Skip to Content
Rule

Medicare Program; Medicare Prescription Drug Benefit

Action

Final Rule.

Summary

This final rule implements the provisions of the Social Security Act (the Act) establishing and regulating the Medicare Prescription Drug Benefit. The new voluntary prescription drug benefit program was enacted into law on December 8, 2003 in section 101 of Title I of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173). Although this final rule specifies most of the requirements for implementing the new prescription drug program, readers should note that we are also issuing a closely related rule that concerns Medicare Advantage organizations, which, if they offer coordinated care plans, must offer at least one plan that combines medical coverage under Parts A and B with prescription drug coverage. Readers should also note that separate CMS guidance on many operational details appears or will soon appear on the CMS website, such as materials on formulary review criteria, risk plan and fallback plan solicitations, bid instructions, solvency standards and pricing tools, plan benefit packages.

Unified Agenda

Medicare Drug Benefit Effective Calendar Year 2006--Title I (CMS-4068-F)

4 actions from August 3rd, 2004 to January 2005

  • August 3rd, 2004
  • October 4th, 2004
    • NPRM Comment Period End
  • July 30th, 2004
  • January 2005
    • Final Action
 

Table of Contents Back to Top

Tables Back to Top

The addition of a prescription drug benefit to Medicare represents a landmark change to the Medicare program that will significantly improve the health care coverage available to millions of Medicare beneficiaries. The MMA specifies that the prescription drug benefit program will become available to beneficiaries beginning on January 1, 2006.

Generally, coverage for the prescription drug benefit will be provided under private prescription drug plans (PDPs), which will offer only prescription drug coverage, or through Medicare Advantage prescription drug plans (MA PDs), which will offer prescription drug coverage that is integrated with the health care coverage they provide to Medicare beneficiaries under Part C of Medicare. PDPs must offer a basic prescription drug benefit. MA-PDs must offer either a basic benefit or broader coverage for no additional cost. If this required level of coverage is offered, MA-PDs or PDPs, but not fallback PDPs may also offer supplemental benefits through enhanced alternative coverage for an additional premium. All organizations offering drug plans will have flexibility in the design of the prescription drug benefit. Consistent with the MMA, this final rule also provides for subsidy payments to sponsors of qualified retiree prescription drug plans to encourage retention of employer-sponsored benefits.

We are implementing the drug benefit in a way that permits and encourages a range of options for Medicare beneficiaries to augment the standard Medicare coverage. These options include facilitating additional coverage through employer plans, MA-PD plans and high-option PDPs, and through charity organizations and State pharmaceutical assistance programs. See sections II.C, II.J, and II.P, and II.R of this preamble for further details on these issues.

The proposed rule identified options and alternatives to the provisions we proposed and we strongly encouraged comments and ideas on our approach and on alternatives to help us design the Medicare Prescription Drug Benefit Program to operate as effectively and efficiently as possible in meeting the needs of Medicare beneficiaries.

DATES: Back to Top

These regulations are effective on March 22, 2005.

FOR FURTHER INFORMATION CONTACT: Back to Top

Lynn Orlosky (410) 786-9064 or Randy Brauer (410)786-1618 (for issues related to eligibility, elections, enrollment, including auto-enrollment of dual eligible beneficiaries, and creditable coverage).

Melvin Sanders (410) 786-8355 (for issues related to marketing and user fees).

Vanessa Duran (214) 767-6435 (for issues related to benefits and beneficiary protections, including Part D benefit packages, Part D covered drugs, coordination of benefits in claims processing and tracking of true-out-of-pocket costs, pharmacy network access standards, plan information dissemination requirements, and privacy of records).

Craig Miner, RPh. (410) 786-1889 for issues of pharmacy benefit cost and utilization management, formulary development, quality assurance, medication therapy management, and electronic prescribing).

Mark Newsom (410) 786-3198 (for issues of submission, review, negotiation, and approval of risk and limited risk bids for PDPs and MA-PD plans; the calculation of the national average bid amount; determination and collection of enrollee premiums; calculation and payment of direct and reinsurance subsidies and risk-sharing; and retroactive adjustments and reconciliations.)

Jim Owens (410) 786-1582 (for issues of licensing and waiver of licensure, the assumption of financial risk for unsubsidized coverage, and solvency requirements for unlicensed sponsors or sponsors who are not licensed in all States in the region in which it wants to offer a PDP.)

Jim Slade (410) 786-1073 (for issues related to pre-emption of State law) and (for issues related to solicitation, review and approval of fallback prescription drug plan proposals; fallback contract requirements; and enrollee premiums and plan payments specific to fallback plans.)

Christine Hinds (410) 786-4578 (for issues of coordination of Part D plans with providers of other prescription drug coverage including Medicare Advantage plans, State pharmaceutical assistance programs (SPAPs), Medicaid, and other retiree prescription drug plans; also for issues related to eligibility for and payment of subsidies for assistance with premium and cost-sharing amounts for Part D eligible individuals with lower income and resources; for rules for States on eligibility determinations for low-income subsidies and general State payment provisions including the phased-down State contribution to drug benefit costs assumed by Medicare).

Mark Smith (410) 786-8015 (for issues related to conditions necessary to contract with Medicare as a PDP sponsor, as well as contract requirements, intermediate sanctions, termination procedures and change of ownership requirements.)

Jean LeMasurier (410) 786-1091 (for issues related to employer group waivers and options).

Frank Szeflinski (303) 844-7119 (for issues related to cost-based HMOs and CMPS offering Part D coverage.)

John Scott (410) 786-3636 (for issues related to the procedures PDP sponsors must follow with regard to grievances, coverage determinations, and appeals.)

Mark Smith (410) 786-8015 (for issues related to solicitation, review and approval of fallback prescription drug plan proposals; fallback contract requirements; and enrollee premiums and plan payments specific to fallback plans.)

Jim Mayhew (410) 786-9244 (for issues related to the alternative retiree drug subsidy and other employer-based sponsor options.)

Joanne Sinsheimer (410) 786-4620 (for issues related to physician self-referral prohibitions.)

Brenda Hudson (410) 786-4085 (for issues related to PACE organizations offering Part D coverage.)

Julie Walton (410) 786-4622 or Kathryn McCann (410) 786-7623 (for issues related to provisions on Medicare supplemental (Medigap) policies.)

SUPPLEMENTARY INFORMATION: Back to Top

Copies: To order copies of the Federal Register containing this document, send your request to: New Orders, Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date of the issue requested and enclose a check or money order payable to the Superintendent of Documents, or enclose your Visa or Master Card number and expiration date. Credit card orders can also be placed by calling the order desk at (202) 512-1800 (or toll-free at 1-888-293-6498) or by faxing to (202) 512-2250. The cost for each copy is $10. As an alternative, you can view and photocopy the Federal Register document at most libraries designated as Federal Depository Libraries and at many other public and academic libraries throughout the country that receive the Federal Register.

This Federal Register document is also available from the Federal Register online database through GPO Access, a service of the U.S. Government Printing Office. The web site address is: http://www.access.gpo.gov/fr/index.html.

Table of Contents Back to Top

I. Background

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

B. Codification of Regulations

C. Organizational Overview of Part 423

II. Discussion of the Provisions of the Final Rule

A. General Provisions

1. Overview

2. Discussion of Important Concepts and Key Definitions

B. Eligibility and Enrollment

1. Eligibility and Enrollment

2. Enrollment Process

3. Enrollment of Full Benefit Dual Eligible Individuals

4. Disenrollment process

5. Enrollment Periods

6. Effective Dates

7. Involuntary Disenrollment by the PDP

8. Late Enrollment Penalty

9. Information about Part D

10. Approval of Marketing Materials and Enrollment Forms

11. Information Provided to PDP sponsors and MA Organizations

12. Procedures to Determine and Document Creditable Status of Prescription Drug Coverage

C. Voluntary Prescription Benefits and Beneficiary Protections

1. Overview and Definitions

2. Plan Formularies

3. Establishment of Prescription Drug Plan Service Areas

4. Access to Covered Part D Drugs

5. Special Rules for Out-of-Network Access to Covered Part D Drugs at Pharmacies

6. Dissemination of Plan Information

7. Public Disclosure of Pharmaceutical Prices for Equivalent Drugs

8. Privacy, Confidentiality, and Accuracy of Enrollee Records

D. Cost Control and Quality Improvement Requirements for Part D Plans

1. Overview (Scope)

2. Drug Utilization Management, Quality Assurance, and Medication Therapy Management Programs (MTMPs)

3. Consumer Satisfaction Surveys

4. Electronic Prescription Program

5. Quality Improvement Organizations (QIO) Activities

6. Treatment of Accreditation

E. RESERVED

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

1. Overview

2. Requirements for Submission of Bids and Related Information

3. General CMS Guidelines for Actuarial Valuation of Prescription Drug Coverage

4. Determining Actuarial Equivalency for Variants of Standard Coverage and for Alternative Coverage.

5. Test for Assuring the Same Protection against High Out-of-Pocket Costs

6. Review and Negotiation of Bid and Approval of Plans

7. National Average Monthly Bid Amount

8. Rules Regarding Premiums

9. Collection of Monthly Beneficiary Premiums

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

1. Overview

2. Definitions

3. General Payment Provisions

4. Requirement for Disclosure of Information

5. Determination of Payment

6. Low-Income Cost-Sharing Subsidy Interim Payments

7. Risk Sharing Arrangements

8. Retroactive Adjustments and Reconciliation

9. Reopening

10. Payment Appeals

H. RESERVED

I. Organization Compliance with State Law and Preemption by Federal Law.

1. Overview

2. Waiver of Certain Requirements in Order to Expand Choice

3. Temporary Waiver for Entities Seeking to Offer a Prescription Drug Plan in more than One State in a Region

4. Solvency Standards for Non-Licensed Entities

5. Preemption of State Laws and Prohibition of Premium Taxes

J. Coordination Under Part D Plans with Other Prescription Drug Coverage

1. Overview and Terminology

2. Application of Part D Rules to Certain Part D Plans on and after January 1, 2006

3. Application to PACE Plans

4. Application to Employer Groups

5. Medicare Secondary Payer Procedures

6. Coordination of Benefits with Other Providers of Prescription Drug Coverage.

K. Application Procedures and Contracts with PDP Sponsors

1. Overview

2. Definitions

3. Application Requirements

4. Evaluation and Determination Procedures for Applications to Be Determined Qualified to Act as a Sponsor

5. General Provisions

6. Contract Provisions

7. Effective Date and Term of Contract

8. Nonrenewal of Contract

9. Modification or termination of contract by mutual consent

10. Termination of Contracts by CMS

11. Termination of Contract by the Part D Plan Sponsor

12. Minimum Enrollment Requirements

13. Reporting Requirements

14. Prohibition of Midyear Implementation of Significant New Regulatory Requirements

15. Fraud, Waste and Abuse

L. Effect of Change of Ownership or Leasing of Facilities during the Term of Contract

1. General Provisions

2. Change of Ownership

3. Novation Agreement Requirements

M. Grievances, Coverage Determinations, and Appeals

1. Introduction

2. General Provisions

3. Grievance Procedures

4. Coverage Determinations

5. Formulary Exceptions Procedures

6. Appeals

7. Effectuation of Reconsideration Determinations

8. Federal Preemption of Grievances and Appeals

9. Employer Sponsored Prescription Drug Programs and Appeals

10. Miscellaneous

N. Medicare Contract Determinations and Appeals

1. Overview

2. Provisions of the Final Rule

O. Intermediate Sanctions

1. Kinds of Sanctions

2. Basis for Imposing Sanctions

3. Procedures for Imposing Sanctions

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

1. Definitions

2. Eligibility for the Low-Income Subsidy

3. Eligibility Determinations, Redeterminations and Applications

4. Premium Subsidy and Cost-Sharing Subsidy

5. Administration of Subsidy Program

Q. Guaranteeing Access to a Choice of Coverage (Fallback Prescription Drug Plans)

1. Overview

2. Terminology

3. Assuring Access to a Choice of Coverage

4. Submission and Approval of Bids

5. Rules Regarding Premiums

6. Contract Terms and Conditions

7. Payment to Fallback Plans

R. Payments to Sponsors of Retiree Prescription Drug Plans

1. Introduction

2. Options for Sponsors of Retiree Prescription Drug Programs

3. Definitions

4. Requirements for qualified retiree prescription drug plans

5. Retiree drug subsidy amounts

6. Appeals

7. Change of Ownership

8. Construction

S. Special Rules for States-Eligibility Determinations for Low-Income Subsidies, and General Payment Provisions

1. Eligibility Determinations

2. General Payment Provisions

3. Treatment of Territories

4. State Contribution to Drug Benefit Costs Assumed by Medicare

T. Part D Provisions Affecting Physician Self-Referral, Cost-Based HMO, PACE, and Medigap Requirements

1. Definition of Outpatient Prescription Drugs for Purposes of Physician Self-Referral Prohibition

2. Cost-Based HMOs and CMPS offering Part D coverage

3. PACE Organizations Offering Part D Coverage

4. Medicare Supplemental Policies

III. Provisions of the Final Rule

IV. Collection of Information Requirements

V. Regulatory Impact Analysis

In addition, because of the many organizations and terms to which we refer by acronym in this final rule, we are listing these acronyms and their corresponding terms in alphabetical order below:

ABN Advanced beneficiary notice
ADAP AIDS Drug Assistance Program
AEP Annual coordinated election period
AHRQ Agency for Healthcare Research and Quality
AI/AN American Indians and Alaska Natives
AIC Amount in controversy
ALJ Administrative Law Judge
AMA American Medical Association
AMCP Academy of Managed Care Pharmacy
ANCI American National Standards Institute
AO Accreditation organization
ASAP American Society of Automation in Pharmacy
ASHP American Society of Health Systems Pharmacists
AWP Average wholesale price
BBA Balanced Budget Act
BLS Bureau of Labor Statistics
CAHP Consumer Assessment of Health Plan
CBI Confidential business information
CBO Congressional Budget Office
CCIP Chronic care improvement programs
CCP Comprehensive Compliance Program
CFR Code of Federal Regulations
CHOW Change of ownership
CMP competitive medical plan
CMS Centers for Medicare Medicaid Services
COB Coordination of benefit
COBRA Consolidated Omnibus Budget Reconciliation Act (of 1985)
CPI-PD Consumer Price Index for Prescription Drugs and Medical Supplies
CPT Current Procedural Terminology
CY Calendar year
DAB Departmental Appeals Board
DHS Designated health services
DME Durable medical equipment
DoD Department of Defense
DOL Department of Labor
DUR Drug utilization review
EOB explanation of benefits
ERISA Employee Retirement Income Security Act of 1974
ESRD End stage renal disease
FAR Federal Acquisition Regulation
FDA Food and Drug Administration
FEHBP Federal Employee Health Benefits Program
FFP Federal financial participation
FOIA Freedom of Information Act
FQHCs Federally qualified health centers
FPL Federal poverty level
FR Federal Register
FSA Flexible savings account
FY Fiscal year
HEDIS Health plan Employer Data and Information Set
HHS Department of Health and Human Services
HIC Health insurance claim
HIPAA Health Insurance Portability and Accountability Act of 1996
HMO Health maintenance organization
HPMS Health Plan Management System
HRA Health reimbursement account
HRSA Health Resources and Services Administration
HSA Health savings account
ICFs/MR Intermediate care facilities for the mentally retarded
IDIQ Indefinite duration, indefinite quantity
IEP Initial enrollment period
IHS Indian Health Service
IRE Independent review entity
I/T/U Indian Tribes and Tribal organizations, and urban Indian organizations
JCHACO Joint Commission on Accreditation of Health Care Organizations
LIS Low-income subsidy
LTC Long term care
MA Medicare Advantage (formerly Medicare+Choice)
MA-PD Medicare Advantage prescription drug plans
MAC Medicare Appeals Council
MAX Medicaid Analytic extract
MCBS Medicare Current Beneficiary Survey
MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003
MSA Medicare savings account
MSIS Medicaid Statistical Information System
MSP Medicare Secondary Payor
MTMP Medication Therapy Management Program
NAIC National Association of Insurance Commissioners
NCQA National Committee for Quality Assurance
NCPDP National Council for Prescription Drug Programs
NCVHS National Center for Vital and Health Statistics
NDC National Drug Code
NHE National Health Expenditure
NPA National PACE Association
NPI National Provider Identifier
OACT Office of the Actuary (CMS)
OBRA Omnibus Budget Reconciliation Act
OCR Office for Civil Rights
OEPI Open enrollment period for institutionalized individuals
OIG Office of the Inspector General
OPM Office of Personnel Management
PT Pharmaceutical and therapeutic
PBA Pharmacy benefit administrator
PBMs Pharmacy benefit managers
PBP Plan Benefit Package
PDP Private prescription drug plan
PDSC Phased-down State contribution
PFFS Private fee-for-service plan
PHI Protected health information
PhRMA Pharmaceutical Manufacturers and Researchers of America
PPO Preferred provider organization
PPV Pharmaceutical Prime Vendor
PSO Provider-sponsored organization
QDWIs Qualified disabled and working individuals
QIl Qualified individuals
QIO Quality Improvement Organization
QMB Qualified Medicare beneficiaries
REACH Regional Education About Choices in Health
RHC Rural Health Center
SCHIP State Children's Health Insurance Program
SEP Special enrollment period
SHIP State health insurance assistance program
SLMB Special Low-Income Beneficiaries
SOW Scope of work
SPAP State Pharmaceutical Assistance Program
SPD Summary Plan Description
SPOC Single point of contact
SSA Social Security Administration
SSI Supplemental Security Income
SSRI Selective serotonin reuptake inhibitor
SSSGs Similarly Sized Subscriber Groups
TANF Temporary assistance for needy families
TrOOP True out-of-pocket
UC Usual and customary
URAC Utilization Review Accreditation Commission
USP U.S. Pharmacopoeia
VA Department of Veterans Affairs
VDSA Voluntary data sharing agreement

I. Background Back to Top

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

Section 101 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173) amended Title XVIII of the Social Security Act (the Act) by establishing a new Part D: the Voluntary Prescription Drug Benefit Program. (For ease of reference, we will refer to the new prescription drug benefit program as Part D of Medicare and we will refer to the Medicare Advantage Program described in Part C of title XVIII of the Act -as Part C of Medicare.)

We believe that the new Part D benefit constitutes the most significant change to the Medicare program since its inception in 1965. The addition of outpatient prescription drugs to the Medicare program reflects the Congress' recognition of the fundamental change in recent years in how medical care is delivered in the U.S. It recognizes the vital role of prescription drugs in our health care delivery system, and the need to modernize Medicare to assure their availability to Medicare beneficiaries. This final rule is designed to broaden participation in the new benefit both by organizations that offer prescription drug coverage and by eligible beneficiaries. In conjunction with complementary improvements to the Medicare Advantage program, these changes should significantly increase the coverage and choices available to Medicare beneficiaries.

Effective January 1, 2006, the new program establishes an optional prescription drug benefit for individuals who are entitled to or enrolled in Medicare benefits under Part A and Part B. Beneficiaries who qualify for both Medicare and Medicaid (full-benefit dual eligibles) will automatically receive the Medicare drug benefit unless Medicare has identified the individual as having other creditable coverage through an employer-based prescription drug plan. The statute also provides for assistance with premiums and cost sharing to eligible low-income beneficiaries.

In general, coverage for the new prescription drug benefit will be provided through private prescription drug plans (PDPs) that offer drug-only coverage, or through Medicare Advantage (MA) (formerly known as Medicare+Choice) plans that offer integrated prescription drug and health care coverage (MA-PD plans). PDPs must offer a basic drug benefit. MA-PDs must offer either a basic benefit, or a benefit with broader coverage than the basic benefit, but at no additional cost to the beneficiary. If this required level of coverage is offered, MA-PDs or PDPs, but not fallback plans, may also offer supplemental benefits, called “enhanced alternative coverage,” for an additional premium.

All organizations offering drug plans will have flexibility in terms of benefit design, including the authority to establish a formulary to designate specific drugs that will be available, and the ability to have a cost-sharing structure other than the statutorily-defined structure, subject to certain actuarial tests. Most Part D plans also may include supplemental drug coverage such that the total value of the coverage offered exceeds the value of basic prescription drug coverage. The specific sections of the Act that address the prescription drug benefit program are the following:

1860D-1 Eligibility, enrollment, and information.
1860D-2 Prescription drug benefits.
1860D-3 Access to a choice of qualified prescription drug coverage.
1860D-4 Beneficiary protections for qualified prescription drug coverage.
1860D-11 PDP regions; submission of bids; plan approval.
1860D-12 Requirements for and contracts with prescription drug plan (PDP) sponsors.
1860D-13 Premiums; late enrollment penalty.
1860D-14 Premium and cost-sharing subsidies for low-income individuals.
1860D-15 Subsidies for Part D eligible individuals for qualified prescription drug coverage.
1860D-16 Medicare Prescription Drug Account in the Federal Supplementary Medical Insurance Trust Fund.
1860D-21 Application to Medicare Advantage program and related managed care programs.
1860D-22 Special rules for employer-sponsored programs.
1860D-23 State pharmaceutical assistance programs.
1860D-24 Coordination requirements for plans providing prescription drug coverage.
1860D-41 Definitions; treatment of references to provisions in Part C.
1860D-42 Miscellaneous provisions.
Specific sections of the MMA that also relate to the prescription drug benefit program are the following:
Sec. 102 Medicare Advantage Conforming Amendments
Sec. 103 Medicaid Amendments
Sec. 104 Medigap
Sec. 109 Expanding the work of Medicare Quality Improvement Organizations to include Parts C and D.

B. Codification of Regulations

The final provisions set forth here are codified in 42 CFR Part 423-Voluntary Medicare Prescription Drug Benefit. Note that the regulations—

  • for Medicare supplemental policies (Medigap) will continue to be located in 42 CFR part 403 (subpart B);
  • for exclusions from Medicare and limitations on Medicare payment (the physician self-referral rules) will continue to be located in 42 CFR part 411;
  • for managed care organizations that contract with us under cost contracts will continue to be located in 42 CFR part 417, Health Maintenance Organizations, Competitive Medical Plans, and Health Care Prepayment Plans;
  • for PACE organizations will continue to be located in 42 CFR part 460.

C. Organizational Overview of Part 423

The regulations set forth in this final rule are codified in the new 42 CFR Part 423-Voluntary Medicare Prescription Drug Benefit. There are a number of places in which statutory provisions in Part D incorporate by reference specific sections in Part C of Medicare (the MA program). The MA regulations appear at 42 CFR Part 422. Since the same organizations that offer MA coordinated care plans will also be required to offer MA-PD plans, we believed it was appropriate to adopt the same organizational structure as part 422. Wherever possible, we modeled the prescription drug regulations on the parallel provisions of the part 422 regulations.

The major subjects covered in each subpart of part 423 are as follows:

Subpart A, General Provisions: Basis and scope of the new part 423, Definitions and discussion of important concepts used throughout part 423, and sponsor cost-sharing in beneficiary education and enrollment-related costs (user fees).

Subpart B, Eligibility, Election, and Enrollment: Eligibility for enrollment in the Part D benefit, enrollment periods, disenrollment, application of the late enrollment penalty, approval of marketing materials and enrollment forms, and the meaning and documentation of creditable coverage. (Please note that other, related topics, are discussed in the following subparts: Subpart P, eligibility and enrollment for low-income individuals; Subpart S, provisions relating to the phase-down of State contributions for dual-eligible drug expenditures; Subpart F, calculation and collection of late enrollment fees; Subpart C, plan disclosure; Subpart Q, eligibility and enrollment for fallback plans; and Subpart T, the definition of a Medicare supplemental (Medigap) policy.)

Subpart C, Benefits and Beneficiary Protections: Prescription drug benefit coverage, service areas, network and out-of-network access, formulary requirements, dissemination of plan information to beneficiaries, and confidentiality of enrollee records. (Please note that actuarial valuation of the coverage offered by plans, as well as the submission of the bid, is discussed in subpart F. Access to negotiated prices is discussed in subpart C, while the reporting of negotiated prices is discussed in subpart G. Formularies are discussed in subpart C, while appeals related to formularies are discussed in subpart M. Incurred costs toward true out-of-pocket (TrOOP expenditures) are discussed in subpart C, while the procedures for determining whether a beneficiary's Part D out-of-pocket costs are actually reimbursed by insurance or another third-party arrangement are discussed in subpart J. Information that plans must disseminate to beneficiaries is discussed in subpart C, while Part D information that CMS must disseminate to beneficiaries is discussed in subpart B.)

Subpart D, Cost Control and Quality Improvement Requirements for Part D Plans: Utilization controls, quality assurance, and medication therapy management, as well as rules related to identifying enrollees for whom medication therapy management is appropriate, consumer satisfaction surveys, and accreditation as a basis for deeming compliance.

Subpart E, Reserved.

Subpart F, Submission of Bids and Monthly Beneficiary Premiums; Plan Approval: Bid submission, the actuarial value of bid components, review and approval of plans, and the calculation and collection of Part D premiums.

Subpart G, Payments to Part D plans for Qualified Prescription Drug Coverage: Data submission, payments and reconciliations for direct subsidies, risk adjustment, reinsurance, and risk-sharing arrangements.

Subpart H, Reserved.

Subpart I, Organization Compliance with State Law and Preemption by Federal Law: Licensure, assumption of financial risk, solvency, and State premium taxes.

Subpart J, Coordination Under Part D With Other Prescription Drug Coverage: Applicability of Part D rules to the Medicare Advantage program, waivers available to facilitate the offering of employer group plans, waivers of part D provisions for PACE plans and 1876 cost plans offering qualified prescription drug coverage, and procedures to facilitate calculation of true out-of-pocket (TrOOP) expenses and coordination of benefits with State pharmaceutical assistance programs and other entities that provide prescription drug coverage. (Please note that subpart C discusses, in more detail, coordination of benefits from the perspective of which prescription drug benefits are covered by Part D and the determination of which incurred beneficiary costs will be counted as TrOOP expenditures. Provisions relating to disenrollment for material misrepresentation by a beneficiary are discussed in subpart B.)

Subpart K, Application Procedures and Contracts with PDP Sponsors: Application procedures and requirements; contract terms; procedures for termination of contracts; reporting by PDP sponsors.

Subpart L, Effect of Change of Ownership or Leasing of Facilities during Term of Contract: Change of ownership of a PDP sponsor; novation agreements; leasing of a PDP sponsor's facilities.

Subpart M, Grievances, Coverage Determinations and Appeals: Coverage determinations by sponsors, exceptions procedures, and all levels of appeals by beneficiaries.

Subpart N, Medicare Contract Determinations and Appeals: Notification by CMS about unfavorable contracting decisions, such as nonrenewals or terminations; reconsiderations; appeals.

Subpart O, Sanctions: Provisions concerning available sanctions for participating organizations.

Subpart P, Premiums and Cost-Sharing Subsidies for Low-Income Individuals: Eligibility determinations and payment calculations for low-income subsidies.

Subpart Q, Guaranteeing Access to a Choice of Coverage (Fallback Plans): Definitions, access requirements, bidding process, and contract requirements for fallback PDPs.

Subpart R, Payments to Sponsors of Retiree Prescription Drug Plans: Provisions for making retiree drug subsidy payments to sponsors of qualified retiree prescription drug plans.

Subpart S, Special Rules for States—Eligibility Determinations for Subsidies and General Payment Provisions: State/Medicaid program's role in determining eligibility for low-income subsidy and other issues related to the Part D benefit.

In addition, in subpart T, this final rule also makes changes to: part 400 relating to definitions of Parts C D, part 403 relating to Medicare supplemental policies (Medigap), part 411 relating to exclusions from Medicare and limitations on Medicare payment (the physician self-referral rules), part 417 relating to cost-based health maintenance organizations (HMOs), and part 460 relating to PACE organizations.

II. Provisions of the Proposed Rule Back to Top

We received 7,696 items of correspondence containing comments on the August 2004 proposed rule. Commenters included managed care organizations and other insurance industry representatives, pharmacy benefit management firms, pharmacies and pharmacy education and practice-related organizations, pharmaceutical manufacturers, representatives of physicians and other health care professionals, beneficiary advocacy groups, representatives of hospitals and other healthcare providers, States, employers and benefits consulting firms, members of the Congress, Indian Health Service, Tribal and Urban Health Programs, American Indians and Alaska Natives, beneficiaries, and others. We also received many comments expressing concerns unrelated to the proposed rule. Some commenters expressed concerns about Medicare unrelated to the Prescription Drug Benefit, while others addressed concerns about health care and health insurance coverage unrelated to Medicare. Because of the volume of comments we received in response to the proposed rule, we will be unable to address comments and concerns that are unrelated to the proposed rule.

Most of the comments addressed multiple issues, often in great detail. Listed below are the areas of the regulation that received the most comments:

  • Transition of Coverage for Dual Eligibles from Medicaid to Medicare
  • Access to Drugs in Long Term Care Facilities
  • Formulary Policies
  • Medication Therapy Management Requirements
  • Network Access Standards
  • Part B/Part D Drug Identification and Coordination
  • Dispensing Fees

In this final rule, we address comments received on the proposed rule. For the most part, we will address issues according to the numerical order of the related regulation sections.

A. General Provisions

1. Overview

Section 423.1 of subpart A specified the general statutory authority for the ensuing regulations and indicated that the scope of part 423 is to establish requirements for the Medicare prescription drug benefit program. We proposed key definitions at § 423.4 for terms that appear in multiple sections of part 423.

Consistent with the MMA statute, in many cases we proposed procedures that parallel those in effect under the MA program. Our goal was to maintain consistency between these two programs wherever possible; thus we evaluated the need for parallel changes in the MA final rule when we received comments on provisions that affect both programs.

Comment: Many commenters urged us to finalize regulations by early January—and detailed business requirements soon thereafter. Some also recommended that we make public certain key decisions and data sooner than January in order to promote planning.

Response: We agree that the earliest possible release of program requirements and final rules will facilitate planning and implementation of new business processes required to offer and administer this new program. Consequently we have made numerous draft documents, such as the risk plan solicitation, PDP solvency requirements, formulary review policies, and the actuarial bidding instructions, available for public comment in November and December of 2004 and have expedited the rulemaking process to meet these goals. In response to the lack of specificity regarding the PDP regions in our proposed rule, we conducted extensive outreach in order to obtain public input prior to the publication of our final rule. On December 6, 2004, we announced the establishment of 26 MA regions and 34 PDP regions.

2. Discussion of Important Concepts and Key Definitions (§ 423.4)

a. Introduction

For the most part, the proposed definitions were taken directly from section 1860D-41 of the Act. The definitions set forth in subpart A apply to all of part 423 unless otherwise indicated, and are applicable only for the purposes of part 423. For example, “insurance risk” applies only to pharmacies that contract with PDP sponsors under part 423.

Definitions that have a more limited application have not been included in subpart A, but instead are set forth within the relevant subpart of the regulations. For example, in subpart F, we have included all the definitions related to bids and premiums. The detailed definitions and requirements related to prescription drug coverage are included in subpart C, but because of their direct relevance to the bidding process they are also referenced in subpart F.

Following our discussion of important concepts, we provide brief definitions of terms that occur in multiple sections of this preamble and part 423. We believe that it is helpful to define these frequently occurring terms to aid the reader, but that these terms do not require the extended discussion necessary in our section on important concepts.

b. Discussion of Actuarial Equivalence, Creditable Prescription Drug Coverage, PDP Plan Regions, Service Area, and User Fees

  • Discussion of the Meaning of Actuarial Equivalence

The concept of actuarial equivalence is applied in several different contexts in Title I of the MMA. In very general terms, actuarial equivalence refers to a determination that, in the aggregate, the dollar value of drug coverage for a set of beneficiaries under one plan can be shown to be equal to the dollar value for those same beneficiaries under another plan. Given the various uses for this term in the Part D provisions, we proposed the following relatively general definition: “Actuarial equivalence” means a state of equivalent values demonstrated through the use of generally accepted actuarial principles and in accordance with section 1860D-11(c) of the Act and § 423.265(c)(3) of this part. This concept is discussed in further detail in those sections of this preamble, such as section II.F, where actuarial equivalence comes into play. We will provide further detailed guidance on methods required to demonstrate actuarial equivalence.

Comment: One commenter requested that the definition of actuarial equivalence be refined through examples or more descriptive language.

Response: We agree that it is critical to disclose our requirements for calculation of actuarial values under Part D requirements as fully and as expeditiously as possible to reduce uncertainty on the part of potential plan sponsors. To that end we made available our draft bid preparation rules and processes early in December 2004 for public comment, and we will continue to refine our guidance to bidders through vehicles such as the annual 45-day notice and the CMS website. We have modified our definition to refer to this separate guidance.

  • Discussion of the Meaning of Creditable Prescription Drug Coverage

Comments on creditable coverage are addressed in the preamble for subparts B and T.

  • Prescription Drug Plan Regions

Prescription drug plan regions are areas in which a contracting PDP sponsor must provide access to covered Part D drugs. Although we included specifications for regions in § 423.112, the regions themselves were not set forth in the proposed rule. To the extent feasible, we tried to establish PDP regions that were consistent with MA regions. The MMA specifically required no fewer than 10 regions and no more than 50 regions, not including the territories. For a further discussion of the PDP regions, see section II.C of this preamble.

Comment: Many commenters expressed concerns about the MA and PDP region decisions. Many argued that regions should closely mirror existing State insurance markets to maximize participation. Others representing rural constituencies argued for larger regions to encourage offering of coverage in rural areas.

Response: We conducted a market survey and analysis, including an examination of current insurance markets as required in the MMA. Key factors in the survey and analysis included payment rates; eligible population size per region; preferred provider organization (PPO) market penetration; current existence of PPOs, MA plans, or other commercial plans; and presence of PPO providers and primary care providers. Additional factors were also considered, including solvency and licensing requirements, as well as capacity issues. Recognizing the lack of specificity regarding the PDP regions in our proposed rule, we conducted extensive outreach in order to obtain public input prior to the publication of our final decision. On December 6, 2004, we announced the establishment of 26 MA regions and 34 PDP regions. For maps and fact sheets on the regions, please see http://www.cms.hhs.gov/medicarereform/mmaregions/.

  • Service Area

In the proposed rule we proposed that Medicare beneficiaries would be eligible to enroll in a PDP or an MA-PD plan only if they reside in the PDP's or MA-PD plan's “Service Area.” For PDPs the service area is defined as the region or regions for which they must provide access. This is the Region established by CMS either pursuant to proposed § 423.112, or, in the case of fallback plans, the fallback service area pursuant to § 423.859, within which the PDP is responsible for providing access to the Part D drug benefit in accordance with the access standards in proposed § 423.120. Under the MA program, an MA plan's service area is defined in § 422.2. For coordinated care plans, the definition of “service area” expressly includes the condition that the service area is an area in which access is provided in accordance with access standards in § 422.112.

We also proposed that for purposes of enrolling in Part D with a PDP, or under an MA-PD plan, the definition of Service Area that governs eligibility to enroll is the area within which the Part D access standards under § 423.120 are met. Beneficiaries in jail or prison do not have access to pharmacies available as required under § 423.120. Therefore, such beneficiaries would not be considered to be in a PDP or MA-PD plan's Service Area for purposes of enrolling in Part D. Incarcerated individuals accordingly would not be assessed a late penalty when they enroll in Part D (either with a PDP or MA-PD plan) upon being released. The same analysis applies with regard to a beneficiary who lives abroad, and does not reside within the boundaries of any PDP Region or MA-PD Service Area. We have modified our definition of service area to clarify our intent as proposed.

Comment: Several commenters asked that we waive the service area requirement for employer group PDP plans.

Response: We agree that we have the authority to waive the service area requirement for employer-sponsored group prescription drug plans, and we plan to do so in appropriate cases. We will provide further details on waivers in separate CMS guidance.

  • Sponsor Cost-Sharing in Beneficiary Education and Enrollment Related Costs-User Fees (§ 423.6)

The last section of subpart A proposed regulations implementing the user fees provided for in section 1857(e)(2) of the Act, as incorporated by section 1860D-12(b)(3)(D) of the Act. These fees are currently required of MA plans for the purpose of defraying part of the ongoing costs of the national beneficiary education campaign that includes developing and disseminating print materials, the 1-800-MEDICARE telephone line, community based outreach to support State health insurance assistance programs (SHIPs), and other enrollment and information activities required under section 1851 of the Act and counseling assistance under section 4360 of the Omnibus Budget Reconciliation Act of 1990 (103).

The MMA expands the user fee to apply to PDP sponsors as well as MA plans. The expansion of the application of user fees recognizes the increased Medicare beneficiary education activities that we would require as part of the new prescription drug benefit. In 2006 and beyond, user fees will help to offset the costs of educating over 41 million beneficiaries about the drug benefit through written materials such as a publication describing the drug benefit, internet sites, and other media. The user fee provisions establish the applicable aggregate contribution portions for PDP sponsors and MA organizations through two calculations.

Comment: Several commenters supported the extension of user fees to PDP sponsors in addition to MA plans. One commenter emphasized the need for Medicare to provide national beneficiary educational materials in accessible formats (including Braille and other languages commonly used by beneficiaries), as well as telecommunications equipment to support beneficiaries with hearing impairments, in order to meet the various needs of Medicare beneficiaries with disabilities. Another commenter urged us to focus beneficiary education efforts on helping beneficiaries make a choice, as opposed to simply describing the array of choices. This commenter also urged us not to overlook the M+C population in its outreach campaign.

Response: We have a long-standing tradition of making our beneficiary education materials accessible in a variety of formats to meet the needs of people with disabilities and special communications barriers. Beneficiary publications on a variety of topics are available in Braille, large print, and audiotape versions, in addition to conventional formats. We expect to continue these practices when educating beneficiaries about MMA topics. In addition, we are finalizing a partnership with the Social Security Administration (SSA) that will allow some of our educational products to be translated into 14 languages (other than English and Spanish) and reach a broader audience.

We are currently planning the development of a range of tools and strategies that will help beneficiaries make a choice that meets their needs. We agree that this action is an essential part of our education process, in addition to building general awareness and understanding. We will address the needs of multiple audiences through our outreach and education efforts, including those with M+C (MA) plans.

c. Definitions of Frequently Occurring Terms

The following definitions were discussed in the preamble to our proposed rule:

Full-benefit dual eligible beneficiary means an individual who meets the criteria established in § 423.772 (Subpart P), regarding coverage under both Part D and Medicaid.

Comment: One commenter asked us to clarify whether individuals eligible for Medicaid at the special income level for long term care qualify as full benefit dual eligibles for a full subsidy.

Response: Yes, all individuals who qualify for Medicaid, including expansion populations and persons eligible for Medicaid in long term care facilities under a State's special income standard which does not exceed 300 percent of the supplemental security income (SSI) payment standard will qualify as full benefit dual eligible beneficiaries eligible for a full subsidy.

Insurance risk means, for a participating pharmacy, risk of the type commonly assumed only by insurers licensed by a State and does not include payment variations designed to reflect performance-based measures of activities within the control of the pharmacy, such as formulary compliance and generic drug substitutions, nor does it include elements potentially in the control of the pharmacy (for example, labor costs or productivity).

Comment: Several commenters supported our definition of `insurance risk', including the exclusion of performance-based compensation as this is not commonly viewed as insurance risk.

Response: We will adopt the definition as proposed.

MA means Medicare Advantage, which refers to the program authorized under Part C of Title XVIII of the Act.

MA-PD plan means an MA plan that provides qualified prescription drug coverage.

Medicare prescription drug account means the account created within the Federal Supplementary Medical Insurance Trust Fund for purposes of Medicare Part D.

Part D eligible individual means an individual who is entitled to Medicare benefits under Part A or enrolled in Medicare Part B. For purposes of this part, enrolled under Part B means “entitled to receive benefits” under Part B.

