304(b) that cost sharing for basic
and supplemental benefits may not vary
among individuals enrolled in an MA
plan.
MA organizations offering local MA
plans within segments of service areas
must submit separate bids for those
segments that may have different
premiums and cost sharing. Section
1858(a)(1) of the Act which specifies
that regional MA plans may not have
segmented service areas.
Proposed § 422.262(f) would
implement section 1854(d)(2) of the Act
on beneficiary payment options. This
provision gives enrollees the option, at
their discretion, of paying their MA
consolidated premium by: (1) having it
deducted directly from their Social
Security benefit amount of from their
Railroad Retirement Board or the Office
of Personnel Management benefit
amount in the same manner that Part B
premium reductions are handled; (2)
setting up an electronic funds transfer;
or (3) through other appropriate means
CMS may identify, including payment
by an employer or under employmentbased retiree coverage on behalf of an
employee, a former employee, or a
dependent. The MA organization may
not impose a charge for individuals
electing to pay their premiums through
a deduction from their Social Security
payments. In this final rule, we have
consolidated subparagraphs (3) and (4)
of § 422.262(f) to clarify that the other
methods we may specify for payment of
premiums include those listed in the
regulation.
Comment: One commenter requested
that we allow intra-regional benefit plan
adjustments (that is, waiver of the
requirement that plan have a uniform
benefit package for a service area,
including plan premiums and all

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applicable cost sharing) to ensure that
regional PPO plans are not placed at a
competitive advantage or disadvantage
versus local plans due to rate variations
within a plan’s regional service area.
The commenter stated that overall, the
intra-regional benefit waiver would lead
to greater participation in the regional
PPO program and, at the same time,
would ensure local plans can continue
participation in areas with traditionally
low reimbursement rates, resulting in
competition and increased access to
health plans for beneficiaries.
Response: We do not have the
authority to waive the requirement at
section 1854(c) of the Act, which states
that plan bids and premiums be uniform
for all members of a plan. Moreover,
section 1858(a)(1) of the Act explicitly
disallows the application of section
1854(h) of the Act to regional plans,
which signals Congressional intention
that there not be variation in premium
and cost sharing across segments within
a region. Therefore, at this time, we
cannot allow variations in the plan
benefit package within the service area
of regional MA plan.
Comment: Two commenters
recommended that we provide an
option for an MA organization to waive
the amount of premium that is the
difference between the MA-PD premium
and the low-income premium subsidy
under Part D provided for in § 423.780.
The commenter believes that this waiver
would fit well within a safe harbor
provided for in the federal anti-kick
back statute. The ability to waive
premium would: (1) allow dual eligibles
to be auto-enrolled into their current
Medicare Advantage plan without the
burden of an added premium that many
of these beneficiaries could not afford;
and (2) provide more flexibility for dual
eligible enrollees to self-enroll into an
MA-PD plan of their choosing.
Response: If the commenter’s
reference to the ‘‘MA-PD premium’’ is to
the combined basic Part A and Part B
beneficiary premium and the Part D
beneficiary premium charged by an MA­
PD plan, then we must emphasize that
these two premiums are determined
separately and under different rules.
When a plan’s basic A/B bid is equal to
or below its benchmark, by law the plan
is not allowed to charge a basic
premium for basic Part A and Part B
benefits. When a plan’s basic A/B bid is
above its benchmark, section
1854(a)(2)(A) of the Act states that this
difference is the monthly basic
beneficiary premium. The basic
beneficiary premium cannot be waived.
Section 1854 of the Act does not
provide for waiver of the basic Part A
and Part B premium for dual eligibles.

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Subsidies for dual eligibles for coverage
of medical benefits are set forth under
Title XIX of the Act. Moreover, special
needs plans are subject to the same
bidding rules as other MA plans, in
accordance with sections 1854(a)(1)(A)
and 1854(a)(6) of the Act. Therefore, we
do not have the authority to waive the
basic beneficiary premium for dual
eligibles.
The Part D premium determination is
discussed at § 423.286. We do not have
the authority to waive the Part D
premium for beneficiaries eligible for a
premium subsidy. If those beneficiaries
eligible for this subsidy enroll in a Part
D plan or MA-PD plan that has a Part
D premium higher than the subsidy,
then they owe this difference.
Comment: A commenter
recommended that during the
negotiation process, MA organizations
be allowed to reallocate rebate dollars to
reduce the Part D premium to the level
of the low-income premium subsidy
benchmark.
Response: See § 422.256 and the
above response to comment in this
subpart of the preamble for a discussion
on this issue.
Comment: Several commenters
recommended that CMS and the Social
Security Administration not implement
the provision that beneficiaries may opt
to have their premiums deducted from
their Social Security benefit amounts
until the systems are fully in place to
ensure that payments will be made to
MA organizations correctly and on a
timely basis. The concern is that
without sufficient operational planning
for the development and testing of a
new payment system, organizations will
not be paid enrollee premiums
accurately and timely.
Response: We do not intend to delay
the implementation of a statutorily
mandated provision that gives
beneficiaries the option of paying MA
premiums by deducting the amounts
from their Social Security benefit
amounts. However, we are confident
that the development and testing of a
new payment system for accurate and
timely payment of plans is feasible by
January 2006.
Comment: One commenter requested
that we make clear that the MMA
language at section 1854(d)(2)(C) of the
Act only prohibits MA plans from
imposing charges pertaining to choice of
the premium payment option if
beneficiaries choose to have their
premiums deducted from their Social
Security benefit checks. That is, the
commenter wishes that we make clear to
beneficiaries that the statute does not
prohibit MA plans from imposing
charges related to premium payment

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under other payment options. The
commenter therefore requested that we
require MA organizations to convey
clearly to beneficiaries, and in writing,
what are the precise charges that will
apply to other premium payment
options before the beneficiary makes a
choice of how to pay plans premiums.
Response: MA plans may not charge
fees for late payment of the plan
premium or other types of processing
fees because this would violate the
uniformity of premiums provision at
section 1854(c) of the Act. For example,
we interpret the uniform premium
provision to mean that plans may not
provide incentives to members to pay
premiums in a certain manner by
offering lower processing fees (per
section 1854(d)). See Subpart B for a
discussion of administrative remedies
for non-payment of premiums.
Comment: One commenter wanted to
verify that beneficiaries may still opt to
pay their MA plan premiums directly to
the plan.
Response: Enrollees in the MA plans
may still choose to pay their MA plan
premiums directly to the plan.
Comment: Several commenters
request that we remove for American
Indian/Alaska Natives (AI/AN) Tribes
the barriers to paying their Part B
premiums under our current group
payer rules, specifically rules
concerning the size of the group and
switching an individual from automatic
deduction to group pay. The
commenters maintained that without
these changes, it is unlikely that AI/AN
individuals, who are entitled to health
care without cost sharing, will enroll in
MA plans.
Response: The issue of payment of
Part B premiums under our current
group payer rules is beyond the scope
of this rulemaking.
7. Calculation of Savings (§ 422.264)
Proposed § § 422.264(a), (c), and (e)
would implement sections
1854(b)(3)(A)and (B) of the Act (for local
plans) and sections 1854(b)(4)(A) and
(B) of the Act (for regional plans)
concerning calculation of risk-adjusted
basic A/B bids and risk-adjusted
benchmarks, which is the first step in
determining whether an MA plan has
savings. The MMA gave the Secretary
flexibility to determine whether the risk
adjustment factors to be applied to the
benchmarks and bids are determined on
a State-wide basis for local plans, a
region-wide basis for regional plans, a
plan-specific basis, or on the basis of
another geographic area.
Proposed § § 422.264(b) and (d)
implement sections 1854(b)(3)(C) and
(b)(4)(C) of the Act, respectively, on how

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to determine the amount of savings for
each local and regional MA plan (if any)
by calculating the amount by which the
risk-adjusted benchmark amount
exceeds the risk-adjusted bid amount.
Comment: All commenters from the
industry agreed plan savings should be
related to the risk profile of the
enrollees. One important reason for this
policy is that the rebate will likely take
the form of supplemental benefits or
reduced cost sharing and/or premiums.
MA plans with enrollees whose average
risk score is higher will typically need
more revenue to provide the same level
of supplemental benefits as a plan
whose enrollees have a lower average
risk score. To accomplish this objective,
the adjustment to the benchmark and
the bid that is used for calculating the
savings should be based on the risk
score of the particular plan.
Response: We agree with the
commenters. For both local and regional
MA plans, the calculation of savings
will be determined by applying the plan
average risk adjustment factor to the
basic A/B bid and benchmark. We have
revised § § 422.264(c) and (e) to reflect
this policy, although we have left in
regulation our discretion, as provided in
the statute, to select a method for
calculating savings.
8. Beneficiary Rebates (§ 422.266)
Section 1854 (b)(1)(C) of the Act states
that an MA plan with savings (because
the basic A/B bid is less than the
benchmark) must provide to the
enrollee a monthly rebate equal to 75
percent of the savings amount for that
plan for the year. The remaining 25
percent of the savings would be retained
by the Medicare Trust Funds. If the plan
basic A/B bid is equal to or greater than
the benchmark, the plan has no savings
and, thus, no rebate.
Proposed § 422.266(b) provided, as set
forth in section 1854(b)(1)(C)(ii) of the
Act, that the beneficiary rebate could be
provided in the following forms: (1)
some part or all of the rebate can be
credited toward the provision of
supplemental health care benefits
(including additional health benefits not
covered under original Medicare; (2) a
reduction in cost sharing for Parts A, B,
and D benefits, and/or a reduction in the
premium for the mandatory
supplemental benefits); or (3) credited
toward the prescription drug premium
or Part B premium.
Proposed § 422.266(b)(1) provided
that all rebate dollars must be applied
to a mandatory supplemental benefit.
We interpret the provision at section
1854(b)(1)(C)(i) of the Act that an MA
plan must provide to enrollees a rebate
equal to 75 percent of savings to mean

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that rebate dollars must be provided to
all enrollees in a plan. Therefore, rebate
dollars could not be used to fund
optional supplemental benefits because
this would not guarantee that the plan
is providing every enrollee with the
rebate dollars.
Although rebate dollars can only be
used to fund a mandatory supplemental
benefit, a mandatory supplemental
benefit may also be funded by
beneficiary premium dollars. That is, a
plan with a rebate may fund a
mandatory supplemental benefit with
rebate dollars only or with a mixture of
rebate and premium dollars.
The MA plan will be required to
inform us about the form and amount of
the rebate and/or the actuarial value of
the supplemental health care benefits.
Adjustments to the structure of the
benefit package will occur during the
process of negotiating and approving
bids detailed in proposed § 422.256.
If an MA organization elects to
provide a rebate in the form of a
reduction in the beneficiary Part B
premium for beneficiaries in a particular
plan, we will work with the
Commissioner of Social Security to
provide the necessary information to the
Commissioner to apply a credit (as
provided for under section 1840 of the
Act) to reduce the amount of the Part B
premium to be charged under section
1839 of the Act for each enrollee in that
MA plan.
Comment: One commenter
recommended that we revise proposed
§ 422.266 to note that rebate dollars may
be used both to pay for the Part D
premium and to provide supplemental
drug coverage at no cost. The
commenter argued that this change is
needed to clarify that MA plans have
the right to use rebate dollars to fund
supplemental prescription drug benefits
at no cost to the beneficiary as part of
the basic Part D prescription drug
benefit offered by the MA plan.
Response: We agree with the
commenter, with one clarification. If an
MA-PD plan offers basic drug coverage
under Part D, by definition at § 423.100,
there is no supplemental drug benefit,
and thus no supplemental drug
premium toward which to apply rebate
dollars. If an MA-PD plan offers
enhanced alternative coverage under
Part D, then the plan must charge a
premium for supplemental drug
coverage. Per § 422.266(b),
supplemental drug coverage may consist
of reductions in Part D cost sharing and
coverage of drugs not covered under
Part D.
Section 1854(b)(2)(C) of the Act refers
to the supplemental beneficiary
premium that is attributable to the

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provision of supplemental health care
benefits, less the amount of the rebate
applied to supplemental benefits. The
supplemental beneficiary premium is
the estimated revenue required to offer
the supplemental package, which may
include non-drug or drug supplemental
benefits or both. Therefore, when
pricing a plan benefit package, MA
organizations will distinguish the cost
of a Part D supplemental benefit from a
non-drug supplemental benefit.
We have changed the language at
§ 422.266(b)(1) to clarify that rebate
dollars may be used to reduce the
premium for either the non-drug or drug
portions of the supplemental benefit.
We also have added language clarifying
that plans must distinguish the amount
of rebate applied to enhance original
Medicare benefits from the rebate
applied to enhance Part D benefits.
Rebate dollars may also be used to
reduce the basic Part D premium and
the Part B premium.
Comment: One commenter requested
that we allow MA organizations to use
rebate dollars to fund stabilization of
their provider networks, because recent
improvements in provider
compensation are not sufficient to
ensure stable provider networks.
Response: Proposed § 422.266(b),
which implements section
1854(b)(1)(C)(ii) of the Act establishes
permissible uses of the beneficiary
rebate. The statute does not allow MA
organizations to apply rebate dollars to
stabilize an MA plan’s provider
network.
9. Incorrect Collection of Premiums and
Cost-Sharing for All Years (§ 422.270)
Proposed § 422.270, which is
identical to the previous language in the
current MA regulations in subpart G at
§ 422.309, sets out procedures for
situations in which an MA organization
collects more than the amount the plan
is allowed to charge its enrollees.
Subpart G—Payments to Medicare
Advantage Organizations
1. Basis and Scope (§ 422.300)
Proposed § 422.300 set forth the basis
and scope for the revised subpart G,
stating that it is based on sections 1853,
1854, and 1858 of the Act. It also
indicated that the regulations in this
subpart set forth the requirements for
making payments to MA organizations
offering local and regional MA plans,
including calculation of MA capitation
rates and benchmarks, conditions under
which payment is based on plan bids,
adjustments to capitation rates
(including risk adjustment), and other
payment rules.

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2. Monthly Payments (§ 422.304)
The MMA revised the payment
methodology for MA plans beginning in
2006. We provided, in proposed
§ 422.304(a), that, with the exception of
payments to MSA plans and payments
for ESRD enrollees in all other plans, we
will make advance monthly payments to
an MA organization for each enrollee for
coverage of original FFS benefits in the
plan payment area for a month, using a
new bidding methodology described in
this subpart and subpart F.
The amount of our payment for an
MA plan (except an MSA plan) depends
on the relationship of the plan basic A/
B bid to the benchmark amount. Section
422.304(a) described two payment
tracks:
• If the plan’s risk-adjusted basic A/
B bid is less than the risk-adjusted
benchmark, the plan’s average per
capita monthly savings equals 100
percent of that difference, and the
beneficiary is entitled to a rebate of 75
percent of this plan savings amount.
• If the plan’s risk-adjusted plan basic
A/B bid is equal to the risk-adjusted
benchmark, the plan has no savings and
thus no rebate, and we pay plans
without rebates the benchmark for the
geographic service area.
• If the plan’s risk-adjusted basic A/
B bid is greater than the risk-adjusted
benchmark, the plan has no rebate and
to meet the plan’s revenue needs
enrollees must pay a basic beneficiary
premium equal to the difference
between the unadjusted basic A/B bid
and the unadjusted benchmark.
Under section 1853(a)(1)(D) of the
Act, implemented in proposed
§ 422.304(b), MA plans offering
qualified prescription drug coverage
also receive payments for the direct and
reinsurance subsidy payments for basic
prescription drug coverage and
reimbursement for premium and cost
sharing reductions for low-income
individuals, described at sections
1860D–14 and 1860D–15 of the Act.
Special rules for enrollees with endstage renal disease. Proposed
§ 422.304(c)(1)(i) would implement
section 1853(a)(1)(H) of the Act, which
instructs us to continue using the ESRD
payments rates and risk adjustment
methodology in effect before the
enactment of the MMA as the basis
upon which to determine ESRD
payment amounts. We believed the
MMA provided us with flexibility for
determining ESRD payments because of
Congressional recognition that the cost
and utilization patterns for ESRD
beneficiaries are distinct from aged and
disabled beneficiaries.
One option proposed was to pay the
State capitation rate for each enrollee,

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with the relevant adjustments under this
part, including risk adjustment. For
plans offering the Part B premium
reduction, the amount of that reduction
would be subtracted from the capitation
payment for ESRD enrollees, too. The
second option proposed was to base
payment on State capitation rates, as
adjusted under MMA adjustments such
as the geographic ISAR adjustment at
section 1853(a)(1)(F). Accordingly,
ESRD enrollees would be fully
incorporated into the bid process and
payments for all enrollees would reflect
the plan’s relative weights of ESRD
versus non-ESRD enrollee costs. We
would consider this sufficient
implementation of section 1853(a)(1)(H)
of the Act because State capitation rates
are the basis of payment. We invited
comments on these two approaches.
Special rules for payments to MSA
plans. Proposed § 422.304(c)(2) would
implement section 1853(a)(1)(B)(iii) of
the Act, which contains the same rules
for MSA plans that existed under the
previous M+C program. The only MMA
change in the payment provision is that
MSA plans become local MA plans, and
we will make payments to MA
organizations for MSA enrollees based
on the non-drug benchmark amount,
less 1/12 of the annual lump sum
amount (if any) we deposit to the
enrollee’s MA MSA, as determined
under § 422.314(c). This payment
amount is adjusted for enrollee risk, as
proposed at § 422.308(c).
RFB plans. Proposed § 422.304(c)(3)
on special rules for religious fraternal
benefit (RFB) society plan enrollees is
unchanged from the current regulations,
now in subpart F at § 422.250(a)(2)(iii).
Payment areas. Proposed § 422.304(d)
would implement section 1853(d) of the
Act, which changes the definition of
payment area to account for the new
MA regional plan program. Under the
previous M+C program, a payment area
was defined as a county or equivalent
area defined by the Secretary (with the
exception of ESRD enrollees, for whom
the payment area was a State).
The MMA establishes two general
types of payment areas: (1) for MA local
plans, the payment area is an MA local
area (defined as a county or equivalent
specified by CMS); and (2) for MA
regional plans, the payment area is an
MA region. The payment area for ESRD
enrollees continues to be a State.
Proposed § 422.304(e) would
implement section 1853(d)(4) of the Act,
which permits a State’s chief executive
to request that we use alternative
payment areas. This provision retains
the same language as the previous M+C
provision, with the exception that the
statute specifies this option applies only

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to local MA plans. No State has availed
itself of this option since its enactment
in 1998.
Comment: A number of commenters
preferred that CMS pay the State rate for
each ESRD enrollee, risk adjusted,
seeing this approach as linked to their
preference not to include ESRD
enrollees in bidding. Several
commenters did not state a preference
for payment, noting that the concept of
the second option was not clear, so they
are continuing to evaluate CMS’s and
other options that may merit our
consideration.
Response: Beginning in 2007, MA-PD
plans will implement a merged bid
method where ESRD and non-ESRD
costs are combined. This means that MA
organizations will submit a single bid
for all enrollees, and will be paid
according to the relationship of the
basic A/B bid and the benchmark.
However, as discussed in the F
preamble, for 2006 MA organizations
will exclude ESRD costs from plan bids.
Accordingly, for 2006 payments, we
will apply the ESRD payment method in
effect for 2005. For ESRD enrollees on
dialysis or transplant status, we will pay
the State-level dialysis rate, adjusted by
the appropriate individual risk score
from the ESRD CMS-HCC risk
adjustment model. For functioning graft
beneficiaries, we will pay the county
risk rate (from the aged/disabled
ratebook), adjusted by the appropriate
individual risk factor from the ESRD
CMS-HCC model.
Finally, as proposed in the August
2004 proposed rule, for any plan
offering a Part B premium reduction to
MA plan enrollees, the amount of this
reduction will be subtracted from the
payment for each ESRD enrollee. Future
changes to how we make payments for
ESRD MA enrollees will be announced
in the Advance Notice of
Methodological Changes for Calendar
Year (CY) Medicare Advantage (MA)
Payment Rates.
3. Annual MA Capitation Rates
(§ 422.306)
For years before 2004, payments to
MA organizations were based on the
highest of three amounts: a ‘‘blended
rate’’ based on a blend of national and
local data on Medicare’s costs for
providing services to beneficiaries not
enrolled in an MA plan, a ‘‘floor
amount,’’ based on an amount specified
in statute, subject to an update factor,
and an amount representing the
previous year’s rate updated by a
minimum percentage increase.
The MMA replaces the ‘‘highest of
three rates’’ methodology in several
phases. For 2004, the MMA specified a

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transitional methodology, where the
county and State rates were the ‘‘highest
of four rates’’: the floor amount rate,
blend rate, minimum percentage
increase rate (which was redefined to be
the higher of 102 percent of the previous
year’s rate or the previous year’s rate
increased by annual MA growth
percentage), or the 100 percent of FFS
costs rate introduced by the MMA.
For the next phase, the MMA
specified that beginning with 2005,
annual capitation rates will be
minimum percentage increase rates
except for years when we rebase the FFS
rate; in rebasing years, the rate is the
higher of the minimum percentage
increase rate and the FFS rate. The
MMA requires us to rebase the FFS rates
no less than every 3 years; that is, at
least every 3 years a ‘‘higher of two
rates’’ methodology is in effect. Hence,
proposed § 422.306(a) would implement
the revised version of section
1853(c)(1)(C) of the Act, which defines
the minimum percentage increase rate.
The MMA also provides that no less
than every three years, we must assign
100 percent of local per capita FFS costs
as the county rate in those counties
where this amount is higher than the
minimum percentage increase rate. The
new FFS rate is defined as the adjusted
average per capita cost (AAPCC) for the
MA local area, as determined under
section 1876(a)(4) of the Act, based on
100 percent of FFS costs for individuals
who are not enrolled in an MA plan for
the year, with the following
adjustments: (1) standardized for the
county risk profile relative to the
nationally average beneficiary; (2)
adjusted to exclude costs of direct
graduate medical education; and (3)
adjusted to include our estimate of costs
for VA and DOD military facility
services to Medicare-eligible
beneficiaries. We must recalculate the
AAPCC rate (which we also call the
‘‘100 percent FFS rate’’) no less than
once every 3 years. The statute gives us
the authority to determine how often to
rebase the ratebook within this 3 year
window. Rebasing the FFS rates means
that the Office of the Actuary retabulates
the per capita FFS expenditures for each
county (and for ESRD beneficiaries, for
each State) so that the FFS rates reflect
more recent county growth trends in
FFS expenditures.
We intend to announce our decision
annually in the Advance Notice of
Methodological Changes for Medicare
Advantage Payment Rates regarding
whether we will rebase the 100 percent
FFS rates for the upcoming year.
Comment: Many commenters
supported annual rebasing in order to
adequately pay MA organizations in

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areas where the FFS costs are increasing
at a rate faster than the national average.
One commenter noted that CMS should
rebase annually because of the high
degree of volatility in local FFS costs,
and stated that CMS recognizes this
volatility by using a 5-year moving
average when forecasting county level
Medicare FFS costs.
Response: As announced in the 2005
Advance Notice of Methodological
Changes, the CMS Office of the Actuary
believes that it is appropriate to evaluate
on an annual basis whether or not it is
necessary to recalculate the basis for the
100 percent of FFS costs payment
category for MA organizations. By
requiring rebasing only every 3 years,
the Congress determined there was no
need to statutorily mandate an annual
retabulation of FFS per capita
expenditures for each county. Therefore,
CMS will announce each year in the
Advance Notice whether it intends to
rebase the FFS rate. Interested parties
will have the opportunity to comment
each year on the announcement before
it is finalized.
Comment: A few commenters noted
that CMS has not implemented the
existing authority for inclusion in the
100 percent FFS rate the costs
associated with services provided to
eligible Medicare beneficiaries at VA
and DOD facilities. Two commenters
claimed that the result of taking these
costs into account would be a positive
adjustment to MA plan payments, and
that currently plans serving areas with
many VA and DOD facilities were not
being fully reimbursed. Commenters
recommended that CMS move forward
as soon as possible with implementation
based on the best data available.
Response: As we previously stated in
our Advance Notice of Methodological
Changes for 2005, in order to
incorporate the costs of services
provided at VA/DOD facilities into the
MA rates, it is necessary to obtain
reliable data on a county level to make
the adjustment. We have been unable to
obtain these data, so to date the
adjustment has been zero. CMS’s Office
of the Actuary will make an annual
determination whether it has been able
to obtain sufficient reliable data on the
costs of services provided at VA/DOD
facilities to make a non-zero adjustment
to the 100 percent FFS rates.
4. Adjustments to Capitation Rates,
Benchmarks, Bids, and Payments
(§ 422.308)
Language proposed in § 422.308(a)
remains the same as that currently in
subpart F of the current regulations
governing payments. Under section
1853(c)(1)(C) of the Act, the MMA

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makes only one change to how we must
apply the national growth percentage
each year to increase the minimum
percentage increase rate. As we
provided in proposed § 422.308(b), no
adjustment can be made for changes in
prior years’ estimates of the national
growth percentage for years before 2004.
Risk adjustment. Proposed
§ 422.308(c) would implement section
1853(a)(1)(C) of the Act, which requires
us to adjust the payment amount for an
MA plan to take into account the health
status of the plan’s enrollees. In order to
ensure that MA organizations are paid
appropriately for their plan enrollees
(that is, less for healthier enrollees and
more for less healthy enrollees), we will
apply these adjustment factors to all
types of plans (with the exception of
MA RFB plans, discussed at
§ 422.304(c)(3)).
In 2006, 25 percent of our payment to
MA organizations for aged and disabled
enrollees will be based on current
demographic factors, and 75 percent
based on the CMS-HCC risk adjustment
model. In 2007 the demographic-only
payment method will be completely
phased-out for MA plans, and 100
percent of payment will be risk-adjusted
in 2007 and succeeding years. Note that
for ESRD MA enrollees, payments to
MA organizations are 100 percent risk
adjusted under the CMS-HCC ESRD risk
adjustment model, effective January 1,
2005. Also, for PACE organizations and
certain demonstrations, the transition
payment blends are one year behind
that for MA organizations.
The demographic adjustment factors
for aged and disabled enrollees are age,
sex, institutional status, Medicaid
status, and working aged status. The
demographic adjustment factors for
ESRD enrollees are age and sex.
Under the CMS-Hierarchical
Condition Category (HCC) risk
adjustment payment methodology, there
are CMS-HCC models for three different
populations: community-based, longterm institutionalized, and ESRD
beneficiaries. Currently, the CMS-HCC
factors in these models include age, sex,
original reason for entitlement,
Medicaid status, and disease factors.
The ESRD risk adjustment model
distinguishes between an enrollee on
dialysis, functioning graft, and
transplant status.
The statute continues to provide us
the authority to add to, modify, or
substitute for risk adjustment factors if
the changes will improve the
determination of actuarial equivalence.
Additional factors would enable us to
pay more accurately for different types
of beneficiaries, that is, the healthier
and less healthy MA enrollees.

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Comment: One commenter wanted
clarification of how plans that are
currently paid under a risk/frailty
adjustment model will be paid in 2006
and beyond.
Response: The MMA did not alter the
payment methodology transition
schedule for MA organizations or other
types of plans that are being paid using
the current risk/frailty adjustment
models (PACE plans and certain
demonstrations). Thus, 2006 will be the
last year that the demographic method
will be used to determine 25 percent of
payments for MA plans. In 2006, 75
percent of payment will be based on the
risk adjustment method, and from 2007
onward 100 percent of payment will be
determined with the risk adjustment
method. Hence, PACE organizations are
on a transition schedule one year
behind MA organizations and certain
demonstrations will be paid on the same
lagged transition schedule. In 2006, 50
percent of our payments to PACE
organizations and certain
demonstrations will be based on the
current demographic factors and the
remaining 50 percent will be based on
the appropriate CMS-Hierarchical
Condition Category (HCC) risk
adjustment model. In 2007, 75 percent
of their payment will be based on the
current demographic factors and the
remaining 25 percent will be based on
the CMS-HCC model. In 2008 and
beyond, payments to PACE
organizations and certain
demonstrations will be entirely based
on the CMS-HCC model.
Regarding demonstration plans, the
MMA did not alter the current protocol
for determining a particular
demonstration’s payment methodology.
Therefore, CMS will continue to make
decisions on pricing and payment
methodology for its demonstrations
specific to each demonstration.
Comment: Regarding the current risk
adjustment model, one commenter
suggested that there are certain
conditions like diabetes and cancer that
have several different HCC risk adjusters
of varying intensity. The concern is that
chronic obstructive pulmonary disease
(COPD), congestive heart failure (CHF),
and other HCCs common among frail
elderly have only one risk score, when
it may be more appropriate to
distinguish a late stage or advanced
stage of illness for certain conditions to
trigger a higher score.
Response: CMS continues to work on
improvements to the CMS-Hierarchical
Condition Category (HCC) risk
adjustment model. For 2006, more
diagnoses and HCCs will be included in
the CMS-HCC model. We will announce
the updates to the CMS-HCC model in

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the Advance Notice of Methodological
Changes for Medicare Advantage
Payment Rates. We believe that this risk
adjustment model, on average,
accurately pays for Medicare enrollees.
Comment: Several commenters
supported the implementation of a
frailty adjuster across the MA program,
but encouraged CMS to delay
implementation of the adjuster for at
least two years until the other
significant changes to the MA program
have been implemented. In light of the
likely delayed implementation of a
frailty adjuster for all MA organizations,
another commenter believed that CMS
should pursue a legislative change to
pay special needs plans (SNPs)
differently, in order to implement a
frailty adjuster, from the rest of the MA
organizations. In particular, several
commenters were concerned about
SNPs being paid accurately for their
dual eligible enrollees.
Response: We agree that
implementation of a frailty adjuster
across the MA program would not be
appropriate in the near future in the
advent of significant changes occurring
in the MA program beginning in 2006.
We believe that the current risk
adjustment model that includes a
Medicaid eligibility adjuster pays on
average correctly for dual eligible
enrollees. In addition, as a part of
refining the CMS-HCC model, we intend
to recalibrate the current risk
adjustment model so that it accurately
reflects more current treatment costs. As
the MA program continues to stabilize
in its new form, we will be able to apply
a frailty adjuster across the entire MA
program. We do not have the statutory
authority to apply a frailty adjuster only
to special needs plans because the MMA
requires CMS to pay special needs plans
using the same methodology it uses for
all other MA organizations.
Comment: One commenter requested
that CMS encourage MA organizations
to include financial incentives in their
contracts with providers that are
designed to encourage risk adjustment
data submission, rather than using
financial penalties. The commenter
noted the success in California with a
pay-for-performance program that
includes financial incentives to IPAs
and medical groups to encourage quality
health care, including incentives for the
submission of encounter data.
Response: In principle, we do not
object to plans using financial
incentives with their physicians to
improve their risk adjustment data
submission volume to the extent that
these financial incentives do not result
in MA organizations’ encouraging
physicians to provide unnecessary or

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inappropriate services in order to
increase diagnosis reporting volumes.
MA organizations proposing to offer
providers remuneration in exchange for
collecting data must ensure that such
arrangements do not violate the antikickback statute. Parties who desire an
advisory opinion about a particular
arrangement may request an opinion
from the HHS Office of the Inspector
General (OIG). The OIG has the
authority to audit financial incentives
offered to providers.
We believe that physicians who
submit diagnoses for purposes of risk
adjustment data submission as if they
were submitting claims to FFS Medicare
for reimbursement will be submitting
the appropriate volume.
Comment: One commenter suggested
that CMS be less concerned about the
burden on MA organizations of
submitting risk adjustment data and
more concerned about the accuracy of
these data. Another commenter echoed
this concern by noting that CMS’
implementation of an abbreviated
dataset might compromise the validity
of the data submitted. One commenter
praised CMS for reducing the burden on
plans by implementing an abbreviated
risk adjustment dataset.
Response: In 2000, we implemented a
risk adjustment model based on only
principal inpatient hospital diagnosis
data. The industry voiced concerns that
the inpatient hospital model draws on
diagnoses from an acute care setting
only, and therefore, is less accurate. In
2004, we implemented a more
comprehensive model with a more
complete list of acute and chronic
diagnoses. Diagnosis data are now being
collected from three settings: inpatient
hospital, outpatient hospital and
physician office settings. At the same
time as the more accurate,
comprehensive model was being
implemented, we began requiring an
abbreviated set of data elements to be
reported in order to reduce any
unnecessary administrative burden on
the MA organizations. However, this
abbreviated dataset does not
compromise the validity of the current
risk adjustment model because all
relevant diagnoses affecting payment
still must be submitted. Rather, the fact
that we no longer collect a full set of
encounters for each MA enrollee means
only that we do not have accurate
utilization data for future recalibration
of risk adjustment models. The fact that
we no longer collect a full set of
encounters does not affect the validity
of the current model for making
payments.

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Comment: One commenter asked for
clarification of risk adjustment data
deadlines.
Response: We will provide updated
information about risk adjustment data
deadlines in the MA organization
training materials and other formats
such as MA organization user groups
designed to provide operational
information including data submission
deadlines. General guidelines about risk
adjustment data submission deadlines
can be found at § 422.310(g).
Comment: One commenter stated that
any risk adjustment system should take
into account the traditionally higher
costs and utilization of large employer
group health plans.
Response: Regarding the commenter’s
concern about the accuracy of the risk
adjustment model for large employer
group plans, data from the Medicare
Current Beneficiary Survey indicate that
any beneficiaries with supplemental
coverage have higher costs. These data
do not support the commenter’s
assertion that the costs and utilization of
Medicare Part A and B benefits are
higher for enrollees of large employer
group plans than for beneficiaries with
other types of supplemental coverage.
Adjustment for intra-area variations.
Proposed § 422.308(d)(1) would
implement section 1853(a)(1)(F)(i) of the
Act, which requires us to adjust
payments for regional MA plans to
account for variations in local payment
rates within the region the plan is
serving.
Proposed § 422.308(d)(2) would
implement section 1853(a)(1)(F)(ii) of
the Act, which requires us to adjust
payments for a local MA plan serving
more than one county to account for
variations in local payment rates within
the plan’s service area.
The proposed rule mentions four
methods that could be used to adjust for
relative costs in a plan’s service area.
Each rate reflects a different type of
variation.
• MA rates: reflect what Congress
determined to be appropriate variation
in payment rates among counties. (The
proposed rule suggests that this option
could be used for local plans.)
• Local average fee-for-service (FFS)
costs: reflect relative price and
utilization differences among counties.
(MA county rates that are 100% FFS
rates also reflect price and utilization
differences.)
• Input prices: reflect only price
differences in certain service categories,
for example, physician services, , not
variations in practice patterns among
counties.
• Plan-provided (county-specific)
factors showing relative revenue needs

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by county (which the MA organizations
would provide in their annual bid
submission): reflect cost variations
unique to each plan.
The proposed rule stated that we may
choose to apply different adjustments to
local versus regional plans, because
there may be different reasons for rate
variation. For example, regional MA
plans will be required to cover regions
at least as large as a State, thereby being
compelled to offer the same benefit
package to urban and rural areas. This
requirement could be the source of
significant variation in plan costs
because of service area differences in
provider practice and beneficiary
utilization patterns, wage indices, and
other factors.
Comment: Most commenters
recommended an adjustment based on
the MA rates. One commenter
recommended an approach where the
cost index would be consistent with the
costs MA plans face in their service
areas. Several commenters
recommended that CMS use the MA
rates for a geographic adjustment at least
in the initial years of the program,
because the industry is familiar with the
MA county rates as a means of payment.
A number of commenters recommended
that the method CMS selects for regional
MA plans should be consistent with that
for local MA plans so that the
adjustment does not advantage one type
of plan over the other, thus contributing
to a more level playing field for all MA
plans—local and regional. Another
commenter remarked that the
adjustment back to the local county
rates is the most consistent with the
constraints of the MMA, is the most
feasible to implement, and contributes
to a level playing field for the different
types of private plans. The commenter
reasoned that because the different
benchmarks are all built upon the
county payment rates, and because the
local plans can always organize to be
paid at the individual county level,
payments to all the types of plans
should reflect the county payment rates;
otherwise, spending on MA plans
would likely increase under any
geographic adjustment. Finally, one
commenter preferred to use county
benchmarks as the basis for intra-area
adjustments for local plans and an index
of county benchmarks for regional
plans, but added that the
appropriateness of an index-type
adjustment method will depend on the
basis of the experience underlying the
index derivation calculations.
Response: To avoid confusion with
the geographic adjustment we use to
calculate the 100 percent FFS rates, we
will refer to this section 1853(a)(1)(F)

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adjustment as the geographic ISAR
adjustment, reflecting its purpose.
We have chosen to interpret the ISAR
adjustment provision broadly. A more
narrow interpretation of ‘‘variations in
MA local payment rates’’ would be that
variation refers only to the
administratively-set MA rates. A
broader interpretation of variation is
that the provision denotes underlying
variations in local prices. In this sense,
‘‘local payment rates’’ means payment
rates MA organizations negotiate with
providers. We have taken the latter
approach because the MMA defines the
bid to be an amount that reflects a plan’s
estimated revenue requirements—that
is, the average underlying costs a plan
faces in its service area. This approach
allows us to consider adjustment
methods in addition to those based on
MA county rates.
By law, a plan’s bid is based on its
projected enrollment. The purpose of
the ISAR adjustment is to ensure that
CMS pays an MA organization what its
plan basic A/B bid would have been if
the enrollment projections used to
estimate the bid were identical to actual
plan enrollment. That is, the ISAR
adjustment would take into account the
difference between the distribution of
enrollment across counties in the plan’s
service area assumed in the plan’s bid
and the actual geographic mix of
enrollment at the time payment is made.
Since plan costs are not uniform across
the plan’s service area, the fact that the
distribution of enrollment assumed in
the bid is not the same as the plan’s
actual enrollment distribution would
impact on whether the plan receives the
revenue it indicated it needed in its bid
to provide Medicare Part A and Part B
services. The ISAR adjustment uses the
distribution of actual enrollment and
assumptions about relative costs across
counties in the plan’s service area to
provide a payment amount that reflects
actual enrollment.
Regardless of the specific method
(whether plan-provided projected costs
per county or a relative cost or price
index not specific to plans), use of the
ISAR adjustment to translate the plan’s
bid into county-specific rates would
mean that if a plan’s enrollment
distribution turns about to be different
than originally estimated in their bid,
their aggregate payments would be
adjusted automatically to reflect the
actual mix of enrollees in of low-cost
and high-cost counties. Recall that for
plans with bids below benchmarks, the
average payment amount is the basic A/
B bid (plus the rebate); and for plans
with bids greater than or equal to the
benchmark, the average payment
amount is the benchmark. Conceptually,

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4659

converting the average payment amount
into plan-specific county rates means
that the bid (or benchmark)—which is
an average for the whole service area—
is ‘‘disaggregated’’ and allocated to each
county in the service area.
For each local and regional plan, we
will be using a geographic ISAR
adjustment based on the MA payment
rates. This approach reflects the method
preferred by the majority of
commenters. However, since it is our
goal to encourage regional bids, we will
allow regional MA plans, on a case-by­
case basis, to request to have their
payments geographically adjusted at the
county level using a plan-determined
statement of the relative costs the plan
faces in different counties for the
provision of Medicare-covered services,
in the event that the variation in MA
rates is not an accurate reflection of the
variation in a plan’s projected costs in
its service area. We would review the
plan-provided ISAR factors for
reasonableness.
MA organizations would be required
to provide support for their factors (such
as the projected utilization and cost by
service category for each county), with
the understanding that we could ask for
additional detail (for example, fee
schedules) during bid negotiation or
during an audit. We would base our
determination of whether to use MA
rate ISAR factors or plan-provided ISAR
factors for a particular regional plan on
the comprehensiveness and
reasonableness of the MA organization’s
cost and utilization assumptions and
associated documentation, and on an
assessment of which approach would
best reflect the plan’s likely costs
throughout the service area.
The rebate, described at
§ 422.304(a)(3), is for the provision of
non-Medicare-covered benefits and is
paid separately from the basic A/B bid.
The rebate is not subject to geographic
adjustment. Further guidance on the
calculation of the ISAR adjustment
factor will be provided in the Advance
Notice of Methodological Changes for
2006 Medicare Advantage Payment
Rates, which we expect to release
February 18, 2005 on our website at
http://www.cms.hhs.gov/healthplans/
rates/default.asp.
Comment: One commenter remarked
that CMS did not clearly explain its
proposed method for the ISAR
adjustment in the NPRM, and felt that
unless we publish a proposed method
for establishing regional PPO
benchmark levels, participation in the
regional PPO program may suffer.
Another commenter requested that CMS
wait until Medpac releases its report on
payment rate variations before

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determining how to apply the ISAR
adjustment, and that CMS allow
industry to comment on the proposed
adjustment before implementation.
Response: First, we would like to
clarify that the geographic ISAR
adjustment does not establish regional
benchmarks. The method for calculating
regional benchmarks is established by
the MMA and implemented at
§ 422.258. The purpose of the ISAR
adjustment is to ensure that we pay an
MA organization what its plan basic A/
B bid would have been if the enrollment
projections used to estimate the bid
were identical to actual plan
enrollment. Second, although we stated
in the August 3, 2004 proposed rule our
intention to review Medpac’s upcoming
study on variations in MA payment
rates, we now do not believe we can
wait until the final Medpac report is
released, because it likely will be
presented to the Congress in June 2005.
We are required to announce our
proposed approach to the ISAR
adjustment, and other payment
methodologies, in the Advance Notice
of Methodological Changes for Calendar
Year 2006 MA Payment Rates, which we
expect to be released February 18, 2005
on the CMS website at http://
www.cms.hhs.gov/healthplans/rates/
default.asp.
Comment: A few commenters
recommended that the ISAR adjustment
should be considered by CMS as a tool
to use in adjusting the local payment
rates in rural markets, where competing
with a regional plan would be cost
prohibitive. One commenter suggested
that the adjustment should result in
localized derivations of regional
benchmarks, and another commenter
suggested that in counties where the
local benchmark is significantly lower
than the regional benchmark, payment
rates to regional plans should be
adjusted downward to reduce the
significant competitive advantage
regional plans would have over local
plans, because the latter will have to
charge a higher member premium for
the same benefit set and cost structure.
Finally, a few commenters stated their
concern that it has taken many years to
narrow the reimbursement gap between
rural and urban areas and now is not the
time to reinvent that disparity. These
commenters felt this could happen
under this ISAR provision because it
could allow health plans to segregate
rural providers within their region and
offer them a substantially lower
payment rate.
Response: As noted above, the ISAR
adjustment will not affect regional or
local benchmarks. In addition, the ISAR
adjustment is not a tool to increase

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payments to local versus regional plans
or vice versa. The ISAR adjustment is a
mechanism to ensure that payments to
plans reflect the plans’ bids and their
actual enrollment distribution.
We have worked within the construct
of the statute to provide a level playing
field for all plans. The MMA created
incentives to encourage participation in
the new regional plan program, such as
possible funding from a stabilization
fund and the use of risk corridors that
are only available to MA regional plans,
as found at § 422.438 and § 422.458 (and
see subpart J). These incentives are
specified by statute, so we are unable to
expand the types of organization that
are eligible for these incentives. It is
important to point out, however, that
there are special provisions available
only to local plans that MA regional
plans do not have available, such as the
ability to target specific counties and
even partial county areas for inclusion
in a plan service area, and to have
segmented service areas within a local
plan, where premiums and cost sharing
can vary across segments.
We are not clear exactly what link the
commenters are positing between the
ISAR adjustment and contract
negotiations with rural providers where
MA organizations offer payment
arrangements that are lower than
previous years.
Adjustment relating to risk
adjustment: the government premium
adjustment. Proposed § 422.308(e)
would implement section 1853(a)(1)(G)
of the Act, which requires us to adjust
payments to plans with basic A/B bids
above their benchmarks to ensure that
plans are not advantaged or
disadvantaged by the method of paying
based on bid-to-benchmark
comparisons. Under the bidding
method, the beneficiary basic premium
is the difference between unadjusted
(‘‘1.0 beneficiary’’) bid and benchmark,
yet the payment is the risk adjusted
benchmark. If the MA organization
received this premium and its risk
adjusted payment from CMS, the
combined payments would not match
its revenue needs since the basic
premium is not risk adjusted. Therefore,
the impact that risk adjustment would
have had on the basic premium will be
incorporated into our payment to the
organization.
Proposed § 422.308(e)(1) specified
that for each regional plan, payments
are adjusted so the sum of the monthly
payment and any basic beneficiary
premium equals the bid adjusted for
enrollee risk factors and the adjustment
for intra-area variations in payments in
proposed § 422.308(d)(1). Note that the
formula as stated at section

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1853(a)(1)(G)(ii) of the Act also
references the adjustment discussed in
the previous paragraph—for intra­
regional variations in local payment
rates.
Proposed § 422.308(e)(2) specified
that for each local plan, payments are
adjusted so the sum of the monthly
payment and any basic beneficiary
premium equals the bid adjusted for
enrollee risk factors. We note that, in
contrast to the language for regional
plans at section 1853(a)(1)(G)(ii) of the
Act, the formula for local plans does not
include a reference to the intra-area
variation described in proposed
§ 422.308(d)(1). We believe this was an
unintended omission for local plans,
because section 1853(a)(1)(F) of the Act
mandates this adjustment for both
regional plans and local plans serving
more than one county.
The government premium adjustment
must be applied after application of the
risk adjustment methodology and after
taking into account adjustments for
intra-area variation in local payment
rates under § 422.304(d).
Comment: Two commenters
supported CMS’ proposal to adjust
payment upward or downward to
account for the fact that the basic
beneficiary premium reflects the
revenue needed for a beneficiary with a
national average risk profile rather than
the MA plan’s anticipated mix of
enrollees.
Response: We will refer to this
adjustment as the ‘‘government
premium adjustment,’’ in order to
distinguish it from other payment
adjustments under the MMA.
Section 1854(a)(1)(G) requires CMS to
adjust payments to ensure that an MA
organization is paid the revenue needed
to offer an MA plan in a service area.
The government premium adjustment
applies to plans that have basic A/B
bids greater than their benchmarks, and
thus must charge a basic beneficiary
premium. As described above, these
plans receive their estimated required
revenue to offer original Medicare
benefits from two sources: capitation
payments from CMS and premium
payments from enrollees. Because the
MMA requires that the basic beneficiary
premium is the difference between the
unadjusted (standardized ‘‘1.0’’)
benchmark and unadjusted bid, plans
with sicker than average risk profiles
will not receive adequate premium
payments from enrollees. The
government premium adjustment would
be an upward adjustment for these
plans. Conversely, plans with healthier
than average risk profiles will receive
more premium payments than required,
so they would receive a downward

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adjustment. The government premium
adjustment will be calculated, at the
individual beneficiary level. Details on
the payment formula will be provided
in the Advance Notice of
Methodological Changes for 2006 MA
Payment Rates, which we expect to
publish February 18, 2005 on the CMS
website at http://www.cms.hhs.gov/
healthplans/rates/default.asp.
Adjustment of payment to reflect the
number of enrollees. Proposed
§ 422.308(f) implemented section
1853(a)(2)(A) of the Act, which is
unchanged by MMA. Therefore, we
proposed to retain the existing
implementing regulatory language
currently found in Subpart F. This
provision requires us to make
retroactive payment adjustments to
account for any difference between the
actual enrollees and the enrollees upon
which we based advanced monthly
payment.
Adjustment for national coverage
determination (NCD) services and
legislative changes in benefits. Section
1853(c)(7) of the Act requires that when
a national coverage determination
(NCD) or legislative change in benefits
is established and we project this will
result in a significant increase in costs,
we must appropriately adjust payments
to reflect these new significant costs.
Because all capitation rates under the
MMA now automatically build in the
annual national MA growth percentage
and therefore incorporate the effect of
NCDs annually, we proposed to amend
§ 422.308(g) and remove the NCD
adjustment factor.
Section 1858(c) of the Act provides
for temporary risk corridors for
adjusting payments to regional plans,
and proposed § 422.308(h) specified
data submission requirements to
implement risk corridor payments. At
the end of contract year 2006 and/or
2007, and before a date we specify, MA
organizations offering regional plans
must submit sufficient information for
us to calculate risk corridor amounts.
This information includes actual
allowable costs for the relevant contract
year and the portion of allowable costs
that are attributable to administrative
expenses incurred in providing these
benefits. In addition, the MA
organization will be required to provide
the total cost for providing rebatable
integrated benefits, as well as the
portion of rebatable integrated benefits’
costs that are attributable to
administrative expenses.
5. Risk Adjustment Data (§ 422.310)
Proposed § 422.310 reflected changes
we made in the methodology for risk
adjusting MA payments, under which

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we moved from collecting extensive
encounter data to collecting targeted
risk-adjustment data. The riskadjustment data referenced in this
section are data that are used in the
application of the current riskadjustment model.
We have implemented a streamlined
process for MA organizations to submit
risk adjustment data. MA organizations
may submit risk adjustment data that
conform to the requirements for
equivalent FFS data. Alternatively,
organizations may submit data
according to an abbreviated format as
specified by us. The purpose of the
abbreviated format is to reduce the data
submission burden on MA
organizations.
In addition, our current practice is to
collect data and a sample of medical
records, for conducting validation
studies of the risk adjustment data we
receive. MA organizations will still be
required to submit a sample of their
medical records in a manner specified
by CMS to support the validation
studies. We have not and will continue
not to use medical records data for any
other purpose.
The risk adjustment data must be
submitted according to the timeframes
specified by CMS. (See the following
website for information on the risk
adjustment processing system: http://
www.mcoservice.com/.) A reconciliation
process will be allowed to account for
late data submissions. Data that we
receive after the final deadline for a
payment year will not be accepted for
purposes of the reconciliation.
We have modified § 422.310(e) to
indicate that there may be penalties for
submission of false data under the
requirement for validation of risk
adjustment data.
6. Announcement of Annual Capitation
Rates, Regional Benchmarks, and
Methodology Changes (§ 422.312)
Proposed § 422.312 would implement
section 1853(b) of the Act, which was
revised by the MMA to change the date
for CMS’ announcement of annual
capitation rates to no later than the first
Monday in April of each year. In
addition, we must announce before
September the non-drug benchmark
amounts for each MA region and MA
regional plan for which a bid is
submitted. We must announce regional
benchmarks after the plan bids are
submitted in June, since per the new
section 1858(f)(5) of the Act, the
regional benchmark calculation
includes a plan bid component based on
regional plans that bid in June and also
participated in the MA program in the
previous year.

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The deadline for our release of the
Advance Notice of Methodological
Changes for Medicare Advantage
Payment Rates was similarly changed by
the MMA to no later than 45 days before
the first Monday in April.
Comment: Two commenters requested
that CMS include in the Advance Notice
of Methodological Changes for Medicare
Advantage Payment Rates additional
detail on the methodologies we use to
develop and refine payment rates. The
commenters specifically requested
detail on the coding intensity
adjustment, issues related to the data lag
elimination, and implementation of the
frailty adjuster.
Response: The annual Advance
Notice is designed to describe the
methodological changes we propose in
sufficient detail to alert MA
organizations to new calculations, new
deadlines, and so forth. If the Advance
Notice is unclear, the public is invited
to request more information during the
public comment period, and we then
publish further detail in the annual Rate
Announcement. We will be sensitive to
the commenters’ request as we prepare
future Advance Notices of
Methodological Changes.
7. Special Rules for Beneficiaries
Enrolled in MA MSA Plans (§ 422.314)
Proposed § 422.314 would implement
section 1853(e)(2) and (3) of the Act,
which sets forth special rules for how
we should make payments to enrollees’
medical savings accounts. The MMA
did not amend the payment provisions
in section 1853(e) of the Act, so these
provisions are similar to the provisions
at § 422.262 in subpart F of the current
MA regulations. However, we have
made a change to conform § 422.314(c)
with the statute at section 1853(e)(1) of
the Act.
In general, we deposit into the
individual’s MA MSA account at the
beginning of a calendar year a lump sum
equal to the annual difference between
the monthly MSA premium (analogous
to a plan basic A/B bid) and the
monthly capitation rate applied under
this section for the area. The premium
filed by the organization offering the
MA MSA plan is uniform for all
enrollees enrolled in the MA MSA plan.
This results in a uniform amount being
deposited into enrollees’ MSAs in a
given area, because the uniform
premium amount will be subtracted
from the uniform rate.
The advance monthly payments we
make to an MA organization for each
enrollee in the plan are risk adjusted
under § 422.308(c), as discussed in
connection with proposed

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§ 422.304(c)(2) on special rules for
payments for MSA enrollees.
Comment: One commenter noted a
deficiency in the proposed regulations
on how payment is made for enrollees
in MSA plans, which prevents an MSA
plan from being viable option under the
MA program. The commenter
summarized the problem as follows.
Under the statute and proposed
regulations, the total CMS payment on
behalf of a beneficiary enrolled in an
MSA (the sum of the deposit to the
enrollee’s MSA account and payment to
the MSA plan) is not equal to the risk
adjusted benchmark amount. Yet
section 1853(a)(1)(B)(iii) requires CMS
to pay the risk adjusted benchmark
amount for each MSA enrollee. This
problem arises because the payment to
the MSA plan is risk-adjusted and the
deposit to the enrollee’s MSA is not.
The result is that the total payment for
an MSA plan enrollee could be
substantially higher or lower than the
risk adjusted benchmark. Beneficiaries
and insurance companies cannot be
reasonably sure that the Medicare
payment will be adequate to cover the
cost of care.
The commenter recommended that
the MSA requirements be written so
that: (1) the deposit to the MA MSA
account is the difference between the
risk-adjusted benchmark amount (based
on the annual capitation rate) and the
risk-adjusted MSA premium; and (2) the
payment to the MSA plan is equal to the
risk-adjusted MSA premium. This
requirement would result in the total
payment (deposit plus payment to MSA
insurance plan) being equal to the riskadjusted benchmark. The commenter
recognized that this change may require
legislation. Specifically, subsection
1853(e) of the Act might need to be
amended to provide for risk adjustment
to the contribution to the MSA account.
Response: In response to this
comment, we have reviewed the
proposed regulations text for MSA plans
and have made a change to conform
§ 422.314(c) with the statute at section
1853(e)(1) of the Act. We are continuing
to consider how this statutory language
should be applied, and this issue will be
addressed in the Advance Notice of
Methodological Changes for MA
Payment Rates, which we expect to
release February 18, 2005.
Comment: Several commenters
expressed concern about CMS’ ability to
risk adjust payments for MSA plan
enrollees accurately. Given the
complexities of risk adjustment and the
absence of enrollee incentives to submit
claims to their MSA plan, the
commenters are concerned that risk
scores for many of these enrollees will

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be artificially low. One commenter is
concerned that in the absence of
systems and incentives that encourage
members to submit medical expenses to
be applied against the deductible, it
would not be possible to risk adjust
accurately the MSA benchmark for
individual health status, which is CMS’
payment amount to the MSA plan
sponsor. As a result, members will
exceed deductibles ‘‘prematurely’’ and
the plan will be responsible for all
medical payments without the benefit of
risk adjusted revenue.
Response: Section 1853(a)(3)(B) of the
statute requires that all MA
organizations submit risk adjustment
data for their plans, including MSA
plans. The MMA did not change this
requirement. We are not sure that we
understand this comment, because MSA
plans are required to track each
enrollee’s health care expenses in order
to track when the deductible has been
met and the plan becomes responsible
for all covered expenses. Therefore, as
an integral part of managing an MSA
plan, an MA organization should have
access to enrollee claims or ‘‘encounter­
like’’ data, which should enable them to
submit the required data to CMS for risk
adjustment payment purposes.
8. Special Payment Rule for Federally
Qualified Health Centers (§ 422.316)
At proposed § 422.316 we would
implement section 1853(a)(4) of the Act,
which provides for a new payment
methodology for FQHCs that contract
with MA organizations. Under this
methodology, the FQHCs will receive a
‘‘wrap-around payment’’ from us
representing the difference (if any)
between what they are paid by an MA
organization, including beneficiary cost
sharing, and 100 percent of their
‘‘reasonable costs’’ of providing care to
patients served at the centers who are
enrolled in an MA plan.
Section 1857(e)(3) of the Act, also
added by MMA, requires that MA
organizations that contract with FQHCs
pay the FQHCs an amount that is not
less than the level and amount of
payment they would make for the
services if furnished by an entity
providing similar services that was not
an FQHC. This is designed to avoid an
agreement between an MA organization
and an FQHC for payment of an
artificially low rate, with the knowledge
that the FQHC would receive
supplemental payments from us
resulting in a total of 100 percent cost
reimbursement.
Comment: One commenter suggests
that § 422.316 be revised to clarify that
it applies to both written contracts and
any deemed contracts as they exist

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under the rules that govern PFFS plans.
PFFS plans would have to clearly
disclose the payment rate in their
written terms and conditions of
payment. This would avoid
discrimination against PFFS plans.
Response: PFFS plans that have
‘‘deemed’’ networks must pay what the
FFS Medicare program pays to the
‘‘provider in question,’’ per
§ 422.114(a)(2)(i). Therefore, there
would be no wrap-around payment for
FQHCs treating PFFS patients under a
‘‘deemed’’ contract because the FQHC
would be receiving full payment from
the plan.
9. Special Rules for Coverage That
Begins or Ends During an Inpatient
Hospital Stay (§ 422.318)
The MMA amended section 1853(g) of
the Act, which puts forth special
payment rules for situations where a
beneficiary’s coverage by an MA plan
begins or ends while the beneficiary is
a hospital inpatient. The MMA
amendment expands the list of hospital
facilities covered under this provision to
include those that have come under a
Medicare prospective payment system
since the Balanced Budget Act. In
addition to ‘‘subsection (d)’’ hospitals,
three other types of facilities are now
included: rehabilitation hospitals,
distinct part rehabilitation units, and
long-term care hospitals. These changes
were proposed at § 422.318, which
otherwise retained existing language
from subpart F applicable only to
subsection (d) hospitals.
Comment: One commenter proposed
that CMS include Critical Access
Hospitals (CAHs) in the list of facilities
to which this provision applies.
Response: Under section 1853(g), this
rule applies only to ‘‘subsection (d)’’
hospitals and the three types of facilities
the MMA specifically added. Because
CAHs are not defined under section
1886(d) of the Act, this provision at
§ 422.318 does not apply to CAHs.
10. Special Rules for Hospice Care
(§ 422.320)
Proposed § 422.320 revised the
existing MA special rules for hospice
care to reflect the new bidding and
payment methodology in sections 1853
and 1854 of the Act, and the creation of
a prescription drug benefit under Part D.
Now the MA organization will be paid
the portion of the payment attributable
to the beneficiary rebate (minus the
amount of the Part B premium
reduction, if any) for the MA plan plus
the amount of the subsidies related to
basic prescription drug coverage for
plans that offer prescription drug
coverage.

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Note that for PACE organizations,
PACE enrollees must elect either their
PACE organization or the hospice
benefit as their provider of Medicare
services. An enrollee who elects to
enroll in hospice is thereby disenrolled
from the PACE benefit. However, PACE
organizations provide a service similar
to hospice known as ‘‘end-of-life-care.’’
Comment: One commenter stated that
beneficiaries who choose to enroll in a
Medicare hospice program should also
assign their Medicare Part D drug
benefit to the hospice. The commenter
argued that prescription drugs are
usually an integral component of
hospice care and should be managed by
the provider. Once a health plan is not
involved in the care management of a
patient, then it should not be
responsible for the patient’s prescription
drug management.
Response: When a beneficiary
enrolled in an MA plan elects hospice,
that beneficiary is still an enrollee in the
plan, is still liable for any plan
premiums and cost sharing for benefits
not covered under hospice. It is possible
for an enrollee who has elected hospice
to require prescription drugs for
conditions not related to hospice care,
which are the plan’s responsibility. We
believe that it is appropriate for
Medicare Advantage Prescription Drug
(MA-PD) plans to manage the
prescription drug coverage of enrollees
who have elected hospice, and therefore
we will pay MA-PD plans the Part D
premium for all enrollees.
Comment: One commenter suggested
that CMS conduct a demonstration
allowing beneficiaries to elect hospice
while still receiving life saving
treatment as a means to overcoming the
fear and perceived finality of electing
hospice. The commenter cites the low
rate of hospice election and short
duration of services as reasons to
develop some innovative approaches to
identifying how to better transition
beneficiaries with terminal or advanced
illness into a care environment that
provides needed and appropriate care,
while improving quality of life.
Response: It is important to note that
the current hospice benefit began as a
Medicare demonstration. It was
considered successful, and therefore,
the Congress added hospice care as a
benefit in the Medicare program. In
addition, § 409 of the MMA requires
CMS to conduct another hospice
demonstration. The statute requires
CMS to test delivery of hospice care in
rural areas under which Medicare
eligible individuals, without a caregiver
at home, may receive care in a facility
of 20 or fewer beds. Such facility will
not have to offer hospice services in the

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community or comply with the 20
percent limit on inpatient days. In the
future, we would be interested in
considering other innovative ideas for
increasing enrollment in hospice care
throughout the country. We invite the
commenter to submit a proposal on the
suggestion.
11. Source of Payment and Effect of MA
Plan Election on Payment (§ 422.322)
With the exception of a new provision
addressing payments for Part D benefits,
proposed § 422.322 is identical to
§ 422.268 in subpart F of the current MA
regulations. Section 422.322(a)(2) was
added to reflect the creation of
subsidized prescription drug coverage
under Part D. As required by section
1853(f) of the Act, subsidy payments to
MA-PD organizations for basic drug
coverage under this title are included in
the payments described in
§ 422.322(a)(2).
Comment: Two commenters requested
clarification on whether an MA
organization can authorize that CMS
payment be made directly to an agent of
the MA organization.
Response: We believe that the
commenters may be anticipating a
situation under the MA program where
an employer directly contracting with
CMS to offer an MA plan would
contract with an MA organization to
manage that plan. However, section
1857(a) of the statute, which was not
amended by the MMA, explicitly states
that no payment shall be made under
section 1853 to an organization unless
that organization is under contract with
the Secretary. Therefore, we do not have
the authority to make any payments
from the Medicare Trust Funds under
section 1853 to an agent of an MA
organization. The existing regulatory
language in Subpart F at § 422.268(c)
that implements section 1857(a) is
found in proposed Subpart G at
§ 422.322(c).
Comment: One commenter was
concerned that the proposed rules are
silent with respect to provider recovery
of unpaid amounts due from MA plan
enrollees. The commenter
recommended that CMS allow providers
that treat MA enrollees the same
recourse for unpaid enrollment amounts
that currently exists in the regulations
for the FFS program, that is, allow a cost
report recovery that follows the
Medicare bad debt recovery criteria.
Without this recovery mechanism,
providers will suffer financial harm
because beneficiaries change program
status, not because of any change in the
service they provide.
Response: The issue of bad debt
recovery criteria for providers who

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submit cost reports is beyond the scope
of this rulemaking. We refer the
commenter to 42 CFR part 413 for
further information about bad debt
recovery rules.
12. Payments to MA Organizations for
Graduate Medical Education Costs
(§ 422.324)
These provisions at proposed
§ 422.324 were virtually identical to the
current MA provisions in subpart F at
§ 422.270 (we proposed some nonsubstantive editorial changes), and
required us to make payments to MA
organizations for direct graduate
medical education costs that MA
organizations incur in dealings with
non-hospital provider settings, under
specified conditions.
Comment: One commenter requested
that the final rule clarify whether
utilization data on MA enrollees should
be considered when making
determinations about FFS payment
adjustments and minimum utilization
standards (for example, direct and
indirect medical education payment
formulas and the disproportionate share
payment formula). The commenter also
noted that current FFS regulations apply
minimum Medicare utilization
standards when assigning certain
designations such as rural health
clinics, sole community provider or
rural referral center status, and
requested that MA utilization data be
included when CMS makes such
designations.
Response: The FFS rate determination
and provider designation processes are
beyond the scope of this rule making.
Such decisions could be proposed and
finalized in an upcoming rule-making
for the relevant prospective payment
system.
Subpart I—Organization Compliance
with State Law and Preemption by
Federal Law
The MMA amended section
1856(b)(3) of the Act and significantly
broadened the scope of Federal
preemption of State law. We proposed
to revise § 422.402 to clearly state that
MA standards supersede State law and
regulation with the exception of
licensing laws and laws relating to plan
solvency. In other words, with those
exceptions, State laws do not apply to
MA plans offered by MA organizations.
We believe that the Conference Report
was clear that the Congress intended to
broaden the scope of preemption in the
MMA. We accordingly 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

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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.
In addition to outlining the new scope
of the preemption, we also proposed the
following technical changes:
• We proposed to remove the current
§ 422.402(c) because
we believed it was no longer relevant
given the new MMA provision.
• We clarified that States are
expressly prohibited from
imposing a premium tax, or similar
type of tax, on premiums paid by
beneficiaries or third parties on behalf
of beneficiaries to MA organizations.
Below we summarize and respond to
the comments we received on Subpart I:
Comment: A commenter expresses
concern that the statutory and
regulatory language stating that Federal
preemption does not extend to State
licensing or solvency requirements is
vague and may allow States to impose
network access requirement on MA
plans.
Response: We note that the
Conference Report makes it clear that
the Congress intended to broaden the
scope of Federal preemption with the
intention of ensuring that the MA
program as a Federal program will
operate under Federal rules. We have
also clarified (in the preamble to the
interim regulation) and we restate here
that we believe that State licensing laws
under Federal preemption are limited to
State requirements for becoming State
licensed, and cannot be extended to
other 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. We believe that under current
Federal preemption authority States are
limited in applying only those
requirements that are directly related to
becoming State licensed. For example,
State-licensing requirements may
include requirements such as filing
articles of incorporation with the
appropriate State agency, or satisfying
State governance requirements.
However, under Federal preemption,
State licensing laws may not be
extended to include rules that apply to
State licensed health plans which we
believe would include network
adequacy requirements for MA plans.
Comment: A commenter expresses
concern that if all State regulation of
MA plans is broadly preempted by
Federal law (with the limited exception
of licensing and solvency requirements),
contracting providers will not have
adequate means to ensure prompt
payment or access to external review of
inappropriate denials of coverage or

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payment. The commenter recommended
that CMS either narrow its
interpretation of how State law may be
preempted or expand its own Federal
requirements for plan-provider
contracting standards to include basic
provider protections, such as prompt
payment.
Response: As previously stated, we
believe that with the exceptions of State
licensing and solvency requirements the
Congress clearly intends and the MMA
statute provides that the MA program is
to be solely under Federal and not State
rules. However, we do recognize
concerns regarding the effectiveness of
Federal regulation of the MA program.
In overseeing the MA Program, CMS
will ensure appropriate oversight of MA
plans.
With respect to prompt pay
requirements, providers and MA
organizations may enter into contracts
the terms of which are established by
the parties. In general the terms of these
contracts including payment amounts
and prompt payment standards are
determined by negotiation between the
parties. We specifically require in our
regulations at § 422.520(b) that contracts
between MA organizations and
providers contain prompt payment
standards which the parties have both
agreed to. In the event an MA
organization fails to honor its provider
contract(s) in certain circumstances, we
may impose intermediate sanctions or
even terminate its contract with the MA
organization.
Comment: A commenter asks that
CMS clarify in its regulations that, with
the exception of State laws that relate to
State licensing and solvency, Federal
preemption extends to any requirement
that the State might impose, including
requirements imposed as a condition of
maintaining State licensure.
Response: We believe our regulations
at § 422.402 are clear in regards to the
broad extent of Federal preemption
authority under the MMA. We have
discussed in previous responses that
States may not use licensure or solvency
requirements as an indirect means to
impose health plan regulations on MA
plans. Again, we reiterate our
understanding of the congressional
intent that the MA program, as a Federal
program operate solely under Federal
rules with the exception of State
licensure and solvency requirements.
Comment: A commenter
acknowledges the preamble discussion
in the proposed rule clarifying that State
licensing laws are limited to the
requirements for becoming State
licensed (for example, filing of articles
of incorporation with the appropriate
State agency or satisfying State

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governance requirements) and do not
extend to the requirements that a State
may impose on licensed health plans
that absent preemption must be met as
a condition of keeping a State license.
The commenter recommended that CMS
make this clarification in § 422.402 of
the MA regulations.
Response: We believe State licensure
requirements cannot be used as an
indirect way to regulate MA plans by
imposing requirements not generally
associated with licensure. For example,
we stated that reasonable licensure
requirements may include the filing of
articles of incorporation with the
appropriate State agency or satisfying
State governance requirements.
However, we chose not to establish the
parameters of State licensure in our
regulations as there may be other
legitimate aspects of State licensure we
have not noted.
Comment: A commenter stated that
the proposed rule reiterates the MMA
and fails to clarify the extent to which
State law is preempted. The commenter
maintains that the proposed regulation
gives no guidance to States in
determining which laws they can
require Medicare plans to observe.
According to the commenter, States do
not know which standards they can
enforce to protect consumers. As an
example, the commenter cites the KnoxKeene Act in California which
conditions health plan licensure on
several minimum requirements. The
commenter maintains that without
explanation from CMS on what types of
‘‘licensing’’ laws States may enforce,
California has no way of determining
which parts of the State’s broad
statutory scheme may apply to Medicare
plans and which parts are preempted.
The commenter believes that CMS has
not provided guidance to States on how
financial solvency requirements can be
separated from other parts of State
licensing law which are intricately
interwoven. Instead of clarifying
underlying statute and policy, in the
commenter’s view, the proposed rule
injects further confusion regarding the
extent of Federal preemption of State
law. The commenter requests further
explanation and practical guidance on
the role of the States in enforcing
minimum licensure and financial
solvency requirements.
Response: As we stated in the
preamble to the proposed rule (69 FR
46904), we believe that under the MMA,
States are preempted from applying any
regulatory requirements on MA plans
with the sole exception of State
licensure and solvency requirements.
We also believe that licensure and
solvency requirements cannot be used

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as an indirect method of imposing State
regulatory requirements that a State
might impose on non MA health plans.
We recognize that there still may be
questions about the extent of allowable
State regulation. As in the case of the
pre-MMA pre-emption provisions, we
intend to address these specific type of
preemption questions in cooperation
with States.
Comment: A commenter stated that
Federal preemption authority under the
MMA means that requirements
concerning these matters as fair
business practices, plan and physician
contracting and prompt payments
which have been traditionally under
State law, will now be governed by
Federal law. The commenter
recommended that CMS monitor the
effect of Federal preemption and
establish strong Federal oversight to
ensure that plans are complying with
Federal regulatory standards. The
commenter is concerned that without
strong Federal oversight, patients in MA
plans may not have the same
protections that apply to other
individuals enrolled in health plans,
including those in traditional Medicare
or those enrolled in private plans
governed by State law. The commenter
also recommended that since most State
laws applicable to health plans will be
preempted by Federal law, CMS should
ensure that laws and regulatory
standards that protect patients and
physicians in the traditional Medicare
program also be applied by CMS to MA
plans.
Response: We are aware of the need
for strong consistent oversight of MA
plans. As we have done under the
previous M+C program, we will ensure
that enrollees in MA plans receive the
appropriate quality and access to plan
covered health care services.
Comment: A commenter stated that in
the proposed rule (69 FR 46913 through
46914), CMS takes the position that
State contract are ‘‘generally applicable’’
to MA organizations and are therefore
not preempted. The commenter also
indicated that CMS explains (in the
preamble to the proposed rule) that
State contract and tort law does not
specifically apply to health plans, and
that the Congress only intended to
preempt State standards contained in
State statutes and regulations, and that
State standards developed through case
law (for example, State contract and tort
law) are not preempted. The commenter
expresses concern that while State
contract and tort law principals may
have general application, State
standards developed through case law
based on interpretations of State
contract and tort law may be specific to

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health plans, and may apply State
standards that would otherwise be
preempted under Section 232(a) of the
MMA.
The commenter concludes by stating
that they believe that in enacting section
232(a) of the MMA, the Congress
intended to draft a clear Federal
preemption standard for the MA
program, and that the primary
motivation for this new preemption
standard was to ease the administrative
burden caused by the ambiguity in the
old § 422.402. The commenter also
recommended that CMS make clear that
all State standards, including those
established through case law, are
preempted with respect to the MA
program, with exceptions of State
licensing and solvency laws.
Response: In response to this
comment, we would clarify that all State
standards, including those established
through case law, are preempted to the
extent that they specifically would
regulate MA plans, with exceptions of
State licensing and solvency laws. Other
State health and safety standards, or
generally applicable standards, that do
not involve regulation of an MA plan
are not preepmted.
Comment: A commenter expresses
concern that under the rules proposed
by CMS, providers who contract with
MA plans will be left with virtually no
protection because State prompt pay
laws will be preempted. The commenter
stated that while CMS has proposed
adding § 422.520(b)(2), which provides
that an MA organization is obligated to
pay contracted providers according to
the terms of the contract with the MA
organization, this language does not
provide sufficient protection for
contracted providers. The commenter
indicated that nearly every State in the
country has enacted prompt pay
legislation to protect providers who are
often unable to negotiate sufficient
prompt pay provisions in their contracts
with plans. The commenter also
suggested that if State prompt pay laws
are preempted then CMS should revise
the proposed rule to add prompt pay
protection for contracted providers that
is at least as strong as that given to noncontract providers.
In addition, the commenter believes
that preemption of State prompt pay
requirements for MA contracting
providers will cause hospitals to be less
willing to contract with MA plans if
they are uncertain whether claims will
be paid promptly and fairly.
Response: In our current MA
regulations at § 422.520(b), we require
that MA organizations include in its
contracts with providers a prompt pay
provision. However, we allow the

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4665

providers and MA organization
discretion to negotiate the terms of the
prompt payment provisions. Since these
contracts typically include payment
arrangements, we believe it is
appropriate and reasonable to leave the
parties to the contract discretion to work
out mutually agreeable terms of their
contract. The contracts may include
payment amounts greater than what
original Medicare will pay for some
services and other payment incentives
for contracted providers. If an MA
organization fails to honor the terms of
its provider contracts under certain
conditions, we have the authority to
impose intermediate sanctions or even
terminate its contract with the MA
organization.
Comment: One commenter
recommended that CMS develop
guidance that builds on the preamble
discussion of preemption in subpart I
and Subpart M. The Congress provided
broad preemption authority to ensure
that the program is implemented in a
uniform way for beneficiaries in States
across the country. The commenter also
recommended that CMS interpret the
preemption authority, consistent with
the Congressional intent, to maximize
the uniformity of program
implementation nationwide.
Response: We believe that in our
previous responses, we have made it
clear that our understating of Federal
preemption and the Congressional
intent is that the MA plans are only
subject to Federal regulation with the
exception of State licensure and
solvency requirements.
Comment: A commenter encourages
CMS to clearly communicate the
provisions of the new law and
regulations relating to both preemption
of State law and restrictions on States
imposing premium tax on funds
collected from enrollees to all States.
The commenter states that they have
already received questions from States
related to premium tax and believe a
communication from CMS would help
clear up any confusion the States may
have.
Response: We believe the MA
regulations at § 422.404 are absolutely
clear that States cannot levy a premium
tax, fee, or any other fee on the payment
CMS makes to MA organizations (on
behalf of MA enrollees) or payments
made by MA enrollees to MA plans or
by a third party to a MA plan on a
beneficiaries behalf.
Comment: One commenter stated that
CMS has not established if its expanded
preemption authority applies to cost
HMOs that are either: (1) observing the
same rules as MA organizations (with
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example); or (2) offering qualifying Part
D coverage. Both the Congress and CMS
have stated that cost HMOs offering
qualifying Part D coverage should be
‘‘treated’’ like local MA-PDs and subject
to the same rules as MA-PD plans
offered by MA organizations. The
commenter maintains that CMS should
apply the expanded preemption
available to MA organizations to cost
HMOs when the latter are carrying out
the same programs and are subject to the
same rules as the former. The
commenter also believes that doing so
in the final rule would be consistent
with the intent of the Congress, and
would ensure consistent application of
Medicare managed care rules when
those rules are the same for both MA
members and cost HMO members. The
commenter concludes by noting that
without preemption, cost HMOs may be
mandated by State law to cover certain
drugs, or have certain cost sharing for
covered drugs, inconsistent with Part D.
Response: If a cost plan offers the Part
D benefit, the Part D provisions that
apply under the MA program would
apply to the Part D product, including
the Federal preemption standards.
However, other services offered by the
cost plan are not subject to the new
Federal preemption authority in the
MMA which otherwise only applies to
MA plans offered by MA organizations.
Subpart J—Special Rules for MA
Regional Plans
Section 1858 of the Act, as amended
by section 221 of the MMA, sets forth
special rules that apply to new MA
regional plans. Although MA regional
plans will have many similarities with
local MA plans, the Congress provided
for a number of unique financial and
administrative incentives designed to
support the introduction of these types
of plans.
These incentives will assist plans as
they enter this new line of business and
learn the market dynamics of serving
beneficiaries across larger geographic
areas. In addition, to encourage the
formation of regional plans, we
establish(at § 422.451) a 2-year
moratorium on new local PPO plans
from January 1, 2006 until December 31,
2007, unless the plan was offered before
the first day of the moratorium, to
implement section 221(a)(2) of the
MMA.
In the August 3, 2004 rule, we
proposed establishing a new subpart J to
address many of the special regional
PPO requirements. (Bidding and
payment provisions for MA regional
plans are implemented in subparts F
and G of part 422.) We received more
than 125 sets of comments on subpart J

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in response to the proposed rule; most
related to the establishment of MA
regions. The Secretary of the
Department of Health and Human
Services announced the establishment
of the MA and PDP regions on
December 6, 2004. The website address
where the MA and PDP regions may be
found is http://www.cms.hhs.gov/
medicarereform/mmaregions/. Below
we summarize the proposed provisions
and respond to comments.
§ 422.451—2 year Moratorium on
Expansion of local PPO plans
To encourage the formation of
regional plans, we had proposed at
§ 422.451 to implement a 2-year
moratorium on the offering of new local
PPO plans from January 1, 2006 until
December 31, 2007. As discussed below,
in response to a comment on this final
rule, we have revised our interpretation
of the moratorium. We now interpret the
moratorium as precluding an MA
organization from offering a new PPO
plan in a service area if the organization
did not offer a PPO plan in that area in
2005. As discussed below, an
organization that offers a PPO plan in
2005 in a service area will, under our
new interpretation, be permitted to offer
a different plan in the same area (for
example, it could offer both an MA plan
and MA-PD plan in the area). Section
221(a)(2) of the MMA provides that we
cannot permit the expansion of local
PPO plans during 2006 or 2007 unless
the PPO was offered as of December 31,
2005. We have determined that a PPO
is ‘‘offered’’ as of December 31, 2005, for
purposes of the moratorium, only if it
has actually enrolled beneficiaries into
its plan before January 1, 2006.
Comment: A commenter believes that
the Congress intended the moratorium
to prohibit the expansion of local PPO
service areas (for 2006 and 2007) but
allow for the introduction of new local
PPO plans within those PPO service
areas. In support of this view, the
commenter believes that the Act permits
plans to ‘‘expand enrollment’’ during
the moratorium, and asserts that
product innovation is necessary to do
that. The commenter also notes that in
order to migrate existing members to
new products, MA organizations will
need to have several plan offerings, both
with and without Part D coverage. In
addition, MA organizations may want to
offer MA-PD PPO plans with both the
standard coverage package and
enhanced packages that provide ‘‘donut
hole’’ coverage. The commenter
concluded that if the moratorium were
interpreted as freezing the number of
plans that a local PPO can offer, the
effect would be to greatly restrict
choices for current members of local

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PPO plans. The commenter believes the
Congress did not intend such a result.
Response: We agree with the
commenter. As noted above, we are now
construing the moratorium to apply at
the MA Organization level, rather than
the plan level. Under this approach, an
MA organization that has not offered a
local PPO plan in a service area prior to
the effective date of the moratorium will
be prohibited from doing so, but an
organization that did offer a PPO plan
in the area could continue to do so, and
could add other PPO plan options. We
believe this change in interpretation is
warranted on several grounds. First, we
interpret section 221(a)(2) of the MMA
as intended to prevent MA
organizations from entering a new
service area with a local PPO product in
2006 and 2007, not to preclude an
organization already offering a PPO plan
in the area from changing its benefit
designs. We believe that even though
the text of section 221(a)(2) contains the
word ‘‘plan,’’ Congress used that word
in its more colloquial sense—that is,
meaning ‘‘health plan’’ rather than ‘‘MA
plan.’’ As the commenter stated, support
for this interpretation is found in the
Conference Report, which states that
MMA section 221(a)(2) establishes the
moratorium ‘‘on new local preferred
provider organizations to encourage
PPOs to operate at the regional level.’’
Further support for this interpretation
arises from the fact that were we to
retain the more restrictive reading, MA
organizations would be precluded from
offering their enrollees the option of
choosing whether to enroll in Part D.
Because the organization would be
required to offer an MA-PD plan in the
service area, if it only offered one PPO
plan in 2005, it would have to offer Part
D benefits in that plan, as only that plan
would be exempted from the
moratorium. We believe that the
Congress intended to give MA
organizations the right to offer a plan
without Part D benefits as long as they
offered an MA-PD plan in the same area.
This right would be thwarted under our
earlier interpretation of the moratorium
provision. We have revised the
regulation accordingly. The effect of the
2006 and 2007 moratorium will be to
prevent an MA organization from
offering a PPO plan in a service area in
2006 and 2007 if it did not already offer
one in the area, and to freeze any service
area expansions of existing local PPO
plans. However, during the 2-year
moratorium, MA organizations offering
local PPO plans, may offer additional
PPO plans (within the pre-moratorium
PPO services areas) to afford
beneficiaries reasonable enrollment

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options and to allow for the MA
organization make changes in order to
offer Part D coverage in a local PPO
plan.
Comment: A commenter
recommended that CMS allow
specialized MA plans for special needs
individuals or SNPs to offer new local
PPO plans and service area expansions
(SAEs), even during the moratorium in
2006 and 2007. The commenter believes
that this flexibility is warranted because
SNPs do not compete with MA regional
plans.
Response: As we have discussed
above, an MA organization may
introduce new local PPO plans within
its 2005 service areas where it has
offered local PPO plans. However, an
MA organization may not expand its
service area beyond the boundaries of
the local PPO plans the organization has
established prior to the moratorium’s
taking effect. This will allow an
organization to offer a SNP (operating as
a local PPO) in its pre-moratorium PPO
service areas. We think this is consistent
with the Congressional intent to allow
organizations offering local PPO type
plans to expand enrollment within its
pre-moratorium service areas.
Comment: A commenter is interested
in applying to us in 2006 as a new local
HMO that would become operational in
2007. The commenter states that its
operational model is as an HMO.
However, the commenter is licensed in
its State of operation as a ‘‘health care
services contractor’’ and not as an HMO.
The commenter is concerned that
because it is not State-licensed as an
HMO, it may not fit the definition of a
local HMO and will be subject to the 2­
year moratorium on local PPOs.
Response: Organizations contracting
with us must meet applicable State
licensure requirements. Our basic
regulatory requirement is that an MA
organization must be State licensed to
bear risk as described in the MA
regulations at § 422.400. Section
422.400 indicates that it is the
responsibility of the MA organization to
demonstrate to us that it is operating
within the scope of its State license or
the State authority granted to it under
§ 422.400(b) (if the entity is not Statelicensed as a commercial insurer)
authorizes it to offer the type of MA
plan or plans it intends to offer in a
State. Upon meeting State licensure
requirements, the organization offering
an MA plan must meet MA regulatory
requirements governing the type of plan
being offered. As we have previously
described, we will approve applications
for new local PPO plans for 2006 and
2007 offered by an MA organization
within the service area of local PPO

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plans offered by that MA organization
and established prior to January 1, 2006.
In addition, MA organizations may
introduce other MA plan types without
service area restriction (for example,
HMOs or PFFS plans) that meet State
licensing requirements and MA
regulatory requirements.
Comment: The commenter opposes
the local PPO 2-year moratorium but
recognizes that it is required under the
MMA. The commenter states that CMS
must set an application deadline that
allows for the review and approval of a
local PPO application in time for the
bidding deadline. Accordingly, the
commenter recommends that we
consider a plan as ‘‘existing’’ before
2006 even though the first effective date
will not be until January 1, 2006. An
MA local PPO should be considered as
‘‘existing’’ when in 2005, has been
awarded a contract, has submitted a bid
for 2006, and is being marketed during
the annual election period which begins
in November, 2005.
Response: Under MMA section
221(a)(2), the 2006 and 2007
moratorium prevents the offering of new
local PPOs in a service area unless a
local PPO plan was offered by that MA
organization in that service area as of
December 31, 2005. We have
determined that this means that local
PPO plans must have actually enrolled
beneficiaries before January 1, 2006 to
be considered ‘‘offered’’ and thus in
effect before the moratorium begins. The
local PPO plans that have enrolled
beneficiaries prior to January 1, 2006
will establish the limits of the service
area where the MA organization can
introduce new local PPO plans during
the moratorium.
Establishment of the MA regions
(§ 422.455)
At § 422.455, we implement section
1858(a) of the Act, which requires us to
establish the regions that will constitute
the service areas for the MA regional
plans. We were required to establish
between 10 and 50 MA regions within
the 50 States and the District of
Columbia, and an MA regional plan will
be required to serve an entire region.
The statute specified that the MA
regions should maximize the
availability of regional plans for
Medicare beneficiaries, particularly
those residing in rural areas, regardless
of their health status. To assist us in
developing the MA regions, we were
required to conduct a market survey and
analysis, including an examination of
current insurance markets.
It is important to note that in
accordance with section 1858(a)(2)(B)(ii)
of the Act, we may periodically review
MA regions and revise as necessary. We

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implement this provision at
§ 422.455(b)(2)(ii).
Combined with comments received
on Prescription Drug Plan (PDP) regions,
we received more than 110 sets of
comments on the establishment of MA
regions as found in § 422.455(b). The
first sets of comments were received in
follow-up to a public meeting held in
Chicago, Illinois on July 21, 2004
regarding the MA and PDP regions. We
also received numerous comments in
response to our request for comments in
the proposed rule for part 422:
Establishment of the MA Program. We
also received comments on PDP regions
on the part 423 proposed rule: Medicare
Prescription Drug Benefit. Comments
and responses that relate to the
establishment of PDP regions are found
in Subpart C of the preamble to the final
rule for part 423. Finally, we received
written comments following a CMS
Special Open Door Forum conference
call on ‘‘Factors for Determining MA
and PDP Regions to Maximize
Beneficiary Choice,’’ held on Friday,
October 22, 2004.
The majority of MA region comments
that specified the size of the region
generally favored establishing 50 Statebased regions. However, about one-third
of all comments supported multistate
regions, though few provided the
number of multistate regions they
would prefer. Issues identified in
support of 50 State-based regions
included the large assumption of risk
with the establishment of larger regions;
insufficient time for plans to negotiate
and develop networks in larger regions
or to renegotiate provider contracts and
form partnerships; limitations in
capacity and infrastructure issues in the
initial years; and potential difficulties in
obtaining State licenses and meeting
State solvency requirements.
Comment: Some commenters
suggested that fewer organizations will
participate as regional PPOs if larger
regions are established. Commenters
who favored multistate regions
indicated their belief that larger regions
would facilitate plan choices in areas
traditionally without a choice of plans.
Further, several commenters noted that
50 State-based regions would perpetuate
the status quo of not providing choice
of plans in certain areas, especially in
rural areas. Commenters in favor of
multistate regions also cited
Congressional intent to provide rural
beneficiaries with the same array of
choices that beneficiaries in non-rural
areas often have. These commenters
contend that these choices would not
occur with 50 State-based regions. From
a market perspective, supporters of
multistate regions believe that there

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would be a critical mass in larger
regions that are necessary to encourage
new entrants into the MA market.
One commenter stated that the lack of
specificity in the proposed rule made it
difficult to envision how the new
regional PPO option would work in
practice. A number of commenters
expressed concern about the
compressed timeframe between our
announcement of the regions and their
deadline for making a decision about
whether to apply as a regional PPO.
Finally, a number of commenters
recommended that CMS make Puerto
Rico a freestanding MA region because
of the unique cultural factors of
Medicare beneficiaries residing in
Puerto Rico.
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,
presence of PPO providers and primary
care providers, and not splitting
multistate Metropolitan Statistical Areas
(MSAs). Additional factors were also
considered, for example, solvency and
licensing requirements and capacity
issues. In response to comments about
the lack of specificity in the proposed
rule, we have taken several steps (for
example, the market survey and
extensive public outreach) to ensure
that the public could see options for the
regions, and factors used in determining
these options. We also have sought
public input in several contexts before
the publication of the regions. The
establishment of the MA PPO and PDP
regions was announced on December 6,
2004, and can be found at http://
www.cms.hhs.gov/medicarereform/
mmaregions/ . We understand the
commenters’ concerns about Puerto
Rico’s unique circumstances. However,
the statute defines an MA region as one
that is within the 50 States and the
District of Columbia. Therefore, we are
not authorized to include Puerto Rico or
any of the other U.S. territories in an
MA region. However, pursuant to the
requirement to establish PDPs under
section 1860D–11(a)(2) of the Act (as
implemented at § 423.112), we have
established PDP regions for the
territories, separate from the 50 States
and the District of Columbia. A separate
PDP region has been established for
each territory.
Risk Sharing (§ 422.458)
Section 1858(c) of the Act provided
that we will share risk with MA regional

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plans for contract years 2006 and 2007,
if plan costs are above or below a
specific risk corridor. Risk sharing is
intended to encourage plans to enter the
regional market and to provide
assistance to these plans during the
start-up phase of their business.
Section 422.258(a) will implement
section 1858(c) of the Act by defining
the following terms:
• Allowable costs were defined as the
total amount of costs incurred in a year
in providing benefits covered under the
original Medicare FFS program option
for all enrollees and in providing
rebatable integrated benefits, reduced by
the portion of those costs attributable to
administrative expenses incurred in
providing these benefits.
• Target amount for an MA regional
plan was defined as the total amount of
payments made to the organization for
enrollees in the plan for the year,
reduced by the amount of
administrative expenses assumed in the
portion of the bid attributable to benefits
under original Medicare FFS program
option and rebatable integrated benefits.
• Rebatable integrated benefits were
defined as those non-drug supplemental
benefits that are funded through
beneficiary rebates (described at
§ 422.266(b)(1)) and that we determine
are: (1) additional health benefits not
covered under the original Medicare
program option; and (2) benefits that
require expenditures by the plan.
Section 422.258(b)(2) will implement
section 1858(c)(1)(B) of the Act by
requiring that MA regional plans notify
us, before that date in the succeeding
year as we specify, of each plan’s total
allowable costs. As mentioned above,
rebatable integrated benefits (RIBs) are
the only supplemental benefits that can
be included in a plan’s allowable costs.
We have discretion to evaluate whether
certain rebatable benefits should be
included in allowable costs for risk
corridor calculations. We asked for
comment whether reductions in cost
sharing for Parts A and B benefits
should be considered RIBs.
Section 422.358(c) will implement
section 1858(c)(2) of the Act relating to
payment adjustments. There will be no
payment adjustment if the allowable
costs for the plan are at least 97 percent,
but do not exceed 103 percent, of the
target amount for the plan. Section
422.358(c) also included the following:
• If allowable costs for the plan are
more than 103 percent but not greater
than 108 percent of the target amount
for the plan for the year, we will
increase the total monthly payments
made to the organization by 50 percent
of the difference between allowable

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costs and 103 percent of the target
amount.
• If allowable costs for the plan are
greater than 108 percent of the target
amount, we will increase the total
monthly payments to the plan by an
amount equal to the sum of: (1) 2.5
percent of the target amount; and (2) 80
percent of the difference between
allowable costs and 108 percent of the
target.
• If the allowable costs for the plan
are less than 97 percent, but greater than
or equal to 92 percent of the target
amount, we will reduce the total
monthly payment to the plan by 50
percent of the different between 97
percent of the target amount and the
allowable cost.
• If the allowable costs for the plan
are below 92 percent of the target, we
will reduce the total monthly payments
to the organization by the sum of: (1) 2.5
percent of the target amount; and (2) 80
percent of the difference between 92
percent of the target and the allowable
costs.
Section 422.358(d) will implement
section 1858(c)(3) of the Act relating to
disclosure of information. Each
contracting MA plan must provide the
information that we determine is
necessary to carry out this section.
Although we have the right to inspect
and audit all books and records
pertaining to information provided
under this section, the information
disclosed or obtained for purposes of
this section may only be used to carry
out this section.
Comment: Two commenters suggested
that we clarify how MA regional plans
should determine their administrative
costs for purposes of determining their
allowable costs and target amounts.
Both commenters recommended that we
develop an administratively
straightforward methodology to identify
administrative costs. One commenter
suggested that we clearly state that the
determination of administrative costs
for purposes of the MA regional plan
risk corridors may differ from the
calculation of administrative costs for
purposes of the Part D program.
Response: As stated in § 422.254 each
bid submission must contain all
estimated revenue required by the plan,
including administrative costs and
return on investment. We interpret the
term administrative costs to be the costs
associated with administering the
program and the expected or retained
earnings of health plans. For purposes
of this final rule, we use the terms
administrative costs and administrative
expenses interchangeably. We intend to
provide further guidance on defining
administrative costs in the instructions

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on use of the bid pricing tool. We expect
that the guidance will seek to reconcile
any differences in how administrative
costs are calculated for purposes of Title
I and Title II.
Comment: Three commenters
recommended that CMS consider cost
sharing reductions for Part A and B
benefits as plan expenditures, and thus
included as rebatable integrated
benefits, rather than as foregone revenue
that would be excluded from RIBs. One
commenter suggested that by doing so,
more risk would be shared between a
plan and Medicare, thereby encouraging
greater plan participation. The
commenter believes that this approach
would be more intuitive and less likely
to result in variable cost estimations
than the alternative approach. Another
commenter suggested that the MA plan
actuary should demonstrate and certify
its estimate of the rebatable portion of
the cost sharing. Another comment was
made recommending that the risk
sharing calculation should be modified
to include full plan costs (that is, those
beyond the rebate funded portion).
Response: We considered several
issues when determining which uses of
rebate dollars to define as RIBs. As we
stated in the August 3, 2004 proposed
rule, one approach could be to define
RIBs as benefits that will otherwise be
covered under original Medicare were it
not for the imposition of deductibles,
co-pays, coinsurance, and benefit
coverage limits. This will exclude, for
example, non-Medicare covered benefits
from the category of RIBs. However, we
concluded that it is difficult to draw a
non-arbitrary line between integrated
and non-integrated benefits. For this
reason, in the proposed rule, we
proposed to include additional health
benefits not covered by original
Medicare in the category of RIBs. In
terms of cost sharing reductions for Part
A and B benefits, we agree with the
commenters that cost sharing reductions
for Part A and Part B Benefits can be
considered expenses to a plan because
when an enrollee pays less, the plan
pays more. In other words, when a plan
uses the rebate to reduce Part A and B
cost sharing, the amount that otherwise
would be paid to the provider by the
beneficiary must be paid by the plan.
Therefore, for the purposes of
determining risk-sharing payments to
regional plans for 2006 and 2007, cost
sharing reductions for Part A and Part
B benefits will be considered plan
expenditures for purposes of
§ 422.458(b)(2)(ii). In doing so, this
allows cost sharing reductions for Part
A and Part B to be considered rebatable
integrated benefits provided that these
reductions are funded by plan rebate

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dollars and not by the beneficiary
supplemental premium. With regard to
extending risk to full plan costs, section
1858(c) of the Act limits the risk sharing
arrangement between us and plans to
only allowable costs (that is, those
incurred in providing Part A and Part B
benefits and rebatable integrated
benefits). For mandatory supplemental
benefits that are non-Medicare benefits
and require expenditures by the plan
though are partly funded by rebate
dollars, we will include only the rebate
funded portion of the costs and
revenues in the risk corridor
calculation.
We note that several applications of
rebate dollars are not considered RIBs:
(1) reductions in Part D cost sharing
since the statute defines RIBS an nondrug supplemental benefits in section
1858(c)(1)(d) of the Act; (2) a Part B or
Part D premium reduction does not
require expenditure by the plan.
State Licensing Waiver
Section 422.458(e) will implement
section 1858(d), of the Act setting forth
organizational and financial
requirements for regional PPOs,
including the provision for a temporary
waiver of the MA State licensing
requirement. In order to facilitate the
offering of MA plans in regions
encompassing multiple States, we may
temporarily waive State license
requirements, for example, to allow
sufficient time for the processing of the
application by the State or States where
an application is pending.
Comment: One commenter stated that
under the MMA we have the authority
to temporarily waive State licensure
requirements to facilitate plans in
regions encompassing multiple States
when a plan is licensed in at least one
State. The commenter asks for
clarification whether we can use our
authority to grant the same waiver to
local plans seeking service area
expansion to bordering States. The
commenter believes that in providing
this authority the Congress intended to
facilitate plan choices for beneficiaries.
The commenter concludes by noting
that the licensure waiver should apply
as well to local plans seeking to become
another enrollment option for enrollees
in neighboring States.
Response: As the commenter
indicated, section 1858(d) of the Act
provides authority for us to temporarily
waive State licensure requirements to
facilitate the introduction of regional
PPO plans if a region encompasses
multiple states. However, under the
statute this authority is specific to
regional PPO plans. We do not believe
we have the authority to extend the

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State licensure waiver to local plans
with a service area encompassing more
than one State.
Comment: Another commenter
recommended that CMS be as
conservative as possible in deciding
how to waive State licensing
requirements in the States in which
regional PPOs are operating. The
commenter recommended that CMS
ensure regional plans serving
beneficiaries in multiple States are held
accountable under the State laws under
which they are operating.
Response: As specified in the MMA,
all MA organizations offering MA plans
including regional PPO plans 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 they
offer an MA plan. We will temporarily
waive the State licensure requirements
only in limited circumstances.
Specifically, if an MA organization
offering an MA regional plan is
organized and licensed under State law
in at least one State in the region but has
not met the licensing requirements in
other States in the region, under section
1858(d) of the Act, we may temporarily
waive the State licensing requirement in
the other States. This waiver will only
be extended to allow sufficient time for
the processing of the application by the
State or States where an application is
pending. The statute allows for the
waiver to extend for a transition period
after denial of a licensure application,
but does not permanently excuse a plan
from compliance with state licensing
requirements. Therefore, if a State
denied a regional PPO’s application for
State licensure, we will not allow the
plan to continue operating in that region
beyond the transition period, unless the
plan obtains licensure in all States in
the region.
Comment: A commenter is concerned
that organizations that lack sufficient
experience in operating a PPO plan or
being a capitated Medicare provider will
apply to become regional PPO plans.
The commenter proposes that we
establish minimum requirements
(beyond the filing of licensing
applications) that an applicant must
satisfy before we would consider a
temporary waiver of the State licensure
requirement. The commenter
recommends that CMS impose the
following requirements:
• The applicant or a sponsoring
organization of the applicant must have
operational experience in offering
insured PPO plans;
• The applicant or a sponsoring
organization of the applicant must have

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operational experience with assuming
risk under capitated programs;
• CMS should limit the duration of
the waiver to one year from the date the
waiver is granted.
Response: We anticipate that most
State licensure waivers will be for less
than 1 year. The exact duration of the
waiver will depend on how long a State
takes to process the application. In any
event, as we indicated in the previous
response, all regional PPO plans must
become State licensed in each State in
which they operate. We do not believe
it is necessary for us to impose
additional requirements for new PPO
applicants. We have considerable
experience in reviewing applications
from new organizations entering the MA
program. New organizations entering
the program must meet the operational
and regulatory requirements that apply
to current plans. If a new applicant has
no current experience we invest the
necessary time and resources to ensure
that the organization offering the plan
does in fact have the capacity to offer
the proposed plan and meet all
regulatory requirements. We expect that
we will take the same approach with
any new applicant to the MA program.
Comment: A commenter recommends
that if CMS do not designate single-State
regions, CMS should amend the
proposed rules governing preemption of
State law to ease the burden of
multistate licensure as much as
possible. The commenter recommended
that CMS apply the Federal waiver and
uniform solvency standards applicable
to provider sponsored organizations to
regional PPO plans to promote greater
regional PPO participation and access to
potential beneficiaries. Alternatively,
the commenter recommends that CMS
engage the National Association of
Insurance Commissioners and the State
departments of Insurance in discussions
that will result in the creation of a
single, uniform MA PPO licensure
application form, procedures, and
solvency standards, that maximize the
availability of PPO assets for use in
providing direct services and care
enhancement, and minimize the net
worth, reserve, deposit, surplus and
related requirements applicable to
PPOs.
Response: Under the MMA we do not
have the authority to establish regional
licensure and solvency standards for
regional PPO plans. Under the law,
regional PPO plans must meet State
licensure and solvency standards in
each State in which they operate. We
have added language to § 422.458(e)(1)
to clarify that regional PPOs must be
licensed in each State of the region,

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except during the period of the
temporary waiver.
Comment: A commenter stated that
even temporarily waiving State
licensure without requiring applicants
to satisfy certain minimum
requirements could expose the MA
program and beneficiaries to insecurity.
Waiver of State licensure requirements
based on a filing of an application for
licensure does not constitute an
assurance the organization has the
essential capability necessary to operate
a multistate PPO potentially serving
thousands of beneficiaries. The
commenter recommended that CMS
establish minimum requirements, such
as solvency standards, in addition to the
filing of an application that a regional
PPO applicant must satisfy before we
even evaluates, or approves, a
temporary wavier of State licensure. The
commenter also recommended that any
waiver be limited to 1 year from the date
the waiver is granted. The commenter
believes that a 1-year limit will promote
stability and confidence in the MA
program by terminating an unlicensed
organization before their withdrawal
causes disruption to beneficiaries.
Response: As we have previously
discussed, we will grant a temporary
State licensure waiver only in
circumstances where the organization is
State licensed in a least one State in the
region and has submitted applications
in the others. Under the waiver process,
in those State(s) where it has a waiver,
the organization will select the licensing
rules of one State in the region and
apply those rules to the States in which
the organization has not met State
licensure until the organization is
licensed in all the States. We have made
a technical change to the regulations at
§ 422.458(e)(2) to clarify this point. We
expect that in most cases the State
licensure waiver will be for less than a
year. However, we will not specify the
time limit, because the length of the
waiver will depend on how quickly the
State processes the PPO’s licensure
application. We note that all regional
PPO plans entering the MA program
(including those with a temporary State
licensure waiver) must still be reviewed
and approved by us and determined to
be capable of meeting all regulatory
requirements. We will not approve any
MA plan that we have not confirmed
through our application review process
has the capacity to offer the proposed
plan.
Stabilization Fund
Section 422.458(f) will implement the
provisions in section 1858(e) of the Act
providing for the creation of a Regional
Stabilization Fund. The Congress has

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authorized an MA Regional Plan
Stabilization Fund in order to promote
greater stability in the regional program
and provide us with a tool to respond
to market fluctuations.
The Fund can be used to provide
incentives for plan entry in each region,
as well as for retaining plans that have
already entered the market in MA
regions with below average MA
penetration. Initially, $10 billion will be
available for expenditures from the
Fund beginning on January 1, 2007, and
these start-up funds will only be
available until December 31, 2013. The
Fund is designed to allow us to respond
to market conditions on a temporary
basis. If the Fund is used for either plan
entry or retention for 2 consecutive
years, we will report to the Congress on
the underlying market conditions in the
regions. These reports will give the
Congress time to respond to the market
conditions through changes to the
regions or the underlying payment
system.
The funds will be available in
advance of appropriations to MA
regional plans in accordance with
specified funding limitations. The total
amount projected to be expended may
not exceed the amount available in the
Fund as of the first day of that year. We
will only obligate funds if our Chief
Actuary, and the appropriate budget
officer, certify that there are sufficient
funds at the beginning of the year to
cover all the obligations for that year.
We will take steps to ensure that
sufficient funds are available to make
the payments for the entire year, which
may include computing lower payment
amounts or limitations on enrollment in
MA regional plans receiving the
payments. Expenditures from the Fund
will first be made from amounts made
available from the initial funding. We
have made a change to § 422.458(f)(3)(ii)
to conform the provision to our proposal
as discussed in the August 2004
proposed rule.
Comment: Several commenters had
concerns over the financial incentives
made available to MA regional plans
and asserted that these would
disadvantage local plans by
compromising their ability to compete
with regional plans or the FFS Medicare
program. To encourage the offering of
all plan options, commenters
recommended that local plans and
others should also have access to these
risk sharing arrangements. Several
commenters proposed that CMS should
use the demonstration authority to offer
the same financial incentives to local
plans as those offered to regional MA
plans. Other commenters expressed
their support for these incentives, and

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asserted that these types of incentives
would encourage MA regional plans to
enter or re-enter certain markets.
Response: Financial incentives, such
as the application of risk corridors and
access to the stabilization fund, were
designed to encourage new regional
plans to enter the MA program and stay
in the program over time. Section 1858
of the Act limits these incentives to only
MA regional plans. As stated
previously, regional plans are defined as
those MA preferred provider
organization plans available to all MA
eligible individuals without regard to
health status and are offered throughout
the entire region. Because these
incentives are provided for in the
statute, we are unable to change the
types of organizations that could receive
them. It is important to note, that there
are special provisions available only to
local plans that MA regional plans do
not have available, for example, the
ability to choose the areas they cover,
including specific counties and even
partial counties, and they are not
required to cover an entire region.
Further, the MMA contemplated
competition between plans so that
beneficiaries will have greater choice of
high-quality, low-cost regional and local
plans. The statute specified the payment
methodology for both local and regional
plans. Additional responses to bidding
and payment comments may be found
in the preamble for subparts F and G.
Comment: One commenter stated that
the stabilization fund discriminates
against local plans because a portion of
local plan savings would subsidize the
regional plans.
Response: The commenter is
incorrect. Seventy-five percent of the
savings accrued when an MA plan bid
falls below the benchmark, is rebated to
the beneficiary in the form of extra
benefits. For local plans, the remaining
25 percent of the difference between the
bid and the benchmark returns to the
Medicare Trust Funds. For regional
plans, the remaining 25 percent of the
difference is split: 12.5 percent of the
difference returns to the Medicare Trust
Funds, and 12.5 percent of the
difference goes toward supplementing
the stabilization fund.
6. Plan Entry Funding
At § 422.458(f), we make available
plan entry incentives for either a 1-year
national bonus payment or multi-year
adjustments in regional payments (but
not both). Funding will only be
available for a single year, but more than
one organization can receive the
incentive in the same year.
As found in § 422.458(f)(4)(ii), the
national bonus payment will be: (1)

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available to an organization only if it
offers plans in every MA region; (2)
available to all MA regional plans of the
organization regardless of whether any
other MA regional plan is offered in any
region; and (3) equal to 3 percent of the
benchmark amount otherwise
applicable for each MA regional plan
offered by the organization, subject to
funding limitations.
If a national bonus payment is not
made, a regional payment adjustment
can be made. The regional payment
adjustment is an increased payment for
an MA regional plan offered in an MA
region that did not have any MA
regional plans offered in the previous
year. The adjusted payment amount will
be determined based solely on plans’
bids in the region and that the adjusted
payment amount be available to all
plans offered in the region.
We did not receive any public
comments on this section. We are
implementing this section as proposed.
7. Regional Payment Adjustment
Subject to funding limitations, we
will determine the period of time that
funds are available for regional payment
changes to encourage plan entry. If
funding is provided for a second
consecutive year under this provision,
we will submit a report to the Congress
describing the underlying market
dynamics in the region and recommend
changes to the payment methodology.
Multi-year funding will be made
available to all MA plans offered in a
region, but if this multi-year increased
amount is made available to MA plans
in a region, funding will not be available
for plan retention in the region in the
following year.
We did not receive any public
comments on this section. We are
implementing this section as proposed.
8. Plan Retention Funding
In addition to using the Fund to
encourage plans to enter regions that
might otherwise go unserved, we may
also use the fund to encourage plans to
remain in regions if market conditions
are causing plan withdrawals. At
§ 422.548(f)(5), incentives for plan
retention could take the form of an
increased payment to plans in regions
that meet specific requirements.
We intend to use this provision to
ensure that all MA organizations
offering regional plans in a region
receive appropriate incentives to remain
in the region. As specified at
§ 422.548(f)(5)(ii), the payment will be
an amount determined by the Secretary
that does not exceed the greater of: (1)
3 percent of the benchmark amount
applicable in the region; or (2) an

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amount that, when added to the
benchmark, results in a ratio such that
the additional amount plus the
benchmark for the region divided by the
adjusted average per capita cost
(AAPCC) equals the weighted average of
benchmarks for all regions divided by
the AAPCC.
The payment would be available if:
(1) one or more plans inform us that
they are going to discontinue service in
the region in the succeeding year; (2) we
determine that if those plans were not
offered, fewer than two MA
organizations will be offering MA
regional plans in the region in the year;
(3) for the previous year, we determine
that the proportion of beneficiaries
enrolled in MA regional plans in the
region is less than the national average
of MA regional plan enrollment; and (4)
funds have not already been awarded
for 2 consecutive years.
We did not receive any public
comments on this section. We are
implementing this section as proposed.
Subpart K—Application Procedures and
Contracts for Medicare Advantage
Organizations
1. Overview
Subpart K sets forth the provisions
relating to the application procedures
and contract determinations that are
entered into by MA organizations
including a description of terms that
must be included in the contract, the
duration of the contract, provisions
regarding the nonrenewal or termination
of a contract, and minimum enrollment,
reporting, and prompt payment
requirements of the MMA.
In this final rule, in order to make
more clear the requirements for MA
plans under part 422 and any additional
requirements for MA plans offering a
prescription drug benefit under part
423, we have amended section § 422.500
by revising the section heading to read
‘‘Scope and definitions≥; designating
the undesignated introductory text as
paragraph (b) and adding the heading
‘‘Definitions≥; and adding a new
paragraph (a), ‘‘Scope,’’ which specifies
the scope of the subpart K requirements.
We also incorporated the application
requirements and evaluation and
determination procedures from subpart
A (§ 422.6 and § 422.8) into subpart K at
newly redesignated § 422.501 and
§ 422.502, respectively. As a result we
have revised the title of subpart K in
this final rule to read as follows
‘‘Application Procedures and Contracts
for Medicare Advantage Organizations.’’
In addition, we have eliminated the
proposed § 422.502(b)(3)(iv)(G),
regarding self-reporting requirements.

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However, we have specified at
§ 422.503(b)(vi)(H), that MA-PDPs must
follow the requirements in part 423 (the
requirements for the Part D prescription
drug benefit) concerning a
comprehensive fraud and abuse plan.
Note that the fraud and abuse
requirement in part 423 applies only to
the Part D prescription drug benefit
offered by the MA organization. Please
see our discussion of this requirement at
section 4 of this preamble.
The MMA added a new section
1857(e)(3)(A) of the Act, which applies
only to Federally Qualified Health
Centers (FQHCs)and requires that the
contract between CMS and MA
organizations include a provision that
any written arrangements between an
MA organization and an FQHC include
a level of payment that would be equal
to what the MA organization would pay
other providers for similar services. This
requirement was codified at proposed
§ 422.527. We received two comments
asking for some clarifications on the
reimbursement of FQHCs which we do
address here.
We also responded to commenters
expressing concern that they would be
unable to properly prepare for
beneficiary enrollment if the contract
process and the bid process were
consecutive. Other commenters, for the
same reason, asked that we streamline
the application and contracting process.
We welcomed these suggestions and
have made changes accordingly, which
we discuss below.
We made a number of technical and
clarifying changes. In § 422.502(b)(1),
for example, we clarified that the
completion of an application is a
condition necessary to contract as an
MA organization, clarified the
distinction between the contract and
process for purposes of
redeterminations at § 422.501(c)(2), and,
at § 422.503(b)(4)(ii),
§ 422.503(b)(4)(vi)(F), § 422.503(b)(6)
and § 422.503(b)(6)(i), made several
terminology changes (for example, we
changed ‘‘terminated’’ to ‘‘non-renew’’).
We received 25 comments on subpart K.
Below we summarize and respond to
these comments. Please refer to the
proposed rule for additional discussion
of the specific provisions of the
requirements we proposed for subpart
K. Note that public comments on the
proposed MA rule and the proposed
rule establishing the prescription drug
benefit under part 423 are often related
and we draw on comments from both
proposed rules for our responses here.
These comments often lead to changes
in both rules and we identify the
changes affecting both rules, as
appropriate. Because of the similarity of

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many aspects of both rules and the
comments we received related to both
we refer interested readers to our final
rule establishing the prescription drug
benefit.
2. Application Requirements (§ 422.501)
Comment: Several commenter
submitted comments on the proposed
regulation for MA organizations as well
as the proposed rule establishing the
Medicare prescription drug benefit
asking CMS to make every effort 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 plan
applicants as well as, specifically, all
Part D plan sponsors (which includes
MA organizations offering a prescription
drug benefit). Several commenters
expressed concern that the contract and
bid determination processes for MA
organizations, as well as, more
generally, sponsors of Part D plans, if
occurring consecutively, would not
leave enough time for plans to be ready
for business by January 2006. The
commenters requested that CMS permit
the contract determination process to
run concurrently with the bid
application process (subpart F).
Response: We will permit contract
applicants to enter into the bid
determination process concurrently
with the contracting process prior to the
execution of a contract. The contract
will be pre-qualified and left unsigned
until a successful bid negotiation has
been approved by us. We are also
clarifying at § 422.501(c)(2) that these
are distinct processes and, further, that
determinations concerning the contract
only are appealable under subpart N of
part 422 (the bid application
requirements are in subpart F). We have
made other changes to streamline the
contract application process including,
for example, the elimination, as a
requirement, of a separate notice of
incomplete or missing application
information which we had proposed in
§ 422.502(e). Additional ways that we
will streamline the contract application
process are included in § 422.502(a)(2).
We made similar changes to the
requirements of part 423. We discuss
these and other changes below.
Comment: A commenter
recommended that CMS confirm the
scope of State licensure requirements
that apply to entities offering MA PPO
plans, as State licensing laws may
restrict an HMO’s ability to offer a PPO
plan, and sought CMS’ confirmation
that a State licensed indemnity insurer
authorized under State law to provide

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PDP coverage meets the definition of a
Regional Plan provider.
Response: Section 422.400(c) is clear
in saying that State law controls
whether the MA organization is licensed
or authorized to offer the type of MA
plan it proposes to offer. As we
explained in the preamble discussion in
subpart A of the proposed rule, the fact
that MA organizations offering local
PPOs that are (or are not) licensed as
HMOs is pertinent to the MA program
solely for purposes of the application of
quality improvement standards in
section 1852(e) of the Act, and has no
specific bearing on whether an MA
organization has State authority to
actually offer an HMO or PPO under the
MA program. Whether an MA
organization (licensed either as an HMO
or otherwise) can offer a specific type of
MA plan continues to rest upon State
licensure or authority to offer such a
type of MA plan.
3. Evaluation and Determination
Procedures (§ 422.502)
Comment: One comment pointed to
the differing timelines for evaluation
and determination of applications set
forth under the Medicare+ Choice rules
(and now under MA plans) from those
proposed for PDP Sponsors under Part
D and requested clarification. Another
commenter asked that CMS streamline
its application process in a way 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.
Response: We have modified the
timeline for evaluation and
determination of applications for both
applicants to be MA organizations and
PDP sponsors at § 422.502 (and made
similar changes to the requirements of
part 423 for other Part D plan sponsors).
We believe that maintaining a single
application and evaluation procedure
and a single set of contract requirements
for both MA and PDP programs brings
simplicity, consistency, and reduced
administrative burden for those entities
that are managing both programs. If an
application is determined to be both
incomplete, and failing to meet
requirements necessary to become an
MA organization resulting in an intent
to deny issuance, we will notify the
applicant concurrently of both
determinations. For a notice of intent to
deny, based on an incomplete (for
example, applicant already received an
incompleteness notice and did not
provide the required information) or
non-responsive application, we will
allow applicants 10 days to cure their
application before issuing a denial
notice, if still justified.

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We remain committed to providing
successful applicants a reasonable time
to begin operations by the first of the
year in their selected service area(s). We
also want to ensure all potential
applicants are given every chance to
contract with us. In the event we
determine that an application is
incomplete, we afford a means for the
applicant to ‘‘cure’’ the contract
application. However, under the MMA
with a bidding process added, and the
absence of a ‘‘rolling application’’
program used under the M+C process,
we needed to modify these
determination timelines.
In order to respond to concerns that
the determination application process as
it was set up could compromise a plan’s
ability to effectively prepare for the
beginning of a contract we are
consolidating the proposed § 422.502 by
removing paragraphs (e), (f), and (g).
The change eliminates, as a separate and
distinct step in the review process,
notification that an application is
incomplete. In the final rule, § 422.502
now provides that if an applicant’s
contract is submitted and found to be
both incomplete, as well as unqualified
(resulting in the issuance of an Intent to
Deny Notice), the period to remedy the
application will be 10 days from the
date of the notice.
Also, in the final rule in
§ 422.502(c)(2)(ii), we are changing the
amount of time that an applicant has to
remedy an application after receiving an
intent to deny notice from 60 days
suggested in the proposed rule to 10
days. We believe this change is in
accordance with the comments we have
received to on both rules to streamline
the process for each, bring the MA
requirements under part 422 and the
prescription drug benefit requirements
under part 423 in to line, and to reduce
confusion and administrative burden.
Additionally, if after the initial review
of the applications, we determine that
an application is missing information
necessary for us to make a
determination we will attempt to notify
the applicant that this is the case. This
is not a requirement, however, and we
are stating in the preamble of this final
rule that applicants receiving
notification that their application is
incomplete but who have not yet
received an intent to deny notice
respond back to us with a cured
application within two days of receiving
the notice. The two days are thus a
guide, but ultimately we are constrained
by the total amount of time 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

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before the applicant submits the
requested information. 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 fail to respond
within 2 days, and then receive an
intent to deny notice from us.
As discussed above, we are making
every effort to accommodate plans in
the contract application process. We
believe that the availability of choices
will enhance opportunities to lower
program costs. However, we must
balance this goal with the need to
ensure that only qualified plans are
selected to contract with us.
With the exceptions noted, we are
accepting the language from the
proposed rule for this section.
4. General Provisions (§ 422.503).
Comment: In the proposed rule at
§ 422.503(b)(vi)(G)(2), CMS suggested
that MA organizations include
provisions that would require a MA
organization to report misconduct it
believes may violate various criminal,
civil or administrative authorities.
Numerous comments, both for and
against, were received regarding these
mandatory self-reporting of misconduct
requirements. Most of the comments,
however, objected that the rule as
written was vague and overbroad, with
no basis in statute. Other comments
directed CMS 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
MA organizations 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 MA
organizations to engage in mandatory
self-reporting, we continue to believe
that self-reporting of fraud and abuse is
a critical element to an effective
compliance plan; and we strongly
encourage MA organizations 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 MA organization
has determined that the misconduct has
violated or may violate criminal, civil or
administrative law, the MA
organization 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.