Prescription drug plan or PDP means prescription drug coverage that is offered under a policy, contract, or plan that has been approved as specified in § 423.272 and that is offered by a PDP sponsor that has a contract with CMS that meets the contract requirements under subpart K or in the case of fallback PDPs also under subpart Q.

PDP region means a prescription drug plan region as determined by CMS under § 423.112.

PDP sponsor means a nongovernmental entity that is certified under this part as meeting the requirements and standards of this part for that sponsor.

Comment: Several commenters noted that the terms PDP sponsor and MA organization offering an MA-PD plan were not consistently used in the proposed rule to represent distinct and mutually exclusive entities. As a result the proposed rule was not always clear regarding when requirements or options applied only to one or the other entity, or both.

Response: We acknowledge that the terminology regarding sponsors and plans was inconsistently applied. We have revised the language in the final rule accordingly and have also standardized the terms `Part D plan' and `Part D plan sponsor' when referring to all plans and sponsors in general. Consequently we have relocated these terms from subpart C to this subpart and clarified that references to “Part D plans” in the final rule refer to any or all of MA-PD plans, PDPs, PACE plans and cost plans. Likewise, the term “Part D plan sponsor” refers to MA organizations offering MA-PD plans, PDP sponsors, and sponsors of PACE plans and cost plans.

Comment: Several commenters asked that we be flexible in its definition of a non-governmental entity to allow either the creation of State-sponsored entities as PDPs or the selection of a preferred PDP entity for Medicaid dual eligible and SPAP populations.

Response: While we understand and support the goals of minimizing client confusion and facilitating continuity of care, we believe the requirements imposed by sections 1860D-41(13) and 1860D-23(b)(2) of the Act do not allow us to approve State-sponsored PDPs or the selection of preferred PDPs for State populations. We would note, however, that we believe we can waive the non-governmental requirement in section 1860D-41(23) of the Act under the employer waiver authority for States that seek to sponsor Part D plans on behalf of their employees. This is discussed in more detail in subpart J of this rule.

d. Financial Relationships between PDP Sponsors, Health Care Professionals and Pharmaceutical Manufacturers

The financial relationships that exist between or among PDP sponsors, health care professionals (including physicians and pharmacists), or pharmaceutical manufacturers may be subject to the anti-kickback statute and, if the relationship involves a physician, the physician self-referral statute. Nothing in this regulation should be construed as implying that financial relationships described in this final rule meet the requirements of the anti-kickback statute or physician self-referral statute or any other applicable Federal or State law or regulation. All such relationships must comply with applicable laws.

In addition to the provisions in these regulation, under section 6(a)(1) of the Inspector General Act of 1978, as amended, OIG has access to all records, reports, audits, reviews, documents, papers and other materials to which the Department has access that relate to programs and operations for which the Inspector General has responsibilities under the Inspector General Act. The provisions in these regulations do not limit the Office of the Inspector General's (OIG) authority to fulfill the Inspector General's responsibilities under Federal law.”

e. ERISA application and requirements

The rules contained in this rulemaking apply for purposes of Title I of the MMA and no inference should be drawn from anything in this rule regarding the applicability of title I of ERISA. In addition, nothing in this rulemaking should be construed as relieving a plan administrator or other fiduciary of obligations under title I of ERISA.

B. Eligibility and Enrollment

We outlined the eligibility and enrollment requirements for Part D plans in subpart B of the August 2004 proposed rule. We received over 100 comments on this subpart. Below we summarize the provisions of the proposed rule and our final rule and respond to public comments. (Please refer to the proposed rule (69 FR 46637) for a detailed discussion of our proposals.)

1. Eligibility for Part D (§ 423.30)

Section 101 of the MMA established section 1860D-1 of the Act, which includes the eligibility criteria an individual must meet in order to obtain prescription drug coverage and enroll in a Part D plan. Section 1860D-1(a)(3)(A) of the Act defines a “Part D eligible individual” as an individual who is entitled to Medicare benefits under Part A or enrolled in Part B. Further, in order to be eligible to enroll in a PDP plan, § 423.30(a) of the proposed rule provided that the individual must reside in the plan's service area, and cannot be enrolled in an MA plan, other than a Medicare savings account (MSA) plan or private fee-for-service (PFFS) plan that does not provide qualified prescription drug coverage. In addition, § 423.4 of the proposed rule provided the definition of service area, which describes that for purposes of eligibility to enroll to receive Part D benefits, certain access standards must be met, hence, making certain individuals ineligible to enroll.

Generally, a Part D eligible individual enrolled in an MA plan that does not provide qualified prescription drug coverage (that is, an MA plan) may not enroll in a PDP. There are, however, exceptions under sections 1860D-1(a)(1)(B)(iii) and (iv) of the Act for individuals who are enrolled in either an MA private fee-for-service plan (as defined in section 1859(b)(2) of the Act) that does not provide qualified prescription drug coverage or an MSA plan (as defined in section 1859(b)(3) of the Act). We provided for these exceptions in § 423.30(b) of the proposed rule.

Except as provided above, in accordance with section 1860D-1(a)(1)(B)(i) of the Act, and as provided in § 423.30(c) of the proposed rule, a Part D eligible individual who is enrolled in an MA-PD plan must obtain prescription drug coverage through that plan. In order to enroll in an MA-PD plan, a Part D eligible individual must also meet the eligibility and enrollment requirements of the MA-PD plan as provided in § 422.50 through § 422.68 of the proposed rule establishing and regulating the MA program (CMS-4069-P) which was also published August 2004.

Except as otherwise provided below, the final rule adopts the eligibility criteria set forth in § 423.30 of the proposed rule.

Comment: Several commenters requested clarification of the definition of a Part D eligible individual. One commenter stated than a literal reading of the proposed definition appears to say that any individual who is eligible for Medicare but not enrolled could get the Part D benefit, and asks if an individual must enroll in Part A or Part B in order to be eligible for Part D. One commenter indicated that it was unclear how CMS would coordinate Part D eligibility with any retroactive eligibility determinations made by SSA.

Response: Section 1860D-1(a)(3)(A) of the Act defines a “Part D eligible individual” as “an individual who is entitled to benefits under Part A or enrolled under Part B.”

In other context, we generally have interpreted the concept of “entitled” to benefits to mean that an individual has met all of the necessary requirements for a benefit (that is, is eligible for the benefit), and has actually applied for and been granted coverage. We believe for purposes of applying the definition of “Part D eligible individual” under section 1860D-1(a)(3) of the Act, we believe this interpretation of “entitlement” is the appropriate interpretation. Accordingly, we will deem an individual “entitled” to Part A, and thus a Part D eligible individual, if the individual is eligible for benefits under Part A, and has actually applied for and been granted coverage under Part A. On the other hand, under our Medicare Part B regulations at part 407, an individual is considered to be “enrolled” in Part B when he or she has applied for Part B coverage (or is deemed to have applied). Nevertheless, we do not believe this interpretation of “enrolled” in Part B is the correct interpretation of section 1860D-1(a)(3)(A) of the Act, and instead interpret “enrolled under Part B” to mean that the individual is entitled to receive benefits under Part B.

When establishing eligibility and enrollment rules for the MA program upon its inception, we adopted a similar interpretation of section 1851(a) (3) of the Act. Section 1851(a) (3) of the Act defined the term “Medicare+Choice eligible individual” to mean an individual who is entitled to benefits under part A “and enrolled under part B.” As we explained in our proposed rule for the Medicare+Choice program (see 63 FR 34979), we believe that the Congress intended that we provide an individual the opportunity to enroll in the Medicare+Choice program only if entitled to actually receive benefits under Part B in addition to Part A. As we explained, under some situations, an individual may apply for or be deemed to have applied for Part B before he or she is actually entitled to receive coverage. For example, if an individual applies for Part B coverage after he or she reaches age 65, the individual may not actually be entitled to Part B coverage under section 1837 of the Act until one or several months after the month of application and enrollment. If we had interpreted section 1851(a) (3) of the Act to permit individuals to enroll in a Medicare+Choice plan when an individual has only been enrolled in Part B, but is not yet entitled to Part B, he or she could be entitled to the benefits under a Medicare+Choice plan before actually being entitled to Medicare Part B coverage. In order to avoid such a result, we interpreted the language “enrolled” in Part B in section 1851(a) (3) of the Act to mean “entitled” to Part B.

We similarly will interpret section 1860D-1(a)(3)(A) of the Act as providing that an individuals is eligible for Part D only if the individual is entitled to receive benefits under Part A or Part B. Section 1860D-1(b)(1)(B) of the Act requires us to use rules similar to and coordinated with certain rules for enrollment that govern eligibility for the MA program. Hence, we believe that the Congress intended that we provide an individual the opportunity to enroll in part D only if entitled to actually receive benefits under Part B (or Part A); otherwise an individual would be entitled to receive coverage of Part D drugs under PDP before being entitled to receive benefits under original fee-for-service Medicare.

Our regulations at § 422.2 define an MA eligible individual as someone who meets the requirements of § 422.50, which outlines the various criteria that an individual must meet to be eligible to elect an MA plan, including: entitlement to Parts A and B, residency in a plan's service area, making an enrollment election and agreeing to abide by the rules of the MA plan. We intend to apply a parallel approach to the Part D program. We will amend § 423.4 to define a Part D eligible individual as an individual who meets the requirements at § 423.30, that is, the individual is entitled to Medicare benefits under Part A or enrolled in Part B and lives in the service area of the Part D plan. We clarify, however, that “enrolled” in Part B means that the individual not only has applied for and enrolled in Part B, but is also receiving coverage for Part B services, in accordance with part 407.

We have included in § 423.30 to be eligible to enroll in a Part D plan, the individual must also reside in the Part D plan's service area and not be enrolled in another Part D plan.

We have clarified Part D eligibility for those individuals for whom eligibility determinations for Medicare Part A or B have been made retroactively, which results in retroactive entitlement to these programs. The MA statute at section 1851(f) of the Act provides that initial elections shall take effect upon the date the individual becomes entitled to Part A or B, except as the Secretary may provide “in order to prevent retroactive coverage.” Under the MA program, an individual who has received a retroactive eligibility determination for Medicare Part A or B is not permitted to enroll in an MA plan retroactively. Again, using section 1860D-1(b)(1)(B) of the Act that directs us to establish rules similar to those in MA, we envision individuals enrolling in a Part D plan prospectively and have revised § 423.30 so that individuals who become entitled to Medicare Part A or Part B benefits for a retroactive effective date are deemed Part D eligible as of the month in which notice of Medicare Part A or Part B entitlement is provided.

Such revisions at § 423.4 and § 423.30 will clarify that an individual is eligible for Part D at the same time an individual is eligible to enroll in Part D.

Comment: Commenters requested clarification on the eligibility of incarcerated individuals. One commenter did not believe that we had the authority to create such exclusion. Another requested clarification of the ability of individuals released from incarceration on probation or parole to enroll in Part D.

Response: In the preamble of the proposed rule, we explained that individuals who are incarcerated likely do not have access to Part D services, as they cannot obtain their prescription drugs from network pharmacies, yet technically the jail or prison may be located within the larger geographic area encompassing a PDP's service area. As a result, the individual would be subject to a late enrollment penalty for not enrolling in a Part D plan. As a result, we believe that it is appropriate to provide in § 423.4 that a PDP's service area would exclude areas in which incarcerated individuals reside (that is, a correctional facility) and as a result, incarcerated individuals would be ineligible to enroll in a PDP and we have revised the definition to clarify this point. Upon release from incarceration, such as for probation or parole, individuals will be considered eligible for Part D by living in a PDP service area, if they meet other Part D eligibility requirements.

Comment: One commenter suggested that we consider individuals who are residents of a State mental institution to be out of the service area and therefore ineligible for enrollment in a Part D plan.

Response: We would not consider individuals who are residing in a State mental institution to be out of the service area. Medicare beneficiaries residing in such institutions have access to Medicare benefits under Parts A and B and therefore would be entitled to enroll in a Part D plan. However, we do recognize that individuals in a State mental institution may be limited to the pharmacy network contracted with the facility. Therefore, we will provide such individuals a Special Enrollment Period (SEP) to enable them to join the appropriate Part D plan based upon their situation. We will clarify this in guidance following publication of this rule.

Comment: One commenter asked that we clarify § 423.30(c) in the final rule to indicate when an individual in an MA-PD plan can change plans.

Response: The provisions explaining the opportunities for individuals to make PDP enrollment choices are fully set forth at § 423.38 of the final rule. The requirements for MA plans are outlined under § 422.50 through § 422.80.

Comment: One commenter suggested that we permit beneficiaries enrolled in an MA plan to enroll in a PDP or disenroll from the MA plan and enroll in an MA-PD plan.

Response: Section 1860D-1(a)(1) of the Act specifically prohibits an MA plan enrollee from enrolling in a PDP except in the case of enrollees of a MA PFFS plan that does not provide qualified prescription drug coverage or enrollees of an MSA plan. All individuals, including enrollees of MA plans, can enroll in a Part D plan during the established enrollment periods, as described at § 423.38 of the final rule.

2. Enrollment Process (§ 423.32)

Section 1860D-1(b)(1) of the Act requires that we establish a process for the enrollment, disenrollment, termination, and change of enrollment of Part D eligible individuals in prescription drug plans. The statute further requires that this process use rules similar to, and coordinated with, the enrollment, disenrollment, termination, and change of enrollment rules for MA plans under certain provisions of section 1851 of the Act. Thus, we proposed, where possible, to adopt the MA enrollment requirements provided under § 422.50 through § 422.80.

Generally, a Part D eligible individual who wishes to make, change, or discontinue an enrollment during applicable enrollment periods must file an enrollment with the PDP directly. However, we will allow PDPs to use other enrollment mechanisms, as approved by us. In addition, § 423.32 of the final rule provides that beneficiaries will remain enrolled in their PDP without having to actively re-enroll in that PDP at the beginning of each calendar year. Except as otherwise provided below, the final rule adopts the enrollment rules set forth in § 423.34 of the proposed rule.

Comment: Several commenters submitted identical comments on various aspects of the coordination of the enrollment process reflected at both § 423.34(b) and § 423.42(a).

Response: Commenters provided similar comments about the enrollment process at § 423.34(b)(1) of the proposed rule and the coordination of enrollment and disenrollment process at § 423.42(a) of the proposed rule. After reviewing these comments, we recognized that these sections were duplicative and could cause confusion. To address this problem, we have reorganized the following subjects in subpart B into a more logical order: the enrollment process at § 423.32 (previously proposed § 423.34); auto-enrollment process for dual eligible individuals at § 423.34 (previously proposed § 423.34(d); the disenrollment process at § 423.36; the enrollment periods in § 423.38; and the effective dates at § 423.40. We believe that this will simplify and clarify these provisions.

Comment: Several commenters supported the inclusion of regulatory provisions that would permit enrollment through means other than the submission of signed, hard-copy enrollment forms in order to facilitate flexibility for future enrollments. These commenters supported allowing alternative mechanisms for enrollment, particularly electronic enrollments, to enable beneficiaries with access to computers to enroll or disenroll through secure websites established by PDP sponsors. Another commented that we should make the same enrollment mechanisms that are available to Medicare Advantage plans available to PDP sponsors. A few commenters requested clarification as to the “other mechanisms” referenced by us in the proposed rule, specifically what types of enrollment are envisioned and the populations to which these “other mechanisms” would be applied. One commenter recommended we allow electronic enrollments through a CMS-hosted web site, and that we develop a standard registration process to authenticate the enrollments. Another stated that processing applications via the Internet would require significant systems changes and that the regulation appeared to lack requirements necessary to process applications in such a manner.

Response: We were pleased by the general support for flexibility and creativity in this important part of the enrollment process, and we anticipate working in collaboration with all of our partners to develop enrollment processes that will be convenient, reliable and secure for all beneficiaries. We will adopt this provision as proposed at § 423.32(b), rather than specify or limit the types of alternative enrollment processes that may be used. We will continue to assess the technology available and provide additional operational guidance in the future, including specific systems requirements and other information necessary to implement these processes.

Comment: We received several comments requesting clarification of what parties are authorized to act on behalf of a beneficiary for enrollment purposes. One commenter noted that the regulation does not appear to recognize a beneficiary's “authorized” or “personal” representative who could be designated to make decisions for individuals and refers to the personal representative definition that we created in subpart P of the proposed rule. Another commenter was concerned that individuals in long-term care facilities do not have a designated surrogate decision maker in place to make such a decision and lack the cognitive capacity to select a PDP. While some commenters stated that we should allow an individual's personal representative to enroll a person into a PDP, others requested that we recognize specific representatives who could effectuate such an enrollment within the regulatory text (for example, SPAP).

Response: In the regulation, we refer to a Part D eligible “individual” who wishes to enroll. An individual who has been appointed as the legal representative to execute such an enrollment on behalf of the beneficiary, in accord with State law, would constitute the “individual” for purposes of making the enrollment or disenrollment. As with the Medicare Advantage provisions, we will recognize State laws that authorize persons to effect an enrollment for Medicare beneficiaries. We will include more information on this clarification in future operational guidance.

Comment: Several commenters asked that we clarify that nothing would prevent a person or entity from assisting a beneficiary in completing and submitting his or her application to the PDP, as the MA program allows at § 422.60(c).

Response: We agree and have revised the regulatory language at § 423.32(b) to allow for such assistance, consistent with the MA regulations.

Comment: One commenter suggested that we set forth an appeals process for beneficiaries who are denied enrollment.

Response: Although we agree with the commenter that we should establish a procedure for beneficiaries to dispute enrollment denials, we do not believe that a formal appeals process is necessary. Instead, we intend to address beneficiary complaints regarding enrollment in a similar manner as we have done under the MA program. Under the MA program, individuals are advised through their notice of denial of enrollment that if they disagree with the decision to deny enrollment, they may contact the MA organization. We monitor MA organizations periodically to ensure that they are providing this notification. We also respond to specific inquiries from beneficiaries and investigate possible situations where MA organizations have failed to notify beneficiaries of the process or where an organization may have incorrectly denied a beneficiary's enrollment. If we discover a beneficiary was incorrectly denied enrollment we can require the MA organization to enroll that individual, as provided in our manual instructions. We believe our current process provides adequate remedies to beneficiaries and will therefore establish a similar process for PDPs. We decline to establish a separate appeals process for these denials at this time.

Comment: One commenter requested that we specify in the final rule that PDPs must provide written notice of enrollment decisions to each consumer.

Response: In § 423.32(d) we require PDPs to provide all individuals prompt notice of acceptance or denial of enrollment in the PDP in a format and manner specified by CMS. We will provide specific instructions on the format and manner of these required notices in operational guidance and intend to provide model language and materials for PDPs to use as well. Looking ahead, we believe that beneficiaries may want to receive documents (such as notices) in a variety of formats, rather than just in writing. To that end, we decline to require a specific format in regulation, thereby preserving the flexibility to foster innovation and creativity to satisfy beneficiary and industry expectations in the future.

Comment: One commenter suggested that individuals enrolled in PACE should remain enrolled in the PACE organization for purposes of Part D coverage effective January 1, 2006. Another commenter suggested a similar process be established for cost plans.

Response: Section 1860D-21(f) of the Act provides that a PACE plan may elect to provide qualified prescription drug coverage to its Part D eligible enrollees. Section 1860D-21(e) of the Act establishes a similar directive to cost-based HMO or competitive medical plan (CMP) plans. Discussion of the application of the Part D benefit to both PACE and cost-based HMO or CMP plans can be found under subpart T of the proposed rule. For PACE plans, we stated that PACE plans generally will be treated similar to MA local plans. Applying the appropriate MA rules from § 422.66, PACE enrollees will receive their Part D benefits through the PACE plan if the PACE plan has elected to provide such coverage. Beneficiaries who are enrolled in PACE plans that provide such coverage as of December 31, 2005 will remain enrolled in that plan on January 1, 2006. For cost-based HMO or CMP plans, we state that cost contracts may offer Part D coverage only to individuals also enrolled for Medicare in the cost contract. As a result of the provisions for PACE and cost-based HMO or CMP plans, we revised § 423.32(f) to provide that individuals who are in PACE or cost-based HMO or CMP plans that provide prescription drug coverage on December 31, 2005 will remain enrolled in that plan and be enrolled in the Part D benefit offered through that plan as of January 1, 2006.

3. Enroll Full-Benefit Dual Eligible Individuals (§ 423.34)

In the proposed rule, § 423.34(d) required that full benefit dual eligible individuals who fail to enroll in a PDP or MA-PD during their initial enrollment period would be automatically enrolled into an appropriate Part D plan, specifically a PDP with a Part D premium that does not exceed the low-income premium subsidy amount. When there is more than one available PDP in a region, full benefit dual eligible individuals would be auto-enrolled on a random basis.

All beneficiaries in an MA plan with any prescription drug coverage on December 31, 2005 will be deemed enrolled on January 1, 2006 in an MA-PD plan offered by the same MA organization in accordance with § 422.66(e)(2) and (e)(3) of Title II of the final regulation even if the monthly beneficiary premium exceeds the low-income premium subsidy amount. For full-benefit dual eligible individuals only, the proposed rule provided that those already enrolled in an MA plan without any prescription drug coverage would be auto-enrolled into an MA-PD plan offered by the same organization, and that has a monthly Part D premium that does not exceed the low-income premium subsidy amount. The proposed rule clarified that those auto-enrolled into a Part D plan may affirmatively decline Part D coverage or change Part D plans.

In a related area, § 423.36(c) of the proposed rule provided a SEP for full-benefit dual eligible individuals that permits them to change Part D plans at any time. Separately, there already exists a SEP for full-benefit dual eligible individuals to enroll in or disenroll from a Medicare Advantage plan at any time, and this will be expanded to include MA-PD plans. This SEP is provided in operational guidance (see section 30.4.4-5 of Chapter 2 of the Medicare Managed Care Manual), in accordance with section 1851(e)(4)(D) of the Act, which gives us the authority to provide Special Enrollment Periods for exceptional circumstances. Taken together, the PDP and MA-PD plan SEPs mean a full-benefit dual eligible individual may switch from Original Medicare and a PDP into an MA-PD plan and vice versa; from one PDP to another; and from one MA-PD plan to another MA-PD plan at any time.

We requested comment on two areas: whether we or States should conduct auto-enrollment, and how to address an inherent conflict in the statute, whereby the statute requires auto-enrollment of full-benefit dual eligible individuals into a Part D plan with a premium that does not exceed the low-income premium subsidy amount, but does not speak to those instances in which an individual is enrolled in an MA organization whose premium for the available MA-PD plan(s) exceeds the low-income premium subsidy amount.

Except as otherwise provided below, the final rule adopts the enrollment rules for full-benefit dual eligible individuals set forth in § 423.34(d) of the propose rule.

Comment: Several commenters supported CMS performing the auto-enrollment function. They viewed it as the most appropriate entity because it is in the best position to randomly assign beneficiaries to MA-PD plans or PDPs in the region, and to establish links with each MA-PD plan or PDP in each region, thereby more efficiently auto-enrolling individuals. Some commenters also suggested that we consider adding an enrollment broker to the process for populations with special health care needs.

A number of other commenters recommended that States either be required or have the option to perform the auto-enrollment function, as they view the States as having more readily available data identifying dual eligible individuals and a vested interest in ensuring these individuals are enrolled in appropriate Part D plans. This option was also viewed as advancing care coordination and ensuring continuity of care. It was noted that these options also present a disincentive for States to maximize enrollment, since the phased-down State contribution payments are tied to the number of Part D eligible individuals enrolled in Part D plans. Commenters also acknowledged that, if we were to afford States the option of conducting the auto-enrollment function, we would have to develop its own systems for auto-enrollment in States that lack the capacity to develop such systems. Commenters supporting this option felt strongly that we should reimburse States for all of their costs related to enrollment activities they are required to perform.

Some commenters recommended that an independent third party coordinate the enrollment process. Those parties could include State and local officials and representatives of nonprofit organizations specializing in care for seniors. One also suggested that the contracted agent would need to be compliant with the Health Insurance Portability and Accountability Act of 1996 (HIPAA) privacy rule and should have no financial incentives regarding a full-benefit dual eligible individual's assignment beyond the contract between it and CMS.

Response: We agree with those who commented that we, or a contractor on our behalf, should perform the auto-enrollment function because we can better ensure consistent, timely implementation. In addition, we would not have to develop and implement a separate administrative structure to oversee auto-enrollment being performed by some or all of the States. Finally, it would likely be more cost effective for us to have a single entity perform auto-enrollment, rather than pay 51 separate entities. For these reasons, we will modify the final regulation to specify that we will conduct the auto-enrollment process.

At this time, we do not envision contracting with an enrollment broker to provide more intensive choice counseling for beneficiaries subject to auto-enrollment. Because the statute makes us ultimately responsible for the auto-enrollment process, we will, at least initially, conduct it ourselves. Instead of hiring a new third party, we believe it would be more effective to partner with existing stakeholders to conduct broad-based outreach and education; provide clear and comprehensive information to beneficiaries; and refer individuals to either the 1-800-MEDICARE toll-free line or to Part D plans for additional information. However, if we decide in the future to contract with an independent enrollment broker, we agree with the commenter that the entity would need to be free of conflicts of interest and comply with HIPAA privacy rules. We note that any delegation to a third party would make the third party a business associate of ours for HIPAA purposes, since the entity would be performing a function on behalf of us.

Comment: Many commenters recommended that we define “random” to include auto-enrollment based on beneficiaries' particular drug needs, pharmacy affiliation, or on their classification as a special needs population. Many commenters expressed concerns about how random assignment will impact individuals who are on drug regimens on which they have been previously stabilized. They were concerned that these individuals would be auto-enrolled in a “low-cost” plan that may not cover the drugs they need. Without direct access to the coverage they need, this population would have no real choice but to switch medications, even though changing medications can be difficult and lead to adverse health outcomes, reactions, and so on.

Several other commenters expressed similar concerns about individuals who reside in long-term care facilities. In addition, some long-term care facilities require residents to use a pharmacy selected and contracted by the facility. One commenter requested that we define “random,” specifically detail how we envision the random process would work, and seek further public comment.

Response: We share the commenters' concerns with ensuring access to necessary prescription drug coverage for vulnerable populations. For ensuring continued access to existing drugs prescribed for an individual, please refer to comments on § 423.120(b) of the final regulation. For ensuring access to long-term care facilities' contracted pharmacies, please refer to comments on § 423.120(a) of the final regulation.

The systems challenges associated with anything other than a random process would be significant, and possibly result in inappropriate assignment or delayed implementation. For example, we have drug utilization data for Medicaid beneficiaries, but there is a time lag in receiving those data. Furthermore, we do not currently have access to information about the pharmacies that contract with long-term care facilities. Finally, we realize that pharmacy affiliation and particular drug needs are only two of the variables that impact a beneficiary's choice of a Part D plan. For example, a beneficiary may also consider cost-sharing, formulary structure, customer service and, in the case of MA-PD plans, whether she or he would want to receive all of her or his Medicare benefits from one organization.

Given these data limitations, and the many and varied reasons for choosing a Part D plan, we do not believe we are in a position to make a judgment about what is best for individual beneficiaries, and decline to change the proposed regulations. However, we will make every effort to ensure that beneficiaries and community organizations receive enough information in time for them to determine the appropriate plan for the beneficiary. The SEP provided for full-benefit dual eligible individuals in the statute and in our final rule at § 423.38(c)(4) also ensures that they can change plans to better accommodate their pharmaceutical needs and pharmacy affiliations.

Comment: One commenter recommended that we establish a bid process whereby PDPs with an expected enrollment by full-benefit dual eligible individuals that is higher than the proportion in the total Medicare eligible population in the relevant PDP region automatically qualify for inclusion in the auto-enrollment process. The commenter further recommended that, if such a plan has a monthly beneficiary premium above the low-income premium subsidy amount, we should permit a “waiver” based on a subsidy or payment of that excess premium by CMS or another entity in order to reduce the premium to an amount equal to or below the low-income premium subsidy amount.

Response: Those plans available for purposes of auto-enrollment are ones that have premiums at or below the low-income premium subsidy amount. This includes fallback plans in areas where they exist. It is our intent to implement the Part D program and adhere to the statute as closely as possible, assuming tenable options are available to do so. In the case of PDPs that serve a disproportionate share of full-benefit dual eligible individuals, and whose premium exceeds the low-income premium subsidy amount, we believe there are tenable options, that is, other PDPs with premiums at or below the low-income premium subsidy amount. However, we note that risk-adjustment should correct for the higher costs incurred by plans with larger proportions of full-benefit dual eligible individuals.

Comment: A few commenters recommended that we not limit the Part D plans available for auto-enrollment to just those plans with premiums below the low-income premium subsidy amount, as this limits full-benefit dual eligible individuals to the “lowest cost” plans, which may offer a less generous benefit. The commenters suggested that, regardless of whether these individuals enroll on their own or are auto-enrolled, they should be permitted to enroll in any plan and not be charged any additional premium. At a minimum, a beneficiary's medical provider could attest that a higher premium plan will better meet his or her medical needs and therefore be allowed to enroll in a higher premium plan without the added premium.

Response: We appreciate the commenters' concern that full-benefit dual eligible individuals be able to enroll in the plan best suited for them, not just “low cost” plans. We note that a full-benefit dual eligible individual is free to enroll in any Part D plan during the initial enrollment period or annual coordinated election period.

For auto-enrollment, however, section 1860D-1(b)(1)(C) of the Act only permit us to, auto-enroll full-benefit dual eligible individuals into those plans with premiums at or below the low-income premium subsidy amount. In addition, those full-benefit dual eligible individuals randomly auto-enrolled in a particular plan may still choose another plan pursuant to a special enrollment period.

In addition, as we do not have the authority under section 1860D-14(a)(1)(A) of the Act to increase the low-income premium subsidy amount (as defined under section 1860D-14(b)(2)(B) of the Act), full-benefit dual eligible individuals who elect to enroll in a plan with a premium exceeding the low-income premium subsidy amount must pay the difference in premium. We are also precluded under sections 1860D-13(a)(1)(F) and 1854(c) of the Act from requiring or even permitting Part D plans from waiving any premium in excess of the premium subsidy amount, including allowing MA-PD plans to use rebate dollars to reduce the premium only for this portion of their enrolled population.

Comment: We received numerous comments related to the timing of the auto-enrollment process for full-benefit dual eligible individuals. Commenters identified the possibility of a gap in coverage for some of those individuals if the auto-enrollment did not occur until the close of the Initial Enrollment Period on May 15, 2006, since Medicaid coverage of Part D drugs ends several months earlier, on January 1, 2006. They proposed that we require auto-enrollment of these individuals to be completed prior to Medicaid coverage ending on December 31, 2005. Some commenters recommended that the process be completed as early as November 15, 2005, and one commenter suggested starting the 2005 Initial Enrollment Period for full-benefit dual eligible individuals prior to November 15, 2005. Another commenter recommended that auto-enrollment precede Part D eligibility by 6 months, and that Medicaid coverage of Part D drugs be continued until auto-enrollment can be done.

Response: We did not intend to implement a process that would create a gap in drug coverage for full-benefit dual eligible individuals. We do not believe that the Congress intended for such a gap to occur. Therefore, we will modify the final rule so that the auto-enrollment of these individuals will begin as soon as Part D plans with premiums at or below the low-income premium subsidy amount are known prior to January 1, 2006. We will also modify the final rule to provide that those full-benefit Medicaid individuals who become eligible for Medicare after January 1, 2006, will be enrolled as soon as their Medicare Part D eligibility is determined. For the suggestion to start the 2005 Initial Enrollment Period for full-benefit dual eligible individuals before November 15, 2005, we are precluded from doing so, as this date is explicitly identified in section 1860D-1(b)(2)(A) of the Act as the date upon which enrollment in Part D may commence.

Comment: Many other commenters suggested that we delay implementation of the Part D program for full-benefit dual eligible individuals by at least five or six months, and some recommended a year's delay, although the commenters recognized that such a delay would require a legislative change. The commenters' concern was based on the limited time to transition drug coverage for these full-benefit dual eligible individuals from Medicaid to Medicare. The commenters expressed concern about the feasibility of identifying, educating, and enrolling the population of full-benefit dual eligible individuals in time for a smooth transition of drug coverage. Some commenters highlighted the need to ensure adequate time for physicians and patients to navigate administrative barriers and change medications to comply with formularies. One commenter suggested Medicare beneficiaries who currently participate in Medicaid buy-in programs (that is, qualified Medicare beneficiaries (QMB), special low-income beneficiaries (SLMB), and qualified individuals (QI1)) be permitted to keep Medicaid drug coverage after Part D starts.

A few commenters recommended that, assuming Part D coverage begins for full-benefit dual eligible individuals on January 1, 2006, Medicaid coverage of Part D drugs be extended past December 31, 2005, and continued until such time as full-benefit dual eligible individuals are enrolled in Part D.

One commenter recommended that full-benefit dual eligible individuals who are American Indians or Alaska Natives (AI/AN) be exempt from Part D and continue to be eligible for Medicaid drug coverage after January 1, 2006. The commenter argued that this would prevent loss of revenues to pharmacies operated by Indian Health Services (IHS), Tribal Clinics, and Urban Indian Clinics, who may receive lower payments from Part D plans than they currently receive from Medicaid, and eliminate barriers for this population.

Response: As the commenters correctly point out, a delay in the implementation of the Part D program, including auto-enrollment for full-benefit dual eligible individuals would require a change to the statute. Similarly, extending Medicaid coverage of prescription drugs covered under Part D would also require a legislative change. Absent such changes, we cannot delay implementation, extend Medicaid coverage of Part D drugs, nor can we exclude full-benefit dual eligible individuals who are AI/AN, or participants in Medicaid buy-in programs from Part D.

Comment: A couple of commenters requested clarification about the circumstances under which a beneficiary may affirmatively decline participation in Part D. They expressed concern that individuals with diminished mental faculties may not fully understand the impact of their decision, and that States would likely bear additional costs associated with full-benefit dual eligible individuals whose health deteriorates due to their failure to take necessary medications. One commenter urged that States be able to obtain FFP to provide prescription drug coverage in these instances. Another commenter asserted that permitting a full-benefit dual eligible individual to affirmatively decline enrollment in Part D contradicts numerous statutory and regulatory provisions that require this population's enrollment in Part D. One commenter urged CMS to make disenrollment contingent upon selection of another Part D plan to ensure there is no lapse in coverage. Finally, one commenter suggested expanding the ability to affirmatively decline enrollment in Part D to Medicare beneficiaries who are not auto-enrolled.

Response: The Congress specified that prescription drug coverage under this program is voluntary, and section 1860D-1(b)(1)(C) of the Act specifically stipulates that auto-enrollment does not prevent a full-benefit dual eligible individual from declining or changing such enrollment. Absent any legislative change, we cannot intervene with an individual's right to decline coverage. Nor can we adopt the suggestion to permit Federal financial participation (FFP) for State Medicaid agencies that choose to provide drug coverage for full-benefit dual eligible individuals who affirmatively decline auto-enrollment. Section 1935(d)(1) of the Act stipulates that no FFP is available for any Part D drugs or cost-sharing for Part D drugs for full-benefit dual eligible individuals who are eligible for Part D, even if they are not enrolled in a Part D plan. However, we will be making every effort to ensure that beneficiaries and community organizations have sufficient information to assist individuals in making the most appropriate choices about participating in Part D.

Concerning the comment that we should make disenrollment from a Part D plan contingent upon enrolling in another Part D plan to prevent a coverage gap for full-benefit dual eligibles, we decline to do so in regulation, but will continue to work develop strategies to prevent a coverage gap in this instance.

We decline to expand the ability to affirmatively decline Part D enrollment to individuals who are not auto-enrolled or for whom we do not facilitate enrollment into a Part D plan. This population is comprised of those who are not deemed or determined eligible for the low-income subsidy. If these individuals do not want Part D coverage, they can simply choose not to enroll in a Part D plan.

Comment: One commenter suggested that there should be flexibility for CMS to change the plan into which a beneficiary has been auto-enrolled should the plan no longer meet the needs of the enrollee.

Response: We agree that it would be prudent to retain the flexibility to enroll an individual in subsequent years in a different plan from the one into which we originally enrolled the individual, and have modified the final rule to provide for this. We note that this will require an exception to the maintenance of enrollment provision in § 423.32(e), so we have modified the final rule to provide for one.

We envision this may only be necessary in certain limited circumstances. For example, we may want to consider doing this if the plan's premium in a subsequent year exceeded the low-income premium subsidy amount. We will ensure that beneficiaries are fully notified, and have the option to remain in their original plan. We will examine the need for this as the program evolves and provide operational guidance should we implement it.

Comment: A number of commenters responded to our request in the preamble for solutions to an inherent conflict in the statute. In this instance, the statute requires auto-enrollment of full-benefit dual eligible individuals into a Part D plan with a premium at or below the low-income premium subsidy amount. Section 423.34(d) of the proposed rule stipulated that those in an MA-only plan would be auto-enrolled into an MA-PD plan in the same organization that has a premium that does not exceed the low-income premium subsidy amount. However, there may be instances in which an individual is enrolled in an MA-only plan offered by an MA organization, and all the MA-PD plans in that organizations have premiums that exceed the low-income premium subsidy amount.

We note that most MA enrollees will be deemed to be enrolled into an MA-PD plan in accordance with § 422.66(e)(2) and (e)(3). However, deeming does not address those who elect an MA-only plan that does not offer any drug coverage in 2005, nor qualified prescription drug coverage thereafter.

Several commenters supported auto-enrolling these full-benefit dual eligible individuals into an MA-PD plan offered by the same organization with the lowest Part D premium, even if it was higher than the low-income premium subsidy amount. This would provide seamless continuation of their Medicare benefits through the same organization. Commenters noted that these individuals retain the right to decline Part D coverage, and have a SEP that permits them to change PDPs or MA-PD plans at any time.

One commenter noted that excluding full-benefit duals from auto-enrollment in an MA-PD plan with a premium higher than the low-income premium subsidy amount would give those MA plans an unfair advantage by removing from their risk pool full-benefit dual eligible individuals, who tend to have higher drug utilization.

Response: We agree with commenters' concerns about ensuring continuity of care through the same MA organization, if possible. However, as we discussed in the preamble to the proposed regulation, there is an inherent statutory conflict that would seem to preclude using auto-enrollment authority to accomplish this. Section 1860D-1(b)(1)(C) of the Act directs the Secretary to auto-enroll full-benefit dual eligible individuals who do not enroll in a PDP or MA-PD plan on a random basis into a PDP with a premium at or below the low-income premium subsidy amount; it does not identify an MA-PD plan as an entity into which an individual could be auto-enrolled.

General principles of statutory interpretation requires us to reconcile two seemingly conflicting statutory provisions rather than allowing one provision to effectively nullify the other provision. We had proposed to resolve this by interpreting the reference to “prescription drug plans” in section 1860D-1(b)(1)(C) of the Act as including both PDPs and MA-PD plans, thereby allowing auto-enrollment of an MA full-benefit dual eligible individual into an MA-PD offered by the same organization offering his or her MA plan if the premium for such plan did not exceed the low-income premium subsidy amount.

Upon further consideration, we believe there continue to be legal concerns as to whether we have the authority to auto-enroll full-benefit dual eligible individuals into an MA-PD plan. Rather than rely on auto-enrollment authority under section 1860D-1(b)(1)(C) of the Act to ensure continuity of Part D coverage for full-benefit dual eligible individuals enrolled in MA-only plans, we instead will rely on our general authority to establish enrollment procedures under section 1860D-1(b)(1)(A) of the Act to establish a facilitated enrollment process that substantially fulfills the intent of ensuring no prescription drug coverage gap for these individuals.