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The failure to disclose such conduct
may result in adverse consequences to
MA organizations, 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.
As discussed earlier, we believe that
establishing procedures to ensure
prompt responses to potential fraud
violations should be one of the elements
in an effective compliance plan. While
we are eliminating the mandatory selfreporting requirements, we expect all
MA organizations offering a Part D plan
to comply with the requirement for a
comprehensive fraud and abuse plan as
found under § 422.503(b)(4)(vi)(H).
(Note: we are not reproducing our
discussion on the fraud and abuse
requirements here as this is a
requirement specifically for MA
organizations offering a prescription
drug benefit. Please see our discussion
in our final rule establishing the
prescription drug benefit.) In summary,
we have elected to recommend
reporting fraud and abuse as part of the
compliance plan as required as a
condition of contracting as an MA
organization. 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.
5. § 422.504 Contract Provisions
Comment: A commenter questioned
the need for proposed § 422.504(h)
which would require MA organizations
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

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relating to licensure. Furthermore,
nothing suggests a rationale for naming
some laws and not others. The same
commenter also suggested that the
provisions might more appropriately be
replace 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
prevent fraud, waste, and abuse and on
issues that we are responsible for
enforcing such as the HIPAA
Administrative Simplification rules. We
have, therefore, made the suggested
changes to reflect this focus at
§ 422.504(h). These changes are in no
way meant to imply that MA
organizations need not comply with
other Federal laws and regulations as
applicable, only that the enforcement of
these Federal laws and regulations is the
responsibility of Federal agencies other
than ours. We have made a similar
change in the regulations establishing
the prescription drug benefit program
under part 423.
Comment: A commenter responding
to our proposed rule establishing the
prescription drug benefit under part 423
asked us to clarify whether the retention
periods all refer to MA organizations
offering Part D plans. Another
commenter asked that our records
retention policy for Part D plan sponsors
parallel the statute of limitations that
applies to the 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
apply to the False Claims Act. And, in
response to the other commenter, we are
using this standard for retention
requirements under both parts 422 and
423. As a result, in the final rule at
§ 422.504(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 (see 42 CFR
447.534(h)). We believe, as is the case
with the Medicaid rule, that in order to
ensure that we have the proper
oversight for investigating the complex

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payment and other relationships
associated with the delivery of
prescription drugs under a program
such as Part D, the 10-year retention
requirement is necessary. We are
making the change to parts 422 and 423
in order to maintain uniformity between
requirements for MA organizations and
other Part D sponsors. With the
exception noted, we are accepting the
language from the proposed for this
section.
6. Prompt Payment by MA organization
(§ 422.520)
Comment: A commenter
recommended that we remove the
distinction between contracted and noncontracted providers under
§ 422.520(a)(3) referring to prompt
payment terms for non-contractors,
fearing that we relinquish any authority
to enforce prompt payment control for
contracted providers. A commenter
asked that the 60-day period for noncontracted providers to be paid be
shortened to 30 days.
Response: In response to the first
commenter, we do not believe it is
necessary to add language concerning
contract and non-contract providers. We
believe that § 422.520(b)(2) makes it
clear that the MA organization is
obligated by the terms of its contract
with the provider and that such a
contract is the proper vehicle for any
prompt payment terms.
In response to the second commenter,
we believe that a limit of 60 calendar
days strikes a reasonable balance by
allowing time for the processing of
payment without causing providers
hardship.
Comment: We received comments
asking that we include Independent
Physicians Associations (IPAs) and
Medical Groups under the prompt
payment standards. Other suggestions
included establishing timely payment
requirement for capitations paid to IPAs
and Medical groups; standards for
documentation that should be included
with capitation payments and/or
deductions; establishment of a 90-day
limit on an MA plan’s ability to
retroactively assign or terminate
beneficiaries to or from a capitated IPA
or Medical group; establishment of a
time limit on how far back an MA plan
is allowed to make a capitation
deduction (not longer than 12 months;
allow capitated IPA and medical groups
to renegotiate their capitation rate if
new benefits are by law and/or added by
an MA plan; requiring MA plans to
provide on a quarterly basis a detailed
accounting of the status of any risk
arrangements or risk pools(for example

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hospital, and pharmacy) in a mutually
agreed to electronic format.
Response: Non-contracted IPAs and
Medical Groups are already included in
the prompt payment requirements in
section 1857(f)(1) of the Act and in
§ 422.502. The billing ‘‘agent’’ or entity
is immaterial. We have not specifically
regulated the content of contracts
between providers and MA
organizations. We have long supported
the notion that allowing the ‘‘free’’
market to determine the contractual
terms, including payment amounts and
timeliness, as well as related matters
was best left to the interested parties
(MA organizations and providers), who
could best represent their own selfinterest. While we support many of the
items suggested and would support
their inclusion in provider/MA
organization contracts, we do not
believe it is appropriate to require that
they appear there.
We have adopted the language of the
proposed rule in this final rule.
7. Agreements with Federally Qualified
Health Centers (§ 422.527)
Comment: One commenter
recommended that we add language
clarifying under § 422.527(b) that
payment in full to an FQHC does not
preclude the FQHC from receiving the
wrap-around payment provided by
statute and in § 422.316.
Response: We agree with the
commenter that we are responsible for
the difference between what the MA
plan pays to the FQHC and what its fee
for service cost are, described above as
a wrap-around. Our proposed language
at § 422.527 concerned primarily the
contract between CMS and the plan.
However, in order to clarify how our
payments to FQHCs are determined
when a beneficiary in an MA plan
receives treatment from an FQHC that
has a written agreement with the MA
organization offering the plan, we have
revised § 422.527 of the final rule by
adding new paragraph (c) to specify that
financial incentives and withholds are
not considered in determining the
payments made under § 422.316(a).
Comment: The same commenter
asked that we clarify that in the final
rule that we will not include a financial
incentives, ‘‘such as risk pool payments,
bonuses or withholds’’ received by a
FQHC from an MA—when determining
payments made by CMS.
Response: In response to the
commenter, we are clarifying in
§ 422.527(c) that financial incentives
such as risk pool payments and bonuses
as well as financial withholds are not
considered in determining payments
made to FQHCs by CMS. The language

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at section 1833(a)(3)(B)(ii) of the Act, as
added by section 237(a)(B)(ii) of the
MMA, specifically excludes these
financial incentives or withholds when
determining the base amount used to be
used in calculating payments by CMS.
With the exception of the changes
noted, we are adopting the language of
the proposed rule for this section.
Subpart L—Effect of Change of
Ownership or Leasing of Facilities
During Term of Contract
In the proposed rule, we indicated
that we would study the modification of
existing change of ownership (CHOW)
provisions in order to reduce the
administrative burden of these
requirements and to increase the
effectiveness of these provisions. In
particular, we requested and received
comments regarding situations which
constitute a CHOW and how the CHOW
provisions should be applied to large
companies with multiple business units.
These provisions are essentially the
same as those requirements found in
Title I subpart L for Prescription Drug
Plan sponsors. Several commenters
specifically requested that we maintain
consistency between the provisions for
subpart L in Title I and Title II.
After reviewing the comments that we
received, we recognize that given the
infinite variety of business arrangements
and transactions it may be necessary to
provide guidance via interpretive
documents (for example, FAQs,) and on
a case by case basis as to whether a
given arrangement constitutes a CHOW
and requires an entity to adhere to the
CHOW requirements. Contracting
organizations should be aware that
although we are committed and
sensitive to reducing the administrative
burden on businesses with multiple
legally related entities, we will be alert
to situations where these organizations
may be looking to avoid compliance
with the CHOW provisions so as to
evade Medicare liabilities and
obligations.
In this final rule we note that
contracted MA organizations must
adhere to the Privacy Rule on sharing
patient health information in the course
of a CHOW and novation agreement.
MA organizations are not permitted to
share protected enrollee health
information with a new owner that is
not, or will not, become a covered entity
absent authorization from its enrollees.
General Provisions (§ 422.550)
Comments: Two commenters
requested that CMS clarify that the
transfer of the MA line of business from
one entity to another constitutes an

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asset transfer for which CMS will permit
a novation agreement.
Response: We agree that the transfer
of a MA line of business from one entity
to another would constitute a CHOW,
such that a novation agreement would
be permitted and, in fact, required.
Comment: A commenter
recommended that the change of
ownership requirements under
§ 422.550 and § 422.552 exempt change
of ownership transactions between two
separate subsidiaries of the same parent
corporation from the financial
information, financial impact and
novation agreement requirements of the
CHOW provisions. Instead, the
commenter suggested that such entities
provide written certification detailing
that a legally binding transfer of the MA
obligations has occurred.
Response: We asked specifically for
comments with regard to multiple
business units so as to ensure that our
rules reflect the realities of today’s
business world and are not unduly
burdensome. While transactions
between two subsidiaries of the same
parent corporation may not in all cases
constitute a CHOW, and, therefore, the
business units would not need to adhere
to the requirements of the CHOW
provisions, we decline to create a
separate certification procedure for such
business units in the event that a CHOW
does occur, as suggested by the
commenter. Our ultimate responsibility
is to the beneficiaries and objective is to
ensure that an entity cannot under any
circumstance evade its responsibilities
to the Medicare program. What is
relevant is whether the transaction
leaves the same entity responsible for
the MA contract and all inherent
responsibilities remain unchanged. Any
transfer of functions and/or assets that
results in a change of the responsible
party or parties for the MA contract
must comply with the CHOW
provisions under Subpart L.
Asset Sale (§ 422.550(a)(2))
Comment: Two commenters
recommended that the title of the
subparagraph identified as ‘‘Asset sale,’’
be revised to read ‘‘Asset Transfer.’’
Response: The suggestion has been
adopted in the final regulation. In the
proposed rule we were looking for
comment on how to best characterize a
CHOWs for those businesses with
multiple business units, recognizing
that a business would not always be
selling its assets, but may sometimes
simply be transferring a business asset.
Notice Period (§ 422.550(b))
Comments: Two commenters
recommended that CMS consider
extending the 60 day Notice period that

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MA organizations are required to
provide before a change of ownership.
The commenters stated that
circumstances may arise when it is not
possible to give such notice, for
example, State approval pending, and a
final determination date by the State is
indefinite. Additionally, they
recommended adding a good clause
exception to the rule when such
circumstances occur.
Response: The MMA was passed, in
part, to encourage and ease MA plans
into the new Medicare market place.
Towards that end we will, on a case by
case basis, have the flexibility to extend
the 60 day notice period if a situation
arises that warrants such an exception.
We do not feel at this time we need to
add a clause that specifies a good cause
exception.
Subpart M—Grievances, Organization
Determinations, and Appeals
1. Introduction
The MMA did not make any revisions
to the statutory requirements in sections
1852(f) and (g) of the Act regarding MA
grievances and appeals. Thus, we
generally proposed to maintain the
existing regulatory requirements in
subpart M of part 422, with the
inclusion of minor changes needed to
conform these subpart regulations to
MMA terminology and other provisions.
We also reviewed the existing MA
grievance and appeal requirements to
identify needed refinements. Finally, we
proposed changes to the part 417
regulations, which apply only to section
1876 cost contractors and section 1833
health care pre-payment plans (HCPPs)
that would establish uniform grievance
and appeal procedures for all Medicare
managed care plans.
We received 30 comments on subpart
M in response to the proposed rule.
Below we summarize our proposals and
respond to public comments. (For a
detailed discussion on our proposals,
please refer to the August 3, 2004
proposed rule. (69 FR 46,866, 46,909).
2. Background
Section 1852(f) of the Act provides
that an MA organization must provide
meaningful procedures for hearing and
resolving grievances between the
organization (including any other entity
or individual through which the
organization provides health care
services) and enrollees in its MA plans.
Section 1852(g) of the Act addresses the
procedural requirements concerning
coverage (‘‘organization’’)
determinations and reconsiderations
and other appeals for MA organizations.
Only disputes concerning ‘‘organization

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determinations’’ are subject to the
reconsideration and other appeal
requirements under section 1852(g) of
the Act.
In general, organization
determinations involve whether an
enrollee is entitled to receive a health
service or the amount the enrollee is
expected to pay for that service. All
other disputes are subject to the
grievance requirements under section
1852(f) of the Act. For purposes of this
regulation, a reconsideration consists of
a review of an adverse organization
determination by either the MA
organization itself or an independent
review entity. We use the term ‘‘appeal’’
to denote any of the procedures that
deal with the review of organization
determinations, including
reconsiderations, hearings before
administrative law judges (ALJs),
reviews by the Medicare Appeals
Council (MAC) and judicial review.
For the grievance, organization
determination, and appeal
requirements, an MA organization must
establish procedures that satisfy these
requirements with respect to each MA
plan that it offers. These requirements
generally are the same for all plan types
—including coordinated care plans such
as HMOs and PPOs, non-network MSA
plans, and PFFS plans. However, note
that for MA-PD plans, separate rules
apply for drug benefits, as set forth
under part 423, subpart M.
Sections 1833(a)(1)(A) and
1876(a)(5)(B) of the Act reference
reasonable cost reimbursement contracts
for HCPPs and HMO/CMPs. Section
1876(c)(5) of the Act sets forth the
procedures HMO/CMP organizations
must follow with regard to grievances,
organization determinations, and
appeals. Section 417.840 of our
regulations requires HCPPs to apply the
administrative review procedures set
forth for HMO/CMPs. Section 1869 of
the Act provides the right to a hearing
and to judicial review for any individual
dissatisfied with a determination
regarding his or her Medicare benefits.
3. General Provisions, Grievances, and
Organization Determinations (§ 422.560
through § 422.576)
Section 940(b)(2)(A) of MMA
amended section 1852(g)(5) of the Act to
incorporate the provisions of section
1869(b)(1)(E)(iii) of the Act, which also
was added by MMA. This new clause
provides for inflation adjustments to the
‘‘amount in controversy’’ required to
pursue a hearing and judicial review. It
makes these provisions applicable in
determining the amount in controversy
under section 1852(g)(5) of the Act ‘‘in
the same manner as they apply to the

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dollar amounts specified in section
1869(b)(1)(E)(i).’’ Therefore, revisions to
the provisions in section 1869 of the Act
governing the calculation of the amount
in controversy apply to MA appeals.
The existing MA regulations
incorporate 42 CFR part 405, subparts G
and H, and 20 CFR part 404, subparts
J and R. Note that in an interim final
rule we expect to publish shortly, we
intend to create a new subpart I of part
405 to implement significant revisions
to section 1869 of the Act. To
accommodate these changes, we
proposed minor changes to the crossreferences for MA appeals at
§ 422.560(a)(3), § 422.561, and § 422.562
accordingly. We are finalizing these
changes in this final rule. We note that
under § 422.562(d), 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, if
and when finalized, would apply to MA
appeals. Thus, we have added a
reference to § 422.602(b) that the time
and place for a hearing before an ALJ
will be set in accordance with
§ 405.1020. Although that 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 videoteleconferencing in ALJ hearings. On the
other hand, the provisions that are
dependent upon qualified independent
contractors would not apply since an
independent review entity conducts
reconsiderations for MA appeals.
We also clarified the definitions of an
authorized representative and an
enrollee under § 422.561, which are
consistent with part 405. We have
removed ‘‘authorized representative’’
and replaced it with ‘‘representative’’ to
clarify that a representative means an
individual appointed by an enrollee or
other party, or authorized under State or
other applicable law, to act on behalf of
an enrollee or other party involved in
the appeal. Unless otherwise stated in
this subpart, the representative will
have all of the rights and
responsibilities of an enrollee or party
in obtaining an organization
determination or in dealing with any of
the levels of the appeals process, subject
to the applicable rules described in part
405 of this chapter.
In accordance with section 1852(g)(1)
of the Act, § 422.566 begins by
specifying that an MA organization
must have a procedure for making
timely organization determinations

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regarding the benefits an enrollee is
entitled to receive and the amount, if
any, that an enrollee must pay for a
health service. We clarified at proposed
§ 422.566(b)(4) that a reduction in
services was an action that constituted
an organization determination that an
enrollee may appeal. Notice
requirements would continue to apply
whenever an enrollee disputed the
reduction, under § 422.568(c).
Standard timeframes and notice
requirements for organization
determinations (§ 422.568)
The only substantive change we
proposed in § 422.568 was the
elimination of the practitioner’s notice
requirement set forth in § 422.568(c).
This section required that at each
patient encounter with an MA enrollee,
a practitioner must notify the enrollee of
his or her right to receive, upon request,
a detailed written notice from the MA
organization regarding any decision to
deny services to an enrollee. Instead of
requiring practitioners to provide
general notices to enrollees at each
patient encounter, we proposed instead
to require MA organizations to provide
specific written notice for MA
organization denials. We believed that
MA organizations could provide general
information about enrollees’ rights in
physician office settings in the plan’s
Evidence of Coverage (EOC). Requiring
practitioners to issue notices to
enrollees has proven to be
administratively burdensome and
impossible to monitor.
We also proposed conforming changes
to § 422.570(d)(2)(ii) and § 422.572(b) to
require that an MA organization must
inform an enrollee of the right to file an
‘‘expedited’’ grievance, if the enrollee
disagrees with the MA organization’s
decision not to expedite a request for an
expedited organization determination.
Timeframe and notice requirements for
expedited organization determinations.
Under § 422.572(c), we proposed to
eliminate the requirement that oral
notice of an expedited determination be
followed up with written confirmation
in cases of fully favorable
determinations. Notice would be
required only for decisions that are fully
or partly adverse to the enrollee, and
thus could engender an appeal.
Comment: Several commenters
supported the elimination of the
practitioner’s notice set forth in
§ 422.568(c). Some commenters agreed
that the practitioner’s notice was not a
practical means of notifying enrollees of
their appeal rights; they supported use
of the EOC to provide information about
enrollee rights in situations where

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physicians make coverage
determinations in their offices. One
commenter contended that the
practitioner’s notice was burdensome
for providers to deliver and in effect
absolved plans of any accountability for
their utilization review decisions.
Two commenters stated that the EOC
was not a viable substitute for
communicating appeals information to
enrollees. The commenters believe that
the EOC would not be as effective as a
notice provided in a practitioner’s office
regarding how an enrollee could get a
coverage determination from the plan.
These commenters thought our proposal
would disadvantage enrollees, because
they do not routinely refer to the EOC.
In lieu of the requirement to provide a
written notice to each enrollee, one
commenter recommended that CMS
require practitioners to display posters
in their offices to inform enrollees about
their rights.
Response: In our view, the EOC is an
appropriate alternative to requiring
practitioners to deliver notices regarding
enrollees’ rights to receive coverage
determinations from their plans. We
believe that enrollees have a
responsibility to refer to their EOC to
obtain general information regarding
coverage determinations. Furthermore,
we believe that enrollees have
relationships with their physicians built
on trust, and enrollees often play an
active role in the treatment decisions
that affect them. Therefore, in the
absence of a delegated arrangement, we
are not placing the burden on
practitioners to deliver notices to
enrollees on their right to receive
detailed coverage notices at each patient
encounter.
We will work with MA organizations
to ensure that the EOC contains
information on an enrollee’s right to
receive a detailed explanation if he or
she believes that a practitioner has
denied care that the enrollee believes he
or she is entitled to receive, or care the
enrollee believes should continue. For
these situations, the EOC will direct the
enrollee to request an organization
determination. We will also work with
consumer advocates to determine other
ways to educate enrollees about their
rights.
Comment: Four commenters
supported CMS’ proposal to explicitly
specify in § 422.566(b) that a reduction
of services constitutes an organization
determination that an enrollee may
appeal.
Response: We believe that this
approach essentially clarifies existing
policy, under which a reduction in
service is an appealable issue. Thus, if
an enrollee disagrees with an MA

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organization’s decision to reduce a
course of treatment, the MA
organization must consider the disputed
reduction of service a new request for an
organization determination. A request
for a new organization determination
allows the enrollee to receive notice,
appeal rights, and access to the MA
appeals system under § 422.570 and
§ 422.584.
4. Requests for Reconsiderations
(§ 422.582)
The only substantive change we
proposed regarding standard
reconsiderations pertained to the
manner in which a party to an
organization determination would
request an appeal. Proposed
§ 422.582(a)(1) and (a)(2) allowed a
party to request a standard
reconsideration orally or in writing. In
addition, proposed § 422.584(e) required
an MA organization to give notice in
accordance with the broader provision
of § 422.590, since there are notice
requirements other than those contained
in § 422.590(d).
As we proposed for expedited
organization determinations under
§ 422.570(d)(2)(ii), proposed
§ 422.590(a) and § 422.590(d)(2)
required an MA organization to inform
an enrollee of the right to file an
‘‘expedited’’ grievance if the enrollee
disagreed with the MA organization’s
decision not to expedite a request for an
expedited reconsideration. This is a
right that already was established under
the grievance provision at
§ 422.564(d)(2) (re-codified under this
final rule at § 422.564(f)(2)); thus, we
needed to make a conforming change.
Comment: One commenter took
exception to the expedited grievance
process currently in § 422.564(d) (recodified in this rule at § 422.564(f)),
(and by extension, the conforming
changes at proposed § § 422.570(d)(2)(ii)
and 422.572(b)), arguing that this
process was not beneficial because it
allowed the same organization
determination to be considered along
two separate tracks simultaneously. The
commenter stated that an MA enrollee
has the right to request an expedited
review of a plan’s organization
determination, and that the review is
automatically granted if supported by a
physician’s assertion that the life or
health of an enrollee would be adversely
affected by a decision not to expedite
the review. Thus, even without the
benefit of an expedited grievance
process, a decision would still be made
by the plan (albeit in a longer period),
and the enrollee would not be in
jeopardy while waiting for the plan’s
decision. The commenter recommended

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that CMS delete this provision from the
regulation in its entirety because, in the
commenter’s view, it is redundant and
inefficient. It would also remove the
need for conforming changes.
Response: We agree with the
commenter that we should not create
redundant processes. However, we do
not believe that § 422.564(d) (now
§ 422.564(f)) is duplicative of the appeal
procedures. An expedited grievance
process provides important protections
for enrollees who are unable or prefer
not to obtain a physician’s certification
that applying the standard time frame
would have adverse consequences for
the enrollee. In addition, an MA plan
could determine that it needs an
extension to process a standard or
expedited organization determination or
reconsideration request. By allowing an
expedited grievance to proceed under
those circumstances, the decision about
the grievance would not be the
organization determination, but the
plan’s appropriate use of its discretion
to extend the time frame. Thus, we
specified at § 422.564(d) (now (f)) that
an MA organization must notify the
enrollee within 24 hours of receiving a
grievance about the MA organization’s
refusal to expedite a review. Similarly,
if an enrollee believes an MA
organization’s decision to invoke an
extension to the organization
determination or reconsideration time
frames is incorrect, an expedited review
would ensure that any inappropriate
procedural actions under the appeals
process are resolved and that the appeal
proceeds without delay. Therefore, we
are retaining the provision that in the
current § 422.564(d) (now § 422.564(f)),
and making the required conforming
changes at § 422.570(d)(2)(ii) and
§ 422.572(b) as previously proposed.
Comment: A commenter supported
CMS’ decision to revise § 422.572(c) to
no longer require MA organizations to
provide written notice for fully
favorable decisions. The commenter
also recommended that the MA
organization should communicate fully
or partially favorable decisions to the
provider, who would then notify the
enrollee of the organization’s decision.
Response: While we agree that the
revision at § 422.572(c) will eliminate
the unnecessary burden to issue written
notices in cases of fully favorable
decisions, we believe that written
notifications remain appropriate for
partially favorable decisions, which may
result in appeals. Moreover,
notwithstanding any arrangements an
MA organization negotiates with its
providers, the MA organization is
ultimately responsible for ensuring that
its decisions are communicated to

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enrollees. We believe that decisions
involving whether to initiate a service
constitute the majority of an MA
organization’s communication with
enrollees. Therefore, in the absence of a
delegated arrangement, we do not
believe that it is appropriate or practical
to require all individuals or entities that
provide health care services to give
routine notices to a plan’s enrollees.
Comment: Two commenters opposed
CMS’ proposed revision at § 422.582(a)
that would allow a party to request a
standard reconsideration orally or in
writing. One commenter recommended
that CMS delete the proposed provision
because oral requests would increase
the number of meritless
reconsiderations and overburden the
reconsideration process. The commenter
believed that this provision would lead
to confusion and undocumented
assertions in the process. The
commenter further believed that written
requests ensure that MA organizations
effectively and efficiently focus on an
enrollee’s ultimate issue. Additionally,
the commenter noted that the MA
organization would be required to
reduce oral requests to writing, which
would transfer the burden of generating
a written request from the enrollee to
the MA organization. If the provision for
oral appeal requests is retained, the
commenter recommended that they be
allowed only in person. Another
commenter believed that MA
organizations would need guidance on
how to process oral requests,
particularly in the case of a request from
a purported authorized representative.
Finally, a commenter stated that CMS
should not permit oral requests in order
to be consistent with private sector
regulatory requirements.
Response: Based on our review of the
comments, we agree with the
commenters that oral appeal requests
could present problems for both MA
organizations and the appealing parties,
particularly when one individual
attempts to translate an oral request into
writing on behalf of another. We believe
that an unintended consequence of our
proposed change is the potential for
essential information to get
misconstrued. Thus, rather than
requiring MA organizations to accept
oral requests, we will continue to
provide guidance on how an MA
organization may choose to accept an
oral request for reconsideration, and the
steps it can take to validate the request.
This will enable plans the flexibility to
create such a process if they choose to
do so. Therefore, we have revised the
text at § 422.582(a) to reflect that an MA
organization may adopt a policy under
which it accepts oral requests for

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standard reconsiderations. We would
expect that MA organizations would
accept oral requests in instances where
there is a clear and compelling reason
to do so. An example of a clear and
compelling reason to accept an oral
request would be in the case of an
illiterate or an incapacitated enrollee on
the basis that they would not be able to
request a reconsideration in writing.
5. Administrative Law Judge (ALJ)
Hearings, Appeals to the Medicare
Appeals Council, Judicial Review, and
Provisions Affected by Part 405
(§ 422.600 through § 422.612)
Section 931 of the MMA requires that
the ALJ hearing function now
conducted by the Social Security
Administration (SSA) be transferred to
the Department of Health and Human
Services by no later than October 1,
2005. In light of this impending change,
we are revising § 422.582 and § 422.602
to eliminate any reference to SSA as a
location for enrollees to file appeals. If
an enrollee inadvertently files an appeal
request with SSA after the transfer, its
field offices will ensure that the request
is transferred to the appropriate appeals
entity. We have modified § 422.602(a) to
require that a party must file a written
request for an ALJ hearing with the
entity specified in the independent
review entity’s (IRE’s) reconsideration
notice.
6. Noncoverage of Inpatient Hospital
Care—Notice and QIO Review
(§ 422.620 and § 422.622)
We proposed at § 422.620(b) to
specify that an MA organization (or an
entity delegated by the organization)
must obtain the concurrence of the
physician responsible for the enrollee’s
in-patient care before discharging an
enrollee. This provision would clarify
an omission in our April 4, 2003 final
rule where we inadvertently failed to
include a corresponding change that
physician concurrence is necessary for
discharging the enrollee rather than for
issuing the notice. Therefore, an MA
organization’s obligation to provide a
notice of non-coverage when an enrollee
objects to a discharge would not be
contingent upon a physician
concurrence because the discharge
decision already would have been
made.
We also proposed to revise
§ 422.620(c) to require that if an MA
organization lowers the enrollee’s level
of care in an inpatient hospital setting,
for example, from acute to skilled, but
the enrollee is not discharged from the
facility, the MA organization must
specify the enrollee’s new level of care
in the notice. This change would be

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consistent with § 422.620(a)(1)(ii),
which requires the MA organization to
provide a notice to the enrollee when it
no longer intends to continue coverage
of the inpatient hospital stay, but is not
‘‘discharging’’ the enrollee from the
facility.
Comment: Several commenter
recommended that CMS clarify that an
enrollee’s right to receive a notice of
non-coverage is linked to physician
concurrence to the extent that the
physician must concur with the MA
organization’s decision to discharge the
enrollee or change the enrollee’s level of
care. Several commenters continued to
believe that an MA organization could
not issue a notice without the
physician’s concurrence. One
commenter thought that the propose
rule suggested that it is the MA
organization rather than the physician
that ultimately discharges the enrollee.
The commenter maintained that since a
hospital cannot discharge an enrollee
without physician concurrence, CMS
should prohibit an MA organization
from ending coverage without a
physician’s concurrence. Another
commenter stated that the final rule
should prevent MA organizations from
shifting financial liability to hospitals
without securing the attending
physician’s concurrence to discharge
the enrollee.
One commenter stated that a benefit
determination based on medical
necessity guidelines to discontinue
unnecessary inpatient coverage does not
require physician concurrence. Another
commenter thought that if physician
concurrence were required to issue the
notice of non-coverage, then enrollees
would be unable to initiate the appeals
process in a timely manner. This
commenter recommended that CMS
delete the entire provision and only
require plans to issue a notice of noncoverage to the enrollee when it decides
to no longer pay for acute care.
Another commenter, concerned about
a hospitalized enrollee’s reaction to
receiving a notice of non-coverage from
the MA organization, thought that CMS
should withdraw the proposal, citing
the trauma, confusion and stress to the
enrollee. Instead, the commenter
believed that the hospital staff familiar
with the specific medical circumstances
related to the enrollee’s confinement
should provide the notice.
Response: Medical guidelines alone
cannot substitute for a physician’s
judgment about the medical condition
of the patient under the physician’s
care. We agree with the commenters that
physicians ultimately have the authority
to discharge enrollees or change the
level of care in hospital settings.

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However, the MA organization is
required to issue a notice of noncoverage if an enrollee objects to the
discharge decision, or when an
enrollee’s level of care changes in an
acute facility. Since the attending
physician must agree to the discharge or
the change in level of care, the MA
organization can provide the notice
without further physician involvement.
Thus, we are merely clarifying under
§ 422.620(b) that a physician
concurrence is required before
discharging an individual or changing
the level of care in an inpatient setting.
We disagree with the commenter that
argued if a physician concurrence were
required to issue the notice, then
enrollees would be unable to initiate
timely appeals. The timeframe for filing
does not begin until the enrollee
receives the notice. We further disagree
that we should delete the entire
provision at § 422.620 and only require
plans to issue notices when they decide
to no longer pay for acute care. If an
enrollee disagrees with being discharged
from the hospital, then the enrollee is
entitled to a notice explaining his or her
appeal rights under the law.
Finally, if an MA organization
believes that its provision of the notice
to an enrollee in an acute facility would
create stress, trauma and confusion,
then the MA organization has the option
to delegate to the hospital the
responsibility to provide the notice of
non-coverage on behalf of the MA
organization.
Advance Beneficiary Notices in the MA
Program
In the August 3, 2004 proposed rule,
we solicited comments on whether to
permit or require network and nonnetwork providers to furnish enrollees
advance beneficiary notices (ABNs)
when they access non-Medicare covered
services, or when they face potential
liability for out of network services that
would be otherwise payable by the MA
plan if proper referral were obtained.
Comment: Several commenters
vehemently opposed requiring
providers to furnish ABNs to enrollees
who wish to obtain non-Medicare
covered services. They stated that CMS
could not enforce any requirements on
non-network providers to advise
enrollees of potential liability. The
commenters believed that ABNs would
be burdensome for physicians,
providers and MA organizations, and
could lead to delays in care for
enrollees. Another commenter stated
that CMS, instead, should educate
providers about their responsibility to
contact the MA organization when

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enrollees seek out of network or nonMedicare covered services.
Several commenters stated that ABNs
in original Medicare have inherent
problems, such as providers that issue
blanket ABNs, which then become
meaningless to the enrollee. A
commenter noted that although the ABN
was only a one-page document, there
were 30 pages of instructions for the
provider to complete the form, thus the
use of ABNs would be confusing.
One commenter indicated that it was
premature to propose the use of ABNs
in managed care. Instead, CMS should
establish a database with information,
so that physicians could have access to
coverage information for each plan.
Otherwise, it would be too burdensome
for physicians to know the different
benefits and coverage of each plan. The
commenter further recommended that if
CMS determined that ABNs were
necessary, then we should ensure that
MA organizations provide clear
information to physicians’ offices on the
appropriate use of ABNs.
Another commenter recommended
that CMS should allow providers to
issue ABNs only after they have
requested and received an adverse
organization determination from the MA
organization. If an enrollee waived the
right to have the provider request an
organization determination, nothing
would preclude the enrollee from
appealing the MA organization’s denial
for the service.
Other commenters, however, were in
favor of CMS allowing the use of ABNs
in managed care. One commenter
reported that not all providers of MA
organizations have contracted networks,
and even among those that do, enrollees
still utilize non-network providers. The
commenter stated that the MA
organization could be unaware that the
enrollee received any services until he
or she presents a claim. ABNs would
inform enrollees about potential costs at
the time the enrollee seeks services,
thereby providing protection from
unintended liability. Another
commenter thought ABNs should be
required when enrollees access nonMedicare covered services, and that an
out of network provider should be
required to get an organization
determination prior to providing
services.
Response: We will continue to study
this issue and will pursue subsequent
notice and comment rulemaking before
implementing any standard use of ABNs
under the MA program. In addition, we
will work with interested parties to
determine how best to educate enrollees
and providers on financial liability
matters, including the possibility of

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permitting optional use of an ABN-like
notice.
8. Appeal Procedures for Cost Plans and
HCPPs.
We proposed under § 417.600(b) that
the same rights, procedures, and
requirements relating to beneficiary
appeals and grievances set forth in
subpart M of part 422 of this chapter
also apply to organizations offering
Medicare cost plans. In proposing this
change, we took into account that a key
difference between cost plans and MA
plans is that virtually all organizations
offering cost plans employ a billing
option available under § 417.532(c)(1)
that reduces a cost plan’s financial
liability for certain Medicare-covered
services. Under this billing
methodology, hospitals and SNFs that
furnish services to cost plan members
can obtain direct reimbursement from
Medicare fiscal intermediaries for these
services. For services paid for under this
methodology, the claims appeal
procedures available under original
Medicare regulations in part 405 would
be the appropriate recourse when a
Medicare fiscal intermediary denies a
claim. However, for other services,
including any service or payment denial
resulting from an organization
determination under a cost plan, as
defined in § 417.606, enrollees would
appeal through the cost plan’s appeals
process. The plan’s appeal procedures
would also apply in the rare situation
when a fiscal intermediary approved a
claim for hospital or SNF services, but
the cost plan refused to pay the covered
portion of the enrollee’s cost sharing
associated with the services.
As noted above, the cost plan appeals
process would follow the same rules
that apply to MA organizations, as set
forth in subpart M of part 422. Although
the appeal procedures set forth in part
417 and part 422 are largely similar, it
is important to note that the part 422
grievance provisions and recent changes
to the notice and appeal requirements
for inpatient hospital, SNF, home health
agency (HHA) and comprehensive
outpatient rehabilitation facility services
would apply to cost plans for the first
time. These changes primarily involve
§ 422.564, § 422.620, § 422.622,
§ 422.624 and § 422.626 which were set
forth in the April 4, 2003 final rule,
Improvements to the Medicare+Choice
Appeals and Grievance Procedures.’’
(See 68 FR 16,652). The effect of those
changes would be that plans would
have more specific guidelines for
processing grievances, and enrollees
would be entitled to the same notice
and appeal rights in cases of
terminations of Medicare services

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furnished by hospitals, SNFs, HHAs and
CORFs.
Comment: Commenters generally
supported CMS’ proposal to require cost
plans and HCPPs to follow the Medicare
Advantage grievance and appeal
requirements, particularly in light of the
unique billing arrangement utilized by
the majority of cost plans. One
commenter stated that CMS should
reflect in its final rule that cost plans
may elect billing option one, a payment
methodology where a fiscal
intermediary pays certain Part A
services instead of the cost plan.
Another commenter wanted CMS to
make sure that the cost plan’s appeals
process would apply in the unusual
circumstance where a fiscal
intermediary approved a claim, but the
cost plan denied payment of the
enrollee’s cost sharing portion. Other
commenters wanted CMS to allow
sufficient time for cost plans that do not
have MA experience to transition to the
MA rules. Some commenters
recommended an effective date of
January 2006. Another commenter
requested that the transition to MA rules
apply as of the first day of the contract
year following publication of the final
rule.
Response: We did not receive any
comments on the applicability of the
notice and appeal requirements to cost
plans when Medicare services end in
SNFs, HHAs and CORFs, under
§ 422.624 and § 422.626. Nevertheless,
we agree with the commenters that there
should be one managed care appeals
process for all plan types. As proposed,
all part 422 rules now apply to cost
plans and HCPPs. Thus, we have
deleted all part 417 grievance,
organization determination, and appeal
provisions, and replaced them with
§ 417.600(b) and § 417.840 to require
cost plans and HCPPs to apply the MA
procedures under part 422, subpart M.
Additionally, we have made a
conforming change to § 417.832(c)
dealing with representation of parties,
and added a new provision at
§ 417.832(d) dealing with administrative
law judge hearings, Medicare Appeals
Council review, and judicial review that
references part 405, as applicable to
those provisions. However, for those
cost plans that elect to bill under
original Medicare, any denied claim by
the fiscal intermediary or carrier must
be subject to the appeals process under
original Medicare. We also agree that if
a plan denies payment of an enrollee’s
cost sharing amount, then the enrollee
must file an appeal under the MA
appeal procedures.
As recommended by commenters, we
will require that cost plans and HCPPs

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must transition to the MA grievance and
appeals processes under part 422 no
later than January 1, 2006. This should
give plans, providers and original
Medicare contractors an ample
opportunity to make a seamless
transition.
9. Federal Preemption of Grievances and
Appeals
Section 232(a) of the MMA changes
the presumption from one in which
State laws are not preempted unless
they conflict with Federal laws or fall
into specified categories to one in which
State standards are presumed
preempted unless they are licensing or
solvency laws. In light of the
comprehensive nature of the appeals
process already established, we did not
believe that the new preemption
standard would have any effect on
coverage appeals provisions. Our
regulations would continue to defer to
State law on the issue of authorized
representatives of enrollees in the
organization determination, grievance
and appeals processes. We were
concerned, however, with State
grievance requirements now preempted,
and believed that we needed to
reexamine our Federal grievance
requirements. Therefore, we solicited
comments on whether we should adopt
the grievance provisions proposed in
our January 24, 2001 proposed rule that
would require MA organizations to
establish notice and timeliness
procedures. (See 66 FR 7593.)
Alternatively, we asked whether we
should impose, as a Federal MA
requirement, that MA organizations
meet State grievance requirements.
Comment: Most commenters,
including both those representing MA
organizations and consumers, favored
adopting the specific grievance
requirements first proposed in the
January 2001 proposed rule. They
indicated that establishing national
standards would eliminate confusion for
plans, particularly regional PPOs, and
protect beneficiary interests. They
indicated that plans should not be
subject to multiple and conflicting State
laws governing grievances. One
commenter generally supported the
grievance rules but recommended that
CMS make two changes. The first
modification would be that MA
organizations must process grievances
‘‘as expeditiously as the enrollee’s
health requires, but no later than 60
days.’’ The second change would
prohibit plans from taking extensions to
the timeframes.
Two commenters thought that CMS
should not only require the originally
proposed standards for grievances, but

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also require plans to adhere to
individual State grievance processes as
well. One of the commenters believed
that requiring plans to follow State
processes would restore the status quo
before enactment of MMA, while the
other commenter thought that
beneficiaries would have better
protections by having access to both
Federal and State grievance procedures.
Response: We agree with the
commenters that establishing a uniform
set of grievance standards would reduce
confusion and burden for MA
organizations. We also believe that one
set of rules will ensure greater
beneficiary understanding of their
grievance rights and achieve
consistency among plan operations.
Thus, we are implementing at § 422.564
the specific Federal requirements for
grievance procedures that basically
mirror those set forth in our January
2001 proposed rule. We disagree with
the commenter that MA organizations
should be required to follow both State
and Federal grievance processes. We
believe that such an approach would be
inconsistent with section 232(a) of the
MMA, which preempts State grievance
requirements.
Under MA grievance requirements,
organizations must notify enrollees of
decisions as expeditiously as the
enrollee’s case requires, but no later
than 30 calendar days after receiving a
complaint. MA organizations may
extend the timeframe by up to 14
calendar days if the enrollee requests
the extension, or if the organization
justifies a need for additional
information and the delay is in the
interest of the enrollee. We believe that
the timeframes should 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
physician does not offer convenient
hours for office visits. In addition, we
believe that most MA organizations will
be able to respond to most grievances
within 30 days. Even if an MA
organization needs to extend the
timeframe, we believe that a 60-day
standard is too long for an MA
organization to respond to an enrollee’s
grievance.
If an enrollee makes a grievance
orally, the MA organization may
respond to it orally or in writing, unless
the enrollee requests a written response.
If an enrollee files a written grievance,
then the MA organization must respond
in writing. In addition, an MA
organization must provide information
to enrollees on their right to request a
review by a Quality Improvement
Organization (QIO) if the grievance

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involves a quality of care issue. For any
complaint involving a QIO, the MA
organization must comply with the
requirement at § 422.564(c), and
cooperate with the QIO in resolving the
complaint. MA organizations must
establish a 72–hour expedited grievance
process for complaints involving certain
procedural matters in the appeals
process. Finally, MA organizations must
create a system to track and maintain
records on all grievances.
We note that under MMA, enrollees
would still have access to various State
remedies available in cases in which an
issue is unrelated to the MA
organization’s status as a health plan. As
noted above, cost plans and HCPPs must
follow the grievance, organization
determination and appeal procedures
under MA. However, general
preemption rules continue to apply to
cost plans and HCPPs.
10. Employer Sponsored Benefits and
Appeals
When an employer, by contracting
with an MA plan, provides health
benefits in addition to those covered
under Part C of Title XVIII of the Social
Security 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 (ERISA), as
amended, and State law (to the extent
such State law is not preempted by
ERISA). In addition, when MA plans
offer benefits covered under Part C, they
also fall under the requirements of part
422 with respect to Part C benefits.
Therefore, we solicited comments on
whether, and to what extent, the
application of parallel appeal
procedures in this context might be a
problem for plans, employers and/or
eligible individuals.
Comment: Almost all commenters
supported utilizing only the MA
procedures for claims involving
integrated ERISA and MA benefits. One
commenter noted 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 MA, MA-PD, or
PDP group plan, including benefits
separately negotiated between the MA,
MA-PD or PDP organization and an
employer or labor organization, those
benefits should be governed by the MA
or PDP regulations on grievances,
organization determinations, and
appeals rather than subjecting the
beneficiary to two separate processes.

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Commenters also noted that although
the ERISA and MA rules contain some
differences, they generally provide
similar enrollee protections.
Three commenters agreed that
adopting and applying a single, uniform
MA appeals process for all benefits
would be easier for the enrollee to
understand. Other commenters stated
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 a
continuation of parallel appeal
procedures, but only to the extent that
parallel procedures afforded enrollees
with more protection than would be
available in the absence of parallel
procedures.
One commenter argued that the
benefits under the two separate
programs must be adjudicated according
to the rules for each program. The
commenter stated that it was not clear
whether the outcome of a CMS decision
would preclude an enrollee from filing
an ERISA appeal, and that a decision
made by CMS could affect the need for
appeal under ERISA when the ERISA
plan had secondary payer status. The
commenter added that given that the
benefits provided to the Medicare
beneficiary in this instance involve two
different laws, there is no statutory
authority for us to adjudicate appeals
relating to an ERISA plan, just as there
is no statutory authority for the DOL to
adjudicate appeals relating to Medicare
benefits. This commenter recommended
that DOL and CMS work together to
develop a process that would allow the
plan sponsor of a retiree health plan to
delegate its authority for appeals to the
same entity considering Medicare
appeals, provided that DOL is satisfied
that this process would satisfy ERISA
claims and appeal procedures.
Response: After reviewing the public
comment and conferring with
representatives of DOL, we have
concluded that changes (not only to the
CMS regulations but also to the DOL
regulations) are needed to properly
address this issue. Accordingly, we have
added § 422.560(c), which is intended to
give ERISA plans the option, according
to regulations of the Secretary of Labor,
of electing the MA process rather than
the procedures under 29 CFR
§ 2560.503–1 for claims involving
supplemental benefits provided by
contract with an MA organization. In
this regard, DOL has agreed to work
with CMS to develop such regulations.
The language in § 422.560 is intended to
demonstrate our commitment to make
the entire MA process available in this

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context. The provision in § 422.560
would not take effect in the absence of
regulations by the Secretary of Labor.
Subpart N. Medicare Contract
Determinations and Appeals
1. Overview
Subpart N ‘‘Medicare Contract
Determinations and Appeals’’ went into
effect under Part C of Title XVIII, and as
such was not part of the proposals in the
proposed rule of August 3, 2004.
However, we found that we needed to
make a change to the requirements
under Title II subpart N.
Section 1860D–12(b)(3)(F) of the Act
directs that the ‘‘procedures for
termination’’ in section 1857(h) of the
Act be incorporated into requirements
for PDP sponsors. Therefore, we
proposed under Title I that a single set
of procedures relating to contract
determinations and appeals would
apply to both MA organizations and
PDP sponsor contractors and that the
requirements in § 423.641 through
§ 423.669 (applicable to PDP sponsors)
would mirror the requirements at
§ 422.641 through § 422.698 for the MA
program. We asked for comments on
this proposal and did not receive any
negative comments. Whenever
practicable the regulations mirror each
other. We assume that commenters
believed that it should be simpler to
adhere to a uniform set of contract
requirements.
We found that in order to maintain
one set of contract requirements—and
be responsive to commenters asking for
a streamlined application process and a
single timeline—we needed to add a
cutoff date to the contract determination
process under subpart N. This new rule
clarifies the timeline for valid contracts,
in the event of a redetermination, and
we have added this provision at
§ 422.654(c). This provision specifies
that in the case of a favorable
redetermination, including favorable
decisions as the result of a hearing or
Administrative review, that such
determinations 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 PDP sponsor regulations by adding
§ 423.647(c).
Subpart O—Intermediate Sanctions
In the proposed rule, we proposed a
technical correction to § 422.752(a)(8).
The word ‘‘entity’’ was inadvertently
left out of the regulations text of that
amendment. We proposed revising
paragraph (a)(8) to read ‘‘[e]mploys or
contracts with an individual or entity
who is excluded from participation in

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Medicare under section 1128 or 1128A
of the Act (or with an entity that
employs or contracts with such an
individual or entity) for the provision of
any of the following.’’ We did not
receive any comments on these
clarifications and will adopt them in
this final rule.
We note that while we did not
propose other changes to the
requirements at § 422.750 through
§ 422.760, an interim final rule with
comment period was issued at the end
of December, 2004 to correct technical
errors in the regulatory text made in a
final rule for MA plans that was issued
on August 22, 2003 and that was
entitled ‘‘Modifications to Medicare
Rules’’ (68 FR 50840).
In addition, in the course of reviewing
and responding to comments that we
received regarding the corresponding
regulatory provisions for Title I and the
Part D program, we discovered that
while we did not need to propose
changes to the substance of the
regulatory provisions, we needed to
make certain revisions to the regulatory
text at this subpart in the interests of
clarity and accuracy. We are, therefore,
making the following changes in this
final rule:
At § 422.752(b), we are deleting the
references to § 422.756(c)(1) and (c)(3)
that are listed under procedures for
imposing sanctions. We are replacing
them with references to § 422.750(a)(2)
and (a)(4). The purpose of this
correction is to include a reference to
the provision that details the kinds of
sanctions that we may impose, rather
than the provision that details the
procedures for imposing sanctions.
At § 422.752(a) we clarified our
authority to impose more than one
sanction at a time by deleting the word
‘‘any’’ and replacing it with the phrase
‘‘one, or more’’. Therefore, § 422.752(a)
will now read as follows: ‘‘All
intermediate sanctions. For the
violations listed in this paragraph (a),
we will impose one, or more, of the
sanctions. . .’’
Also, at § 422.752(a)(8) we have added
the word ‘‘excluded’’ to the
parenthetical clause in the interest of
clarity. The parenthetical will now read,
‘‘or with an entity that employs or
contracts with an excluded individual
or entity.’’
At § 422.756(f)(2) a reference to ‘‘part
1005 of this chapter’’ was incorrect and
we have replaced with a reference to
‘‘part 1003 of this chapter,’’ since part
1003 is the correct reference to the OIG
procedures for imposing sanctions
whereas part 1005 includes the appeal
procedures for sanctions.

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At § 422.756(f)(3) we have deleted the
clause ‘‘in accordance with the
provisions of part 1005 of this chapter’’
of this chapter. Since this subparagraph
discusses our authority to impose CMPs,
as opposed to the OIG’s authority, we
realized that this reference was
incorrect.
At § 422.758, in the introduction and
at paragraph (c), we made some editorial
changes to better clarify the basis for
civil money penalties issued by CMS.
IV. Provisions of the Final Rule
For the most part, this final rule
incorporates the provisions of the
proposed rule. Those provisions of this
final rule that differ from the proposed
rule are as follows:
Effective Date of Initial Regulations
(§ 417.402)
In paragraph (c)(2) we have added the
word ‘‘calendar’’ prior to ‘‘year’’ to
clarify our intent.
Applicability of Requirements and
Procedures (§ 417.832)
We have made a conforming change
to paragraph (c) of § 417.832 to reflect
that the provisions of subpart I of part
405 dealing with the representation of
parties apply to organization
determinations and appeals.
We have added a new paragraph (d)
at § 417.832 to indicate that the
provisions of subpart I of part 405
dealing with administrative law judge
hearings, Medicare Appeals Council
review, and judicial review are
applicable, unless otherwise provided.
Definitions (§ 422.2)
We have amended the definitions of
‘‘prescription drug plan (PDP)’’ and
‘‘Prescription drug plan (PDP) sponsor’’
to make them consistent with the
Medicare Prescription Drug Benefit
Program proposed rule.
We have revised the definition of
‘‘service area’’ to clarify that CMS may
consider whether a contracting provider
network meets the access and
availability standards set forth in
§ 422.112 for all MA coordinated care
plans and network MA MSA plans.
We have clarified the definition of
‘‘institutionalized’’ for the purpose of
SNPs to provide information on what is
meant by a long term care facility (SNFs,
ICF, ICF/MR and Inpatient Psychiatric
hospitals). We have also expanded the
definition to include a special needs
individual who is expected to reside in
a long-term care facility for 90-days or
longer based on as assessment of the
potential for such a stay as long as the
assessment is of a type approved by
CMS .
We have defined a SNP that enrolls a
disproportionate percentage of special
needs individuals as one that enrolls a

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greater proportion of the target group
than occur nationally in the Medicare
population.
We have included in its definition
that a SNP is required to provide Part
D coverage.
We further clarified the definition of
a SNP as a plan that has been designated
by CMS as meeting the requirements of
a MA SNP for institutionalized or dual
eligible individuals or those individuals
with a severe or disabling chronic
condition as determined on a case-by­
case basis using criteria that include the
appropriateness of the target population,
the existence of clinical programs or
special expertise to serve the target
population, and whether the proposal
discriminates against sicker members of
the target population
Additionally, we have added a
technical amendment to correct the term
‘‘Religious and Fraternal Benefit (RFB)
Society’’ to read ‘‘Religious Fraternal
Benefit (RFB) Society’’.
Types of Plans (§ 422.4)
We have amended paragraph (a)(1)(iv)
to clarify the types of MA plans and Part
D prescription drug coverage.
We have also added a new paragraph
(c) regarding rules for MA plans’ Part D
coverage. This paragraph clarifies the
requirements for MA coordinated care
plans, MA MSAs, and MA PFFS plans.
In addition, a new paragraph (c)(2)
states the MSAs cannot offer drug
coverage, other than that required under
Parts A and B of Title XVIII of the Act.
Finally, in paragraph (c)(3), we have
added language that MA organizations
offering private fee for service plans can
choose to offer qualified Part D coverage
meeting the requirements in § 423.104.
Eligibility to Elect an MA Plan (§ 422.50)
In § 422.50, we have added a new
paragraph (a)(2)(iii) to allow SNPs to
serve ESRD individuals.
We have amended paragraph (a)(5) to
provide that beneficiaries may make
elections by completing an enrollment
form by completing another CMS
approved election mechanism offered
by the MA organization.
Coordination of Enrollment and
Disenrollment through MA
Organizations (§ 422.66)
We have revised § 422.66(d)(5) to
allow us to offer, as an option in the
future, the ability of an MA plan to
process a ‘‘seamless’’ enrollment upon
an individual’s entitlement to Medicare.
Disenrollment by the MA Organization
(§ 422.74)
We have added a new paragraph
(b)(2)(iv) to show that in certain cases,
loss of special needs status is a basis for
required disenrollment from a SNP that
enrolls only special needs individuals.

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We have amended paragraph (d)(1)(i)
by adding paragraphs (d)(1)(i)(A), (B),
and (C) to clarify what ‘‘reasonable
efforts’’ to collect unpaid premiums
must be taken in prior to the
disenrollment of an individual from an
MA plan.
We have revised the definition of
‘‘disruptive behavior’’ in paragraph
(d)(2)(i) to focus on the behavior that
substantially impairs the plan’s ability
to arrange or provide care for the
individual or other plan members.
We have added a new paragraph
(d)(2)(ii) ‘‘Basis of disenrollment for
disruptive behavior.
We have amended paragraph
(d)(2)(iii) to require the MA organization
to provide reasonable accommodations
for individuals with mental or cognitive
conditions.
We have amended paragraph (d)(2)(iv)
‘‘Documentation’’ to provide an MA
organization the option to decline future
enrollment of an individual who has
been disenrolled for disruptive
behavior.
We have revised proposed paragraph
(d)(2)(v) ‘‘CMS review of the proposed
disenrollment’’ to also require MA
organizations to provide a ‘‘reasonable
accommodation’’ to individuals in
exceptional circumstances.
We have removed proposed paragraph
(d)(2)(vi) ‘‘Reenrollment in the MA
organization’’ and paragraph (d)(2)(vii)
‘‘Expedited process’’.
Requirements Related to Basic Benefits
(§ 422.101)
We have revised paragraph (b)(4) to
clarify its intent.
We have added a new paragraph (b)(5)
to require MA organizations that elect to
apply local coverage policies uniformly
across a local MA plan’s service area, or
across an MA regional plan’s service
area, to inform enrollees and potential
providers of the applicable local
coverage policy that applies to the MA
plan enrollees.
We have modified § 422.101(d)(4) to
indicate that notification to providers,
as well as members, of enrollee status
related to a deductible (if any) and
catastrophic caps is required.
Special Rules for Self-Referral and Point
of Service Option (§ 422.105)
We have renamed the title of this
section and reorganized the section in
order to clarify its scope and
applicability.
Coordination of Benefits with Employer
or Union Group Health Plans and
Medicaid (§ 422.106)
We have modified § 422.106 to clarify
the intent.
Disclosure Requirements (§ 422.111)
To be consistent with language
elsewhere in this regulation, we have

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added a conforming amendment,
revising paragraph (b)(9) to change
references to ‘‘Quality assurance
program’’ to ‘‘Quality improvement
program.
We have amended paragraph (e) by
reinserting the word ‘‘written’’, as its
removal was unintentional.
We have corrected the language in
§ 422.111(f)(10) to clarify our initial
intent.
We have added a requirement at
§ 422.111(f)(11) requiring all MA
organizations to make uniform coverage
policies related to an MA plan readily
available to members and providers,
including through the Internet.
We have also added a new paragraph
(f)(12) requiring MA organizations that
have Internet web-sites to post the
Evidence of Coverage, the Summary of
Benefits, and information on the
network of contracted providers.
Access to Service (§ 422.112)
In paragraph (a) introductory text, we
removed obsolete terminology from both
heading and introductory text.
We have revised paragraph (b)
introductory text related to ‘‘continuity
of care.’’
We have removed the instructions
that would have removed paragraph
(b)(4)(i) and redesignated paragraphs
(b)(4)(ii) and (b)(4)(iii). The inclusion of
this amendment in the proposed rule
was an error.
We have amended paragraph (c)
introductory text by adding
‘‘noncontracting’’ before ‘‘hospital’’.
We have amended paragraph (c)(1) to
clarify the types of hospitals that are
eligible to be designated an ‘‘essential
hospital’’.
We have amended paragraph (c)(3) to
clarify ‘‘good faith’’.
We have added a new paragraph (c)(4)
in order to include ‘‘competition text’’
in regulation, where no MA
organization will be permitted to
designate a hospital as an ‘‘essential
hospital’’ where there is a ‘‘competing
hospital’’ in the area.
We have added a new paragraph
(c)(7), under which we will evaluate the
continued applicability of ‘‘essential
hospital’’ status on an annual basis at
the time of annual contract renewal.
Compliance Deemed on the Basis of
Accreditation (§ 422.156)
We revised paragraph (b)(1) to change
the term ‘‘Quality assurance Program’’
to ‘‘Quality improvement program’’, in
order to be consistent with changes
elsewhere in this regulation.
Terminology (§ 422.252)
We have made a clarifying change to
the definition of MA local area to be
consistent with the intent of § 422.308.
Submission of Bids (§ 422.254)

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We amended paragraph (a)(1) by
adding ‘‘and, for plans with rebates as
described at § 422.266(a), the MA
organization must provide the
information required in paragraph (d) of
this section.’’
We have added a new paragraph
(a)(3), to retain language from the
current MA regulations at
§ 422.306(a)(2), which says if the bid
submission is not complete, timely, or
accurate, CMS has the authority to
impose sanctions under subpart O of
this part or may choose not to renew the
contract.
We have revised paragraph revise
(b)(2) to read ‘‘as the term revenue
requirements is used for purposes of
section 1302(8) of the Public Health
Service Act’’ to track the statutory
language.
We have amended paragraph (b)(3) by
removing the proposed sentence stating
that plan assumptions about revenue
requirements must include adjustments
for the utilization effects of cost sharing
reductions.
We have revised paragraph (b)(4) to
conform the regulation to the statutory
provision.
We have made a clarifying change to
paragraph (c)(5) to reflect the statutory
requirement that in the bid submission,
MA organizations provide the actuarial
bases for determining the amount of cost
sharing for a plan.
We have added a new paragraph (c)(9)
to address information requirements
resulting from our policy decision on
the geographic ISAR adjustment,
presented in the G preamble discussion
of § 422.308(d).
We have added paragraph (f) to clarify
that separate bids must be submitted for
Part A and Part B enrollees and Part Bonly enrollees for each MA employer
group health plan offered.
Review, Negotiation, and Approval of
Bids (§ 422.256)
We have amended paragraph (b)(2) for
clarity and to better reflect the statutory
language on standards of bid review.
Calculations of Benchmarks (§ 422.258)
We have corrected paragraph (c)(4) to
clarify the plan-bid component of the
regional benchmark is calculated based
only on regional plan bids, not an all of
the MA plan bids in the region.
We made an additional change to the
proposed paragraph (c)(5)(i) to clarify
further how the plan bid component of
the regional benchmark will be
calculated.
Calculation of Beneficiary Premiums
(§ 422.262)
We have amended paragraph (f)(1) to
add the Railroad Retirement Board and
the Office of Personnel Management.

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We consolidate paragraphs (f)(3) and
(f)(4) to clarify that the other methods
CMS may specify for payment of
premiums include those listed in the
regulation.
Calculation of Savings (§ 422.264)
We have amended paragraphs (c) and
(e) to more accurately reflect the policy
that for both local and regional MA
plans, the calculation of savings will be
determined by applying the plan
average risk adjustment factor to the
basic A/B bid and benchmark, although
we have left in regulation the statutorily
mandated discretion for CMS to select a
method for calculating savings.
Beneficiary Rebates (§ 422.266)
We have changed the language in
paragraph (b)(1) to clarify that rebate
dollars may be used to reduce the
premium for either the non-drug or drug
portions of the supplemental benefit.
We also add language clarifying that
plans must distinguish the amount of
rebate applied to enhance original
Medicare benefits from the rebate
applied to enhance Part D benefits.
We have amended paragraph (c) by
adding ‘‘MA organizations must
distinguish, for each MA plan, the
amount of rebate applied to enhance
original Medicare benefits fro the
amount of rebate applies to enhance
Part D benefits.’’
Adjustments to Capitation Rates,
Benchmarks, Bids, and Payments
(§ 422.308)
We have amended the language in
paragraph (e) to refer to the adjustment
as the ‘‘government premium
adjustment,’’ in order to distinguish it
from other payment adjustments under
the MMA.
Risk Adjustment Data (§ 422.310)
We have modified § 422.310(e) to
indicate that there may be penalties for
submission of false data under the
requirement for validation of risk
adjustment data.
Special Rules for Payments to Federally
Qualified Health Centers (§ 422.316)
We have amended (a) to clarify what
amount CMS will pay an FQHC by
adding ‘‘less the amount the FQHC
would receive for the MA enrollee from
the MA organization and taking into
account the cost sharing amount paid by
the enrollee.’’
Moratorium on New Local Preferred
Provider Organization Plans (§ 442.451)
We have revised this section to better
reflect Congressional intent to give MA
organizations the option of introducing
new PPO plans in those service areas
where they have already established a
local PPO plan prior to the start of the
local PPO moratorium of 2006 & 2007.

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Risk Sharing with Regional MA
Organizations for 2006 and 2007
(§ 422.458)
We have added language to
§ 422.458(e)(1) to clarify that regional
PPOs must be licensed in each State of
the region, except during the period of
the temporary waiver.
We have also made a technical change
in paragraph (e)(2) to clarify what State
licensing rules an organization must
apply until the organization is licensed
in all states, under the waiver process.
Scope (§ 422.500)
This section sets forth application
requirements for entities seeking a
contract as a Medicare Organization
offering, an MA plan. MA organizations
offering prescription drug plans must, in
addition to the requirements of this part,
follow the requirements of 42 CFR part
423 specifically related to the
prescription drug benefit.
Application Requirements (§ 422.501)
We have added a new § 422.501(c)(2)
to clarify that a CMS determination that
an entity is qualified to act as an MA
sponsor is distinct from the bid
negotiation that occurs under subpart F
of part 422.
Evaluation and Determination
Procedures (§ 422.502)
In paragraph (c)(2)(ii), we are
changing the amount of time that an
applicant has to remedy an application
after receiving an Intent to Deny Notice
from 60 days to 10 days.
We have eliminated paragraphs (e), (f)
and (g
General Provisions (§ 422.503)
In § 422.503, we have eliminated the
mandatory self reporting requirements
that we proposed, but we have added a
new requirement at
§ 422.503(b)(4)(vi)(H) that MA-PDPs
have a comprehensive fraud and abuse
plan.
Contract Provisions (§ 422.504)
We have made changes in paragraph
(h) to reflect our focus on requirements
to prevent fraud, waste and abuse and
on issues that we are responsible for
enforcing, such as the HIPAA
administrative simplification rules.
Agreements with Federally Qualified
Health Centers (§ 422.527)
We have amended paragraph (c) to
clarify that financial withholds are not
considered in determining payments
made to FQHCs by CMS.
General Provisions (§ 422.550)
We have added an amendment to
amend § 422.550(a)(2) by revising the
heading to read, ‘‘Asset Transfer’’
instead of ‘‘Asset Sale’’.
Basis and Scope (§ 422.560)
In response to comments on whether
and to what extent, the application of
parallel appeal procedures might be a

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problem for plans, employers, and
eligible individuals, we have added a
new paragraph (c) related to ERISA
standards.
Definitions (§ 422.561)
We have clarified the definitions of
‘‘Enrollee’’ and ‘‘Authorized
representative’’ in this section. We have
removed ‘‘Authorized representative’’
and replaced it with ‘‘Representative’’ to
clarify that a representative means an
individual appointed by an enrollee or
other party, or authorized under State or
other applicable law, to act on behalf of
an enrollee or other party involved in an
appeal.
Grievance Procedures (§ 422.564)
We have added new paragraphs (d)
and (e) related to the method for filing
a grievance and the grievance
disposition and notification process and
we have redesignated the existing
sections.
Timeframes and notice requirements for
expedited organization determinations.
We have made a conforming change
in paragraph (b) of § 422.572 to reflect
the enrollee’s right to file an expedited
grievance if he or she disagrees with an
MA organization’s decision not to
expedite an organization determination.
Request for a Standard Reconsideration
(§ 422.582)
We have revised the text in paragraph
(a) to denote that an MA organization
may adopt a policy under which it
accepts oral requests for standard
considerations. Additionally, in
accordance with part 405, subpart I, we
have removed paragraph (a)(2) to
eliminate the SSA as a filing location for
standard reconsideration requests.
Timeframes and Responsibility for
Reconsideration (§ 422.5900)
We have made a conforming change
in paragraph (a) of § 422.590 to reflect
the enrollee’s right to file an expedited
grievance if he or she disagrees with an
MA organization’s decision not to
expedite a request for an expedited
reconsideration.
We have revised paragraph (a) of
§ 422.602 that previously read that a
party must file a written request with
‘‘the appropriate ALJ hearing office’’ to
read that a party must file a written
request for a hearing with ‘‘the entity
specified in the IRE’s reconsideration
notice’’ in accordance with part 405,
subpart I that eliminates alternate filing
locations.
Reconsideration: Applicability
(§ 422.648)
We have added a new paragraph (c)
to § 422.648. This provision specifies
that in the case of a favorable
determination, including favorable
decisions as a result of a hearing or
Administrative review, that such

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determinations be made by July 15 for
the contract in question to be effective
in January of the following year.
Basis for Imposing Sanctions (§ 422.752)
We have amended paragraph (a) in
§ 422.752 to clarify CMS’ authority to
impose more than one sanction at a
time.
We have also amended paragraph (b),
by deleting references to § 422.756 (c)
(1) and (c) (3) and replacing them with
references to § 422.750(a)(2) and (a)(4).
This clarifies that we are cross
referencing the basis for sanctions with
the kind of sanctions that could result,
not the procedure for imposing
sanctions.
Procedures for Imposing Sanctions
(§ 422.756)
We have amended paragraph (f)(2) to
corrected a reference to ‘‘part 1005 of
this chapter’’ to correctly reference ‘‘part
1003 of this chapter,’’ since 1003
includes the OIG procedures for
imposing sanctions whereas 1005 are
appeal procedures.
Maximum Amount of Civil Money
Penalties Imposed by CMS (§ 422.758)
At § 422.758 we added some language
that better clarifies the basis for Civil
monetary penalties (CMPS) issued by
CMS. At § 422.758(a) we added
language that clarifies the existing basis
for the Office of the Inspector General to
support the imposition of this CMP. At
§ 422.752(a)(8) we added the word
‘‘excluded’’ for clarification.’’
V. 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
affected public, including automated
collection techniques.
The collection requirements
referenced in sections one and two
below are currently approved under
OMB approval number 0938–0753
(CMS–R–0267, Medicare Plus Choice

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Program Requirements Referenced in 42
CFR 422.000 through 422.700), with a
current expiration date of October 31,
2005.
Section one below outlines the
collection requirements referenced in
this regulation that have not been
modified by the proposed regulatory
changes. Section number two references
requirements in this regulation that
have been technically revised, but do
not affect the currently approved burden
estimates. Table three below references
new collection requirements.
It should be noted that all of the
collection requirements summarized
and discussed below are open for public
comment and will be submitted to OMB
for approval.
1. Currently Approved Collection
Requirements Not Affected By Proposed
Regulation:
Section 422.54 Continuation of
enrollment for MA local plans
(b) The intent by an enrollee to no
longer reside in an area and
permanently live in another area must
be verified by the plan through
documentation that establishes
residency, such as a driver’s license,
voter registration.
(c)(2) The enrollee must make the
choice of continuing enrollment in a
manner specified by CMS. If no choice
is made, the enrollee must be
disenrolled from the plan.
Section 422.60 Election process
(b)(1) MA organizations may submit
information on enrollment capacity of
plans.
(c)(1) The plan election must be
completed by the MA eligible
individual (or the individual who will
soon become eligible to elect an MA
plan) and include authorization for
disclosure and exchange of necessary
information between the U.S.
Department of Health and Human
Services and its designees and the MA
organization. Persons who assist
beneficiaries in completing forms must
sign the form, or through other
approved mechanisms, indicate their
relationship to the beneficiary.
(e)(3) The MA organization must give
the beneficiary prompt notice of
acceptance or denial in a format
specified by CMS.
(e)(4) If the MA plan is enrolled to
capacity, it must explain the procedures
that will be followed when vacancies
occur to the potential enrollee.
(e)(5) Upon receipt of the election, or
for an individual who was accepted for
future enrollment from the date a
vacancy occurs, the MA organization

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transmits, within the timeframes
specified by CMS, the information
necessary for CMS to add the
beneficiary to its records as an enrollee
of the MA organization.
(f)(3) Upon receipt of the election
from the employer, the MA organization
must submit the enrollment within
timeframes specified by CMS.
Section 422.66 Coordination of
enrollment and disenrollment through
MA organizations
(f)(2) Upon receipt of the election
from the employer, the MA organization
must submit a disenrollment notice to
CMS within timeframes specified by
CMS.
Section 422.80 Approval of marketing
materials and election forms
(a)(i) At least 45 days (or 10 days if
using marketing materials that use,
without modification, proposed model
language as specified by CMS) before
the date of distribution the MA
organization has submitted the material
or form to CMS for review under the
guidelines in paragraph (c).
Section 422.506 Nonrenewal of
contract
(a)(2)(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
Medicare services within the service
area, including alternative MA plans,
Medigap options, and original Medicare
and must receive CMS approval prior to
issuance.
Section 422.564 Standard timeframes
and notice requirements for
organization determinations
(e)(3)(ii) 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.
Based on the results of prior sampling
of managed care enrollees, we
extrapolate that approximately 17
percent of MA enrollees would likely
experience some dissatisfaction with
their MA organizations. Since we
estimate that there would be
approximately 6.7 million MA enrollees
in 450 plans, we estimate that
approximately 1,139,000 enrollees
likely would experience some
dissatisfaction with their MA
organizations in a given year.
Based on previous grievance
requirements analysis (See 66 FR 7593
through 7600), we estimate that
approximately 455,600 enrollees, that is,

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40 percent of the total number of
dissatisfied enrollees, will file an oral or
written grievance. We further estimate
that another 60 percent will request a
grievance orally, that is, 273,360. Of
those requests, we believe that
approximately 10 percent of enrollees
will request a follow-up written
response, that is 27,336 enrollees.
We estimate that it will take MA
organizations 15 minutes to prepare and
furnish each written response, and that
MA organizations will be required to
provide an estimated 27,336 written
notices following oral requests. The
total annual burden associated with this
requirement is 6,834 hours.
Section 422.568 Standard timeframes
and notice requirements for
organization determinations
(a) When a party has made a request
for a service, the MA organization must
notify the enrollee of its determination
as expeditiously as the enrollee’s health
condition requires, but no later than 14
calendar days after the date the
organization receives the request for a
standard organization determination.
(c) If an MA organization decides to
deny service or payment in whole or in
part, or if an enrollee disagrees with an
MA organization’s decision to
discontinue or reduce the level of care
for an ongoing course of treatment, the
organization must give the enrollee
written notice of the determination.
Section 422.590 Timeframes and
responsibility for reconsiderations
(d)(2) When the MA organization
extends the timeframe, it must notify
the enrollee in writing of the reasons for
the delay, and inform the enrollee of the
right to file an expedited grievance if he
or she disagrees with the MA
organization’s decision to grant an
extension. The MA organization must
notify the enrollee of its determination
as expeditiously as the enrollee’s health
condition requires but no later than
upon expiration of the extension.
Section 422.600 Right to a hearing
(a) If the amount remaining in
controversy after reconsideration meets
the threshold requirement established
annually by the Secretary, any party to
the reconsideration (except the MA
organization) who is dissatisfied with
the reconsidered determination has a
right to a hearing before an ALJ.
Section 422.608 Medicare Appeals
Council (MAC) review
Any party to the hearing, including
the MA organization, who is dissatisfied
with the ALJ hearing decision, may
request that the MAC review the ALJ’s
decision or dismissal.

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Section 422.612 Judicial review
(b) Any party, including the MA
organization, may request judicial
review (upon notifying the other parties)
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) In order to request judicial review,
a party must file a civil action in a
district court of the United States in
accordance with section 205(g) of the
Act. See part 405 of this chapter for a
description of the procedures to follow
in requesting judicial review.
2. Currently Approved Collection
Requirements Technically Modified By
Proposed Regulation: Not Affecting
Burden:

is disruptive as defined in
422.74(d)(2)(1)(i)only after it meets the
requirements described in this section
and CMS reviews and approves the
request.
(d)(2)(iii) The beneficiary has a right
to submit any information or
explanation that he or she may wish to
submit to the MA organization.
(d)(2)(iv) The MA organization must
document the enrollee’s behavior, its
own efforts to resolve any problems, as
described in paragraphs (d)(2)(i) through
(d)(2)(ii) of this section and any
extenuating circumstances. The MA
organization may request from CMS the
ability to decline future enrollment by
the individual if the organization
obtains approval from CMS.

Section 422.50 Eligibility to elect an
MA plan
(a)(5) Completes and signs an election
form or completes another CMS
approved election method offered by the
MA organization and provides
information required for enrollment.

Section 422.111 Disclosure
requirements

Section 422.66 Coordination of
enrollment and disenrollment through
MA organizations
(b)(1)(i)Elect a different MA plan by
filing the appropriate election with the
MA organization.
(b)(1)(ii) Submit a request for
disenrollment to the MA organization in
the form and manner prescribed by CMS
or file the appropriate disenrollment
request through other mechanisms as
determined by CMS.
(b) (3) (ii) Provide enrollee with notice
of disenrollment in a format specified
by CMS.
(b) (3) (iii) In the case of a plan where
lock-in applies, include in the notice a
statement.
(d) (5) The individual who is
converting must complete an election as
described in § 422.60(c)(1), unless
otherwise provided in a form and
manner approved by CMS.
Section 422.74 Disenrollment by the
Medicare Advantage Organization
(c)(1) A notice must be provided to
the individual before submission of the
disenrollment transaction to CMS.
(d)(1)(i) The MA organization can
demonstrate to CMS that it made
reasonable efforts to collect the unpaid
premium amount that meets the
requirements of this section.
(d)(1)(ii)The MA organization
provides the enrollee with notice of
disenrollment that meets the
requirements set forth in paragraph (c)
of this section.
(d)(2)(ii)An organization may
disenroll an individual whose behavior

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(d)(2) For changes that take effect on
January 1, the plan must notify all
enrollees 15 days before the beginning
of the Annual Coordinated Election
Period defined in section 1851(e)(3)(B)
of the Act.
(e) The MA organization must make a
good faith effort to provide written
notice of a termination of a contracted
provider at least 30 calendar days before
the termination effective date to all
enrollees who are patients seen on a
regular basis by the provider whose
contract is terminating, irrespective of
whether the termination was for cause
or without cause. When a contract
termination involves a primary care
professional, all enrollees who are
patients of that primary care
professional must be notified.
Section 422.112 Access to services
(a)(1)(i) Maintain and monitor a
network of appropriate providers that is
supported by written agreements and is
sufficient to provide adequate access to
covered services to meet the needs of
the population served. These providers
are typically used in the network as
primary care providers (PCPs),
specialists, hospitals, skilled nursing
facilities, home health agencies,
ambulatory clinics, and other providers.
(a)(1)(ii) MA regional plans, upon
CMS pre-approval, can use methods
other than written agreements to
establish that access requirements are
met.
Section 422.152 Quality improvement
program
(b)(3)(i) Plans must measure
performance using the measurement
tools required by CMS, and report its
performance to CMS. The standard

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measures may be specified in uniform
data collection and reporting
instruments required by CMS.
(b)(3)(ii) Make available to CMS
information on quality and outcomes
measures that will enable beneficiaries
to compare health coverage options and
select among them, as provided in
§ 422.64(c)(10).
(d)(5) The organization must report
the status and results of each project to
CMS as requested.
(e)(2)(i) MA organizations offering an
MA regional plan or local PPO plan as
defined in this section must measure
performance under the plan using
standard measures required by CMS and
report its performance to CMS. The
standard measures may be specified in
uniform data collection and reporting
instruments required by CMS.
(f)(i) and (iii) For all types of plans
that it offers, an organization must
maintain a health information system
that collects, analyzes, and integrates
the data necessary to implement its
quality improvement program and make
all collected information available to
CMS.
Section 422.570 Expediting certain
organization determinations
(d)(2)(ii) The plan must inform the
enrollee of the right to file an expedited
grievance if he or she disagrees with the
MA organization’s decision not to
expedite.
Section 422.572 Timeframes and
notice requirements for expedited
organization determinations
(c) If the MA organization 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.
Section 422.582 Request for a
standard reconsideration
(a) A party to an organization
determination must ask for a
reconsideration of the determination by
making an oral or written request to the
MA organization that made the
organization determination or to an SSA
office.
(c)(2) If the 60-day period in which to
file a request for reconsideration has
expired, a party to the organization
determination may file a request for
reconsideration with the MA
organization.
Section 422.602 Request for an ALJ
hearing
A party must file a written request for
a hearing with the appropriate ALJ

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office, which meets the requirements of
this section.
Section 422.620 How enrollees of MA
organizations must be notified of
noncovered inpatient hospital care
(c) When appropriate, a written notice
of non-coverage must be issued no later
than the day before hospital coverage
ends. The written notice must include
the elements set forth in this section.
As noted above, while the
requirements in this section have been
modified, the associated burden has not
changed.
3. New/Revised Collection
Requirements Proposed In This
Regulation: Affecting burden:
Section 422.80 Approval of marketing
materials and election forms
(a)(3) The MA plan meets the
performance requirements established
by CMS The MA plan may distribute the
designated marketing materials 5 days
following their submission to CMS with
an certification that the marketing
materials meet the model language
guidelines specified by CMS.
The burden associated with this
requirement is the time and effort
necessary for the plan to submit the
designated marketing materials to CMS
five days prior to distribution.
We estimate it will take 350 plans
approximately 12 hours to provide the
materials to CMS on an annual basis.
Section 422.101 Requirements relating
to basic benefits
(b)(5) An MA organization an MA
local plan or regional MA plan as
described in this section must make
information on the selected local
coverage policy readily available to the
enrollees and health care providers.
The burden associated with this
requirement is the time and effort
necessary for the plan to make
information on the selected local
coverage policy readily available to the
enrollees and health care providers. We
estimate that it will require 350 MA
plans 1 hour each on annual basis to
make the necessary information
available.
(d)(4) MA regional plans are required
to track the deductible (if any) and
catastrophic limits in paragraphs (d)(1)
through (d)(3) of this section based on
incurred out-of-pocket beneficiary costs
for original Medicare covered services,
and are also required to notify members
and health care providers when the
deductible (if any) or a limit has been
reached.
The burden associated with this
requirement is the time and effort
necessary for the plan to notify members

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4687

when the deductible (if any) or a limit
has been reached. While this
requirement is subject to the PRA, we
believe this requirement meets the
requirements of 5 CFR 1320.3(b)(2), and
as such, the burden associated with this
requirement is exempt from the PRA.
Section 422.106 Coordination of
benefits with employer group health
plans and Medicaid
(d)(1) To facilitate the offering of MA
plans by employers, labor organizations,
or the trustees of a fund established by
one or more employers or labor
organizations (or combination thereof)
to furnish benefits to the entity’s
employees, former employees (or
combination thereof) or members or
former members (or combination
thereof), of the labor organizations,
those MA plans may request, in writing,
from CMS, a waiver or modification of
those requirements in this part that
hinder the design of, the offering of, or
the enrollment in, those plans by those
individuals.
The burden associated with this
requirement is the time and effort
necessary for the plan to submit a
waiver to CMS. We estimate that on an
annual basis it will take plans 2 hours
to submit the waiver to CMS. However,
we do not anticipate more then nine
waiver requests on an annual basis. As
such, this requirement is not subject to
the PRA as stipulated under 5 CFR
1320.3(c).
Section 422.111 Disclosure
requirements
(f)(10) The names, addresses, and
phone numbers of providers from whom
the enrollee may obtain in-network
coverage in other areas.
The burden associated with this
requirement is the time and effort
necessary for the plan to notify member
of the names, addresses, and phone
numbers of providers from whom the
enrollee may obtain in-network
coverage in other areas. While this
requirement is subject to the PRA, we
believe this requirement meets the
requirements of 5 CFR 1320.3(b)(2), and
as such, the burden associated with this
requirement is exempt from the PRA.
Section 422.112 Access to services
(c) An MA regional plan may seek,
upon application to CMS, to designate
a noncontracting hospital as an essential
hospital as defined in section 1858(h) of
the Act that meets the conditions set
forth in this section.
The burden associated with this
requirement is the time and effort
necessary for the plan to submit the
required materials to CMS. We estimate

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that on an annual basis it will take 100
plans 8 hours to submit the materials to
CMS.
Section 422.254 Submission of bids
and rebate information
(a)(1) No later than the first Monday
in June, each MA organization must
submit to CMS an aggregate monthly bid
amount for each MA plan (other than an
MSA plan) the organization intends to
offer in the upcoming year in the service
area (or segment of such an area if
permitted under § 422.262(c)(2)) that
meets the requirements in paragraph (b)
of this section. With each bid submitted,
the MA organization must provide the
information required in paragraph (c) of
this section and, for plans with rebates
as described at 422.266, the MA
organization must provide the
information required in this section.
The burden associated with this
requirement is the time and effort
necessary for the plan to submit the
required bid materials and rebate
information to CMS. 350 MA
organizations offering 400 plans 100
hours per plan bid and rebate
submission to CMS for a total annual
burden of 40,000 hours.
(b) For MSA plans, MA organizations
must submit the following information:
the monthly MSA premium, the plan
deductible amount, and the beneficiary
supplemental premium, if any. Since
CMS does not review or approach MSA
plan submissions, we estimate that the
submission burden is half that for other
MA plans. Under the M+C program, no
MSA plans were offered. We estimate
that under the MA program 5
organizations will offer an MSA plan
and require 50 hours for submission of
the above information, for a total annual
burden of 250 hours.
Section 422.270 Incorrect collections
of premiums and cost-sharing
(b) An MA organization must agree to
refund all amounts incorrectly collected
from its Medicare enrollees, or from
others on behalf of the enrollees, and to
pay any other amounts due the enrollees
or others on their behalf.
The burden associated with this
requirement is the time and effort
necessary for the MA organization to
provide written assurance to CMS that
they will refund all amounts incorrectly
collected from its Medicare enrollees or
representatives. We estimate that on an
annual basis it will take 350 MA
organizations 30 minutes to submit a
written agreement to CMS.
Section 422.304 Monthly payments
(e)(2) A State’s chief executive may
request, no later than February 1 of any

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year, a geographic adjustment of the
State’s payment areas, as outlined in
this section, for MA local plans for the
following calendar year.
The burden associated with this
requirement is the time and effort
necessary for a State to provide a
written request for geographic
adjustment to CMS. Under the M+C
program, we received inquiries from 2
states and requests from none. Thus, we
estimate that on an annual basis we may
receive 2 State submissions. As such,
this requirement is not subject to the
PRA as stipulated under 5 CFR
1320.3(c).
Section 422.310 Risk adjustment data
(b) Each MA organization must
submit to CMS (in accordance with
CMS instructions) all data necessary to
characterize the context and purposes of
each service provided to a Medicare
enrollee by a provider, supplier,
physician, or other practitioner. CMS
may also collect data necessary to
characterize the functional limitations
of enrollees of each MA organization.
The burden associated with this
requirement is the time and effort
necessary for a plan to submit the
required risk adjustment data to CMS.
We estimate that on an annual basis it
will take 350 MA organizations 121
hours each to submit the required data
to CMS.
(d)(1) MA organizations must
electronically submit data that conform
to the requirements for equivalent data
for Medicare FFS when appropriate, and
to all relevant national standards.
Alternatively, MA organizations may
submit data according to an abbreviated
format, as specified by CMS and which
meet the requirements of (d)(2) and
(d)(3) of this section.
The burden associated with this
requirement is the time and effort
necessary for a plan to gather the
required data and submit the required
risk adjustment data to CMS. The
estimate for submission of the
abbreviated format data is included in
the above estimate.
(e) MA organizations and their
providers and practitioners will be
required to submit medical records for
the validation of risk adjustment data, as
required by CMS.
The burden associated with this
requirement is the time and effort
necessary for a plan to submit the
required validation data to CMS. We
estimate that on average 350 MA
organizations will each submit 29
medical records to CMS, requiring 1
hour per record, for a total annual
burden of 9800 hours.

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Section 422.314 Special rules for
beneficiaries enrolled in MA MSA plans
(b) An entity that acts as a trustee for
an MA MSA must Register with CMS,
certify that it is a licensed bank,
insurance company, or other entity
qualified, under sections 408(a)(2) or
408(h) of the IRS Code, agree to comply
with the MA MSA provisions of section
138 of the IRS Code of 1986; and
provide any other information that CMS
may require.
The burden associated with this
requirement is the time and effort
necessary for an entity to certify and
submit the required materials to CMS as
outlined in this section. We estimate 5
MA organizations will submit the
required information on an annual
basis. As such, this requirement is not
subject to the PRA as stipulated under
5 CFR 1320.3(c).
Section 422.320 Special rules for
hospice care
(a) An MA organization that has a
contract under subpart K of this part
must inform each Medicare enrollee
eligible to select hospice care under
§ 418.24 about the availability of
hospice care if a Medicare hospice
program is located within the plan’s
service area, or it is common practice to
refer patients to hospice programs
outside that area.
The burden associated with this
requirement is the time and effort
necessary for a plan to disclose to each
Medicare enrollee about the availability
of hospice care. We estimate that on an
annual basis it will take 350 plans 1.14
hours to distribute the required
materials to enrollees. While this
estimate may appear low, we believe
that this disclosure requirement will be
standardized and incorporated into the
plans marketing material routinely
disseminated to enrollees.
Section 422.458 Risk sharing with
regional MA organizations for 2006 and
2007
(d)(1) Each MA organization offering
an MA regional plan must provide CMS
with information as CMS determines is
necessary to implement this section.
The burden associated with this
requirement is the time and effort
necessary for a plan to submit the
required information to CMS. We
estimate that on an annual basis it will
take 30 to 100 plans, 40 hours to submit
the required information to CMS.
(d)(2) Pursuant to the existing
§ 422.502(d)(1)(iii) (section
1857(d)(2)(B) of the Act), CMS has the
right to inspect and audit any books and
records of the organization that pertain

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to the information regarding costs
provided to CMS under paragraph (b)(2)
of this section.
This requirement is exempt from the
PRA as stipulated under 5 CFR 1320.4.
Section 422.501 Application
requirements
(b)(1) In order to obtain a
determination on whether it meets the
requirements to become an MA
organization and is qualified to provide
a particular type of MA plan, an entity,
or an individual authorized to act for
the entity (the applicant) must complete
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 a plan to submit the
required application to CMS. We
estimate that on an annual basis it will
take 350 plans 40 hours to submit the
required application to CMS.
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–4069–P)
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–4069–F],
[email protected].
Fax (202) 395–6974.
VI. Regulatory Impact Analysis
We received comments on the
proposed rule regulatory impact
analysis in six subject areas. The
comments pertained to (1) our not
having examined the impact of the
Comparative Cost Adjustment program
under section 241 of the MMA, set to
begin in 2010; (2) an error in our
projection of the value of extra benefits
that enrollees of MA plans will receive;
(3) a question regarding the number of
insurers licensed to operate nationally
or in multiple states; (4) the manner in
which we classify entities as being
either regional plans or local plans; (5)
concerns about the competitive
advantages that regional plans may have

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over local plans; and (6) our not having
discussed the effect of these rules on
American Indian and Alaska Native
populations. Our responses to those
comments are addressed in the
appropriate sections below. None of
these comments suggested the need for
major changes in our analysis, and we
have accordingly modified it primarily
to reflect final decisions and to use
updated economic projections (in
addition to correcting the projection
error pointed out in public comments).
A. Overall Impact
We have examined the impacts of this
rule 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) and
Executive Order 13132 on Federalism.
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 any
rule with an effect on the economy of
$100 million or more in any one year.
Since this rule will be the most
significant step in implementing the MA
program, we are classifying it as an
economically ‘‘significant’’ rule for
purposes of E.O. 12866 and as a ‘‘major’’
rule for purposes of the Congressional
Review Act (5 U.S.C., section 804(2)).
Accordingly, we have prepared this RIA
in accordance with OMB Circular A–4,
combined with a Final Regulatory
Flexibility Analysis (FRFA), pursuant to
the Regulatory Flexibility Act), in which
we analyze the overall effects of the
Medicare Advantage program, including
effects not addressed in this rulemaking
(for example, rate increases that went
into effect in March, 2004). Although
the MMA is a highly detailed statute
that delineates most important
provisions of the MA program, there are
alternatives available to us in
implementing several important
provisions of the statute. We analyze in
detail those areas for which regulatory
alternatives are available.
Although we have included or
summarized most of the required
analysis in this section of the preamble,
the explanation of the basis for the rule
and analysis of some regulatory options
are presented elsewhere in the
preamble. We note that the preamble to
the companion rulemaking concerning

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the Part D drug benefit also contains an
RIA and a FRFA, and some effects of the
legislation (for example, on Medigap
plans) are analyzed in more detail in
that preamble.
The MMA provides for increasing the
role of private plans in providing
Medicare benefits to beneficiaries. The
statute made changes to the payment
system that increase Medicare payment
rates to private plans as of 2004, and for
subsequent years. A new private plan
option is introduced, the regional
Medicare Advantage plan, structured as
a PPO, which will be required to offer
services over a wide geographic area. To
encourage the formation of such plans,
the MMA provides financial incentives
above and beyond the payment rate
increases applicable to all plans. There
are other financial incentives discussed
in what follows and elsewhere in the
preamble. In addition to increased
payments to plans, the MMA will
provide benefits to beneficiaries and to
entities (such as employers and States)
that would otherwise be financially
responsible for the cost of beneficiaries’
medical care. The benefits to
beneficiaries and plans are the result of
transfer payments from the Federal
Government which we project will total
$18.3 billion in the period 2004 to 2009
(as a result solely of the Title II
provisions of the MMA), as described in
more detail in what follows.
The main purpose of this rule is to
implement the statutory provisions of
Title II of the MMA, which deal with
the Medicare Advantage program.
Insofar as the rule implements
provisions of the law, we are providing
a general discussion of the impact of the
law and our basis for projections of the
impact. These impact projections reflect
the statutory scheme in its entirety, not
just the relatively minor effects
attributable to discretionary provisions
in the regulations. Although the statute
prescribes Medicare Advantage rules
and procedures in considerable detail, it
specifically affords CMS discretion to
make decisions on a number of issues
regarding how the law will be
implemented. The preamble and this
impact analysis discuss these types of
issues in greater detail. The rule also
introduces changes to Medicare private
health plan requirements that, in most
cases, are intended to streamline the
administration of the program and make
contracting less burdensome for health
plans while not impinging on the rights
of enrollees. (Note that this analysis
does not extend beyond the year 2009;
that is, the Comparative Cost
Adjustment (CCA) demonstration
program of subtitle E of the MMA is not

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discussed. The CCA regulations will be
proposed at a later date.)
Comment: One commenter expressed
disappointment in the approach of
dealing with the impact of the law and
regulations only through 2009, without
discussing the Comparative Cost
Adjustment (CCA) program set to begin
in 2010 (under section 241 of the
MMA). The commenter is interested in
knowing what our thinking is with
regard to the CCA program.
Response: As discussed in the notice
of proposed rule making, any necessary
regulations for the CCA program will
appear sometime in the future as
proposed rules, at which time there will
be opportunity for public comment. We
would also note that our experience
with the bidding system that begins in
2006 will help inform our thinking
about the CCA program when we begin
active planning for it.
1. Objectives of the Final Rule
The primary goal of the MMA is to
expand the health plan choices
available to Medicare beneficiaries,
allowing beneficiaries to meet their
medical needs at a lower cost. There is
also the expectation that Medicare
health plan enrollment will increase.
The expansion of health plan choice is
envisioned as occurring at many levels:
areas of the country that previously did
not have private plans available should
see new plans enter the market; areas
where there are plans should see an
increase in the number of competing
plans; and beneficiary choice should be
enhanced by the introduction of new
types of plans, including specialized
plans, and, most importantly, regional
plans that are structured as preferred
provider organizations. In keeping with
the overall objectives of the law, the rule
seeks to implement the law in ways that
will promote plan participation (and, as
a consequence, lead to increased
enrollment in private plans). The
introduction of regional plans and the
choice of the PPO model for such plans
are designed to lead to greater plan
participation. The rationale for the
introduction of regional plans and the
use of the PPO model are discussed in
the impact analysis of the August 3,
2004 proposed rule (69 FR 46919).
General Impact. In general, the law
and regulations will have a positive
impact on beneficiaries and private
health plans. Transfer payments from
the Federal Government will go towards
the provision of additional health
benefits to enrollees of health plans and
reduced out-of-pocket costs, including
reduced Part B and Part D premiums for
these enrollees. The law will result in
increased revenue for participating
private plans for the provision of the

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basic Medicare benefit and the
provision of additional health benefits.
We also anticipate a positive impact for
employers and unions as sponsors of
retiree coverage, as discussed in more
detail below.
There are revenue effects on States
arising directly from the law (the
prohibition on premium taxes) and
arising indirectly as a result of
beneficiary movement towards private
plans and away from traditional FFS
Medicare with Medigap coverage. The
latter effect is relevant to Medigap
insurers. The effects on States and
insurers are discussed more fully in
what follows.
2. Provisions of the Law
The MMA introduces major changes
in the payment rules for private plans.
These changes are discussed in detail in
the preamble text for subparts F and G
of these regulations. For local plans, the
MMA increased MA payment rates
beginning in 2004, by using county FFS
rates (minus direct medical education
payments) as a minimum payment level
and rebasing the rates periodically, by
removing a budget neutrality limitation
on payment at a national/local blended
rate, and by providing for higher yearly
payment rate increases (while
maintaining minimum payment rate
increases).
Payment to plans are risk adjusted for
health status (in addition to risk
adjustment for demographic factors
such as age), with 30 percent of
payment being subject to health status
risk adjustment in 2004, 50 percent in
2005, 75 percent in 2006, and 100
percent in 2007 and thereafter. When
payments are risk-adjusted, a greater
proportion of such payments are
directed to chronically ill and older
beneficiaries with predictably high
costs. Note that CMS is currently
implementing health status risk
adjustment in a ‘‘budget-neutral’’
manner, with savings re-invested in
plan payments. That is, the difference in
payment between the total health statusadjusted payment rates and the rates
adjusted only by demographic factors is
paid to the health plan ‘‘sector,’’ in
2006, but the funds are distributed
among plans based on the relative
health status of each plan’s enrollees.
Through 2005, there is no change to
the payment rules related to how plans
must use any excess funds (Medicare
payments greater than the amount a
health plan requires to provide the
Medicare benefit). Currently such funds
must be returned to enrollees in the
form of reduced cost sharing, or the
provision of extra (non-Medicare)
benefits. Plans also have the option of

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using the excess funds to reduce all or
a portion of an enrollee’s Part B
premium, but in that case, the
Government retains 20 percent of the
reduction in plan payments while
reducing the Part B premium that is
usually collected through a beneficiary’s
Social Security payment. Another
option for the disposition of excess
funds is to make deposits to a
‘‘stabilization fund’’ to be used in a
subsequent contract year for reductions
in cost sharing or for financing of extra
benefits-an option that the MMA
eliminates as of the end of the 2005
contract year.
Currently and through 2005, the
determination of whether there are
excess funds is done through the
‘‘adjusted community rate’’ approval
process (a CMS review of proposed
benefits and premiums and the revenue
required to provide the benefit package).
The MMA does away with the ACR
review process and instead institutes a
bidding process. As of 2006, plans will
present bids that are to be compared
against benchmarks to determine
whether enrollees will receive rebates or
be required to pay a premium to the
health plan. For local plans, the
benchmark is based on what today are
county payment rates. For regional
plans, the benchmark represents a
weighting of these same county rates
and the actual plan bids. CMS will
evaluate the bids for reasonableness and
actuarial soundness, and can negotiate
over the bid amounts and proposed
supplemental benefits. In 2006 and
thereafter, to the extent that the bid is
less than the benchmark, that difference
(comparable to the current ‘‘excess
funds’’) determines plan rebates. The
Government retains 25 percent of this
difference, and the remaining 75 percent
is to be used for beneficiary ‘‘rebates,’’
which can take the form of extra
benefits, reduced cost sharing, reduced
health plan premiums for mandatory
supplemental benefits, or reduced Part
B and/or Part D premiums. To the extent
that the plan bid is greater than the
benchmark, that difference becomes the
premium the plan must charge enrollees
for ‘‘basic’’ benefits.
The limitation on cost sharing for
Medicare services that previously
existed is modified in the MMA. Prior
to the MMA, for coordinated care plans,
the combination of the actuarial value of
cost sharing for Medicare-covered
services, plus any premium or portion
of a premium representing a charge in
lieu of Medicare cost sharing, could not
exceed the average level of cost sharing
that beneficiaries face in FFS Medicare.
As of 2006, premium amounts that are
in lieu of cost sharing are not counted

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in determining whether the limit is
exceeded (which is the rule as it is
currently applied to PFFS plans). In
addition, the comparison is made to
local values of cost sharing in FFS
Medicare rather than to the current use
of national values. (The cost sharing for
Medicare Part A and B services that
enrollees of MA regional plans obtain
from non-network providers is not
counted in determining whether the
cost sharing limit on Medicare services
has been exceeded.)
The MMA also makes structural
changes in the Medicare private plan
contracting program. The most
important of these statutory changes is
the introduction of regional MA plans
that will be structured as PPOs, and
which would first become available in
2006. While local plans may choose the
counties in which they wish to operate
as MA plans, regional plans must cover
an entire region. On December 6, 2004,
we designated 26 regions for MA
regional plans and 34 regions for PDP
plans. Information on the regions and
the basis for their selection can be found
at www.cms.hhs.gov/medicarereform/
mmaregions. To facilitate the ability of
regional plans to operate in multiple
States, plans that are licensed in at least
one State in the region can qualify for
a waiver of the licensing requirements
in the other States in the region for a
period of time pending an organization’s
becoming licensed in each State (see the
preamble text for subpart J). In the first
2 years of formation of regional plans,
there is a moratorium imposed on the
formation or expansion of local PPOs.
Regional plans have various statutory
incentives to participate, including:
∑ Sharing risk with the Government
in 2006 and 2007,
∑ Access, beginning in 2007 through
the end of 2013, to a ‘‘stabilization
fund’’ of $10 billion (plus half of the 25
percent of regional plan rebate dollars
that would otherwise go to the
Government). The stabilization fund
will be used to encourage plan entry
(including a bonus for plans operating
in the entire Nation) or to prevent plans
from discontinuing contracts; and
∑ Access to additional funding
payable to ‘‘essential’’ hospitals (as
described in the subpart G preamble
text).
As described elsewhere in this
regulation, we are also taking other
regulatory steps to support regional plan
participation, such as allowing plan
payments to be adjusted based on
geographic variations in a plan’s costs
within a region, and providing
flexibility in network adequacy
standards (as outlined in the preamble
discussion of subpart G).

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Other structural changes affecting
Medicare health plans include
provisions for plans that can exclusively
or disproportionately serve special
needs individuals, special treatment of
enrollees with ESRD (paid outside of the
bidding system in 2006–see subpart G),
authority for direct contracting between
CMS and employers or unions for
coverage of retirees (see § 422.106), and
removal of certain limitations that had
been imposed on medical savings
account plans. There are also provisions
calling for the termination of costreimbursed contracts with health plans
if certain conditions are met (see
discussion of changes to part 417).
In the following section we list those
areas in which we will exercise
discretion, either because the law
entails a choice of options or because
we have elected to exercise regulatory
discretion.
3. Discretion Resulting from Statutory
Provisions
Designation of Regions. The most
important feature of the MA program
that the statute leaves to the discretion
of the Secretary is to determine the
boundaries for the regions in which
regional MA plans will operate. As
permitted by the statute, the regions for
MA are different from the PDP regions,
as explained in the announcement of
the regional configurations and as
discussed in the impact analysis for
Title I of the MMA (concerning PDPs).
The biggest difference between the two
sets of regions is that the size of the
eligible population necessary to support
economic viability is somewhat larger
for MA than PDP plans. All PDP regions
are ‘‘nested’’ within (included in) MA
regions to simplify planning and
administration. Some of the issues
relating to the configuration of regions
were discussed in the alternatives
considered section of the proposed rule
(see 69 FR 46937). The estimates
contained in the analysis found in the
proposed rule (see 69 FR 46928, Table
2, for example) were for illustrative
purposes and were based on an
assumption that there would be 15
regions. The projected numbers in this
final rule are based on the MA regions
designated by CMS. The configuration
of the regions affects the projections
because of the expected benchmark
levels in each region and the projected
bids from health plans in the regions.
Statewide Versus Plan-Specific Risk
Adjustment. CMS is given the authority
to use a statewide, area-wide, or a planspecific, risk adjustment methodology
for determining rebates. The effects of
each and the factors to consider in
choosing one or the other approach

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were discussed in the alternatives
considered section of the proposed rule
(see 69 FR 46942). The consequence of
choosing the option of the plan-specific
approach is briefly discussed below, in
the alternatives considered section of
this final rule.
4. Regulatory Discretion
The statute spells out in detail most
major and many minor parameters of
Medicare reform. However, in certain
matters, the statute describes a structure
or uses terminology that is open to
interpretation but which is a necessary
component of the statutory scheme.
There are also other areas where we
believe further interpretation is needed,
or where there appear to be internal
inconsistencies in the statute that need
to be resolved. The following issues are
of this nature, and each is noted here
briefly, with some of the issues
discussed in further detail in the section
on alternatives considered.
Actuarial Value of Medicare Cost
Sharing. When plans present bids for
Medicare-covered services the bid may
include only Medicare-covered services
and must reflect cost sharing at
Medicare levels or with ‘‘actuarially
equivalent’’ cost sharing. The options
for defining ‘‘actuarially equivalent’’ in
this context are discussed in detail in
the preamble text of subsection F in this
final rule and in the proposed rule
(where the uniform, plan-specific, and
proportional amount methods of
determining actuarial equivalence are
discussed).
Treatment of Induced Demand as a
Supplemental Cost. As was discussed in
the proposed rule, to the extent that we
were to use the ‘‘plan-specific’’
approach to determining cost sharing
that is actuarially equivalent to that of
traditional Medicare, an additional issue
arises, having to do with the additional
expenditures arising from ‘‘induced
demand’’ (higher utilization because of
lower cost sharing). We have decided
not to use the plan-specific approach,
relying instead on a proportional
approach to determining cost sharing as
a component of the bid for Medicare A
and B services. Therefore we are unable
to quantify any induced demand that
may exist (that is, any difference in A
and B expenditures between the bid and
actual utilization under a plan’s benefit
design which is attributable to reduced
cost sharing). In the alternatives
considered section, below, we discuss
the consequence of this choice.
Prohibiting Use of Rebate Dollars for
the Purchase of Optional Supplemental
Benefits. This final rule prohibits rebate
dollars from being used for the purchase
of optional supplemental benefits, as

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explained in the preamble text for
subpart F.
Intra-Area Geographic Adjustment to
Payments. The statute specifies that ‘‘if
applicable’’ (1853(a)(1)(B)(i)), CMS
‘‘shall adjust’’ payments ‘‘in a manner to
take into account variations in MA local
payment rates’’ (1853(a)(1)(F) for
regional plans and for local plans
operating in more than one local
payment area. This issue is discussed in
more detail in the ‘‘alternatives
considered’’ section. We will be using a
geographic adjustment based on MA
county payment rates, but in
exceptional situations, for regional
plans, we will allow the use of a plandetermined statement of the variation in
the relative cost to the plan of providing
Medicare-covered services.
5. Provisions Of The Rule Not Based On
Specific MMA Changes
As discussed throughout the preamble
of this final rule and the proposed rule,
we have made a concerted effort to
improve, and wherever possible
simplify and reduce the burden of,
existing regulations. In general, as
previously noted, these provisions
reduce the burden on health plans while
enhancing beneficiary protections or not
adversely affecting the rights of
enrollees. Among the changes that are
being made that are not a result of the
MMA statutory provisions are (a) new
beneficiary protections related to
coverage of services when network
providers can see patients on a ‘‘point­
of-service’’ basis (§ 422.105); (b)
revisions to the rules limiting
beneficiary cost sharing related to
emergency episodes (§ 422.113); (c) the
elimination of requirements on MA
plans that are duplicative of activities
already conducted by CMS regarding
information about beneficiary health
care coverage options (elimination of
§ 422.111(f)(4) and (f)(6), and portions of
(f)(7)); (d) the elimination of certain
access to care provisions (changes made
at § 422.112); (e) use of alternative
election mechanisms other than forms
(§ 422.50(a)(5)), and alternative notice
options (§ 422.60(e)); (f) allowing MA
organizations to submit requests to
restrict enrollment for capacity reasons
at any time during the year (§ 422.60(b));
(g) providing more flexibility in the
procedures for disenrolling beneficiaries
for failure to pay premiums
(§ 422.74(d)(1)) and rules related to
disenrollment due to disruptive
behavior (§ 422.74(d)(2)); (h) formal
adoption of a ‘‘file and use’’ approach to
approval of marketing materials
(§ 422.80) for contractors that have
demonstrated a record of compliance
with marketing rules; (i) changes in

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requirements regarding information
plans provide to enrollees about
participating providers (§ 422.111(b)(3),
for example); and, in § 422.133 ,
extending the right under section
1852(l) of the Act for admission to a
‘‘home skilled nursing facility’’ in the
event that a health plan admits an
enrollee to a skilled nursing facility
without a prior qualifying hospital stay.
In addition, various changes are made in
subpart D that are consistent with a
‘‘quality improvement’’ approach to
quality standards.
B. Basis for Estimating Impacts
The extent of the impact of the MMA
will depend on whether the goals of the
law are realized. We believe that the
payment changes and structural changes
of the MMA will lead to higher levels
of plan participation, and, as a
consequence, enrollment in coordinated
care plans will increase over the next
several years and over the longer term.
We expect the absolute level of
Medicare health plan enrollment to
increase because of the greater
availability of plans, and we expect the
rate of enrollment in such plans
(‘‘penetration’’) to increase because
plans will be able to offer plan designs
that will allow beneficiaries to meet
their medical needs at a lower cost, and
MA organizations will be able to offer
generous benefit packages that Medicare
beneficiaries will find attractive.
However, there is a great deal of
uncertainty involved in making
projections of plan participation and
beneficiary enrollment levels. The
factors contributing to uncertainty
include uncertainty about market
decisions health plans might make, how
changes in health care markets and costs
will affect plan participation and
beneficiary enrollment, whether MA
plan offerings will satisfy the
enrollment preferences of Medicare
beneficiaries, how MA plans will fare in
competition with the new PDP plans,
and other factors. For the MMA, the
designation of MA regions and how the
marketplace will react to the regional
designations is also a factor contributing
to uncertainty.
We have revised the enrollment,
expenditure, and distribution of funds
estimates contained in the proposed
rule (summarized in the proposed rule,
in Tables 2, 4, and 12, found at 69 FR
46928, 46930, and 46951). The revisions
reflect revised bid and benchmark
estimates based on the designation of
regions; and revised enrollment
estimates based in part on the results of
discussions with the Technical Review
Panel on the Medicare Trustees Reports
(information about the panel and its

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findings can be found at http://
aspe.hhs.gov/health/medpanel/2004/,
in particular the minutes of the October
15, 2004 meeting). The enrollment
estimates (and associated expenditures
for MA) were revised downward for the
2004 to 2009 period that is the subject
of the projections contained in this final
rule. While enrollment in MA had been
projected to reach 33 percent of the
Medicare population by 2009 in our
proposed rule projections, we are
revising the penetration projection to be
lower in 2009–it is now projected to be
about 24 percent-but we continue to
expect enrollment to reach 33 percent
by 2016, with enrollment in 2016 being
evenly divided between local MA plans
and regional plans.
The proposed rule contained a
lengthy discussion of the history and
current state of the MA program (and its
predecessor programs, such as
Medicare+Choice). The discussion
contained data on beneficiary access to
MA plans over the years and
penetration levels in the past, the types
of beneficiaries who currently enroll in
such plans (for example, lower-income
individuals are more likely to enroll in
MA), the categories of beneficiaries less
likely to enroll; and a discussion of any
conclusions that can be drawn from the
history of the program in terms of health
plan decisions to participate in the
program and beneficiary decisions on
enrollment in Medicare health plans (69
FR 46921 through 46925 of the
proposed rule). The discussion was
intended to provide historical and
anecdotal evidence to support the
enrollment projections found in the
proposed rule. For this final rule, we are
providing an update of some of the data.
As of January 2005 there are 174 MA
coordinated care plans (CCPs), and such
plans were available to 65 percent of the
Medicare population (compared to 61
percent of the population at the end of
2004, and compared to a historical high
of 74 percent). There are applications
pending for 19 additional CCPs.
Including PFFS plans, if all pending
new contract applications and service
area expansion requests are approved,
86 percent of Medicare beneficiaries
will have access to at least one Medicare
private plan.
The current data demonstrate a
significant increase in plan participation
in MA, associated with an increase in
enrollment in CCP plans of about three
percent between January and December
of 2004 (to 4.7 million). (In addition,
enrollment in PPO demonstration plans
increased 34 percent to 111,000; and
enrollment in PFFS plans increased 93
percent, to 51,000.)

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With regard to MSA plans, we remain
uncertain, as noted in the proposed
rules, about participation and
enrollment in MSAs. The MMA
changed the MSA provisions of the BBA
with a view towards facilitating the
offering of such plans. However, we are
unable to determine whether the MMA
provisions will result in such plans
being introduced and the extent to
which beneficiaries might enroll in such
plans.
Comment: Several commenters
remarked that the impact analysis
showed that very little of the additional
payments to health plans resulting from
the MMA would be used to fund extra
benefits for plan enrollees.
Response: The commenters have
pointed out what is an error in the
impact analysis published in the notice
of proposed rule making of August 3,
2004. We are correcting the error in this
final rule. While the projections of
Tables 2 and 4 of the proposed rule (69
FR 46928 and 46930, respectively) show
that only about six percent of total new
expenditures arising from the MMA
would be used to fund extra benefits,
the correct percentage, over the period
2004 through 2009, should be a much
higher figure-in the range of 50 percent,
as explained below in the section on
effect on beneficiaries. The remainder of
the payment increases will support
maintaining and enhancing provider
networks and stabilization of the plans’
financial status in Medicare. (The
erroneous projected percentage was
based on the percentage of total MA
payments in 2004 through 2009 that we
project will be used for extra benefits,
not the percentage of only the
incremental dollars that plans will
receive in 2004 through 2009 because of
the MMA provisions.)
Comment: One comment questioned a
statement in the impact analysis of the
proposed rule to the effect that there
were a number of insurers that are
licensed as insurers in every State in the
Nation, or which are licensed in
multiple States. The commenter noted
that they were aware of several national
and multi-state insurers but inquired
whether CMS had in mind any other
insurers beyond the ones named in the
comment.
Response: The CMS information on
the number of insurers that are multistate or national insurers was based on
information available at the web site of
the National Association of Insurance
Commissioners (www.naic.org),
showing the licensure status, by State,
of health insurance companies. We have
not done an exhaustive analysis to
determine the total number of such
companies. Our purpose was merely to

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point out, as the commenter noted, that
there are a number of organizations that
are potential MA regional plan
contractors.
Projections Provided in the Impact
Analysis. The methodology used to
project the impact of the law and
regulations is partly explained in the
section on effects on beneficiaries. The
projections in this final rule, which are
different from those in the proposed
rule, are based on the CMS designation
of 26 MA regions. For projection
purposes, a model is used that assumes
three regional plans in each region, with
each plan at a different level of
efficiency (though this is not to suggest
that this would be the number of
regional/national plans in each region).
With regard to the number of MA local
plans, the projections of enrollment do
not involve assumptions about any
specific number of local plans. Instead
a certain level of enrollment is assumed
for local plans based on the benefits
they are expected to offer. It was
assumed that there would be sufficient
capacity among local plans to enroll all
beneficiaries that are expected to join
such plans. The estimates of plan bids
are based on the proprietary information
submitted to CMS by current Medicare
Advantage plans (coordinated care
plans as well as demonstration PPO
plans). Beneficiary behavior is modeled
with utility functions that predict the
choices they will make among available
health plan options. As previously
mentioned, we recognize the high
degree of uncertainty entailed in such
projections. The projections represent
our best estimate of the impact given the
assumptions stated.
C. Unfunded Mandates Reform Act
Section 202 of the Unfunded
Mandates Reform Act of 1995 (UMRA)
requires that agencies identify any
Federal mandates resulting from rules
that may result in the expenditure by
State, local, and tribal governments of
$100 million or more (adjusted for
inflation and currently about $110
million). If this threshold is met, a
detailed analysis is required. This rule
does not contain any such mandate, and
other direct effects on State, local, and
tribal governments will be minimal.
There will, however, be an indirect
effect on State premium tax revenues
due to the increased enrollment in MA
plans and reduced enrollment in certain
Medigap policies. These indirect effects,
however, are not the result of these
rules, but of increased plan payments
and prohibitions on sale of those
Medigap policies implemented
independently of these regulations.

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Title II of the MMA contains several
provisions that have a direct impact on
States. Section 232(a) of the MMA
amends section 1856(b)(3) to preempt
all State standards other than licensure
and solvency as they apply to MA plans.
Section 232(b) of MMA amends section
1854(g) to expand a prohibition on State
taxes for MA plans to apply to both
CMS’ payments to MA plans and to
enrollee premium payments to MA
plans. In addition, section 221(c) of
MMA allows for temporary waiver of
State licensure in States covered by
regional MA plans where those plans
cover a multi-State area.
Medicare law prohibiting State taxes
on section 1853 payments to M+C
organizations, that is, payments made
by CMS to health plans contracting with
Medicare, was established by the
Balanced Budget Act 1997. That
prohibition did not apply to enrollee
premium payments made to M+C plans.
Section 232(b) of the MMA has
expanded the prohibition on State taxes
for MA plans, addressed in statute at
section 1854(g), to apply to both section
1853 payments to MA plans and to
section 1854 enrollee premium
payments to MA plans. This provision
was effective on the date of enactment
of the MMA and is, therefore, not
subject to the Regulatory Accountability
provisions of the UMRA, which apply
only to effects resulting from
promulgation of rules. Section
422.404(a) is revised to reflect this
change. We do not anticipate that the
added prohibition on taxation of
enrollee premiums to have a significant
cost impact on States. Enrollee
premiums to Medicare health plans are
a small proportion of total payments to
health insurers. Thus, State loss of tax
revenue from Medicare enrollee
premiums would also be small.
Therefore, even if it were subject to
UMRA, the prohibition of taxation by
States of Medicare enrollee premiums
would not approach the UMRA
threshold.
We also recognize, however, that
there is an indirect effect of the MMA
law because of the expected enrollment
shift from taxable Medigap insurance,
and employer-sponsored private
supplemental coverage, to non-taxable
MA plans. This indirect effect would
vary by State and would be dependent
on a variety of factors, including the
State’s tax rate on health insurance
premiums, the extent of Medigap
enrollment in a State, the extent that
Medigap enrollees choose to shift to MA
plans in that State, as well as other
resulting factors such as changes in
Medigap premiums that could result
from enrollment shifts. Due to these

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factors, estimates of the indirect effect of
enrollment shifts away from taxable
Medigap and employer-sponsored
supplemental plans combined with the
prohibition on State taxation of
Medicare enrollee premiums would
involve great uncertainty and would
necessarily be speculative.
D. Federalism
MMA provisions may have qualitative
impacts on how States regulate and
interrelate with health insurers serving
Medicare enrollees due to the expanded
preemption of State laws and possible
temporary waiver of State licensure for
multi-State MA regional plans. Law
relating to Federal preemption of State
standards for Medicare-contracting
health plans has undergone several
revisions in recent years. While Federal
preemption of State standards was
initially established into Medicare law
by the Balanced Budget Act of 1997, a
general preemption authority existed
under Executive Order prior to that
time. Federal preemption of State
standards for Medicare-contracting
health plans was expanded by Congress
in 2000 and expanded again by
Congress in 2003.
Prior to 1997, Federal law did not
contain specific preemption
requirements for Medicare-contracting
health plans. However, section 1876
Federal requirements could preempt a
State law or standard if State provisions
were inconsistent with Federal
standards based on general
constitutional Federal preemption
principles, consistent with the
provisions of Executive Order 12612 on
Federalism, since superseded by
Executive Order 13132. Section 1876
requirements did not preempt a State
law or standard unless the State law or
standard was in direct conflict with
Federal law. See the June 26, 1998
Federal Register notice (63 FR 35012)
for further discussion on the history of
general Federal preemption of State law
prior to the BBA.
The BBA established for the M+C
program at section 1856(b)(3) of the Act
a general preemption authority in which
State laws or standards would be
preempted when they were inconsistent
with M+C standards in the same manner
that the previous Executive Order
applied, and this law also established a
specific preemption of State laws and
standards in three areas: benefit
requirements, requirements relating to
inclusion or treatment of providers, and
coverage determinations (including
related appeals and grievance
procedures). This meant that a general
preemption applied if State laws,
regulations, or other standards were

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inconsistent with Federal standards
and, furthermore, in the specifically
preempted areas, meant that State
standards were preempted regardless of
whether or not those standards were
inconsistent with Federal standards.
In 2000, section 614 of BIPA
maintained the general preemption
authority and expanded specific
preemption requirements by amending
benefit requirements to include costsharing requirements and by adding a
fourth specific preemption for
requirements relating to marketing
materials and summaries and schedule
of benefits regarding a M+C plan. Thus,
the list of areas of specific preemption
effective since 2001 were: benefit
requirements (including cost-sharing
requirements), requirements relating to
inclusion or treatment of providers,
coverage determinations (including
related appeals and grievance
procedures), and requirements relating
to marketing materials and summaries
and schedule of benefits.
In 2003, section 232(a) of the MMA
amended section 1856 for MA plans by
eliminating the general and specific
preemption distinctions from section
1856 and expanded Federal preemption
of State standards to broadly apply
preemption to all State law or regulation
(other than State licensing laws or State
laws relating to plan solvency). Section
422.402 of the regulation is thus revised.
Note that State laws on secondary payer
are also preempted by Federal law and
a change is made in regulation at
§ 422.108(f) to reflect that States are
prohibited from limiting the amount
that MA organizations can recover from
liable third parties under Medicare
Secondary Payer provisions. The
Congress indicated its intention to fully
preempt State laws in the Conference
Report for the MMA emphasizing that
Medicare is a Federal program and that
State laws should not apply. Section
232(a) of MMA was effective on
enactment.
We do not perceive that there will be
a significant cost impact on States from
section 232(a) of MMA to broaden
Federal preemption authority to
preempt all State law and regulation
(other than State licensing laws or State
laws relating to plan solvency). The
specific preemptions already in effect
were broad areas where States were
most likely to have enacted laws or
developed other regulations or
standards for health insurance. Apart
from those specific preemptions, general
preemption already applied where State
provisions were inconsistent with
Federal standards such that other State
standards in conflict with Federal
standards were also already preempted.