We will therefore facilitate enrollment into Part D for full-benefit dual eligible individuals enrolled in a MA plan that does not offer qualified prescription drug coverage by assigning them to an MA-PD plan with the lowest premium offered by the same MA organization, even if the plan's MA monthly prescription drug beneficiary premium exceeds the low income premium subsidy amount. We will inform them in advance of this assignment. If the beneficiary fails to affirmatively elect an alternative plan or declines enrollment in Part D, she or he will be enrolled into the plan into which she or he has been assigned. In this instance, a beneficiary's silence would be deemed consent to the enrollment choice we are making on their behalf. We note that the right to affirmatively decline in § 423.34(e), on affirmatively declining Part D enrollment, and the Special Enrollment Period in § 423.38(c)(4), apply equally to all full-benefit dual eligibles, whether they are auto-enrolled or have their enrollment facilitated.

In the case of a full-benefit dual eligible for whom we facilitate enrollment into an MA-PD plan with a premium higher than the low-income premium subsidy amount, we acknowledge that this creates a new financial obligation for the enrollee to pay the balance of the monthly MA monthly prescription drug beneficiary premium not covered by the low-income premium subsidy amount. However, this option best preserves informed enrollee choice, is consistent with statutory intent, respects the beneficiary's initial choice to enroll in an MA plan, and ensures continuity of prescription drug coverage. These individuals will have information about other plan choices available and retain their right to a Special Enrollment Period to choose another plan at any time, as provided by section 1861D-1(b)(3) of the Act for PDPs, and section 1851(e)(4)(D) of the Act and section 30.4.4-5 of Chapter 2 of the Medicare Managed Care Manual for MA-PD plans.

Comment: A few commenters generally supported auto-enrolling full-benefit dual eligible individuals into an MA-PD plan, but urged CMS to find a solution that would ensure no additional costs were imposed on beneficiaries. Some of the commenters that supported auto-enrollment into the MA-PD plan with the lowest Part D premium provided suggestions as to how to minimize the financial impact on beneficiaries. A few suggested that for those who are institutionalized, the excess premium should be considered an incurred medical expense and deducted from their monthly share of cost to the facility. For non-institutionalized beneficiaries, in States with State Pharmacy Assistance Programs (SPAPs), SPAPs should be allowed to pay the balance. For full-benefit dual eligible individuals who are medically needy, the balance should be considered an incurred medical expense contributing towards their spend-down. Otherwise, individuals should be counseled about the premium discrepancy and about the right to disenroll from an MA plan and enroll in Original Medicare with a PDP.

Response: We appreciate these suggestions for minimizing the financial impact on beneficiaries. We intend to highlight the impact of our facilitating enrollment into an MA-PD plan with a premium higher than the low-income premium subsidy amount to these beneficiaries and advise them of their ability to switch plans. We note that under Medicaid, whatever portion of the premium the individual pays would be an incurred medical expense, including any portion of the premium that is paid by the SPAP. Since incurred medical expenses are deducted from income when determining patient liability for an institutionalized individual, and are deducted from income for medically needy spend-down purposes, the commenter's suggestions correctly characterize how Medicaid would treat any premium difference paid by the individual. The commenter is also correct in noting that SPAPs will be allowed to pay the balance for their enrollees, but we note this is an option for all enrollees of an SPAP, not just non-institutionalized enrollees. Since these options are already permitted under the regulatory language in the proposed rule, we will not modify the regulation further to specify them.

Comment: One commenter suggested that we permit MA-PD plans to waive the portion of their premium above the low-income premium subsidy amount. The commenter suggested that explicit authorization by CMS would be a contract amendment, not an inducement to a beneficiary to enroll, which would ensure that the waiver of the excess premium does not implicate the Federal anti-kickback rules or be considered disparate treatment.

Response: We appreciate the intent of the commenter's suggestion. However, we are precluded from permitting MA-PD plans to waive a portion of the Part D premium for a subset of their enrollees by section 1854(c) of the Act, which requires uniform premiums for all enrollees of an MA plan.

Comment: A few commenters urged CMS to prohibit auto-enrollment of full-benefit dual eligible individuals into MA-PD plans. Instead, these MA enrollees should be auto-enrolled into a PDP for their Part D benefit. The commenters note that these beneficiaries could always switch to an MA-PD plan.

Response: Section 1861D-1(a)(1)(B)(ii) of the Act specifies that, with limited exceptions, individuals in an MA plan may not also enroll in a PDP. The only exceptions are those enrolled in a MSA plan, or in a MA private fee-for-service plan or cost-based HMO or CMP that does not offer qualified prescription drug coverage, may enroll in a PDP. Thus, auto-enrolling these individuals into a PDP would require us to also disenroll them from their MA plan, which could be inconsistent with our current MA requirements § 422.66(e), which provide that an individual who elects an MA plan is considered to have continued to have made that election until he or she voluntarily changes that election, or the plan is discontinued or no longer serves the service area.

Comment: Finally, one commenter suggested that if no MA-PD plan is available, or if the Part D premium of the available MA-PD plan exceeds the low-income premium subsidy amount, CMS should auto-enroll these beneficiaries into another organization's MA-PD plan whose premium does not exceed the low-income premium subsidy amount.

Response: For the concern that no MA-PD plan would be available, we note that section 1860D-21(a) of the Act requires all MA organizations to offer at least one MA-PD plan.

Involuntarily disenrolling the individual from his or her MA plan, and auto-enrolling him or her into another MA-PD plan offered by another MA organization, is inconsistent with MA requirements at § 422.66(e) described above.

Comment: A few commenters urged expanding Part D auto-enrollment in the case of full-benefit dual eligible individuals who are in an organization's Medicaid managed care product, but currently receive Part A and B benefits through Original Medicare. Specifically, the commenters recommended that these beneficiaries be auto-enrolled into an MA-PD plan that is offered under common ownership and control of the organization offering the Medicaid managed care plan.

Response: Please refer to responses to comments on § 422.66(d) in Title II of the final regulation for a discussion on this issue.

Comment: A few commenters proposed that, where a full-benefit dual eligible individual in Original Medicare will be auto-enrolled into a PDP that is affiliated with an MA Special Needs Plan, CMS auto-enroll the individual into the MA Special Needs Plan for their Part A and B benefits, as a way to promote better overall coordination of care. To preserve the beneficiary choice, the commenter suggested the regulation provide an opportunity for the individual to “opt out” within some specified period of time (for example, 90 days).

Response: The statute prohibits beneficiaries who have Part D coverage through a PDP from getting their Medicare A and B coverage through an MA-only plan. As a result, we decline to make the suggested change.

Comment: One commenter asked CMS to clarify that, if a full-benefit dual eligible individual is auto-enrolled into an MA-PD plan with a premium higher than the low-income premium subsidy amount, that the State Medicaid program would not be obliged to pay the balance on behalf of the beneficiary.

Response: We confirm that the State Medicaid agency has no obligation to pay any Part D premium in excess of the low-income premium subsidy amount. Further, section 1905(a) of the Act, which provides Federal medical assistance for Medicare cost-sharing (as defined in section 1905(p)(3)(A) of the Act), does not include Part D premiums.

Comment: A few commenters recommended that we consider establishing a process for automatically enrolling or at least facilitating the enrollment into Part D plans all individuals deemed eligible for the full low-income subsidy. In effect, this would expand auto-enrollment to individuals in Medicare Savings Programs. These are individuals for whom State Medicaid agencies pay for Medicare cost sharing, but who are not eligible for comprehensive Medicaid benefits and thus are not considered full-benefit dual eligible individuals. They include QMB, SLMB, and QI1. To the extent that we accept this recommendation, the commenters suggested we also broaden the SEP provision to cover any full subsidy eligible individual who is auto-enrolled in a Part D Plan.

A few commenters advocated expanding auto-enrollment even further to all those who receive the low-income subsidy. This would include not only those deemed eligible for the subsidy, but also those who have to apply and be determined eligible. Auto-enrollment would ensure that these individuals are not subject to a late enrollment penalty.

Response: We agree that there are compelling reasons to promote Part D enrollment of all individuals deemed or determined eligible for the low-income subsidy. These individuals typically are less healthy and often face barriers to care. Effective medication management and prescription drug coverage can lead to reduced inpatient hospital expenditures, making it more cost-effective to provide drug coverage.

Facilitating enrollment into Part D would promote access to drug coverage for these beneficiaries by ensuring that they have drug coverage starting in 2006, while also preserving the voluntary nature of enrollment in Part D. Doing so would also ensure that beneficiaries with limited means would not be liable for a late enrollment penalty for failing to enroll in Part D when first eligible.

We intend to pursue many steps to assist beneficiaries, particularly low-income beneficiaries, in taking advantage of the new Medicare drug coverage. Such steps could include facilitating enrollment into Part D for those beneficiaries. We will provide details in operational guidance to be issued shortly after the publication of the final regulation, including details on the population for whom we will facilitate enrollment. By facilitating enrollment, we mean giving beneficiaries an opportunity to choose a Part D plan first; if they do not choose, we would notify them that we intend to facilitate their enrollment into a specific plan prospectively. If the beneficiary fails to affirmatively elect an alternative plan or declines enrollment in Part D by a given date, she or he would be enrolled into the plan into which she or he has been assigned. In this instance, a beneficiary's silence would be deemed consent to the enrollment choice we are making on their behalf. If we facilitate enrollment in this manner, we would likely follow rules for assigning beneficiaries to Part D plans similar to those for the auto-enrollment and facilitated enrollment process for full-benefit dual eligibles: MA enrollees would be enrolled into an MA-PD plan with the lowest Part D premium; Original Medicare beneficiaries would be enrolled in a PDP with a Part D premium that does not exceed the low-income premium subsidy amount, and, if there is more than one such PDP available, the individual would be randomly enrolled into one of the plans available. In establishing a process for this facilitated enrollment, we would rely upon discretion afforded the Secretary under section 1860D-1(b)(1)(A) of the Act to establish enrollment processes for Part D eligible individuals. Similarly, we would extend some of the same protections afforded the full-benefit dual eligible population who are auto-enrolled to those whose enrollment we facilitate. These protections would include a Special Enrollment Period, the right to affirmatively decline Part D enrollment, and where possible, facilitating enrollment into plans whose premiums do not exceed the low-income premium subsidy amount.

Comment: One commenter suggested expanding auto-enrollment to PACE enrollees, that is, CMS auto-enroll them into their PACE organization for purposes of Part D coverage effective January 1, 2006, unless the PACE enrollee makes another enrollment choice. PACE organizations would provide their enrollees an opportunity to opt out of enrollment in Part D (and, as a result, out of the PACE organization).

Response: We agree that PACE enrollees should not be required to take any additional steps to obtain their Part D benefit through their PACE organization. Individuals who enroll in a PACE organization elect to get all their Medicaid (if eligible for Medicaid) and Medicare benefits through the PACE organization. As noted in response to a similar comment on § 423.32 of the final regulation, we will modify the final regulation to deem individuals enrolled in a PACE organization as of December 31, 2005 to be enrolled with that PACE organization for their Part D benefit as of January 1, 2006. This precludes the need to expand auto-enrollment to PACE enrollees, so we decline to make that change.

Comment: One commenter noted that no provision was made for auto-enrollment of full-benefit dual eligible individuals enrolled in Medicare cost-based HMO or CMPs. The commenter suggested that for full-benefit dual eligible individuals enrolled in a cost-based HMO or CMP, CMS auto-enroll these individuals into the cost-based HMO or CMP for Part D benefits if the cost-based HMO or CMP offers Part D, even if the Part D premium is higher than the low-income premium subsidy amount. If the cost-based HMO or CMP does not offer Part D benefits, the commenter recommends auto-enrolling the beneficiary into a PDP.

Response: We agree that we should ensure that full-benefit dual eligible individuals, and potentially others eligible for the low-income subsidy who are enrollees of a cost-based HMO or CMP obtain Part D benefits. As noted in response to a similar comment on § 423.32 of the final regulation, we will modify the final regulation to specify that all individuals enrolled in a cost-based HMO or CMP that offers any prescription drug coverage as of December 31, 2005, will be deemed to be enrolled in the cost-based HMO or CMP for Part D benefits as of January 1, 2006, if the cost-based HMO or CMP opts to provide Part D benefits, and regardless of whether the Part D premium exceeds the low-income subsidy amount.

We believe the same legal concerns noted above for auto-enrolling full-benefit dual eligible individuals into MA-PD plans arise for auto-enrolling them into a cost plan HMO or CMP. As a result, we decline to expand auto-enrollment a suggested by this commenter. Instead, we will use a facilitated enrollment process discussed above to accomplish substantially the same end. We will facilitate the enrollment of full-benefit dual eligible individuals enrolled in a cost plan HMO or CMP that offers Part D benefits and who fail to enroll in a Part D plan into the Part D benefits offered by their cost plan HMO or CMP. If the cost plan HMO or CMP does not offer Part D benefits, the individual will be enrolled in a PDP. We may similarly facilitate the enrollment of other cost plan enrollees eligible for the low-income subsidy who fail to elect a Part D plan into the Part D benefit offered by their cost plans.

Comment: One commenter requested clarification as to whether auto-enrollment into a PDP will only occur for Medicare beneficiaries who receive comprehensive health care benefits (full hospital and physician services) from both Medicare and Medicaid, or whether auto-enrollment also applies to Medicare beneficiaries that receive pharmacy-only benefits through Medicaid.

Response: The final rule will limit auto-enrollment to only those dual eligible individuals who receive comprehensive health benefits from both Medicare and Medicaid. As noted above, we may facilitate enrollment of all others deemed or determined eligible for the low-income subsidy into Part D plans. To the extent that a Medicare beneficiary with pharmacy-only Medicaid benefits is in the population whose enrollment we facilitate, we would facilitate that individual's enrollment into a Part D plan.

Comment: One commenter recommended that we explore auto-enrolling residents of long term care facilities who are not full-benefit dual eligible individuals, and permitting these beneficiaries to disenroll or choose another Part D plan. The commenter was especially concerned about residents who lack the cognitive capacity to select a PDP and who do not have a designated surrogate decision-maker in place.

Response: Generally, enrollment in Part D is voluntary. Section 1860D-1(b)(1)(C) of the Act provides for auto-enrollment of full-benefit dual eligible individuals. As noted above, we may facilitate enrollment of others deemed or otherwise determined eligible for the low-income subsidy into Part D plans. To the extent that a resident of a long term care facility is in the population whose enrollment we facilitate, we would facilitate that individual's enrollment into a Part D plan.

Since the Act limits auto-enrollment to full-benefit dual eligible individuals, we decline to auto-enroll long-term care residents who do not receive the low-income subsidy. While we acknowledge that access to prescription drug coverage is critical for this population, we believe they generally have the resources and support to make timely enrollment decisions. We will, however, continue to explore options regarding enrollment for all individuals in long-term care facilities.

Comment: A number of commenters urged CMS to permit SPAPs to act as authorized representatives and enroll some or all of the beneficiaries they serve into the SPAP's preferred PDP. These beneficiaries should be permitted to decline enrollment in the SPAP's preferred PDP or to change to another Part D plan.

Response: With regard to the issue of authorized representatives, we defer to State law, as discussed in response to comments on § 423.32. However, it is important to note that SPAPs that act as the authorized representative for the individual must also comply with the nondiscrimination provisions at § 423.464(e). Please see responses to related comments in subpart J.

Comment: One commenter noted that it appears that a full-benefit dual eligible individual cannot enroll in an MA-PD plan if the individual is not already an MA enrollee. The commenter urged that MA-PD plans that bid at or below the low-income premium subsidy amount should be an enrollment option for all full-benefit dual eligible individuals.

Response: During the Part D initial enrollment period that starts November 15, 2005, full-benefit dual eligible individuals who are in Original Medicare are free to change to an MA-PD plan. Further, we have established in our operational guidance a Special Enrollment Period (SEP) that permits full-benefit dual eligible individuals to enroll in and disenroll from an MA plan at any time, and will extend this SEP to MA-PD plans. This will ensure that MA-PD plans are an option for all full-benefit dual eligible individuals.

As indicated previously, any individual enrolled in a PACE organization as of December 31, 2005 will be deemed to be enrolled with that organization for their Part D benefit as of January 1, 2006.

The chart below provides a summary of the enrollment rules for all beneficiaries, including those with and without the low-income subsidy, in accordance with § 423.32, § 423.34, and § 422.66.

Population Enrollment Rules
General Medicare Population (1) A beneficiary who chooses to enroll a Part D plan must do so as follows:
Original Medicare ➜ Original Medicare with separate PDP
MA Plan without drug coverage ➜ MA-PD plan
Medical Savings Account (MSA) Plan ➜ MSA with separate PDP
PFFS with Part D ➜ PFFS with Part D
Private Fee-For-Service Plan (PFFS) without Part D ➜ PFFS with separate PDP
Cost Plan with Part D ➜ Cost plan Part D or cost plan with separate PDP
Cost Plan without Part D ➜ Cost Plan with separate PDP
(2) A beneficiary enrolled in an entity that offers any drug coverage in 2005, CMS deems him or her enrolled as follows* :
MA Plan ➜ MA-PD Plan
Cost Plan ➜ Cost Plan with Part D
PACE Organization ➜ PACE Organization
(3) On a case-by-case basis, CMS may allow an MA organization to process “seamless” enrollments into the organization's MA-PD plan if individuals are enrolled in a health plan offered by that MA organization that includes prescription drug coverage upon their entitlement to Medicare.
Full-Benefit Dual Eligible Beneficiaries (1) A beneficiary who chooses to enroll in a Part D Plan follows the same rules as above; otherwise CMS auto-enrolls or facilitates enrollment for him or her as follows:
Original Medicare ➜ PDP
MSA Plan ➜ PDP
PFFS Plan without Part D ➜ PDP
Cost Plan with Part D ➜ Cost plan with Part D
Cost Plan without Part D ➜ PDP
MA-Only Plan ➜ MA-PD Plan
(2) For a beneficiary enrolled in an entity that offers any drug coverage in 2005, CMS deems him or her enrolled as follows:
MA Plan ➜ MA-PD Plan
Cost Plan ➜ Cost Plan with Part D
PACE Organization ➜ PACE Organization
(3) On a case-by-case basis, CMS may allow an MA organization to process “seamless” enrollments into the organization's MA-PD plan if individuals are enrolled in a health plan offered by that MA organization that includes prescription drug coverage upon their entitlement to Medicare.
* Those in an MA Plan without any drug coverage in 2005 will not be deemed into an MA-PD plan, but instead must actively choose one if they want Part D benefits.  
** We may facilitate enrollment for other beneficiaries eligible for the low income subsidy; if so, we would likely follow these same rules.  
For additional detail, please see discussion on:  
§ 423.32—Beneficiary's choice  
§ 422.66(d)(5)—“Seamless” enrollment on case-by-case basis  
§ 422.66(e)(2)-(3)—Deemed enrollment in 2005  
§ 423.34—Auto-enrollment and facilitated enrollment  

4. Disenrollment process (§ 423.36)

Section 1860D-1(b)(1)(A) of the Act authorizes us to establish a process to allow disenrollment from prescription drug plans. In the proposed rule, we outlined the rules for a Part D eligible individual who wishes to change or discontinue an enrollment during applicable enrollment periods, including filing a disenrollment with the PDP directly or enrolling in another PDP.

While we initially envision a paper disenrollment process, we retain the flexibility for other secure and convenient mechanisms that we may approve in the future. Any such mechanism will be available at the option of each PDP sponsor. We believe it is important to clarify that, as other mechanisms are approved and implemented, we will require all PDPs offer a minimum standard process, which at this time would be a paper process, along with any optional election mechanism available to prospective enrollees and plan members in conjunction with the paper process. In the future, as technology evolves, another process may be a more appropriate minimum standard. Except as provided below, the final rule adopts the disenrollment rules set forth at § 423.42 of the proposed rule.

Comment: One commenter asked that we clarify whether an enrollment in a different PDP would automatically disenroll the beneficiary from his or her previous PDP effective the first day of enrollment in a new PDP and asked who is responsible for that notification.

Response: We envision creating a process similar to that created for the MA program, under which an individual who is eligible to enroll in another PDP will automatically be disenrolled from the previous PDP upon enrollment in the new PDP. The PDP to which the individual submits an enrollment is required to provide a notice of acceptance or denial, as provided in § 423.32(d). We will notify the previous PDP of the disenrollment and that PDP will inform the individual that he or she has been disenrolled. As for the specifics of the notice requirements, we will issue guidance to PDPs following the publication of this rule.

Comment: One commenter requested that we clarify in the regulations that proper beneficiary protections for retroactive disenrollments are in place for beneficiary requests that are made but not properly acted upon.

Response: We will treat an individual's request for disenrollment that was made but not properly acted upon as if the disenrollment had properly occurred. We will provide guidance to PDPs as to how to handle the processing of such requests, including proper notification to the beneficiary.

Comment: One commenter asked CMS to address the issue for those retirees who enroll in both a PDP and the employer sponsored plan due to their confusion over the variety of new coverage options. The commenter indicated that this not only results in duplicative coverage and unnecessary premium costs. In addition, the commenter was concerned because many retirees may not be aware that a consequence of enrolling in Part D may be the discontinuation of their employer group benefits, often permanently prevented from ever being able to rejoin the group once he or she enrolls in other coverage, such as Part D. One commenter requested that we allow for retroactive disenrollment from Part D and refund of the Part D premiums for these retirees who enrolled by mistake into a PDP.

Response: We recognize that during the initial enrollment period that some retirees may be confused about how their employer-based coverage may coordinate with Part D coverage. While we feel that establishing a retroactive disenrollment process specifically for this reason would generally be inappropriate, we can establish a process in which we would work with employer group sponsors, PDPs and MA-PDs to educate beneficiaries prior to open enrollment and at the time of enrollment. In addition, we intend to establish a process for the PDPs and MA-PDs to verify an enrollment request for those individuals who have been identified to CMS as having been claimed by an employer group sponsor to receive the employer based subsidy. We will also include information in beneficiary education and enrollment materials targeted to those individuals who already have other prescription drug coverage to provide assistance in determining whether enrollment in Part D would be appropriate for that individual. We will issue operational guidance on this process shortly following publication of the final rule.

5. Part D Enrollment Periods (§ 423.38)

In the proposed rule, as directed by the MMA, we established three coverage enrollment periods: (1) the initial enrollment period (IEP); (2) the annual coordinated election period (AEP); and (3) SEPs. Generally, in accordance with section 1860D-1(b)(2)(B) of the Act, the IEP for Part D is the same as the initial enrollment period established for Part B. In addition, as part of the implementation of the Part D program, and in accordance with section 1860D-1(b)(2)(A) of the Act, we have established an initial enrollment period for Part D from November 15, 2005 until May 15, 2006 for those individuals who are already eligible to enroll in a Part D plan as of November 15, 2005.

In accordance with section 1860D-1(b)(1)(B)(iii) of the Act, the AEP for Part D is concurrent with the annual coordinated election period for the MA program under section 1851(e)(3) of the Act. It is during this annual period in which all PDP plans must open enrollment to Medicare beneficiaries. For coverage beginning in 2006, the annual coordinated election period begins on November 15, 2005 and ends on May 15, 2006. As a result, the initial enrollment period for individuals who are eligible to enroll in a Part D plan as of November 15, 2005 and the annual coordinated election period will run concurrently during this time frame. In accordance with section 1851(e)(3)(B)(iv) of the Act, § 423.36(b)(2) of our proposed rule provides that, for 2007 and subsequent years, the annual coordinated election period will be November 15 through December 31 for coverage beginning on January 1 of the following year.

The MMA also establishes SEPs. SEPs allow an individual to disenroll from one PDP and enroll in another PDP. Similarly, the SEP rules that will apply for individuals in an MA-PD plan will be provided under § 422.62(b). We will include in regulation those SEPs that have been specifically named in the statute. Those SEPs established for exceptional circumstances for PDPs and MA-PDs, as authorized by section 1860D-1(b)(3)(C) of the Act and section 1851(e)(4) for MA-PDs of the Act, respectively, will be provided in our manual instructions. The final rule adopts the enrollment periods as proposed.

Comment: We received several comments regarding SEPs. Several commenters supported the SEPs for exceptional conditions we proposed to provide through manual guidance. Specifically, these include certain SEPs already established in the MA program for circumstances where a plan terminates its contract or the individual changes his or her permanent residence. These commenters also supported an SEP to enroll in a PDP for individuals disenrolling from an MA-PD plan during the MA Open Enrollment Period, and for institutionalized individuals. Other commenters suggested we establish various other SEPs, including the following:

  • A subsidy-eligible individual who leaves private prescription drug coverage for any reason, including his or her inability to pay;
  • A change in a person's health status that makes a current plan choice no longer suitable to his or her needs;
  • Individuals eligible for the low-income subsidy, other than full benefit dual eligible individuals;
  • If there are substantial changes to the plan's formulary;
  • Individuals with “life-threatening situations;”
  • Individuals whose situations are pharmacologically complex;
  • All individuals for the first 18 months of the program as it may be a confusing time;
  • All beneficiaries leaving MA plans throughout the year so that they can enroll in a PDP;
  • Medicare-eligible retirees whose plan sponsor changes their retiree drug coverage so that it no longer meets the criteria for creditable coverage;
  • Individuals enrolled in, or desiring to enroll in PACE, as the PACE program has continuous enrollment and disenrollment; and
  • Full benefit dual eligibles at any time, including every time a PDP changes its plan in a way that directly effects these individuals, such as removing a drug from its formulary, changing the co-payment tier for a drug, or denying their appeal concerning a non-formulary drug or an effort to change the co-payment tier.

Response: We appreciate this feedback. As previously mentioned, we have historically included in regulation only those SEPs that have been specifically named in the statute. The SEPs explicitly provided for in statute include an SEP for full-benefit dual eligible individuals, individuals who permanently change their residence so that they no longer reside in their PDP's service area, and individuals enrolled in a PDP whose contract is terminated.

We will issue guidance regarding the above SEPs and other additional SEPs that we choose to establish following publication of the regulation. We intend to establish in this guidance an SEP for those individuals eligible for the low-income subsidy whose enrollment into a Part D plan will be facilitated, individuals in long-term care facilities, individuals enrolled in, or desiring to enroll, in PACE and individuals enrolled in employer group health plans. However, we decline to establish SEPs for other reasons included in the comments described above, because we do not view these circumstances as exceptional. However, we retain the right to establish additional SEPs in the future and will do so in our operational guidance. Furthermore, we may establish SEPs on a case-by-case basis, where warranted by an immediate exceptional circumstance, such as an individual with a life-threatening condition or illness. For the commenter's request that we provide an SEP for the first 18 months of the program, we do not believe that such an SEP is warranted in the circumstances. First, we are committed to ensuring all beneficiaries have adequate information to make informed choices about participating in the Part D program. Second, the statute provides for an extended AEP and provides a concurrent IEP at the beginning of this program. These extended enrollment periods, in conjunction with the planned education and information campaigns, will provide all beneficiaries with adequate time and information to make an enrollment decision. Therefore, we do not believe that such an SEP is warranted.

Comment: A few commenters recommended that we should provide a SEP to permit those individuals who will receive the low-income subsidy under subpart P but who are not full-benefit dual eligible individuals to change to a plan of their choosing.

Response: We strongly agree that we should permit those individuals who are enrolled or whose enrollment is facilitated by CMS the opportunity to change to a plan of their choosing. Since we are generally limiting in regulation those SEPs specified in statute, we will provide for this SEP in operational guidance.

Comment: One commenter recommends that we change the provision of an SEP for the involuntary loss of creditable coverage to include individuals who lose such coverage due to failure to pay premiums. The commenter believes the provision as proposed is too restrictive and should be modified.

Response: Section 1860D-1(b)(3)(A)(iii) of the Act is clear that disenrollments for failure to pay premiums will be considered a voluntary disenrollment action. We therefore do not believe it appropriate to treat this disenrollment as an exceptional circumstance justifying an SEP.

Comment: One commenter asked if MA-PD plans are required to participate in the AEP.

Response: The MA enrollment periods are discussed in the MA regulations at § 422.62. The AEP applies to both PDP and MA-PD plans.

Comment: One commenter requested clarification of how many times an individual may use an SEP to enroll in a PDP and encouraged CMS to limit the number of times an SEP may be used to enroll.

Response: The duration and applicability of an SEP is specific to each SEP and may vary from one specific circumstance to another. For example, an SEP in the MA program for individuals affected by a plan termination is specific to the circumstances surrounding that specific action and limited in duration. Other SEPs apply more generally to individuals, for example, full-benefit dual eligible dual individuals. We will provide detailed guidance concerning each SEP following the publication of this rule.

Comment: One commenter requested clarification of proposed § 423.36(c)(3) regarding the SEP for individuals whose enrollment or nonenrollment in Part D is caused by an error of a Federal employee or any person authorized by the Federal government to act on its behalf. The commenter suggests that we include all sponsors of Part D plans as “persons authorized by the Federal Government to act on its behalf.”

Response: We have interpreted this statutorily required SEP to apply to Federal government employees, staff, and contractors hired by the Federal government to perform government duties. We would not consider Part D plans to be performing enrollment functions as a subcontractor on the behalf of CMS; rather, Part D plans must perform certain enrollment functions as requirement of their direct contract with CMS. While it is unlikely that an SEP would be necessary, we will correct any errors made by the plan and not hold the individual liable for the plan's mistake. Thus, we may allow an SEP in individual situations, if appropriate.

Comment: One commenter asked if SEP enrollment in a PDP could be retroactive in order to maintain continuity of care.

Response: An SEP enrollment in a PDP will generally be prospective. We establish the effective date for SEPs and can accommodate unusual circumstances on a case-by-case basis.

Comment: One commenter suggested that we establish an SEP with no late enrollment penalty if a Medigap issuer or other entity fails to provide adequate or accurate notice of whether such coverage is creditable.

Response: Section 423.38(c)(2) of the final rule establishes an SEP for all individuals who are not adequately informed when their creditable prescription drug coverage is lost or changes so that it is no longer creditable prescription drug coverage or that the individual never had such creditable coverage. We believe that these provisions adequately protect an individual who does not receive the required notice from a Medigap issuer or other entity. Regarding the late enrollment penalty, the provision of an SEP is not directly related to, nor does it have a direct effect upon, the imposition of applicable late enrollment penalties. The late enrollment penalty is discussed in more detail at § 423.46 and its relationship to creditable prescription drug coverage is discussed at § 423.56. Specifically, at § 423.56(g) of the final rule we describe the available remedy for an individual who was not adequately informed that their prescription drug coverage is not creditable.

Comment: One commenter believed the enrollment process should ensure that residents of a long-term care facility are enrolled in a PDP that provides access to the pharmacy located in the long-term care facility.

Response: We understand the issue raised by the commenter. Individuals who are in a long-term care facility will be given an SEP to ensure they can choose the PDP that is appropriate for their situation. This will be clarified in guidance following publication of this rule.

6. Effective Dates of Coverage and Change of Coverage (§ 423.40)

Section 1860D-1(b)(1)(B)(iv) of the Act directs us to apply the effective date requirements provided under the MA program at section 1851(f) of the Act. As described above, the three enrollment periods provided under Part D are the IEP, the AEP, and SEP. In the proposed rule, we established the following effective dates for these enrollment periods:

a. Initial Enrollment Period

In accordance with section 1851(f)(1) of the Act, as incorporated into Part D under section 1860D-1(b)(1)(B)(iv) of the Act, an enrollment made during the initial enrollment period will generally be effective the first day of the calendar month following the month in which the individual enrolled in Part D. An enrollment made prior to the month of entitlement to Part A or enrollment in Part B is effective the first day of the month the individual is entitled to Part A or enrolled in Part B. Since the Part D provisions are not effective until January 1, 2006, we clarified that in no case may enrollment in Part D be effective prior to this date. We also clarified that initial enrollments made between November 15 and December 31, 2005 will be effective January 1, 2006. An enrollment made during or after the month of entitlement to Part A or enrollment in Part B is effective the first day of the calendar month following the month in which the enrollment in Part D is made.

b. Annual Coordinated Election Period

In accordance with section 1851(f)(3) of the Act, as incorporated into Part D under section 1860D-1(b)(1)(B)(iv) of the Act, an enrollment made during the annual coordinated election period is effective as of the first day of the following calendar year, that is, January 1 [st] . One exception to this rule occurs during 2006 in the special annual coordinated election period in 2006, in which elections made between January 1, 2006 though May 15, 2006 will be effective the first day of the calendar month following the month in which the enrollment in Part D is made.

c. Special Enrollment Period

A SEP is effective in a manner that we determine to ensure continuity of health benefits coverage.

The final rule adopts the effective dates as proposed.

Comment: Three commenters suggested that we specify a distinct effective date for the SEPs in the final rule (as described in § 423.38(c) of the proposed rule) to ensure adequate consumer protection. Two commenters suggested adding: “but no later than the first day of the second calendar month following the month of the request for the enrollment change” to the end of this section. The third commenter suggested we add: “changes made before the 20 [th] of the month are effective the first day of the second month following” the change.

Response: We have outlined the specific effective date requirements for SEPs granted in the MA program in operational guidance and will follow the same process for the Part D program. We believe that in so doing, we retain our ability to react quickly to changes or unforeseen circumstances.

7. Involuntary Disenrollment by the PDP (§ 423.44)

Section 1860D-1(b)(1)(B) of the Act generally directs us to use disenrollment rules similar to those established under section 1851 of the Act. The proposed disenrollment provisions for PDPs were outlined in § 423.44 of our proposed rule, including the basis for disenrollment—both optional and required—and guidance for notice requirements.

Specifically, we proposed at § 423.44(b)(2) that a PDP is required to disenroll an individual who dies, no longer resides in the PDP's service area, loses entitlement or enrollment to Medicare benefits under Part A and is no longer enrolled in Part B, or knowingly misrepresents to the PDP that he or she has received or expects to receive reimbursement for covered Part D drugs through other third-party coverage. The proposed rule also required a PDP to disenroll an individual if the PDP sponsor's contract is terminating.

In addition to providing requirements for mandatory disenrollments, we also provided under § 423.44(d) of our proposed rule that PDPs may disenroll individuals who do not pay monthly premiums or whose behavior is disruptive, consistent with section 1860D-1(b)(1)(B)(v) of the Act.

As with the MA program, PDP sponsors will be required in the final rule to provide proper notice to the beneficiary, as outlined at proposed § 423.44(c), and afford him or her due process in accordance with the procedures outlined in our operational instructions prior to disenrolling the individual. For example, a PDP that wishes to disenroll a beneficiary for disruptive behavior must receive our prior approval and demonstrate to our satisfaction that it has made a good faith effort to resolve the issue prior to requesting the disenrollment. We will review these requests on a case-by-case basis, taking into account all of the facts and circumstances of a particular case, prior to making its decision. PDP sponsors must apply their policies for optional disenrollment for failure to pay premiums and disruptive behavior consistently among individuals enrolled in their plans, unless we permit otherwise, and must do so consistent with applicable laws regarding discrimination on the basis of disability.

Except as otherwise provided below, the final rule adopts the involuntary disenrollment rules set forth in § 423.44 of the proposed rule.

Comment: Several commenters urged CMS to establish a process for individuals to appeal disenrollment decisions. Several commenters believed that individuals should have access to an outside independent review process, especially if these individuals are disenrolled without an SEP. Another commenter stated that involuntary disenrollments must be heavily scrutinized and an appeal right be available on an expedited basis.

Response: As we discussed under a previous comment regarding appeals for enrollment denials, we do not believe that a formal appeals process is necessary. Instead, we intend to address beneficiary complaints regarding disenrollment in a manner addressed under the MA program. Under the MA program, MA plans are required to follow a specific process, which includes notice of potential disenrollment if the individual does not address situation. We currently provide assistance to MA organizations to handle beneficiary inquiries and complaints regarding disenrollment through staff assigned to each MA organization. We envision a similar process being established under the PDP program.

Comment: Several commenters pointed out an error in the numbering of the regulatory text for disruptive behavior at proposed § 423.44(b)(1).

Response: We concur and have corrected the numbering.

Comment: A commenter requested that we clearly define how long an individual would need to reside out of the PDP service area before we would consider the individual as no longer residing in the service area. One commenter did not think that it was reasonable to apply a 6-month time limit to PDPs; PDPs should not be required to disenroll individuals if the PDP can provide individuals access to benefits out of the service area through a PDP in another region, or the PDP's network of pharmacies in other regions, or mail order pharmacies. One commenter believed the decision should be left to the individual as to when he or she has permanently moved out of the PDP service area. A few commenters did not believe that a person's residency should be a factor in a plan's basis for disenrollment. Another commenter stated that a PDP should not be required to disenroll an individual if the PDP meets licensure requirements in the State where the individual has moved and the PDP has a national pharmacy network in place. Another commenter suggested that PDP maintain members if they are an established sponsor and meet certain network adequacy requirements in the region in which the beneficiary moves.

Response: We agree that disenrolling a beneficiary after being temporarily out of the service area for a certain period of time may be less appropriate for PDPs than in the MA program. The MMA directs us to use rules similar to (and coordinated with) the MA residency requirements at section 1851(b)(1)(A) of the Act, which provides that an individual may elect an MA plan only if the plan serves the geographic area in which the individual resides, except as the Secretary may otherwise provide. However, the MA regulation at § 422.74(d)(4) generally provides for disenrollment of an individual if that individual is out of the service area, even temporarily, for 6 months, unless the MA organization offers visitor or traveler benefits that provide for benefits while outside of the service area. We believe that the nature of the prescription drug benefit and the ability for many individuals to access the benefit through mail order or chain drug stores provide greater flexibility in accessing the prescription drug benefit while temporarily being out of the PDP's service area. However, while an individual has greater flexibility to be temporarily outside the service area and still access the PDP benefit, we maintain that the individual must maintain his or her permanent residence within the PDP's service area to be a member of the PDP. If the PDP learns of a change in the individual's permanent address, the PDP would initiate the disenrollment process. It is, however, an individual's responsibility to notify the PDP if the individual permanently moves out of the service area. We will provide further guidance to PDPs on the process of disenrollment when an individual permanently moves out of the service area following publication of this rule.

Comment: One commenter asked how a PDP will learn of loss of entitlement to Part A or Part B.

Response: We will notify the PDPs of the loss of Part A or B benefits. We will issue detailed operational guidance for PDPs prior to 2006.

Comment: A few commenters requested that we further clarify the provision that an individual who “knowingly misrepresents to the PDP that he or she has received or expects to receive reimbursement for covered Part D drugs through other third party coverage” (that is, whether his or her costs are expected to be reimbursed through insurance or otherwise, such as a group health plan) must be disenrolled. These commenters also asked how “knowingly” will be determined and what entity would be responsible for investigating such a case. One commenter indicated that a beneficiary should not be penalized for unintended errors or inadvertent omissions, and that many beneficiaries will be confused at the outset about their PDP coverage and how it may coordinate with other insurance.

Response: Section 1860D-2(b)(4)(D)(ii) of the Act provides that “material misrepresentation” by an individual as to whether his or her costs are expected to be reimbursed through insurance or otherwise (through a group health plan or other third party payment arrangement) shall be grounds for termination by the PDP. Since section 1860D-2(b)(4)(D)(ii) of the Act also provides that a PDP sponsor may periodically ask Part D eligible individuals about such reimbursement, the statute establishes a penalty for an individual who “materially” misrepresents such information. This provision is not intended to disenroll individuals who simply make an error, but instead apply to those individuals who knowingly provide such false information. We would be responsible for reviewing and issuing the final decision on such a case. We plan to issue further guidance on this for PDPs prior to 2006.