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Areas of State law that will newly be
preempted by full preemption of State
laws (other than licensing and solvency)
do exist, however, and will affect State
residents who are Medicare
beneficiaries. State governments will be
affected in that State governments will
no longer be responsible for enforcing
preempted laws, which will likely
reduce costs to States. A discussion of
the diverse types of State laws that
previously fell under general
preemption is addressed in some detail
in the response to public comments in
the preamble to a June 29, 2000 final
rule implementing the BBA’s
preemption law. (See 65 FR 35012
through 35014 of the June 29, 2000
Federal Register for a further discussion
of the types of State laws that may be
affected, which includes grievances and
quality complaint reviews conducted by
State governments.)
In reality, determinations of which
State laws have been subject to general
preemption often has not been made
unless specific questions or disputes
have arisen that resulted in a court
review of applicability of law to specific
cases. The MMA revision relieves
uncertainty of which State laws are
preempted by ‘‘preempting the field’’ of
State laws other than State laws on
licensing and solvency.
As required by Executive Order
13132, because of the implications for
the States of the Federal preemption of
State laws enacted in the MMA, we will
consult with the States regarding the
effect of the preemption provision on
the role the States will play with respect
to the regulation of Medicare plans, and
the effect the preemption will have on
State agencies and on beneficiaries
enrolled in Medicare health plans. As
noted in the preamble discussion of
subpart I, there are issues to resolve
with the States in order to clarify the
breadth of preemption provisions with
respect to State licensure laws, and
which State statutory and regulatory
provision may be considered licensing
standards which are not preempted by
the MMA provision. The comments and
responses presented earlier in this
preamble make clear that the role of
State regulation of these plans is
severely circumscribed. Some Statespecific questions may subsequently
arise, and some of these may be
common across several States. In such
cases we will undertake appropriate
consultations with the States and, if
necessary, issue interpretive guidance.
E. Effect on Beneficiaries
The MMA increases the value of
benefits that enrollees of MA plans have
and will increase the availability of such

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benefits. When MA plans can bid at
levels below the relevant benchmark,
they can offer Medicare enrollees
coverage of benefits beyond what
Medicare covers (such as eyeglasses,
hearing aids, or dental care), reduction
in out-of-pocket expenditures for
covered services (either as reduced cost
sharing, on average, compared to FFS
Medicare, or reduced expenditures for
supplemental premiums compared to
Medigap, for example), and reductions
in expenditures for the Medicare Part B
and Part D premiums. As a result of the
MMA provisions, we project that in the
period 2004 through 2009, Medicare
beneficiaries enrolling in MA plans will
see benefits beyond basic Medicare
Parts A and B coverage which represent
approximately 50 percent of the
incremental dollars that are the
government transfers to plans listed in
Table 1. We are unable to provide a
more precise figure because of the type
of modeling used to determine projected
expenditures and enrollment. The 50
percent estimate is based on the
disposition of the incremental MMA
dollars that MA plans received in March
of 2004, at which time plans were asked
to resubmit adjusted community rate
proposals to CMS to account for the
extra money received mid-year. We
analyzed the benefit changes resulting
from these mid-year filings and found
that, for non-employer-sponsored plans,
58 percent of the additional funds were
used to provide enrollees with extra
benefits (or were deposited in a
stabilization fund to be used for that
purpose in 2005). Remaining funds were
used to strengthen MA benefits in other
ways, for example, maintaining or
enhancing provider networks or
financial stability for the MA plan.
Expressed in dollars per enrollee, of the
$38 per enrollee per month that was
added to plan payments by the MMA in
March of 2004, $22 was used to finance
extra benefits or reduce out-of-pocket
costs, and most of the remainder was
used for provider networks (which will
be particularly important to create
attractive PPO plans). Employer group
plans, which represent a little under 20
percent of MA enrollment, had a higher
proportion of incremental dollars used
for extra benefits-about 80 percent of the
incremental dollars were used for that
purpose-but, unlike non-group plans, a
substantial proportion of the
incremental dollars (over three-fourths
of the funds) were deposited for use in
2005 (compared to five percent for nongroup enrollees), and are included in
the 80 percent figure. On average,
therefore, across both types of
coordinated care plans (employer group

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plans and plans for individual Medicare
enrollees), about 60 percent of the 2004
MMA incremental dollars were used to
finance extra benefits for MA enrollees.
We assume that in future years this
percentage will decrease slightly (a)
because of the 2006 provision whereby
the Government retains 25 percent of
savings generated by local plans, and (b)
because regional plans will incur
relatively higher costs for the provision
of Medicare A and B services (for
example, because of higher out-of­
network costs) and will consequently
have less money available to return to
enrollees in the form of rebates.
Because of the MMA payment
increases effective March 2004,
beneficiaries enrolled in private plans
have already seen reduced out-of-pocket
expenditures and increased benefits.
Our analysis of MA benefit packages in
2004 after the MMA payment increases
shows that enrollees of MA plans had
out-of-pocket costs (including Medigap
premiums) that were $700 less per year
than for an individual in traditional
FFS. This corresponds to a 14 percent
savings for MA enrollees, relative to
traditional Medicare. Individuals in
poorer health had estimated savings in
out-of-pocket costs of up to $1,909 a
year in comparison to the alternative of
traditional Medicare without Medigap
coverage. (Savings are also substantial
for MA relative to traditional Medicare
with Medigap, average $1,647 per year).
F. Effect on Health Plans and Insurers
Health plans will see significant
increases in transfer payments from the
Federal Government as a result of the
MMA. Plan payments will increase
significantly, allowing plan revenues
and profits to rise as enrollment
increases with the offering of better
benefits, better networks, and more
stable plan availability. Organizations
that currently contract with Medicare
will have new market opportunities as
regional plans and opportunities to
expand their participation as local plans
(other than as PPOs at a local level,
which are prohibited from being newly
formed, or expanding into a new service
area, for an interim transition period,
2006 and 2007). Organizations that are
not currently participating in Medicare
will have a more favorable market
environment for participating as local or
regional plans.
The Federal Government transfer
payments to health plans over and
above what would have been paid in the
absence of the law, as a result of the
Title II provisions of the MMA, are
expected to total $18.3 billion. To
determine the administrative costs
associated with these expenditures, we

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4695

have relied on the adjusted community
rate proposals of current MA
coordinated care plans and
demonstration PPOs, which report
administrative cost figures as a
percentage of Medicare payments. On
average, ten percent of total plan
revenues-consisting of Government
payments and member premiums-will
be used for plan administration in each
type of plan (local and regional). The
benefits to health plans will vary
geographically, depending on
benchmarks and the cost of doing
business for the plans. The
administrative cost figure cited here for
the plans includes projected start-up
costs for new organizations becoming
Medicare contractors. The estimates of
benefits related to MA plans for 2004
through 2009 are shown in Table 1. The
data in the table reflect projections we
have made about the number of plans
participating, their bids and
(consequently) their level of benefits,
and the level of expected beneficiary
enrollment. These projections are based
on (a) what we know about the expected
benchmarks in each of the 26 MA
regions; (b) the current premium and
benefit packages of MA plans and PPO
demonstration plans, and their costs for
the packages as submitted to CMS; and
(c) the current patterns of enrollment in
health plans in Medicare and the
commercial sector. As noted previously,
projections are based on a model that
assumes three regional plans in each
region, and that there will be a sufficient
number of local plans to meet
beneficiary demand for enrollment in
local plans. In general, in terms of the
proportion of funds used to provide
extra benefits to enrollees, we expect
local MA plans to be able to have more
revenue available than regional PPO
plans for the provision of extra benefits
and reduced out-of-pocket expenditures.
This is due to the cost of doing business
in the areas where the regional PPOs
will draw much of their enrollment (for
example, the higher costs in rural areas),
and the PPO structure, which involves
the use of network providers as well as
non-network providers. However, we
would also expect that in many areas,
there will only be regional plans
available, and no local MA coordinated
care plans. In addition, some
beneficiaries will prefer the availability
of out-of-network options in the regional
PPOs, as is the case for many nonelderly Americans who prefer PPOs. As
noted elsewhere, areas where there are
only regional plan options and no
coordinated care MA plans are likely to
have higher benchmarks that are a
vestige of the ‘‘floor’’ payment status of

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such counties. Although PPO plans may
face higher costs in operating in such
areas, the higher benchmarks will
enable them to offer enriched benefit
packages (compared to traditional FFS
Medicare). The projections of Table 1
show the distribution of dollars to all
plans. The distribution is subject to
regional variation (as is currently the
case), so that in some areas, for example,
beneficiaries will have more offerings
and better benefit packages available to
them as a result of plans having more
funds to provide extra benefits, reduced
cost sharing, lower premiums, or more
extensive networks. Some plans may
offer very few extra benefits but would
still be attractive to enrollees and would
be viewed by beneficiaries as more
advantageous than FFS Medicare with
Medigap coverage, for example.
The dollar figures shown in Table 1
reflect the projected additional
Medicare Part A and B expenditures
incurred solely as a result of the MMA
provisions. That is, the expenditures are
the incremental program expenditures
that are incurred because of the MMA
provisions, including any difference in
expenditures that result when
beneficiaries enroll in a private plan

rather than receiving care in FFS
Medicare.
Comment: Several commenters stated
that the impact analysis projections are
misleading in how types of plans are
classified-that is, the basis for
determining whether a plan is a regional
plan or a local plan, and what kinds of
organizations will be receiving
payments as MA plans. The commenters
noted that some local plans cannot
become regional plans because they are
not able to provide services across an
entire region, while some local plans are
sponsored by organizations that would
also be (or could become) regional
plans. The commenters believe that
payments to local plans that are
operated by organizations that operate
regional plans (or could operate such
plans) should be classified as payments
to regional plans rather than payments
to local plans. Response: While we
acknowledge that the commenters’
observations reflect the situation in the
health care market-which is that not all
organizations can be regional plans-we
have provided separate projections for
regional and local plans on the basis of
the statutorily defined differences
between the two types of MA

contractors. In addition, we separated
the two categories because we believe
there is a value to the public in knowing
what our expectations are with respect
to the new types of plans-MA regional
plans-introduced by the MMA.
The Congress recognized that it is not
feasible for some organizations that are
current MA contractors to become
regional plans, and Congress did not
preclude regional plan sponsors from
also operating local plans. In various
sections of the conference report it is
noted that regional plans were designed
to be able to provide services over a
wide geographic area, and in particular
to provide choices in rural areas that
historically have not had coordinated
care plans available to Medicare
beneficiaries (see pages 96 through 98 of
the MMA Conference Agreement, for
example). It is recognized that regional
plans would be larger-scale plans than
some current local plans. We would also
note that the possibility envisioned in
the statute of a national plan eligible for
stabilization fund payments
demonstrates that Congress was aware
that there could be plans that operate on
a much larger scale than many local
plans.

TABLE 1: PROJECTED PAYMENTS TO MA PLANS RESULTING FROM TITLE II PROVISIONS OF THE MMA, YEARS 2004 TO
2009, IN MILLIONS (INCREMENTAL AMOUNTS IN ABSENCE OF MMA TITLE II PROVISIONS); PROJECTED TOTAL PLAN
ENROLLMENT, 2004 TO 2009, IN THOUSANDS (TOTALS MAY NOT SUM DUE TO ROUNDING)
Year 2004
Enrollment Projection, Local
Plans

Year 2005

4,752

Year 2006

4,855

Enrollment Projection, Re­
gional Plans
Total Value of Transfer Pay­
ments, Local Plans

1,738

2,618

Total Value of Transfer Pay­
ments, Regional Plans
Total Value of Transfer Pay­
ments to Plans, Both Types
of Plans

1,738

As between regional and local plans,
and the choice that an organization can
make, regional plans, as described
elsewhere, have a number of financial
incentives. Local plans have the
advantage of being able to selectively
market to Medicare beneficiaries in that
they can make decisions on a county
basis. Local MA plans can choose
whether or not to serve a particular
county, and they can also vary benefits
and premiums by county under one
contract by segmenting larger service

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2,618

Year 2007

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Year 2009

TOTAL,
Years 2004–
2009

4,980

5,648

6,234

6,539

1,686

2,637

3,097

3,604

2,143

1,632

1,259

1,023

10,414

746

2,498

2,372

2,312

7,928

2,889

4,130

3,631

3,335

18,342

areas to as small a unit as a single
county. The uniform benefit
requirement applies to local plans at the
service area or segment level, while
regional MA plans, as previously noted,
must have a uniform benefit in the
entire region (for each of the plans that
an MA regional organization offers in a
region, each of which must be offered
on a region-wide basis). One
organization may offer both local and
regional plans.

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Although we have emphasized the
additional benefits that we expect plans
to be able to offer, the transition to a
competitive bidding process more
similar to that used by FEHB and large
employers to obtain high-quality, stable
plan participation should also help
provide broader plan participation. As
part of this process, Medicare has
replaced the adjusted community rate
process and its requirement that plan
profit levels must be the same as for a
plan’s commercial product, and has

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eliminated the limit on premiums
related to reducing cost sharing for
Medicare-covered benefits, plans can
potentially manage their profit levels by
developing more competitive benefit
packages at a lower cost. Plans with bids
exceeding the benchmark can also be
assured of having adequate revenue to
operate as Medicare plans (though they
must offer sufficient additional benefits
or quality to attract beneficiaries despite
their higher premium). These provisions
may also lend stability to the program
in allowing plans to make adjustments
to revenue needs from one year to the
next without facing statutorily imposed
limits on their ability to generate needed
revenue.
There are a number of statutory and
regulatory provisions which reduce
burden on Medicare plans while
maintaining and strengthening
beneficiary protections, including the
statutory changes that eliminated the
reporting requirements relating to
physician incentive plans, and the
major changes in the quality assurance
standards for plans. As discussed
elsewhere, this rule also has several
administrative changes that will reduce
plan burden, including elimination of
plan disclosure requirements that are
redundant, and provisions that
streamline the appeals procedure as
regards notices to beneficiaries.
In terms of estimating the impact of
these changes, the physician incentive
plan (PIP) burden reduction was
previously codified in the final rule
entitled ‘‘Medicare Program:
Modifications to Managed Care Rules’’
on August 22, 2003 and effective
September 22, 2003. In the regulatory
impact statement of that rule (68 FR
50853 and 50854) we stated: ‘‘We find
that overall the economic impact of this
final rule is positive, due to...the
reductions in regulatory burden due
to...the reduction of the physician
incentive reporting requirements...The
data available do not allow us to
determine the distributional effects...We
have not considered alternatives to
lessen the economic impact or
regulatory burden of this final rule
because the regulatory burden is
reduced...’’ We have no new data at this
time that would alter the analysis and
conclusions drawn in the prior rule.
With regard to the ‘‘file and use’’
policy, we are codifying in regulation a
previously existing program tolerance
which has been successful. The ‘‘burden
reduction’’ actually associated with
‘‘File and Use’’ is minimal for two
reasons. The first is that it represents a
‘‘tolerance’’ already in use; so additional
burden reduction is non-existent.
Second, File and Use is simply

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permission to publish (or use) certain
marketing materials prior to CMS
review and approval. To the extent that
MA plans ‘‘earn’’ (or qualify for) File
and Use status, the advantage gained
and the burden reduction available to
them is that MA plans qualifying for
File and Use will not need to wait for
CMS approval prior to using specific
marketing materials. Finally, CMS does
not currently collect data nor does it
have information on the distributional
impact of the currently existing File and
Use program, so it is impossible to
project the precise impact that File and
Use will have on organizations
qualifying for it.
We remove certain plan disclosure
requirements from § 422.111(f). These
disclosure requirements all are
information that MA organizations must
provide ‘‘upon request.’’ We have no
data that would help us quantify the
actual level of burden reduction.
Therefore, the level of administrative
burden mitigation is likely negligible.
Other Effects. Although most
Medicare health plans and organizations
that can participate as MA plans stand
to benefit from the MA provisions,
Medigap insurers may face price
pressures and see declining enrollment
if MA enrollment increases to the level
that CMS projects. It should be noted
that many of the insurers that offer
Medigap coverage are companies that
also operate health plans and are
already, or can become, local or regional
MA plans.
Medicare Advantage PFFS plans are
another class of insurer that may see
changes in the competitive
environment. To date, such plans have
operated primarily in ‘‘floor’’ counties
(counties in which, because of the BBA
and BIPA payment rules, health plan
payment rates are higher than estimated
FFS Medicare costs). PFFS plans
generally have not competed directly
against coordinated care plans. PFFS
plans offer generally less generous
benefit packages than MA coordinated
care plans (involving higher levels of
cost sharing and premiums), but they do
offer some level of supplemental
coverage for individuals (including drug
coverage in many such plans), and they
offer an advantage that some
beneficiaries prefer, which is that there
is not a limited network of providers
that must be used to obtain covered
care. As a consequence of the MMA,
where there are regional MA plans,
regional plans are likely to have a
competitive advantage over Medicare
PFFS plans that had usually targeted
areas in which there were no MA local
plans. MA regional plans must offer
coverage for out-of-network care, and

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they are likely to be able to offer a
significant level of extra benefits
because of the financial incentives in
the MMA. (As stated elsewhere in the
preamble, regional MA plans may not be
PFFS plans; regional plans must operate
as a PPO model.)
G. Effects on States
States may see benefits from Title II
of the MMA if more Medicaid
beneficiaries who are also entitled to
Medicare A and B coverage (the dual
eligible population) enroll in private
Medicare plans. Because MA enrollees
are likely to receive non-Medicare­
covered benefits (such as vision care) as
well as lower copayments for Medicarecovered benefits, dual eligible enrollees
would receive benefits that the States
would otherwise have had to pay for.
States may benefit from reduction of the
Part B premium which the State would
otherwise pay for dual eligibles. It
should be noted that to date, the
enrollment level of dual eligibles in
Medicare plans is not as high as it could
be (see Edith G. Walsh and William D.
Clark, ‘‘Managed Care and Dually
Eligible Beneficiaries: Challenges in
Coordination,’’ Health Care Financing
Review, fall 2002, volume 24, number
1). A number of factors could contribute
to greater enrollment of dual eligibles in
MA plans: the extension of plan
availability across an entire State (as
part of a regional plan), the likelihood
of Part B premium rebates (which the
State would be entitled to), and the
designation in the law of dual eligibles
as a category for purposes of
determining whether an MA plan is a
specialized plan. Dual eligible
individuals do not have the same
incentives to enroll in MA plans as
other low-income Medicare
beneficiaries. In certain circumstances, a
State may require the enrollment of dual
eligibles in MA plans (if, for example,
the plan is also a Medicaid health plan
and the State has a waiver permitting
mandatory health plan enrollment for
Medicaid beneficiaries).
The direct effect on the States of the
expansion of the premium tax
prohibition is discussed in the section
on unfunded mandates. The MMA
changed the law to exempt from State
premium taxes the premiums paid by
beneficiaries, as well as Federal
payments to plans (which the law
already exempted). This provision by
itself has a relatively minor effect on
State revenues, given the prevalence of
zero-premium MA plans and given the
expected trend in MA benefit packages
towards more zero-premium products.
However, an indirect effect of the
premium tax prohibition is that, to the

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extent that there are reductions in the
number of beneficiaries who hold
Medigap policies, States may lose
premium tax revenue that would have
been derived from Medigap policies (the
entire premium of which is generally
taxed). As previously discussed, it is
unclear what the impact will be if there
is such an effect, given the trend of
greater numbers of beneficiaries with
Medigap coverage and rising Medigap
premiums.
H. Effect on Employers and Unions as
Sponsors of Retiree Coverage
Historically, Medicare-contracting
health plans that contracted with
employer or union groups to provide
benefits had to comply with the same
Medicare regulatory requirements that
apply to all Medicare-contacting health
plans. In 2000, section 617 of the
Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection
Act of 2000 (BIPA) added a new
authority at section 1857(i) of the Act,
effective 2001, that provided CMS broad
authority to waive or modify
requirements that hinder the design of,
the offering of, or the enrollment in
M+C plans under contracts between
M+C organizations and employers, labor
organizations, or the trustees of a fund
established to furnish benefits to an
employer’s current or former employees
or to a labor organization’s current or
former members.
Three types of waivers have been
approved under the BIPA authority
which are discussed in an August 22,
2003 Federal Register notice (68 FR
50845). The three types of waivers are:
(1) M+C organizations are allowed to
offer employer-only plans that are not
open to individuals and plan marketing
materials do not have to be submitted
for CMS review and approval; (2) M+C
organizations are allowed to ‘‘swap’’
benefits not covered by Medicare of
approximately equal value when an
employer asks for a benefit package
different from what is offered on the
individual market; and (3) M+C
organizations are allowed to raise the
co-payments for certain benefits but to
provide a higher benefit level or a
modification to the premium charged as
long as projected beneficiary liability is
actuarially equivalent. These waiver
authorities also will continue for MA
organizations.
Section 222(j) of the MMA adds
another authority for employer or union
sponsored plans, effective 2006, at
section 1857(i)(2) of the Act CMS may
waive or modify requirements that
hinder the design of, the offering of, or
the enrollment in an MA plan offered
directly by an employer, a labor

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organization, or the trustees of a fund
established by employers or labor
organizations to furnish benefits to
current or former employees or to
current or former members of labor
organizations. This authority is added in
the rule at § 422.106(d). We have
received a number of inquiries from
employers and labor organizations
expressing interest in this direct
contracting option.
We believe that there is likely to be
a significant increase in the number of
retirees whose employer or union
provides retiree coverage through an
MA plan because of the additional
payments MA plans will receive (so that
benefits that otherwise would have been
financed by the employer or union can
be financed by Medicare payments), and
because regional plans will be available
that can cover wider geographic areas
and meet the needs of employers with
retirees residing throughout a large
geographic area, or dispersed across
many geographic areas.
As of January 2002, about 18 percent
of enrollees in Medicare+Choice plans
were employer- or union-sponsored
retirees (see Geoffrey R. Hileman, Kerry
E. Moroz, C. William Wrightson, and
Suhn K. Kim, ‘‘Medicare+Choice
Individual and Group Enrollment: 2001
and 2002,’’ Health Care Financing
Review, fall 2002, volume 24, number
1). There are 1.1 million beneficiaries
residing in counties in which only
employer-sponsored retirees or
dependents may enroll in MA plans
operating in those counties. MA plans
may find this particular market segment
attractive for a number of reasons,
including: the efficiency of marketing to
a large group; the advantage of having
a group will have been previously
insured; and the ability of offering
enrollees a seamless continuation of
coverage between active worker status
and retiree status. The regional PPO
model may also facilitate the ability of
plans to serve this population to the
extent that retirees no longer reside near
their place of work.
According to a 2003 Hewitt-Kaiser
Family Foundation survey of large
employers, 21 percent of employers
with 1000 or more employees require
new Medicare-eligible retirees to pay
100 percent of the plan premium. The
survey also found that, with regard to
future trends, ‘‘Serious consideration is
also being given to only providing
access to health benefits and asking
retirees to pay 100 percent of costs; 26
percent of firms said that they are very
or somewhat likely to make such a
change.’’ (Frank B. McArdle, et al.,
‘‘Large Firms’ Retiree Health Benefits
Before Medicare Reform: 2003 Survey

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Results.’’ Health Affairs, web exclusive,
January 14, 2004.) MA plans are a likely
vehicle for employers to offer health
plans under these circumstances. In
fact, the 2004 Kaiser/Hewitt Survey on
Retiree Health Benefits report indicates
the continuing trend of having retirees
pay 100 percent of their premiums and
also shows that, among the changes
large private sector employers made in
2004, ten percent of such employers are
offering MA plans (the report is
available at http://www.kff.org/
medicare/loader.cfm?url=/commonspot/
security/getfile.cfm&PageID=49652; see
in particular exhibit 22, at page 53).
These trends would suggest that we will
see an increase in MA enrollment of
retirees with employer group or unionsponsored coverage (for beneficiaries of
both types, those for whom the sponsor
contributes to the cost of the coverage
and those whose coverage involves only
an offering of coverage).
I. Effect on the Federal Government
The benefits to beneficiaries and
private health plans are the result of
transfer payments from the Federal
Government to plans, or, in the case of
reductions in the Part B and Part D
premiums, transfer payments to
beneficiaries. For the period 2004
through 2009, the total amount of such
transferred funds is projected to be
$18.3 billion above what would
otherwise have been incurred in the
absence of the Title II provisions of the
law. The preceding figure assumes a
private plan penetration rate of 24
percent by 2009. The total expenditure
figure assumes that $5.1 billion of the
stabilization fund dollars for regional
MA plans are used in the period 2004
through 2009. We have not separately
projected an administrative cost to the
Government for the administration of
Title II of the MMA separate from
administration of all portions of the
MMA taken together.
There were several issues with a
potential budgetary impact that were
discussed in the notice of proposed rule
making. The section on alternatives
considered in the proposed rule
examined the impact on expenditures in
choosing between statewide and planspecific risk adjustment to determine
rebate amounts (beginning at page
46942). The conclusion of that analysis
was that expenditures under either
approach (plan-specific or area-wide)
depended on the risk profile of plan
enrollees, and that it was not possible to
quantify the effect: ‘‘Wide swings in the
level of rebate dollars are possible under
either method, but we cannot quantify
the effect at this time without knowing
the risk distribution of enrollees for

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2006 and the respective bids of the
health plans.’’ As discussed in the
preamble, in part as a reflection of
comments received, CMS has chosen
the plan-specific option. (See the
preamble of the final rule and the
alternatives considered section of the
proposed rule, previously cited, for a
discussion of the considerations that led
to this decision.)
Another issue that has an effect on
expenditures is the payment adjustment
relating to risk adjustment for bids that
exceed the benchmark. The regulatory
text at § 422.308(e), discussed in subpart
G of the preamble, would implement
section 1853(a)(1)(G) of the Act, which
requires CMS to make certain plan
payment adjustments to take into
account the health status of a plan’s
enrollees. For plans bidding above the
benchmark, this provision would allow
the total revenue a plan receives for its
actual enrollees to more closely match
the plan’s required revenue. The
1853(a)(1)(G) provision requires CMS to
adjust plan payments in recognition of
the amount that a health plan receives
as a basic premium from its enrollees.
The basic member premium that plans
actually will charge is the premium for
a ‘‘1.0’’ beneficiary-that is, it is
determined based on the revenue needs
for a person with average health status.
For a plan with a risk score above 1.0
(that is, the plan has enrollees that are
sicker than average and utilize more
services), there would be an additional
payment from Medicare to provide the
plan with revenue that covers the
shortfall between the basic premium
determined for a 1.0 enrollee, and the
actual revenue necessary from member
premiums. (Under the current system,
but not after 2005, in such a case
enrollees would be charged a higher
plan premium to cover the needed
revenue that matches their enrollees’
actual utilization patterns.)
A similar adjustment would be made
for plans with risk scores below 1.0. A
plan with a risk score below 1.0 would
have determined its basic premium for
a 1.0 person, and enrollees will be
charged that level of premium. This
provides the plan with more revenue
than it needs. Consequently, the section
1853(a)(1)(G) provision would call for a
reduction in Medicare’s payment to the
plan in recognition of the additional
revenue that comes from member
premiums that are determined for a 1.0
beneficiary.
The budgetary impact of this
provision depends on the number of
plans that would have bids above the
benchmark, and the health status of
enrollees in such plans. One would
assume that the majority of

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organizations deciding to enter the
Medicare market would like to be able
to offer extra benefits at no cost, or at
little cost, to prospective enrollees.
Therefore there may be few plans that
bid above the benchmark, and those that
do so would try to limit the basic
premium to an amount that would
attract a sufficient number of
beneficiaries. However, bids above the
benchmark may arise (a) in certain
areas-for example, in areas where there
may be only one or two plans, or (b) in
certain competitive situations-for
example, when the reason for a bid
above the benchmark is that the plan
offers coverage that is expensive but has
features that appeal to beneficiaries
(such as a wide network of providers,
particular ‘‘marquee’’ providers in the
network, especially lower copayments,
or generous out-of-network coverage).
With respect to the risk profile of
plans that may be bidding above the
benchmark, currently private plan
enrollees are somewhat healthier on
average than Medicare beneficiaries in
traditional FFS. If plans bidding above
the benchmark have healthier-than­
average enrollees, the budgetary impact
of the 1853(a)(1)(G) provision would
actually be net program savings as
beneficiaries bear some extra cost in
their plan premium. If today’s patterns
of enrollment continue, there may be
such program savings: looking at the
subset of plans that currently charge a
premium for Medicare-covered services
compared to plans that have no
premium charge for Medicare-covered
services (a rough type of proxy for
determining whether a bid will be above
the benchmark), the risk status of
enrollees of plans in which there is no
premium is below 1.0 but closer to 1.0
than among plans charging a premium.
The latter group of plans have risk
scores that are also below 1.0, but the
risk scores are about 10 percent lowerthat is, risk scores show that enrollees
are healthier-than the risk scores of
plans that have no premium charge for
Medicare-covered services.
On the other hand, as Medicare
increases the proportion of plan
payments that are risk-adjusted to 100
percent, plans will have even greater
financial incentives to offer benefit
packages that appeal to less healthy
beneficiaries. Consequently, moving to
full risk adjustment would be expected
to lead to a reduction of any differences
in health status in MA plans, including
the higher-premium plan.
In summary, the 1853(a)(1)(G) risk
adjustment provision, which may have
limited applicability if few plans bid
above the benchmark, may result in
program savings.

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4699

J. Administrative Costs
The expenditures shown in Table 1
include administrative costs for MA
plans. For both local and regional plans,
administrative costs are assumed to
comprise ten percent of the total
incremental expenditures shown in
Table 1. This includes both costs to
administer the program and the profit or
retained earnings of health plans.
Administrative costs for local plans and
regional plans are considered to be
roughly the same based on the reported
administrative costs of current MA
plans that are PPOs and HMOs.
K. Analysis of Effects on Small Entities
The Regulatory Flexibility Act (RFA)
requires us to determine whether a rule
will have a ‘‘significant economic
impact on a substantial number of small
entities.’’ If so, the RFA requires that a
Final Regulatory Flexibility Analysis
(FRFA) be prepared. Under the RFA, a
‘‘small entity’’ is defined as either a
small business (as defined by the size
standards of the Small Business
Administration, or SBA), a non-profit
entity of any size that is not dominant
in its field, or a small governmental
jurisdiction. The SBA size standard for
‘‘small entity’’ health insurance plans is
annual revenue of $6 million or less.
The direct effects of Medicare
Advantage fall primarily on insurance
firms and on individual enrollees. The
competitive market created by Medicare
Advantage is likely to have long run
indirect effects on health care providers,
such as hospitals, physicians, and
pharmacies, depending on the extent to
which MA plans attract enrollees.
However, those effects will result from
the workings of market choices made by
enrollees, plans, and providers, not from
specific provisions of this rule. (There is
an MMA provision for paying certain
‘‘essential hospitals’’ higher rates for
participation in the MA program, which
we analyze below.) Therefore, we
primarily analyze effects on the
insurance industry (including HMOs as
insurers) in this FRFA.
We do not believe that these rules will
create a significant economic impact on
a substantial number of small entities.
We have prepared the following
analysis in part to provide a factual
basis for our beliefs regarding the
impact of this regulation on small
entities; we also consider this analysis
a voluntary FRFA. Under longstanding
HHS policy we prepare a FRFA if
significant impacts of a rule on small
entities are positive rather than
negative. We also prepare a FRFA if we
cannot be certain of a conclusion of no
‘‘significant impact’’ on less than a

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‘‘substantial number.’’ In this case, the
statutory reform is so major and the
number of regulatory changes so large
that we cannot be certain of our
conclusion. Finally, we generally
prepare a FRFA if there is likely to be
substantial interest on the part of small
entities. Essentially all of the insurance
firms affected by the statute and this
final 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.
We note that under prior law (continued
unchanged for Medicare Advantage), no
health insurance plan is normally
eligible to participate in Medicare
Advantage unless it already serves at
least 5,000 enrollees, or 1,500 enrollees
if it primarily serves rural areas. At the
5,000–enrollee level, no plan would fall
below the SBA revenue cutoff assuming,
very conservatively, yearly revenue of
$2,000 per enrollee. While a very small
rural plan could fall below the
threshold, we do not believe that there
are more than a handful of such plans.
In the InterStudy Competitive Edge
HMO Directory for 2000, discussed
below, we found only one rural HMO
with a continuing enrollment level
below 1,500. Therefore, the statutory
limits generally prevent any insurance
firm defined as ‘‘small’’ pursuant to the
RFA’s size standards from participating
in the program. However, a substantial
fraction of the insurance firms affected
by this final rule are ‘‘small entities’’ by
virtue of their non-profit status. The
analysis in this section, taken together
with the other regulatory impact
sections, and the preamble as a whole,
constitute our FRFA for the Medicare
Advantage provisions of Title II of the
MMA. We note that there is a related
FRFA in the companion final rule on
the Part D Drug Program of Title I of the
MMA.
1. The Health Insurance Industry
The 1997 Economic Census: Finance
and Insurance (the latest available
edition when the proposed rule was
being developed) states that there were
944 firms classified as ‘‘Health and
Medical Insurance Carriers’’ under the
North American Industry Classification
System. Of these, 851 firms operated the
entire year. Using Census data, these
firms had total revenue of $203 billion,
operated through about 3,200
establishments, and had about 328,000
employees. Of the 851 firms that
operated the entire year, 342 had
revenues of less than $5 million. Taking
into account subsequent inflation, this
corresponds closely to the $6 million

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threshold established by the SBA as the
current cutoff for small businesses in
this insurance category. Thus,
approximately 40 percent of the
industry as counted by the Census is
‘‘small’’ using the SBA definition. These
small firms had total revenue of about
$440 million, rather less than one half
of one percent of total health insurance
revenue. As discussed below, we do not
believe that any of these small firms
underwrite comprehensive health
insurance policies, or are actual or
potential participants in the Medicare
Advantage market.
In contrast, the Census found that the
largest 50 firms, or 6 percent, accounted
for 75 percent of all health insurance
revenue. While these data cannot be
reconciled directly with other statistics
on numbers and size of health insurance
companies, they clearly indicate that the
market for comprehensive health
insurance policies, covering the lives of
about 200 million Americans, is
dominated by several hundred
companies, few of which, and most
likely none of which, are ‘‘small’’ by
SBA revenue standards.
Another source of industry data,
much richer in detail, is found in the
InterStudy Competitive Edge. This
annual report covers only HMOs. The
discussion that follows uses the 2000
edition as reflecting most of the changes
of the 1990s, but still close enough in
time to the Census information to be
roughly comparable. In 2000, there were
560 HMOs. While these were all
separately incorporated, many were
subsidiaries of larger corporations. For
example, the report lists 40 United
HealthCare plans, 22 Aetna and 32
Prudential plans (all owned by Aetna),
31 Cigna plans, 10 Humana plans, and
9 Kaiser plans. Ninety-seven of these
HMOs enrolled 200,000 or more people
(enrollment is a standard industry
measure of size). The InterStudy data,
using an enrollment cutoff of 3,000 to
correspond roughly to the SBA $6
million threshold, shows that only 5
HMOs were continually operating
entities (not entering or exiting the
industry) with revenues below the SBA
small entity threshold.
Of the approximately 200 contracts
under the current MA program (this
figure excludes demonstration
contracts), only a handful have
enrollment of fewer than one thousand
or annual Medicare revenue of under $6
million assuming, conservatively,
revenues of $6,000 per enrollee
(Medicare enrollees cost, and are
reimbursed, more than double working
age persons). Of course, these plans
have other revenues from non-Medicare
clients, and we are unaware of any

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current MA organizations with revenues
below the SBA threshold. (Note that the
number of current MA contracts
includes separate Medicare contracts
held by a single firm in different parts
of the country-as in the case of
PacifiCare, for example, which has ten
contracts in eight States.)
These data show that few, if any,
health insurance firms with revenues of
$6 million or less underwrite
comprehensive insurance in the
national insurance market. Furthermore,
discussions with Bureau of the Census
staff indicate many and probably most
of the small firms classified as insurers
do not underwrite health care costs (that
is, provide comprehensive health
insurance), but are firms offering dental
or medical discounts through small
provider networks or offering
indemnity-type policies paying, for
example, a few hundred dollars a day
for each day spent in a hospital. They
would not even be licensed by States to
offer comprehensive or group insurance
policies. Therefore, we have no reason
to believe that the changes to the
Medicare Advantage program that will
take effect for the 2006 contract year
will have any positive or negative effect
on ‘‘small’’ insurance firms, with the
possible exception of Medigap insurers.
Some of these small firms may be
Medigap insurers. For this limited
group, the MMA has major
consequences. Specifically, existing
categories of Medigap policy that cover
prescription drugs will become illegal to
sell to new enrollees, and several new
Medigap categories will be created.
(These changes, however, are specified
in the statute and are not subject to
regulatory discretion.) Furthermore,
Medigap insurance is a unique type of
product that does not involve accepting
insurance risk for the full cost of health
benefits, since Medicare itself remains
the primary insurer. Therefore, it is
unlikely that any consequential number
of firms operating solely in the Medigap
market would expect to operate in the
Medicare Advantage market. Effects of
the MMA on Medigap are discussed in
more detail the economic effects
analysis in the companion Title I rule.
The definition of small entities under
the RFA also encompasses not-for-profit
organizations that are not ‘‘dominant’’
in their field. (HHS interprets
‘‘dominant’’ to mean national
dominance.) There are many large HMO
companies that are non-profit. As of
2000, about 37 percent of HMO
enrollment was in non-profit firms, and
152 of 558 HMOs, or 27 percent, were
non-profit (InterStudy Competitive Edge
HMO Industry Report for 2000). None of
these firms is nationally ‘‘dominant’’ in

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the health insurance industry although
many firms achieve large market share
in particular health care markets.
About half of these firms already
compete in the Medicare MA market,
and most are potential entrants or re­
entrants as Medicare Advantage plans.
According to the InterStudy data, about
one third of HMOs currently
participating in MA are non-profit.
Some HMOs, profit or non-profit, may
be potential entrants in the new regional
MA markets. This will partly depend on
how rapidly the non-profit firms grow
by merger or make other market
adaptations, such as adding PPO
networks. However, relatively few HMO
plans (in contrast to parent company or
linked HMOs), operating through local
HMO networks, are likely to be able to
compete in a region encompassing large
areas or several States and multiple
health care markets.
2. The Local Medicare Advantage
Market and Small Entities
Under MA, there are two distinct
(though overlapping) markets: local and
regional. All existing MA HMO plans
participate on a local area basis,
typically covering the several counties
encompassed in a metropolitan area.
Because HMOs are most common in
metropolitan areas, and especially in the
largest metropolitan areas, existing plan
availability and enrollment is
concentrated in these areas. As
discussed previously in this analysis,
only about one fifth of U.S. counties,
though over 60 percent of the eligible
population, have an MA coordinated
care plan available. The MMA makes
one major change for local plans by
significantly improving payment rates.
This statutory change is already in effect
and is not addressed in these rules.
These rules will have beneficial effects
on local plans, by reducing some
administrative burdens, but the changes
in this final rule, singly and collectively,
do not rise to the level of ‘‘significant
economic impact’’ on local HMOs
(though the payment increases in 2004,
already in effect as a result of the
statute, did have an effect of that
magnitude).
The other major changes of Medicare
Advantage include the creation of a new
regional plan structure to become
operational in 2006, designed for and
limited to PPO plans. The regional
structure is intended to ensure that the
entire beneficiary population, not just
those residing in major urban centers,
has access to alternative plans. As
discussed elsewhere in this analysis, we
assume that as a result of these changes
private plans may attract as much as

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one-third of all Medicare enrollment by
2016.
Starting in 2006, local HMOs will face
two new sources of competition. First,
they will find themselves seeking to
attract enrollees from a pool of eligible
applicants who will now have Part D
drug benefits as enrollees in FFS
Medicare. Second, they will be
competing against regional MA plans
serving their areas. Regional plans will
have some advantages specified in the
statute, including access to the
stabilization fund and, temporarily, to
risk sharing with the government. It is
possible that some existing local plans
will lose some enrollment. The local
HMOs will, however, have important
assets including integrated benefit
packages (as compared to free-standing
PDPs), quite likely drug benefits at
premiums lower than PDP premiums,
and extra benefits (including rebates of
the Parts B and D premiums) not
available in FFS and possibly more
generous than those available in
regional MA plans. The local plans will
have an existing customer base and pre­
existing networks in the areas where
most beneficiaries live. Most compete in
major metropolitan areas where
Medicare payment rates are higher than
in other areas that a region would
encompass. Finally, many and perhaps
most local plans are subsidiaries of large
insurance firms that offer multiple
product lines. These firms retain the
ability to ‘‘mix and match’’ their
product offerings to best advantage.
Regardless, whether and how much any
given plan loses or gains will primarily
depend on its overall attractiveness
(benefits, services, provider panels, out
of network benefits, and premiums)
compared to its competitors. Nothing in
these rules, as such, either favors or
disfavors local plans when competing
against regional plans.
While it is impossible to predict the
precise situations that these HMOs will
face, or their responses, there are some
lessons available from the FEHB
Program experience. In that program,
about 200 local HMOs co-exist in
competition with about a dozen national
PPO plans. Most HMOs compete in big
city markets against 15 or 20 plans, both
PPO and HMO. While HMO enrollment
in the program has declined slightly in
recent years, and almost half of all
HMOs have left the program since their
peak participation in the early 1990s
(reflecting mainly industry
consolidations), HMOs currently enroll
about 35 percent of all Federal
employees, and 9 percent of retirees,
down only slightly from the peak levels
of 39 percent and 10 percent,
respectively, a decade ago.

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3. The Regional Medicare Advantage
Market and Small Entities
Starting in 2006, health insurance
firms both profit and non-profit (and
hence ‘‘small entities’’ under the RFA)
will be able to compete as regional
plans. A firm may compete in as many
regions as it chooses, up to and
including the entire nation. The chief
constraint is that a plan must
demonstrate that it has a region-wide
network of providers.
We know of one group of potential
regional competitors who may be
affected by regional boundary decisionsinsurance plans that operate on a statespecific basis, notably Blue Cross/Blue
Shield plans. In recent years many Blue
Cross/Blue Shield plans have merged
within and across State lines. However,
there still remain several dozen of these
plans that operate on a state-delineated
basis. The regional MA boundaries
established in December, 2004 attempt
to accommodate these and other plans
that face significant practical constraints
in operating across state line. Of course,
many considerations affected decisions
on regional boundaries, including
beneficiary access, viable economic size,
and existing medical and PPO markets.
Our primary objectives were to give all
Medicare beneficiaries the opportunity
to enroll in an MA plan, to give them
the greatest amount of choice by
encouraging competition, and as a result
to provide price competition and
affordable costs for enrollees. These
considerations, and the resulting
boundary decisions, are described on
the CMS Web site at www.cms.hhs.gov/
medicarereform/mmaregions.
A local plan may encompass all or
most of a State, and/or operate in more
than one State if it so chooses. Of
course, regional plans have some
advantages, but local plans have others.
Since the statute preempts State
standards for benefits, coverage, and
provider networks, leaving effectively
only licensure and solvency standards
as State-imposed requirements, we
anticipate no important problems for
plans (though regional plans may have
to seek licensure in States in which they
currently do not operate, or would have
to seek a waiver as permitted by the
MMA). There is another problem that
could be important to a plan far larger
than the SBA size standard but
nonetheless smaller than the plans
serving hundreds of thousands or
millions of enrollees. Organizing the full
resources needed to compete effectively
in the Medicare context will require
substantial investments in acquiring and
maintaining actuarial expertise, legal
expertise, effective marketing, network

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building, benefit design, cost-control,
disease management, formulary design,
claims processing, financing, and so
forth. There are economies of scale in
health insurance (like many other
businesses), and these presumably favor
larger firms, all other things equal, up to
some point. We are not aware of any
industry studies that seek to measure
the minimum size necessary for health
insurance firms to compete effectively
in local, regional, or national markets
and request information on this
question. However, to the best of our
understanding any such barriers to entry
or cost competitiveness are likely to fall
well within the size of most firms
competing today in such large systems
as M+C, the FEHB Program, or the
private employer market. In summary,
the MA program, by having both a
regional and local model, provides
opportunity for health insurance entities
of all types and most sizes (but probably
not below the ‘‘small’’ insurance entity
cutoff level defined by the SBA, which
is lower than appears viable for a
comprehensive, risk-bearing insurance
plan), and offering many different kinds
of plans, to participate. That
participation is more likely to take the
form of local plans in the case of smaller
and non-profit entities. However, the
overriding objective of the regional plan
model is to give beneficiaries access to
and choice among integrated private
plans that can offer comprehensive
health insurance encompassing
Medicare parts A, B, and D. This model
is dictated in almost all its important
details in the statute.
Comment: Several commenters felt
that the impact analysis did not discuss
the negative impact on local MA plans
of having to compete with regional
plans, which have various financial
incentives to ensure participation. For
example, local plans operating in a rural
area would be at a disadvantage because
their benchmarks could be lower than
the benchmarks applying to regional
plans. The commenters also suggested
that CMS work with the Department of
Justice and the Federal Trade
Commission to ensure that anticompetitive practices are not permitted,
given that the MMA creates new health
insurance markets with participating
plans that, the commenters state, would
have the market power to unfairly limit
competition.
Response: As we noted above in
response to another comment regarding
how to classify plans as local or
regional, in order to address the issue of
limited access to coordinated care plans
in rural areas, the MMA has created the
MA regional plan option, which is
likely to be an option that is primarily

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offered by larger health plans or
insurers. In the year 2003, only about 13
percent of Medicare beneficiaries
residing in rural areas had access to a
Medicare coordinated care plan. That is,
only 13 percent of the rural population
was served by a local coordinated care
plan. If the MMA is successful in the
goal of expanding access to rural areas,
ideally 100 percent of rural enrollees
will have access to a coordinated care
plan because of new regional MA
option.
The manner in which the MMA seeks
to expand access to coordinated care
plans in rural areas involves certain
incentives for plans willing to
participate under the terms set out by
the law, and it involves certain ‘‘trade­
offs’’ that were felt necessary to ensure
participation. One such trade-off is the
willingness of the Congress to increase
payments through the use of the
stabilization fund in order to ensure
maximum access to MA plans across a
wide geographic area. Only plans that
are willing to serve a wide geographic
area have access to the stabilization
fund. Local plans do not have access to
the fund, unless they are willing to
participate as regional plans. Similarly,
regional benchmarks may be higher than
local benchmarks in certain areas.
However, organizations for which a
regional benchmark applies are
assuming risk for a large population
across a wide geographic area, must
offer a uniform benefit package across
the entire area, and cannot selectively
discontinue contracting on a county-by­
county basis (or even selectively drop
portions of counties, as local plans are
permitted to do under certain
circumstances). Regional plans are
required to operate as preferred provider
organizations throughout a large service
area. Requiring plans to operate under
such a model, as opposed to a more
tightly knit network model, would tend
to raise costs for the plan and would
result in a lower level of extra benefits
for enrollees. The PPO model also adds
to the level of risk assumed by the
health plans because of the uncertainty
surrounding the utilization and costs for
out-of-network services that such plans
must reimburse.
As we have stated above, we would
hope that there is room for competition
to occur in all types of areas of the
country between local plans and
regional plans. With regional and local
plans each having some advantages, and
open competition among multiple plans
of each type expected in most areas, we
cannot predict likely ‘‘winners.’’ Our
expectation is that plans of both types
will succeed in most areas.

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With respect to anti-competitive
practices, CMS has worked with the
Department of Justice and Federal Trade
Commission in the past on competition
issues in the provider and health plan
markets, and we will continue to work
with those agencies in the future.
4. Hospitals
An additional program under
Medicare Advantage directly affects
hospitals. HHS has long taken the
approach of treating all hospitals as
presumptive ‘‘small entities’’ within the
meaning of the RFA, mainly because of
the dominance of the non-profit model
in the hospital industry (about 80
percent) and also because most of the
rest have revenues under the $29
million SBA size threshold for
hospitals.
The MMA facilitates the inclusion of
hospitals in regional networks in cases
in which a plan and a hospital cannot
reach agreement regarding the hospital’s
provision of services under the plan. As
described in more detail under the
Subpart C preamble section, if the
hospital’s participation is ‘‘essential’’ to
meeting a plan’s network adequacy
requirement, and the hospital can
demonstrate to us that its costs are
higher than the normal Part A payment
it receives, then the MA plan can pay
the normal amount and the network
adequacy fund will pay the difference.
The total amount available nationally
for this purpose is $25 million in 2006
(rising annually at the hospital market
basket rate).
This provision will most likely apply
to small towns and rural areas,
particularly if such areas are served by
only one hospital. It is impossible at this
time to predict the frequency with
which this situation will arise, since
that depends on future bargaining
among plans and hospitals, and on
hospitals’ ability to demonstrate excess
costs. Since the hospitals benefiting
would otherwise serve Medicare
enrollees at Medicare rates, the financial
effects of this program on hospitals
should never be negative, and qualifying
hospitals will obtain higher payments.
Likewise, by allowing regional plans to
meet their network requirements at a
reasonable cost the effects on them are
positive. We note that over 700 rural
hospitals are already paid at rates
somewhat higher than would otherwise
be applicable under Medicare’s hospital
payment rules. Some of these would be
candidates for ‘‘essential’’ hospital
payments (although the eligibility
criteria are different). Although there are
700 such hospitals, they are small
hospitals in sparsely inhabited rural
areas and account for only about one

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percent of Medicare hospital payments.
The pattern under the essential hospital
program is likely to be similar.
5. Medical Savings Accounts
These regulations also change the
rules for Medical Savings Accounts
(MSAs), which are high deductible
plans. This provides new opportunities
for insurance firms to participate in
Medicare Advantage. High deductible
plans are increasingly being offered in
the under age 65 market by large
insurance firms. As discussed
previously in this Preamble, we are
implementing the statutorily defined
changes (at section 233 of the MMA),
which are intended to make MSAs a
viable option for beneficiaries. We are
also amending the existing rules in
several places to remove requirements
that would be inappropriate if applied
to MSAs.
6. Employer Sponsored Plans
The MMA adds new authority for
employers and unions to sponsor plans
for their employees and former
employees, or members. Previously they
could sponsor plans through an M+C
organization; the statute gives them the
flexibility to sponsor plans directly. The
statute and the regulation provide for
waiver or modification of any
requirement under Part C or Part D that
would hinder the design of, the offering
of, or the enrollment in employer or
union-sponsored plans.
7. Other Requirements in the Regulatory
Flexibility Act
The RFA lists five general
requirements for a FRFA and four
categories of burden reducing
alternative to be considered. It also
defines as a small entity a ‘‘small
governmental jurisdiction’’ whose area
has a population of less than fifty
thousand. We anticipate no
consequential effects of these
regulations on small governmental
jurisdictions. We know of no relevant
Federal rules that duplicate, overlap, or
conflict with the rule (which in any
event amends an existing rule that is not
duplicated or overlapped by other
rules). The analysis above, taken
together with the rest of this preamble,
addresses all these general
requirements.
We have also sought both to avoid
imposing new burdens, and to
ameliorate existing burdens, as
discussed throughout this analysis.
Throughout this preamble we identify a
number of changes that would lessen
the burden of the existing MA rules.
Comment: In response to our desire to
know of any small businesses or entities

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affected by these regulations whose
concerns might not have been
addressed, a number of commenters
stated that CMS failed to address issues
related to the health care needs of AI/
AN.
Response: This concern is addressed
in various sections of the preamble
language dealing with specific issues as
they relate to AI/AN (specifically in
subparts A, B, C and F). As noted in
those sections, where the statute permits
us to do so, we have taken into
consideration issues raised by
commenters having to do with the
special needs of AI/AN populations,
their use of IHS providers and the
reimbursement rules and cost sharing
requirements for such providers, and
outreach issues related to such
populations.
The preamble to subpart A addressed
the comments asking (1) that IHS
services be included within the
definition of basic services; (2) that we
include as SNPs those plans that would
enroll only AI/AN beneficiaries; and (3)
that we recognize that IHS, I/T/U
Programs will face high costs related to
outreach, education and enrollment
because of the MMA. As stated in the
preamble, we are unable to accept the
commenters suggestions for the first two
issues because there is no statutory
authority to expand the definition of
basic services as suggested, and there is
no statutory authority for establishing
AI/AN special needs plans. With regard
to the third issue, we recognize this
concern and state that we will continue
to work with the IHS and other partners
in identifying effective outreach and
education strategies appropriate to AI/
AN populations.
Comments on subpart B asked that (1)
we make exceptions for AI/AN
beneficiaries when plans are closed for
enrollment because of capacity waivers;
(2) allow AI/AN beneficiaries to switch
among types of plans outside of open
enrollment periods; (3) have plans
contact I/T/U if a plan intends to
involuntarily disenroll an AI/AN
enrollee; and (4) specify that outreach
workers employed by IHS or tribal
organizations not be prohibited from
going door-to-door to assist AI/AN
individuals in making health plan
choices because of the prohibition on
door-to-door marketing. With regard to
the first item, we do not believe it is
appropriate to have exceptions to
capacity waivers for particular
categories of individuals because of the
nature of capacity waivers, which are
granted when an organization
establishes that its provider network
capacity is such that enrollment must be
limited to a certain number of

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4703

individuals. With respect to SEPs, the
subpart B preamble language explains
that specific SEPs are included in
regulations if they are based on statutory
provisions. Periodically, we establish
SEPs based on special circumstances,
and there may arise situations in which
AI/AN populations may be subject to
SEPs. On the question of involuntary
disenrollment, the preamble states that
the notification is to the individual who
is the subject of the proposed
disenrollment, and that to bring in other
parties would be beyond the scope of
the statutory provision. With regard to
the prohibition on door-to-door
marketing, the preamble notes that we
understand this concern and will work
with the IHS and tribal organizations to
address the concern.
Subpart C comments included
requests that there be rules requiring
‘‘full reimbursement’’ of IHS facilities
and that there be a blanket waiver of
cost sharing requirements for AI/AN
enrollees of MA plans. Neither of these
requests is possible within the scope of
the statute. However, the rules that
apply, for example, to non-network
providers and the amount that must be
paid to such providers, apply to IHS
providers. With regard to cost sharing,
although blanket waivers are not
permissible, under current law and
regulations cost sharing can be waived
in individual cases under certain
circumstances.
The subpart C preamble also
discusses a comment asking that we use
the waiver authority of section
1857(i)(2) of the Act, as expanded by
section 222(j)(2) of the MMA, to permit
direct contracting with I/T/Us to
sponsor MA plans exclusively designed
for AI/AN beneficiaries. As stated in the
subpart C discussion, the waiver
authority applies only to employer- or
union-sponsored health plans.
In the subpart F preamble we note
that we are considering possible options
to facilitate the ability of AI/AN Tribes
to use the option of allowing groups to
pay the part B premium for individuals,
which is suggested as a means of
making it more likely that AI/AN
beneficiaries will enroll in MA plans.
L. Alternatives Considered
In this section we discuss the impact
of several issues in which we have made
a choice among various policy options.
We refer readers to the Notice of
Proposed Rule Making, and other
documents available from CMS, for a
fuller discussion on the issue of the
designation of regions. Readers are
referred to the NPRM for a discussion of
the effect of our decision to use a planspecific versus statewide, area-wide or
region-wide risk adjustment to

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determine plan rebates, and the effect of
the payment adjustment relating to risk
adjustment for bids that exceed the
benchmark. Below is a discussion of the
impact of our decision regarding the
determination of the actuarial value of
Medicare cost sharing as part of a health
plan’s bid, as well as a discussion of the
potential impact of different approaches
to intra-area geographic adjustment of
payments when plans serve more than
one county.
Designation of Regions
The impact analysis for the proposed
rule of August 3, 2004, noted that a
major area in which CMS was given
discretion was in the matter of
designating the configuration of MA and
PDP regions. The proposed rule impact
analysis included a discussion of some
of the issues related to the designation
of MA regions (69 FR 46937). On
December 6, 2004, CMS announced the
MA and PDP regions. The listing of the
regions and material discussing the
rationale for choosing the regions can
found at http://www.cms.hhs.gov/
medicarereform/mmaregions/. That site
also contains links to sites containing
research findings related to the
designation of regions, and information
concerning public meeting that were
held on the subject of the regions (for
example, http://www.cms.hhs.gov/
medicarereform/mmaregions/
All_Info_Materials.pdf). The impact
analysis of the companion Title I final
regulations contain an explanation of
why there is a larger number of PDP
regions than MA regions.
As we have discussed in the
explanation of projections, the
enrollment and expenditure figures of
Table 1 represent our best estimate of
the effects of the law and regulations
based on the regions as they have now
been designated. The proposed rule
assumed 15 regions, but with a greater
number of MA regions, there is likely to
be a smaller level of enrollment in
regional plans.
Plan-Specific Versus Statewide, AreaWide or Region-Wide Risk Adjustment
to Determine Plan Rebates; Payment
Adjustment Relating To Risk
Adjustment For Bids That Exceed The
Benchmark
As noted previously in section I
(Effect on the Federal Government),
these issues were discussed at length in
the proposed rule, with the conclusion
being that the impact could not be
quantified without knowing the risk
distribution among the plans and their
bids. Another issue that has an effect on
expenditures is the payment adjustment
relating to risk adjustment for bids that
exceed the benchmark, previously

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discussed in section I, Effect on the
Federal Government.
Actuarial Value of Medicare Cost
Sharing as Part of Bid
As explained in the preamble of this
final rule in the discussion of subpart F,
a number of alternatives were
considered in determining how to
compute an actuarially equivalent value
of Medicare cost sharing as a component
of a plan’s bid for the basic Medicare
benefit package (coverage of Medicare A
and B services). Under the provisions of
section 1854(a)(6)(A)(ii)(I) of the Act,
one component of the bid is the
proportion of ‘‘such bid
amount.attributable to.the provision of
benefits under the original Medicare feefor-service program option (as defined
in section 1852(a)(1)(B)).’’ Under section
1852(a)(1)(B), ‘‘benefits under the
original Medicare fee-for-service
program’’ are defined as ‘‘those items
and services (other than hospice care)
for which benefits are available under
parts A and B to individuals entitled to
benefits under part A and enrolled
under part B, with cost-sharing for those
services as required under parts A and
B or an actuarially equivalent level of
cost-sharing as determined in this part.’’
A number of alternatives are discussed
in the preamble of the final rule and the
proposed rule under subpart F.
One alternative discussed would use
a plan-specific determination of cost
sharing which would have included a
computation of any induced demand
resulting from reduced cost sharing.
That is, for purposes of comparison to
the benchmark, a bid would have been
made based on the cost sharing
structure of FFS Medicare. To the extent
that the Medicare cost sharing structure
acts as a limit on utilization, a plan
would require less revenue to provide
Medicare A and B services as compared
to a benefit package with a cost sharing
structure less restrictive than that of FFS
Medicare (the extreme case being, for
example, a benefit package with no cost
sharing on Part A and B benefits). The
former, lower amount-the bid based on
Medicare cost sharing-would be the
amount to be compared to the
benchmark to determine whether there
were any savings that would be retained
by the Government (25 percent of the
savings, for local plans) or which would
have to be passed on to the plan’s
enrollees (75 percent of the savings). If
an organization decided to offer a
benefit package with, for example, no
cost sharing for Medicare-covered
services, the proposed rule suggested
that the supplemental benefits
associated with such a benefit package
would include not only the dollar value
of reduced cost sharing (that is, the

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charges that would otherwise be the
responsibility of the beneficiary are
borne by the health plan), but also the
dollar value of any additional utilization
of Part A and B services which would
not have arisen if there had been a
Medicare-like cost sharing structure. In
other words, because the benefit
package being offered is ‘‘richer’’ or
more costly than the benefit package
that the Government asks plans to bid
on (the Medicare Part A and B package
with a specified level of cost sharing),
one hundred percent of that cost must
be borne by the plan and/or its
enrollees. The cost to the beneficiary of
such a package could be reduced by
available rebate dollars, but the
computation of the total rebate dollars
would be based on a comparison
between the benchmark and the planspecific determination of the
presumably lower-cost ‘‘benefits under
part A and.part B, with cost-sharing for
those services as required under Parts A
and B.’’
The alternative chosen-which is to
use a proportional method to determine
the actuarial value of cost sharing for
Part A and B services associated with a
bid-does not involve a determination of
induced utilization. The proportional
method assigns cost sharing values to a
bid in manner that is intended to closely
approximate Medicare FFS cost sharing
with respect to the expenditures for
services that would be plan
expenditures versus those (the cost
sharing) that are beneficiary
expenditures. It is not entirely clear
whether having chosen this method
rather than the plan-specific approach
has the effect of reducing the amount of
savings the Government would have
retained. And if there is such a
difference, we do not believe we are
able to provide a reasonable dollar
estimate of the effect.
With regard to whether induced
demand is an issue that would affect the
determination of Government savings as
just described, a number of commenters
stated that induced demand does not
arise in managed care plans because
utilization is limited to necessary and
appropriate services through the plan’s
utilization management practices. That
is, changes in cost sharing would
neither reduce nor increase utilization;
they would only shift the source of
provider revenue from the plan to the
enrollee. As discussed in the preamble,
this argument may be clearer for
hospital services received through a
plan, when discretionary
hospitalizations may be limited because
physicians admit patients, but for other
service such as specialist physician
services in ‘‘open access’’ plans there

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would presumably be a utilization effect
if, for example, copayments for
specialist physician visits are far higher
than copayments for primary care
providers and a beneficiary is making a
choice between visiting a specialist
versus a primary care provider.
As we note in the preamble, CMS will
continue to examine the issue of the
relationship between cost sharing and
plan bids, and we may refine our
approach in the future.
Geographic Adjustment of Payments
Subpart G of the preamble contains a
discussion of the manner in which we
will implement the geographic
adjustment of payments called for in
section 1853(a)(1)(F) of the Act ‘‘to take
into account variations in MA local
payment rates under this part among the
different MA local areas.’’ Under the
bidding system effective in 2006,
variations in payment rates among
counties have to be taken into account
through an adjustment process that is
somewhat different from what occurs
today when Medicare Advantage plans
operate in more than one county. As
previously noted, we will be using a
geographic adjustment based on countylevel MA payment rates, but will allow
regional MA plans, on a case-by-case
basis, to request to have their payments
geographically adjusted at the county
level using a plan-determined statement
of the relative costs the plan faces in
different counties for the provision of
Medicare-covered services. What
follows is a general discussion of the
two methods and the possible budget
implications of one method versus
another.