Comment: We received several comments on the disenrollment for nonpayment of premium provision, both supporting and opposing inclusion of such a process. Several commenters requested that we clarify the details of disenrollment for nonpayment of premium, including what we view as “reasonable efforts” to collect the premium. Several commenters recommended providing a minimum grace period for repayment before permitting disenrollment. One commenter requested that we waive payment of past premiums for full-benefit dual eligible individuals or low-income subsidy individuals. Some commenters believe that it is inappropriate for us to disenroll any individual from Part D for nonpayment of premium. One commenter stated that individuals enrolled in a PACE plan should not be subject to the disenrollment requirements under § 423.44 of the proposed rule.

Response: Section 1860D-1(b)(1)(B)(v) of the Act specifically directs us to apply rules to PDPs that are similar to (and coordinated with) the MA provisions at section 1851(g) of the Act related to disenrollment for nonpayment of premium. While some commenters objected to disenrollment by the PDP on those grounds, we note that such disenrollment is at the PDP sponsor's option and PDP sponsors therefore have the ability to apply this rule to their plan enrollees. In contrast, under Part B, individuals who fail to pay their Part B supplementary medical insurance premiums must be disenrolled from Part B. While we do not review and approve such disenrollments, we maintain that if a PDP chooses the option to disenroll a beneficiary for nonpayment of the premium, we would require that the PDP apply this policy consistently, as we direct, amongst all its members and could not “waive” the premium for a certain group of its members. As indicated in the preamble of subpart T of this rule, we will issue additional guidelines that will include a comprehensive listing of Part D waivers applicable to PACE organizations. However, we agree that PACE organizations should not be subject to the disenrollment requirements of § 423.44 as they are duplicative of the PACE disenrollment requirements associated with § 460.164 of the PACE regulation.

Comment: Several commenters recommended that we permit plans to deny reinstatement following disenrollment for failure to pay premiums unless the enrollee pays the outstanding amount that is due. Other commenters stated that PDP should not be required, under any circumstance, to re-enroll individuals who are disenrolled for nonpayment of the premium.

Response: We have provided in the final regulation at § 423.44(d)(1)(iii) that a PDP may decline future enrollment to individuals who have been disenrolled for failure to pay premiums until past due premiums are paid to the PDP. However, we would not allow a PDP to prohibit an individual from enrolling in its plan if the individual has paid all past due premiums to the PDP.

Comment: We received a substantial number of comments on proposed § 423.44(d)(2) to allow PDP sponsors to disenroll individuals who exhibit disruptive behavior.

One commenter supported the definition established in the proposed rule, while several commenters supported the due process safeguards afforded by our approval of disenrollment requests. Two commenters suggested that we provide guidance to PDP sponsors on the symptoms of mental illness and dementia and other personality disorders to distinguish between disruptive behavior and behavior resulting from a medical condition. There were other commenters who asked us to clearly define the terms and requirements for disenrolling a beneficiary for disruptive behavior. These commenters recommended that we include in the final rule such requirements as documentation of a PDP sponsor's effort to provide a reasonable accommodation for individuals with disabilities and sufficient notice of the sponsor's actions during the course of the disenrollment process.

Numerous commenters expressed concern that the proposed definition of disruptive behavior does not adequately protect individuals whose behavior is induced by disability, mental illness, cognitive impairment, or certain prescribed drugs and who rely on prescription drug therapy to stabilize their behavior. Some commenters recommended that we prohibit PDP sponsors from disenrolling certain populations for disruptive behavior, explaining that State Medicaid programs will not be able to claim Federal matching funds for prescription drugs spending on behalf of full-benefit dual eligibles who have been disenrolled by a PDP sponsor. Other commenters suggested that we develop more stringent criteria for PDP sponsors requesting to disenroll a full-benefit dual eligible individual. Several commenters stated that, in cases where an individual is unstable, disruptive behavior could be related to unsuccessful attempts to find the proper medication. There were also a number of commenters who asserted that we lacked statutory authority to permit PDPs sponsors to disenroll individuals for disruptive behavior. Two commenters questioned the appropriateness of applying a policy of involuntary disenrollment for disruptive behavior to PDPs. One commenter suggested that we allow an individual who is disruptive to designate an authorized representative to access services on his or her behalf.

Response: In the final rule, we aim to strike a balance between allowing PDP sponsors to disenroll individuals who exhibit disruptive behavior and creating adequate protections for individuals who face involuntary disenrollment from a PDP. In accordance with the statute (at section 1860D-1(b)(1)(B)(v) of the Act), we must establish a process that is similar to and coordinated with the process under the MA program that permits MA organizations to disenroll an individual for disruptive behavior. At the same time, we recognize the impact of such a disenrollment on an individual's ability to access prescription drug coverage under the Medicare program, and the need for adequate safeguards for individuals whose disruptive behavior is due to mental illness or a medical condition. Continuity of care for these individuals is essential, especially if they are taking prescription medications that can minimize the debilitating impact of their illness and restore their functioning.

Therefore, in revising our proposed definition of disruptive behavior in § 423.44(d)(2)(i) of the final rule, we focus on behavior that substantially impairs a PDP sponsor's ability to arrange or provide care for the individual or other plan members. Behavior that is related to the use of medical services or compliance (or non-compliance) with medical advice is not disruptive behavior.

We also agree with commenters that arranging or providing care for individuals with mental illness, cognitive impairments such as Alzheimer's disease or other dementias, and medical conditions and treatments that may cause disruptive behavior warrant special consideration, and therefore revise § 423.44(d)(2)(v) to require PDP sponsors to provide a reasonable accommodation to individuals in such exceptional circumstances that we deem necessary. Such accommodation is intended to ensure that the individual can maintain Medicare prescription drug coverage and may include granting an individual a SEP to choose another plan, or requiring the plan to continue the individual's enrollment until the Annual Coordinated Election Period, when the individual has an opportunity to enroll in another plan. We will determine the type of accommodation necessary after a case-by-case review of the needs of all parties involved. This review will be conducted as part of our review and approval of the PDP sponsor's request, as required in regulations at § 423.44(d)(2)(v), and will include expert opinion from our staff with appropriate clinical or medical background.

In addition, we recognize that circumstances may arise where an individual is only able to obtain qualified prescription drug coverage from a fallback prescription drug plan operating in his or her service area. In such instances, allowing a fallback entity to disenroll an individual may create substantial barriers to accessing prescription medications under the Medicare program. Section 1860D-11(g)(4)(B) of the Act grants us authority to establish additional requirements specifically for fallback prescription plans. Under this authority, we reserve the right at § 423.44(d)(2)(vi) to deny a fallback prescription drug plan's request to disenroll an individual for disruptive behavior.

In the proposed rule, we established procedures that PDP sponsors must follow prior to requesting to disenroll a member for disruptive behavior. Under proposed § 423.44(c), a PDP sponsor must give an individual timely notice of the disenrollment, which includes an explanation of the individual's right to a hearing under the PDP's grievance procedures. We further required at proposed § 423.44(d)(2)(ii) a sponsor to make a serious effort to resolve the problems presented by the individual, including the use or attempted use of the organization's grievance procedures. Finally, we established under proposed § 423.44(d)(2)(iii) that a PDP sponsor must document the individual's behavior, its own efforts to resolve the problem, and the use or attempted use of its internal grievance procedures. We are preserving all of these requirements in the final rule at § 423.44(c) and § 423.44(d)(2)(iii) and (d)(2)(iv).

We believe that the final rule achieves the twin goals of permitting involuntary disenrollment based on an individual's disruptive behavior, while also establishing necessary protections for individuals who are subject to our disenrollment rules.

Comment: Several commenters contended that allowing a PDP sponsor to disenroll an individual for disruptive behavior provides an opportunity for PDP sponsors to discriminate against individuals with disabilities, mental illness, Alzheimer's, and other cognitive conditions.

Response: We appreciate the commenters concern about the need to ensure that individuals are not discriminated against on the basis of their disability. However, the Part D plans are not provided the authority to make the decision on such a disenrollment. In addition to establishing safeguards in the final rule for individuals with special needs by requiring PDP sponsors to make reasonable accommodations where we deem necessary, it is CMS who reviews the request for disenrollment and makes the decision to approve or deny the request. In our review, we will include our staff with the appropriate clinical or medical expertise review the case before a final decision is made.

Comment: Several commenters noted that the proposed rule denies protection to individuals who comply with medical advice by trying an on-formulary drug instead of the drug originally prescribed and subsequently experience an adverse reaction that triggers the disruptive behavior. A few commenters asked us to prohibit PDPs from disenrolling an individual because of his or her refusal or inability to adhere to a treatment plan developed by the PDP or other health care professionals associated with the plan.

Response: We agree with the commenters and clarify in the final rule at § 423.44(d)(2)(i) that an individual cannot be considered disruptive if such behavior is related to the use of medical services or compliance (or non-compliance) with medical advice or treatment.

Comment: Two commenters supported the flexibility afforded PDP sponsors by our allowing PDP sponsors to limit re-enrollment for individuals who are disenrolled for disruptive behavior, and one of these commenters specifically asked us to establish criteria for re-enrolling an individual such as a minimum waiting period and a commitment by the individual to discontinue such behavior. On the other hand, there were many commenters who opposed the ability of a PDP sponsor to decline re-enrollment of an individual. These commenters contended that prohibiting an individual from re-enrolling in a PDP for a specified period could cause undue harm and lapses in coverage, especially if the individual is not able to enroll in another PDP. One commenter requested that we specify the maximum period of time that a PDP sponsor may prohibit re-enrollment of an individual who has been disenrolled for disruptive behavior.

Response: In the proposed rule, we enabled PDP sponsors to request, at their option, the ability to decline future enrollment by an individual who had been disenrolled for disruptive behavior. While we retain this option for PDPs in the final rule, we require these sponsors to request future conditions on re-enrollment as part of their disenrollment request. At the same time, we reserve the right in accordance with § 423.44(d)(2)(v) to review each request on a case-by-case basis. In the review process, we will give due consideration to exceptional circumstances that may warrant reasonable accommodations in addition to the appropriateness of conditions on re-enrollment.

Comment: There were several commenters who objected to the expedited disenrollment process. The commenters noted that the expedited process lacks even the minimal standards and requirements that are in place to protect beneficiaries in these circumstances.

Response: It is our intent to ensure that all individuals facing involuntary disenrollment for disruptive behavior have sufficient opportunity, as provided by the notice requirements, to change their behavior or grieve the PDP sponsor's decision to request involuntary disenrollment from us. We have therefore removed this provision from the final regulation.

Comment: One commenter asked us to clarify whether a full-benefit dual eligible individual who is disenrolled for disruptive behavior is entitled to a SEP.

Response: In accordance with the § 423.38(c)(4), a full-benefit dual eligible individual as defined under section 1935(c)(6) of the Act is entitled to a SEP. A full benefit dual eligible individual who is involuntarily disenrolled for disruptive behavior remains entitled to a Special Enrollment Period.

Comment: We received two comments asking us to adopt an interpretation of nonpayment of cost sharing as disruptive behavior as we had discussed in the preamble of the proposed rule for MA organizations.

Response: We appreciate the feedback provided on the consideration to include nonpayment of cost-sharing as disruptive for the purposes of applying the provisions under disruptive behavior. We will consider these comments in developing guidance for the disruptive behavior provisions.

8. Late Enrollment Penalty (§ 423.46)

Section 1860D-13(b) of the Act establishes late enrollment penalties for beneficiaries who fail to maintain creditable prescription drug coverage for a period of 63 days following the last day of an individual's initial enrollment period and ending on the effective date of enrollment in a Part D plan. We outlined this process for imposing the penalty in the proposed rule. We also proposed that an uncovered month is any month in which an individual does not have creditable coverage at any time during that month. We also reference the calculation of the amount of the penalty, which was described at § 423.286(d)(3) of the proposed rule.

The final rule adopts the rules for late enrollment penalties as proposed.

Comment: Several commenters requested that we waive the late enrollment penalty for certain individuals, such as full-benefit dual eligible individuals, subsidy eligible individuals, individuals who are eligible for a special enrollment period and individuals who are involuntarily disenrolled. One commenter asked that State Medicaid programs be allowed to request and obtain such a waiver. Other commenters urged CMS to delay the implementation of the late enrollment penalty for one to two years, or be flexible with the application of the penalty, stating the Part D program was new and complex. Another commenter asked if we would provide any exception to the penalties for exceptional circumstances, such as natural disaster, family death, or clinical justification. A few commenters did not see a late penalty appeals process in the regulation and requested that we add an opportunity to appeal the late penalty.

Response: There is nothing in the statute that would provide us with the authority to waive or delay the late enrollment penalty at any time unless an individual was not adequately informed that his or her prescription drug coverage as described at § 423.56 was not creditable. Only in this limited situation will we be able to deem the individual's prescription drug coverage as creditable, regardless of whether it actually is creditable, so as not to impose the late penalty. Further, it is clear that the statute intended this provision to apply to full-benefit dual eligible individuals since the application of the penalty is specifically referenced in the definition of the full premium subsidy under section 1860D-14(a)(1)(A) of the Act, for which full-benefit dual eligible individuals are eligible. Specifically, section 1860D-14(a)(1)(A) of the Act provides that full subsidy eligible individuals, including full-benefit dual eligible individuals, are responsible for 20 percent of any late enrollment penalty for the first 60 months during which such penalty is imposed. As discussed in the proposed rule, we will develop a process for individuals to apply to CMS for reconsideration of the penalty. We appreciated the feedback that organizations provided on setting up such a process.

Comment: Several commenters asked CMS to clarify that those who do not receive a notice that their prescription drug coverage was not creditable (or received the wrong notice) are not subject to the late enrollment penalty.

Response: As provided in § 423.56(g) of the final rule, an individual who is not adequately informed that his or her prescription drug coverage was not creditable may apply for our review and make a determination if this occurred. If we determine that the individual did not receive adequate notice or received incorrect information, we may deem the individual to have had creditable coverage so that the late enrollment penalty will not be imposed.

Comment: One commenter asked CMS to clarify how the 63-day period would be counted. The commenter recommended from the end of the IEP to the date of the application for the low-income subsidy since individuals may delay a decision until he or she knows whether there will be a subsidy.

Response: The count of the 63-day period will commence the day following the end of the individual's IEP or, once the IEP has passed, the day following the last day of creditable coverage or Part D enrollment (in a PDP or MA-PD plan). The application of the 63-day period will be consistently applied to all individuals, regardless of when an individual may or may not apply for the low-income subsidy.

Comment: One commenter asked how the late enrollment penalty will be coordinated with the late enrollment penalty for Part B.

Response: We are currently developing operational and system requirements to implement the late enrollment penalty process. Additional guidance will be provided to PDPs and individuals with specific information as to how this will occur.

9. Part D Information That CMS Provides to Beneficiaries (§ 423.48)

As provided under section 1860D-1(c)(1) of the Act, we will conduct activities designed to broadly disseminate information about Part D coverage to individuals who are either eligible or prospectively eligible for Part D benefits. In the proposed rule, we indicated that this information will be made available to beneficiaries at least 30 days prior to their initial enrollment period.

Each organization offering a PDP or MA-PD plan must provide us annually with the information to disseminate to individuals who are currently or prospectively eligible for Part D benefits. The information dissemination activities for Part D will be similar to, and coordinated with, the information dissemination activities that we currently perform for Medicare beneficiaries under sections 1851(d) and 1804 of the Act.

As required under section 1860D-1(c)(3) of the Act, we proposed to include the following comparative information for qualified prescription drug coverage provided by PDPs and MA-PD plans as part of our dissemination of Part D information and our efforts to promote informed beneficiary decisions:

  • Benefits and prescription drug formularies;
  • Monthly beneficiary premium;
  • Quality and performance;
  • Beneficiary cost-sharing; and
  • Results of consumer satisfaction surveys.

We also proposed to provide information to beneficiaries regarding the methodology we will use for determining late enrollment penalties, as provided in § 423.286(d) of our proposed rule.

In carrying out the annual dissemination of Part D information, we will conduct a significant public information campaign to educate beneficiaries about the new Medicare drug benefit and to ensure the broad dissemination of accurate and timely information. We will work with SSA and the States to ensure that low-income individuals eligible for or currently enrolled in Part D benefits are aware of the additional benefits available to them and how to receive those benefits. In order to maximize the enrollment of Part D eligible individuals, this public information campaign would include outreach, information, mailings, and enrollment assistance with and through appropriate State and Federal agencies, including SHIPs, and will coordinate with other Federal programs providing assistance to low-income individuals. In addition, we will undertake special outreach efforts to disadvantaged and hard-to-reach populations, including targeted efforts among historically underserved populations, and coordinate with a broad array of public, voluntary, private community organizations, plan sponsors and stakeholders serving Medicare beneficiaries to explain the options available under this program. Materials and information will be made available in languages other than English where appropriate.

This information will enable beneficiaries to make informed decisions regarding their Part D coverage options. Organizations offering a PDP or MA-PD plan will be required to provide this information in a format and to use standard terminology that we will specify in further operational guidance.

In the interest of broadly disseminating information that promotes informed decision-making among Part D enrollees and prospective Part D enrollees, as required under Section 1860D-1(c) of the Act, we would extend the price comparison requirements to PDP sponsors and MA organizations offering MA-PD plans and making comparative information about Part D plans' negotiated prices available to beneficiaries through www.medicare.gov.

Since the introduction of www.medicare.gov in 1998, we have substantially increased the amount of personalized information available to Medicare beneficiaries, making it one of the government's most comprehensive and customer-oriented sites available to the public. The web site hosts twelve separate database applications to help individuals make their own health care decisions. The most significant ones are: the Medicare Personal Plan Finder (which contains costs, benefits, quality, satisfaction and disenrollment measures), Nursing Home Compare (which contains basic characteristics, staffing information and inspection results), the Prescription Drug and Other Assistance Programs application (which contains the most extensive, nationally complete listing of the Medicare-approved discount drug cards, including price comparisons, as well as other government and private programs designed to help with prescription drug costs), and the Medicare Eligibility Tool (which assists users in determining when they are eligible, how to enroll and what they need to consider when joining Medicare). Other tools providing customized results include: the Participating Physician and Supplier Directories, Home Health and Dialysis Facility Compare, Your Medicare Coverage, Helpful Contacts, Publications, and Frequently Asked Questions. By updating all information on the web site at least once a month, the information provided to Medicare beneficiaries via www.medicare.gov is the most reliable and consistent information available.

Much of the information available through www.medicare.gov is also available via the 1-800-MEDICARE helpline. 1-800-MEDICARE is a major information channel for providing the most personalized and reliable information to people with Medicare. The beneficiary can call 1-800-MEDICARE to find out the most reliable information on public and private programs that offer discounted or free medication, programs that provide help with other health care costs, and Medicare health plans that include prescription drug coverage. The caller can always talk to a live person at 1-800-MEDICARE to get the facts they need. We can also give the beneficiary personalized brochures containing information on their health plan choices, nursing homes and Medicare participating physicians in their area. 1-800-MEDICARE is available 24 hours a day, 7 days a week, to provide the one-on-one service that our Medicare beneficiaries need to make appropriate health care decisions.

The final rule adopts the information requirements set forth in the proposed rule.

Comment: Several commenters were concerned that the web site should reflect accurate information that is presented in an appropriate context and in a way that is useful for beneficiaries to use. Many commenters noted that the web site should provide beneficiaries with the ability to compare plans on the basis of estimating their out-of-pocket spending, including premiums and applicable cost sharing. Several commenters encouraged CMS to rely not only on price as the factor in determining which Part D plan fits beneficiary needs. Another commenter urged CMS to include specific information regarding which drugs are covered by each plan. Other commenters indicated that other information that the beneficiaries would need to consider would be the level of coinsurance, the amount a beneficiary would pay during any period he or she is liable for 100 percent of the cost sharing, whether the drug is on or off the formulary, and other cost management techniques that may apply, such as step therapy and prior authorization. Another commenter stated that we must post prices on its website of retail pharmacies that offer maintenance supplies of medications. One commenter stated that beneficiaries need to know whether the pharmacy is included in the plan's network.

Response: We appreciate this feedback and will consider this when developing the requirements for the Part D price comparison web tool.

Comment: Another commenter stated that we need to ensure that any website includes price comparisons about generic drugs compared to their innovator brands, as well as generics compared to other brand name drugs in a similar therapeutic class.

Response: This comment will be considered when developing the requirements for the Part D price comparison web tool. As with the current price comparison tool for the Medicare-approved drug discount card program, we include pricing information for both brand and generic drugs.

Comment: One commenter noted that correct information may not be provided to seniors if we require plans to post the maximum price that could be charged, since the maximum price is typically the pharmacy's usual and customary cash price.

Response: It is our understanding that usual and customary pricing data is not readily accessible; therefore, we anticipate posting the maximum negotiated prices for prescription drugs on the website with the understanding that beneficiaries will pay the lower of the negotiated or usual and customary price at the point of sale. It is anticipated that the prices displayed on the website would reflect what enrollees would expect to pay at the point of sale for their prescriptions under the respective plans.

Comment: One commenter asked that we define the process for the information sharing exchange between PDPs and CMS.

Response: The process has not been defined at this time. Once we have developed the data requirements and process for submission of data, we will share this information with all prospective Part D plans.

Comment: Several commenters believe that the price comparison tool should not be a requirement for PDP sponsors or MA organizations offering MA-PD plans.

Response: It is important for beneficiaries to have access to all information in order to make informed choices. We are committed to providing Medicare beneficiaries with information about both PDPs and MA-PD plans through the price comparison tool. Therefore, we will keep this requirement.

Comment: One commenter expressed a general concern with the disclosure of negotiated prices and the negative impact that disclosure of such information could have on competition. The commenter further noted that negotiated prices may be subject to confidentiality agreements. The commenter suggested that we disclose only estimated or average prices and that this information only be posted on the specific website of the Part D plan.

Response: As mentioned previously, it is anticipated that the prices displayed on the website will reflect what enrollees would expect to pay at the point of sale for their prescriptions under the respective plans.

Comment: A commenter stated it was unacceptable for CMS not to provide quality and performance information in the first year or second year of the Part D program.

Response: Quality data will not be available for the first year since this is a new program and historical data will not be available for reporting. For year two, the regulation simply states that if it is impractical to obtain data or if it is not available, it will not be reported; this is not the same as stating that it will not be available for the second plan year. From the perspective of many beneficiaries, cost and availability are the most important quality issues. Hence, we will be able to report timely in response to these issues.

Comment: One commenter urged the agency to work closely with pharmacies to ensure that any price comparison website is understandable and free of errors before it is made public.

Response: Historically, we have worked closely with beneficiaries, stakeholders, partners, and advocacy groups to ensure the information disseminated meets the needs of the Medicare population we serve. We will continue this practice in the development of the website for Part D plan information.

Comment: One commenter stated that we are silent on the notification timeframe for beneficiaries. CMS simply refers to the 30-day notice period. The commenter thinks that beneficiaries will need much more than 30 days to digest all of the information they will receive from CMS to enable them to make informed choices about their Part D coverage. The commenter urges information to be disseminated as soon as possible and urges CMS to plan numerous information campaigns now and involve numerous organizations in developing education activities and materials. Another commenter suggests dissemination activities occur at least 60 days prior to the initial enrollment period for Part D, which begins November 15, 2005.

Response: We are planning outreach and education activities that will occur throughout 2005 and 2006. Detailed information about drug plans and their individual benefit structures will be released as soon as possible after this information is approved. It is impossible to send out plan data any sooner due to submission dates for plan information and the process steps needed to translate the raw data into consumer-friendly information, as well as the print production steps for the publication that will house this comparative information.

Comment: One commenter asked what information we will provide to SSA, SHIPs, and other groups to educate beneficiaries about the late enrollment penalty.

Response: We will provide important details about the penalty associated with late enrollment in the information provided to SSA and SHIPs, as well as in SHIP training materials. In addition, we will develop materials that can be used by employers, unions, partners, advocacy groups and other stakeholders to educate beneficiaries about the late enrollment penalty.

Comment: One commenter stated that we must give greater attention to developing materials and education campaigns focused on informing beneficiaries, especially those with special needs, about the new drug benefit and to help them to enroll in the best plan available.

Response: We are planning a multi-tiered education program to repeatedly reach all beneficiaries. This program will include plans for specific important target audiences, including those with special needs. Mailings and outreach activities to dual eligibles are currently being planned. Education and outreach materials developed for beneficiaries will be thoroughly tested with the target audience.

Comment: Another commenter stated that we should mail, no later than October 15, 2005, standardized, easy-to-understand notices to full-benefit dual eligible individuals that, among other things: inform them of their eligibility to receive the low-income subsidy if they enroll in a PDP; list of choices of health plans, clearly denoting those that meet the benefit premium assistance limit, and contact information for each plan; explain that full-benefit dual eligible individuals will be randomly enrolled in a prescription drug plan at a specified date if they fail to opt out or enroll in a plan themselves; explain how they may change their drug plans if they wish at any time; and inform them of where in their community they can go to get help with enrollment. The commenter also recommended that these notices should be tested for readability by focus groups and experts.

Response: We plan to consumer test beneficiary notices and send out the information noted by the commenter above by October 15, 2005. We are considering using the mailing to inform the full-benefit dual eligible individuals about what plan they will be auto-enrolled in if they fail to elect a Part D plan by December 31, 2005 or affirmatively opt of Part D, and that they have a right to choose to enroll in a different plan.

Comment: One commenter stated that the website should be provided in languages other than English to reflect the language spoken in a PDP service area.

Response: We appreciate this feedback and will consider this when developing the requirements for the website.

Comment: CMS should include in the final rule binding and enforceable standards defining information plans must provide to beneficiaries with various types of disabilities. For example, this information must be available to individuals who are blind or have low-vision. Further, CMS must require PDP internet websites to be accessible for individuals with vision impairments.

Response: Our websites are accessible to people with various disabilities, including those who are blind or have low-vision. Under our marketing requirements in § 423.50, we require Part D plans to demonstrate that marketing resources are allocated to marketing to the vulnerable populations, as well as beneficiaries age 65 and over. It is also important to note that Section 508 of the Rehabilitation Act of 1973 allows individuals with disabilities to access electronic information.

Comment: Commenters stated that the proposed rule focused largely on support through Internet sources and the 1-800 Medicare number, and argued that both are necessary and helpful but insufficient to meet the needs of many duals, as well as those eligible for the low-income subsidy.

Response: Although the basis for information dissemination is through publications, www.medicare.gov and 1-800-MEDICARE, we do not plan to solely rely on these resources to reach the population as a whole. We will work closely with SSA, SHIPs, Area Associations on Aging as well as other national stakeholders and partners, to provide assistance to those who may qualify for the low-income subsidy. Through a broad network of support from community based organizations, we will make considerable efforts to reach those beneficiaries who do not have access to the Internet or are uncomfortable calling 1-800-MEDICARE.

Comment: CMS should also make detailed information about PDPs available electronically to others in accessible formats that would enable them to conduct independent analyses about what plan would be best for a particular individual.

Response: Because the actual plan data underlying the price comparison tool is considered proprietary, we do not anticipate making the underlying data available electronically to outside organizations. Since nothing in the MMA addresses disclosure of plan data, the Freedom of Information Act (FOIA) rules apply. FOIA Exemption 4 protects certain confidential commercial information that is submitted to a Federal agency. Determinations about the applicability of FOIA Exemption 4 to plans' pricing data would be made on a case-by-case basis depending on whether the submitter of the data could demonstrate that disclosure of this information would likely cause substantial competitive harm to the submitter's competitive position. If FOIA Exemption 4 is found to protect submitted price information, we cannot disclose this information because to do so would violate the Trade Secrets Act (18 U.S.C. 1905).

Comment: Several commenters stated that we should develop specific outreach and education strategies for vulnerable populations, including disabled Medicare beneficiaries and dual eligibles. Another commenter stated that PDPs should be required to include specific plans for encouraging enrollment of hard-to-reach populations, including individuals with mental illness. Another commenter indicated that outreach efforts must involve community-based groups on a collaborative basis and not just use these groups as conduits for distributing written materials produced by CMS regarding the new benefit. Resources must be provided to enable these groups to educate beneficiaries about their choices and help enroll them. This collaboration with community groups must begin as soon as possible to establish the infrastructure needed once Part D goes into effect.

Response: We are developing an extensive outreach campaign for these individuals and are working closely with U.S. Department of Health and Human Services' Office of Disability to ensure that this important audience is reached.

Comment: One commenter strongly urged CMS to develop a specific plan for facilitating enrollment of beneficiaries with disabilities that incorporates collaborative partnerships with State and local agencies and disability advocacy organizations.

Response: In addition to working closely with the HHS Office of Disability to ensure we reach this group of individuals, we plan to broaden local partner networks though the Regional Education About Choices in Health (REACH) campaign to provide training, information and planning support to provide outreach and assistance to these populations. REACH is a national education and publicity campaign implemented at the local level by our Regional Offices and their partners. The REACH campaign works through partnerships to increase awareness of the Medicare program and resources among hard to reach populations.

Comment: A commenter suggested that we should develop and implement effective outreach strategies utilizing the Medicare Beneficiary Ombudsman authorized under section 923 of the MMA.

Response: Section 923 of the MMA states that, to the extent possible, the Ombudsman shall work with SHIPs to facilitate the provision of information to individuals entitled to benefits under Part A or enrolled under Part B, or both regarding MA plans and changes to those plans. We will ensure that SHIPs receive sufficient training in all aforementioned subjects so that SHIPs can provide information and assistance to beneficiaries referred to them by the Ombudsman. The Ombudsman operational design assumes that 1-800-MEDICARE will refer callers to appropriate sources, including SHIPs, for resolution of complaints and appeals and, when necessary, refer them directly to the Ombudsman as a last resort.

Comment: We received two comments that strongly recommended that we clarify the SHIPs mandate to ensure that they address the needs of individuals with disabilities, including non-elderly individuals.

Response: Section 4360 of the Omnibus Budget Reconciliation Act (OBRA) 1990, which created SHIP, requires that SHIPs provide information, counseling and assistance to Medicare eligible beneficiaries, including beneficiaries with disabilities. All CMS SHIP grant announcements expressly reference beneficiaries with disabilities as intended recipients of SHIP services. In addition, we provide training and information on the special needs and issues related to this population. We agree with the commenters and will clarify the SHIP mandate through the methods described here to address this need.

Comment: One commenter suggested that we partner with and fund community-based disability organizations to conduct outreach, information, and referral activities on the new Part D benefit.

Response: While we agree to partner with these organizations in these activities, funding these groups are subject to available funds in our budget.

Comment: One commenter was concerned about beneficiaries being inundated with marketing and outreach materials. Since many beneficiaries will need counseling on plan selection, this commenter asked for clarification regarding whether counseling will be available, what the States' role will be, and whether there will be Federal financial participation available for such costs.

Response: States that had SPAPs on October 1, 2003 will have Federal assistance available to them through the transitional grant program authorized under section 1860D-23(d) of the Act. These States will use the transitional grant funds to educate SPAP enrollees about the plans that are available to them under part D, as well as provide technical assistance, phone support, counseling, and other activities the SPAP believes will promote the effective coordination of enrollment in Part D. States that do not have a SPAP operational as of October 1, 2003 will not have these transitional funds available to them.

In addition, we will continue to provide grants to the States through the SHIP. SHIP is a national program that offers one-on-one counseling and assistance to people with Medicare and their families. Through grants directed to States, SHIPs provide free counseling and assistance via telephone and face-to-face interactive sessions, public education presentations and programs, and media activities. We expect SHIP counseling to be an important source of information for beneficiaries about Part D.

Comment: One commenter was concerned that the targeted and hands-on outreach, education and decision support and enrollment services, particularly outreach to lower income, rural and disabled beneficiaries is not adequate.

Response: Through the REACH campaign, we plan to broaden local partner networks in order to provide training, information and planning support to provide outreach and assistance to these populations. Through a broad network of support from community-based organizations as well as national stakeholders and partners, considerable effort will be made to reach those beneficiaries who do not have access to the Internet or who are uncomfortable calling 1-800-MEDICARE.

Comment: One commenter stated that we should consider preparing educational materials that would help pharmacists understand the benefits and other material that they can use to educate beneficiaries.

Response: We are working with our provider education staff to develop materials for all providers, including pharmacists, for educational use.

10. Approval of Marketing Materials and Enrollment Forms (§ 423.50)

Section 1860D-1(b)(1)(B)(vi) of the Act directs us to use rules similar to those established under section 1851 of the Act to review PDPs' marketing materials and application forms.

In the proposed rule, we generally replicated the marketing provisions established under § 422.80 for MA plans as appropriate for PDPs. Therefore, we proposed at § 423.50(a) guidance for our review of marketing materials, definition of marketing materials, deemed approval, and standards for PDP marketing. We do recognize that the differences between PDPs and MA plans will require different marketing requirements and we requested comments on this issue. We have drafted the final rule to apply the marketing requirements to all Part D sponsors, although we may waive the Part D provisions in deference to similar MA, PACE and cost plan requirements.

We also proposed to add § 423.50(a)(3) in order to streamline the marketing review process for all PDP sponsors for those materials which pose the lowest risk of confusing or misleading beneficiaries. This aspect of the File and Use program allows the PDP sponsor, prior to distribution, to submit and certify that for certain types of marketing materials it followed all applicable marketing guidelines, or for certain other marketing materials that it used, without modification, proposed model language as specified by CMS.

Except as otherwise provided below, the final rule adopts the marketing rules set forth in § 423.50 of the proposed rule. Although the following area generally applies to Fallback plans, subpart Q specifically addresses issues related Fallback plans.

In addition to marketing materials and enrollment forms, comments provided the opportunity to respond to enrollment issues related to SPAPs, pharmacist and physician marketing to beneficiaries, and organizations marketing additional products in conjunction with PDP services.

Comment: We received several comments on types and quantity of information that should be disseminated to beneficiaries. Many commenters suggested that specific formulary information needs to be provided including specific drugs (top 25-50), pricing and premium information, benefit structure, pharmacy networks, plan availability by region, medication management services offered (and who is eligible for them), appeals and exception process and information on plan performance. Most agreed that this information should be mailed, as well as provided on the Internet and that comparison tables with this information for all plans in a geographic region should be provided so that beneficiaries can compare plans side-by-side. One commenter was concerned that beneficiaries would be overwhelmed with materials and expressed concern about the potential for adverse selection. It was suggested that strict and detailed regulations on marketing be issued to protect beneficiaries. One commenter suggested that we need more detail in the final rule around patient education.

Response: We agree with the commenters that beneficiaries will need information on the Part D plans available in their areas. Our goals in providing information has always been to ensure that beneficiaries have access to timely, accurate and reliable information that helps them make informed health care decisions. Our education and outreach efforts related to Part D are no exception. We will employ multiple tactics, including publications, direct mailings, the Internet (www.medicare.gov), toll-free telephone numbers, and localized grassroots partnerships to help beneficiaries access the level of detailed information that they want and need to make their best choice among Part D plans. Our tiered communications approach recognizes that different beneficiaries have varying information needs and what might be an overwhelming level of detail to some individuals may only meet the baseline needs of another. By using multiple, integrated education and outreach approaches and thoroughly market testing our products and messages during development, we are working to strike the best balance of providing the right information at the right time. In addition, we are committed to making sure plans provide clear, accurate information on covered benefits, including formulary, pharmacy networks, and costs. We intend to require such information in guidance rather than specifying the full range of materials in the regulations so that we can modify our requirements in a timely manner to meet beneficiary needs.

Comment: We received several comments regarding the use of various marketing vehicles to promote PDPs. Several of the commenters supported the distribution of information through websites, 800 numbers, written communications and telemarketing. One commenter stated that marketing should be limited to mail contacts only due to concerns regarding fraud. One commenter stated that the restrictions on marketing need to be expanded due to the potential for fraud. Many commenters opposed telemarketing and one was explicitly against email as well.

Response: Section § 1860(D)(1)(b) of the Act allows for similar marketing rules for the drug benefit as those for MA. We intend to follow this guidance and promote marketing guidelines that are in line with those under the MA program. The MA program supports the use of websites, 800 numbers, mailings, email and telemarketing for plan marketing. By allowing plans multiple routes for marketing, we believe that greater numbers of beneficiaries will be reached and thus enrolled in drug benefit plans. We believe this is an important goal given the penalty for late enrollment in Part D. We understand that this is contrary to what we allowed in the drug discount programs. We did not allow the drug discount card programs to participate in telemarketing practices because many of the drug card sponsors were stand alone start-up companies that did not have a previous history of doing business. We expect that the PDP sponsors will have previous experience administering drug plans, insurance or other lines of similar business, with established reputations, much like MA plans.

Marketing guidelines are in the process of being established, and these will set forth in greater detail what will be expected of the plans. PDP sponsors may be barred from engaging in certain practices if abuses occur. In addition, PDPs will be prohibited from requesting beneficiary identification numbers over the telephone or via email as related to marketing activities.

Comment: One commenter stated that the States should be able to steer its SPAP enrollees toward the most appropriate plan.

Response: Section 1860D-23(b)(2) of the Act defines an SPAP as a State program which, in determining eligibility and the amount of assistance to a Part D eligible individual under the program, provides assistance to such individuals in all Part D plans and does not discriminate based upon the Part D plan in which the individual is enrolled. We further interpreted that provision in the preamble of the proposed regulation such that a SPAP may not designate a preferred PDP, even if the State allows beneficiaries to choose a non-preferred plan and provides for benefits equivalent to that which it also provides for the preferred plan (referred to as wrap-around benefits). We believe that, regardless of whether the SPAP is authorized under State law to make enrollment decisions on behalf of the beneficiary, we interpret using that authority to steer beneficiaries to a preferred PDP or MA-PD plan would be interpreted to violate the non-discrimination provision under section 1860D-23(b)(2) of the Act.

Section 1860D-23(d) of the Act provides for grants to SPAPs, in existence as of October 1, 2003, which were awarded in September of 2004 for fiscal year 2005, for the purpose of educating their members about options to access Medicare drug benefit coverage and about comparing options so they can choose the best value to them. We will reach out to SPAPs with information to help people with Medicare understand their drug plan options. We will also assist SPAPs in adapting this information to ensure that their members understand the way that the new Part D plans coordinate with their SPAP benefit and supporting their members in making informed decisions about drug benefit plan options. Outreach to SPAPs would also include instruction on the educational/outreach/assistance activities SPAPs could pursue while not discriminating against Part D plans.

SPAPs cannot discriminate amongst plans; however, they may provide beneficiaries with comparable education on all of the available Part D plans (PDPs, MA-PD plans, and PACE and cost-based HMO or CMPs offering qualified prescription drug coverage) in terms of the following: which plans have lower premiums after application of any uniform SPAP premium subsidy; which plans offer formularies that cover the drugs utilized by the beneficiaries so that beneficiaries can continue to use the same drugs; which plans offer the drugs used by the beneficiary at the most favorable combination of deductibles, coinsurance/co-pays, and negotiated prices; which plans use the same network pharmacies as the SPAP so that beneficiaries can continue to use the same pharmacy; and which plans (if any) have ID cards that include an emblem or symbol indicating its coordination with the SPAP to facilitate secondary payment at the point of service.

In addition, SPAPs are prohibited from recommending Part D plans based on their financial interest in minimizing their cost of providing coverage that supplements (wraps-around) their members Part D benefits. They are required to mirror our process auto-enrolling full-benefit dual eligible individuals among PDPs on a random basis in the event that members do not actively select a Part D plan during their IEP or after enroll in the SPAP.

Part D plans benefit coordination requirements include establishing procedures to share information with SPAPs on enrollment files, the processing and payment of claims, claims reconciliation reports and whether the beneficiary has satisfied the out-of-pocked limit. Part D plans are encouraged to work with all SPAPs to co-brand the Part D benefits by providing (in its electronic claim response to the pharmacy) information on payment of premiums and coverage, and whether claims should be sent to an SPAP for processing. Plans should also consider including the SPAPs' benefits in marketing and educational materials to beneficiaries, which includes SPAP benefit information, eligibility criteria, order of party payment, and a phone number for SPAP enrollment and claims payment information.