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Under the system in use in 2005 (as
in prior years), the ‘‘geographic
adjustment’’ consists simply of paying
the county MA rate adjusted by the
demographic and risk characteristics of
the individual beneficiary. To the extent
that a plan’s health care expenditures
vary by county, this method of
‘‘geographic adjustment’’ entails a
certain level of risk for a health plan
with respect to any unanticipated costs
incurred for (a) the provision of
Medicare A and B benefits, to the extent
that the plan’s costs of providing A and
B benefits vary from county to county,
and (b) the provision of required extra
benefits to the extent that the cost of
such benefits vary by county, or-what is
more likely-to the extent that the
Medicare A and B cost and revenue
projections, which form the basis of the
determination of savings and the
valuation of extra benefits, vary from
actual A and B costs and revenues
because of the actual enrollment
distribution. The geographic adjustment
system of 2006 and thereafter will have
a different budgetary impact because of
the manner in which rebates are paid
for, and the impact may differ from
today’s methodology depending on the
method used to accomplish the
geographic adjustment.
Today’s method of ‘‘geographic
adjustment’’ is illustrated in Table 2. In
this example, an organization is
operating in three counties with the
same benefit package offered in all
counties. The first section of Table 2
shows the plan’s projected enrollment,
revenue needs, and ability to provide

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extra benefits based on the projected
enrollment (the kind of information
contained in the adjusted community
rate proposal the plan submits to CMS
under today’s system). Although in one
county, County A of the example, the
plan’s projected cost of providing the
Medicare A and B benefit package
exceeds the Medicare payment level
($520 in costs versus a payment of
$500), the ability of the plan to provide
the Medicare A/B benefit package in
other counties at a ‘‘cost’’ below the
level of the MA payment rate in the
county enables the organization to
provide extra benefits to each of its
expected enrollees. That is, enrollees in
one county are cross-subsidizing the
costs of enrollees in other counties. Had
this organization only contracted for
County C, residents of that county
would have received $100 in extra
benefits. However, because there are
three counties involved, and a certain
enrollment distribution is assumed,
County C enrollees will receive less in
extra benefits, but they will receive the
same amount as any other enrollee of
the plan in the three-county area. This
geographic cross-subsidization enables
residents of some counties (in this case,
the first two counties listed in Table 2)
to receive extra benefits financed by
revenues generated in a different county
(County C, which enables County A
residents to receive extra benefits, and
enables County B enrollee to receive
better benefits than they would
otherwise receive under a single-county
contract).
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Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
Table 2 serves to illustrate the ‘‘risk’’
to the Government, and the risk to the
plan, in the current system. If the actual
enrollment had turned out to be the
distribution in section II.a. of Table 2,
the Government would have paid the
plan more money because of the actual
enrollment distribution coming from
each county. In this example, the plan
would have had excess revenue beyond
that needed to provide the Medicare A
and B benefits and the promised level
of extra benefits. Had the plan predicted
this enrollment distribution going into
the contract year in its ACR submission,
beneficiaries would have been entitled
to extra benefits valued at $83 per
month. (Under the current system, there
is a limit to the Goverment’s ‘‘risk
exposure’’ in the case just described
because county level payments for any
enrollee cannot exceed the MA payment
rate in each county.)
Section II.b. of Table 2 shows a
situation in which, because of the actual
enrollment distribution, the plan incurs
a loss both in the provision of A and B
benefits and in providing the promised
level of extra benefits. Plans can seek to
protect themselves from this kind of risk
by reducing their obligation to provide
extra benefits. The plan can have an
adjusted community rate filing showing
that its required revenue matches the
MA payment rates in each county, for
example (though the stated inability to
provide extra benefits may dampen
enrollment, and the statement of
revenue needs might be challenged in
the ACR audit process). However, even
with that approach to minimizing risk,
if the figures in section II.b. of Table 2
accurately represent the plan’s costs in
each county, the plan will incur a loss
just in providing Medicare A and B
benefits, with the enrollment mix
shown in the example. To avoid that
kind of risk, what the MA organization
might do is either not include the first
county in its service area, or segment
that county. Segmenting the countyestablishing a separate ‘‘plan’’ for the
county-enables the organization to
exclude the county’s enrollees from the
computation of extra benefits for the
other counties and to have a separate
determination of the Medicare benefit
package to be offered in the individual
county. (Such service area segmentation
is not available to regional plans in the
competitive bidding system, but the
approach can still be used by MA local
plans in 2006 and thereafter.)
The examples of Table 2 show
extreme cases in which the actual
enrollment ends up being significantly
different from the projected distribution
of enrollment by county. Once a plan
has at least one year’s experience as a

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contractor, there is a better basis for
reviewing the enrollment projections of
a plan to ensure that the projections are
reasonable and that the plan is
appropriately determining the level of
benefits it should be providing to its
enrollees. This will also be true in the
new system as of 2006, when one aspect
of the bid review process will be an
evaluation of the reasonableness of a
plan’s projections. However, there is
always likely to be some level of
uncertainty in predicting a plan’s
enrollment distribution by county. The
issue of geographic adjustment is
especially important for regional plans
that will be required to have a uniform
benefit package and premium in a large
region.
The purpose of the equivalent of a bid
under the ‘‘old’’ system was solely to
determine whether there were any extra
benefits available to beneficiaries, and
what their Medicare premium would be.
A bid under the new system serves that
same purpose but it also can be thought
of as the primary basis of payment for
the provision of Medicare A and B
services. Any rebate, for the provision of
non-Medicare-covered benefits, is paid
separately from the bid, and is not
subject to geographic adjustment In the
competitive bidding system of 2006 and
thereafter, the Government is ‘‘at risk’’
for the cost of the rebate to the extent
that the rebate amount would have been
higher or lower because a plan’s
projected enrollment mix does not
match its actual enrollment mix. Under
the prior system, plans could be said to
be at risk for the promised value of extra
benefits incorporated in their bid: even
though there might be significant
changes in the county of residence of
their actual enrollment compared to
their projected enrollment, only the
county-based Government payments
could change. When the Government
payments changed in tandem with the
relative change in costs faced by the
plan, the plan would remain whole with
respect to its revenue needs for the
provision of Medicare A and B benefits
and, potentially, for the provision of any
additional benefits. (Whether the plan
would remain whole would also depend
on the types of additional benefits being
provided-for example, a fixed cost
benefit such as a dollar reduction of the
Part B premium, or a benefit with
variable costs, such as the buy-down of
cost sharing that can take the form of
reduced coinsurance. Under the new
system, the Government also limits its
risk exposure by retaining 25 percent of
plan savings.)
For geographic adjustment in 2006,
one of the alternatives considered, an
adjustment based on the MA payment

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rates, is similar to today’s system. This
method allows us to adjust the service
area-wide bid to arrive at the county MA
rate, less the value of any rebate when
a rebate is required. The rebate value
that reduces the MA rate is
‘‘apportioned’’ across all counties based
on the plan’s projected enrollment and
based on the overall expected revenue
that enabled the plan to offer a rebate
(which is a function of the MA payment
rate totaled across all counties, based on
the enrollment projected in each
county). When a plan provides a rebate,
this method pays a percentage (always
less than 100 percent) of the county MA
payment rate, even though in a
particular county the plan’s costs of
providing the Part A and B benefit
might exceed the county MA payment.
In that respect, this method is similar to
the current method, which limits the
Government’s risk exposure to the level
of the MA payment, or benchmark, in a
given county.
This adjustment is illustrated in Table
3. The bid is adjusted by the countylevel, enrollment-weighted MA factors
shown in Table 3. This operation
‘‘returns’’ the bid to the appropriate MA
rate for that county, taking into account
the level of rebate dollars determined on
a plan-wide basis. (Note that unless the
plan projects the same level of
enrollment in each county of its service
area, the MA factors for the plan are not
the same as the simple relationship
among MA payment levels in the plan’s
service area.)
Under this method of geographic
adjustment based on MA payment rates,
the Government never pays more than
the MA rate in a given county for the
provision of Medicare A and B benefits.
However, it is possible under the
competitive bidding system for the
Government to have higher per capita
expenditures for an MA enrollee in a
given county as compared to today’s
MA payment methodology, because of
the manner in which rebate dollars are
paid. In the competitive system of 2006
and thereafter, the bid to benchmark
comparison-a comparison based on
projected enrollment-determines the
rebate dollars (in the same manner that
savings were determined in 2005, by
comparing projected payment rates to
projected revenue needs for Medicare A
and B services). In 2006 and thereafter,
regardless of the plan’s actual
enrollment distribution by county, the
Government is obligated to pay the per
capita amount of rebate dollars directly
to the plans as a separate payment
stream (or the Government withholds
the amount for reduction of the Part B
premium). That is, the rebate amount, as
determined based on projected

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numbers, is a fixed amount and is not
geographically adjusted. In 2005 and
earlier years, there was no separate
payment of savings dollars. Savings
were financed out of the county MA
rate, with plans receiving 100 percent of
the MA payment rate as the payment for

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the provision of both A and B benefits.
The MA payment also financed the
provision of any extra (non-Medicare)
benefits the plan was obligated to
provide if its projected average MA
payment rate exceeded its adjusted
community rate for the provision of

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Medicare A and B benefits. (For
simplicity, these examples represent the
situation of a multi-county local plan
with enrollment of beneficiaries with a
1.0 risk score. A similar methodology
would also apply to regional plans.)
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A different alternative method for
geographic adjustment that was
mentioned in the impact analysis of the
NPRM, would emphasize the bid-based
nature of the new system (that is, plans
are to be paid their bids for the
provision of Medicare A and B services)
and would recognize variation in plan
costs among counties, as stated by the
plans, for the provision of Medicare A
and B benefits. Under this method,
illustrated in Table 5, we would adjust
the bid by a county-level cost factor to
arrive at the payment for each plan in
each county. Under either system, the
MA-based system or the plandetermined cost factor system, total
payments to a plan in a given year

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would be the same to the extent that the
plan’s actual enrollment distribution
across counties matched the projected
enrollment distribution that formed the
basis of any rebate determination. When
the actual enrollment distribution
differs from the projection, the
Government payment to a plan might
exceed the MA rate in a given county if
the plan states that its costs in the
county exceed the MA rate. However, in
at least one county, we would pay less
than the MA rate (and less than the MA­
rate-based geographically adjusted
amount of the alternative previously
described, given that there has to be at
least one county below the MA rate in
order for the plan to have a rebate). This

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bid-based method of payment based on
plan-determined relative costs makes
plans whole with respect to their
revenue needs for the provision of
Medicare A and B services, unlike the
MA-based system which can pay more
or less than the plan needs for the
provision of A and B services. With
regard to rebate dollars, either method
results in the plan being paid the stated
cost of providing the required rebate,
which should make the plan whole with
respect to these expenditures unless
there is geographic variation in the cost
of providing the rebate (for example,
cost sharing reductions as a rebate).

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

Table 5 below summarizes the
examples of Tables 2, 3 and 4. The two
different possible methods of geographic
adjustment for 2006 discussed above
have different results, but in each case
there is a divergence only when the
actual enrollment differs from the
projected enrollment distribution, as
previously noted. In certain cases, the
plan-determined index produces higher
total Government expenditures than the
MA payment-based index, while in
other cases the opposite is true. Only
the plan-determined index makes a plan
whole with respect to its reported cost
of providing benefits on a county-by­

county basis. As is the case with today’s
payment system, enrollment
distributions different from those
projected in advance result in either
revenue gains or revenue shortfalls.
Compared to the current system of
payment, the plan-determined index
would appear to be particularly
advantageous to plans in ensuring the
avoidance of risk based on errors in
enrollment projections. As previously
noted, however, the MA-based index
prevents Government payments in any
county which would exceed the
benchmark-which is a possibility for the
plan-specified approach. Again, as

previously noted, for there to be any
projected rebate, there has to be at least
one county in which plans costs
(whether revealed or not) are below the
benchmark, with such margins being
used to cross-subsidize other counties.
One concern with the plan-specified
system is the issue of whether it is more
subject to gaming than the MA index
approach. Either approach is gameable
based on misstatements of enrollment
projections in order to maximize profits.
However, manipulation of the
enrollment distribution, if it occurs,
would likely be an issue only in the first
year of contracting.

BILLING CODE 4120–01–C

bids. As we have noted, local plans can
fashion their own service areas and can
pick and choose which counties they
want to serve. In most cases, local plans
are operating as Medicare plans in areas
in which they have commercial
operations and are therefore familiar
with the market conditions that they
face. This enables local plans to be able
to project their costs (in relation to MA
rates) and to make more reliable
projections of enrollment in a given
area. For regional plans, the law
requires that they assume risk over a
wide geographic area, because a regional
plan must serve an entire MA region
and not a subset of counties in the
region. Regional plans are likely to be
entering areas in which they have not
had any Medicare involvement and may

not have had any significant commercial
presence (for example, in rural areas,
where fewer people have employer
group coverage).

The public comments on the method
of geographic adjustment almost
without exception favored the use of the
MA rates as the basis for adjustment.
Commenters stated that they favored
using the MA rates because it promotes
a level playing field among plans and
because current plans are familiar with
adjustments made on this basis (which
is similar to today’s method of
adjustment). While we have accepted
these comments and have decided to
use the MA rates for geographic
adjustment, we also believe that it is
important to provide the option to
regional plans, on a case-by-case basis,
of using a plan-determined index for
geographic adjustment. The purpose of
allowing this is to encourage regional

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M. Accounting Statement
As required by OMB Circular A–4
(available at http://
www.whitehouse.gov/omb/circulars/
a004/a–4.pdf), in Table 6 we have
prepared an accounting statement
showing the classification of the
expenditures associated with the
provisions of Title II of the MMA that
are the subject of this regulation. The
table provides our best estimate of the
dollar amount of these transfers,
expressed in 2001 dollars, at three
percent and seven percent discount
rates.

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All expenditures are classified as
transfers to health plans. As previously
explained, a large share of these
expenditures would be used for the
provisions of extra
benefits and reduced cost sharing for
beneficiaries enrolled in private plans.
(Note that this information, as it
appeared in Table 12 of the August 3,
2004 proposed rule did not contain
annualized figures. The figures were
total figures for the 2004 to 2009
period.)

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

TRANSFERS
Annualized Monetized
Transfers

2,742

From Whom To
Whom?

Federal Government
To Private Plans

Seven Percent Annual Discount Rate
TRANSFERS
Annualized Monetized
Transfers

2,711

From Whom To
Whom?

Federal Government
To Private Plans

In accordance with the provisions of
Executive Order 12866, this regulation
was reviewed by the Office of
Management and Budget.
List of Subjects
42 CFR Part 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 422
Administrative practice and
procedure, Health facilities, Health
maintenance organizations (HMO),
Medicare, Penalties, Privacy, Reporting
and recordkeeping requirements
For the reasons set forth in the
preamble, the Centers for Medicare &
Medicaid Services amends 42 CFR
chapter IV as set forth below:
PART 417–HEALTH MAINTENANCE
ORGANIZATIONS, COMPETITIVE
MEDICAL PLANS, AND HEALTH CARE
PREPAYMENT PLANS
1. The authority citation for part 417
continues to read as follows:

■

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3. Section 417.600 is revised to read as
follows:

■

§ 417.600 Basis and scope.

Subpart J—Qualifying Conditions for
Medicare Contracts
2. Amend § 417.402 by—
A. Revising paragraph (b).
B. Adding paragraph (c).
The revision and addition read as
follows:

■

TABLE 6. ACCOUNTING STATEMENT:
417.402 Effective date of initial
CLASSIFICATION OF EXPENDITURES, §regulations.
2004 THROUGH 2009 (2001 DOL­
*
*
*
*
*
LARS, IN MILLIONS)
Three Percent Annual Discount Rate

Subpart Q—Beneficiary Appeals

(b) No new cost plan contracts are
accepted by CMS. CMS will, however,
accept and approve applications to
modify cost plan contracts in order to
expand service areas, provided they are
submitted on or before September 1,
2006, and CMS determines that the
organization continues to meet
regulatory requirements and the
requirements in its cost plan contract.
Section 1876 cost plan contracts will
not be extended or renewed beyond
December 31, 2007, where conditions in
paragraph (c) of this section are present.
(c) Mandatory HMO or CMP and
contract non-renewal or service area
reduction. CMS will non-renew all or a
portion of an HMO’s or CMP’s
contracted service area using procedures
in § 417.492(b) and § 417.494(a) for any
period beginning on or after January 1,
2008, where­
(1) There were two or more
coordinated care plan-model MA
regional plans in the same service area
or portion of a service area for the entire
previous calendar year meeting the
conditions in paragraph (c)(3) of this
section; or
(2) There were two or more
coordinated care plan-model MA local
plans in the same service area or portion
of a service area for the entire previous
calendar year meeting the conditions in
paragraph (c)(3) of this section.
(3) Minimum enrollment
requirements. (i) With respect to any
service area or portion of a service area
that is within a Metropolitan Statistical
Area with a population of more than
250,000 and counties contiguous to the
Metropolitan Statistical Area, 5,000
enrolled individuals.
(ii) With respect to any service area or
portion of a
service area that is not within a
Metropolitan Statistical Area described
in paragraph (c)(3)(i) of this section,
1,500 individuals.

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(a) Statutory basis. (1) Section 1869 of
the Act provides the right to a
redetermination, reconsideration,
hearing, and judicial review for
individuals dissatisfied with a
determination regarding their Medicare
benefits.
(2) Section 1876 of the Act provides
for Medicare payments to HMOs and
CMPs that contract with CMS to enroll
Medicare beneficiaries and furnish
Medicare-covered health care services to
them.
(3) Section 234 of the MMA requires
section 1876 contractors to operate
under the same provisions as MA plans
where two plans of the same type enter
the cost plan contract’s service area.
(b) Applicability. (1) The rights,
procedures, and requirements relating to
beneficiary appeals and grievances set
forth in subpart M of part 422 of this
chapter also apply to Medicare contracts
with HMOs and CMPs under section
1876 of the Act.
(2) In applying those provisions,
references to section 1852 of the Act
must be read as references to section
1876 of the Act, and references to MA
organizations as references to HMOs
and CMPs.
§ 417.602 through § 417.638

[Removed]

4. Sections 417.602 through 417.638
are removed.

■

Subpart U—Health Care Prepayment
Plans
5. Amend § 417.832 byA. Revising paragraph (c).
B. Adding paragraph (d).
The revision and addition read as
follows:

■

§ 417.832 Applicability of requirements
and procedures.

*

*
*
*
*
(c) The provisions of part 405 dealing
with the representation of parties apply
to organization determinations and
appeals.
(d) The provisions of part 405 dealing
with administrative law judge hearings,
Medicare Appeals Council review, and
judicial review are applicable, unless
otherwise provided.
■ 6. Section 417.840 is revised to read as
follows:
§ 417.840 Administrative review
procedures.

The HCPP must apply § 422.568
through § 422.619 of this chapter to

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organization determinations that affect
its Medicare enrollees, and to
reconsiderations, hearings, Medicare
Appeals Council review, and judicial
review of those organization
determinations.
PART 422—MEDICARE ADVANTAGE
PROGRAM
7. The authority citation for part 422
continues to read as follows:

■

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

8. Revise the heading of part 422 to
read as set forth above.

■

Subpart A—General Provisions
9. Amend § 422.1(a) by adding the
following statutory basis in numerical
order:

■

§ 422.1 Basis and scope.

(a) * * *

1858—Special rules for MA Regional

Plans.
*
*
*
*
*
■ 10. Amend § 422.2 byA. Removing the definitions of
‘‘ACR,’’ ‘‘Additional benefits,’’
‘‘Adjusted community rate,’’ and
‘‘M+C.’’
B. Revising the definitions of ‘‘Basic
benefits,’’ ‘‘Benefits,’’ ‘‘Mandatory
supplemental benefits,’’ and ‘‘Service
area.’’
C. Adding the definitions of
‘‘Institutionalized,’’
‘‘MA,’’ ‘‘MA local area,’’ ‘‘MA local
plan,’’ ‘‘MA-Prescription drug plan,’’
‘‘MA regional plan,’’ ‘‘Prescription drug
plan (PDP),’’ ‘‘Prescription drug plan
(PDP) sponsor,’’ ‘‘Special needs
individual,’’ and ‘‘Specialized MA plans
for special needs individuals.’’
D. In the definitions of ‘‘M+C eligible
individual,’’ ‘‘M+C organization,’’ ‘‘M+C
plan,’’ and ‘‘M+C plan enrollee,’’
‘‘M+C’’ is removed each place it appears
and ‘‘MA’’ is added in its place.
E. Amending the definition of
‘‘Religious and Fraternal Benefit (RFB)
Society’’ by removing the words
‘‘Religious and Fraternal’’ and by adding
the words ‘‘Religious Fraternal’’ in their
place.
■ The revisions and additions read as
follows:
§ 422.2

Definitions.

*

*
*
*
*
Basic benefits means all Medicarecovered benefits (except hospice
services).
Benefits means health care services
that are intended to maintain or
improve the health status of enrollees,
for which the MA organization incurs a

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cost or liability under an MA plan (not
solely an administrative processing
cost). Benefits are submitted and
approved through the annual bidding
process.
*
*
*
*
*
Institutionalized means for the
purpose of defining a special needs
individual, an MA eligible individual
who continuously resides or is expected
to continuously reside for 90 days or
longer in a long-term care facility which
is a skilled nursing facility (SNF)
nursing facility (NF); SNF/NF; an
intermediate care facility for the
mentally retarded (ICF/MR); or an
inpatient psychiatric facility.
*
*
*
*
*
MA stands for Medicare Advantage.
MA local area is defined in § 422.252.
MA local plan means an MA plan that
is not an MA regional plan.
MA-Prescription drug (PD) plan
means an MA plan that provides
qualified prescription drug coverage
under Part D of the Social Security Act.
MA regional plan means a
coordinated care plan structured as a
preferred provider organization (PPO)
that serves one or more entire regions.
An MA regional plan must have a
network of contracting providers that
have agreed to a specific reimbursement
for the plan’s covered services and must
pay for all covered services whether
provided in or out of the network.
Mandatory supplemental benefits
means health care services not covered
by Medicare that an MA enrollee must
accept or purchase as part of an MA
plan. The benefits may include
reductions in cost sharing for benefits
under the original Medicare fee for
service program and are paid for in the
form of premiums and cost sharing, or
by an application of the beneficiary
rebate rule in section 1854(b)(1)(C)(ii)(I)
of the Act, or both.
*
*
*
*
*
Prescription drug plan (PDP). PDP has
the definition set forth in § 423.272 of
this chapter.
Prescription drug plan (PDP) sponsor.
A prescription drug plan sponsor has
the definition set forth in § 423.2 of this
chapter.
*
*
*
*
*
Service area means a geographic area
that for local MA plans is a county or
multiple counties, and for MA regional
plans is a region approved by CMS
within which an MA-eligible individual
may enroll in a particular MA plan
offered by an MA organization. Each
MA plan must be available to all MAeligible individuals within the plan’s
service area. In deciding whether to
approve an MA plan’s proposed service

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area, CMS considers the following
criteria:
(1) For local MA plans:
(i) Whether the area meets the
‘‘county integrity rule’’ that a service
area generally consists of a full county
or counties.
(ii) However, CMS may approve a
service area that includes only a portion
of a county if it determines that the
‘‘partial county’’ area is necessary,
nondiscriminatory, and in the best
interests of the beneficiaries. CMS may
also consider the extent to which the
proposed service area mirrors service
areas of existing commercial health care
plans or MA plans offered by the
organization.
(2) For all MA coordinated care plans,
whether the contracting provider
network meets the access and
availability standards set forth in
§ 422.112. Although not all contracting
providers must be located within the
plan’s service area, CMS must
determine that all services covered
under the plan are accessible from the
service area.
(3) For MA regional plans, whether
the service area consists of the entire
region.
Special needs individual means an
MA eligible individual who is
institutionalized, as defined above, is
entitled to medical assistance under a
State plan under title XIX, or has a
severe or disabling chronic condition(s)
and would benefit from enrollment in a
specialized MA plan.
Specialized MA Plans for Special
Needs Individuals means a MA
coordinated care plan that exclusively
enrolls or enrolls a disproportionate
percentage of special needs individuals
as set forth in § 422.4(a)(1)(iv) and that,
beginning January 1, 2006, provides Part
D benefits under part 423 of this chapter
to all enrollees; and which has been
designated by CMS as meeting the
requirements of a MA SNP as
determined on a case-by-case basis
using criteria that include the
appropriateness of the target population,
the existence of clinical programs or
special expertise to serve the target
population, and whether the proposal
discriminates against sicker members of
the target population.
■ 11. Amend § 422.4 byA. Revising the section heading.
B. Revising paragraph (a)(1)(iii).
C. Redesignating paragraph (a)(1)(iv)
as paragraph
(a)(1)(v).
D. Adding a new paragraph (a)(1)(iv).
E. Revising newly redesignated
paragraph (a)(1)(v).
F. Removing paragraph (a)(2)(ii).

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G. Redesignating paragraph (a)(2)(iii)
as paragraph (a)(2)(ii).
H. Adding a new paragraph (c).
■ The revisions and additions read as
follows:
§ 422.4 Types of MA plans.

(a) * * *
(1) * * *
(iii) Coordinated care plans include
plans offered by health maintenance
organizations (HMOs), providersponsored organizations (PSOs),
regional or local preferred provider
organizations (PPOs) as specified in
paragraph (a)(1)(v) of this section, and
other network plans (except MSA and
PFFS plans).
(iv) A specialized MA plan for special
needs individuals (SNP) includes any
type of coordinated care plan that meets
CMS’SNP requirements and either—
(A) Exclusively enrolls special needs
individuals as defined in § 422.2; or
(B) Enrolls a greater proportion of
special needs individuals than occur
nationally in the Medicare population
as defined by CMS.
(v) A PPO plan is a plan that has a
network of providers that have agreed to
a contractually specified reimbursement
for covered benefits with the
organization offering the plan; provides
for reimbursement for all covered
benefits regardless of whether the
benefits are provided within the
network of providers; and, only for
purposes of quality assurance
requirements in § 422.152(e), is offered
by an organization that is not licensed
or organized under State law as an
HMO.
*
*
*
*
*
(c) Rule for MA Plans’ Part D
coverage.
(1) Coordinated care plans. In order to
offer an MA coordinated care plan in an
area, the MA organization offering the
coordinated care plan must offer
qualified Part D coverage meeting the
requirements in § 423.104 of this
chapter in that plan or in another MA
plan in the same area.
(2) MSAs. MA organizations offering
MSA plans are not permitted to offer
prescription drug coverage, other than
that required under Parts A and B of
Title XVIII of the Act.
(3) Private Fee-For-Service. MA
organizations offering private fee-for­
service plans can choose to offer
qualified Part D coverage meeting the
requirements in § 423.104 in that plan.
§ 422.6
■

12. Remove § 422.6.

§ 422.8
■

[Removed]

[Removed]

13. Remove § 422.8.

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§ 422.10 [Redesignated as § 422.6]

14. Redesignate § 422.10 as § 422.6 and
amend newly redesignated § 422.6 byA. Revising the section heading.
B. Revising paragraph (a).
C. Revising paragraph (b).
D. Revising paragraph (d)(2)(ii).
E. Revising paragraph (e).
F. Revising paragraph (f)(1).
G. Revising paragraph (f)(2)
H. Revising paragraph (f)(3).
■ The revisions read as set forth below:
■

§ 422.6 Cost-sharing in enrollment-related
costs (MA user fee).

(a) Basis and scope. This section
implements that portion of section 1857
of the Act that pertains to cost-sharing
in enrollment-related costs. It sets forth
the procedures that CMS follows to
determine the aggregate annual ‘‘user
fee’’ to be contributed by MA
organizations and PDP sponsors under
Medicare Part D and to assess the
required user fees for each MA plan
offered by MA organizations and PDP
sponsors.
(b) Purpose of assessment. Section
1857(e)(2) of the Act authorizes CMS to
charge and collect from each MA plan
offered by an MA organization its pro
rata share of fees for administering
section 1851 of the Act (relating to
dissemination of enrollment
information), and section 4360 of the
Omnibus Budget Reconciliation Act of
1990 (relating to the health insurance
counseling and assistance program) and
section 1860D–1(c) of the Act (relating
to dissemination of enrollment
information for the drug benefit).
*
*
*
*
*
(d) * * *
(2) * * *
(ii) For fiscal year 2006 and each
succeeding year, $200 million, the
applicable portion (as defined in
paragraph (e) of this section) of $200
million.
(e) Applicable portion. In this section,
the term ‘‘applicable portion’’ with
respect to an MA plan means, for a
fiscal year, CMS’s estimate of Medicare
Part C and D expenditures for those MA
organizations as a percentage of all
expenditures under title XVIII and with
respect to PDP sponsors, the applicable
portion is CMS’s estimate of Medicare
Part D prescription drug expenditures
for those PDP sponsors PDP sponsors as
a percentage of all expenditures under
title XVIII.
(f) Assessment methodology. (1) The
amount of the applicable portion of the
user fee each MA organization and PDP
sponsor must pay is assessed as a
percentage of the total Medicare
payments to each organization. CMS

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4715

determines the annual assessment
percentage rate separately for MA
organizations and for PDPs using the
following formula:
(i) The assessment formula for MA
organizations (including MA-PD plans):
C divided by A times B where—
A is the total estimated January
payments to all MA organizations
subject to the assessment;
B is the 9-month (January through
September) assessment period; and
C is the total fiscal year MA
organization user fee assessment
amount determined in accordance with
paragraph (d)(2) of this section.
(ii) The assessment formula for PDPs:
A is the total estimated January
payments to all PDP sponsors subject to
the assessment;
B is the 9-month (January through
September) assessment period; and
C is the total fiscal year PDP sponsor’s
user fee assessment amount determined
in accordance with paragraph (d)(2) of
this section.
(2) CMS determines each MA
organization’s and PDP sponsor’s pro
rata share of the annual fee on the basis
of the organization’s calculated monthly
payment amount during the 9
consecutive months beginning with
January. CMS calculates each
organization’s monthly pro rata share by
multiplying the established percentage
rate by the total monthly calculated
Medicare payment amount to the
organization as recorded in CMS’s
payment system on the first day of the
month.
(3) CMS deducts the organization’s fee
from the amount of Federal funds
otherwise payable to the MA
organization or PDP sponsor for that
month.
*
*
*
*
*
Subpart B—Eligibility, Election, and
Enrollment
15. Amend § 422.50 byA. Revising the section heading.
B. Adding introductory text.
C. Amending paragraph (a)(2)(i) by
removing the word ‘‘and’’ from the end
of the paragraph.
D. Amending paragraph (a)(2)(ii) by
removing the period from the end of the
paragraph and by adding ‘‘; and’’ in its
place.
E. Adding paragraph (a)(2)(iii).
F. Revising paragraph (a)(5).
■ The revisions and addition read as
follows:
■

§ 422.50 Eligibility to elect an MA plan.

For this subpart, all references to an
MA plan include MA-PD and both MA
local and MA regional plans, as defined

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in § 422.2 unless specifically noted
otherwise.
(a) * * *
(2) * * *
(iii) An individual with end-stage
renal disease may elect an MA special
needs plan as defined in § 422.2, as long
as that plan has opted to enroll ESRD
individuals.
*
*
*
*
*
(5) Completes and signs an election
form or completes another CMSapproved election method offered by the
MA organization and provides
information required for enrollment;
and
*
*
*
*
*
■ 16. Add § 422.52 to read as follows:
§ 422.52 Eligibility to elect an MA plan for
special needs individuals.

(a) General rule. In order to elect a
specialized MA plan for a special needs
individual (Special Needs MA plan, or
SNP), the individual must meet the
eligibility requirements specified in this
section.
(b) Basic eligibility requirements.
Except as provided in paragraph (c) of
this section, to be eligible to elect an
SNP, an individual must:
(1) Meet the definition of a special
needs individual, as defined at § 422.2;
(2) Meet the eligibility requirements
for that specific SNP; and
(3) Be eligible to elect an MA plan
under § 422.50.
(c) Exception to § 422.50. CMS may
waive § 422.50(a)(2) concerning the
exclusion of persons with ESRD.
(d) Deeming continued eligibility. If
an SNP determines that the enrollee no
longer meets the eligibility criteria, but
can reasonably be expected to again
meet that criteria within a 6-month
period, the enrollee is deemed to
continue to be eligible for the MA plan
for a period of not less than 30 days but
not to exceed 6 months.
(e) Restricting Enrollment. An SNP
must restrict future enrollment to only
special needs individuals as established
under § 422.2.
(f) Exceptions. (1) As specified in
§ 422.4, CMS may designate certain MA
plans that disproportionately serve
special needs individuals, as defined in
§ 422.2 as SNPs.
(2) Individuals already enrolled in an
MA plan that CMS subsequently
designates as an SNP may continue to
be enrolled in the plan and may not be
involuntarily disenrolled because they
do not meet the definition of special
needs individuals in § 422.2.
■ 17. Amend § 422.54 byA. Revising the section heading.
B. Revising paragraph (a).

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■

C. Revising paragraph (b).
D. Revising paragraph (c)(1)(ii).
E. Revising paragraph (c)(2).
F. Revising paragraph (d)(3).
The revisions read as follows:

§ 422.54 Continuation of enrollment for MA
local plans.

(a) Definition. Continuation area
means an additional area (outside the
service area) within which the MA
organization offering a local plan
furnishes or arranges to furnish services
to its continuation-of-enrollment
enrollees. Enrollees must reside in a
continuation area on a permanent basis.
A continuation area does not expand the
service area of any MA local plan.
(b) Basic rule. An MA organization
may offer a continuation of enrollment
option to MA local plan enrollees when
they no longer reside in the service area
of a plan and permanently move into
the geographic area designated by the
MA organization as a continuation area.
The intent to no longer reside in an area
and permanently live in another area is
verified through documentation that
establishes residency, such as a driver’s
license or voter registration card.
(c) * * *
(1) * * *
(ii) Describe the option(s) in the
member materials it offers and make the
option available to all MA local plan
enrollees residing in the continuation
area.
(2) An enrollee who moves out of the
service area and into the geographic area
designated as the continuation area has
the choice of continuing enrollment or
disenrolling from the MA local plan.
The enrollee must make the choice of
continuing enrollment in a manner
specified by CMS. If no choice is made,
the enrollee must be disenrolled from
the plan.
(d) * * *
(3) Reasonable cost sharing. For
services furnished in the continuation
area, an enrollee’s cost-sharing liability
is limited to the cost-sharing amounts
required in the MA local plan’s service
area (in which the enrollee no longer
resides).
*
*
*
*
*
■ 18. Amend § 422.56 byA. Revising the section heading.
B. Revising paragraph (a).
C. Revising paragraph (b).
■ The revisions read as follows:
§ 422.56 Enrollment in an MA MSA plan.

(a) General. An individual is not
eligible to elect an MA MSA plan unless
the individual provides assurances that
are satisfactory to CMS that he or she
will reside in the United States for at
least 183 days during the year for which
the election is effective.

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(b) Individuals eligible for or covered
under other health benefits program.
Unless otherwise provided by the
Secretary, an individual who is enrolled
in a Federal Employee Health Benefit
plan under 5 U.S.C. chapter 89, or is
eligible for health care benefits through
the Veteran’s Administration under 10
U.S.C. chapter 55 or the Department of
Defense under 38 U.S.C. chapter 17,
may not enroll in an MA MSA plan.
*
*
*
*
*
■ 19. Amend § 422.60 byA. Revising paragraph (b)(1).
B. Revising paragraph (b)(3).
C. Revising the heading of paragraph
(c).
D. Revising paragraph (c)(1).
E. Revising paragraph (d).
F. Revising paragraph (e).
G. Revising paragraph (f)(1).
H. Revising paragraph (f)(3).
■ The revisions read as follows:
§ 422.60 Election process.

*

*
*
*
*
(b) Capacity to accept new enrollees.
(1) MA organizations may submit
information on enrollment capacity of
plans.
*
*
*
*
*
(3) CMS considers enrollment limit
requests for an MA plan service area, or
a portion of the plan service area, only
if the health and safety of beneficiaries
is at risk, such as if the provider
network is not available to serve the
enrollees in all or a portion of the
service area.
(c) Election forms and other election
mechanisms. (1) The election must
comply with CMS instructions
regarding content and format and be
approved by CMS as described in
§ 422.80. The election must be
completed by the MA eligible
individual (or the individual who will
soon become eligible to elect an MA
plan) and include authorization for
disclosure and exchange of necessary
information between the U.S.
Department of Health and Human
Services and its designees and the MA
organization. Persons who assist
beneficiaries in completing forms must
sign the form, or through other
approved mechanisms, indicate their
relationship to the beneficiary.
*
*
*
*
*
(d) When an election is considered to
have been made. An election in an MA
plan is considered to have been made
on the date the completed election is
received by the MA organization.
(e) Handling of elections. The MA
organization must have an effective
system for receiving, controlling, and
processing elections. The system must

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meet the following conditions and
requirements:
(1) Each election is dated as of the day
it is received in a manner acceptable to
CMS.
(2) Elections are processed in
chronological order, by date of receipt.
(3) The MA organization gives the
beneficiary prompt notice of acceptance
or denial in a format specified by CMS.
(4) If the MA plan is enrolled to
capacity, it explains the procedures that
will be followed when vacancies occur.
(5) Upon receipt of the election, or for
an individual who was accepted for
future enrollment from the date a
vacancy occurs, the MA organization
transmits, within the timeframes
specified by CMS, the information
necessary for CMS to add the
beneficiary to its records as an enrollee
of the MA organization.
(f) Exception for employer group
health plans. (1) In cases in which an
MA organization has both a Medicare
contract and a contract with an
employer group health plan, and in
which the MA organization arranges for
the employer to process elections for
Medicare-entitled group members who
wish to enroll under the Medicare
contract, the effective date of the
election may be retroactive. Consistent
with § 422.250(b), payment adjustments
based on a retroactive effective date may
be made for up to a 90-day period.
*
*
*
*
*
(3) Upon receipt of the election from
the employer, the MA organization must
submit the enrollment within
timeframes specified by CMS.
■ 20. Amend § 422.62 byA. Revising the section heading.
B. Revising paragraph (a).
C. Revising paragraph (b) introductory
text.
D. Revising the heading of paragraph
(d).
E. Revising paragraph (d)(1).
F. Removing paragraph (d)(2)(i)(A).
G. Redesignating paragraph
(d)(2)(i)(B) as paragraph (d)(2)(i)(A).
H. Redesignating paragraph
(d)(2)(i)(C) as paragraph (d)(2)(i)(B).
■ The revisions and addition read as
follows:
§ 422.62 Election of coverage under an MA
plan.

(a) General: Coverage election
periods—(1) Initial coverage election
period for MA. The initial coverage
election period is the period during
which a newly MA-eligible individual
may make an initial election. This
period begins 3 months before the
month the individual is first entitled to
both Part A and Part B and ends on the
later of—

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(i) The last day of the month
preceding the month of entitlement; or
(ii) If after May 15, 2006, the last day
of the individual’s Part B initial
enrollment period.
(2) Annual coordinated election
period. (i) Beginning with 2002, the
annual coordinated election period for
the following calendar year is November
15th through December 31st, except for
2006.
(ii) For 2006, the annual coordinated
election period
begins on November 15, 2005 and
ends on May 15, 2006.
(iii) During the annual coordinated
election period, an individual eligible to
enroll in an MA plan may change his or
her election from an MA plan to original
Medicare or to a different MA plan, or
from original Medicare to an MA plan.
If an individual changes his or her
election to original Medicare, he or she
may also elect a PDP.
(3) Open enrollment and
disenrollment opportunities through
2005. Through 2005, the number of
elections or changes that an MA eligible
individual may make is not limited
(except as provided for in paragraph (d)
of this section for MA MSA plans).
Subject to the MA plan being open to
enrollees as provided under
§ 422.60(a)(2), an individual eligible to
elect an MA plan may change his or her
election from an MA plan to original
Medicare or to a different MA plan, or
from original Medicare to an MA plan.
(4) Open enrollment and
disenrollment during 2006. (i) Except as
provided in paragraphs (a)(4)(ii),
(a)(4)(iii), and (a)(6) of this section, an
individual who is not enrolled in an MA
plan, but who is eligible to elect an MA
plan in 2006, may elect an MA plan
only once during the first 6 months of
the year.
(A) An individual who is enrolled in
an MA-PD plan may elect another MA­
PD plan or original Medicare and
coverage under a PDP. Such an
individual may not elect an MA plan
that does not provide qualified
prescription drug coverage.
(B) An individual who is enrolled in
an MA plan that does not provide
qualified prescription drug coverage
may elect another MA plan that does
not provide that coverage or original
Medicare. Such an individual may not
elect an MA-PD plan or coverage under
a PDP.
(ii) Newly eligible MA individual. An
individual who becomes MA eligible
during 2006 may elect an MA plan or
change his or her election once during
the period that begins the month the
individual is entitled to both Part A and
Part B and ends on the last day of the

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4717

6th month of the entitlement, or on
December 31, whichever is earlier,
subject to the limitations in paragraphs
(a)(4)(i)(A) and (a)(4)(i)(B) of this
section.
(iii) The limitation to one election or
change in paragraphs (a)(4)(i) and
(a)(4)(ii) of this section does not apply
to elections or changes made during the
annual coordinated election period
specified in paragraph (a)(2) of this
section or during a special election
period specified in paragraph (b) of this
section.
(5) Open enrollment and
disenrollment beginning in 2007. (i) For
2007 and subsequent years, except as
provided in paragraphs (a)(5)(ii),
(a)(5)(iii), and (a)(6) of this section, an
individual who is not enrolled in an MA
plan but is eligible to elect an MA plan
may make an election into an MA plan
once during the first 3 months of the
year.
(A) An individual who is enrolled in
an MA-PD plan may elect another MA­
PD plan or original Medicare and
coverage under a PDP. An individual
who is in original Medicare and has
coverage under a PDP may elect a MA­
PD plan. Such an individual may not
elect an MA plan that does not provide
qualified prescription drug coverage.
(B) An individual who is enrolled in
an MA plan that does not provide
qualified prescription drug coverage
may elect another MA plan that does
not provide that coverage or original
Medicare. An individual who is in
original Medicare and does not have
coverage under a PDP may elect an MA
plan that does not provide qualified
prescription drug coverage. Such an
individual may not elect an MA-PD plan
or coverage under a PDP.
(ii) Newly eligible MA individual. An
individual who becomes MA eligible
during 2007 or later may elect an MA
plan or change his or her election once
during the period that begins the month
the individual is entitled to both Part A
and Part B and ends on the last day of
the 3rd month of the entitlement, or on
December 31, whichever is earlier
subject to the limitations in paragraphs
(a)(5)(i)(A) and (a)(5)(i)(B) of this
section.
(iii) The limitation to one election or
change in paragraph (a)(5)(i) and
(a)(5)(ii) of this section does not apply
to elections made or changes made
during the annual coordinated election
period specified in paragraph (a)(2) of
this section or during a special election
period specified in paragraph (b) of this
section.
(6) Open enrollment period for
institutionalized individuals. After
2005, an individual who is eligible to

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elect an MA plan and who is
institutionalized, as defined by CMS, is
not limited (except as provided for in
paragraph (d) of this section for MA
MSA plans) in the number of elections
or changes he or she may make. Subject
to the MA plan being open to enrollees
as provided under § 422.60(a)(2), an MA
eligible institutionalized individual may
at any time elect an MA plan or change
his or her election from an MA plan to
original Medicare, to a different MA
plan, or from original Medicare to an
MA plan.
(b) Special election periods. An
individual may at any time (that is, not
limited to the annual coordinated
election period) discontinue the election
of an MA plan offered by an MA
organization and change his or her
election, in the form and manner
specified by CMS, from an MA plan to
original Medicare or to a different MA
plan under any of the following
circumstances:
*
*
*
*
*
(d) Special rules for MA MSA plans—
(1) Enrollment. An individual may
enroll in an MA MSA plan only during
an initial coverage election period or
annual coordinated election period
described in paragraphs (a)(1) and (a)(2)
of this section.
*
*
*
*
*
■ 21. Amend § 422.66 byA. Revising the section heading.
B. Revising paragraph (b)(1)(i).
C. Revising paragraph (b)(1)(ii).
D. Revising paragraph (b)(3)(ii).
E. Revising paragraph (b)(3)(iii)
introductory text.
F. Revising paragraph (d)(5).
G. Revising paragraph (e).
H. Revising paragraph (f)(2).
■ The revisions and additions read as
follows:
§ 422.66 Coordination of enrollment and
disenrollment through MA organizations.

*

*
*
*
*
(b) * * *
(1) * * *
(i) Elect a different MA plan by filing
the appropriate election with the MA
organization.
(ii) Submit a request for disenrollment
to the MA organization in the form and
manner prescribed by CMS or file the
appropriate disenrollment request
through other mechanisms as
determined by CMS.
*
*
*
*
*
(3) * * *
(ii) Provide enrollee with notice of
disenrollment in a format specified by
CMS; and

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(iii) In the case of a plan where lockin applies, include in the notice a
statement explaining that he or she—
*
*
*
*
*
(d) * * *
(5) Election. The individual who is
converting must complete an election as
described in § 422.60(c)(1) unless
otherwise provided in a form and
manner approved by CMS.
*
*
*
*
*
(e) Maintenance of enrollment. (1) An
individual who has made an election
under this section is considered to have
continued to have made that election
until either of the following, which ever
occurs first:
(i)The individual changes the election
under this section.
(ii)The elected MA plan is
discontinued or no longer serves the
area in which the individual resides, as
provided under § 422.74(b)(3), or the
organization does not offer or the
individual does not elect the option of
continuing enrollment, as provided
under § 422.54.
(2) An individual enrolled in an MA
plan that becomes an MA-PD plan on
January 1, 2006, will be deemed to have
elected to enroll in that MA-PD plan.
(3)An individual enrolled in an MA
plan that, as of
December 31, 2005, offers any
prescription drug coverage will be
deemed to have elected an MA-PD plan
offered by the same organization as of
January 1, 2006.
(4) An individual who has elected an
MA plan that does not provide
prescription drug coverage will not be
deemed to have elected an MA-PD plan
and will remain enrolled in the MA
plan as provided in paragraph (e)(1) of
this section.
(5) An individual enrolled in an MA­
PD plan as of December 31 of a year is
deemed to have elected to remain
enrolled in that plan on January 1 of the
following year.
(f) * * *
(2) Upon receipt of the election from
the employer, the MA organization must
submit a disenrollment notice to CMS
within timeframes specified by CMS.
■ 22. Amend § 422.68 by revising
paragraph (b) to read as follows:
§ 422.68 Effective dates of coverage and
change of coverage.

*

*
*
*
*
(b) Annual coordinated election
periods. For an election or change of
election made during the annual
coordinated election period as described
in § 422.62(a)(2)(i), coverage is effective
as of the first day of the following
calendar year except that for the annual

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coordinated election period described in
§ 422.62(a)(2)(ii), elections made after
December 31, 2005 through May 15,
2006 are effective as of the first day of
the first calendar month following the
month in which the election is made.
*
*
*
*
*
■ 23. Amend § 422.74 byA. Revising the section heading.
B. Revising paragraph (b)(1)(ii).
C. Adding paragraph (b)(2)(iv).
D. Revising paragraph (c)(1).
E. Revising paragraph (d)(1).
F. Revising paragraph (d)(2).
■ The revisions and addition read as
follows:
§ 422.74 Disenrollment by the MA
Organization.

*

*
*
*
*
(b) * * *
(1) * * *
(ii) The individual has engaged in
disruptive behavior specified at
paragraph (d)(2) of this section.
*
*
*
*
*
(2) * * *
(iv) Individuals enrolled in a
specialized MA plan for special needs
individuals that exclusively serves and
enrolls special needs individuals who
no longer meet the special needs status
of that plan (or deemed continued
eligibility, if applicable).
(c) * * *
(1) Be provided to the individual
before submission of the disenrollment
to CMS; and
*
*
*
*
*
(d) Process for disenrollment—(1)
Monthly basic and supplementary
premiums are not paid timely. An MA
organization may disenroll an
individual from the MA plan for failure
to pay basic and supplementary
premiums under the following
circumstances:
(i) The MA organization can
demonstrate to CMS that it made
reasonable efforts to collect the unpaid
premium amount, including:
(A) Alerting the individual that the
premiums are delinquent;
(B) Providing the individual with a
grace period, that is, an opportunity to
pay past due premiums in full. The
length of the grace period will be, at
minimum, one month and will begin on
the first day of the month for which the
premium is unpaid.
(C) Advising the individual that
failure to pay the premiums by the end
of the grace period will result in
termination of MA coverage.
(ii) The MA organization provides the
enrollee with notice of disenrollment
that meets the requirements set forth in
paragraph (c) of this section.

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(iii) If the enrollee fails to pay the
premium for optional supplemental
benefits but pays the basic premium and
any mandatory supplemental premium,
the MA organization has the option to
discontinue the optional supplemental
benefits and retain the individual as an
MA enrollee.
(2) Disruptive Behavior. (i) Definition
of disruptive behavior. An MA plan
enrollee is disruptive if his or her
behavior substantially impairs the
plan’s ability to arrange for or provide
services to the individual or other plan
members. An individual cannot be
considered disruptive if such 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. An organization
may disenroll an individual whose
behavior is disruptive as defined in
422.74(d)(2)(i) only after it meets the
requirements described in this section
and CMS has reviewed and approved
the request.
(iii) Effort to resolve the problem. The
MA organization 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 and
developmental disabilities. In addition,
the MA organization must inform the
individual of the right to use the
organization’s grievance procedures.
The beneficiary has a right to submit
any information or explanation that he
or she may wish to the MA organization.
(iv) Documentation. The MA
organization must document the
enrollee’s behavior, its own efforts to
resolve any problems, as described in
paragraph (iii), and any extenuating
circumstances. The MA organization
may request from CMS the ability to
decline future enrollment by the
individual. The MA organization must
submit this information and any
documentation received by the
beneficiary to CMS.
(v) CMS review of the proposed
disenrollment. CMS will review the
information submitted by the MA
organization and any information
submitted by the beneficiary (which the
MA organization must forward to CMS)
to determine if the MA organization has
fulfilled the requirements to request
disenrollment for disruptive behavior. If
the organization has fulfilled the
necessary requirements, CMS will
review the information and make a
decision to approve or deny the request
for disenrollment, including conditions
on future enrollment, within 20 working

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days. During the review, CMS will
ensure that staff with appropriate
clinical or medical expertise review the
case before making the final decision.
The MA organization will be required to
provide a reasonable accommodation, as
determined by CMS, for the individual
in such exceptional circumstances that
CMS deems necessary. CMS will notify
the MA organization within 5 working
days after making its decision.
(vi) Effective date of disenrollment. If
CMS permits an MA organization to
disenroll an individual for disruptive
behavior, the termination is effective the
first day of the calendar month after the
month in which the MA organization
gives the individual notice of the
disenrollment that meets the
requirements set forth in paragraph (c)
of this section, unless otherwise
determined by CMS.
*
*
*
*
*
■ 24. Amend § 422.80 byA. Revising paragraph (a).
B. Revising paragraph (e)(1)(ii).
C. Revising paragraph (e)(1)(iii).
D. Revising paragraph (e)(1)(iv).
E. Revising paragraph (e)(1)(v).
F. Adding paragraph (e)(1)(ix).
■ The revisions and additions read as
follows:
§ 422.80 Approval of marketing materials
and election forms.

(a) CMS review of marketing
materials. (1) Except as provided in
paragraph (a)(2) of this section, an MA
organization may not distribute any
marketing materials (as defined in
paragraph (b) of this section ), or
election forms, or make such materials
or forms available to individuals eligible
to elect an MA organization unless—
(i) At least 45 days (or 10 days if using
marketing materials that use, without
modification, proposed model language
as specified by CMS) before the date of
distribution the MA organization has
submitted the material or form to CMS
for review under the guidelines in
paragraph (c); and
(ii) CMS does not disapprove the
distribution of new material or form.
(2) The MA organization may
distribute the marketing materials 5
days following their submission to CMS
if—
(i)The MA organization is deemed by
CMS to meet certain performance
requirements established by CMS; or
(ii)The MA organization certifies that
in the case of certain marketing
materials designated by CMS, it
followed all applicable marketing
guidelines or used model language
specified by CMS without modification.
*
*
*
*
*

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4719

(e) * * *
(1) * * *
(ii) Engage in any discriminatory
activity, 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 MA
organization. The MA organization may
not claim 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 MA plan. It
may, however, explain that the
organization is approved for
participation in Medicare.
(v) Distribute marketing materials for
which, before expiration of the 45-day
period (or 10 days as provided in
paragraph (a)(1) of this section), the MA
organization receives from CMS written
notice of disapproval because it is
inaccurate or misleading, or
misrepresents the MA organization, its
marketing representatives, or CMS.
*
*
*
*
*
(ix) Engage in any other marketing
activity prohibited by CMS in its
marketing guidance.
*
*
*
*
*
Subpart C—Benefits and Beneficiary
Protections
§ 422.100

[Amended]

25. Amend § 422.100 byA. Revising paragraph (b)(2).
B. Revising paragraph (c)(1).
C. Removing paragraph (e).
D. Redesignating paragraph (f) as
paragraph (e).
E. Redesignating paragraph (g) as
paragraph (f).
F. Redesignating paragraph (h) as
paragraph (g).
G. Redesignating paragraph (i) as
paragraph (h).
H. Redesignating paragraph (j) as
paragraph (i).
I. Revising newly redesignated
paragraph (f) introductory text.
J. Revising newly redesignated
paragraph (f)(2).
■ The revisions read as follows:
■

Subpart C—Benefits and Beneficiary
Protections
§ 422.100 General requirements.

*

*
*
(b) * * *

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*

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(2) An MA plan (and an MA MSA
plan, after the annual deductible in
§ 422.103(d) has been met) offered by an
MA organization satisfies paragraph (a)
of this section with respect to benefits
for services furnished by a
noncontracting provider if that MA plan
provides payment in an amount the
provider would have received under
original Medicare (including balance
billing permitted under Medicare Part A
and Part B).
(c) ***
(1) Basic benefits are all Medicarecovered services, except hospice
services.
*
*
*
*
*
(f) CMS review and approval of MA
benefits. CMS reviews and approves MA
benefits using written policy guidelines
and requirements in this part and other
CMS instructions to ensure that—
*
*
*
*
*
(2) MA organizations are not
designing benefits to discriminate
against beneficiaries, promote
discrimination, discourage enrollment
or encourage disenrollment, steer
subsets of Medicare beneficiaries to
particular MA plans, or inhibit access to
services; and
*
*
*
*
*
■ 26. Amend § 422.101 byA. Revising paragraph (b)(2).
B. Revising paragraph (b)(3)
introductory text.
C. Adding paragraph (b)(4).
D. Adding paragraph (b)(5).
E. Adding paragraph (d).
F. Adding paragraph (e).
■ The revision and additions read as
follows:
§ 422.101 Requirements relating to basic
benefits.

*

*
*
*
*
(b) * * *
(2) General coverage guidelines
included in original Medicare manuals
and instructions unless superseded by
regulations in this part or related
instructions; and
(3) Written coverage decisions of local
Medicare contractors with jurisdiction
for claims in the geographic area in
which services are covered under the
MA plan. If an MA plan covers
geographic areas encompassing more
than one local coverage policy area, the
MA organization offering such an MA
plan may elect to apply to plan
enrollees in all areas uniformly the
coverage policy that is the most
beneficial to MA enrollees. MA
organizations that elect this option must
notify CMS before selecting the area that
has local coverage policies that are most
beneficial to enrollees as follows:
*
*
*
*
*

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(4) Instead of applying rules in
paragraph (b)(3) of this section, and to
the extent it exercises this option, an
organization offering an MA regional
plan in an MA region that covers more
than one local coverage policy area must
uniformly apply all of the local coverage
policy determinations that apply in the
selected local coverage policy area in
that MA region to all parts of that same
MA region. The selection of the single
local coverage policy area’s local
coverage policy determinations to apply
throughout the MA region is at the
discretion of the MA regional plan and
is not subject to CMS pre-approval.
(5) If an MA organization offering an
MA local plan elects to exercise the
option in paragraph (b)(3) of this section
related to a local MA plan, or if an MA
organization offering an MA regional
plan elects to exercise the option in
paragraph (b)(4) of this section related to
an MA regional plan, then the MA
organization must make information on
the selected local coverage policy
readily available, including through the
Internet, to enrollees and health care
providers.
*
*
*
*
*
(d) Special cost-sharing rules for MA
regional plans. In addition to the
requirements in paragraph (a) through
paragraph (c) of this section, MA
regional plans must provide for the
following:
(1) Single deductible. MA regional
plans, to the extent they apply a
deductible, are only permitted to have
only a single deductible related to
combined Medicare Part A and Part B
services (to the extent they have a
deductible). Applicability of the single
deductible may be differential for
specific in-network services and may
also be waived for preventative services
or other items and services.
(2) Catastrophic limit. MA regional
plans are required to provide for a
catastrophic limit on beneficiary out-of­
pocket expenditures for in-network
benefits under the original Medicare feefor-service program (Part A and Part B
benefits).
(3) Total catastrophic limit. MA
regional plans are required to provide a
total catastrophic limit on beneficiary
out-of-pocket expenditures for innetwork and out-of-network benefits
under the original Medicare fee-for­
service program. This total out-of-pocket
catastrophic limit, which would apply
to both in-network and out-of-network
benefits under original Medicare, may
be higher than the in-network
catastrophic limit in paragraph (d)(2) of
this section, but may not increase the
limit described in paragraph (d)(2) of
this section.

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(4) Tracking of deductible and
catastrophic limits and notification. MA
regional plans are required to track the
deductible (if any) and catastrophic
limits in paragraphs (d)(1) through (d)(3)
of this section based on incurred out-of­
pocket beneficiary costs for original
Medicare covered services, and are also
required to notify members and health
care providers when the deductible (if
any) or a limit has been reached.
(e) Other rules for MA regional plans.
(1) MA regional plans are required to
provide reimbursement for all covered
benefits, regardless of whether those
benefits are provided within or outside
of the network of contracted providers.
(2) In applying the actuarially
equivalent level of cost-sharing with
respect to MA bids related to benefits
under the original Medicare program
option as set forth at § 422.256(b)(3),
only the catastrophic limit on out-of­
pocket expenses for in-network benefits
in paragraph (d)(2) of this section will
be taken into account.
■ 27. Amend § 422.102 byA. Revising paragraph (a)(1).
B. Revising paragraph (a)(3).
C. Adding paragraph (a)(4).
■ The revisions and addition read as
follows:
§ 422.102 Supplemental benefits.

(a) * * *
(1) Subject to CMS approval, an MA
organization may require Medicare
enrollees of an MA plan (other than an
MSA plan) to accept or pay for services
in addition to Medicare-covered
services described in § 422.101.
*
*
*
*
*
(3) CMS approves mandatory
supplemental benefits if the benefits are
designed in accordance with CMS’
guidelines and requirements as stated in
this part and other written instructions.
(4) Beginning in 2006, an MA plan
may reduce cost sharing below the
actuarial value specified in section
1854(e)(4)(A) of the Act only as a
mandatory supplemental benefit.
*
*
*
*
*
■ 28. Amend § 422.103 by—
A. Revising the section heading.
B. Revising paragraph (a).
■ The revisions read as follows:
§ 422.103 Benefits under an MA MSA plan.