Comment: Two commenters were concerned that SPAP beneficiaries will be confused by materials and decline enrollment if premiums, deductibles and coverage gaps are discussed since SPAP participants were never required to pay these amounts. It was also stated that marketing materials for this population should include coordination of benefit (COB) information.

Response: We expect that SPAPS will provide information to beneficiaries on their drug plan choices in their States. We expect that plans will work cooperatively with SPAPs to co-brand materials, when appropriate, to ensure that beneficiaries are provided with comprehensive, appropriate, coordinated information that will facilitate education and understanding of their benefits. Requirements for coordination of benefits with other providers of prescription drug coverage are described under § 423.464 (e). We expect Part D plans to work with SPAPs on coordination of benefit activities to ensure that beneficiaries are provided seamless care that is easily understandable.

Comment: We received multiple comments regarding the specific requirements for marketing materials. Many commenters agreed that marketing materials should be available in Spanish and in other languages that are in the plan's service area. Two commenters stated that marketing materials should be developed at an appropriate health literacy level. Two commenters stated that the information will need to be adapted for the blind/low vision, those with cognitive disabilities, in Braille, large print and on audio or computer disks. It was also stated that there should be a requirement that the Internet site be accessible for the visually impaired and that interpreters and alternative communication methods should be mandated. Another commenter stated that a subpart should be devoted to notice requirements.

Response: We agree that there are special needs of beneficiaries that will need to be provided for. The regulation currently dictates that marketing materials need to be available in low-literacy formats. While we do not require materials to be available in other languages, it is highly encouraged. In addition, basic enrollee information should be developed to accommodate the visually impaired. Call centers must be able to accommodate non-English speaking/reading beneficiaries. Plan sponsors should have appropriate individuals or translation services available to call center personnel to answer questions that beneficiaries may have concerning aspects of the drug benefit. We are working on developing guidance shortly following publication of the final rule that is similar to the MA requirements to ensure appropriate information is available to beneficiaries.

Comment: Several commenters stated that marketing materials should be consistent with other Medicare programs.

Response: We are currently developing additional marketing guidelines and expect them to be similar to other Medicare programs (for example, the MA and the Medicare-approved prescription drug discount card programs), to the extent possible, in order to reduce the administrative burden for plans that participate in these programs.

Comment: We received many conflicting comments regarding whether providers (pharmacists and physicians) should be allowed to market to beneficiaries. This includes the display of materials from Part D sponsors as well as verbally steering beneficiaries to particular plans. Several commenters were in support of pharmacies marketing MA/PD and PDPs; some of these commenters stated that equal attention should be provided to all plans in the particular area. In addition, some commenters specifically mentioned that they were in support of physicians marketing Part D plans.

Other commenters were against marketing of Part D plans in the pharmacy setting; three specifically mentioned the prohibition of physicians from marketing to beneficiaries. Most stated that the reasons for their positions were that physicians or pharmacists could steer a beneficiary to inappropriate Part D plans.

Response: Both the MA and the Medicare-approved prescription drug discount card programs allow some provider marketing to occur. Our position is that it is appropriate to allow providers and pharmacies to market to beneficiaries. This marketing provides beneficiaries with access to information about the options available to them under Part D that they may not have received through other sources because beneficiaries often look to their health care professionals to provide them with complete information regarding their health care choices. Therefore, we believe that providers and pharmacies should provide prospective enrollees with information on the full range of options available to them under Part D. This process is similar to the process followed for the discount drug card program, where pharmacies may provide information on where beneficiaries may get complete information regarding all the Medicare-approved discount cards available in the region in their service area. We would require Part D sponsors that want their network pharmacies to provide marketing materials to prospective enrollees to include in their contracts language requiring the pharmacies Part D eligible individuals with information on all Part D options available in the service area. This requirement would be specified in the further guidance issued by CMS. Any remuneration offered to providers in exchange for providing to patients information about particular Part D plans must comply with applicable Federal and State laws on fraud and abuse.

Comment: Two commenters stated that Part D sponsors should be prohibited from using Medicare discount card enrollee and applicant information to provide leads for marketing their Part D plans.

Response: We acknowledge the importance of beneficiary privacy, and the marketing limitations that drug cards operate in accordance with section 1860D-31(h)(7) of the Act. The drug card provisions under section 1860D-31 of the Act contemplate a transition from the drug card program to Part D, and we are considering what will be the specific drug card responsibilities of drug card sponsors during transition. From that understanding we will assess whether PDP sponsors currently offering a drug card may use of beneficiary drug card information to market their Part D plans and we will provide further guidance to the drug card sponsors and Part D sponsors at a later time. We note, however, that the HIPAA Privacy Rules may limit the ability of drug card sponsors to disclose their enrollees' information to un-affiliated Part D sponsors.

Comment: One commenter suggested that the File Use program should be delayed one year until we have more experience with evaluating the practice of the PDPs, and that the term “performance requirements” needs to be defined.

Response: We will define the eligibility and performance requirements associated with the File Use program in further guidance.

Comment: There was concern over the amount of time that was stated was necessary for a review of PDP and MA-PD marketing materials. Some suggestions included decreasing the time of this review from 45 days to 30 days, and instituting a 10-day review period for resubmitted materials. In addition, if unaltered model materials were used, the review should be limited to 10 days.

Response: We agree that that timelines for reviewing marketing materials should be shortened. However, we intend on maintaining the proposed timelines for Part D marketing materials as defined in the statute. We will work to develop a review process that is as efficient as possible. We will develop a range of model materials for Part D sponsors.

Comment: We also received a comment that the amount of materials that must be individually approved should be limited. There was also concern that we may not have enough staff to review the materials and that the process needs to be open, fair and constructive.

Response: We will develop a range of model materials for Part D sponsors to choose from to improve efficiency of the marketing review process. Materials that utilize “model language”, without modification, are subject to a streamlined review process. We will work to develop a review process that is as efficient and effective as possible utilizing standardized criteria to review the materials.

Comment: Two commenters stated that it is unacceptable that marketing materials are deemed approved if we fail to approve them within the time period and materials should be reviewed multiple times for multiple regions.

Response: It is a statutory requirement that we approve marketing materials within 45 days or that they are then deemed approved. In developing sub regulatory marketing guidance and processes, we will work to ensure that our reviews are completed within the statutory timeframe.

Comment: Commenters stated that guidelines for CMS review under § 423.5(c)(i),(ii), and (iii) of the proposed rule need to be more specific. These sections lay out the information that Part D plans need to provide to beneficiaries.

Response: We will provide greater detail in the sub regulatory guidance in order to facilitate any necessary future changes that would need to be made.

Comment: Many commenters gave input as to whether additional products, such as financial services, should be marketed to Medicare beneficiaries in conjunction with the Part D benefit. Several of the organizations expressed their concerns over the fact that beneficiaries may be confused with receiving additional information for other products and services in conjunction with information about the Part D benefit. The major concern is that beneficiaries would choose not to participate in Part D because they did not like some of the other products or that they may mistakenly believe that we have approved these products. One commenter suggested that individuals must actively agree to receive marketing materials other than enrollment materials. Some commenters suggested that financial institutions should not be encouraged to participate as PDPs, since the potential for abuse, as in selection of healthier beneficiaries into plans and avoidance of financial services to less healthy individuals, is enormous.

Some health plans commented that they are in favor of allowing PDP sponsors to market additional health-related and non-health-related products to beneficiaries. These products could be provided for an additional fee or at no additional cost to the beneficiary. The belief is that the additional tools could help beneficiaries manage their expenses and financial securities. One organization also stated that if PDP sponsors are permitted to provide these additional products, than MA-PD plans should be allowed to similarly provide these additional products.

Response: We do not want to restrict beneficiaries from receiving materials about of health-related and non-health-related services that may be of benefit to them in managing their health or payments for health care. All organizations that are qualified to be a Part D sponsor are encouraged to participate in providing services under Part D. In situations where plans want to use or disclose protected health information (PHI), for purposes of marketing these other products or services, for example beneficiary enrollment information, Part D plans must comply with the HIPAA Privacy Rule and obtain a written authorization from the beneficiary prior to using the beneficiary's PHI to market non-health-related products and services. In other cases where Part D plans implement general marketing mailings that do not use beneficiary PHI, we would not object to plans providing such information to beneficiaries as long as the information is not contingent upon PHI to do so. For example, a plan may obtain a general mailing list from a non-related marketing vendor to mail materials to all individuals over age 65 in a geographic area to promote its products. The use of beneficiary names and addresses obtained from a plan and used for mailings to beneficiaries only, would presumably use PHI. Consequently, plans could not market non-health-related products through mailings using beneficiary information absent authorization.

Comment: One commenter recommended that any Part D sponsor offering other health coverage to its Part D plan enrollees be required to provide anti-duplication notices like those that are required under the National Association of Insurance Commissioners (NAIC) model regulation for Medigap policies. The purpose of these anti-duplication notices is to advise Medicare beneficiaries as to whether other non-Medigap types of coverage being offered to them might duplicate coverage they already have under Medicare.

Response: The disclosure statements that are required under the NAIC model regulation for Medigap policies were adopted by the NAIC pursuant to anti-duplication provisions contained in section 171(d) of the Social Security Act Amendments of 1994 (SSAA'94-103) that amended section 1882(d)(3)(A) of the Act. These statements apply to all issuers of health insurance coverage that is offered to Medicare beneficiaries that is neither a Medigap policy nor a type of coverage that is listed as exempt from this requirement in a Federal Register notice that CMS [then HCFA] published on June 12, 1995. Section 171(d) required CMS to either publish the disclosure statements developed by the NAIC or publish its own. The FR notice through which CMS accepted the 10 separate disclosure statements developed by the NAIC for the various types of coverage commonly offered to Medicare beneficiaries contained a list of types of policies not requiring disclosure statements (See 60 FR 30880).

Among the types of coverage not requiring the use of a disclosure statement were managed care organizations with Medicare contracts under section 1876 of the Act. The notice went on to explain that these types of policies are exempt because “these plans do not `duplicate' Medicare benefits; rather their purpose is to actually provide all covered Medicare benefits directly to enrolled beneficiaries.” In 1995, cost and risk managed care organizations with contracts under section 1876 of the Act were the primary alternative to fee-for-service Medicare. Medicare+Choice plans were authorized by the Balanced Budget Act (BBA) in 1997, and the program has now been renamed Medicare Advantage by MMA. MMA also provided for private prescription drug plans (PDPs) to contract to deliver Medicare prescription drug benefits under Medicare Part D. Because Part D plans will actually provide all covered Medicare drug benefits directly to enrolled beneficiaries, we wish to clarify that these entities will not have to provide anti-duplication notices for their provision of coverage pursuant to their Medicare Part D contracts. However, if Part D plans choose to market to their enrollees other (non-Medigap) health insurance products that are not part of their contracts under Part D, these other types of health insurance products will have to bear the disclosure statements required by section 1882(d)(3)(A) (vi) of the Act and the NAIC model regulation unless the other coverage comes within one of the specified exemptions.

11. Information Provided to PDP sponsors and MA Organizations

Section 1860D-1(b)(4)(A) of the Act authorizes us to provide information about Part D eligible individuals to PDP sponsors and MA organizations to facilitate the marketing and enrollment of beneficiaries in their PDP and MA-PD plans. This information is intended to ensure participation in the Part D program, as well as to reduce costs to those plans.

In the final rule, it is not necessary to provide regulatory text implementing this provision; however, we intend to provide additional guidance shortly following publication of this rule, as explained below.

Comment: We received several comments on this MMA provision. Several of the commenters supported the provision of such information to organizations, with a few offering to work with CMS to develop guidance and ensure that the appropriate beneficiary protections are in place. Many who supported this initiative believed that, at a minimum, the name, address, and telephone number of the individual should be provided. Another commenter believed that the statute permits organizations to contact beneficiaries through written, electronic, or phone communication. Another commenter stated that the individual's dual eligible or low-income subsidy status should also be provided. The commenter also noted that we should provide the information to organizations upon request, as opposed to being limited to only receiving such information at certain times of the year. The commenter also believed that the statute would permit PDP sponsors to obtain marketing information on low-income and dual eligible individuals directly from States and SPAPs.

Several commenters also opposed such information being provided to organizations. One commenter believed that providing such information to Part D competitors would generate more problems and “incite” more negative beneficiary reaction that would outweigh any value in enhancing beneficiary outreach. Other commenters were concerned that such information would be used to “cherry pick” healthier and less expensive beneficiaries. Several commenters noted that if we were to provide such information to organizations, such information should be limited to the minimum amount necessary. They stated that certain information, such as health or financial information or telephone numbers should not be provided. Further, beneficiaries should be given the option to request that we not share their information with plans. Several commenters did not believe that PDPs or MA-PD plans should be able to use the information for telemarketing purposes. Another commenter indicated that we should only disclose information to the plan if the plan's marketing material contains formulary and drug pricing information and is accompanied by an application form.

Response: We decline to provide specifics on the provision of this information at this time but reserves the right to provide this information to plans in the future. We will develop further guidance on this issue shortly after publication of this rule.

12. Procedures to Determine and Document Creditable Status of Prescription Drug Coverage (§ 423.56)

Section 1860D-13(b)(6) of the Act identifies certain entities, which we describe in our proposed rule that must disclose whether the prescription drug coverage that they provide to their members who are Part D eligible is creditable prescription drug coverage.

Sections 1860D-13(b)(4) (A) through (G) of the Act lists seven forms of potential creditable prescription drug coverage: Coverage under a PDP or under an MA-PD plan; Medicaid; a group health plan (including coverage provided by a Federal or a nonfederal government plan and by a church plan for its employees); a State pharmaceutical assistance program; veterans' coverage of prescription drugs, prescription drug coverage under a Medigap policy; and military coverage (including Tricare). Many of these terms are defined elsewhere in Federal regulations; some of them are under the jurisdiction of other Federal agencies.

In addition to the forms of creditable coverage identified in sections 1860D-13(b)(4) (A)-(G) of the Act, section 1860D-13(b)(4)(H) of the Act provides the Secretary with the flexibility to identify “other coverage” that could be considered to be creditable prescription drug coverage. We proposed, at § 423.56, to expand the list of types of creditable prescription drug coverage.

As discussed in § 423.46 of the proposed rule, upon becoming eligible for Part D, beneficiaries must decide whether to enroll in Part D, or forego that opportunity and face a possible financial penalty should they later decide to enroll. Beneficiaries who decide not to enroll in Part D because they have creditable prescription drug coverage will not face such a penalty if they later decide to enroll in Part D.

According to section 1860D-13(b)(5) of the Act, an enrollee who would otherwise be subject to a late enrollment penalty may avoid the penalty if his or her previous coverage met the standards of “creditable prescription drug coverage”. Under section 1860D-13(b)(5) of the Act, previous coverage will only meet those standards “if the coverage is determined (in a manner specified by the Secretary) to provide coverage of the cost of prescription drugs the actuarial value of which (as defined by the Secretary) to the individual equals or exceeds the actuarial value of standard prescription drug coverage.”

In the proposed rule, we interpreted “to the individual” in this case as being to the average individual under the plan, as opposed to the sponsor of the plan. For purposes of determining creditable coverage, we proposed a “gross” test: will the expected plan payout on average be at least equal to the expected plan payout under the standard benefit? We also proposed at § 423.56(c) that any entity seeking to offer coverage of the type described in § 423.56 must attest to the actuarial equivalence (or non-equivalence) of its prescription drug coverage in their notice to Medicare beneficiaries and in a submission to CMS, and must maintain documentation of the actuarial analysis and assumptions supporting the attestation.

In coordination with the provisions regarding the late enrollment penalty, we proposed at § 423.56 to establish a process under which these entities will disclose the creditable status of their prescription drug coverage to us and to each part D eligible beneficiary enrolled in such coverage.

Section 1860D-13(b)(6)(C) of the Act, implemented at § 423.56(g) of the proposed rule, provides that an individual who was not adequately informed that his or her prescription drug coverage was not creditable prescription drug coverage may apply to CMS to have such coverage treated as creditable prescription drug coverage for purposes of not having the late penalty imposed.

Comment: One commenter stated that Medicaid should not be considered creditable prescription drug coverage, for the purposes of Part D, because no Medicaid benefit for Part D covered prescription drugs is available to Part D eligible beneficiaries.

Response: All entities listed under § 423.56(b), except PDPs and MA-PDs under (b)(1) and PACE plans and cost-based HMOs and CMPs offering qualified prescription drug coverage, must provide notice to both CMS and its members whether the prescription drug coverage provided is or is not creditable. The purpose of the notice of creditable coverage is to ensure that individuals are aware of whether such coverage is creditable prescription drug coverage and its implication to the late enrollment penalty.

Medicaid is prohibited from providing Part D drugs to full-benefit dual eligible individuals. However, since there may be other individuals who are not receiving the full range of benefits from Medicaid but who will continue to receive some drug coverage from the State, these individuals must also receive this notice providing status of the coverage.

Comment: One commenter requested that we include SPAP in the definition of types of coverage that may be creditable.

Response: The proposed rule at § 423.56(b)(4) includes SPAPs as potentially creditable. Section 1860D-13(b)(4)(D) of the Act specifies these programs, as described in section 1860D-23(b) of the Act, as such. To ensure this concept is clear, we will revise § 423.56(b)(4) to include the acronym “SPAP.”

Comment: We received a comment indicating that the value of prescription drug coverage under PACE will likely equal or exceed the actuarial value of Part D standard prescription drug coverage as a result of existing requirements in sections § 460.90 and § 460.92 of the PACE regulation. The commenter recommended incorporating PACE into the CMS definition of creditable prescription drug coverage found in § 423.56(a).

Response: We agree with the commenter and have incorporated PACE into the definition of potentially creditable prescription drug coverage found in § 423.56(b). Additional discussion of the applicability to Part D benefits and requirements to PACE are outlined in subpart T of the final rule.

Comment: A few commenters inquired about the actuarial equivalence test that the entities listed will be required to meet, since the actuarial equivalence reference in § 423.265 refers to bid submissions. Commenters supported both the concept of “gross” test and an “aggregate test” for calculation of the actuarial equivalence for plans, including group health plans which offer several benefit packages to determine if the prescription drug coverage is creditable.

Response: The basic actuarial equivalence value test for the determination of creditable coverage of alternative coverage is determined by calculating whether the expected plan payout on average will be at least equal to the expected plan payout under defined prescription drug coverage (gross test). We believe Section 1860D-22(a)(2) of the Act is subject to two reasonable interpretations of calculating the creditable coverage test (gross test). Under the first interpretation, the actuarial equivalence standard for determining creditable coverage would be applied to the alternative coverage as a whole, and under the second interpretation the actuarial standard would be applied for each benefit option (including separate cost-sharing arrangements) within a single group health plan. Whereas our proposed rule required plans to apply the actuarial equivalence standard at the aggregate level, for the final rule we instead require plans to apply the actuarial equivalence standard to each benefit option within its plan.

Our rationale for revising the actuarial equivalence test is to ensure that beneficiaries are adequately informed that their coverage is or is not creditable prescription drug coverage. A sponsor may offer many different benefit options to beneficiaries. One of those benefit options may not pass the gross test but be included in an overall (or “aggregate”) text. As a result, this would leave beneficiaries in certain benefit options with a determination that their coverage is creditable, when in actuality it is not. For example, a sponsor has a group in which richer benefits are offered, compared to another group that has more limited benefits. If the sponsor would aggregate the two benefits together, the lower benefit will end up as “creditable” when the benefit packages are averaged together.

We will issue guidance on the aspects of actuarial equivalence shortly following publication of the final rule.

Comment: One commenter asked if any coverage that is less than full pharmacy benefits could be considered creditable prescription drug coverage, such as coverage for maintenance or coverage of specific disease-only drugs.

Response: We believe that the definition of creditable prescription drug coverage would prohibit us from concluding that such coverage is creditable. To be creditable prescription drug coverage, the coverage must equal or exceed the actuarial value of defined standard prescription drug coverage, as we will define in guidance referenced in the previous response. It is likely that coverage of a very limited scope such as the commenter refers will not likely meet our actuarial equivalence test.

Comment: In response to our request for comments on other forms of coverage that may potentially be considered creditable, two commenters requested that we cost-based HMOs and CMPs authorized under section 1876 of the Act as potential providers of creditable prescription drug coverage. Both commenters also suggest that we include a provision allowing CMS to designate other types of coverage as potentially creditable prescription drug coverage in the future without requiring such an addition be accomplished through the rule making process. Another commenter suggested that coverage provided by State high risk insurance pools also be included in the types of coverage that may be creditable.

Response: We agree with these suggestions and have revised § 423.56(b) to include cost-based HMOs and CMPs and coverage offered by State high risk pools, as defined under the HIPAA regulations at § 146.113(a)(1)(vii), as well as a provision permitting CMS to recognize other types of coverage as potentially creditable prescription drug coverage, which we would do so in separate guidance as determined necessary.

Comment: Several commenters supported permitting the disclosure of the creditable prescription drug status of coverage through the inclusion of this information in already existing beneficiary materials, such as Summary Plan Descriptions (SPDs), or annual notices. One commenter suggested that because beneficiaries are already familiar with these documents, they provide a more recognizable and familiar avenue for this important information. On the other hand, several commenters supported requiring all notices of the creditable status of coverage to “stand alone;” that is; to be provided separately in a specific notice to each individual. Some commenters expressed concern that if this disclosure were not highlighted in a separate notice, the important message could go unnoticed and inadvertently subject an individual to the late enrollment penalty. Another commenter suggested that all notices be linked to ERISA disclosure documents (that is, SPDs), and to HIPAA or COBRA required notices. One commenter suggested that notice of creditable status could be incorporated into already existing beneficiary information materials, while notice of non-creditable status should stand alone. Lastly, a commenter requested that we specify the elements that would be required to be included in these notices.

Response: We specifically requested comment on the disclosure of creditable prescription drug notice requirements and appreciate the feedback received. Based on the comments we received we believe that linking the notice of creditable status to other required documents is an acceptable vehicle provided it is conspicuous and includes standard information elements. This approach appropriately recognizes the importance and familiarity of materials that beneficiaries currently receive regarding coverage they have. Further, we believe that it is important to encourage compliance with the provision of these notices by eliminating duplication and the undue burden associated with it. To that end, we have revised § 423.56(c) to allow notices of creditable and non-creditable status to be provided in the same manner, and will provide specific guidance following the publication of the rule. This guidance will require that a notice of creditable and non-creditable status be provided, at minimum, prominently with other beneficiary information materials, and will include model language for both types of notices.

We may specify different requirements for those entities identified at § 423.56(b) that are required to provide these notices, where appropriate, to reduce beneficiary confusion and minimize administrative burden. For example, as explained in our discussion of § 423.34 above, we intend to notify full benefit dual eligible individuals that they are eligible for the low-income subsidy. This notice will also inform individuals that Medicaid will no longer cover those prescription drugs covered under Part D and that any additional prescription drug coverage provided by Medicaid would not be creditable coverage under Part D. Including this information in the same notice will avoid duplication of effort and possible beneficiary confusion.

Comment: Several commenters felt that requiring an attestation by group health plans of actuarial equivalence for creditable coverage when the sponsor of such coverage elects not to enroll in the retiree drug subsidy program under subpart R was an unnecessary cost and an administrative burden. The commenters believed that for those employer groups that offer prescription drug coverage to active employees who might be Part D eligible individuals, such coverage should be assumed to be “creditable” and should only have to provide notices to those qualified retirees and dependents who are Part D eligible individuals. The commenters also suggested that notices could be published in summary plan descriptions, on employer website and via e-mail.

Response: Section 1860D-13(b)(6)(B) of the Act requires specific entities that offer prescription drug coverage to provide notices to all Part D eligible individuals enrolled in their plans regarding whether such prescription drug coverage is creditable. This would include sponsors (as defined under § 423.880) not electing the Retiree Drug Subsidy, as described in subpart R. A notice of creditable or non-creditable coverage must be provided to active Medicare eligible employees and Medicare eligible dependents so that a late enrollment penalty will not be imposed when the beneficiary enrolls in Part D coverage.

We will provide further guidance on a simplified method of determining creditable coverage for those sponsors not electing the retiree drug subsidy.

We will also provide guidance to sponsors on the form, manner, and timing of such notice requirements, following publication of this final rule. Notices may be provided, at minimum, prominently with other plan participant information materials (for example, summary plan descriptions, or HIPAA notices) that the sponsor is required to provide as long as it is conspicuous and includes standard information elements as determined in our guidance. This approach appropriately recognizes the importance and familiarity of materials that beneficiaries currently receive regarding coverage they have.

Comment: Many commenters responded to our request for comments on the timing of the delivery of creditable coverage status notices to Part D eligible individuals. Several of these commenters suggested that the initial notice should be required to be delivered prior to the commencement of the AEP which begins on November 15, 2005. One commenter suggested that notices also be issued at least 60 days prior to the effective date of any change to current coverage. Another commenter suggested that entities required to deliver these notices should do so within 30 to 45 days of the end of Part D enrollment periods.

Response: We appreciate the feedback we received regarding the timing of notices to disclose creditable prescription drug coverage. We agree that, in order to ensure beneficiaries are making informed choices regarding enrollment in Part D, notice must be provided to all Part D eligible individuals each year prior to the commencement of the AEP, which begins on November 15 [th] . We also believe there are three other key times when notice must be provided: (1) prior to the commencement of the individual's initial enrollment period in Part D; (2) prior to the effective date of enrollment in such coverage or any change in creditable status of that coverage; and, (3) upon request by the beneficiary. We will revise § 423.56(f) to require that notice be provided, at minimum, at these 4 times.

Comment: One commenter requested that we clarify the meaning of the words in § 423.56(b) of the proposed rule “with the exception of PDPs and MA-PD plans.” for the duty to furnish notices of creditable coverage to beneficiaries. The commenter also requested clarification of the duty of Cost plans offered under section 1876 of the Act that provide qualified prescription drug coverage to furnish such notice. Lastly, the commenter asked us to clarify if the provision at § 423.56(d) of the proposed rule regarding the disclosure of creditable status to CMS applies to any entity that is exempted from notice requirements according to § 423.56(b).

Response: It is our view that the practical need for disclosure of creditable status notices is directly related to a beneficiary's understanding of their options related to enrolling in Part D and any consequences should they choose not to, such as the late enrollment penalty. It also provides the beneficiary with information about how their coverage compares to what is available under a Part D plan. Beneficiaries enrolled in a PDP, MA-PD plan, PACE plan or cost plan that provides qualified prescription drug coverage are enrolled in Part D, and therefore not subject to any consequence of choosing not to enroll. Including these types of coverage in the list of coverage that may be considered creditable ensures that at no time could a beneficiary who has maintained enrollment in a legitimate Part D plan be subject to the late enrollment penalty for the same time period. However, sending notice of creditable status seems superfluous since, as these plans are Part D plans, the creditable status is automatic.

The statute at 1860D-13(b)(6)(B) of the Act exempts PDP sponsors and MA organizations from providing notice of creditable coverage to its members. Since sections 1860D-21(e) and (f) of the Act provide that we treat cost-based HMO and CMPs and PACE organizations that elect to provide qualified prescription drug coverage similar to MA-PD local plans, such cost-based HMO and CMP and PACE organizations offering qualified prescription drug coverage will also be excepted from this notice requirement. We will revise the notice requirements under § 423.56(c) to reflect that PACE plans and 1876 Cost plans offering qualified prescription drug coverage as excepted entities from the notice requirements under § 423.56(c). We also note that PACE plans and section 1876 of the Act cost plans that do not offer qualified prescription drug coverage must provide notices, as required. To ensure that Part D plan members understand their options, we will ensure that an explanation of the late enrollment penalty and the concept of creditable coverage are included in plan documents.

Similarly, a requirement for organizations that provide Part D benefits to submit separate notice would be duplicative by their nature as CMS approved Part D plans, they are creditable. We will revise § 423.56(e) to clarify that all entities providing CMS-approved Part D coverage do not have to disclose creditable status of Part D coverage to us under this paragraph.

Comment: One commenter suggests that we consider ways that entities could provide the required notice of creditable status to beneficiaries and CMS via electronic means.

Response: We recognize that most plan documents have been historically provided to beneficiaries in hard-copy (that is, paper) but know from the comments received from plan sponsors and business advocates that participants are receiving plan information through other electronic means, such as websites and e-mail. Most beneficiaries are probably accustomed to receiving materials in one of these manners. We feel that paper documents have better ensured that the beneficiary receives and understands the information. In addition, paper documents will provide beneficiaries a hard copy that they can present whenever needed to show proof of creditable coverage. Since beneficiaries may already be choosing to receive information electronically, we will explore this option as we develop operational guidance for creditable notice requirements.

As for entities notifying us of the creditable status of their coverage, we will describe the form and manner in which entities disclose this information to us in operational guidance and will consider various options for entities to do so.

C. Voluntary Prescription Benefits and Beneficiary Protections

1. Overview and Definitions (§ 423.100)

Proposed subpart C of part 423 implemented sections 1860D-2, 1860D-4(a), 1860D-4(b), 1860D-4(i), 1860D-4(k), 1860D 11(a), 1860D-21(a), 1860D-21(c)(3), and 1860D 21(d)(2) of the Act. This subpart set forth requirements regarding—

  • Definitions for terms that are frequently used in this subpart.
  • The benefits offered by Part D sponsors.
  • The establishment of prescription drug plan service areas.
  • Access standards with regard to covered Part D drugs.
  • Part D sponsor formularies.
  • Information dissemination by Part D sponsors.
  • Disclosure to beneficiaries of pricing information for generic versions of covered Part D drugs.
  • Privacy, confidentiality, and accuracy of PDP sponsors' beneficiary records.

Below we summarize the provisions of subpart C and respond to public comments. (Please refer to the proposed rule (69 FR 46646) for a detailed discussion of our proposals.)

a. Part D Drug

The definition of a covered Part D drug in § 423.100 of our proposed rule closely followed the statutory definition in section 1860D-2(e) of the Act. According to this definition, a covered Part D drug was available only by prescription, approved by the Food and Drug Administration (FDA), used and sold in the United States, and used for a medically accepted indication (as defined in section 1927(k)(6) of the Act). A covered Part D drug included prescription drugs, biological products, insulin as described in specified paragraphs of section 1927(k) of the Act, and vaccines licensed under section 351 of the Public Health Service Act. The definition also included “medical supplies associated with the injection of insulin (as defined in regulations of the Secretary).” We proposed to define those medical supplies to include syringes, needles, alcohol swabs, and gauze.

In accordance with section 1860D-2(e)(2) of the Act, the definition of a covered Part D drug specifically excluded drugs or classes of drugs, or their medical uses, which may be excluded from coverage or otherwise restricted under Medicaid under section 1927(d)(2) of the Act, with the exception of smoking cessation agents. In accordance with section 1927(d)(2) of the Act, the drugs or classes of drugs that may currently be excluded or otherwise restricted under Medicaid include: (1) agents when used for anorexia, weight loss, or weight gain; (2) agents when used to promote fertility; (3) agents when used for cosmetic purposes or hair growth; (4) agents when used for the symptomatic relief of cough and colds; (5) prescription vitamins and mineral products, except prenatal vitamins and fluoride preparations; (6) nonprescription drugs; (7) outpatient drugs for which the manufacturer seeks to require that associated tests or monitoring services be purchased exclusively from the manufacturer or its designee as a condition of sale; (8) barbiturates; and (9) benzodiazepines.

The definition of a covered Part D drug also excluded any drug for which, as prescribed and dispensed or administered to an individual, payment would be available under Parts A or B of Medicare for that individual (even though a deductible may apply).

Except as otherwise provided below, the final rule adopts the definition of “covered Part D drug” set forth in § 423.100 of the proposed rule.

Comment: Several commenters were confused about the distinction between drugs that may be covered under Part D given the definition of the term “covered Part D drug” in section 1860D-2(e) of the Act and those drugs that are actually included on a Part D plan's formulary.

Response: In order to clarify when we are referring to a drug that may be covered under Part D and one that not only is covered by Part D but is also included on a particular Part D plan's formulary, we refer to drugs that may be covered under Part D, consistent with the definition of the term “covered Part D drug” in section 1860d-2(e) of the Act, simply as “Part D drugs.” We use the term “covered Part D drug” to refer to a drug that not only is a Part D drug, but that is included in a Part D plan's formulary or treated (through a coverage determination or appeal described in subpart M of this preamble) as being included in a Part D plan's formulary, and is obtained at a network pharmacy or at an out-of-network pharmacy in accordance with § 423.124 of our final rule. Both terms are defined in § 423.100 of our final rule.

Comment: One commenter recommended that we consider expanding the definition of “medically accepted indication” beyond the FDA-approved indications to include uses in official compendia or research. Another commenter was concerned that the definition of “medically accepted indication” may allow Part D sponsors to limit their payments for use of Part D drugs solely to FDA-approved indications even though clinical standards allow for alternative uses. Another commenter was concerned that pharmacists will be penalized for dispensing prescriptions that are prescribed for an indication that is not a medically accepted indication. This commenter indicated that pharmacists cannot be expected to contact each physician for each prescription in question to determine if the drug is being prescribed for a medically-accepted indication.

Response: To qualify as a Part D drug, a drug or biological must be used for a medically accepted indication, as defined under section 1927(k)(6) of the Act. This definition states that a medically accepted indication means not only any use for a covered outpatient drug which is FDA-approved, but also a use which is supported by one or more citations included or approved for inclusion in any of the compendia listed in section 1927(g)(1)(B)(i) of the Act-the American Hospital Formulary Service Drug Information, United States Pharmacopoeia-Drug Information, the DRUGDEX Information System, and American Medical Association Drug Evaluations. We cannot extend the meaning of “medically accepted indication” to cover uses in research, as one commenter notes, since the definition of “medically accepted indication” in section 1927(k)(6) of the Act does not include the reference in section 1927(g)(1)(B)(ii) of the Act to peer-reviewed medical literature. Thus, a “medically accepted indication” is limited by statute to a use for a covered outpatient drug which is approved by the FDA, or the use of which is supported by one or more citations in the compendia listed above. It will be Part D plans' responsibility to ensure that covered Part D drugs are prescribed for a medically accepted indication; plans may, for example, rely on utilization management policies and procedures (which we will review as part of our comprehensive review of Part D plan benefits) to ensure that drugs are prescribed and used for medically accepted indications. We clarify that pharmacists will not be required to contact each physician to verify whether a prescription is being used for other than a medically accepted indication.

Comment: Some commenters recommended including coverage for all EPA-recommended disposal methods and disposal solutions as part of the definition of “medical supplies associated with injection of insulin”. The commenters noted that proper disposal of needles and lancets are necessary to patient safety and important to public health. Some commenters requested that the definition include lancets, blood glucose test strips, glucometers, syringes, and needles. One commenter suggested that gauze not be included.

Response: We are interpreting the term “medical supplies associated with the injection of insulin” in section 1860D-2(e)(1)(B) of the Act as comprising syringes, needles, alcohol swabs, gauze, and insulin delivery devices not otherwise covered by Part B, such as insulin pens, pen supplies, and needle-free syringes. Given that section 1860D-2(e)(2)(B) of the Act excludes products covered by Part B from the definition of a Part D drug, test strips and lancets, which are covered under Part B, cannot be covered under Part D. While we recognize the importance of needle disposal systems, we also do not consider the systems to be directly associated with injection. Thus, these devices fall outside of our interpretation of medical supplies associated with the injection of insulin.

We note that it is our intention to narrowly construe further Part D plan determinations of what constitutes “medical supplies associated with the injection of insulin” in order to ensure that such determinations are consistent with the examples we have provided, and that they do not lead to an inappropriate expansion of the Part D benefit.

Comment: Some commenters asked for clarification on coverage of smoking cessation products, specifically regarding whether over-the-counter products will be covered under Part D. Another commenter suggested that in order to cover smoking cessation products, Part D plans should require proof of smoking cessation classes.

Response: Section 1860D-2(e)(1)(A) of the Act specifies that a Part D drug is a drug that may be dispensed only upon a prescription. Although section 1860D-2(e)(1)(B) of the Act specifically allows smoking cessation agents to be covered under Part D, such agents must not otherwise be excluded from coverage under Part D. Over-the-counter smoking cessation products (for example, gum and most patches), by virtue of being not being drugs that may be dispensed only upon a prescription, therefore cannot be considered Part D drugs, even though they are smoking cessation products. Smoking cessation products that may be dispensed only upon a prescription, however (for example, some patches, oral inhalants, nasal sprays, and Zyban), may be considered Part D drugs provided they meet all other applicable requirements under the definition of a Part D drug in § 423.100 of the final rule. We do not have the authority to require Part D plans to condition coverage of permissible smoking cessation agents on proof of smoking cessation classes.

Comment: One commenter requested clarification in the final rule that Part D plans are not prohibited from providing drugs on the exclusion list (under section 1927(d)(2) of the Act, other than smoking cessation drugs) if they are provided through an enhanced benefit.

Response: As provided in § 423.104(f)(1)(ii)(A) of our final rule and in accordance with section 1860D-2(a)(2)(A)(ii) of the Act, Part D plans may only provide coverage of drugs that are specifically excluded as Part D drugs under section 1860D-2(e)(2)(A) of the Act, that is, drugs or classes of drugs, or their medical uses, which may be excluded from coverage or otherwise restricted under Medicaid under section 1927(d)(2) of the Act, with the exception of smoking cessation agents—if they do so as supplemental benefits through enhanced alternative coverage and if they would otherwise meet the definition of a Part D drug under section 1860D-2(e)(1) of the Act, but for the application of section 1860D-2(e)(2)(A) of the Act.

Comment: Many commenters urged us to remove benzodiazepines from the exclusion list indicating the multiple therapeutic uses of this drug. One commenter was concerned that excluding drugs such as these from the Part D benefit would force health care providers to alter how they treat patients based on which medications are Part D drugs. Many commenters noted that benzodiazepines serve as valuable therapy for anxiety disorders, bipolar disorder, Parkinson's disease, seizures, and other conditions. Some commenters noted that excluding drugs such as benzodiazepines that are inexpensive, first-line therapies would require more expensive drugs to be prescribed simply because they are covered. Some commenters were concerned about the dangers of beneficiary withdrawal from benzodiazepines if these drugs are not covered under Part D. Some commenters were concerned about loss of drug coverage for benzodiazepines for dual eligibles, especially because benzodiazepines are covered in many States. Many commenters also urged us to remove barbiturates from the exclusion list, citing similar reasons as those listed for benzodiazepines.

Some commenters urged us to make an exception for vitamins used under special circumstances, specifically with ESRD patients. Another commenter was concerned about the exclusion of renal vitamins under Part D and requested that we allow the coverage of water-soluble vitamins lost during dialysis to be covered under Part D. Another commenter noted that prescription vitamins are relatively inexpensive.

Some commenters requested coverage of over-the-counter medications for beneficiaries with certain conditions. One commenter asked us to reconsider excluding over-the-counter drugs that were formerly prescription-only drugs and now have over-the-counter status. Another commenter recommended including a provision allowing over-the-counter drugs to be covered if prescribed in the same manner as a prescription item. Another commenter asked us to consider over-the-counter drugs and medications for unintended weight loss as a covered drug under Part D. One commenter suggested that we amend the exclusion for “agents used for symptomatic relief of cough or cold” to “non-prescription agents used for symptomatic relief of cough or cold”.