(a) General rule. An MA organization
offering an MA MSA plan must make
available to an enrollee, or provide
reimbursement for, at least the services
described in § 422.101 after the enrollee
incurs countable expenses equal to the
amount of the plan’s annual deductible.
*
*
*
*
*
■ 29. Amend § 422.105 by­

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■

§ 422.106 Coordination of benefits with
employer or union group health plans and
Medicaid.

A. Revising the section heading.
B. Revising paragraph (a).
C. Revising paragraph (b).
The revisions read as follows:

*

§ 422.105 Special rules for self-referral and
point of service option.

(a) Self-referral. When an MA plan
member receives an item or service of
the plan that is covered upon referral or
pre-authorization from a contracted
provider of that plan, the member
cannot be financially liable for more
than the normal in-plan cost sharing, if
the member correctly identified himself
or herself as a member of that plan to
the contracted provider before receiving
the covered item or service, unless the
contracted provider can show that the
enrollee was notified prior to receiving
the item or service that the item or
service is covered only if further action
is taken by the enrollee.
(b) Point of service option. As a
general rule, a POS benefit is an option
that an MA organization may offer in an
MA coordinated care plan to provide
enrollees with additional choice in
obtaining specified health care services.
The organization may offer A POS
option—
(1) Before January 1, 2006, under a
coordinated care plan as an additional
benefit as described in section
1854(f)(1)(A) of the Act;
(2) Under a coordinated care plan as
a mandatory supplemental benefit as
described in § 422.102(a); or
(3) Under a coordinated care plan as
an optional supplemental benefit as
described in § 422.102(b).
(4) An MA regional plan or local MA
PPO is permitted to offer a POS–LIKE
benefit as described in paragraphs (b)(2)
or (b)(3) of this section as a
supplemental benefit. An MA regional
plan or local MA PPO may offer a POS–
LIKE option as a supplemental benefit
where cost sharing for out-of-network
services is reduced, in a limited manner,
for services obtained from out-of­
network providers. Offering a POS–LIKE
supplemental benefit does not affect the
MA regional plan’s or local MA PPO’s
responsibility to provide reimbursement
for all covered benefits, regardless of
whether those benefits are provided
within the network of contracted
providers.
*
*
*
*
*
■ 30. Amend § 422.106 byA. Revising the paragraph (c) heading.
B. Revising paragraph (c)(2).
C. Adding paragraph (d).
■ The revisions and addition read as
follows:

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*
*
*
*
(c) Waiver or modification of
contracts with MA organizations.
*
*
*
*
*
(2) Approved waivers or
modifications under this paragraph
granted to any MA organization may be
used by any other similarly situated MA
organization in developing its bid.
(d) Employer sponsored MA plans for
plan years beginning on or after January
1, 2006. (1) CMS may waive or modify
any requirement in this part or Part D
that hinders the design of, the offering
of, or the enrollment in, an MA plan
(including an MA-PD plan) offered by
one or more employers, labor
organizations, or the trustees of a fund
established by one or more employers or
labor organizations (or combination
thereof), or that is offered, sponsored or
administered by an entity on behalf of
one or more employers or labor
organizations, to furnish benefits to the
employers’ employees, former
employees (or combination thereof) or
members or former members (or
combination thereof) of the labor
organizations. Any entity seeking to
offer, sponsor, or administer such an
MA plan described in this paragraph
may request, in writing, from CMS, a
waiver or modification of requirements
in this part that hinder the design of, the
offering of, or the enrollment in, such
MA plan.
(2) An MA plan described in this
paragraph may restrict the enrollment of
individuals in that plan to individuals
who are beneficiaries and participants
in that plan.
(3) Approved waivers or
modifications under this paragraph
granted to any MA plan may be used by
any other similarly situated MA plan in
developing its bid.
■ 31. Amend § 422.108 by revising
paragraph (f) to read as follows:
§ 422.108 Medicare secondary payer (MSP)
procedures.

*

*
*
*
*
(f) MSP rules and State laws.
Consistent with § 422.402 concerning
the Federal preemption of State law, the
rules established under this section
supersede any State laws, regulations,
contract requirements, or other
standards that would otherwise apply to
MA plans. A State cannot take away an
MA organization’s right under Federal
law and the MSP regulations to bill, or
to authorize providers and suppliers to
bill, for services for which Medicare is
not the primary payer. The MA
organization will exercise the same

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4721

rights to recover from a primary plan,
entity, or individual that the Secretary
exercises under the MSP regulations in
subparts B through D of part 411 of this
chapter.
■ 32. Amend § 422.109 byA. Revising paragraph (a)(2).
B. Revising paragraph (c)(2)(iv).
C. Revising paragraph (c)(3).
■ The revisions read as follows:
§ 422.109 Effect of national coverage
determinations (NCDs) and legislative
changes in benefits.

(a) * * *
(2) The estimated cost of Medicare
services furnished as a result of a
particular NCD or legislative change in
benefits represents at least 0.1 percent of
the national average per capita costs.
*
*
*
*
*
(c) * * *
(2) * * *
(iv) Any services, including the costs
of the NCD service or legislative change
in benefits, to the extent the MA
organization is already obligated to
cover it as a supplemental benefit under
§ 422.102.
(3) Costs for significant cost NCD
services or legislative changes in
benefits for which CMS fiscal
intermediaries and carriers will make
payment are those Medicare costs not
listed in paragraphs (c)(2)(i) through
(c)(2)(iv) of this section.
*
*
*
*
*
■ 33. Amend § 422.110 byA. Revising paragraph (b).
B. Removing paragraph (c).
■ The revision reads as follows:
§ 422.110 Discrimination against
beneficiaries prohibited.

*

*
*
*
*
(b) Exception. An MA organization
may not enroll an individual who has
been medically determined to have endstage renal disease. However, an
enrollee who develops end-stage renal
disease while enrolled in a particular
MA organization may not be disenrolled
for that reason. An individual who is an
enrollee of a particular MA
organization, and who resides in the
MA plan service area at the time he or
she first becomes MA eligible, or, an
individual enrolled by an MA
organization that allows those who
reside outside its MA service area to
enroll in an MA plan as set forth at
§ 422.50(a)(3)(ii), then that individual is
considered to be ‘‘enrolled’’ in the MA
organization for purposes of the
preceding sentence.

§ 422.111

[Amended]

34. Amend § 422.111 byA. Revising paragraph (b)(2)
introductory text.

■

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B. Redesignating paragraph (b)(3)
introductory text as paragraph (b)(3)(i)
and revising it.
C. Adding new paragraph (b)(3)(ii).
D. Revising paragraph (b)(9).
E. Adding paragraph (b)(11).
F. Revising paragraph (c)(1).
G. Revising paragraph (d)(2).
H. Revising paragraph (e).
I. Removing paragraph (f)(4).
J. Removing paragraph (f)(6).
K. Redesignating paragraph (f)(5) as
paragraph (f)(4).
L. Redesignating paragraph (f)(7) as
paragraph (f)(5).
M. Redesignating paragraph (f)(8) as
paragraph (f)(6).
N. Redesignating paragraph (f)(9) as
paragraph (f)(7).
O. Redesignating paragraph (f)(10) as
paragraph (f)(8).
P. Redesignating paragraph (f)(11) as
paragraph (f)(9).
Q. Revising newly redesignated
paragraph (f)(5)(iv).
R. Removing newly redesignated
paragraph (f)(5)(v).
S. Redesignating paragraph (f)(5)(vi)
as paragraph (f)(5)(v).
T. Redesignating paragraph (f)(5)(vii)
as paragraph (f)(5)(vi).
U. Redesignating paragraph (f)(5)(viii)
as paragraph (f)(5)(vii).
V. Revising newly redesignated
paragraph (f)(9).
W. Adding new paragraph (f)(10).
X. Adding new paragraph (f)(11)
Y. Adding new paragraph (f)(12)
■ The revisions and addition read as
follows:
§ 422.111 Disclosure requirements.

*

*
*
*
*
(b) * * *
(2) Benefits. The benefits offered
under a plan, including applicable
conditions and limitations, premiums
and cost-sharing (such as copayments,
deductibles, and coinsurance) and any
other conditions associated with receipt
or use of benefits; and to the extent it
offers Part D as an MD-PD plan, the
information in § 423.128 of this chapter;
and for purposes of comparison­
*
*
*
*
*
(3) Access. (i) The number, mix, and
distribution (addresses) of providers
from whom enrollees may reasonably be
expected to obtain services; any out-of
network coverage; any point-of-service
option, including the supplemental
premium for that option; and how the
MA organization meets the
requirements of § 422.112 and § 422.114
for access to services offered under the
plan.
(ii) The process MA regional plan
enrollees should follow to secure innetwork cost sharing when covered

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services are not readily available from
contracted network providers.
*
*
*
*
*
(9) Quality improvement program. A
description of the quality improvement
program required under § 422.152.
*
*
*
*
*
(11) Catastrophic caps and single
deductible. MA organizations
sponsoring MA regional plans are
required to provide enrollees a
description of the catastrophic stop-loss
coverage and single deductible (if any)
applicable under the plan.
(c) * * *
(1) The information required in
paragraph (f) of this section.
*
*
*
*
*
(d) * * *
(2) For changes that take effect on
January 1, notify all enrollees at least 15
days before the beginning of the Annual
Coordinated Election Period defined in
section 1851(e)(3)(B) of the Act.
*
*
*
*
*
(e) Changes to provider network. The
MA organization must make a good faith
effort to provide written notice of a
termination of a contracted provider at
least 30 calendar days before the
termination effective date to all
enrollees who are patients seen on a
regular basis by the provider whose
contract is terminating, irrespective of
whether the termination was for cause
or without cause. When a contract
termination involves a primary care
professional, all enrollees who are
patients of that primary care
professional must be notified.
(f) * * *
(5) * * *
(iv) In the case of an MA MSA plan,
the amount of the annual MSA deposit.
*
*
*
*
*
(9) Supplemental benefits. Whether
the plan offers mandatory and optional
supplemental benefits, including any
reductions in cost sharing offered as a
mandatory supplemental benefit as
permitted under section 1852(a)(3) of
the Act (and implementing regulations
at § 422.102) and the terms, conditions,
and premiums for those benefits.
(10) The names, addresses, and phone
numbers of contracted providers from
whom the enrollee may obtain innetwork coverage in other parts of the
service area.
(11) If an MA organization exercises
the option in § 422.101(b)(3) or (b)(4)
related to an MA plan, then it must
make the local coverage determination
that applies to members of that plan
readily available to providers, including
through a web site on the Internet.
(12) To the extent an MA organization
has a web site or provides MA plan

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information through the Internet, then it
must also post copies of its Evidence of
Coverage, Summary of Benefits and
information (names, addresses, phone
numbers, specialty) on the network of
contracted providers on an Internet web
site. Such posting does not relieve the
MA organization of its responsibility
under § 422.111(a) to provide hard
copies to enrollees.
§ 422.112

[Amended]

35. Amend § 422.112 byA. Revising the heading of paragraph
(a) and paragraph (a) introductory text.
B. Revising paragraph (a)(1).
C. Removing paragraph (a)(4).
D. Redesignating paragraph (a)(5) as
paragraph (a)(4).
E. Redesignating paragraph (a)(6) as
paragraph (a)(5).
F. Redesignating paragraph (a)(7) as
paragraph (a)(6).
G. Redesignating paragraph (a)(8) as
paragraph (a)(7).
H. Redesignating paragraph (a)(9) as
paragraph (a)(8).
I. Redesignating paragraph (a)(10) as
paragraph (a)(9).
J. Revising the heading of paragraph
(b) and paragraph (b) introductory text.
K. Adding paragraph (c).
■ The revisions and addition read as
follows:
■

§ 422.112 Access to services.

(a) Rules for coordinated care plans.
An MA organization that offers an MA
coordinated care plan may specify the
networks of providers from whom
enrollees may obtain services if the MA
organization ensures that all covered
services, including supplemental
services contracted for by (or on behalf
of) the Medicare enrollee, are available
and accessible under the plan. To
accomplish this, the MA organization
must meet the following requirements:
(1) Provider network. (i) Maintain and
monitor a network of appropriate
providers that is supported by written
agreements and is sufficient to provide
adequate access to covered services to
meet the needs of the population served.
These providers are typically used in
the network as primary care providers
(PCPs), specialists, hospitals, skilled
nursing facilities, home health agencies,
ambulatory clinics, and other providers.
(ii) Exception: MA regional plans,
upon CMS pre-approval, can use
methods other than written agreements
to establish that access requirements are
met.
*
*
*
*
*
(b) Continuity of care. MA
organizations offering coordinated care
plans must ensure continuity of care
and integration of services through

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arrangements with contracted providers

that include­

*
*
*
*
*

(c) Essential hospital. An MA regional
plan may seek, upon application to
CMS, to designate a noncontracting
hospital as an essential hospital as
defined in section 1858(h) of the Act
under the following conditions:
(1) The hospital that the MA regional
plan seeks to designate as essential is a
general acute care hospital identified as
a ‘‘subsection(d)’’ hospital as defined in
section 1886(d)(1)(B) of the Act.
(2) The MA regional plan provides
convincing evidence to CMS that the
MA regional plan needs to contract with
the hospital as a condition of meeting
access requirements under this section.
(3) The MA regional plan must
establish that it made a ‘‘good faith’’
effort to contract with the hospital to be
designated as an essential hospital and
that the hospital refused to contract
with it despite its ‘‘good faith’’ effort. A
‘‘good faith’’ effort to contract will be
established to the extent that the MA
regional plan can show it has offered the
hospital a contract providing for the
payment of rates in an amount no less
than the amount the hospital would
have received had payment been made
under section 1886(d) of the Act.
(4) The MA regional plan must
establish that there are no competing
Medicare participating hospitals in the
area to which MA regional plan
enrollees could reasonably be referred
for inpatient hospital services.
(5) The hospital that is to be
designated as an essential hospital
provides convincing evidence to CMS
that the amounts normally payable
under section 1886 of the Act (and
which the MA regional plan has agreed
to pay) will be less than the hospital’s
actual costs of providing care to the MA
regional plan’s enrollee.
(6) If CMS determines the
requirements in paragraphs (c)(1)
through (c)(5) of this section have been
met, it will make payment to the
essential hospital in accordance with
section 1858(h)(2) of the Act based on
the order in which claims are received,
as limited by the amounts specified in
section 1858(h)(3) of the Act.
(7) If CMS determines the
requirements in paragraphs (c)(1)
through (c)(4) of this section have been
met, (and if they continue to be met
upon annual renewal of the CMS
contract with the MA organization
offering the MA regional plan), then the
hospital designated by the MA regional
plan in paragraph (c)(1) of this section
shall be ‘‘deemed’’ to be a network
hospital to that MA regional plan based

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4723

on the exception in paragraph (a)(1)(ii)
of this section and normal in-network
inpatient hospital cost sharing levels
(including the catastrophic limit
described in § 422.101(d)(2)) shall apply
to all plan members accessing covered
inpatient hospital services in that
hospital.
■ 36. Amend § 422.113 byA. Revising paragraph (b)(2)(v).
B. Revising paragraph (c)(2)(iv).
■ The revisions read as follows:

prior qualifying hospital stay under
§ 422.101(c), then that SNF care is also
subject to the home skilled nursing
facility rules in this section. In applying
the provisions of this section to
coverage under this paragraph,
references to a hospitalization, or
discharge from a hospital, are deemed to
refer to wherever the enrollee resides
immediately before admission for
extended care services.
*
*
*
*
*

§ 422.113 Special rules for ambulance
services, emergency and urgently needed
services, and maintenance and poststabilization care services.

Subpart D—Quality Improvement

*

*
*
*
*
(b) * * *
(2) * * *
(v) With a limit on charges to
enrollees for emergency department
services of $50 or what it would charge
the enrollee if he or she obtained the
services through the MA organization,
whichever is less.
*
*
*
*
*
(c) * * *
(2) * * *
(iv) Must limit charges to enrollees for
post-stabilization care services to an
amount no greater than what the
organization would charge the enrollee
if he or she had obtained the services
through the MA organization. For
purposes of cost sharing, poststabilization care services begin upon
inpatient admission.
*
*
*
*
*
■ 37. Amend § 422.114 by—
A. Revising the section heading to
read as set forth below.
B. Adding paragraph (c) to read as
follows:
§ 422.114 Access to services under an MA
private fee-for-service plan.

*

*
*
*
*
(c) Contracted network. Private feefor-service plans that meet network
adequacy requirements for a category of
health care professional or provider by
meeting the requirements in paragraph
(a)(2)(ii) of this section may provide for
a higher beneficiary copayment in the
case of health care professionals or
providers of that same category who do
not have contracts or agreements to
provide covered services under the
terms of the plan.
■ 38. Amend § 422.133 by adding
paragraph (b)(4) to read as follows:
§ 422.133 Return to home skilled nursing
facility.

*

*
*
*
*
(b) * * *
(4) If an MA organization elects to
furnish SNF care in the absence of a

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39. In subpart D, remove ‘‘quality
assurance’’ wherever it appears and add
in its place ‘‘quality improvement.’’
■ 40. Revise § 422.152 to read as follows:
■

§ 422.152 Quality improvement program.

(a) General rule. Each MA
organization (other than MA private-fee­
for-service and MSA plans) that offers
one or more MA plans must have, for
each of those plans, an ongoing quality
improvement program that meets the
applicable requirements of this section
for the services it furnishes to its MA
enrollees. As part of its ongoing quality
improvement program, a plan must—
(1) Have a chronic care improvement
program that meets the requirements of
paragraph (c) of this section concerning
elements of a chronic care program;
(2) Conduct quality improvement
projects that can be expected to have a
favorable effect on health outcomes and
enrollee satisfaction, and meet the
requirements of paragraph (d) of this
section; and
(3) Encourage its providers to
participate in CMS and HHS quality
improvement initiatives.
(b) Requirements for MA coordinated
care plans (except for regional MA
plans) and including local PPO plans
that are offered by organizations that
are licensed or organized under State
law as HMOs. An MA coordinated care
plan’s (except for regional PPO plans
and local PPO plans as defined in
paragraph (e) of this section) quality
improvement program must—
(1) In processing requests for initial or
continued authorization of services,
follow written policies and procedures
that reflect current standards of medical
practice.
(2) Have in effect mechanisms to
detect both underutilization and
overutilization of services.
(3) Measure and report performance.
The organization offering the plan must
do the following:
(i) Measure performance under the
plan, using the measurement tools
required by CMS, and report its
performance to CMS. The standard

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measures may be specified in uniform
data collection and reporting
instruments required by CMS.
(ii) Make available to CMS
information on quality and outcomes
measures that will enable beneficiaries
to compare health coverage options and
select among them, as provided in
§ 422.64(c)(10).
(4) Special rule for MA local PPO-type
plans that are offered by an organization
that is licensed or organized under State
law as a health maintenance
organization must meet the
requirements specified in paragraphs
(b)(1) through (b)(3) of this section.
(c) Chronic care improvement
program requirements. Develop criteria
for a chronic care improvement
program. These criteria must include—
(1) Methods for identifying MA
enrollees with multiple or sufficiently
severe chronic conditions that would
benefit from participating in a chronic
care improvement program; and
(2) Mechanisms for monitoring MA
enrollees that are participating in the
chronic care improvement program.
(d) Quality improvement projects. (1)
Quality improvement projects are an
organization’s initiatives that focus on
specified clinical and nonclinical areas
and that involve the following:
(i) Measurement of performance.
(ii) System interventions, including
the establishment or alteration of
practice guidelines.
(iii) Improving performance.
(iv) Systematic and periodic followup on the effect of the interventions.
(2) For each project, the organization
must assess performance under the plan
using quality indicators that are—
(i) Objective, clearly and
unambiguously defined, and based on
current clinical knowledge or health
services research; and
(ii) Capable of measuring outcomes
such as changes in health status,
functional status and enrollee
satisfaction, or valid proxies of those
outcomes.
(3) Performance assessment on the
selected indicators must be based on
systematic ongoing collection and
analysis of valid and reliable data.
(4) Interventions must achieve
demonstrable improvement.
(5) The organization must report the
status and results of each project to CMS
as requested.
(e) Requirements for MA regional
plans and MA local plans that are PPO
plans as defined in this section—(1)
Definition of local preferred provider
organization plan. For purposes of this
section, the term local preferred
provider organization (PPO) plan means
an MA plan that—

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(i) Has a network of providers that
have agreed to a contractually specified
reimbursement for covered benefits with
the organization offering the plan;
(ii) Provides for reimbursement for all
covered benefits regardless of whether
the benefits are provided within the
network of providers; and
(iii) Is offered by an organization that
is not licensed or organized under State
law as a health maintenance
organization.
(2) MA organizations offering an MA
regional plan or local PPO plan as
defined in this section must:
(i) Measure performance under the
plan using standard measures required
by CMS and report its performance to
CMS. The standard measures may be
specified in uniform data collection and
reporting instruments required by CMS.
(ii) Evaluate the continuity and
coordination of care furnished to
enrollees.
(iii) If the organization uses written
protocols for utilization review, the
organization must—
(A) Base those protocols on current
standards of medical practice; and
(B) Have mechanisms to evaluate
utilization of services and to inform
enrollees and providers of services of
the results of the evaluation.
(f) Requirements for all types of
plans—(1) Health information. For all
types of plans that it offers, an
organization must—
(i) Maintain a health information
system that collects, analyzes, and
integrates the data necessary to
implement its quality improvement
program;
(ii) Ensure that the information it
receives from providers of services is
reliable and complete; and
(iii) Make all collected information
available to CMS.
(2) Program review. For each plan,
there must be in effect a process for
formal evaluation, at least annually, of
the impact and effectiveness of its
quality improvement program.
(3) Remedial action. For each plan,
the organization must correct all
problems that come to its attention
through internal surveillance,
complaints, or other mechanisms.
§ 422.154

[Removed]

41. Remove § 422.154.
42. Amend § 422.156 byA. Revising paragraph (b)(1).
B. Adding paragraph (b)(7).
■ The revision and addition read as
follows:
■
■

§ 422.156 Compliance deemed on the
basis of accreditation.

*

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*

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*

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(b) * * *
(1) Quality improvement.
*
*
*
*
*
(7) Part D prescription drug benefit
programs that are offered by MA
programs.
*
*
*
*
*
Subpart E—Relationships With
Providers
§ 422.202

[Amended]

43. In § 422.202, amend paragraph (b)
introductory text by removing ‘‘quality
assurance’’ and adding ‘‘quality
improvement’’ in its place.

■

§ 422.204

[Amended]

44. In § 422.204, amend paragraph
(b)(2)(ii) by removing ‘‘quality
assurance’’ and adding ‘‘quality
improvement’’ in its place.
■ 45. In § 422.208, the following changes
are made:
A. Paragraph (c)(2) is revised.
B. Paragraph (h) is removed.
C. Paragraph (i) is redesignated as
paragraph (h).
■ The revision reads as follows:
■

§ 422.208 Physician incentive plans:
Requirements and limitations.

*

*
*
*
*
(c) * * *
(2) If the physician incentive plan
places a physician or physician group at
substantial financial risk (as determined
under paragraph (d) of this section) for
services that the physician or physician
group does not furnish itself, the MA
organization must assure that all
physicians and physician groups at
substantial financial risk have either
aggregate or per-patient stop-loss
protection in accordance with paragraph
(f) of this section and conduct periodic
surveys in accordance with paragraph
(h) of this section.
*
*
*
*
*
■ 46. Section 422.210 is revised to read
as follows:
§ 422.210 Assurances to CMS.

Each organization will provide
assurance satisfactory to the Secretary
that the requirements of § 422.208 are
met.
■ 47. In 422.214, the following changes
are made:
A. Paragraph (a)(1) is revised.
B. Paragraph (b) is revised.
■ The revisions read as follows:
§ 422.214 Special rules for services
furnished by noncontract providers.

(a) * * *
(1) Any provider (other than a
provider of services as defined in
section 1861(u) of the Act) that does not

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have in effect a contract establishing
payment amounts for services furnished
to a beneficiary enrolled in an MA
coordinated care plan, an MSA plan, or
an MA private fee-for-service plan must
accept, as payment in full, the amounts
that the provider could collect if the
beneficiary were enrolled in original
Medicare.
*
*
*
*
*
(b) Services furnished by section
1861(u) providers of service. Any
provider of services as defined in
section 1861(u) of the Act that does not
have in effect a contract establishing
payment amounts for services furnished
to a beneficiary enrolled in an MA
coordinated care plan, an MSA plan, or
an MA private fee-for-service plan must
accept, as payment in full, the amounts
(less any payments under § 412.105(g)
and § 413.86(d) of this chapter) that it
could collect if the beneficiary were
enrolled in original Medicare. (Section
412.105(g) concerns indirect medical
education payment to hospitals for
managed care enrollees. Section
413.86(d) concerns calculating payment
for direct medical education costs.)
■ 48—49. Subpart F is revised to read as
follows:
Subpart F—Submission of Bids, Premiums,
and Related Information and Plan Approval
Secs.
422.250 Basis and scope.
422.252 Terminology.
422.254 Submission of bids.
422.256 Review, negotiation, and approval
of bids.
422.258 Calculation of benchmarks.
422.262 Beneficiary premiums.
422.264 Calculation of savings.
422.266 Beneficiary rebates.
422.270 Incorrect collections of premiums
and cost sharing.

Subpart F-Submission of Bids,
Premiums, and Related Information
and Plan Approval
§ 422.250 Basis and scope.

This subpart is based largely on
section 1854 of the Act, but also
includes provisions from section 1853
and section 1858 of the Act. It sets forth
the requirements for the Medicare
Advantage bidding payment
methodology, including CMS’
calculation of benchmarks, submission
of plan bids by Medicare Advantage
(MA) organizations, establishment of
beneficiary premiums and rebates
through comparison of plan bids and
benchmarks, and negotiation and
approval of bids by CMS.
§ 422.252

Terminology.

Annual MA capitation rate means a
county payment rate for an MA local
area (county) for a calendar year. The

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terms ‘‘per capita rate’’ and ‘‘capitation
rate’’ are used interchangeably to refer
to the annual MA capitation rate.
MA local area means a payment area
consisting of county or equivalent area
specified by CMS.
MA monthly basic beneficiary
premium means the premium amount
an MA plan (except an MSA plan)
charges an enrollee for benefits under
the original Medicare fee-for-service
program option (if any), and is
calculated as described at § 422.262.
MA monthly MSA premium means
the amount of the plan premium for
coverage of benefits under the original
Medicare program through an MSA
plan, as set forth at § 422.254(e).
MA monthly prescription drug
beneficiary premium is the MA-PD plan
base beneficiary premium, defined at
section 1860D–13(a)(2) of the Act, as
adjusted to reflect the difference
between the plan’s bid and the national
average bid (as described in
§ 422.256(c)) less the amount of rebate
the MA-PD plan elects to apply, as
described at § 422.266(b)(2).
MA monthly supplemental
beneficiary premium is the portion of
the plan bid attributable to mandatory
and/or optional supplemental health
care benefits described under § 422.102,
less the amount of beneficiary rebate the
plan elects to apply to a mandatory
supplemental benefit, as described at
§ 422.266(b)(2)(i).
MA-PD plan means an MA local or
regional plan that provides prescription
drug coverage under Part D of Title
XVIII of the Social Security Act.
Monthly aggregate bid amount means
the total monthly plan bid amount for
coverage of an MA eligible beneficiary
with a nationally average risk profile for
the factors described in § 422.308(c),
and this amount is comprised of the
following:
(1) The unadjusted MA statutory nondrug monthly bid amount for coverage
of original Medicare benefits;
(2) The amount for coverage of basic
prescription drug benefits under Part D
(if any); and
(3) The amount for provision of
supplemental health care benefits (if
any).
Plan basic cost sharing means cost
sharing that would be charged by a plan
for benefits under the original Medicare
FFS program option before any
reductions resulting from mandatory
supplemental benefits.
Unadjusted MA area-specific nondrug monthly benchmark amount
means, for local MA plans serving one
county, the county capitation rate CMS
publishes annually, and for local MA
plans serving multiple counties it is the

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4725

weighted average of county rates in a
plan’s service area, weighted by the
plan’s projected enrollment per county.
Unadjusted MA region-specific nondrug monthly benchmark amount
means, for MA regional plans, the
amount described at § 422.258(b).
Unadjusted MA statutory non-drug
monthly bid amount means a plan’s
estimate of its average monthly required
revenue to provide coverage of original
Medicare benefits to an MA eligible
beneficiary with a nationally average
risk profile for the risk factors CMS
applies to payment calculations as set
forth at § 422.308(c).
§ 422.254 Submission of bids.

(a) General rules. (1) Not later than the
first Monday in June, each MA
organization must submit to CMS an
aggregate monthly bid amount for each
MA plan (other than an MSA plan) the
organization intends to offer in the
upcoming year in the service area (or
segment of such an area if permitted
under § 422.262(c)(2)) that meets the
requirements in paragraph (b) of this
section. With each bid submitted, the
MA organization must provide the
information required in paragraph (c) of
this section and, for plans with rebates
as described at § 422.266(a), the MA
organization must provide the
information required in paragraph (d) of
this section.
(2) CMS has the authority to
determine whether and when it is
appropriate to apply the bidding
methodology described in this section to
ESRD MA enrollees.
(3) If the bid submission described in
paragraphs (a)(1) and (2) of this section
is not complete, timely, or accurate,
CMS has the authority to impose
sanctions under subpart O of this part
or may choose not to renew the contract.
(b) Bid requirements. (1) The monthly
aggregate bid amount submitted by an
MA organization for each plan is the
organization’s estimate of the revenue
required for the following categories for
providing coverage to an MA eligible
beneficiary with a national average risk
profile for the factors described in
§ 422.308(c):
(i) The statutory non-drug bid
amount, which is the MA plan’s
estimated average monthly required
revenue for providing benefits under the
original Medicare fee-for-service
program option (as defined in
§ 422.252).
(ii) The amount to provide basic
prescription drug coverage, if any
(defined at section 1860D–2(a)(3) of the
Act).

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(iii) The amount to provide
supplemental health care benefits, if
any.
(2) Each bid is for a uniform benefit
package for the service area.
(3) Each bid submission must contain
all estimated revenue required by the
plan, including administrative costs and
return on investment.
(4) The bid amount is for plan
payments only but must be based on
plan assumptions about the amount of
revenue required from enrollee costsharing. The estimate of plan costsharing for the unadjusted MA statutory
non-drug monthly bid amount for
coverage of original Medicare benefits
must reflect the requirement that the
level of cost sharing MA plans charge to
enrollees must be actuarially equivalent
to the level of cost sharing (deductible,
copayments, or coinsurance) charged to
beneficiaries under the original
Medicare program option. The
actuarially equivalent level of cost
sharing reflected in a regional plan’s
unadjusted MA statutory non-drug
monthly bid amount does not include
cost sharing for out-of-network
Medicare benefits, as described at
§ 422.101(d).
(c) Information required for
coordinated care plans and MA private
fee-for-service plans. MA organizations’
submission of bids for coordinated care
plans, including regional MA plans and
specialized MA plans for special needs
beneficiaries (described at
§ 422.4(a)(1)(iv)), and for MA private
fee-for-service plans must include the
following information:
(1) The plan type for each plan.
(2) The monthly aggregate bid amount
for the provision of all items and
services under the plan, as defined in
§ 422.252 and discussed in paragraph (a)
of this section.
(3) The proportions of the bid amount
attributable to­
(i) The provision of benefits under the
original Medicare fee-for-service
program option (as defined at
§ 422.100(c));
(ii) The provision of basic
prescription drug coverage (as defined
at section 1860D–2(a)(3) of the Act; and
(iii) The provision of supplemental
health care benefits (as defined
§ 422.102).
(4) The projected number of enrollees
in each MA local area used in
calculation of the bid amount, and the
enrollment capacity, if any, for the plan.
(5) The actuarial basis for determining
the amount under paragraph (c)(2) of
this section, the proportions under
paragraph (c)(3) of this section, the
amount under paragraph (b)(4) of this
section, and additional information as

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CMS may require to verify actuarial
bases and the projected number of
enrollees.
(6) A description of deductibles,
coinsurance, and copayments applicable
under the plan and the actuarial value
of the deductibles, coinsurance, and
copayments.
(7) For qualified prescription drug
coverage, the information required
under section 1860D–11(b) of the Act
with respect to coverage.
(8) For the purposes of calculation of
risk corridors under § 422.458, MA
organizations offering regional MA
plans in 2006 and/or 2007 must submit
the following information developed
using the appropriate actuarial bases.
(i) Projected allowable costs (defined
in § 422.458(a)).
(ii) The portion of projected allowable
costs attributable to administrative
expenses incurred in providing these
benefits.
(iii) The total projected costs for
providing rebatable integrated benefits
(as defined in § 422.458(a)) and the
portion of costs that is attributable to
administrative expenses.
(9) For regional plans, as determined
by CMS, the relative cost factors for the
counties in a plan’s service area, for the
purposes of adjusting payment under
§ 422.308(d) for intra-area variations in
an MA organization’s local payment
rates.
(d) Beneficiary rebate information. In
the case of a plan required to provide a
monthly rebate under § 422.266 for a
year, the MA organization offering the
plan must inform CMS how the plan
will distribute the beneficiary rebate
among the options described at
§ 422.266(b).
(e) Information required for MSA
plans. MA organizations intending to
offer MA MSA plans must submit—
(1) The enrollment capacity (if any)
for the plan;
(2) The amount of the MSA monthly
premium for basic benefits under the
original Medicare fee-for-service
program option;
(3) The amount of the plan
deductible; and
(4) The amount of the beneficiary
supplemental premium, if any.
(f) Separate bids must be submitted
for Part A and Part B enrollees and Part
B-only enrollees for each MA plan
offered.
§ 422.256 Review, negotiation, and
approval of bids.

(a) Authority. Subject to paragraphs
(a)(2), (d), and (e) of this section, CMS
has the authority to review the aggregate
bid amounts submitted under § 422.252
and conduct negotiations with MA

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organizations regarding these bids
(including the supplemental benefits)
and the proportions of the aggregate bid
attributable to basic benefits,
supplemental benefits, and prescription
drug benefits.
(1) When negotiating bid amounts and
proportions, CMS has authority similar
to that provided the Director of the
Office of Personnel Management for
negotiating health benefits plans under
5 U.S.C. chapter 89.
(2) Noninterference. (i) In carrying out
Parts C and D under this title, CMS may
not require any MA organization to
contract with a particular hospital,
physician, or other entity or individual
to furnish items and services.
(ii) CMS may not require a particular
price structure for payment under such
a contract, with the exception of
payments to Federally qualified health
centers as set forth at § 422.316.
(b) Standards of bid review. Subject to
paragraphs (d) and (e) of this section,
CMS can only accept bid amounts or
proportions described in paragraph (a)
of this section if CMS determines the
following standards have been met:
(1) The bid amount and proportions
are supported by the actuarial bases
provided by MA organizations under
§ 422.254.
(2) The bid amount and proportions
reasonably and equitably reflects the
plan’s estimated revenue requirements
for providing the benefits under that
plan, as the term revenue requirements
is used for purposes of section 1302(8)
of the Public Health Service Act.
(3) Limitation on enrollee cost
sharing. For coordinated care plans
(including regional MA plans and
specialized MA plans) and private feefor-service plans (other than MSA
plans):
(i) The actuarial value of plan basic
cost sharing, reduced by any
supplemental benefits, may not
exceed—
(ii) The actuarial value of deductibles,
coinsurance, and copayments that
would be applicable for the benefits to
individuals entitled to benefits under
Part A and enrolled under Part B in the
plan’s service area with a national
average risk profile for the factors
described in § 422.308(c) if they were
not members of an MA organization for
the year, except that cost sharing for
non-network Medicare services in a
regional MA plan is not counted under
the amount described in paragraph
(b)(2)(i) of this section.
(c) Negotiation process. The
negotiation process may include the
resubmission of information to allow
MA organizations to modify their initial
bid submissions to account for the

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Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
outcome of CMS’ regional benchmark
calculations required under § 422.258(b)
and the outcome of CMS’ calculation of
the national average monthly bid
amount required under section 1860D–
13(a)(4) of the Act.
(d) Exception for private fee-for­
service plans. For private fee-for-service
plans defined at § 422.4(a)(3), CMS will
not review, negotiate, or approve the bid
amount, proportions of the bid, or the
amounts of the basic beneficiary
premium and supplemental premium.
(e) Exception for MSA plans. CMS
does not review, negotiate, or approve
amounts submitted with respect to MA
MSA plans, except to determine that the
deductible does not exceed the statutory
maximum, defined at § 422.103(d).
§ 422.258 Calculation of benchmarks.

(a) The term ‘‘MA area-specific nondrug monthly benchmark amount’’
means, for a month in a year:
(1) For MA local plans with service
areas entirely within a single MA local
area, 1/12th of the annual MA
capitation rate (described at § 422.306)
for the area, adjusted as appropriate for
the purpose of risk adjustment.
(2) For MA local plans with service
areas including more than one MA local
area, an amount equal to the weighted
average of annual capitation rates for
each local area (county) in the plan’s
service area, using as weights the
projected number of enrollees in each
MA local area that the plan used to
calculate the bid amount, and adjusted
as appropriate for the purpose of risk
adjustment.
(b) For MA regional plans, the term
‘‘MA region-specific non-drug monthly
benchmark amount’’ is:
(1) The sum of two components: the
statutory component (based on a
weighted average of local benchmarks in
the region, as described in paragraph
(c)(3) of this section; and the plan bid
component (based on a weighted
average of regional plan bids in the
region as described in paragraph (c)(4)
of this section).
(2) Announced before November 15 of
each year, but after CMS has received
the plan bids.
(c) Calculation of MA regional nondrug benchmark amount. CMS
calculates the monthly regional nondrug benchmark amount for each MA
region as follows:
(1) Reference month. For all
calculations that follow, CMS will
determine the number of MA eligible
individuals in each local area, in each
region, and nationally as of the
reference month, which is a month in
the previous calendar year CMS
identifies.

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(2) Statutory market share. CMS will
determine the statutory national market
share percentage as the proportion of
the MA eligible individuals nationally
who were not enrolled in an MA plan.
(3) Statutory component of the regionspecific benchmark. (i) CMS calculates
the unadjusted region-specific non-drug
amount by multiplying the county
capitation rate by the county’s share of
the MA eligible individuals residing in
the region (the number of MA eligible
individuals in the county divided by the
number of MA eligible individuals in
the region), and then adding all the
enrollment-weighted county rates to a
sum for the region.
(ii) CMS then multiplies the
unadjusted region-specific non-drug
amount from paragraph (c)(3)(i) of this
section by the statutory market share to
determine the statutory component of
the regional benchmark.
(4) Plan-bid component of the regionspecific benchmark. For each regional
plan offered in a region, CMS will
multiply the plan’s unadjusted regionspecific non-drug bid amount by the
plan’s share of enrollment (as
determined under paragraph (c)(5) of
this section) and then sum these
products across all plans offered in the
region. CMS then multiples this by 1
minus the statutory market share to
determine the plan-bid component of
the regional benchmark.
(5) Plan’s share of enrollment. CMS
will calculate the plan’s share of MA
enrollment in the region as follows:
(i) In the first year that any MA
regional plan is being offered in an MA
region, and more than one MA regional
plan is being offered, CMS will
determine each regional plan’s share of
enrollment based on one of two possible
approaches. CMS may base this factor
on equal division among plans, so that
each plan’s share will be 1 divided by
the number of plans offered.
Alternatively, CMS may base this factor
on each regional plan’s estimate of
projected enrollment. Plan enrollment
projections are subject to review and
adjustment by CMS to assure
reasonableness.
(ii) If two or more regional plans are
offered in a region and were offered in
the reference month: The plan’s share of
enrollment will be the number of MA
eligible individuals enrolled in the plan
divided by the number of MA eligible
individuals enrolled in all of the plans
in the region, as of the reference month.
(iii) If a single regional plan is being
offered in the region: The plan’s share
of enrollment is equal to 1.

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4727

§ 422.262 Beneficiary premiums.

(a) Determination of MA monthly
basic beneficiary premium. (1) For an
MA plan with an unadjusted statutory
non-drug bid amount that is less than
the relevant unadjusted non-drug
benchmark amount, the basic
beneficiary premium is zero.
(2) For an MA plan with an
unadjusted statutory non-drug bid
amount that is equal to or greater than
the relevant unadjusted non-drug
benchmark amount, the basic
beneficiary premium is the amount by
which (if any) the bid amount exceeds
the benchmark amount. All approved
basic premiums must be charged; they
cannot be waived.
(b) Consolidated monthly premiums.
Except as specified in paragraph (b)(2)
of this section, MA organizations must
charge enrollees a consolidated monthly
MA premium.
(1) The consolidated monthly
premium for an MA plan (other than a
MSA plan) is the sum of the MA
monthly basic beneficiary premium (if
any), the MA monthly supplementary
beneficiary premium (if any), and the
MA monthly prescription drug
beneficiary premium (if any).
(2) Special rule for MSA plans. For an
individual enrolled in an MSA plan
offered by an MA organization, the
monthly beneficiary premium is the
supplemental premium (if any).
(c) Uniformity of premiums—(1)
General rule. Except as permitted for
supplemental premiums pursuant to
§ 422.106(d), for MA contracts with
employers and labor organizations, the
MA monthly bid amount submitted
under § 422.254, the MA monthly basic
beneficiary premium, the MA monthly
supplemental beneficiary premium, the
MA monthly prescription drug
premium, and the monthly MSA
premium of an MA organization may
not vary among individuals enrolled in
an MA plan (or segment of the plan as
provided for local MA plans under
paragraph (c)(2) of this section). In
addition, the MA organization cannot
vary the level of cost-sharing charged for
basic benefits or supplemental benefits
(if any) among individuals enrolled in
an MA plan (or segment of the plan).
(2) Segmented service area option. An
MA organization may apply the
uniformity requirements in paragraph
(c)(1) of this section to segments of an
MA local plan service area (rather than
to the entire service area) as long as
such a segment is composed of one or
more MA payment areas. The
information specified under § 422.254 is
submitted separately for each segment.
This provision does not apply to MA
regional plans.

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(d) Monetary inducement prohibited.
An MA organization may not provide
for cash or other monetary rebates as an
inducement for enrollment or for any
other reason or purpose.
(e) Timing of payments. The MA
organization must permit payments of
MA monthly basic and supplemental
beneficiary premiums and monthly
prescription drug beneficiary premiums
on a monthly basis and may not
terminate coverage for failure to make
timely payments except as provided in
§ 422.74(b).
(f) Beneficiary payment options. An
MA organization must permit each
enrollee, at the enrollee’s option, to
make payment of premiums (if any)
under this part to the organization
through­
(1) Withholding from the enrollee’s
Social Security benefit payments, or
benefit payments by the Railroad
Retirement Board or the Office of
Personnel Management, in the manner
that the Part B premium is withheld;
(2) An electronic funds transfer
mechanism (such as automatic charges
of an account at a financial institution
or a credit or debit card account);
(3) According to other means that
CMS may specify, including payment by
an employer or under employmentbased retiree health coverage on behalf
of an employee, former employee (or
dependent), or by other third parties
such as a State.
(i) Regarding the option in paragraph
(f)(1) of this section, MA organizations
may not impose a charge on
beneficiaries for the election of this
option.
(ii) An enrollee may opt to make a
direct payment of premium to the plan.
§ 422.264 Calculation of savings.

(a) Computation of risk adjusted bids
and benchmarks.
(1) The risk adjusted MA statutory
non-drug monthly bid amount is the
unadjusted plan bid amount for
coverage of original Medicare benefits
(defined at § 422.254), adjusted using
the factors described in paragraph (c) of
this section for local plans and
paragraph (e) of this section for regional
plans.
(2) The risk adjusted MA area-specific
non-drug monthly benchmark amount is
the unadjusted benchmark amount for
coverage of original Medicare benefits
by a local MA plan (defined at
§ 422.258), adjusted using the factors
described in paragraph (c) of this
section.
(3) The risk adjusted MA regionspecific non-drug monthly benchmark
amount is the unadjusted benchmark for
coverage of original Medicare benefits

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amount by a regional MA plan (defined
at § 422.258) adjusted using the factors
described in paragraph (e) of this
section.
(b) Computation of savings for MA
local plans. The average per capita
monthly savings for an MA local plan is
100 percent of the difference between
the plan’s risk-adjusted statutory nondrug monthly bid amount (described in
paragraph (a)(1) of this section) and the
plan’s risk-adjusted area-specific nondrug monthly benchmark amount
(described in paragraph (a)(2) of this
section). Plans with bids equal to or
greater than plan benchmarks will have
zero savings.
(c) Risk adjustment factors for
determination of savings for local plans.
CMS will publish the first Monday in
April before the upcoming calendar year
the risk adjustment factors described in
paragraph (c)(1) or (c)(2) of this section
determined for the purpose of
calculating savings amounts for MA
local plans.
(1) For the purpose of calculating
savings for MA local plans CMS has the
authority to apply risk adjustment
factors that are plan-specific average
risk adjustment factors, Statewide
average risk adjustment factors, or
factors determined on a basis other than
plan-specific factors or Statewide
average factors.
(2) In the event that CMS applies
Statewide average risk adjustment
factors, the statewide factor for each
State is the average of the risk factors
calculated under § 422.308(c), based on
all enrollees in MA local plans in that
State in the previous year. In the case of
a State in which no local MA plan was
offered in the previous year, CMS will
estimate an average and may base this
average on average risk adjustment
factors applied to comparable States or
applied on a national basis.
(d) Computation of savings for MA
regional plans. The average per capita
monthly savings for an MA regional
plan and year is 100 percent of the
difference between the plan’s riskadjusted statutory non-drug monthly bid
amount (described in paragraph (a)(1) of
this section) and the plan’s risk-adjusted
region-specific non-drug monthly
benchmark amount (described in
paragraph (a)(3) of this section), using
the risk adjustment factors described in
paragraph (e) of this section. Plans with
bids equal to or greater than plan
benchmarks will have zero savings.
(e) Risk adjustment factors for
determination of savings for regional
plans. CMS will publish the first
Monday in April before the upcoming
calendar year the risk adjustment factors
described in paragraph (e)(1)and (e)(2)

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of this section determined for the
purpose of calculating savings amounts
for MA regional plans.
(1) For the purpose of calculating
savings for MA regional plans, CMS has
the authority to apply risk adjustment
factors that are plan-specific average
risk adjustment factors, Region-wide
average risk adjustment factors, or
factors determined on a basis other than
MA regions.
(2) In the event that CMS applies
region-wide average risk adjustment
factors, the region-wide factor for each
MA region is the average of the risk
factors calculated under § 422.308(c),
based on all enrollees in MA regional
plans in that region in the previous year.
In the case of a region in which no
regional plan was offered in the
previous year, CMS will estimate an
average and may base this average on
average risk adjustment factors applied
to comparable regions or applied on a
national basis.
§ 422.266 Beneficiary rebates.

(a) General rule. An MA organization
must provide to the enrollee a monthly
rebate equal to 75 percent of the average
per capita savings (if any) described in
§ 422.264(b) for MA local plans and
§ 422.264(d) for MA regional plans.
(b) Form of rebate. The rebate
required under this paragraph must be
provided by crediting the rebate amount
to one or more of the following:
(1) Supplemental health care benefits.
MA organizations may apply all or some
portion of the rebate for a plan toward
payment for non-drug supplemental
health care benefits for enrollees as
described in § 422.102, which may
include the reduction of cost sharing for
benefits under original Medicare and
additional health care benefits that are
not benefits under original Medicare.
MA organizations also may apply all or
some portion of the rebate for a plan
toward payment for supplemental drug
coverage described at § 423.104(f)(1)(ii),
which may include reduction in cost
sharing and coverage of drugs not
covered under Part D. The rebate, or
portion of rebate, applied toward
supplemental benefits may only be
applied to a mandatory supplemental
benefit, and cannot be used to fund an
optional supplemental benefit.
(2) Payment of premium for
prescription drug coverage. MA
organizations that offer a prescription
drug benefit may credit some or all of
the rebate toward reduction of the MA
monthly prescription drug beneficiary
premium.
(3) Payment toward Part B premium.
MA organizations may credit some or all
of the rebate toward reduction of the

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Medicare Part B premium (determined
without regard to the application of
subsections (b), (h), and (i) of section
1839 of the Act).
(c) Disclosure relating to rebates. MA
organizations must disclose to CMS
information on the amount of the rebate
provided, as required at § 422.254(d).
MA organizations must distinguish, for
each MA plan, the amount of rebate
applied to enhance original Medicare
benefits from the amount of rebate
applied to enhance Part D benefits.
§ 422.270 Incorrect collections of
premiums and cost-sharing.

(a) Definitions. As used in this
section­
(1) Amounts incorrectly collected­
(i) Means amounts that­
(A) Exceed the limits approved under
§ 422.262;
(B) In the case of an MA private feefor-service plan, exceed the MA
monthly basic beneficiary premium or
the MA monthly supplemental premium
submitted under § 422.262; and
(C) In the case of an MA MSA plan,
exceed the MA monthly beneficiary
supplemental premium submitted under
§ 422.262, or exceed permissible cost
sharing amounts after the deductible has
been met per § 422.103; and
(ii) Includes amounts collected from
an enrollee who was believed to be
entitled to Medicare benefits but was
later found not to be entitled.
(2) Other amounts due are amounts
due for services that were—
(i) Emergency, urgently needed
services, or other services obtained
outside the MA plan; or
(ii) Initially denied but, upon appeal,
found to be services the enrollee was
entitled to have furnished by the MA
organization.
(b) Basic commitments. An MA
organization must agree to refund all
amounts incorrectly collected from its
Medicare enrollees, or from others on
behalf of the enrollees, and to pay any
other amounts due the enrollees or
others on their behalf.
(c) Refund methods—(1) Lump-sum
payment. The MA organization must
use lump-sum payments for the
following:
(i) Amounts incorrectly collected that
were not collected as premiums.
(ii) Other amounts due.
(iii) All amounts due if the MA
organization is going out of business or
terminating its MA contract for an MA
plan(s).
(2) Premium adjustment or lump-sum
payment, or both. If the amounts
incorrectly collected were in the form of
premiums, or included premiums as
well as other charges, the MA

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organization may refund by adjustment
of future premiums or by a combination
of premium adjustment and lump-sum
payments.
(3) Refund when enrollee has died or
cannot be located. If an enrollee has
died or cannot be located after
reasonable effort, the MA organization
must make the refund in accordance
with State law.
(d) Reduction by CMS. If the MA
organization does not make the refund
required under this section by the end
of the contract period following the
contract period during which an amount
was determined to be due to an enrollee,
CMS will reduce the premium the MA
organization is allowed to charge an MA
plan enrollee by the amounts incorrectly
collected or otherwise due. In addition,
the MA organization would be subject to
sanction under subpart O of this part for
failure to refund amounts incorrectly
collected from MA plan enrollees.
■ 50–51. Subpart G is revised to read as
follows:
Subpart G—Payments to Medicare
Advantage Organizations
Sec.
422.300 Basis and scope.
422.304 Monthly payments.
422.306 Annual MA capitation rates.
422.308 Adjustments to capitation rates,
benchmarks, bids, and payments.
422.310 Risk adjustment data.
422.311 Announcement of annual
capitation rate, benchmarks, and
methodology changes.
422.314 Special rules for beneficiaries
enrolled in MA MSA plans.
422.316 Special rules for payments to
Federally qualified health centers.
422.318 Special rules for coverage that
begins or ends during an inpatient
hospital stay.
422.320 Special rules for hospice care.
422.322 Source of payment and effect of
MA plan election on payment.
422.324 Payments to MA organizations for
graduate medical education costs.

Subpart G—Payments to Medicare
Advantage Organizations
§ 422.300 Basis and scope.

This subpart is based on sections
1853, 1854, and 1858 of the Act. It sets
forth the rules for making payments to
Medicare Advantage (MA) organizations
offering local and regional MA plans,
including calculation of MA capitation
rates and benchmarks, conditions under
which payment is based on plan bids,
adjustments to capitation rates
(including risk adjustment), and other
payment rules.
See § 422.458 in subpart J for rules on
risk sharing payments to MA regional
organizations.

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4729

§ 422.304 Monthly payments.

(a) General rules. Except as provided
in paragraph (b) of this section, CMS
makes advance monthly payments of
the amounts determined under
paragraphs (a)(1) and (a)(2) of this
section for coverage of original fee-for­
service benefits for an individual in an
MA payment area for a month.
(1) Payment of bid for plans with bids
below benchmark. For MA plans that
have average per capita monthly savings
(as described at § 422.264(b) for local
plans and § 422.264(d) for regional
plans), CMS pays:
(i) The unadjusted MA statutory nondrug monthly bid amount defined in
§ 422.252, risk-adjusted as described at
§ 422.308(c) and adjusted (if applicable)
for variations in rates within the plan’s
service area (described at
§ 422.258(a)(2)) and for the effects of
risk adjustment on beneficiary
premiums under § 422.262; and
(ii) The amount (if any) of the rebate
described in paragraph (a)(3) of this
section.
(2) Payment of benchmark for plans
with bids at or above benchmark. For
MA plans that do not have average per
capita monthly savings (as described at
§ 422.264(b) for local plans and
§ 422.264(d) for regional plans), CMS
pays the unadjusted MA area-specific
non-drug monthly benchmark amount
specified at § 422.258, risk-adjusted as
described at § 422.308(c) and adjusted
(if applicable) for variations in rates
within the plan’s service area (described
at § 422.258(a)(2)) and for the effects of
risk adjustment on beneficiary
premiums under § 422.262.
(3) Payment of rebate for plans with
bids below benchmarks. The rebate
amount under paragraph (a)(1)(ii) of this
section is the amount of the monthly
rebate computed under § 422.266(a) for
that plan, less the amount (if any)
applied to reduce the Part B premium,
as provided under § 422.266(b)(3)).
(b) Separate payment for Federal drug
subsidies. In the case of an enrollee in
an MA-PD plan, defined at § 422.252,
the MA organization offering such a
plan also receives­
(1) Direct and reinsurance subsidy
payments for qualified prescription drug
coverage, described at section 1860D–
15(a) and (b) of the Act (other than
payments for fallback prescription drug
plans described at section 1860D–
11(g)(5) of the Act); and
(2) Reimbursement for premium and
cost sharing reductions for low-income
individuals, described at section
1860D–14 of the Act.
(c) Special rules—(1) Enrollees with
end-stage renal disease. (i) For enrollees
determined to have end-stage renal

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disease (ESRD), CMS establishes special
rates that are actuarially equivalent to
rates in effect before the enactment of
the Medicare Prescription Drug,
Improvement, and Modernization Act of
2003.
(ii) CMS publishes annual changes in
these capitation rates no later than the
first Monday in April each year, as
provided in § 422.312.
(iii) CMS applies appropriate
adjustments when establishing the rates,
including risk adjustment factors.
(iv) CMS reduces the payment rate for
each renal dialysis treatment by the
same amount that CMS is authorized to
reduce the amount of each composite
rate payment for each treatment as set
forth in section 1881(b)(7) of the Act.
These funds are to be used to help pay
for the ESRD network program in the
same manner as similar reductions are
used in original Medicare.
(2) MSA enrollees. In the case of an
MSA plan, CMS pays the unadjusted
MA area-specific non-drug monthly
benchmark amount for the service area,
determined in accordance with
§ 422.314(c) and subject to risk
adjustment as set forth at § 422.308(c),
less 1/12 of the annual lump sum
amount (if any) CMS deposits to the
enrollee’s MA MSA.
(3) RFB plan enrollees. For RFB plan
enrollees, CMS adjusts the capitation
payments otherwise determined under
this subpart to ensure that the payment
level is appropriate for the actuarial
characteristics and experience of these
enrollees. That adjustment can be made
on an individual or organization basis.
(d) Payment areas—(1) General rule.
Except as provided in paragraph (e) of
this section—
(i) An MA payment area for an MA
local plan is an MA local area defined
at § 422.252.
(ii) An MA payment area for an MA
regional plan is an MA region, defined
at § 422.455(b)(1).
(2) Special rule for ESRD enrollees.
For ESRD enrollees, the MA payment
area is a State or other geographic area
specified by CMS.
(e) Geographic adjustment of payment
areas for MA local plans—(1)
Terminology. ‘‘Metropolitan Statistical
Area’’ and ‘‘Metropolitan Division’’
mean any areas so designated by the
Office of Management and Budget in the
Executive Office of the President.
(2) State request. A State’s chief
executive may request, no later than
February 1 of any year, a geographic
adjustment of the State’s payment areas
for MA local plans for the following
calendar year. The chief executive may
request any of the following adjustments

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to the payment area specified in
paragraph (c)(1)(i) of this section:
(i) A single statewide MA payment
area.
(ii) A metropolitan-based system in
which all non-metropolitan areas within
the State constitute a single payment
area and any of the following constitutes
a separate MA payment area:
(A) All portions of each single
Metropolitan Statistical Area within the
State.
(B) All portions of each Metropolitan
Statistical Area within each
Metropolitan Division within the State.
(iii) A consolidation of noncontiguous
counties.
(3) CMS response. In response to the
request, CMS makes the payment
adjustment requested by the chief
executive. This adjustment cannot be
requested or made for payments to
regional MA plans.
(4) Budget neutrality adjustment for
geographically adjusted payment areas.
If CMS adjusts a State’s payment areas
in accordance with paragraph (d)(2) of
this section, CMS at that time, and each
year thereafter, adjusts the capitation
rates so that the aggregate Medicare
payments do not exceed the aggregate
Medicare payments that would have
been made to all the State’s payments
areas, absent the geographic adjustment.
§ 422.306 Annual MA capitation rates.

Subject to adjustments at § 422.308(b)
and § 422.308(g), the annual capitation
rate for each MA local area is
determined under paragraph (a) of this
section for 2005 and each succeeding
year, except for years when CMS
announces under § 422.312(b) that the
annual capitation rates will be
determined under paragraph (b) of this
section.
(a) Minimum percentage increase rate.
The annual capitation rate for each MA
local area is equal to the minimum
percentage increase rate, which is the
greater of—
(1) 102 percent of the annual
capitation rate for the preceding year; or
(2) The annual capitation rate for the
area for the preceding year increased by
the national per capita MA growth
percentage (defined at § 422.308(a)) for
the year, but not taking into account any
adjustment under § 422.308(b) for a year
before 2004.
(b) Greater of the minimum
percentage increase rate or local area
fee-for-service costs. The annual
capitation rate for each MA local area is
the greater of—
(1) The minimum percentage increase
rate under paragraph (a) of this section;
or
(2) The amount determined, no less
frequently than every 3 years, to be the

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adjusted average per capita cost for the
MA local area, as determined under
section 1876(a)(4) of the Act, based on
100 percent of fee-for-service costs for
individuals who are not enrolled in an
MA plan for the year, with the following
adjustments:
(i) Adjusted as appropriate for the
purpose of risk adjustment;
(ii) Adjusted to exclude costs
attributable to payments under section
1886(h) of the Act for the costs of direct
graduate medical education; and
(iii) Adjusted to include CMS’
estimate of the amount of additional per
capita payments that would have been
made in the MA local area if individuals
entitled to benefits under this title had
not received services from facilities of
the Department of Defense or the
Department of Veterans Affairs.
§ 422.308 Adjustments to capitation rates,
benchmarks, bids, and payments.

CMS performs the following
calculations and adjustments to
determine rates and payments:
(a) National per capita growth
percentage. The national per capita
growth percentage for a year, applied
under § 422.306, is CMS’ estimate of the
rate of growth in per capita
expenditures under this title for an
individual entitled to benefits under
Part A and enrolled under Part B. CMS
may make separate estimates for aged
enrollees, disabled enrollees, and
enrollees who have ESRD.
(b) Adjustment for over or under
projection of national per capita growth
percentages. CMS will adjust the
minimum percentage increase rate at
§ 422.306(a)(2) and the adjusted average
per capita cost rate at § 422.306(b)(2) for
the previous year to reflect any
differences between the projected
national per capita growth percentages
for that year and previous years, and the
current estimates of those percentages
for those years. CMS will not make this
adjustment for years before 2004.
(c) Risk adjustment—(1) General rule.
CMS will adjust the payment amounts
under § 422.304(a)(1), (a)(2), and (a)(3)
for age, gender, disability status,
institutional status, and other factors
CMS determines to be appropriate,
including health status, in order to
ensure actuarial equivalence. CMS may
add to, modify, or substitute for risk
adjustment factors if those changes will
improve the determination of actuarial
equivalence.
(2) Risk adjustment: Health status—(i)
Data collection. To adjust for health
status, CMS applies a risk factor based
on data obtained in accordance with
§ 422.310.

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(ii) Implementation. CMS applies a
risk factor that incorporates inpatient
hospital and ambulatory risk adjustment
data. This factor is phased as follows:
(A) 100 percent of payments for ESRD
MA enrollees in 2005 and succeeding
years.
(B) 75 percent of payments for aged
and disabled enrollees in 2006.
(C) 100 percent of payments for aged
and disabled enrollees in 2007 and
succeeding years.
(3) Uniform application. Except as
provided for MA RFB plans under
§ 422.304(c)(3), CMS applies this
adjustment factor to all types of plans.
(d) Adjustment for intra-area
variations. CMS makes the following
adjustments to payments.
(1) Intra-regional variations. For
payments for an MA regional plan for an
MA region, CMS will adjust the
payment amount specified at
§ 422.304(a)(1) and (a)(2) to take into
account variations in local payment
rates among the different MA local areas
included in the region.
(2) Intra-service area variations. For
payments to an MA local plan with a
service area covering more than one MA
local area (county), CMS will adjust the
payment amount specified in
§ 422.304(a)(1) and (a)(2) to take into
account variations in local payment
rates among the different MA local areas
included in the plan’s service area.
(e) Adjustment relating to risk
adjustment: the government premium
adjustment. CMS will adjust payments
to an MA plan as necessary to ensure
that the sum of CMS’ monthly payment
made under § 422.304(a) and the plan’s
monthly basic beneficiary premium
equals the unadjusted MA statutory
non-drug bid amount, adjusted for risk
and for intra-area or intra-regional
payment variation.
(f) Adjustment of payments to reflect
number of Medicare enrollees—(1)
General rule. CMS adjusts payments
retroactively to take into account any
difference between the actual number of
Medicare enrollees and the number on
which it based an advance monthly
payment.
(2) Special rules for certain enrollees.
(i) Subject to paragraph (f)(2)(ii) of this
section, CMS may make adjustments, for
a period (not to exceed 90 days) that
begins when a beneficiary elects a group
health plan (as defined in § 411.1010)
offered by an MA organization, and
ends when the beneficiary is enrolled in
an MA plan offered by the MA
organization.
(ii) CMS does not make an adjustment
unless the beneficiary certifies that, at
the time of enrollment under the MA
plan, he or she received from the

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organization the disclosure statement
specified in § 422.111.
(g) Adjustment for national coverage
determination (NCD) services and
legislative changes in benefits. If CMS
determines that the cost of furnishing an
NCD service or legislative change in
benefits is significant, as defined in
§ 422.109, CMS will adjust capitation
rates, or make other payment
adjustments, to account for the cost of
the service or legislative change in
benefits. Until the new capitation rates
are in effect, the MA organization will
be paid for the significant cost NCD
service or legislative change in benefits
on a fee-for-service basis as provided
under § 422.109(b).
(h) Adjustments to payments to
regional MA plans for purposes of risk
corridor payments. For the purpose of
calculation of risk corridors under
§ 422.458, MA organizations offering
regional MA plans in 2006 and/or 2007
must submit, after the end of a contract
year and before a date CMS specifies,
the following information:
(1) Actual allowable costs (defined in
§ 422.458(a)) for the previous contract
year.
(2) The portion of the costs
attributable to administrative expenses
incurred in providing these benefits.
(3) The total costs for providing
rebatable integrated benefits (as defined
in § 422.458(a)) and the portion of the
costs that is attributable to
administrative expenses in addition to
the administrative expenses described
in paragraph (h)(2) of this section.
§ 422.310 Risk adjustment data.

(a) Definition of risk adjustment data.
Risk adjustment data are all data that are
used in the application of a risk
adjustment payment model.
(b) Data collection: Basic rule. Each
MA organization must submit to CMS
(in accordance with CMS instructions)
the data necessary to characterize the
context and purposes of each service
provided to a Medicare enrollee by a
provider, supplier, physician, or other
practitioner. CMS may also collect data
necessary to characterize the functional
limitations of enrollees of each MA
organization.
(c) Sources and extent of data. (1) To
the extent required by CMS, risk
adjustment data must account for the
following:
(i) Services covered under the original
Medicare program.
(ii) Medicare covered services for
which Medicare is not the primary
payer.
(iii) Other additional or supplemental
benefits that the MA organization may
provide.

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4731

(2) The data must account separately
for each provider, supplier, physician,
or other practitioner that would be
permitted to bill separately under the
original Medicare program, even if they
participate jointly in the same service.
(d) Other data requirements. (1) MA
organizations must submit data that
conform to the requirements for
equivalent data for Medicare fee-for­
service when appropriate, and to all
relevant national standards.
Alternatively, MA organizations may
submit data according to an abbreviated
format, as specified by CMS.
(2) The data must be submitted
electronically to the appropriate CMS
contractor.
(3) MA organizations must obtain the
risk adjustment data required by CMS
from the provider, supplier, physician,
or other practitioner that furnished the
services.
(4) MA organizations may include in
their contracts with providers,
suppliers, physicians, and other
practitioners, provisions that require
submission of complete and accurate
risk adjustment data as required by
CMS. These provisions may include
financial penalties for failure to submit
complete data.
(e) Validation of risk adjustment data.
MA organizations and their providers
and practitioners will be required to
submit a sample of medical records for
the validation of risk adjustment data, as
required by CMS. There may be
penalties for submission of false data.
(f) Use of data. CMS uses the data
obtained under this section to determine
the risk adjustment factor used to adjust
payments, as required under
§ 422.304(a)(1), (a)(2), and (a)(3). CMS
may also use the data for other purposes
except for medical records data.
(g) Deadlines for submission of risk
adjustment data. Risk adjustment
factors for each payment year are based
on risk adjustment data submitted for
services furnished during the 12-month
period before the payment year that is
specified by CMS. As determined by
CMS, this 12-month period may include
a 6-month data lag that may be changed
or eliminated as appropriate.
(1) The annual deadline for risk
adjustment data submission is the first
Friday in September for risk adjustment
data reflecting services furnished during
the 12-month period ending the prior
June 30, and the first Friday in March
for data reflecting services furnished
during the 12-month period ending the
prior December 31.
(2) CMS allows a reconciliation
process to account for late data
submissions. CMS continues to accept
risk adjustment data submitted after the

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March deadline until December 31 of
the payment year. After the payment
year is completed, CMS recalculates the
risk factors for affected individuals to
determine if adjustments to payments
are necessary. Risk adjustment data that
are received after the annual December
31 late data submission deadline will
not be accepted for the purposes of
reconciliation.
§ 422.312 Announcement of annual
capitation rate, benchmarks, and
methodology changes.

(a) Capitation rates—(1) Initial
announcement. Not later than the first
Monday in April each year, CMS
announces to MA organizations and
other interested parties the following
information for each MA payment area
for the following calendar year:
(i) The annual MA capitation rate.
(ii) The risk and other factors to be
used in adjusting those rates under
§ 422.308 for payments for months in
that year.
(2) CMS includes in the
announcement an explanation of
assumptions used and a description of
the risk and other factors.
(3) Regional benchmark
announcement. Before the beginning of
each annual, coordinated election
period under § 422.62(a)(2), CMS will
announce to MA organizations and
other interested parties the MA regionspecific non-drug monthly benchmark
amount for the year involved for each
MA region and each MA regional plan
for which a bid was submitted under
§ 422.256.
(b) Advance notice of changes in
methodology. (1) No later than 45 days
before making the announcement under
paragraph (a)(1) of this section, CMS
notifies MA organizations of changes it
proposes to make in the factors and the
methodology it used in the previous
determination of capitation rates.
(2) The MA organizations have 15
days to comment on the proposed
changes.
§ 422.314 Special rules for beneficiaries
enrolled in MA MSA plans.

(a) Establishment and designation of
medical savings account (MSA). A
beneficiary who elects coverage under
an MA MSA plan—
(1) Must establish an MA MSA with
a trustee that meets the requirements of
paragraph (b) of this section; and
(2) If he or she has more than one MA
MSA, designate the particular account
to which payments under the MA MSA
plan are to be made.
(b) Requirements for MSA trustees. An
entity that acts as a trustee for an MA
MSA must—

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(1) Register with CMS;
(2) Certify that it is a licensed bank,
insurance company, or other entity
qualified, under sections 408(a)(2) or
408(h) of the Internal Revenue Code of
1986, to act as a trustee of individual
retirement accounts;
(3) Agree to comply with the MA
MSA provisions of section 138 of the
Internal Revenue Code of 1986; and
(4) Provide any other information that
CMS may require.
(c) Deposit in the MA MSA. (1) The
payment is calculated as follows:
(i) The monthly MA MSA premium is
compared with 1/12 of the annual
capitation rate applied under this
section for the area determined under
§ 422.306.
(ii) If the monthly MA MSA premium
is less than 1/12 of the annual capitation
rate applied under this section for the
area, the difference is the amount to be
deposited in the MA MSA for each
month for which the beneficiary is
enrolled in the MSA plan.
(2) CMS deposits the full amount to
which a beneficiary is entitled under
paragraph (c)(1)(ii) of this section for the
calendar year, beginning with the month
in which MA MSA coverage begins.
(3) If the beneficiary’s coverage under
the MA MSA plan ends before the end
of the calendar year, CMS recovers the
amount that corresponds to the
remaining months of that year.
§ 422.316 Special rules for payments to
Federally qualified health centers.

If an enrollee in an MA plan receives
a service from a Federally qualified
health center (FQHC) that has a written
agreement with the MA organization
offering the plan concerning the
provision of this service (including the
agreement required under section
1857(e)(3) of the Act and as codified in
§ 422.527)—
(a) CMS will pay the amount
determined under section 1833(a)(3)(B)
of the Act directly to the FQHC at a
minimum on a quarterly basis, less the
amount the FQHC would receive for the
MA enrollee from the MA organization
and taking into account the cost sharing
amount paid by the enrollee; and
(b) CMS will not reduce the amount
of the monthly payments under this
section as a result of the application of
paragraph (a) of this section.
§ 422.318 Special rules for coverage that
begins or ends during an inpatient hospital
stay.

(a) Applicability. This section applies
to inpatient services in a ‘‘subsection (d)
hospital’’ as defined in section
1886(d)(1)(B) of the Act, a psychiatric
hospital described in section

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1886(d)(1)(B)(i) of the act, a
rehabilitation hospital described in
section 1886(d)(1)(B)(ii) of the Act, a
distinct part rehabilitation unit
described in the matter following clause
(v) of section 1886(d)(1)(B) of the Act, or
a long-term care hospital (described in
section 1886(d)(1)(B)(iv)).
(b) Coverage that begins during an
inpatient stay. If coverage under an MA
plan offered by an MA organization
begins while the beneficiary is an
inpatient in one of the facilities
described in paragraph (a) of this
section—
(1) Payment for inpatient services
until the date of the beneficiary’s
discharge is made by the previous MA
organization or original Medicare, as
appropriate;
(2) The MA organization offering the
newly-elected MA plan is not
responsible for the inpatient services
until the date after the beneficiary’s
discharge; and
(3) The MA organization offering the
newly-elected MA plan is paid the full
amount otherwise payable under this
subpart.
(c) Coverage that ends during an
inpatient stay. If coverage under an MA
plan offered by an MA organization
ends while the beneficiary is an
inpatient in one of the facilities
described in paragraph (a) of this
section—
(1) The MA organization is
responsible for the inpatient services
until the date of the beneficiary’s
discharge;
(2) Payment for those services during
the remainder of the stay is not made by
original Medicare or by any succeeding
MA organization offering a newlyelected MA plan; and
(3) The MA organization that no
longer provides coverage receives no
payment for the beneficiary for the
period after coverage ends.
§ 422.320 Special rules for hospice care.

(a) Information. An MA organization
that has a contract under subpart K of
this part must inform each Medicare
enrollee eligible to select hospice care
under § 418.24 of this chapter about the
availability of hospice care (in a manner
that objectively presents all available
hospice providers, including a
statement of any ownership interest in
a hospice held by the MA organization
or a related entity) if—
(1) A Medicare hospice program is
located within the plan’s service area; or
(2) It is common practice to refer
patients to hospice programs outside
that area.
(b) Enrollment status. Unless the
enrollee disenrolls from the MA plan, a

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beneficiary electing hospice continues
his or her enrollment in the MA plan
and is entitled to receive, through the
MA plan, any benefits other than those
that are the responsibility of the
Medicare hospice.
(c) Payment. (1) No payment is made
to an MA organization on behalf of a
Medicare enrollee who has elected
hospice care under § 418.24 of this
chapter, except for the portion of the
payment attributable to the beneficiary
rebate for the MA plan, described in
§ 422.266(b)(1) plus the amount of the
monthly prescription drug beneficiary
premium (described at § 422.252). This
no-payment rule is effective from the
first day of the month following the
month of election to receive hospice
care, until the first day of the month
following the month in which the
election is terminated.
(2) During the time the hospice
election is in effect, CMS’ monthly
capitation payment to the MA
organization is reduced to the sum of—
(i) An amount equal to the beneficiary
rebate for the MA plan, as described in
§ 422.304(a)(3) or to zero for plans with
no beneficiary rebate, described at
§ 422.304(a)(2); and
(ii) The amount of the monthly
prescription drug beneficiary premium
(if any).
(3) In addition, CMS pays through the
original Medicare program (subject to
the usual rules of payment)—
(i) The hospice program for hospice
care furnished to the Medicare enrollee;
and
(ii) The MA organization, provider, or
supplier for other Medicare-covered
services to the enrollee.
§ 422.322 Source of payment and effect of
MA plan election on payment.

(a) Source of payments. (1) Payments
under this subpart for original fee-for­
service benefits to MA organizations or
MA MSAs are made from the Federal
Hospital Insurance Trust Fund or the
Supplementary Medical Insurance Trust
Fund. CMS determines the proportions
to reflect the relative weight that
benefits under Part A, and benefits
under Part B represents of the actuarial
value of the total benefits under title
XVIII of the Act.
(2) Payments to MA-PD organizations
for statutory drug benefits provided
under this title are made from the
Medicare Prescription Drug Account in
the Federal Supplementary Medical
Insurance Trust Fund.
(b) Payments to the MA organization.
Subject to § 412.105(g) and § 413.86(d)
of this chapter and § 422.109, § 422.264,
and § 422.266, CMS’ payments under a
contract with an MA organization

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(described in § 422.304) with respect to
an individual electing an MA plan
offered by the organization are instead
of the amounts which (in the absence of
the contract) would otherwise be
payable under original Medicare for
items and services furnished to the
individual.
(c) Only the MA organization entitled
to payment. Subject to § 422.314,
§ 422.318, § 422.320, and § 422.520 and
sections 1886(d)(11) and 1886(h)(3)(D)
of the Act, only the MA organization is
entitled to receive payment from CMS
under title XVIII of the Act for items and
services furnished to the individual.
§ 422.324 Payments to MA organizations
for graduate medical education costs.

(a) MA organizations may receive
direct graduate medical education
payments for the time that residents
spend in non-hospital provider settings
such as freestanding clinics, nursing
homes, and physicians’ offices in
connection with approved programs.
(b) MA organizations may receive
direct graduate medical education
payments if all of the following
conditions are met:
(1) The resident spends his or her
time assigned to patient care activities.
(2) The MA organization incurs ‘‘all or
substantially all’’ of the costs for the
training program in the non-hospital
setting as defined in § 413.86(b) of this
chapter.
(3) There is a written agreement
between the MA organization and the
non-hospital site that indicates the MA
organization will incur the costs of the
resident’s salary and fringe benefits and
provide reasonable compensation to the
non-hospital site for teaching activities.
(c) An MA organization’s allowable
direct graduate medical education costs,
subject to the redistribution and
community support principles specified
in § 413.85(c) of this chapter, consist
of—
(1) Residents’ salaries and fringe
benefits (including travel and lodging
where applicable); and
(2) Reasonable compensation to the
non-hospital site for teaching activities
related to the training of medical
residents.
(d) The direct graduate medical
education payment is equal to the
product of—
(1) The lower of—
(i) The MA organization’s allowable
costs per resident as defined in
paragraph (c) of this section; or
(ii) The national average per resident
amount; and
(2) Medicare’s share, which is equal to
the ratio of the number of Medicare
beneficiaries enrolled to the total

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4733

number of individuals enrolled in the
MA organization.
(e) Direct graduate medical education
payments made to MA organizations
under this section are made from the
Federal Supplementary Medical
Insurance Trust Fund.
Subpart I—Organization Compliance
With State Law and Preemption by
Federal Law
52. Section 422.402 is revised to read
as follows:

■

§ 422.402 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) with respect to the MA plans
that are offered by MA organizations.
■ 53. Amend § 422.404 by revising
paragraph (a) to read as follows:
§ 422.404 State premium taxes prohibited.

(a) 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, or any of their
political subdivisions or other
governmental authorities with respect to
any payment CMS makes on behalf of
MA enrollees under subpart G of this
part, or with respect to any payment
made to MA plans by beneficiaries, or
payment to MA plans by a third party
on a beneficiary’s behalf.
*
*
*
*
*
■ 54. A new subpart J is added to read
as follows:
Subpart J—Special Rules for MA Regional
Plans
Sec.
422.451 Moratorium on new local
preferred provider organization plans.
422.455 Special rules for MA Regional
plans.
422.458 Risk sharing with regional MA
organizations for 2006 and 2007.

Subpart J—Special Rules for MA
Regional Plans
§ 422.451 Moratorium on new local
preferred provider organization plans.

CMS will not approve the offering of
a local preferred provider organization
plan during 2006 or 2007 in a service
area unless the MA organization seeking
to offer the plan was offering a local
preferred provider organization plan in
the service area before December 31,
2005.
§ 422.455 Special rules for MA Regional
Plans.

(a) Coverage of entire MA region. The
service area for an MA regional plan

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will consist of an entire MA region
established under paragraph (b) of this
section, and an MA region may not be
segmented as described in
§ 422.262(c)(2).
(b) Establishment of MA regions—(1)
MA region. The term ‘‘MA region’’
means a region within the 50 States and
the District of Columbia as established
by CMS under this section.
(2) Establishment—(i) Initial
establishment. By January 1, 2005, CMS
will establish and publish the MA
regions.
(ii) Periodic review and revision of
service areas. CMS may periodically
review MA regions and may revise the
regions if it determines the revision to
be appropriate.
(3) Requirements for MA regions. CMS
will establish, and may revise, MA
regions in a manner consistent with the
following:
(i) Number of regions. There will be
no fewer than 10 regions, and no more
than 50 regions.
(ii) Maximizing availability of plans.
The main purpose of the regions is to
maximize the availability of MA
regional plans to all MA eligible
individuals without regard to health
status, or geographic location, especially
those residing in rural areas.
(4) Market survey and analysis. Before
establishing MA regions, CMS will
conduct a market survey and analysis,
including an examination of current
insurance markets, to assist CMS in
determining how the regions should be
established.
(c) National plan. An MA regional
plan can be offered in more than one
MA region (including all regions).
§ 422.458 Risk sharing with regional MA
organizations for 2006 and 2007.

(a) Terminology. For purposes of this
section—
Allowable costs means, with respect
to an MA regional plan offered by an
organization for a year, the total amount
of costs that the organization incurred in
providing benefits covered under the
original Medicare fee-for-service
program option for all enrollees under
the plan in the region in the year and
in providing rebatable integrated
benefits, as defined in this paragraph,
reduced by the portion of those costs
attributable to administrative expenses
incurred in providing these benefits.
Rebatable integrated benefits means
those non-drug supplemental benefits
that are funded through beneficiary
rebates (described at § 422.266(b)(1))
and that CMS determines are additional
health benefits not covered under the
original Medicare program option and
that require expenditures by the plan.

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For purposes of the calculation of risk
corridors, these are the only
supplemental benefits that count toward
allowable costs.
Target amount means, with respect to
an MA regional plan offered by an
organization in a year, the total amount
of payments made to the organization
for enrollees in the plan for the year
(which includes payments attributable
to benefits under the original Medicare
fee-for-service program option as
defined in § 422.100(c)(1), the total of
the MA monthly basic beneficiary
premium collectable for those enrollees
for the year, and the total amount of
rebatable integrated benefits), reduced
by the amount of administrative
expenses assumed in the portion of the
bid attributable to benefits under
original Medicare fee-for-service
program option or to rebatable
integrated benefits.
(b) Application of risk corridors for
benefits covered under original fee-for­
service Medicare—(1) General rule. This
section will only apply to MA regional
plans offered during 2006 or 2007.
(2) Notification of allowable costs
under the plan. In the case of an MA
organization that offers an MA regional
plan in an MA region in 2006 or 2007,
the organization must notify CMS,
before that date in the succeeding year
as CMS specifies, of—
(i) Its total amount of costs that the
organization
incurred in providing benefits
covered under the original Medicare feefor-service program option for all
enrollees under the plan (as described
in paragraph (a) of this section).
(ii) Its total amount of costs that the
organization incurred in providing
rebatable integrated benefits for all
enrollees under the plan (as described
in paragraph (a) of this section), and,
with respect to those benefits, the
portion of those costs that is attributable
to administrative expenses that is in
addition to the administrative expense
incurred in provision of benefits under
the original Medicare fee-for-service
program option.
(c) Adjustment of payment—(1) No
adjustment if allowable costs within 3
percent of target amount. If the
allowable costs for the plan for the year
are at least 97 percent, but do not
exceed 103 percent, of the target amount
for the plan and year, there will be no
payment adjustment under this section
for the plan and year.
(2) Increase in payment if allowable
costs above 103 percent of target
amount—(i) Costs between 103 and 108
percent of target amount. If the
allowable costs for the plan for the year
are greater than 103 percent, but not

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greater than 108 percent, of the target
amount for the plan and year, CMS will
increase the total of the monthly
payments made to the organization
offering the plan for the year under
§ 422.302(a) (section 1853(a) of the Act)
by an amount equal to 50 percent of the
difference between those allowable
costs and 103 percent of that target
amount.
(ii) Costs above 108 percent of target
amount. If the allowable costs for the
plan for the year are greater than 108
percent of the target amount for the plan
and year, CMS will increase the total of
the monthly payments made to the
organization offering the plan for the
year under section 1853(a) of the Act by
an amount equal to the sum of—
(A) 2.5 percent of that target amount;
and
(B) 80 percent of the difference
between those allowable costs and 108
percent of that target amount.
(3) Reduction in payment if allowable
costs below 97 percent of target
amount—(i) Costs between 92 and 97
percent of target amount. If the
allowable costs for the plan for the year
are less than 97 percent, but greater than
or equal to 92 percent, of the target
amount for the plan and year, CMS will
reduce the total of the monthly
payments made to the organization
offering the plan for the year under
§ 422.302(a) (section 1853(a) of the Act)
by an amount (or otherwise recover
from the plan an amount) equal to 50
percent of the difference between 97
percent of the target amount and those
allowable costs.
(ii) Costs below 92 percent of target
amount. If the allowable costs for the
plan for the year are less than 92 percent
of the target amount for the plan and
year, CMS will reduce the total of the
monthly payments made to the
organization offering the plan for the
year under § 422.302(a) (section
1853(a)of the Act) by an amount (or
otherwise recover from the plan an
amount) equal to the sum of­
(A) 2.5 percent of that target amount;
and
(B) 80 percent of the difference
between 92 percent of that target
amount and those allowable costs.
(d) Disclosure of information—(1)
General rule. Each MA organization
offering an MA regional plan must
provide CMS with information as CMS
determines is necessary to implement
this section; and
(2) According to existing
§ 422.502(d)(1)(iii) (section
1857(d)(2)(B) of the Act), CMS has the
right to inspect and audit any books and
records of the organization that pertain
to the information regarding costs

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provided to CMS under paragraph (b)(2)
of this section.
(3) Restriction on use of information.
Information disclosed or obtained for
the purposes of this section may be used
by officers, employees, and contractors
of DHHS only for the purposes of, and
to the extent necessary in, implementing
this section.
(e) Organizational and financial
requirements—(1) General rule.
Regional MA plans offered by MA
organizations must be licensed under
State law, or otherwise authorized
under State law, as a risk-bearing entity
(as defined in § 422.2) eligible to offer
health insurance or health benefits
coverage in each State in which it offers
one or more plans. However, as
provided for under this section, MA
organizations offering MA regional
plans may obtain a temporary waiver of
State licensure. In the case of an MA
organization that is offering an MA
regional plan in an MA region, and is
not licensed in each State in which it
offers such an MA regional plan, the
following rules apply:
(i) The MA organization must be
licensed to bear risk in at least one State
of the region.
(ii) For the other States in a region in
which the organization is not licensed
to bear risk, if it demonstrates to CMS
that it has filed the necessary
application to meet those requirements,
CMS may temporarily waive the
licensing requirement with respect to
each State for a period of time as CMS
determines appropriate for the timely
processing of the application by the
State or States.
(iii) If the State licensing application
or applications are denied, CMS may
extend the licensing waiver through the
end of the plan year or as CMS
determines appropriate to provide for a
transition.
(2) Selection of appropriate State. In
the case of an MA organization to which
CMS grants a waiver and that is licensed
in more than one State in a region, the
MA organization will select one of the
States, the rules of which shall apply in
States where the organization is not
licensed for the period of the waiver.
(f) Regional stabilization fund—(1)
Establishment. The MA Regional Plan
Stabilization Fund (referred to in this
paragraph (f) as the ‘‘Fund’’) is available
beginning in 2007 for two purposes:
(i) Plan entry. To provide incentives
to have MA regional plans offered in
each MA region under paragraph (f)(4)
of this section.
(ii) Plan retention. To provide
incentives to retain MA regional plans
in certain MA regions with below­

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national-average MA market penetration
under paragraph (f)(5) of this section.
(2) Availability of funding from
savings. Funds made available under
section 1853(f) of the Act are transferred
into a special account in the Treasury
from the Federal Hospital Insurance
Trust Fund and the Federal
Supplementary Medical Insurance Trust
Fund in the proportion specified in
section 1853(f) of the Act, ‘‘payments
From Trust Funds,’’ on a monthly basis.
(3) Funding limitation—(i) General
rule. The total amount expended from
the Fund as a result of the application
of this section through the end of a
calendar year may not exceed the
amount available to the Fund as of the
first day of that year. For purposes of
this section, amounts that are expended
under this title insofar as those amounts
would not have been expended but for
the application of this section will be
counted as amounts expended as a
result of that application.
(ii) Application of limitation. CMS
will obligate funds from the Fund for a
year only if the Chief Actuary of CMS
and the appropriate budget officer
certify that there are available in the
Fund at the beginning of the year
sufficient amounts to cover all of those
obligations incurred during the year
consistent with paragraph (f)(3)(i) of this
section. CMS will take those steps, in
connection with computing additional
payment amounts under paragraphs
(f)(4) and (f)(5) of this section and
including limitations on enrollment in
MA regional plans receiving those
payments or computing lower payment
amounts, to ensure that sufficient funds
are available to make those payments for
the entire year.
(4) Plan entry funding—(i) General
rule. Funding is available under this
paragraph for a year in the following
situations:
(A) National plan. For a national
bonus payment described in paragraph
(f)(4)(ii) of this section, when a single
MA organization offers an MA regional
plan in each MA region in the year, but
only if there was not a national plan
offered in each region in the previous
year. Funding under this paragraph is
only available with respect to any
individual MA organization for a single
year, but may be made available to more
than one such organization in the same
year.
(B) MA Regional Plans. Subject to
paragraph (f)(4)(i)(C) of this section, for
an increased amount under paragraph
(f)(4)(iv) of this section for an MA
regional plan offered in an MA region
that did not have any MA regional plan
offered in the prior year.

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4735

(C) Limitation on MA regional plan
funding in case of national plan. There
will be no payment adjustment under
paragraph (f)(4)(iii) of this section for a
year for which a national bonus
payment is made under paragraph
(f)(4)(ii) of this section.
(ii) National bonus payment. The
national bonus payment under this
paragraph will—
(A) Be available to an MA
organization only if the organization
offers MA regional plans in every MA
region;
(B) Be available for all MA regional
plans of the organization regardless of
whether any other MA regional plan is
offered in any region; and
(C) Be subject to amounts available
under paragraph (f)(3) of this section for
a year and be equal to 3 percent of the
benchmark amount otherwise
applicable for each MA regional plan
offered by the organization.
(iii) Regional payment adjustment—
(A) General rule. The increased amount
under this paragraph for an MA regional
plan in an MA region for a year must be
an amount, determined by CMS, based
on the bid submitted for that plan (or
plans) and will be available to all MA
regional plans offered in that region and
year. That amount may be based on the
mean, mode, or median or other
measure of those bids and may vary
from region to region. CMS will not
limit the number of plans or bids in a
region.
(B) Multi-year funding. Subject to
amounts available under paragraph
(f)(3) of this section, funding will be
available for a period determined by
CMS.
(C) Application to all plans in a
region. Funding under this paragraph
for an MA region will be made available
for all MA regional plans offered in the
region.
(D) Limitation on availability of plan
retention funding in next year. If plans
receive plan entry funding in a year,
plans in that region are prohibited from
receiving plan retention funding in the
following year.
(iv) Application. Any additional
payment under this section provided for
an MA regional plan for a year will be
treated as if it were an addition to the
benchmark amount otherwise
applicable to that plan and year, but
will not be taken into account in the
computation of any benchmark amount
for any subsequent year.
(5) Plan retention funding—(i)
General rule. Funding is available under
this paragraph for a year with respect to
MA regional plans offered in an MA
region for the increased amount
specified in paragraph (f)(5)(ii) of this

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section but only if the region meets the
requirements of paragraphs (f)(5)(iii)(A),
(f)(5)(iii)(B), (f)(5)(iii)(C) and (f)(5)(iii)(E)
of this section.
(ii) Payment increase. The increased
amount under this paragraph for an MA
regional plan in an MA region for a year
will be an amount, determined by CMS,
that does not exceed the greater of—
(A) 3 percent of the benchmark
amount applicable in the region; or
(B) The amount as (when added to the
benchmark amount applicable to the
region) will result in the ratio of­
(1) That additional amount plus the
benchmark amount computed under
section 1854(b)(4)(B)(i)of the Act, ‘‘the
risk-adjusted benchmark amount’’ for
the region and year, to the adjusted
average per capita cost for the region
and year, as estimated by CMS under
section 1876(a)(4) of the Act and
adjusted as appropriate for the purpose
of risk adjustment; being equal to—
(2) The weighted average of those
benchmark amounts for all the regions
and that year, to the average per capita
cost for the United States and that year,
as estimated by CMS under section
1876(a)(4)of the Act and adjusted as
appropriate for the purpose of risk
adjustment.
(iii) Regional requirements. The
requirements of this paragraph for an
MA region for a year are as follows:
(A) Notification of plan exit. CMS has
received notice (as specified by CMS),
before a new contract year, that one or
more MA regional plans that were
offered in the region in the previous
year will not be offered in the
succeeding year.
(B) Regional plans available from
fewer than two MA organizations in the
region. CMS determines that if the plans
referred to in paragraph (f)(5)(iii)(A) of
this section are not offered in the year,
fewer than two MA organizations will
be offering MA regional plans in the
region in the year involved.
(C) Percentage enrollment in MA
regional plans below national average.
For the previous year, CMS determines
that the average percentage of MA
eligible individuals residing in the
region who are enrolled in MA regional
plans is less than the average percentage
of those individuals in the United States
enrolled in those plans.
(D) Application. Any additional
payment under this paragraph provided
for an MA regional plan for a year will
be treated as if it were an addition to the
benchmark amount otherwise
applicable to that plan and year, but
will not be taken into account in the
computation of any benchmark amount
for any subsequent year.

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(E) 2–consecutive-year limitation. In
no case will plan retention funding be
available under this paragraph in an MA
region for more than 2 consecutive
years.
Subpart K-Application Procedures and
Contracts for Medicare Advantage
Organizations
55. Amend § 422.500 byA. Revising the section heading.
B. Designating the undesignated
introductory text as paragraph (b) and
adding the heading ‘‘Definitions.≥
C. Adding new paragraph (a).
■ The revisions and addition read as
follows:
■

§ 422.500 Scope and definitions.

(a) Scope. This subpart sets forth
application requirements for entities
seeking a contract as a Medicare
organization offering an MA plan. MA
organizations offering prescription drug
plans must, in addition to the
requirements of this part, follow the
requirements of part 423 of this chapter
specifically related to the prescription
drug benefit.
(b) Definitions. For purposes of this
subpart, the following definitions apply:
*
*
*
*
*
§ 422.501, § 422.502, and § 422.504
[Redesignated]

56. Redesignate § 422.501, § 422.502,
and § 422.504 as § 422.503, § 422.504,
and § 422.505, respectively.
■ 57. Add new § 422.501 to read as
follows:
■

§ 422.501 Application requirements.

(a) Scope. This section sets forth
application requirements for entities
that seek a contract as an MA
organization offering an MA plan.
(b) Completion of an application. (1)
In order to obtain a determination on
whether it meets the requirements to
become an MA organization and is
qualified to provide a particular type of
MA plan, 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 applicable to
MA plans, and is authorized by the
State to accept prepaid capitation for
providing, arranging, or paying for the
comprehensive health care services to
be offered under the MA contract; or
(ii) For regional plans, documentation
of application for State licensure in any

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State in the region that the organization
is not already licensed.
(2) The authorized individual must
thoroughly describe how the entity and
MA plan meet, or will meet, the
requirements described in this part.
(c) Responsibility for making
determinations. (1) CMS is responsible
for determining whether an entity
qualifies as an MA organization and
whether proposed MA plans meet the
requirements of this part.
(2) A CMS determination that an
entity is qualified to act as an MA
organization is distinct from the bid
negotiation that occurs under subpart F
of this part and such negotiation is not
subject to the appeals provisions
included in subpart N of this part.
(d) Resubmittal of application. An
application that has been denied by
CMS may not be resubmitted for 4
months after the date of the notice from
CMS denying the application.
(e) 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 U.S.C. 552, the Freedom of
Information Act, or because of
exemptions provided in 45 CFR part 5
(the Department’s regulations providing
exceptions to disclosure), must label the
material ‘‘privileged’’ and include an
explanation of the applicability of an
exception described in 45 CFR part 5.
Any final decisions as to whether
material is privileged is the final
decision of the Secretary.
■ 58. Add new § 422.502 to read as
follows:
§ 422.502 Evaluation and determination
procedures.

(a) Basis for evaluation and
determination. (1) CMS evaluates an
application for an MA contract on the
basis of information contained in the
application itself and any additional
information that CMS obtains through
other means such as on-site visits,
public hearings, and any other
appropriate procedures.
(2) After evaluating all relevant
information, CMS determines whether
the applicant’s application meets the
applicable requirements of § 422.501.
(b) Use of information from a prior
contracting period. If an MA
organization has failed to comply with
the terms of a previous contract with
CMS under title XVIII of the Act, or has
failed 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

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contract applicant meets all of the
current requirements.
(c) Notice of determination. Within
timeframes determined by CMS, it
notifies each applicant that applies for
an MA contract under this part of its
determination and the basis for the
determination. The determination is 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
an MA organization.
(2) Intent to deny. (i)If CMS finds that
the applicant does not appear to be able
to meet the requirements for an MA
organization and/or has not provided
enough information to evaluate the
application, CMS gives the contract
applicant notice of intent to deny the
application for an MA contract and a
summary of the basis for this
preliminary finding.
(ii) Within 10 days from the date of
the intent to deny notice, the contract
applicant must respond in writing to the
issues or other matters that were the
basis for CMS’ preliminary finding and
must revise its application to remedy
any defects CMS identified.
(3) Denial of application. If CMS
denies the application, it gives written
notice to the contract applicant
indicating —
(i) That the applicant is not qualified
to contract as an MA organization under
Part C of title XVIII of the Act;
(ii) The reasons why the applicant is
not qualified; and
(iii) The applicant’s right to request
reconsideration in accordance with the
procedures specified in subpart N of
this part.
(d) Oversight of continuing
compliance. (1) CMS oversees an MA
organization’s continued compliance
with the requirements for an MA
organization.
(2) If an MA organization no longer
meets those requirements, CMS
terminates the contract in accordance
with § 422.510.
§ 422.503

[Amended]

59. Amend newly redesignated
§ 422.503 byA. Redesignating paragraphs (b)(1)
through (b)(5) as paragraphs (b)(2)
through (b)(6) respectively.
B. Adding new paragraph (b)(1).
C. Revising newly redesignated
paragraph (b)(4)(ii).
D. Revising newly redesignated
paragraph (b)(4)(vi)(F).
E. Adding new paragraphs
(b)(4)(vi)(G)(1), and (2).
F. Adding new paragraph
(b)(4)(vi)(H).

■

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G. Revising newly redesignated
paragraph (b)(6) introductory text.
H. Revising newly redesignated
paragraph (b)(6)(i).
■ The revisions read as follows:
§ 422.503 General provisions.

*

*
*
*
*
(b) * * *
(1) Complete an application as
described in § 422.501.
*
*
*
*
*
(4) * * *
(ii) To operate a quality improvement
program and have an agreement for
external quality review as required
under this part.
*
*
*
*
*
(vi) * * *
(F) Procedures for internal monitoring
and auditing.
(G) * * *
(1) If the MA organization discovers
evidence of misconduct related to
payment or delivery of items or services
under the contract, it must conduct a
timely, reasonable inquiry into that
conduct.
(2) The MA organization must
conduct appropriate corrective actions
(for example, repayment of
overpayments, disciplinary actions
against responsible employees) in
response to the potential violation
referenced in paragraph (b)(4)(vi)(G)(1)
of this section.
(H) For MA-PDPs, A comprehensive
fraud and abuse plan to detect and
prevent fraud, waste, and abuse as
specified at § 423.504(b)(4)(vi)(H) of this
chapter.
*
*
*
*
*
(6) The MA organization’s contract
must not have been non-renewed under
§ 422.506 within the past 2 years
unless—
(i) During the 6-month period
beginning on the date the organization
notified CMS of the intention to nonrenew the most recent previous
contract, there was a change in the
statute or regulations that had the effect
of increasing MA payments in the
payment area or areas at issue; or
*
*
*
*
*
■ 60. Amend newly redesignated
§ 422.504 byA. Revising paragraph (e)(4)
introductory text.
B. Revising paragraph (e)(4)(ii)
C. Revising paragraph (e)(4)(iii).
D. Removing paragraph (f)(2)(vii).
E. Redesignating paragraph (f)(2)(viii)
as paragraph (f)(2)(vii).
F. Revising paragraph (h).
G. Revising paragraph (i)(3)(ii).
■ The revisions read as follows:
§ 422.504 Contract provisions.

*

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*

*

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*

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4737

(e) * * *
(4) HHS, the Comptroller General, or
their designee’s right to inspect,
evaluate, and audit extends through 10
years from the end of the final contract
period or completion of audit,
whichever is later unless­
*
*
*
*
*
(ii) There has been a termination,
dispute, or allegation of fraud or similar
fault by the MA organization, in which
case the retention may be extended to 6
years from the date of any resulting final
resolution of the termination, dispute,
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 MA organization
at any time.
*
*
*
*
*
(h) Requirements of other laws and
regulations. The MA organization agrees
to comply with­
(1) Federal laws and regulations
designed to prevent or ameliorate fraud,
waste, and abuse, including, but not
limited to, applicable provisions of
Federal criminal law, the False Claims
Act (32 U.S.C. 3729 et. seq.), and the
anti-kickback statute (section 1128B(b))
of the Act); and
(2) HIPAA administrative
simplification rules at 45 CFR parts 160,
162, and 164.
(i) * * *
(3) * * *
(ii) Accountability provisions that
indicate that the MA organization may
only delegate activities or functions to a
provider, related entity, contractor, or
subcontractor in a manner consistent
with the requirements set forth at
paragraph (i)(4)of this section.
*
*
*
*
*
■ 61. Amend newly redesignated
§ 422.505 by adding paragraph (d).
§ 422.505 Effective date and term of
contract.

*

*
*
*
*
(d) Renewal of contract contingent on
reaching agreement on the bid.
Although an MA organization may be
determined qualified to renew its
contract under this section, if the
organization and CMS cannot reach
agreement on the bid under subpart F of
this part, no renewal will take place,
and the failure to reach an agreement is
not subject to the appeals provisions in
subpart N of this part.
■ 62. Amend § 422.506 byA. Revising paragraph (a)(2)(i).
B. Revising paragraph (a)(2)(ii).
C. Revising paragraph (a)(3)
introductory text.
■ The revisions read as follows:

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§ 422.506 Nonrenewal of contract.

(a) * * *
(2) * * *
(i) CMS in writing, by the first
Monday in June of the year in which the
contract would end;
(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
Medicare services within the service
area, including alternative MA plans,
Medigap options, and original Medicare
and must receive CMS approval prior to
issuance.
*
*
*
*
*
(3) CMS may accept a nonrenewal
notice submitted after the first Monday
in June if­
*
*
*
*
*
■ 63. Amend § 422.510 by revising
paragraph (a)(4) to read as follows:
§ 422.510 Termination of Contract by CMS.

(a) * * *
(4) There is credible evidence that the
PDP sponsor committed or participated
in false, fraudulent, or abusive activities
affecting the Medicare program,
including submission of false or
fraudulent data.
*
*
*
*
*
■ 64. Amend § 422.520 byA. Revising the section heading.
B. Revising paragraph (a)(3).
C. Redesignating paragraph (b)
introductory text as paragraph (b)(1).
D. Adding new paragraph (b)(2).
E. Adding new paragraph (d).
■ The revisions and additions read as
follows:
§ 422.520 Prompt payment by MA
organization.

(a) * * *
(3) All other claims from noncontracted providers must be paid or
denied within 60 calendar days from the
date of the request.
(b) * * *
(2) The MA organization is obligated
to pay contracted providers under the
terms of the contract between the MA
organization and the provider.
*
*
*
*
*
(d) A CMS decision to not conduct a
hearing under paragraph (c) of this
section does not disturb any potential
remedy under State law for
1866(a)(1)(O) of the Act.
■ 65. Add new § 422.527 at the end of
subpart K to read as follows:
§ 422.527 Agreements with Federally
qualified health centers.

The contract between the MA
organization and CMS must specify
that—

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66. Amend § 422.550 by revising
paragraph (a)(2) to read as follows:

Representative means an individual
appointed by an enrollee or other party,
or authorized under State or other
applicable law, to act on behalf of an
enrollee or other party involved in the
appeal. Unless otherwise stated in this
subpart, the representative will have all
of the rights and responsibilities of an
enrollee or party in obtaining an
organization determination or in dealing
with any of the levels of the appeals
process, subject to the applicable rules
described in part 405 of this chapter.
■ 68a. Amend § 422.562 by—
A. Revising paragraph (b)(4)(iv).
B. Revising paragraph (b)(4)(vi).
C. Revising paragraph (c)(1)(ii).
D. Revising paragraph (d).
■ The revisions read as follows:

§ 422.550 General provisions.

§ 422.562 General provisions.

(a) * * *
(2) Asset transfer. Transfer of title and
property to another party constitutes
change of ownership.
*
*
*
*
*

*

(a) The MA organization must pay a
Federally qualified health center
(FQHC) a similar amount to what it pays
other providers for similar services.
(b) Under such a contract, the FQHC
must accept this payment as payment in
full, except for allowable cost sharing
which it may collect.
(c) Financial incentives, such as risk
pool payments or bonuses, and financial
withholdings are not considered in
determining the payments made by
CMS under § 422.316(a).
Subpart L-Effect of Change of
Ownership or Leasing of Facilities
During Term of Contract
■

Subpart M—Grievances, Organization
Determinations and Appeals
■

■

67. Amend § 422.560 byA. Adding paragraph (a)(3).
B. Adding paragraph (c).
The additions read as follows:

§ 422.560 Basis and scope.

(a) * * *
(3) Section 1869 of the Act 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.
These provisions are incorporated for
MA appeals by section 1852(g)(5) of the
Act and part 405 of this chapter.
*
*
*
*
*
(c) Relation to ERISA requirements.
Consistent with section 1857(i)(2) of the
Act, provisions of this subpart may, to
the extent applicable under regulations
adopted by the Secretary of Labor, apply
to claims for benefits under group
health plans subject to the Employee
Retirement Income Security Act.
■ 68. Amend § 422.561 byA. Removing the definition of
‘‘authorized representative’’.
B. Revising the definition of
‘‘Enrollee’’.
C. Adding the definition of
‘‘Representative’’.
■ The revisions and addition read as
follows:
§ 422.561

Definitions.

*

*
*
*
*
Enrollee means an MA eligible
individual who has elected an MA plan
offered by an MA organization.
*
*
*
*
*

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*
*
*
*
(b) * * *
(4) * * *
(iv) The right to an ALJ hearing if the
amount in controversy is met, as
provided in § 422.600.
*
*
*
*
*
(vi) The right to judicial review of the
hearing decision if the amount in
controversy is met, as provided in
§ 422.612.
(c) * * *
(1) * * *
(ii) The QIO review decision is subject
only to the appeal procedures set forth
in part 478 of this chapter.
*
*
*
*
*
(d) When other regulations apply.
Unless this subpart provides otherwise,
the regulations in part 405 of this
chapter (concerning the administrative
review and hearing processes and
representation of parties under titles II
and XVIII of the Act), apply under this
subpart to the extent they are
appropriate.
■ 69. Amend § 422.564 by—
A. Redesignating paragraphs (d) and
(e) as paragraphs (f) and (g).
B. Adding a new paragraph (d).
C. Adding a new paragraph (e).
■ The additions read as follows:
§ 422.564 Grievance procedures.

*

*
*
*
*
(d) Method for filing a grievance. (1)
An enrollee may file a grievance with
the MA organization either orally or in
writing.
(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 MA organization
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

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Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
after the date the organization receives
the oral or written grievance.
(2) The MA organization may extend
the 30-day timeframe by up to 14 days
if the enrollee requests the extension or
if the organization justifies a need for
additional information and documents
how the delay is in the interest of the
enrollee. When the MA organization
extends the deadline, it must
immediately notify the enrollee in
writing of the reasons for the delay.
(3) The MA organization 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
MA organization must cooperate with
the QIO in resolving the complaint.
*
*
*
*
*
■ 70. Amend § 422.566 by revising
paragraph (b)(4) to read as follows:
§ 422.566 Organization determinations.

*

*
*
*
*
(b) * * *
(4) Discontinuation or reduction of a
service if the enrollee believes that
continuation of the services is medically
necessary.
*
*
*
*
*
■ 71. Amend § 422.568 byA. Revising paragraph (a).
B. Revising paragraph (c).
■ The revisions read as follows:
§ 422.568 Standard timeframes and notice
requirements for organization
determinations.

(a) Timeframe for requests for service.
When a party has made a request for a
service, the MA organization must
notify the enrollee of its determination
as expeditiously as the enrollee’s health
condition requires, but no later than 14
calendar days after the date the
organization receives the request for a
standard organization determination.
The MA organization may extend the
timeframe by up to 14 calendar days if
the enrollee requests the extension or if
the organization justifies a need for
additional information and how the
delay is in the interest of the enrollee
(for example, the receipt of additional
medical evidence from noncontract
providers may change an MA

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organization’s decision to deny). When
the MA organization extends the
timeframe, it must notify the enrollee in
writing of the reasons for the delay, and
inform the enrollee of the right to file an
expedited grievance if he or she
disagrees with the MA organization’s
decision to grant an extension.
*
*
*
*
*
(c) Written notice for MA organization
denials. If an MA organization decides
to deny service or payment in whole or
in part, or if an enrollee disagrees with
an MA organization’s decision to
discontinue or reduce the level of care
for an ongoing course of treatment, the
organization must give the enrollee
written notice of the determination.
*
*
*
*
*
■ 72. Amend § 422.570 by revising
paragraph (d)(2)(ii) to read as follows:
§ 422.570 Expediting certain organization
determinations.

*

*
*
*
*
(d) * * *
(2) * * *
(ii) Informs the enrollee of the right to
file an expedited grievance if he or she
disagrees with the MA organization’s
decision not to expedite; and
*
*
*
*
*
■ 73. Amend § 422.572 by —
A. Revising paragraph (b).
B. Revising paragraph (c).
■ The revisions read as follows:
§ 422.572 Timeframes and notice
requirements for expedited organization
determinations.

*

*
*
*
*
(b) Extensions. The MA organization
may extend the 72–hour deadline by up
to 14 calendar days if the enrollee
requests the extension or if the
organization justifies a need for
additional information and how the
delay is in the interest of the enrollee
(for example, the receipt of additional
medical evidence from noncontract
providers may change an MA
organization’s decision to deny). When
the MA organization extends the
deadline, it must notify the enrollee in
writing of the reasons for the delay and
inform the enrollee of the right to file an
expedited grievance if he or she
disagrees with the MA organization’s
decision to grant an extension. The MA
organization must notify the enrollee of
its determination as expeditiously as the
enrollee’s health condition requires, but
no later than upon expiration of the
extension.
(c) Confirmation of oral notice. If the
MA organization first notifies an
enrollee of an adverse expedited
determination orally, it must mail
written confirmation to the enrollee

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4739

within 3 calendar days of the oral
notification.
*
*
*
*
*
■ 74. Amend § 422.582 byA. Revising paragraph (a).
B. Revising paragraph (b).
C. Revising paragraph (c)(2)
introductory text.
■ The revisions read as follows:
§ 422.582 Request for a standard
reconsideration.

(a) Method and place for filing a
request. A party to an organization
determination must ask for a
reconsideration of the determination by
making a written request to the MA
organization that made the organization
determination. The MA organization
may adopt a policy for accepting oral
requests.
(b) Timeframe for filing a request.
Except as provided in paragraph (c) of
this section, a party must file a request
for reconsideration within 60 calendar
days from the date of the notice of the
organization determination.
(c) * * *
(2) How to request an extension of
timeframe. If the 60-day period in which
to file a request for reconsideration has
expired, a party to the organization
determination may file a request for
reconsideration with the MA
organization. The request for
reconsideration and to extend the
timeframe must—
*
*
*
*
*
■ 75. Amend § 422.584 by revising
paragraph (e) to read as follows:
§ 422.584 Expediting certain
reconsiderations.

*

*
*
*
*
(e) Action following acceptance of a
request. If an MA organization grants a
request for expedited reconsideration, it
must conduct the reconsideration and
give notice in accordance with
§ 422.590.
*
*
*
*
*
■ 76. Amend § 422.590 by —
A. Revising paragraph (a)(1).
B. Revising paragraph (d)(2).
■ The revisions read as follows:
§ 422.590 Timeframes and responsibility
for reconsiderations.

(a) Standard reconsideration: Request
for services. (1) If the MA organization
makes a reconsidered determination
that is completely favorable to the
enrollee, the MA organization must
issue the determination (and effectuate
it in accordance with § 422.618(a)) as
expeditiously as the enrollee’s health
condition requires, but no later than 30
calendar days from the date it receives
the request for a standard

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reconsideration. The MA organization
may extend the timeframe by up to 14
calendar days if the enrollee requests
the extension or if the organization
justifies a need for additional
information and how the delay is in the
interest of the enrollee (for example, the
receipt of additional medical evidence
from noncontract providers may change
an MA organization’s decision to deny).
When the MA organization extends the
timeframe, it must notify the enrollee in
writing of the reasons for the delay, and
inform the enrollee of the right to file an
expedited grievance if he or she
disagrees with the MA organization’s
decision to grant an extension. For
extensions, the MA organization must
issue and effectuate its determination as
expeditiously as the enrollee’s health
condition requires, but no later than
upon expiration of the extension.
*
*
*
*
*
(d) * * *
(2) Extensions. The MA organization
may extend the 72–hour deadline by up
to 14 calendar days if the enrollee
requests the extension or if the
organization justifies a need for
additional information and how the
delay is in the interest of the enrollee
(for example, the receipt of additional
medical evidence from noncontract
providers may change an MA
organization’s decision to deny). When
the MA organization extends the
timeframe, it must notify the enrollee in
writing of the reasons for the delay, and
inform the enrollee of the right to file an
expedited grievance if he or she
disagrees with the MA organization’s
decision to grant an extension. The MA
organization must notify the enrollee of
its determination as expeditiously as the
enrollee’s health condition requires but
no later than upon expiration of the
extension.
*
*
*
*
*
■ 77. Amend § 422.600 byA. Revising paragraph (a).
B. Revising paragraph (b).
■ The revisions read as follows:

■

§ 422.600 Right to a hearing.

(a) * * *
(2) The amount in controversy meets
the threshold requirement established
annually by the Secretary.
(b) Review of MAC decision. Any
party, including the MA organization,
may request judicial review (upon
notifying the other parties) 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, a party
must file a civil action in a district court

(a) If the amount remaining in
controversy after reconsideration meets
the threshold requirement established
annually by the Secretary, any party to
the reconsideration (except the MA
organization) who is dissatisfied with
the reconsidered determination has a
right to a hearing before an ALJ.
(b) The amount remaining in
controversy, which can include any
combination of Part A and Part B
services, is computed in accordance
with part 405 of this chapter.
*
*
*
*
*

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■

78. Amend § 422.602 by—
A. Revising paragraph (a).
B. Revising paragraph (b).
C. Revising paragraph (d).
The revisions read as follows:

§ 422.602 Request for an ALJ hearing.

(a) How and where to file a request.
A party 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 time frame as
provided in part 405 of this chapter, a
party must file a request for a hearing
within 60 days of the date of the notice
of a reconsidered determination. The
time and place for a hearing before an
ALJ will be set in accordance with
§ 405.1020.
*
*
*
*
*
(d) Insufficient amount in
controversy. (1) If a request for a hearing
clearly shows that the amount in
controversy is less than that required
under § 422.600, 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 § 422.600, the ALJ
discontinues the hearing and does not
rule on the substantive issues raised in
the appeal.
■ 79. Revise § 422.608 to read as follows:
§ 422.608 Medicare Appeals Council (MAC)
review.

Any party to the hearing, including
the MA organization, who is dissatisfied
with the ALJ hearing decision, may
request that the MAC review the ALJ’s
decision or dismissal. The regulations
under part 405 of this chapter regarding
MAC review apply to matters addressed
by this subpart to the extent that they
are appropriate.
■ 80. Amend § 422.612 by—
A. Revising paragraph (a)(2).
B. Revising paragraph (b).
C. Revising paragraph (c).
■ The revisions read as follows:
§ 422.612 Judicial review.

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of the United States in accordance with
section 205(g) of the Act. See part 405
of this chapter for a description of the
procedures to follow in requesting
judicial review.
■ 81. Amend § 422.616 by revising
paragraph (a) to read as follows:
§ 422.616 Reopening and revising
determinations and decisions.

(a) An organization or reconsidered
determination made by an MA
organization, a reconsidered
determination made by the independent
entity described in § 422.592, 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 405 of this
chapter.
*
*
*
*
*
■ 82. Amend § 422.620 by—
A. Revising the section heading.
B. Revising paragraph (b).
C. Revising paragraph (c).
■ The revisions read as follows:
§ 422.620 How enrollees of MA
organizations must be notified of
noncovered inpatient hospital care.

*

*
*
*
*
(b) Physician concurrence required.
Before discharging an individual or
changing the level of care in an
inpatient hospital setting, the MA
organization must obtain the
concurrence of the physician who is
responsible for the enrollee’s inpatient
care.
(c) Notice to the enrollee. When
applicable, the written notice of noncoverage must be issued no later than
the day before hospital coverage ends.
The written notice must include the
following elements:
(1) The reason why inpatient hospital
care is no longer needed or covered;
(2) The effective date and time of the
enrollee’s liability for continued
inpatient care;
(3) The enrollee’s appeal rights;
(4) If applicable, the new lower level
of care being covered in the hospital
setting; and
(5) Any additional information
specified by CMS.
■ 83. Amend § 422.622 by revising
paragraph (b)(1)(i) to read as follows:
§ 422.622 Requesting immediate QIO
review of noncoverage of inpatient hospital
care.

*

*
*
*
*
(b) * * *
(1) * * *
(i) To the QIO that has an agreement
with the hospital under part 475,
subpart C of this chapter;
*
*
*
*
*

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Subpart N-Medicare Contract
Determinations and Appeals
84. Amend § 422.648 by adding
paragraph (c) to read as follows:

■

§ 422.648 Reconsideration: Applicability.

*

*
*
*
*
(c) Notice of any redetermination
favorable to the MA organization
applicant, including those resulting
from a hearing or Administrator review
conducted under this subpart, must be
issued by July 15 for the contract in
question to be effective on January 1 of
the following year.
Subpart O-Intermediate Sanctions
85. Amend § 422.752 by—
A. Revising paragraph (a) introductory
text.
B. Revising paragraph (a)(8)
introductory text.
C. Revising paragraph (b)
■ The revisions read as follows:
■

§ 422.752 Basis for imposing sanctions.

(a) All intermediate sanctions. For the
violations listed in this paragraph (a),
we may impose one, or more, of the
sanctions specified in § 422.750(a)(2),
(a)(3), or (a)(4) on any MA organization
that has a contract in effect. The MA
organization may also be subject to
other applicable remedies available
under law.
*
*
*
*
*
(8) 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 such an excluded individual or
entity) for the provision of any of the
following:
*
*
*
*
*
(b) Suspension of enrollment and
marketing. If CMS makes a

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determination under § 422.510(a), CMS
may impose the intermediate sanctions
in § 422.750(a)(2) and (a)(4).
■ 86. Amend § 422.756 byA. Revising paragraph (f)(2).
B. Revising paragraph (f)(3).
■ The revisions read as follows:
§ 422.756 Procedures for imposing
sanctions.

*

*
*
*
*
(f) * * *
(2) In the case of a violation described
in paragraph (a) of § 422.752, or a
determination under paragraph (b) of
§ 422.752 based upon a violation under
§ 422.510(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 MA
organization 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 § 422.752(b) other than a
determination based upon a violation
under § 422.510(a)(4), CMS may impose
civil money penalties on the MA
organization in the amounts specified in
§ 422.758 in addition to, or in place of,
the sanctions that CMS may impose
under paragraph (c) of this section.
■ 87. Amend § 422.758 byA. Revising the introductory text.
B. Revising paragraph (c).
■ The revisions read as follows:
§ 422.758 Maximum amount of civil money
penalties imposed by CMS.

If CMS makes a determination under
§ 422.510(a), as described in
§ 422.752(b) excepting those
determinations under § 422.510(a)(4),
CMS may impose civil money penalties
in addition to, or in place of, the

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sanctions that CMS may impose under
§ 422.756(c) in the following amounts:
*
*
*
*
*
(c) If CMS makes a determination that
a MA organization has terminated its
contract other than in a manner
described under § 422.512 and that the
MA organization has therefore failed to
substantially carry out the terms of the
contract—$250 per Medicare enrollee
from the terminated MA plan or plans
at the time the MA organization
terminated its contract, or $100, 000,
whichever is greater.
Nomenclature Changes
88. In part 422, remove ‘‘Departmental
Appeals Board’’ wherever it appears and
add in its place ‘‘Medicare Appeals
Council’’.
■ 89. In part 422, remove ‘‘DAB’’
wherever it appears and add in its place
‘‘MAC’’.
■ 90. In part 422, remove
‘‘Medicare+Choice’’ wherever it appears
and add in its place ‘‘Medicare
Advantage’’.
■ 91. In part 422, remove ‘‘M+C’’
wherever it appears and add in its place
‘‘MA’’.
(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. 05–1322 Filed 1–21–05; 11:19 am]
BILLING CODE 4120–01–S

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