Response: Section 1860D-2(e)(2) of the Act clearly requires us to exclude certain drugs from the definition of a Part D drug. According to the statute, the definition of a Part D drug specifically excludes certain drugs or classes of drugs that may be excluded from Medicaid coverage under section 1927(d)(2) of the Act, including agents when used for anorexia, weight loss, or gain; agents when used for cosmetic purposes or hair growth; agents when used for symptomatic relief of cough and colds; prescription vitamins and mineral products, except prenatal vitamins and fluoride preparations; outpatient drugs for which the manufacturer seeks to require that associated tests or monitoring services be purchased exclusively from the manufacturer or its designee as a condition of sale; nonprescription drugs; barbiturates; and benzodiazepines. We have no flexibility to allow Part D coverage of any of these drugs, including over-the-counter drugs used to treat certain medical conditions, except as provided in § 423.104(f)(1)(ii)(A) of the final rule, which permits Part D plans to provide coverage of drugs that otherwise meet the definition of a Part D drug under section 1860D-2(e)(1) of the Act and are not otherwise excluded under section 1860D-2(e)(2)(B) of the Act, if they do so as supplemental benefits through enhanced alternative coverage. We also note that insurance or otherwise, group health plans, or third party payment arrangements (including States under Medicaid and State Pharmaceutical Assistance Programs) may, at their discretion, provide Part D enrollees with supplemental coverage for drugs excluded from coverage under Part D.

Comment: One commenter said that many of the categories of excludable drugs in section 1927(d)(2) of the Act refer to drugs when used for a specific purpose and that it is inappropriate to simply exclude these drugs when they may be covered depending on the specific clinical use. This commenter recommended that that we provide coverage for potentially excludable drugs when they are prescribed for a clinical use not covered by section 1927(d)(2) of the Act. Two examples provided were “weight loss agents” when used not for cosmetic purposes, but for the treatment of morbid obesity, and decongestant combination products, which while commonly prescribed to treat coughs and colds, could be used for the treatment of allergic conditions.

Response: Drugs that are excluded from coverage under Part D when used as agents for certain conditions may be considered covered when used to treat other conditions not specifically excluded by section 1927(d)(2) of the Act, provided they otherwise meet the requirements of section 1860D-2(e)(1) of the Act and are not otherwise excluded under section 1860D-2(e)(2)(B) of the Act. To the extent this is the case, and a drug is dispensed for a “medically accepted indication” as described in the statute, weight loss agents may be covered for the treatment of morbid obesity, and decongestant products for example, may be covered when used to treat allergies. However, we clarify that Part D plans may establish utilization management processes in order to ensure that such drugs are being prescribed for medically accepted indications that are not excluded under section 1927(d)(2) of the Act (for example, decongestant products when used for “symptomatic relief of coughs and colds”).

Comment: One commenter suggested excluding drugs that have non-prescription drug alternatives available as Part D drugs. Two commenters supported excluding drugs that are “lifestyle” drugs such as Viagra, Levitra, and Cialis.

Response: We do not have the authority to exclude the drugs if they meet all the criteria of a Part D drug as provided under section 1860D-2(e)(1) of the of the Act and are not otherwise excluded under section 1860D-2(e)(2) of the Act. However, we clarify that Part D plans may subject these drugs to utilization management processes provided we do not find such processes to discourage enrollment by certain Part D enrollees as part of the benefits package review we will conduct (and which is discussed in detail elsewhere in this preamble).

Comment: One commenter supports the current statutory language regarding the manufacturer tying arrangements exclusion, whereas another commenter supports expanding this prohibition but does not specify how we should expand it. One commenter opposes any CMS effort to mandate the interactions between Part D plans and pharmaceutical manufacturers, and another asks us to affirm that this exclusion will not interfere with Part D plan decisions to cover drugs/diagnostic test combinations if manufacturers do not require the purchase of the combinations. Yet another commenter points out that the tying arrangement exclusion would exclude drugs from Part D coverage that are tied to one pharmacy system because of requirements for patient monitoring.

Response: We appreciate the clarification provided by the various commenters. We are not expanding the manufacturer tying arrangement exclusion of coverage under Part D in our final rule. We believe that existing Federal fraud and abuse laws, including the anti-kickback statute at section 1128B(b) of the Act, as well as the civil monetary penalty provision at Section 1128A(a)(5) of the Act, provide clear guidance regarding what are and are not inappropriate manufacturer tying arrangements. Manufacturers remain responsible for ensuring that they do not engage in any tying arrangements that violate the anti-kickback statute or, where applicable, the civil monetary penalty provision prohibiting inducements to beneficiaries.

Comment: Some commenters asked for clarification on which vaccines are covered under the Part D benefit and suggested that we provide additional guidance on how non-Part B vaccines are to be covered under Part D, including administrative fees. Another commenter requested that we strongly encourage Part D plans to include all vaccines that are not covered under Part B on their formularies.

Response: The definition of a Part D drug in section 1860D-2(e) of the Act clarifies that Part D may cover a biological product described in sections 1927(k)(2)(B)(i) to (k)(2)(B)(iii) of the Act—to include a vaccine licensed under section 351 of the Public Health Service Act. Since section 1860D-2(e)(2)(B) of the Act excludes an otherwise covered Part D drug from coverage under Part D “if payment for such drug as so prescribed and dispensed or administered with respect to that individual is available (or would be available but for the application of a deductible) under Part A or B for that individual,” certain drugs and vaccines would be covered under Part D only to the extent they are not covered under Part B.

In addition to excluding Part B vaccines from coverage under Part D, section 1860D-2(e)(3) of the Act provides that a Part D plan may exclude from coverage covered Part D drugs for which payment may not be made under section 1862(a) of the Act if applied to Part D. Section 1862(a)(1)(A) generally excludes from payment items and services that are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member, except those vaccines identified in section 1862(a)(1)(B) of the Act as covered Part B vaccines. Section 1862(a)(1)(A) of the Act, however, excepts from this rule vaccines covered under Part B. Therefore, if these provisions are read literally, Part D plans would be permitted to exclude from coverage preventative vaccines that are covered Part D drugs because they are not “reasonable and necessary for the diagnosis or treatment of an illness or injury.”

However, we argue that whereas section 1862(a)(1)(B) of the Act requires coverage under Part B of covered Part B vaccines, by analogy, section 1862(a)(1)(B) of the Act as applied to Part D should be read as requiring coverage under Part D of vaccines that are covered Part D drugs. This argument is buttressed by the fact that the Congress specifically defined Part D drugs under section 1860D-2(e)(1) of the Act to include vaccines. Moreover, section 1860D-2(e)(3) of the Act references all of section 1862(a) of the Act, and the only way to give meaning to the reference to section 1862(a)(1)(B) of the Act is to extend the provision to permit coverage of Part D vaccines. In other words, if section 1862(a)(1)(B) of the Act as applied to Part D were read literally as only permitting coverage of Part B vaccines, the reference in section 1860D-2(e)(3)(A) of the Act to section 1862(a)(1)(B) of the Act would be rendered meaningless.

Building on the argument that by analogy section 1862(a)(1)(B) of the Act should be extended to Part D so as to require coverage of non-Part B vaccines under Part D, the standard under Part D should reflect a standard similar to section 1862(a)(1)(b) of the Act but adapted to apply to preventative vaccines. Therefore, we believe such standard should be vaccines that are “reasonable and necessary for the prevention of illness.” Plans will need to develop explicit criteria that can be applied on a case-by-case basis to determine that the administration of Part D vaccine is “reasonable and necessary” and that the Part D vaccine is therefore a covered Part D drug. Presumably these will comply with any widely accepted practice guidelines. If widely accepted practice guidelines are not available for certain vaccines, Part D plans will need to develop criteria that they can support with sound clinical reasoning.

Currently, most vaccines of interest to the Medicare population are covered under Part B. Although Part B makes only three exceptions (influenza, pneumococcal, and hepatitis B vaccines for high risk patients) to its rule requiring injury or direct exposure, these three exceptions probably account for the majority of vaccinations needed by an elderly population. Since many of the remaining vaccines on the market are administered during childhood, we do not expect that Part D will cover a large number of vaccines. However, as more vaccines are developed and practice guidelines develop, Part D plans might face a growing burden with supplying vaccinations to significant numbers of their Part D patient populations. Therefore, the ability of Part D plans to limit payment to those situations that are “reasonable and necessary for the prevention of illness” will become more and more important.

Given the definition of dispensing fees we have incorporated in the final rule, the costs of Part D-covered vaccine administration could not be covered as part of a dispensing fee. Neither could those costs be covered as separate administrative fees, since as discussed elsewhere in this preamble, other than medication therapy management programs (described in subpart D), we do not expect medical or clinical services to be included in administrative fees.

As discussed in subpart J, Part D-covered vaccines administered in a physician's office will be covered under the out-of-network access rules at § 423.124 of our final rule. The costs of vaccine administration may be included in physician fees under Part B since Part B pays for the medically necessary administration of non-covered drugs and biologicals. However, there is currently no ready mechanism for physicians to bill Part D plans for Part D-covered vaccine costs. In the short-term, we will require that a Part D enrollee self-pay the physician for the Part D-covered vaccine cost and submit a paper claim for reimbursement by his or her Part D plan. This approach is consistent with how beneficiaries accessing covered Part D drugs at an out-of-network pharmacy will be reimbursed by Part D plans for costs associated with those drugs. Once Part D is implemented, we will get a better sense for the actual volume of Part D-covered vaccines (and other covered Part D drugs appropriately dispensed and administered in a physician's office) and the need and most appropriate mechanisms for any automatic cross-over procedures such that physicians could submit claims for reimbursement of Part D-covered vaccine ingredient costs directly to the appropriate Part B carrier. Any such automatic cross-over procedures would mean that beneficiaries would not have to submit paper claims and, instead, physicians could submit a single claim for reimbursement of both the Part D-covered vaccine ingredient costs and the administration fee directly to the appropriate Part B carrier, which would forward the Part D charge to the appropriate Part D plan.

Comment: One commenter asked that we cover individually compounded medications or combinations of medications. Another commenter stated that we should not consider compounded drugs as meeting the definition of a Part D drug, as it is contrary to the definition in the MMA and would put patients at risk.

Response: Historically, extemporaneous compounding has filled an important role in pharmacy practice and continues to be an important part of contemporary pharmacy practice. While less than one percent of prescriptions are compounded, these compounded prescriptions often provide medically necessary drug therapies that would otherwise be unavailable to patients. Compounding also provides many independent pharmacies with the opportunity to offer services that competitively differentiate them from the chain industry. In addition, compounded prescription drug products are frequently reimbursed under commercial prescription drug benefit plans. Therefore, excluding compounded prescription drug products from Medicare Part D would be a significant change from current pharmacy practice.

Section 1860D-2(e)(1)(A) of the Act defines a Part D drug as including a drug that may be dispensed only upon a prescription and that is described in section 1927(k)(2)(A)(i), (A)(ii) or (A)(iii) of the Act. As a matter of simplification, we refer to these products as “FDA approved prescription drug products,” and note that, as used in this part of the preamble, that term incorporates the non-FDA approved drug products specifically described under sections 1927(k)(2)(A)(ii) and (A)(iii) of the Act.

Compounded prescription drug products may contain: (1) all FDA approved prescription drug products; (2) some FDA approved prescription drug products; or (3) all non-FDA approved drug products. While the strictest reading of section 1927(k)(2) of the Act appears to indicate that non-FDA approved compounded prescription drug products are not Part D drugs, we believe that FDA-approved prescription drug product components of a non-FDA approved compounded prescription drug product could be considered to be Part D drugs. The definition of a Part D drug is not based on the final form of the drug as dispensed to the beneficiary; rather, section 1860D-2(e)(1)(A) of the Act speaks to a drug “that may be dispensed” only upon a prescription and that meets the requirements of section 1927(k)(2) of the Act. Therefore, the FDA approved component can satisfy section 1860D-2(e)(1)(A) of the Act even if the finished product does not. Although reimbursement must be limited to the FDA approved prescription drug components (that is, no reimbursement is available for compounded products containing only products that are not approved by the FDA, or otherwise described under sections 1927(k)(2)(A)(ii) and (A)(iii) of the Act, or only over-the-counter products), these usually account for the most significant drug costs and, accordingly, current commercial practice often limits reimbursement to the most expensive component only. In addition, the labor costs associated with mixing a compounded drug product that contains at least one FDA approved prescription drug component can be included in dispensing fees (as defined in § 423.100 of our final rule).

Comment: Two commenters suggested covering medical foods under the Part D benefit because medical foods contain vitamins and nutrition that are beneficial to beneficiaries with certain diseases such as End Stage Renal Disease (ESRD). Another commenter asked that we cover parenteral nutrition therapy.

Response: It is not clear what the commenter meant by “medical foods.” If “medical foods” refers to products that are vitamins and mineral products, these are excluded from the definition of Part D drugs and are not a covered Part D benefit. In addition, enteral nutrients are not regulated as drugs by the FDA and are therefore not covered under Part D.

On the other hand, parenteral nutrition frequently contains primary components such as amino acids, nitrogen products, and dextrose mixtures that are regulated by the FDA as drugs and therefore meets the definition of a Part D drug if prescribed for a medically accepted indication and not otherwise excluded under section 1860D-2(e)(2) of the Act. Vitamins and minerals added to parenteral nutrition are not be considered Part D drugs, and costs associated with these vitamins or minerals cannot be paid for under Part D.

Part D plans would only need to include parenteral nutrition coverage for reasonable and necessary medically accepted indications that are not covered under Parts A or B. These situations would likely involve long-term care facility or home infusion patients who do not qualify for Part B coverage under the prosthetic benefit provision for permanent dysfunction of the alimentary tract. This could include temporary situations in which patients are unable to swallow or absorb nutrients from the alimentary tract, either for physical or cognitive reasons. We are currently unable to estimate the potential impact of such coverage on Part D expenditures. However, Part D plans will need to establish appropriate policies and procedures in order to limit Part D coverage of parenteral nutrition to patients with medically accepted indications that are not otherwise covered by Parts A or B. In addition, we note that Part D plans are not responsible for the costs of supplies and equipment related to parenteral nutrition therapy.

Comment: One commenter suggested additional supplies to consider for Part D coverage: spacers and aerochambers for administration of inhalation products, devices for administration of eye drops, and flushing supplies (for example, saline and heparin for home infusion therapy).

Response: Section 1860D-2(e)(1) of the Act provides us with authority to deem medical supplies to be Part D drugs to the extent they are associated with the injection of insulin. Thus, the supplies mentioned by this commenter cannot be covered under Part D, as they are not associated with the injection of insulin. We clarify that although heparin is a Part D drug, a heparin flush is not used to treat a patient for a medically accepted indication, but rather to dissolve possible blood clots around an infusion line. Therefore, heparin's use in this instance is not therapeutic but is, instead, necessary to make durable medical equipment work. It would therefore not be a Part D drug when used in a heparin flush.

Comment: One commenter recommended that Part D drugs should include liquid, chewable, transdermal and other special dosage forms and delivery mechanisms to accommodate swallowing limitations and intravenous medications, such as antibiotics.

Response: The definition of a Part D drug at section 1860D-2(e) of the Act places no limitations on drug dosage forms and delivery mechanisms provided that a drug or biological product is not otherwise excluded by the statute. We expect Part D plans to provide an adequate benefit that includes coverage of special dosage forms and delivery mechanisms to fit the needs of all their enrollees.

Comment: Several commenters supported our proposed framework for Part D coverage wrapping around Part B coverage at the individual level. However, other commenters recommended that drugs currently covered under Part B be excluded from coverage under Part D until the mandated study on the transitioning of Part B prescription drug coverage into Part D is released. Another commenter recommended that individual drugs be paid by either Part B or Part D in all circumstances.

Response: The statutory definition of the term “covered Part D drug” would, under section 1860D-2(e)(2)(B) of the Act, exclude any drug for which, as dispensed and administered to an individual, payment would be available under Parts A or B of Medicare for that individual (even though a deductible may apply). By including the language “as so prescribed and dispensed or administered,” section 1860D-2(e)(2)(B) of the Act makes a distinction between what would be paid for under Part D as opposed to Part B. This language indicates that the Congress was aware that some drugs could qualify for payment under Part B in some circumstances and Part D in others, depending on the way those drugs are dispensed or administered. Given the statutory definition of the term “covered Part D drug”, we cannot preclude drugs that may be covered under Part B under some circumstances (for example, when they are furnished “incident to” a physician's service), but that are not covered under Part B under other circumstances, from being covered under Part D under such other circumstances (for example, because they are self-administered by the patient at home). Such a policy would require statutory changes by the Congress. The various issues raised by the drugs covered under Part B for the administration of the Part D drug benefit will be addressed in our report mandated by section 1860D-42(c) of the Act.

Comment: We solicited comments concerning any drugs that may require special guidance with regard to their coverage under Part D, and any gaps that may exist in the combined “Part D B” coverage package. A number of commenters requested that we further clarify the relationship between drugs covered under Medicare Part B and drugs that will be covered under Part D. These commenters would like us to clarify how Part D plans can recognize Part B covered drugs since no universal list exists, Part B coverage differs by patient and situation, and Part B coverage policies differ regionally. They raise concerns about appropriately limiting coverage of drugs under Part D while achieving our goal of wrapping around Medicare Part B to the greatest extent possible.

Response: We acknowledge that there are numerous complexities involved in the distinction between drugs covered under Parts B and D, as well as with wrapping around existing drug coverage under Part B. Nevertheless, section 1860D-2(e)(2)(B) of the Act states that Part D plans must exclude any drug that would otherwise be considered a Part D drug for which, as so prescribed and dispensed or administered to that individual, payment would be available under Parts A or B (even though a deductible may apply). Furthermore, we believe that the language “as so prescribed and dispensed or administered” indicates the Congress's awareness that the determination regarding whether a particular drug is covered under Part B or Part D could differ on a case-by-case basis.

Despite the complexities, we believe Part D plans can best wrap around existing Part B coverage under Part D by understanding the scope of the definition of covered Part D drug, becoming familiar with the general categories of Part B covered drugs, and planning for potential Part B interactions that are likely to be encountered in specific settings with regard to some of these categories.

Part D drugs are not limited to typical outpatient prescription drugs. The definition includes injectable prescription drugs (for example, intramuscular, intravenous, and infusible drugs, as well as vaccines). Some Part D plans may lack experience with covering the drugs under an outpatient prescription drug benefit program because they are more commonly covered under commercial medical benefits, as opposed to commercial prescription drug benefits.

The implementation of the Part D benefit does not alter coverage or associated rules for drugs currently covered under Part B. Part B covers drugs in a variety of settings. In almost all of these settings the question of whether coverage should be provided under Part D will not arise since the drugs are being provided in the context of a service or procedure. For a limited number of categories, however, pharmacists and infusion providers will have to determine whether to bill Part B or Part D, and Part D sponsors will need to confirm whether Part D is being billed correctly. In some cases, this determination can be made on the basis of the drug. For example, in the case of oral anti-cancer drugs, there is a list of drugs covered under Part B based on certain statutory criteria. All other oral anti-cancer drugs will be covered under Part D, provided they otherwise meet the definition of a Part D drug. In other cases, the pharmacist or infusion provider would need information about the member in order to bill appropriately. For example, in the case of drugs used in immunosuppressive therapy, Part B should be billed in the case of a beneficiary whose transplant has been covered by Medicare. Part D should make payment in all other instances. We will provide more information and guidance on the relation between Part B and Part D coverage in separate guidance to Part D plans.

Based upon the definition of the term “Part D drug” and the general categories of coverage under Part B, we believe that Part D plans could implement utilization management strategies to identify potential Part B drug coverage overlap for individuals and verify appropriate coverage accordingly. For example, if a Part D beneficiary were filling a retail prescription for an antiemetic, prior authorization could be used to ensure that the drug is not covered by Part B. Similarly, prior authorization could be used to flag drugs dispensed via home infusion that are covered under the Part B durable medical equipment policy. Plans will need to ensure that they do not cover any drugs which, as prescribed and dispensed or administered, are covered under Part B in a specific region under its local medical review policy (LMRP).

We clarify that MA organizations must follow fee-for-service coverage rules as provided in section 1852(a)(1) of the Act in determining whether to pay for a drug under its Part A/Part B or Part D benefits. Payment for injectable drugs that Medicare considers to be usually not self-administered should be paid under the Part A or Part B benefits if provided in a physician's office, and under Part D if dispensed by a network pharmacy. Even if an MA plan offers coverage under Part D of an injectable drug that Medicare considers to be usually not self-administered (for example, Avonex) the plan cannot deny coverage of this drug under its Part A or Part B benefits when furnished in a physician's office.

Comment: Several commenters noted that excluding Part B drugs from coverage under Part D regardless of whether the consumer is enrolled in Part B is seriously detrimental to consumers who enroll in Part B but who cannot effectuate their enrollment for many months due to the Part B enrollment timeframes. Consumers without Part B coverage, but who intend to enroll, could enroll in Part D in April of 2006 but would not be able to gain coverage for Part B drugs until 15 months later (enrollment in January effective in July). These commenters argue that we should make an exception for beneficiaries in this predicament such that their Part D plans could cover Part B drugs. This is especially important for full-benefit dual eligible individuals in this situation, since they would be unable to fall back on Medicaid to obtain coverage for Part B-covered medications. They recommend that Part D plans be required to cover Part B medications for a consumer for up to 15 months (the maximum amount of time it could take to effectuate an enrollment under Part B).

Response: Section 1860D-2(e)(2)(B) of the Act specifies that a drug prescribed to a Part D eligible individual that would otherwise qualify as a Part D drug cannot be considered a covered Part D drug if payment for such drug “... is available (or would be available but for the application of a deductible) under part A or B for that individual.” We interpreted this to mean that if payment could be available under Part A or Part B to the individual for such drug, then it will not be covered under Part D. Thus, for all Part D eligible individuals, drugs covered under Parts A and B are available if they choose to pay the appropriate premiums.

This will be the case even if a beneficiary has Part A, but not Part B, or vice versa, since, as we explain in subpart F of this preamble and at § 423.265(c) of the Act, Part D sponsors must offer a uniform benefit package in order to carry out the Congress's intent in section 1860D-13(a)(1)(F) of the Act. If Part B covered drugs were included in the Part D benefit package only for those enrollees without Part B, but not for others, it would not be possible for Part D sponsors to offer uniform benefit packages for a uniform premium to all enrollees. In addition, we believe that payment for a drug under Part A or B is available to any individual who could sign up for Parts A or B, regardless of whether they actually enrolled or are waiting to be enrolled, as these commenters describe. All individuals who are entitled to premium-free Part A are eligible to enroll in Part B. This includes individuals who are entitled to Part A based on age, disability, and ESRD. All individuals who are entitled to Part B only are age 65 or older and, in almost all instances, not eligible for premium-free Part A. However, they are eligible to buy into Part A for a premium.

Comment: Some commenters recommended that we introduce more consistent coverage rules by adopting national standards rather than relying on local carriers for coverage and payment decisions.

Response: Policies with regard to coverage of infusible drugs covered as DME supplies are uniform across the country. Some differences do exist between carriers with regard to which injectable drugs will be covered under Part B “incident to” a physician service. These differences in coverage in a physician's office setting, however, should not impact whether a Part D plan will cover a prescription for an injectable drug presented at a participating pharmacy. The statute does not exclude “all drugs” covered under Medicare, but rather, drugs when Medicare coverage under Part B is available “as so prescribed and dispensed or administered.”

Comment: One commenter asked about the interface between the hospice benefit and Part D, specifically whether we anticipated that Part D would account for or impact the delivery of hospice drugs.

Response: As provided in section 1861(dd)(1) of the Act, the hospice benefit covers all medications related to a beneficiary's terminal illness. There is no change in Medicare coverage of these drugs. However, all other medications provided to the beneficiary are currently paid for either out-of-pocket or by private insurance. These drugs could now be covered by Part D plans on either a primary or secondary basis depending on the presence or nature of other insurance. Given the life expectancy of beneficiaries receiving hospice benefits, we do not expect this to be a large expense for Part D plans.

b. Dispensing Fees

The MMA does not define the term “dispensing fee,” although the terms “dispensing fee” and “dispense” appear several times throughout the MMA. Because the statute is ambiguous on the meaning of “dispensing fee,” in the proposed rule we did not propose a specific definition of “dispensing fee,” but instead offered three different options we believed would be reasonable, permissible definitions of the term and invited comments on which option would be most appropriate under Part D.

  • Option 1: The dispensing fee will include only those activities related to the transfer of possession of the covered Part D drug from the pharmacy to the beneficiary, including charges associated with mixing drugs, delivery, and overhead. The dispensing fee will not include any activities beyond the point of sale (that is, pharmacy follow-up phone calls) or any activities for entities other than the pharmacy.
  • Option 2: The dispensing fee will include the activities included in Option 1, but in addition will include amounts for the supplies and equipment necessary for the drugs to be provided in a State in which they can be effectively administered.
  • Option 3: The dispensing fee will include the activities in Option 2, but in addition will include activities associated with ensuring proper ongoing administration of the drugs, such as the professional services of skilled nursing visits and ongoing monitoring by a clinical pharmacist.

We also requested comments regarding any implications for our proposed options for defining dispensing fees vis-à-vis the administration of other drugs (for example, vaccines and injectable long-acting antipsychotic drugs).

Comment: The majority of commenters favored Option 1 claiming that this definition is consistent with current industry practice regarding dispensing fees. Several said that professional services involved in providing medications should more appropriately be covered under Parts A and B, and another commenter opined that Options 2 and 3 were burdensome for Part D sponsors. Another commenter expressed concern that what is currently covered under Part B should not be shifted to Part D through the dispensing fees. Other commenters stated that, although they supported Option 1, they believed that the definition proposed for Option 1 was too narrow. One commenter suggested that pharmacists are required to provide patient counseling for Medicaid patients under OBRA 1990 and that they should be reimbursed for those efforts. They also felt that the definition of what it means to dispense a drug should be clarified. One commenter argued that supplies, equipment and professional services needed to deliver a drug should be covered under ancillary fees negotiated between pharmacies and Part D plans and should not be included in dispensing fees. Another commenter pointed out that requiring PBMs to pay for professional services, as contemplated under Option 3, would require them to renegotiate tens of thousands of contracts with the pharmacies in their networks.

Several commenters supported Option 2. One commenter focused on medication packaging and the need to cover packaging specifically designed for the cognitively impaired or those with physical impairments.

Other commenters favored adoption of Option 3. Some of these commenters argued that the Congress meant for home infusion to be covered and that failure to pay for the supplies, equipment and services involved in delivering home infusion drugs was tantamount to failure to cover the drug itself. Since Part D specifically covers those drugs, (antibiotics, pain management, chemotherapy, parenteral nutrition, immune globulin and other infused drugs) they argued that we must require that dispensing fees cover the resources needed to deliver them. Other commenters argued that new treatment modalities were allowing patients to remain at home, a cost-effective setting, to receive their medications, and that some patients might not be able to receive their medications at home should the definition of dispensing fee fail to cover the service, equipment, and supplies needed to deliver the medications in the home setting. One commenter specifically noted the need to cover supplies and services surrounding infusion of long-term anti-psychotic medications in community mental health centers. Two commenters focused on the need to pay for physician services involved in home infusion of certain drugs given that many infections and adverse events take place in this setting. Direct physician supervision of these services is required to mitigate these potential problems.

Other commenters argued for Part D plan flexibility in establishing dispensing fees that would be appropriate for the setting and medication at issue, allowing each Part D plan to define dispensing fee. One commenter thought that Part D plans should be allowed to use tiered dispensing fees to encourage the use of generic drugs. One commenter indicated that point of sale systems in place today already support multiple variations of dispensing fees based on drug or amount of effort required to prepare or administer medication and such systems could handle the multiple variations for the drug benefit. Another commenter specified that the transmission standard should be the National Council of Prescription Drug Program's Telecommunication Standard Version 5.1.

Response: We agree with the majority of commenters that Option 1—including only those activities related to the transfer of possession of the covered Part D drug from the pharmacy to the beneficiary, including charges associated with mixing drugs, delivery, and overhead is the most appropriate definition of the term “dispensing fees” for Part D, and we have included a definition of dispensing fees in § 423.100 of our final rule consistent with Option 1.

Although we recognize that Options 2 or 3 would eliminate current gaps in coverage relative to home infused drugs, such approaches would also extend the definition of dispensing fee beyond the mere transfer of possession of the drug, and certainly beyond what we believe to have been Congressional intent regarding the scope of an outpatient drug benefit. The inclusion of professional services in the definition of dispensing fees is also problematic given the potential for double billing with regard to some of the skilled nursing costs associated with home infusion. In many cases, these skilled nursing costs are separately billable to Part A, Medicaid, or supplemental insurance, and we are concerned about Part D supplanting these other sources of payment.

We believe Option 1 represents the best reading of the statute, since it will limit dispensing fees to a transfer of possession of the drug and will not include any fees associated with administering the drug. We also note that where the Congress wished for us to include the cost of supplies under Part D, it specifically directed us to do so (for example, by requiring that the supplies associated with the injection of insulin be included in the definition of the term Part D drug).

Even though some commenters suggest that the supplies, equipment, and services associated with Options 2 and 3 could be paid for through a separate fee or additional compensation to home infusion and other providers, we caution that such separate administrative fees would not be allowed under Part D. Other than medication therapy management programs, as described in section 1860D-4(c)(2) of the Act, we do not expect medical or clinical services to be included in administrative fees. Please refer to the subpart G preamble discussion of the types of costs that Part D plans may include as administrative costs in their bids. Thus, the costs for professional services associated with home infusion could not be included in the premium bid. In addition, professional services, including those associated with home infusion, may not be included in Part D plan supplemental coverage, given that section 1860D-2(a)(2) of the Act defines supplemental coverage as consisting of: (1) a reduction in the deductible, coinsurance percentage, initial coverage limit, or any combination thereof; or (2) coverage of drugs that are excluded from the definition of a “Part D drug” because of the application of section 1927(d)(2) or (3) of the Act.

Provided that Part D plans include only those activities allowed under our definition of dispensing fees in the dispensing fees negotiated with network pharmacies and offer standard contracting terms and conditions to all pharmacies, we note that Part D plans have the flexibility to vary the actual dispensing fee paid to pharmacies. For example, Part D plans may need to increase the dispensing fees paid to rural or long-term care pharmacies in order to obtain their participation in networks and meet the pharmacy access standards.

As detailed elsewhere in this preamble, Part D plans will be required to ensure adequate access to home infusion services as part of their pharmacy network access standards. Thus, enrollees will have access to home infusion services, though they may have to pay for supplies, equipment, and professional services out-of-pocket particularly if they are enrolled in a Part D plan and have no source of supplemental coverage.

As we noted in the proposed rule, our definition of dispensing fees under Part D will not carry over to Part B of the Medicare program. Section 1842(o)(2) of the Act gives the Secretary discretionary authority to pay a dispensing fee to a licensed pharmacy that furnishes certain covered Part B drugs and biologicals to Medicare beneficiaries. While the term “dispensing fee” is not defined in section 1842(o)(2) of the Act, the considerations under Medicare Part B, a more comprehensive health insurance product that has separate payment mechanisms for durable medical equipment and professional services, are different from those under Part D.

Comment: Some commenters did not support a particular option for defining the term “dispensing fees,” but were more concerned about including certain activities in the definition of dispensing fees (for example, staff, equipment, automation, facilities overhead, time inputting information into a computer, resolving problems with PBMs and prescribing practitioners, counseling the patient, waste disposal, turning the medication over to the patient, particularly when it involved home delivery, and actually packaging the medications). Many of these commenters noted that pharmacists merit a small profit and that dispensing fees should not be specifically designed simply to meet costs. Others felt that terms used in the proposed options were too vague. Specifically, they wanted the meaning of dispensing to be defined to include the costs they outlined. They also wanted to account for the level of complexity and include clear definitions of reconstituting, mixing and compounding drugs, which they believe involve very different equipment, skill and time resources.

Response: We have defined the term “dispensing fees” in § 423.100 of our final rule to include reasonable pharmacy costs associated with ensuring that possession of the appropriate covered Part D drug is transferred to a Part D enrollee. We specify that reasonable pharmacy costs may include costs associated with a pharmacist's time in checking the computer for information about an individual's coverage, performing quality assurance activities consistent with § 423.153(c)(2) of our final rule, measurement or mixing of the covered Part D drug, filling the container, physically providing the completed prescription to the Part D enrollee, delivery costs, special packaging costs, and overhead costs associated with maintaining the facility and equipment necessary to operate the pharmacy. We clarify that in using the term “reasonable” pharmacy costs, our intent is to convey that such costs be appropriate for the typical beneficiary in that pharmacy setting. We believe that our definition clarifies commenters' concerns about the inclusion of some overhead costs, time spent inputting information into a computer and resolving problems with PBMs and prescribing practitioners, transferring the medication to the patient, and special packaging costs.

We clarify that reasonable delivery costs include only those costs appropriate for the typical beneficiary in a particular pharmacy setting. Thus, while it would be appropriate for Part D plans to reimburse long-term care, mail-order, and home infusion pharmacies for home delivery costs via the dispensing fee, this would not be the case for retail pharmacies (where the term “delivery” would be limited to the transfer of a covered Part D drug from the pharmacist to the patient at the point of sale) because the typical retail customer does not require home delivery. While retail pharmacies may offer home delivery services, Part D plans may not reimburse those pharmacies for these costs, and the delivery cost must be borne by the beneficiary.

As concerns patient counseling, dispensing fees for covered Part D drugs may include pharmacy costs associated with quality assurance activities consistent with § 423.153(c)(2) of our final rule. Section 423.153(c)(1) of our final rule requires Part D plans to represent that pharmacists in their network pharmacies comply with minimum standards for pharmacy practice established by the States. Since almost all States have established requirements for pharmacy practice related to counseling, we believe that the offer of counseling that pharmacists currently provide their customers will continue consistent with current pharmacy practice in compliance with State requirements. .Any pharmacist counseling activities in addition to those established by the States will have to be negotiated and paid for separately under Part D plans' medication therapy management programs (discussed in greater detail elsewhere in this preamble).

As provided in section 1860D-11(i) of the Act, we cannot intervene in negotiations between pharmacies and Part D plans. Thus, the extent to which Part D plans reimburse pharmacies for their entire dispensing costs (or even in excess of their dispensing costs) will depend on the outcome of those negotiations. In addition, we clarify that we expect Part D plans and pharmacies to account for pharmacy profit as part of negotiated prices—either as part of overhead costs accounted for in dispensing fees or in the reimbursement rates for ingredient costs negotiated with pharmacies.

We clarify that we interpret the term “mixing” as used in our definition of the term “dispensing fees” to encompass reconstituting and compounding of covered Part D drugs. Further, we note that Part D plans have the flexibility to pay differential dispensing fees to pharmacies based on higher labor costs—for example, for a compounded product relative to a non-compounded covered Part D drug. Plans could also used differential dispensing fees to encourage the use of generics over brand-name drugs as appropriate.

Comment: Another commenter wanted dispensing fees for non-profit entities to reflect their preferred acquisition costs, arguing that without this, Part D would be assisting tax-exempt non-profit competitors of small business pharmacies.

Response: As mentioned previously, we have defined the term “dispensing fees” in § 423.100 of our final rule to include pharmacy costs associated with ensuring that possession of the appropriate covered Part D drug is transferred to a Part D enrollee. Plans may wish to consider non-profit entities' preferred acquisition costs in the ingredient cost reimbursement negotiated with those entities as part of negotiated prices on covered Part D drugs. However, it is unclear to us why dispensing fees should vary among non-profit and for-profit pharmacies based on differences in acquisition costs.

Comment: Several commenters emphasized the need to provide dispensing fees tailored to long term care pharmacies. They focused on the need to reimburse long-term care pharmacists for 24-hour care, the specialized packaging that is required, emergency preparation and delivery of medications, and the distinct type of medications typically prepared and delivered.

Response: The definition of dispensing fee in § 423.100 of our final rule encompasses some of the services—for example, specialized packaging, delivery, and preparation of medications (not including the actual administration of those medications)—typically provided by long-term care pharmacies. Additional long-term care pharmacy services could be reimbursed via medication therapy management programs established by Part D plans for institutionalized Part D enrollees.

Comment: Some commenters emphasized the need for the dispensing fee to cover all of the costs involved in providing a medication.

Response: As provided in section 1860D-11(i) of the Act, we cannot intervene in negotiations between pharmacies and Part D plans. Thus, the extent to which Part D plans reimburse pharmacies for their entire dispensing costs will depend on the outcome of those negotiations. Given Part D plans' need to secure a network of providers that meets our access standards, we believe that Part D plans will have every incentive to adequately reimburse pharmacies via dispensing fees for the costs involved with providing covered Part D drugs to Part D enrollees.

c. Long-Term Care Facility

We requested comments regarding the definition of the term long-term care facility in § 423.100 of our proposed rule, which we interpreted to mean a skilled nursing facility (as defined in section 1819(a) of the Act), or a nursing facility (as defined in section 1919(a) of the Act). We were particularly interested to explore whether we should include in the definition facilities other than skilled nursing and nursing facilities—particularly intermediate care facilities for the mentally retarded (ICFs/MR), described in § 440.150, and other types of facilities in which full-benefit dual eligible individuals may reside and which may exclusively contract with long-term care pharmacies in a manner similar to current practice in skilled nursing and nursing facilities.

Comment: We received a number of comments urging us to expand the definition of the term “long-term care facility” in the proposed rule. Some of the suggested additions include ICFs/MR; assisted living facilities; other facilities recognized by State law as eligible for payment under Sections 1915(c) (Home and Community Based waivers), 1616(e), and 1115 of the Act; group homes for the developmentally disabled; and other forms of congregate living arrangements regulated by the States. Some commenters suggested that many of these facilities operate under exclusive contracts with long-term care pharmacies. Other commenters urged us not to make the presence of exclusive contracts with long-term care pharmacies the only criterion for defining congregate living arrangements as long-term care facilities, as these beneficiaries could benefit significantly from subsidies for low-income institutionalized Part D enrollees.

Response: We have expanded the definition of the term “long-term care facility” in § 423.100 of our final rule to encompass not only skilled nursing facilities, as defined in section 1819(a) of the Act, but also any medical institution or nursing facility for which payment is made for institutionalized individuals under Medicaid, as defined in section 1902(q)(1)(B) of the Act. We note that we have eliminated the reference to nursing facilities as defined in section 1919(a) of the Act, as such facilities are captured as nursing facilities for which payment is made for institutionalized individuals under Medicaid. Such an expansion would include ICFs/MR and inpatient psychiatric hospitals along with skilled nursing and nursing facilities in the definition of a long-term care facility, provided those facilities meet the requirements of a medical institution that receives Medicaid payments for institutionalized individuals under section 1902(q)(1)(B) of the Act. We do not believe that the definition of term long-term care facility should be expanded to include other facilities recognized by State law but not by Medicare or Medicaid, regardless of whether some of these facilities contract on an exclusive basis with long-term care pharmacies. Furthermore, we do not believe that our definitions of terms associated with institutionalized Part D enrollees should conflict. Our revised definition of the term “long-term care facility” is consistent with the definition of “institutionalized” in subpart P of this rule and will allow for residents of a number of institutional settings to benefit from the special rules for access to covered Part D drugs established for residents of long-term care facilities. 2. Requirements Related to Qualified Prescription Drug Coverage (§ 423.104)

Under section 1860D-11(e)(2)(A) of the Act, we may approve as Part D sponsors only those entities proposing to offer qualified prescription drug coverage in accordance with our requirements. As provided in section 1860D-2(a)(1) of the Act, qualified prescription drug coverage may consist of either standard prescription drug coverage or alternative prescription drug coverage.

a. Standard Prescription Drug Coverage

As provided under section 1860D-2(b) of the Act, “standard prescription drug coverage” consists of coverage of covered Part D drugs subject to an annual deductible; 25 percent coinsurance (or an actuarially equivalent structure) up to an initial coverage limit; and catastrophic coverage after an individual incurs out-of-pocket expenses above a certain threshold. In 2006, the annual deductible will be $250, the initial coverage limit will be $2,250, and the out-of-pocket threshold will be $3,600.

Once a Part D enrollee reached the annual out-of-pocket threshold, in 2006, his or her nominal cost-sharing will be equal to the greater of: (1) 5 percent coinsurance; or (2) a copayment of $2 for a generic drug or a preferred multiple source drug and $5 for any other drug, or an actuarially equivalent structure. (See Table C-1 for a summary version of standard prescription drug coverage benefits for 2006.)

Section 1860D-2(b) of the Act provides that, beginning in 2007, the annual deductible, initial coverage limit, out-of-pocket threshold, and beneficiary cost-sharing after the out-of-pocket threshold is met are to be adjusted annually. In accordance with section 1860D-2(b)(6) of the Act, these amounts will be increased over the previous year's amounts by the annual percentage increase in average per capita aggregate expenditures for Part D drugs for the 12-month period ending in July of the previous year. We requested comments regarding the methods and data sources we might use to determine the annual percentage increase in the first several years of the Part D program.

Table C-1 Back to Top Standard Prescription Drug Coverage Benefits for 2006 Back to Top
Cost-Sharing Percentage Beneficiary Out-of-Pocket Costs Plan Payment Percentage Plan Payment
1Entities have the option of substituting a cost-sharing structure that is actuarially equivalent.
2$500 is the maximum out-of-pocket costs if coverage is based on 25 percent coinsurance. Under an actuarially equivalent cost-sharing structure, the maximum out-of-pocket costs and the maximum plan payment for any Part D enrollee could be higher or lower.
3This figure may, in fact, be higher to the extent that a Part D enrollee is reimbursed for out-of-pocket costs for covered Part D drugs covered under his or her plan by a group health plan, insurance or otherwise, or other third party arrangement.
Annual Deductible ($0-$250 in spending on covered Part D drugs) 100 percent $250 0 percent $0
Initial Benefit ($250.01-$2,250 in spending on covered Part D drugs) 25 percent1 $5002 75 percent1 $1,500
No coverage of costs ($2,250.01-$5,1003in spending on covered Part D drugs) 100 percent $2,8503 0 percent $0
Catastrophic Coverage (after the enrollee has incurred out-of-pocket costs on covered Part D drugs greater than $3,600; this is generally equivalent to $51003in covered Part D drug spending) The greater of: (1) 5 percent; or (2) $2 for a generic or preferred multiple source drug/$5 for other drugs.1 95 percent

In our proposed rule, we interpreted the provisions of section 1860D 2(b) of the Act to provide for two distinct types of standard prescription drug coverage-“defined standard coverage” and “actuarially equivalent standard coverage.” Section 1860D-2(b)(2)(A)(ii) of the Act provides that Part D sponsors offering actuarially equivalent standard prescription drug coverage will be permitted to substitute cost-sharing requirements (including tiered structures tied to Part D plan formularies and particular pharmacies in a Part D plan's network) for costs above the annual deductible and up to the initial coverage limit, provided that those alternative cost-sharing requirements are actuarially equivalent to an average expected coinsurance of 25 percent for costs above the annual deductible and up to the initial coverage limit. Alternative cost-sharing arrangements under actuarially equivalent standard coverage could include reducing cost-sharing to $0 for generic or preferred covered Part D drugs, as provided under section 1860D-2(b)(5) of the Act, as long as the cost-sharing structure is actuarially equivalent to an average expected coinsurance of 25 percent for costs above the annual deductible and up to the initial coverage limit.

Based on our interpretation of section 1860D-2(b)(5) of the Act, we also proposed allowing Part D plans offering actuarially equivalent standard coverage to establish cost-sharing of an amount that is actuarially equivalent to the expected cost-sharing above the out-of-pocket threshold. We proposed requiring that any alternative cost-sharing structure for costs in the catastrophic range (whether under actuarially equivalent standard coverage or enhanced alternative coverage) be actuarially equivalent to standard prescription drug coverage's structure of the greater of 5 percent coinsurance or $2/$5 copayments. We noted that any such alternative cost-sharing arrangements would be reviewed, along with the rest of a Part D plan's benefit design, to ensure that they do not discourage enrollment by certain Part D eligible individuals.

Except as otherwise provided below, the final rule adopts the criteria for standard prescription drug coverage set forth in § 423.104(e) of the proposed rule.

Comment: Several commenters felt that the benefit structure established in our proposed regulations was too complex and should be simplified to minimize beneficiary confusion.

Response: We do not have the statutory authority to simplify the benefit further, as suggested by this commenter. The MMA provides private plans with a great deal of flexibility to vary their benefit structures consistent with Congressional intent to ensure that Medicare beneficiaries have choices regarding outpatient prescription drug coverage under Part D that fit their particular needs and minimize beneficiary and Medicare costs.

Comment: One commenter asked how cross-licensed drugs will be classified as generics or as brands for the purpose of cost-sharing. The commenter also asks what the co-payments would be for multiple source drugs that are ordered “dispensed as written.”

Response: The amount of cost-sharing, and any variations in cost-sharing based on brands, generics, or other classifications will be determined by Part D plans.

Comment: Two commenters suggested alternative data sources to use in determining the annual percentage increase in the first several years of the Part D program. The first commenter recommended two data sources to use for years 2007 and 2008—the annual estimates of prescription drug expenditures in the CMS National Health Accounts data (based on census data and sample surveys of private retail pharmacy sales) and employer retiree health plan data (released by Pharmacy Benefit Managers and benefit consulting firms). Either of these sources of data could be used as a starting point, but should be adjusted to account for any difference in trend for Medicare-eligible individuals compared to the overall prescription trend. In addition, the trend in Part D will likely differ from the overall prescription drug trend due to the large volume negotiating power which could control the trend or allow manufacturers leeway to raise drug prices. FEHBP experience may be useful in accounting for such large volume influences in Part D. This commenter also suggested using our Office of the Actuary (OACT) procedure in place for Medicare Advantage to make coverage limit adjustments the following year for over- or under-stated trends. The commenter also noted that the Medicare Current Beneficiary Survey (MCBS) and the Medicare 5 percent sample are not available in a timely enough fashion to be useful data sources.

Another commenter recommended that we use the OACT spending growth projections that will underlie the Fiscal Year (FY) 2007 President's Budget Medicare baseline that will be published in February 2006. We could use the March 2006 OACT Medicare baseline estimates as a reference check on the OACT projections. OACT and the Congressional Budget Office (CBO) are preferred because they use the latest available empirical data based on MCBS, these data are the basis for the Medicare Trustees' Reports, and the data are widely accepted. In addition, this commenter recommended that OACT use the Consumer Price Index for Prescription Drugs and Medical Supplies (CPI-PD), issued in a timely fashion by the Bureau of Labor Statistics (BLS), as the basis for projecting the price inflation component of per capita Part D spending growth. This commenter thought that utilization growth should be based primarily on the analysis of the latest available MCBS data.

Response: We appreciate the ideas suggested by the commenters and will take these recommendations into consideration as we develop our strategy for determining the annual percentage increase in the first several years of the Part D drug benefit program. We will provide further detail regarding the sources of data to be used and how the annual percentage increase will be determined via operational guidance to Part D sponsors prior to the deadline for bid submissions.

b. Incurred Costs/TrOOP Limit

According to section 1860D-2(b)(4)(C) of the Act, beneficiary costs for Part D drugs are only considered incurred (for purposes of applicability toward beneficiary spending against the annual out-of-pocket limit) if they are incurred—

(1) Against any annual deductible, any applicable cost-sharing for costs above the annual deductible and up to the initial coverage limit, and any applicable cost-sharing for costs above the initial coverage limit and up to the out-of-pocket threshold;

(2) By the Part D enrollee (or by another person on behalf of that individual); paid on behalf of a low-income individual under the Part D subsidy provisions described in § 423.782 of the proposed rule; or paid on behalf of the enrollee under a SPAP defined in § 423.454 of the proposed rule; and

(3) On covered Part D drugs (in other words, Part D drugs that are either included in a Part D plan's formulary or treated as being included in a Part D plan's formulary as a result of a coverage determination, redetermination, or appeal under § 423.566, § 423.580, § 423.600, § 423.610, § 423.620, and § 423.630 of our final rule).

We also proposed that beneficiary costs incurred under the following circumstances count as incurred costs (with Part D plans explicitly accounting for such price differentials in the actuarial valuation of their coinsurance in their bids): (1) any differential between a network retail pharmacy's negotiated price and a network mail-order pharmacy's negotiated price for an extended (for example, 90-day) supply of a covered Part D drug purchased at a retail pharmacy; and (2) any differential between an out-of-network pharmacy's usual and customary price for a covered Part D drug purchased in accordance with the out-of-network access rules and the plan allowance for that covered Part D drug. As further explained below, because we have clarified that the differential for a 90-day supply dispensed at a retail network pharmacy will generally be a differential in cost-sharing and not negotiated price (in other words, the difference in cost sharing for the 90-day supply between the retail and mail-order network pharmacies), we have modified the definition of incurred costs in § 423.100.

Section 1860D-2(b)(4)(C)(ii) of the Act provides that any costs for which a Part D individual is reimbursed by insurance or otherwise, a group health plan, or another third-party payment arrangement do not count toward incurred costs; only costs paid by a Part D enrollee, or on behalf of a Part D enrollee by another person, will count as incurred, or TrOOP costs. This provision thus creates a distinction between all enrollee out-of-pocket expenditures and those that are counted as TrOOP expenditures.

Except as otherwise provided below, the final rule adopts the rules applicable to incurred costs set forth in § 423.100 of our proposed rule.

Comment: Several commenters urged us to count all beneficiary spending on Part D drugs whether on a Part D plan's formulary or not toward TrOOP.

Response: Section 1860D-2(b)(4)(C)(i) of the Act specifically excludes from the definition of the term “incurred costs” those costs incurred for Part D drugs that are not included (or treated as being included on a formulary as a result of a coverage determination, redetermination, appeal, or exception) on a Part D plan's formulary. Therefore, we do not have the statutory authority to permit the payments to count toward a Part D enrollees' TrOOP limit.

Comment: Many commenters supported our proposal that beneficiary costs incurred as a result of any differential between a network retail pharmacy's negotiated price and a network mail-order pharmacy's negotiated price for an extended (for example, 90-day) supply of a covered Part D drug purchased at a retail pharmacy count as an incurred costs for the purposes of TrOOP. Only one commenter opposed allowing such differentials to count toward TrOOP.

Many commenters supported our proposal that beneficiary costs incurred as a result of any differential between an out-of-network pharmacy's usual and customary price for a covered Part D drug purchased in accordance with the out-of-network access rules and the plan allowance for that covered Part D drug count as an incurred costs for the purposes of TrOOP. Only one commenter specifically opposed our proposal, stating that if the differential were allowed to count toward TrOOP, the use of retail pharmacies would not be cost-neutral to Part D plans because individuals who use retail pharmacies would reach the out-of-pocket limit sooner.

Response: We agree with the majority of commenters that it is appropriate to allow beneficiary payment differentials to count toward TrOOP in cases in which a beneficiary accesses a covered Part D drug consistent with the out-of-network policy in § 423.124(a) of our final rule.

Section 423.120(a)(6) of our proposed rule provided that a Part D enrollee who obtained a 90-day supply of a covered Part D drug at a network pharmacy that is a retail pharmacy rather than a network mail-order pharmacy would be required to pay for any differential in the negotiated price for the covered Part D drug. However, consistent with section 1860D-4(b)(1)(D) of the Act, which requires that the Part D enrollee pay for “any differential in charge” when accessing a 90-day supply of a covered Part D drug at a network retail pharmacy instead of a network mail-order pharmacy, we have clarified in § 423.120(b)(10) of our final rule that the beneficiary is not responsible for the difference in negotiated price but, rather, for any higher cost-sharing associated with purchasing the drug at a retail pharmacy rather that a mail-order pharmacy. Any such difference in cost-sharing would therefore automatically count toward a beneficiary's TrOOP expenditures, since the covered Part D drug in question is being purchased at a network pharmacy.

Comment: Several commenters asked us to define the term “person” such that a family member can pay for enrollees' cost-sharing on their behalf.

Response: Section 1860D-2(B)(4)(C)(ii) of the Act specifically mentions a family member as an example of a person who may pay cost-sharing on behalf of a beneficiary. We clarify that our proposed rule defined the term “person” to include a “natural person.” Such a definition of the term “person” thus permits other individuals, such as family members, to pay for covered Part D drug cost-sharing on behalf of Part D enrollees. We have therefore retained this definition of the term “person” in § 423.100 of our final rule.

Comments: Several commenters supported our proposed definition of the term “person,” which would allow financial assistance for beneficiary cost-sharing rendered by “bona fide” charities to count toward enrollee's out-of-pocket threshold. Some commenters requested that we clarify what constitutes a “bona fide” charity. Another commenter objected to Part D plan member financial assistance programs being treated differently from third-party charities for purposes of TrOOP.

Response: Our broad definition of the term “person” captures not only “bona fide” charities, but other charitable organizations as well. We note that any arrangement in accordance to which a charitable organization pays a Medicare beneficiary's cost-sharing obligations must comply with all applicable fraud and abuse laws, including, where applicable, the anti-kickback statute at section 1128B(b) of the Act, as well as the civil monetary penalty provision prohibiting inducements to beneficiaries at section 1128A(a)(5) of the Act. Thus, even if a charity is not a bona fide charity for purposes of Federal fraud and abuse law, any drug payments it makes on behalf of Part D enrollees would count toward TrOOP unless otherwise excluded as payments by a group health plan, insurance or otherwise, or similar third party arrangement. Charities that are established, maintained, or otherwise controlled by an employer or union will likely fall under our definition of “group health plan,” and any benefits supplementing Part D benefits that they provide will therefore be excluded from TrOOP on this basis.

Comment: We noted in the proposed rule that we were considering whether assistance in paying enrollees' out-of-pocket cost-sharing obligations provided through prescription drug patient assistance programs sponsored by pharmaceutical manufacturers would be allowed under Federal fraud and abuse laws, including the anti-kickback statute, section 1128B(b) of the Act, as well as the civil monetary penalty provision at Section 1128A(a)(5) of the Act.

We received a number of comments requesting clarification regarding whether assistance in paying enrollees' out-of-pocket cost-sharing obligations provided through pharmaceutical manufacturer-sponsored patient assistance programs (PAPs) would be permissible under Federal fraud and abuse laws and request that we work with the OIG to develop guidelines. Some commenters believe that financial assistance and product donations provided by PAPs should be allowed to count toward beneficiaries' TrOOP expenditures. Some of these commenters recommended that product donations be counted as incurred costs and valued at the price beneficiaries would have paid at a network pharmacy (the negotiated price). One commenter recommended that we allow manufacturers to provide funds to Part D plans so that Part D plans can apply appropriate criteria and make payments on behalf of manufacturers. Another commenter cautions us that without a change in the current interpretation of Federal fraud and abuse laws preventing PAPs from providing cost-sharing assistance, many low-income beneficiaries may avoid filling scripts, resort to splitting pills, and interrupt critical drug therapy.

Response: Regardless of whether a manufacturer patient assistance program is a bona fide charity for the purpose of Federal fraud and abuse laws, any drug payments it makes on behalf of Part D enrollees would count toward TrOOP unless these organizations qualify as group health plans, insurance or otherwise, or similar third-party payment arrangements. However, any arrangements pursuant to which a charitable organization pays a Medicare beneficiary's cost-sharing obligations must comply with Federal fraud and abuse laws, where applicable, including the anti-kickback statute at section 1128(b) of the Act, as well as the civil monetary penalty provision prohibiting inducements to beneficiaries at section 1128A(a)(5) of the Act.

A related issue although it is not mentioned in the proposed rule is whether pharmacies can waive or reduce Part D cost-sharing obligations given Federal fraud and abuse laws and, if they can, whether such waived or reduced cost-sharing should count toward a beneficiary's TrOOP limit. Although we did not receive comments on this matter, we would like to clarify our policy. Under the new exception to the anti-kickback statute added by section 101(e) of the MMA, pharmacies are permitted to waive or reduce cost-sharing amounts provided they do so in an unadvertised, non-routine manner after determining that the beneficiary is financially needy or after failing to collect the cost-sharing amount despite reasonable efforts, as set forth in section 1128A(i)(6)(a) of the Act. In addition, a pharmacy may waive or reduce a beneficiary's Part D cost-sharing without regard to these standards for beneficiaries enrolled in a Part D plan eligible for the low-income subsidy under section 1860D-14 of the Act, provided the pharmacy has not advertised that the waivers or reductions of cost-sharing are available. Depending on the circumstances, pharmacies that waive or reduce cost-sharing amounts for covered Part D drugs without following the requirements of the pharmacy waiver safe harbor could be subject to civil monetary penalties and exclusion from participating in Federal health care programs, as well as criminal fines and imprisonment under the anti-kickback statute.

We will allow waivers or reductions of Part D cost-sharing by pharmacies to count toward TrOOP. Not allowing such waived or reduced cost-sharing to count toward TrOOP would make it more burdensome for Part D plans given the need to track down whether cost-sharing was actually incurred by a beneficiary rather than a pharmacy. Moreover, we believe this option is consistent both with the definition of “person” in the proposed rule (making waiver or reduction of cost-sharing applicable toward an enrollee's incurred costs), and with Congressional intent in amending the anti-kickback statute to provide for a pharmacy waiver safe harbor.

Comment: Several commenters asked that coverage supplementing the benefits available under Part D coverage provided by various government programs be allowed to count as incurred costs for purposes of TrOOP. These government insurers and programs included Medicaid (using State-only funds), Medicaid Section 1115 “Pharmacy Plus” waiver programs, Federally qualified health centers (FQHCs), the Department of Veterans Affairs health care program, and local or State indigent drug programs.

In addition, a substantial number of commenters urged us to allow coverage that supplements the benefits available under Part D coverage that is provided by AIDS Drug Assistance Programs (ADAPs) funded under the Ryan White CARE Act to count as incurred costs. These commenters argued that ADAPs are an integral component of the safety net for HIV/AIDS patients because they fill coverage gaps in public and private insurance for critical HIV/AIDS drug treatments. They argue that if ADAP supplemental coverage payments do not count as incurred costs, ADAPs will have little incentive to coordinate coverage with Part D plans, particularly if Part D plans impose user fees on ADAPs. Many of these commenters also urged us to define ADAPs as SPAPs so that their supplemental coverage will be considered incurred costs for the purposes of TrOOP.

Several commenters also objected to the inclusion of IHS and Indian Tribes and Tribal organizations, and urban Indian organizations (collectively I/T/U) facilities in the definition of “insurance or otherwise” in § 423.100 of our proposed rule. Since IHS beneficiaries—by custom and regulation—may not be charged any cost-sharing, I/T/U facilities must provide supplemental coverage for all cost-sharing that would have been assessed by a Part D plan. For this reason, the commenters argue, our proposed regulations essentially ensure that most IHS beneficiaries will never incur costs above the out-of-pocket threshold and thus subject AI/AN enrollees and the I/T/U pharmacies that serve them to severe financial penalties in comparison to non-AI/ANs and non-I/T/U pharmacies. I/T/U facilities will have to continue to use their limited appropriated funds to pay the prescription drug costs of AI/AN beneficiaries. Commenters further argue that the proposed exclusion of financial assistance for cost-sharing provided by I/T/U facilities is not required by the statute and is simply an interpretation of the term “insurance or otherwise.” Given the Federal government's obligation to provide health services to AI-ANs based on the government-to-government relationship between the United States and Tribes, these commenters argue that IHS and tribal health programs are not “insurance or otherwise,” but instead “persons” given that I/T/U facilities are the functional equivalent of “family members.” We were also asked to clarify why supplemental coverage of deductible costs counts toward a beneficiary's deductible limit, but supplemental coverage of cost sharing above the deductible and initial coverage limit, does not count toward TrOOP.

Response: Section 1860D-24(a)(1) of the Act extends the coordination of benefits provisions required for SPAPs to entities providing other prescription drug coverage—including Medicaid programs, Section 1115 waiver demonstrations, group health plans, Federal Employee Health Benefits Program (FEHBP), military coverage (including TRICARE), and “such other health benefit plans or programs that provide coverage or financial assistance for the purchase or provision of prescription drug coverage on behalf of Part D eligible individuals as the Secretary may specify.” Section 1860D-24(b) of the Act defines includes among these entities providing other prescription drug coverage some government payers, which when coupled with section 1860D-24(a)(2) of the Act, which specifically applies the TrOOP provisions at 1860D-2(b)(4)(D) of the Act to Rx plans suggests that the Congress intended for the term “insurance or otherwise” to include government benefit plans or programs that provide health care or pay the cost of covered Part D drugs. Although section 1860D-24(b) of the Act does not list all the government health care programs we consider to be “insurance or otherwise,” in the absence of a meaningful distinction between those entities specifically listed in section 1860D-24(b)—Medicaid, SPAPs, TRICARE, and FEHBP—and other government health care programs, allowing payments from such other programs to count toward TrOOP would be arbitrary. Further, in giving the Secretary the authority to identify other entities providing other prescription drug coverage under section 1860D-24(b)(5) of the Act, the Congress contemplated that its list of entities providing other prescription drug coverage was not exhaustive.

For additional clarification of this issue, we have split the definition of “insurance or otherwise,” in our proposed rule into two separate definitions—“insurance” and “or otherwise”—in our final rule. The term insurance (at § 423.100 of our final rule) refers to a health plan that provides, or pays the cost of covered Part D drugs, including, but not limited to health insurance coverage, a MA plan, and a PACE organization. We note that our definition of “insurance” does not modify the definition of “health plan” at 45 CFR 160.103 of the HIPAA Administrative Simplification Regulations, or any interpretation thereof issued by the Department of Health and Human Services.

We believe that the phrase “or otherwise” refers to government-funded health programs. We have defined the term “government-funded health programs” at § 423.100 of our final rule to mean any program established, maintained, or funded—in whole or in part—by the Federal government, the governments of States or political subdivisions of States, or any agency or instrumentality of these governments which uses public funds in whole or in part to provide to, or pay on behalf of, an individual the cost of Part D drugs. Thus, insurance or otherwise encompasses not just traditional health insurance coverage that is not considered a group health plan, but also government programs and entities (including the Department of Veterans Affairs (VA), IHS, Federally Qualified Health Centers (FQHCs), Department of Labor (DOL) Federal Workers' Compensation Program), government insurers (including Medicaid, Medicaid 1115 demonstrations, and the State Children's Health Insurance Program (SCHIP)), and government-sponsored funds (including black lung benefits, Ryan White CARE Act funds, and State special funds that assist certain individuals with their medical costs, such as a special fund for AIDS patients).

We believe we have defined these terms consistent with the Congress's intent of reducing incentives for current employers, other insurers, and government programs to reduce their current levels of coverage. Because costs for covered Part D drugs paid by insurance or otherwise on behalf of a Part D enrollee do not, as previously discussed, count as incurred costs, any coverage that supplements the benefits available under Part D coverage that are provided to beneficiaries by Medicaid, Medicaid Section 1115 “Pharmacy Plus” waiver programs, the VA health care program, the IHS, ADAP programs, and local or State indigent drug programs would not count as an incurred cost for purposes of TrOOP. We note, however, that to the extent that a State provides assistance with covered Part D costs to Part D enrollees with State-only funds and meets the requirements of a State Pharmaceutical Assistance Program as specified in § 423.464(e)(1), such assistance does count as an incurred cost as provided by section 1860D-2(b)(4)(C)(ii) of the Act. However, if an entity providing for or paying the cost of drugs receives a government grant none of which is used to pay for drugs (for example, a low-income housing grant)—such an entity is not considered a government-funded program. On the other hand, if an entity pays for drugs using a mix of private and public funds, the entity is considered a government-funded health program, and all of its drug spending is excluded from TrOOP.

As mentioned above, Pharmacy Plus program costs, including State spending, cannot be counted towards TrOOP because Pharmacy Plus programs are funded under Medicaid and therefore do not qualify as SPAPs. For this reason, we believe that, generally, States will be better off and will realize savings if they restructure their prescription drug programs as SPAPs, rather than continuing their Pharmacy Plus programs. Their savings could be used in a variety of ways, such as directly paying for their enrollees' Part D premiums, wrapping around the Part D benefit by paying for the required cost-sharing, or paying Part D plans for supplemental benefits.

According to IHS estimates, we anticipate that a large proportion of AI/ANs will be eligible for low-income subsidies under Part D, which should significantly limit the financial impact on I/T/U facilities. For those AI/ANs not eligible for the low-income subsidies and enrolled in a Part D plan, the IHS will still obtain some benefit from Part D coverage because I/T/U facilities participating in Part D plan networks will be reimbursed for 75 percent of spending (on average) between the deductible and the initial coverage limit. Moreover, AI/AN enrollees will experience no difference in the way they obtain their prescription drugs to the extent that they use I/T/U pharmacies or IHS-contracted pharmacies.

ADAPs cannot be considered SPAPs because these programs receive Federal funding. As discussed in subpart J, we have interpreted section 1860D-23(b) of the Act, which requires SPAPs to be State programs that provide financial assistance for the purchase of provision of prescription drugs, to mean that an SPAP must provide such assistance with State funds. Therefore, the definition of the term SPAP excludes any program in which program funding is from Federal grants, awards, contracts, entitlement programs, or other Federal sources of funding (though we clarify that this does not exclude some Federal administrative funding or incidental Federal monies). Since ADAPs receive Federal funding, they cannot be defined as SPAPs under § 423.454 of our final rule. However, according to HRSA estimates, we anticipate that a substantial majority of ADAP enrollees will qualify for low-income subsidies. For those ADAP enrollees who do not receive a full or partial subsidy, we estimate that the Part D benefit would pay 75 percent, on average, of an enrollee's covered Part D drug expenditures between the deductible and initial coverage limit. To ensure coordination of benefits for the HIV/AIDS and population, as well as to eliminate any barriers to enrolling in Part D benefits, the ADAP program may wish to pay for their beneficiaries' premiums to eliminate any barriers to Part D benefits.

Per several commenters' request, we also wish to clarify that section 1860D-2(b)(4)(C) of the Act defines the term “incurred costs” only for the out-of-pocket threshold. Thus, the fact that coverage that supplements the benefits available under Part D coverage that is provided by certain entities is excluded from the definition of incurred costs for purposes of TrOOP has no bearing on counting that supplemental coverage against the deductible. In other words, ADAPs, IHS, and other programs providing coverage that supplements the benefits provided under Part D may subsidize costs incurred against a Part D enrollee's deductible for those patients unable to afford these costs. The provision of the supplemental coverage will not affect an enrollee's ability to satisfy the deductible and therefore qualify for reduced cost-sharing between the deductible and the initial coverage limit. In addition, these entities are not precluded from paying for a Part D enrollee's cost-sharing above the out-of-pocket threshold once a beneficiary has accumulated incurred costs in excess of the out-of-pocket threshold.

Comment: We requested comments regarding the treatment of health savings account (HSAs), flexible savings arrangements (FSAs), health reimbursement arrangements (HRAs), and medical savings accounts (MSAs) vis-à-vis our definitions of “group health plan,” “insurance or otherwise,” and “third party payment arrangements.” Many commenters suggested that HSAs, FSAs, MSAs, and HRAs be excluded from our proposed definition of “group health plan” such that any distributions used by Part D enrollees to pay out-of-pocket costs associated with cost-sharing for covered Part D drugs are allowed to count as incurred costs. These commenters agreed that these funds are analogous to beneficiaries' bank accounts. Some of these commenters asked that we specify that payment of out-of-pocket expenses via these accounts count toward TrOOP only when such accounts are bona fide arrangements set up in accordance with IRS rules and guidance, such funds are not limited to paying prescription drug expenses, and individuals have control over how the funds from these accounts are utilized. One commenter notes that any exemption of HSAs, FSAs, MSAs, and HRAs from our definition of “group health plan” should be written carefully to avoid circumvention of Medicare Secondary Payer (MSP) laws. Another commenter noted that from Part D plans' perspective, it makes the most sense administratively and operationally to allow funds from these accounts to count toward incurred costs because it will be difficult for them to identify and differentiate between different sources of enrollee funds and carve out the payments from TrOOP calculations. One commenter noted that HRAs present a more difficult case, since they are by definition employer-funded only. However, this commenter noted that, from an administrative perspective, it may be difficult to distinguish between HRAs and other types of personal health savings vehicles.

In contrast, several commenters disagreed that HSAs and similar accounts should be exempted from our definition of “group health plan.” Some of these commenters believed that contributions from one type of employer-sponsored benefit should not receive differential treatment than other types, particularly when contributions from employer-sponsored group health coverage are not being counted as incurred costs. One commenter thought that we had no statutory authority to create a special rule to exempt HSAs from our definition of “group health plan.” This commenter was concerned about non-employer sponsored HSAs, that these funds are not like bank accounts given the tax breaks associated with them, that allowing these funds to count toward TrOOP discriminates against retirees with employer-sponsored drug coverage, and that we would create a substantial windfall and unjustified double taxpayer subsidy.

Response: We agree with the majority of the commenters that HSAs, FSAs, and MSAs are essentially analogous to a beneficiary's bank account, and that distributions from these personal health savings vehicles should count as incurred costs for the purposes of the out-of-pocket threshold. However, as one commenter noted, we believe that HRAs are fundamentally different from these personal health saving vehicles because they are required to be solely employer-funded. Although employers are permitted to contribute funds to HSAs, FSA, and MSAs and may administer the benefits associated with these accounts, employees are not foreclosed from contributing to these vehicles as they are under HRAs. Excluding FSAs, MSAs, and HSAs from the definitions of “insurance” and “group health plan” for purposes of calculation of TrOOP expenditures will further our objective of encouraging beneficiaries to set aside their own money for drug expenses by allowing those funds to count toward enrollees' TrOOP expenditures. In order to clarify that distributions from HSAs, FSAs, and MSAs can be counted toward a Part D enrollee's incurred costs, we have revised the definitions in § 423.100 of our final rule accordingly and added a definition of “personal health savings vehicles” that is limited to HSAs, FSAs, and Archer MSAs.

We note that the term “group health plan” is used in reference to TrOOP, creditable coverage, and the retiree subsidy in our final rule, but that we do not define the term uniformly in our final rule. Section 1860D-22(c) of the Act explicitly defines “group health plan” to include ERISA plans, which may include an FSA, MSA, and, in limited circumstances, an HSA. The reference to “group health plan” under the creditable coverage provisions in section 1860D-13(b)(4)(C) of the Act states that a group health plan includes a qualified retiree prescription drug plan as defined under section 1860D-22 of the Act, which is in turn based on the definition of “group health plan” under section 1860D-22(C) of the Act and thus may include an MSA or, in limited circumstances, an FSA or HSA. In contrast, the TrOOP provisions simply refer to a “group health plan,” without specifying what this term may include. Given that the statutory references to “group health plan” under the TrOOP and creditable coverage provisions use different language, and that the policies underlying these issues are different, we have adopted two different definitions of the term “group health plan”: one with regard to the TrOOP provisions, and another with regard to the remaining provisions of Part D, including the creditable coverage and the retiree subsidy provisions. While the Congress specifically enumerated two types of coverage to be considered group health plans with regard to creditable coverage, the TrOOP provisions do not.

We also note that the definition of a “group health plan” used to implement the Part D drug benefit will differ from the definition of “group health plan” used by the Medicare Secondary Payer (MSP) program for recovery of Medicare payments. While both of our Part D definitions of “group health plan” are based on the “ERISA” definition set forth at 29 U.S.C. 1167(1), the MSP definition is taken from the Internal Revenue Service (IRS) definition of “group health plan” at 26 U.S.C. 5000(b)(1). Therefore, the definitions of “group health plan” in § 423.100 and § 423.4 of our final rule do not permit circumvention of the MSP laws since they will not apply in the MSP context.

b. Alternative Prescription Drug Coverage

Section 1860D-2(c) of the Act provides that a Part D sponsor may offer an alternative prescription drug benefit design, provided that the Part D sponsor applies for and receives our approval for the proposed alternative. In order to receive approval to offer an alternative prescription drug benefit design, a Part D sponsor will have to meet the requirements related to actuarial equivalence described in section 1860D-2(c)(1) of the Act, and must use defined standard coverage (and not actuarially equivalent standard coverage) as a fixed point of comparison.

  • Basic Alternative Coverage

Beyond the required parameters for alternative coverage discussed above, we interpreted the provisions of section 1860D-2(c) of the Act, together with section 1860D-2(a)(1) of the Act, as providing for two forms of alternative coverage—either “basic alternative coverage” or “enhanced alternative coverage.” Basic alternative coverage refers to alternative coverage that is actuarially equivalent to defined standard prescription drug coverage. Enhanced alternative coverage refers to alternative coverage that exceeds defined standard coverage by offering supplemental benefits.

Within the parameters for alternative prescription drug coverage described above, a Part D sponsor with a basic alternative prescription drug benefit design can theoretically—by combining features such as a reduction in the deductible, changes in cost-sharing, and a modification of the initial coverage limit—still maintain an actuarial value of coverage equal to defined standard prescription drug coverage.

  • Enhanced Alternative Coverage

Section 423.104(f) of our proposed rule permitted Part D sponsors to provide qualified prescription drug coverage that includes supplemental benefits. We referred to any Part D benefit package that includes supplemental benefits as “enhanced alternative coverage.”

Enhanced alternative coverage includes basic prescription drug coverage and supplemental benefits. The requirements for the supplemental benefits that may be included in enhanced alternative coverage are found in section 1860D-2(a)(2) of the Act. These supplemental benefits will supplement basic prescription drug coverage, providing for a package of benefits that exceeds the actuarial value of defined standard coverage. Supplemental benefits can consist of:

+Reductions in cost-sharing that increase the actuarial value of the coverage beyond that of defined standard coverage; or

+Coverage of drugs that are specifically excluded from the definition of Part D drugs under section 1860D-2(e)(2)(A) of the Act and § 423.100 of our proposed rule.

Under section 1860D-2(a)(2)(B) of the Act, a PDP sponsor would not be permitted to offer a prescription drug plan that provided enhanced alternative coverage in a particular service area unless it also offers a prescription drug plan that provides only basic prescription drug coverage (which we defined as either standard prescription drug coverage or basic alternative coverage, with access to negotiated prices) in that same area.

Similarly, as provided under section 1860D-21(a)(1)(A) of the Act, beginning on January 1, 2006, an MA organization cannot offer an MA coordinated care plan in a service area unless that plan, or another MA plan offered by the same organization in the same service area, includes required prescription drug coverage. As defined in § 423.100 of our proposed rule, required prescription drug coverage, for the purposes of an MA organization offering an MA-PD plan, included either: (1) basic prescription drug coverage; or (2) enhanced alternative coverage, provided there is no MA monthly supplemental beneficiary premium applied under the MA-PD plan. The enhanced alternative coverage could be provided without a monthly supplemental beneficiary premium only if a MA-PD plan applied a credit against the otherwise applicable premium of rebate dollars available under section 1854(b)(1)(C) of the Act.

Rebate dollars represent the dollars available for supplemental (and other) benefits when an MA plan's risk-adjusted non-drug bid is under the risk-adjusted non-drug monthly benchmark amount. In other words, to the extent that an MA-PD plan chooses to provide enhanced alternative coverage for no additional premium through the application of rebate dollars, the enhanced alternative coverage would constitute required coverage for the purposes of meeting the requirement in section 1860D-21(a)(1)(A) of the Act.

As provided under section 1860D-21(a)(1)(B)(i) of the Act, an MA organization could not offer prescription drug coverage (other than that required under Parts A and B of Medicare) to enrollees of a medical savings account (MSA) plan. Under section 1860D-21(a)(1)(B)(ii) of the Act, an MA organization also could not offer prescription drug coverage (other than that required under Parts A and B of Medicare) under another type of MA plan—including a private fee-for-service plan—unless the drug coverage it provided under that MA plan consisted of qualified prescription drug coverage and met our requirements regarding required prescription drug coverage.

Given changes in § 417.440(b) of our final rule (described in subpart T), we clarify in our final rule the requirements associated with the offering of enhanced alternative coverage by cost plans. As provided in § 423.104(f)(4)(i) of our final rule, a cost plan that elects to offer qualified prescription drug coverage under Part D may offer enhanced alternative coverage only as an optional supplemental benefit (under § 417.440(b)(2)(ii)), and only if the cost plan also offers basic prescription drug coverage.

As provided in § 423.104(f)(4)(ii) of our final rule, a cost plan that elects to offer Part D coverage as an optional supplemental benefit (under § 417.440(b)(2)(ii)) may only do so if the coverage it offers consists of qualified prescription drug coverage. However, a cost plan that does not offer qualified prescription drug coverage may provide prescription drug coverage that is not qualified prescription drug coverage, and the requirements of Part D do not apply to the coverage.

Except as otherwise provided below, the final rule adopts the rules of alternative coverage set forth in § 423.104(f) and § 423.104(g) of our proposed rule.

Comment: One commenter recommended that we issue regulations encouraging basic alternative coverage including optional drugs because it will offer beneficiaries a more comprehensive benefit package.

Response: We do not have the statutory authority to allow basic alternative coverage to include drugs that are statutorily excluded from the definition of Part D drugs. Coverage of drugs otherwise excluded from the definition of Part D drug under section 1860D-2(e)(2)(A) of the Act is considered a supplemental benefit as provided under section 1860D-2(a)(2) of the Act. As specified in § 423.100 of our proposed and final rules, basic alternative coverage must be actuarially equivalent to defined standard coverage and cannot include any supplemental benefits. The only way that Part D plans may provide supplemental benefits, to include coverage of drugs excluded from the definition of Part D drugs under section 1860-D(2)(e)(2)(A) of the Act, is by providing enhanced alternative coverage.

Comment: One commenter sought clarification as to whether alternative coverage would be subject to the same kind of out-of-pocket cost limits and coverage thresholds instituted under standard prescription drug coverage.

Response: In accordance with section 1860D-2(b)(A)(i)(I) of the Act, Part D plans offering enhanced alternative coverage may only reduce certain cost-sharing specifically, a reduction in the deductible, a reduction in the coinsurance percentage or copayments applicable to covered Part D drugs obtained between the annual deductible, and the initial coverage limit, or an increase in the initial coverage limit. Section 1860D-2(A)(i) does not permit Part D plans to offer enhanced alternative drug coverage consisting of a reduction of the out-of-pocket threshold under § 423.104(d)(5)(iii) of our final rule. Section 1860D-2(c)(3) of the Act also requires that Part D plans offering alternative prescription drug coverage provide the same protection against high out-of-pocket expenditures as defined standard coverage. Thus, enhanced alternative coverage may fill in some of the coverage gaps in defined standard coverage, but it cannot affect the true out-of-pocket threshold described in § 423.104(d)(5)(B)(iii) of our final rule, which will be $3,600 in 2006. In other words, beneficiaries must still incur $3,600 (in 2006) in true out-of-pocket expenses before they can benefit from the Medicare catastrophic coverage cost-sharing amounts (the greater of 5 percent coinsurance or $2/$5 copayments), and before Part D plans are eligible to receive reinsurance subsidies from Medicare. As with actuarially equivalent standard coverage, Part D plans can provide an actuarially equivalent version of the coverage provided after the true out-of-pocket threshold is met. In addition, enhanced alternative coverage can improve this coverage.

Comment: Several commenters opposed the provisions of § 423.104(f) of our proposed rule and recommended that the final rule exclude provisions for enhanced alternative coverage. These commenters argue that this section exceeds the statutory authority supplied to the Secretary under the MMA and that allowing such Part D plans to be offered would make it impossible to make a valid comparison between Part D plans, thus making it more difficult for beneficiaries to choose a Part D plan.

Response: We disagree with these commenters. Section 1860D-2(a)(2) of the Act provides that qualified prescription drug coverage may include supplemental prescription drug coverage consisting of: (1) reductions in cost-sharing (for example, a reduction in the deductible, a reduction in the coinsurance percentage or copayments applicable to covered Part D drugs obtained between the annual deductible and the initial coverage limit, or an increase in the initial coverage limit), provided these reductions in cost-sharing increase the actuarial value of the benefits provided above the actuarial value of basic prescription drug coverage; or (2) coverage of drugs that are specifically excluded as Part D drugs under section 1860D-2(e)(2)(A) of the Act. “Enhanced alternative coverage” is simply our term for qualified prescription drug coverage that includes these supplemental benefits specifically permitted by the statute. We understand commenters' concerns about beneficiaries' ability to compare Part D plan features given the benefit flexibility design accorded to Part D plans under the MMA and will work to ensure that our comparative information is as standardized and user friendly as possible.

c. Negotiated Prices

Section 1860D-2(d)(1) of the Act requires that a Part D sponsor provide beneficiaries with access to negotiated prices for covered Part D drugs. As required by section 1860D-2(d)(1)(B) of the Act, negotiated prices will have to take into account negotiated price concessions for covered Part D drugs such as discounts, direct or indirect subsidies, rebates, and direct or indirect remunerations, and would include any applicable dispensing fees. Access to negotiated prices will be provided even when no benefits would otherwise be payable on behalf of an enrollee due to the application of a deductible, the initial coverage limit, or other cost-sharing.

As required under section 1860D-2(d)(1)(C) of the Act, prices negotiated with manufacturers for covered Part D drugs by either (1) a Part D plan, or (2) a qualified retiree prescription drug plan for covered Part D drugs provided on behalf of Part D eligible individuals will not be taken into account in making best price determinations under the Medicaid program.

Section § 423.104(h)(3) of our proposed rule required that Part D sponsors disclose to us all aggregate negotiated price concessions including discounts, direct or indirect subsidies, and direct or indirect remunerations, they obtain from each pharmaceutical manufacturer that are passed through to the Medicare program in the form of lower subsidies or to beneficiaries in the form of: (1) lower monthly beneficiary premiums; or (2) lower covered Part D drug prices at the point of sale.

As provided under section 1860D-2(d)(2) of the Act, information on negotiated prices reported to us for the purposes of ascertaining the level of pass-through will be protected under the confidentiality provisions applicable to Medicaid pricing data under section 1927(b)(3)(D) of the Act. However, that these confidentiality protections did not preclude audit and evaluation of negotiated price concession information by the HHS OIG.

As provided under section 1860D-2(d)(3) of the Act and codified in § 423.104(h)(4) of our proposed rule, we are authorized to conduct periodic audits either directly or through contracts with other organizations of the financial statements and records of Part D sponsors pertaining to the Part D plans they offer. As required in section 1860D-2(d)(3) of the Act, this auditing will be performed with the ultimate goal of protecting the Medicare program against fraud and abuse, as well as ensuring proper disclosures and accounting under Part D.

Except as otherwise provided below, the final rule adopts the rules for negotiated prices set forth in § 423.104(h) of our proposed rule.

Comment: Some commenters believed that the phrase “take into account” in our definition of negotiated prices is not strong enough, and that we should establish minimum requirements for the proportion of total negotiated price concessions passed through to beneficiaries. Suggestions ranged from a majority (75 to 80 percent) to 100 percent of negotiated price concessions.

Response: Section 1860D-2(d)(1)(B) of the Act specifically requires that negotiated prices “shall take into account negotiated price concessions, such as discounts, direct or indirect subsidies, rebates, and direct or indirect remunerations.” Had the Congress intended that all negotiated price concessions be passed through to beneficiaries, they would have used a phrase other than “take into account” in the definition of the term “negotiated prices.”

In addition, section 1860D-2(d)(2) of the Act specifically requires that Part D plans disclose to us aggregate negotiated price concessions that are passed through to enrollees and to us through lower subsidies, lower monthly premiums, and lower prices through pharmacies and other dispensers. In requiring Part D plans to disclose to us the extent to which they pass through negotiated price concessions to enrollees and to us, section 1860D-2(d)(2) of the Act anticipates that Part D plans might not pass through all negotiated price concessions. Therefore, we interpret the definition of the term negotiated prices in section 1860D-2(d)(1)(B) of the Act as requiring Part D plans to pass on to enrollees some, but not necessarily all, of these price concessions and have clarified this interpretation in our definition of the term “negotiated prices” in § 423.100 of our final rule. We believe that market competition will encourage Part D plans to pass through to enrollees a high percentage of the negotiated price concessions they obtain in the form of negotiated prices at the point of sale. Establishing minimum threshold levels for the pass-through of negotiated price concessions would have the effect of undercutting market competition, as Part D plans might cluster their negotiated prices around that threshold.

Comment: Some commenters recommended that we clarify how price concessions will be passed through to the pharmacy and to the beneficiaries. Some of these commenters specifically asked us to ensure that Part D plans, not pharmacists, bear the costs of discounts.

Response: The Part D benefit was established by the MMA as a market-based model under which marketplace competition ensures that enrollees receive low prices for prescription drugs. Given this market-based approach envisioned by the Congress, we are wary of regulating negotiations between private parties particularly regarding the specifics of price negotiations so as to ensure that enrollees receive competitive prices on their covered Part D drugs. We note, as well, that pharmacies are not required to contract with Part D plans. To the extent that pharmacies believe that the discounts they are being asked to offer are too high, they can refuse to participate in Part D plan pharmacy networks. Given our pharmacy access standards at § 423.120(a)(1), we expect that pharmacies will have some leverage vis-à-vis the payment provisions in Part D plan contracts.

Comment: Two commenters stated that they considered our requirement that pharmacies pass through negotiated prices during coverage gaps and for non-covered formulary drugs to be price controls.

Response: Section 1860D-2(d)(1) of the Act requires, as implemented under § 423.104(g)(1) of our final rule, that a Part D sponsor provide enrollees with access to negotiated prices for covered Part D drugs even when no benefits would otherwise be payable on behalf of an enrollee due to the application of a deductible, the initial coverage limit, or other cost-sharing. We interpret the reference to the lack of payable benefits due to the application of the initial coverage limit as referring to that portion of covered Part D drug expenditures between the initial coverage limit and the threshold for catastrophic coverage. In that expenditure range, a beneficiary enrolled in standard prescription drug coverage would be responsible for 100 percent cost-sharing. These are still covered Part D drugs, and enrollees should be able to benefit from negotiated prices during the coverage gap.

We clarify that negotiated prices do not have to be made available for non-covered Part D drugs. However, as we stated in the preamble to our proposed rule, we are interpreting the phrase “or other cost-sharing” as a reference to Part D plan designs that include, as part of their formulary design, access to negotiated prices on certain drugs but at a tier within their formulary in which the Part D plan would pay no benefits and the enrollee would be responsible for 100 percent cost-sharing (in other words, a negotiated price would be available and the drug would be on the Part D plan's formulary, but the beneficiary would always be responsible for 100 percent of the drug's negotiated price). These drugs would therefore be formulary drugs and would have to be offered at negotiated prices. As stated elsewhere in this preamble, however, we note that we will review formulary design as part of our benefit package review to ensure that Part D plans do not establish formulary structures (including tiered cost-sharing) that substantially discourage enrollment by certain beneficiaries. To the extent that Part D plans propose using certain cost-sharing tiers (including, but not limited to, 100 percent cost-sharing tiers) in a discriminatory fashion, they would not be allowed.

In addition, we clarify that we interpret the requirement that negotiated prices always be provided to mean that uniform negotiated prices must be available to beneficiaries for a particular drug when purchased from the same pharmacy. In other words, the negotiated price for a particular drug will be the same, at a particular pharmacy, regardless of whether a beneficiary's drug spending is between $0 and the deductible, between the deductible and initial coverage limit, between the initial coverage limit and the out-of-pocket threshold, or in excess of the out-of-pocket threshold. We believe that non-uniform negotiated prices would discourage enrollment by certain Part D eligible individuals in violation of section 1860D-11(e)(2)(D)(i) of the Act and, therefore, plans will not be able to apply differential negotiated prices to any drug purchased from a given pharmacy.

Comment: Other commenters recommended that the definition of the term “negotiated price” reflect the price to the Part D plan net of any rebates, discounts, or other price concessions paid to the Part D plan for a covered Part D drug prescription obtained from either a retail or mail-order pharmacy. Some commenters asked that price concessions not be allowed to artificially lower the cost of mail order prescriptions.

Response: Part D sponsors will negotiate prices with pharmacies and manufacturers, and we assume based on current market practices that negotiated prices will vary within a retail pharmacy network, as well as between retail and mail-order pharmacies. How a Part D sponsor nets out negotiated price concessions in its negotiated prices is at the discretion of the Part D sponsor, but we expect that competition will create incentives for Part D sponsors to offer reasonable negotiated prices. Ultimately, however, these pricing issues are between a Part D sponsor and the network pharmacies and manufacturers with whom the Part D plan negotiates price concessions.

Comment: Some commenters recommended that Part D plans be required to reimburse pharmacies to recover costs of purchasing, handling, and dispensing products to beneficiaries.

Response: As provided elsewhere in this preamble, negotiated prices will include any dispensing fees for covered Part D drugs related to the transfer of possession of the covered Part D drug from the pharmacy to the beneficiary, including charges associated with mixing drugs, delivery, and overhead. As provided in section 1860D-11(i) of the Act, we cannot intervene in negotiations between pharmacies and Part D plans. Thus, the extent to which Part D plans reimburse pharmacies for their entire dispensing costs will depend on the outcome of those negotiations.

Comment: Two commenters noted that our definition of the term “negotiated prices” appears to envision network model Part D plans, but that MA organizations and cost plans that own and operate their own pharmacies do not negotiate reimbursement rates with contract pharmacies. One commenter recommended that negotiated prices for such MA organizations and cost plans be defined as the prescription charge established by the organization, and that such charge include the acquisition cost of the drug, dispensing, operational, capital, overhead, and margin costs. The commenter suggested that, in determining whether Part D plans' negotiated prices meet the standard of section 1860D-2(d)(1)(B) of the Act, we could either compare an MA organization's negotiated prices to negotiated prices of network model Part D plans in the same market or, alternatively, require the MA organization to demonstrate how it takes price discounts it receives from manufacturers into account in its pricing methodology or formula. Another commenter suggested that we permit such MA organizations to establish a pricing methodology that reflects a good faith effort to reflect prices analogous to those that would be negotiated by an MA organization with third party pharmacy providers, and that we consult with affected MA organizations in establishing this policy.

Response: We clarify that our definition of the term “negotiated prices” in § 423.100 of the final rule requires that “discounts, direct or indirect subsidies, rebates, other price concessions, and direct or indirect remunerations” be taken into account in establishing covered Part D drug negotiated prices. Plans do not have to take into account pharmacy discounts to the extent that no such discounts exist. Moreover, we note that our definition of the term “dispensing fees” in § 423.100 of the final rule indicates that, in the case of pharmacies owned and operated by a health plan, dispensing fees are understood to be the equivalent of all reasonable pharmacy costs included in the definition (those related to the transfer of possession of a covered Part D drug to a Part D plan enrollee), including the salaries of pharmacists and other pharmacy workers as well of the costs associated with maintaining the pharmacy facility and equipment necessary to operate the pharmacy. For purposes of evaluating the validity of a Part D plan's bid, including its negotiated prices for covered Part D drugs, we will request and evaluate disaggregated negotiated price concession data only to the extent that such detail is necessary in order to justify actuarial assumptions or as part of an audit.

Comment: One commenter asked that we define the meaning of the terms “direct or indirect subsidies” and “direct or indirect remunerations.” Another commenter suggested that negotiated price concessions reported to us should include formulary placement incentives, market share movement incentives, administrative fees paid to Part D plans, and direct and indirect forms of remuneration. One commenter asked that we provide clarification on how rebates will be calculated, reflected in negotiated prices, and reported to us.

Response: We note that Part D plans may fulfill the requirements of section 1860D-2(d)(2) of the Act through the data submission requirements discussed in further detail in subpart G. In other words, we should be able to determine the proportion of total aggregate price concessions passed through to either the Medicare program or to enrollees based on the cost data Part D plans will be required to submit to us. Although all negotiated price concessions be they direct or indirect subsidies, direct or indirect remunerations, rebates, or discounts must be reported to us, as provided in § 423.104(g)(3) of our final rule, we will require that Part D plans break out any fair market value administrative fees pharmaceutical manufacturers may pay Part D sponsors. The use of the term indirect with direct is meant to be all-inclusive. In other words, we clarify that this means any and all subsidies or remunerations. We will specify in operational guidance the format and frequency of these reports, as well as what constitutes direct or direct subsidies, direct or indirect remunerations, rebates, and discounts.

Comment: We received a number of comments regarding our aggregate negotiated price concession disclosure requirements. Several commenters asked us to clarify that only aggregate price concessions passed through to us and to enrollees will be reported to us, rather than the amount or proportion of total price concessions obtained by a Part D plan. Other commenters thought that Part D plans should be required to disclose all price concessions, not just the proportion passed through to Part D enrollees. A number of other commenters asked that we require the disclosure of negotiated price concession by drug.

Response: We clarify that, as provided under section 1860D-2(d)(2) of the Act, and specified in § 423.104(g)(3) of our final rule, we will require that all aggregate negotiated price concession data and not just the proportion passed through to beneficiaries be reported to us for purposes of Part D plan bids. However, as explained in subpart G, it may be necessary for us to receive disaggregated negotiated price concession data from Part D plans in order to ensure accurate payment to Part D plans. We will provide further information regarding negotiated price concession reporting in separate guidance.

Comment: Several commenters recommended that Part D plans share all negotiated price concession data reporting with SPAPs.

Response: Since nothing in the MMA addresses disclosure of negotiated price information to SPAPs, FOIA rules apply. FOIA applies to requests for data from States. FOIA Exemption 4 protects certain confidential commercial information that is submitted to a Federal agency. Determinations about the applicability of FOIA Exemption 4 to a Part D plan's pricing data would be made on a case-by-case basis depending on whether the submitter of the data could demonstrate that disclosure of this information would likely cause substantial competitive harm to the submitter's competitive position. If FOIA Exemption 4 is found to protect submitted price information, we cannot disclose this information to States because to do so would violate the Trade Secrets Act (18 U.S.C. 1905).

Comment: One commenter stated the “best price” provision undermined the original intent of section 1927 (c)(1)(C) of the Act and would have a negative financial impact on the Medicaid prescription drug program.

Response: We believe the Congress intended that there be no Federal barriers to Part D sponsors negotiating the lowest prices possible for their plan members. If negotiated prices counted towards “best price,” this could create a disincentive for manufacturers to offer discounts. Further, the purpose of “best price” exemptions in section 1927(c)(1)(C) of the Act is to ensure that manufacturers offer Medicaid programs strong rebates that are market-driven, without penalizing the manufacturers indirectly for the discounts they offer by law under other Federal drug programs. Exempting negotiated prices under the new Medicare prescription drug benefit is consistent with that purpose. The issue of effects on Medicaid best price is discussed in the impact analysis.

Comment: One commenter asked for further guidance regarding the “best price” exemption, stating that Part D providers should be able to negotiate simultaneously for commercial prices, which would count toward “best price,” and for Medicare/qualified retiree prices, which would not count toward “Best Price.”

Response: Under section 1860D-11(i) of the Act, we have no authority to regulate price concessions between manufacturers and Part D plans. Consequently, we cannot prohibit or require Part D plans from negotiating simultaneously for commercial prices, which would be included in the calculation of the Medicaid drug rebate best price, and Medicare prices, which would not be included in the calculation of the Medicaid drug rebate best price. If Part D plans wish to simultaneously negotiate their commercial and Medicare prices, they are free to do so.

Comment: One commenter suggested that we recommend to the Congress alternatives to the existing “best price” rebate formula. The commenter recommended a flat rebate formula to generate savings for State Medicaid programs, while eliminating the negative impact of the “best price” formula on the prescription drug market generally.

Response: This regulation does not address the best price provisions of the Medicaid drug rebate statute as we do not have the statutory authority under Title I of the MMA to modify the Medicaid rebate program.

3. Establishment of Prescription Drug Plan Service Areas (§ 423.112)

Section 1860D-11(a)(2) of the Act provides us with the authority to establish PDP regions, and such PDP regions must be established in a manner that is consistent with the establishment of MA regions. Section 1860D-11(a)(2)(B) of the Act stipulates that PDP regions must be, to the extent practicable, consistent with MA regions as established under section 1858(a)(2) the Act. However, we may establish PDP regions that vary from MA regions if we determine that access to Part D benefits would be improved by establishing different regions. Section 1860D-11(a)(2)(C) of the Act stipulates that we designate a separate PDP region (or regions) for the U.S. territories.

Except as otherwise provided below, the final rule adopts the requirements related to the establishment of prescription drug plan service areas set forth in § 423.112 of the proposed rule.

Comment: We received a number of comments on the establishment of PDP regions both in response to the provisions of our proposed rule and as follow-up to a public meeting held in Chicago on July 21, 2004. The majority of commenters favored establishing 50 State-based regions or, more generally, a larger number of smaller regions—close to that of State-level regions. Issues identified in support of 50 State-based regions included the large assumption of risk associated with the establishment of larger regions; insufficient time for Part D plans to negotiate and develop networks, or to renegotiate providers' contracts and form partnerships; potential difficulties in meeting State licensure and solvency requirements; and greater ease in terms of coordination between Part D plans and SPAPs in providing coverage that supplements the benefits available under Part D coverage. Several commenters recommended an intermediate number of regions between the 10 and 50 regions authorized by the MMA. One commenter cautioned us to develop an appropriate number of regions in order to ensure that beneficiaries particularly those in rural areas have meaningful access to Part D choices. Yet another commenter recommended that we align PDP and MA regions in order to preclude beneficiary confusion by MA enrollees as they try to understand their options during the initial enrollment period for Part D coverage.

Several other commenters specifically recommended that a standalone region be created for Puerto Rico separate from the 50 States and any of the other U.S. territories. These commenters believe it is necessary for Puerto Rico to be placed in its own PDP region because a multi-state PDP region for Puerto Rico would compromise the viability of Part D on the island. They argue that Puerto Rico-based plans have years of experience working with the local Medicare population and its distinct linguistic and cultural traditions and will be disadvantaged when competing with U.S. companies to build provider networks outside Puerto Rico. Some commenters also thought that combining Puerto Rico and another State or States (for example, Florida or New York) will drive up premiums for Puerto Rican enrollees. On the other hand, one commenter argued that a standalone region for Puerto Rico would isolate it, and preferred to stay in the New York region under the MA and PDP programs.

Response: We conducted a market survey and analysis, including an examination of current insurance markets as required in the MMA. Key factors in the survey and analysis included payment rates; eligible population size per region; PPO market penetration; current existence of PPOs, MA plans, or other commercial plans; and presence of PPO providers and primary care providers. Additional factors were also considered, including solvency and licensing requirements, as well as capacity issues. In response to the lack of specificity regarding the PDP regions in our proposed rule, we conducted extensive outreach in order to obtain public input prior to the publication of our final rule. On December 6, 2004, we announced the establishment of 26 MA regions and 34 PDP regions. For maps and fact sheets on the on the regions, please see http://www.cms.hhs.gov/medicarereform/mmaregions/.

4. Access to Covered Part D Drugs (§ 423.120)

a. Pharmacy Access Standards

As required by section 1860D-4(b)(1)(C) of the Act, Part D plans must secure the participation in their pharmacy networks of a sufficient number of pharmacies that dispense drugs directly to patients (other than by mail order) to ensure convenient access to covered Part D drugs by Part D plan enrollees. To achieve that goal, we are authorized to establish access rules that are no less favorable to enrollees than rules for convenient access established in the statement of work solicitation (#MDA906-03-R-0002) by the Department of Defense (DOD) on March 13, 2003, for purposes of the TRICARE Retail Pharmacy program. Consistent with the TRICARE standards, our proposed rule required that Part D plans establish pharmacy networks in which:

  • In urban areas, at least 90 percent of Medicare beneficiaries in the Part D plan's service area, on average, live within 2 miles of a retail pharmacy participating in the plan's network;
  • In suburban areas, at least 90 percent of Medicare beneficiaries in the Part D plan's service areas, on average, live within 5 miles of a retail pharmacy participating in the prescription drug plan's or MA-PD plan's network; and
  • In rural areas, at least 70 percent of Medicare beneficiaries in the Part D plan's service area, on average, live within 15 miles of a retail pharmacy participating in the plan's network.

As provided under section 1860D-21(c)(3) of the Act and codified in § 423.120(a)(3)(i) of our proposed rule, we are authorized to waive the pharmacy access standards in § 423.120(a)(1) in the case of an MA-PD plan or cost plan that provides access (other than via mail order) to qualified prescription drug coverage through pharmacies owned and operated by the MA organization that offers the plan or the cost plan. However, in order for the pharmacy access standards to be waived, the MA-PD plan or cost plan in question is required to have a pharmacy network that, per our determination, provides comparable pharmacy access to its enrollees as provided under § 422.112.

Similarly, section 1860D 21(d)(2) of the Act provides that if a private fee-for-service MA plan offering qualified prescription drug coverage provides coverage for drugs, including covered Part D drugs, purchased from all pharmacies regardless of whether they are network pharmacies under contract with the MA plan, and provided that beneficiaries are not charged any cost-sharing above and beyond what they will be charged under standard prescription drug coverage—the pharmacy access requirements will also be waived.

As provided under section 1860D-4(b)(1)(A) of the Act, Part D sponsors will be required to permit the participation in their Part D plan networks of any pharmacy that was willing to accept the plan's terms and conditions. Based on section 1860D-4(b)(1)(B) of the Act, our proposed rule clarified that a Part D sponsor will have the option of reducing cost-sharing for its enrolled beneficiaries below the level that would otherwise apply for covered Part D drugs dispensed through network pharmacies. We interpreted this provision as permitting Part D sponsors from varying cost-sharing not only based on type of drug or formulary tier, but also on a particular pharmacy's status within the Part D plan's pharmacy network-in essence authorizing distinctions between “preferred” and “non-preferred” pharmacies.

As stipulated under section 1860D-4(b)(1)(E) of the Act and § 423.120(a)(4)(ii) of our proposed rule, pharmacies could not be required to accept insurance risk as a condition of participation in a Part D sponsor's pharmacy network. We defined “insurance risk” in relation to a network pharmacy as referring to risk of the type commonly assumed only by insurers licensed by a State, but not including payment variations designed to reflect performance-based measures of activities within the control of a pharmacy, such as formulary compliance and generic drug substitutions, or elements potentially in the control of the pharmacy (for example, labor costs, and productivity).

Section 1860D-4(b)(1)(D) of the Act requires Part D sponsors to allow their enrollees to receive benefits at a network retail pharmacy instead of a network mail-order pharmacy, if they so choose. Consistent with the statute, our proposed rule allowed Part D plan enrollees who choose to obtain an extended supply of a covered Part D drug through a network retail pharmacy to be responsible for any differential between the network retail pharmacy's and the network mail-order pharmacy's negotiated price for that covered Part D drug. We sought comments on our proposal that this price differential be counted as an incurred cost against the annual out-of-pocket threshold and note that, as discussed elsewhere in this preamble, we have modified the level playing field provision at § 423.120(b)(10) of our final rule to clarify that an enrollee will be responsible for any higher cost-sharing (and not a differential in negotiated price) associated with purchasing a 90-day supply of a covered Part D drug at a network retail pharmacy, as well as our definition of incurred costs at § 423.100 of the final rule.

Except as otherwise provided below, the final rule adopts the access standards set forth in § 423.120(a) of the proposed rule.

Comment: In our proposed rule, we interpreted the TRICARE access standards such that a prescription drug plan or regional MA-PD plan would have been required to meet or exceed the access standards across each region in which it operates, and a local MA-PD plan would have to meet or exceed the access standards in its local service area.

Some commenters supported this application of the TRICARE access standards in our proposed rules (regional for prescription drug plans and MA-PD plans). A number of commenters expressed concerns about the adequacy of our proposed application of the access standards and urged us to apply the standards at the local (zip-code) level. A number of other commenters urged us to apply the TRICARE standards at the State level. Several other commenters recommended that Part D plans meet the access standards at the broadest geographic area served by the plan (for example, regional, multi-regional, or national).

Response: Although section 1860D-4(b)(1)(C)(ii) of the Act directs us to adopt access standards no less favorable to enrollees than those set forth in the March 13, 2003, statement of work solicitation (#MDA906-03-R-0002) of the Department of Defense under the TRICARE Retail Pharmacy Program, we note that the statement of work does not specify the geographic level at which to apply the TRICARE standard. We therefore believe that we have discretion to apply the TRICARE standards at the geographic level we believe to be most appropriate.

Although we considered applying the TRICARE standard at the local (zip code or county) level for Part D plans, we believe such application would make it impossible for Part D plans to meet the standards particularly the rural standard—in some parts of the country. On the other hand, we believe that application of the access standards at the broader, regional level would not adequately ensure convenient access for beneficiaries given the potential for Part D plans to “average out” the access standards across many urban, suburban, and rural areas in a region—thus meeting the access standards in the aggregate but potentially leaving certain parts of a region without convenient access to retail pharmacies.

We agree with commenters who proposed a State-level application of the TRICARE pharmacy access standards for regional MA-PD plans and prescription drug plans, and have made changes to § 423.120(a)(1) accordingly such that a prescription drug plan or regional MA-PD plan will have to meet or exceed the access standards across urban, suburban, and rural areas, respectively, in each State in which it operates, a local-MA-PD plan would have to meet or exceed the access standards across urban, suburban, and rural areas, respectively, in each service area (including multi-county service areas) in which it operates, and a cost plan would have to meet or exceed the access standards across urban, suburban, and rural areas, respectively, in each geographic area in which it operates. In other words, a prescription drug plan or regional MA-PD that operates in a multi-region or national service area could not meet the access standards proposed in § 423.120(a)(1) by applying them across the entire geographic area serviced by the plan; instead, it would have to meet the standards in each State of its multi-region or national service area. We believe that such an interpretation is a reasonable compromise between application at the local level and application at the regional or national level, and maximizes Part D plan flexibility while ensuring convenient access to network pharmacies for Part D enrollees.

Comment: Some commenters expressed concern that TRICARE's rural access standard was insufficient to provide convenient access to network pharmacies in rural areas and urged us to adopt a more adequate definition of rural. Others argued for an exceptions process for remote, isolated areas in which it is simply not feasible to establish pharmacy networks that comply with our requirements.

Response: We are aware of the difficulties faced by rural beneficiaries in accessing medical care. We believe that TRICARE's definition of “rural” is adequate and have not modified it in our final rule (though we will monitor the access standards over time to ensure they continue to provide convenient access to all beneficiaries). Furthermore, we believe access in rural areas will be improved given our revised interpretation of the access standards, whereby we will evaluate access at the State (and not the regional) level. However, we are aware—based on our experience implementing the Medicare Prescription Drug Discount Card and Transitional Assistance Program—that there are likely to be several States in which meeting the rural access standard will be impossible or impracticable given the lack of infrastructure. We expect to establish an exceptions process, which we will outline in operational guidance to Part D plans that will account for any problem areas and mitigate any disincentives plans may have to avoid doing business in parts of the country in which meeting the pharmacy access standards would be a challenge.

In addition, and as explained elsewhere in this preamble, and codified in § 423.120(a)(2) of our final rule, we will allow Part D plans to count certain non-retail pharmacies—specifically, I/T/U, Federally Qualified Health Center (FQHC), and Rural Health Center (RHC) pharmacies—toward the pharmacy access requirements in § 423.120(a)(1) of our final rule. We believe this policy will help ensure convenient access in rural areas.

Comment: Several commenters asked that we ensure that national Part D plans are created. These commenters thought that national Part D plans would be of benefit to beneficiaries who travel regularly or who reside in more than one State in a given year (for example, “snowbirds”), and urged that the ramifications of choosing a local MA-PD plan or a regional Part D plan be made clear to beneficiaries who may not realize the implications of such limited geographic access when they select Part D plan coverage.

Response: Although a Part D sponsor may offer a Part D plan in more than one PDP or MA region, it is not required to do so. Therefore, we cannot require national Part D plans, though we certainly recognize the benefits of such plans for some beneficiaries given the limited applicability of our out-of-network access policy. We note that our pharmacy access standards would not in any way preclude Part D sponsors from contracting with pharmacies outside their Part D plans' service areas, provided that the plans meet the pharmacy access requirements within their service areas. Such a feature would be of particular use to beneficiaries who spend significant amounts of time outside their Part D plan's service area (for example, snowbirds) and could make a particular Part D plan that offered such benefits more attractive to beneficiaries who travel regularly. National Part D plans are also of interest to employers who have retirees living throughout the country, and the employer group waiver authority discussed in subpart J could facilitate these employer-only national Part D plans. We also note that, as part of our information dissemination requirements in § 423.128(b) of the final rule, Part D plans will be required to inform beneficiaries about the plan's service area, as well as the locations of network pharmacies.

Comment: Several commenters asked us to make allowances for “snowbirds,” stating that our regulations should allow Part D sponsors to offer “visitor/traveler” benefits available under the MA program. One commenter specifically suggested the application of the MA requirements, which allow an organization to provide such benefits to an individual who is temporarily out of the area for up to 12 months. A few commenters stated that we should require prescription drug Part D plans to offer visitor/traveler benefits. One commenter suggested, however, that we allow exceptions for regional Part D plans and those with out-of-network services. One commenter suggested that we consider allowing Part D plans to offer “travel” networks without requiring them to contract in those regions, suggesting that this could be an interim approach pending evaluation of the cost/payment experience for both Part D plans and us.

Response: We appreciate the feedback provided by the commenters on applying a visitor/traveler benefit to prescription drug plans as has been provided to the MA program. We do not have the authority to establish a visitor/traveler benefit. However, as noted above, our pharmacy access standards would not in any way preclude Part D sponsors from contracting with pharmacies outside their plans' service areas, provided that plans meet the pharmacy access requirements within their service areas, and such access is not provided outside the United States.

Comment: We interpreted the access requirements in section 1860D-4(b)(1)(C) of the Act as requiring Part D plans to count only retail pharmacies as part of their networks for the purpose of meeting the access standards, and we proposed defining a retail pharmacy as any licensed pharmacy from which covered Part D enrollees could purchase a covered Part D drug without being required to receive medical services from a provider or institution affiliated with that pharmacy. We also requested comment regarding whether we should allow Part D plans to count pharmacies that are operated by the Indian Health Service, Indian tribes and tribal organizations, and urban Indian organizations (I/T/U pharmacies) toward their network access requirements when the pharmacies are under contract with the Part D plan, and it would be impossible or impracticable for the plan to meet the access standard in rural areas of its service area without the inclusion of some or all of these pharmacies. In addition, we solicited comments on permissible ways to ensure enrollee access to FQHC and rural pharmacies, since these pharmacies could potentially provide access to covered Part D drugs in remote, rural areas.

Several commenters support counting only retail pharmacies towards Part D plans' access requirements. Other commenters supported allowing I/T/U pharmacies to count toward Part D plans' pharmacy access requirements to the extent that we do not require Part D plans to offer I/T/U pharmacies a standard contract, at a minimum.

Response: We agree that, in most cases, only retail pharmacies, which we define in § 423.100 of our final rule as any licensed pharmacy from which covered Part D enrollees could purchase a covered Part D drug without being required to receive medical services from a provider or institution affiliated with that pharmacy, should count toward our pharmacy access standards. Examples of non-retail pharmacies include I/T/U, FQHC, Rural Health Center (RHC), and hospital and other provider-based pharmacies, as well as Part D-owned and operated pharmacies that serve only plan members.

However, as explained elsewhere in this preamble, we are concerned about access to pharmacies in rural and underserved areas. As one way of addressing this concern, § 423.120(a)(2) of our final rule allows Part D plans to count certain non-retail pharmacies—specifically, I/T/U, FQHC, and RHC pharmacies toward the pharmacy access requirements in § 423.120(a)(1) of our final rule.

FQHCs and RHCs face many of the same barriers to inclusion in commercial plan networks as do I/T/U pharmacies, which we discuss in greater detail elsewhere in this preamble. Beneficiaries served by FQHCs and RHCs are often served in those settings because of their financial and geographic circumstances. We believe that allowing Part D plans to count these pharmacies toward their access requirements will incentivize plans to make an extra effort to solicit and include these pharmacies in their networks. As the number of these pharmacies is limited and, with the exception of I/T/U pharmacies, can generally offer services to a broad-based population, we do not believe that this exception will have a significant impact on convenient access to pharmacies in rural areas for the general population. However, we intend to review Part D plans' proposed pharmacy networks to ensure that their inclusion of I/T/U, FQHC, and RHC pharmacies does not substitute for the inclusion in Part D plan networks of retail pharmacies. We also note that this policy should not be interpreted as requiring broader access to I/T/U, FQHC, and RHC pharmacies than is currently permissible.

Comment: Several commenters expressed concern about the inclusion of rural and FQHC pharmacies in Part D plan networks, with some advocating for requiring plans to contract in some cases, under preferential contracting terms and conditions with these pharmacies. Other commenters opposed requiring Part D plans to contract with specific kinds of pharmacies, asserting that the any willing pharmacy and pharmacy network access requirements are sufficient to ensure an adequate pharmacy network for all beneficiaries. One commenter asked that, to the extent we require Part D plans to contract with certain pharmacies, plans would only be required to offer standard terms and conditions.

Response: With the exception of I/T/U pharmacies, we will not require Part D plans to contract with non-retail pharmacies including FQHC or rural pharmacies. We believe our access standards for rural areas and the Statewide application of access rules generally will ensure adequate access in rural areas. However, as discussed elsewhere in this preamble, we will allow Part D plans to count I/T/U, FQHC, and RHC pharmacies toward their access requirements as an incentive for Part D plans to contract with these pharmacies, which are critical providers in underserved areas.

Comment: One commenter believes we should mandate that Part D plans solicit inner city and rural pharmacies that meet the Small Business Administration's small business standard for participation in their pharmacy networks and should give them access to any terms that the Part D plan offers to a subset of pharmacies.

Response: We believe the pharmacy access standards, as well as their application at the State level, in § 423.120(a)(1) of our final rule, will ensure adequate access to covered Part D drugs for all Part D enrollees in urban, suburban, and rural areas. Given the standards, pharmacies' bargaining power will be strengthened in underserved areas. Ultimately, however, it is at Part D plans' discretion how they will establish pharmacy networks— including the offering of contracting terms and conditions that are different than standard contracting terms and conditions and the establishment of preferred pharmacies provided they meet our pharmacy access standards, non-discrimination provisions, and other applicable requirements under Part D. We believe that the type of market intervention requested by the commenter is contrary to the Congress's intent that we not interfere in the private negotiations between Part D plans and pharmacies. We will therefore not mandate that Part D plans solicit inner city and rural retail pharmacies or that they automatically deem them preferred pharmacies within their networks.

Comment: We sought public comments regarding whether we should consider using the authority in section 1860D-4(b)(1)(C) of the Act to require that Part D plans contract with a sufficient number of home infusion pharmacies in their service area to provide reasonable access for Part D enrollees.

Several commenters supported requiring Part D plans to contract with a sufficient number of home infusion pharmacies in their service areas to ensure adequate access for beneficiaries. One commenter noted that this requirement would result in savings for the Medicare program by reducing expenditures under Parts A and B. In addition, these pharmacies allow beneficiaries to safely receive their medications at home by providing training and skilled support so beneficiaries can avoid the inconvenience of hospitals, clinics, and doctor visits. One commenter urged us to expand our proposed requirement to include all specialty pharmacies, not just home infusion pharmacies.

Other commenters recommended not mandating Part D plans to contract with these non-retail pharmacies but rather encourage participation because it would reduce negotiating leverage of plans with these pharmacies.

One commenter urged that home infusion pharmacies should not be counted toward network TRICARE standards.

Response: We agree with commenters who believe that we should use our authority under section 1860D-4(b)(1)(C) of the Act to require Part D plans to provide adequate access to home infusion pharmacies. Given coverage of home infusion drugs under Part D, we do not believe it is an option for Part D plans not to include at least some home infusion pharmacies in their networks in order to provide enrollees with meaningful access to those drugs. This is particularly a concern with regard to prescription drug plans which, unlike other Part D plans, do not benefit from reduced medical costs associated with home infusion and may therefore have little incentive to contract with home infusion pharmacies. Therefore, we have added a new provision to our final regulations at § 423.120(a)(4) which requires Part D plans to demonstrate to us that they provide adequate access to home infusion pharmacies consistent with CMS operational guidance to Part D plans. We expect that Part D plans will demonstrate adequate access based in part on the number of enrollees in their service areas and the geographic distribution and capacity of home infusion pharmacies in those service areas. We have not included specialty pharmacies that do not provide home infusion services in this requirement however, as it is unclear whether beneficiaries will need routine access to such pharmacies or would not be adequately served through our out-of-network access rules. We clarify, that we have made a distinction between specialty pharmacies and long-term care pharmacies. We note that home infusion pharmacies will not count toward Part D plans' pharmacy access requirements because they are not retail pharmacies.

Comment: We requested comments regarding the advantages and disadvantages of using the authority provided under section 1860D-4(b)(1)(C)(iv) of the Act to require Part D plans to approach some or all long-term care pharmacies in their service areas with at least the same terms available under their standard pharmacy contracts, or, alternatively, to not require (but strongly encourage) Part D sponsors to negotiate with and include long-term care pharmacies in their Part D plans' pharmacy networks. In addition, we requested comments regarding how to balance convenient access to long-term care pharmacies with appropriate payment to long-term care pharmacies under the provisions of the MMA.

Some commenters were adamant that the current one-to-one relationship between the long-term care pharmacies and nursing homes be preserved, as it is critical to ensuring safety and convenient access to drugs for Medicare beneficiaries residing in nursing homes. One commenter suggested that Part D plans should also provide standardized long-term care pharmacy contracts that recognize long-term care pharmacies' essential role.

Some commenters recommended that the final regulation require Part D plans to contract with any willing long-term care pharmacy. A number of commenters would prefer that we do not require Part D plans to contract with any particular non-retail pharmacies (including long-term care pharmacies) because both our access standards and the any willing pharmacy requirement adequately address our objective of ensuring access to Part D drugs for all enrollees. One commenter notes that Part D plans will need to include long-term care pharmacies in their networks to meet access standards, and that this will encourage Part D plans to contract with long-term care pharmacies. Another believes that we struck a balance with the option for long-term care pharmacies to provide benefits in- or out-of-network because it gives long-term care pharmacies and Part D plans the appropriate negotiating flexibility to reach mutually satisfactory arrangements for providing services to long-term care residents. Also, one commenter points out that some long-term care pharmacies would not be able to meet all the operational standards necessary to participate in Part D, and Part D plans would have to negotiate special reimbursement rates with these pharmacies. Some commenters believe that we should promote appropriate payment methodologies (for example, via dispensing fees or separate fee schedules to pay for specialized services) that would enable all long-term care pharmacies to join networks and provide a meaningful benefit. Another variation suggested was that a Part D plan should be required to include at least one long-term care pharmacy in its network and to contract with any long-term care pharmacy that agrees to the Part D plan's standard contract.

One commenter reasoned that there should be a balance in the contracting requirement; for example, long-term care pharmacies that service X percent of beneficiaries should also be required to contract with at least one Part D plan. But, without this balance, the commenter felt the Part D plans and long-term care pharmacies should be strongly encouraged to contract with each other. A few commenters believed that we should encourage, but not require, Part D plans to contract with long-term care pharmacies and that we should explicitly state in regulation that long-term care residents can access long-term care pharmacies as out-of-network providers when those pharmacies do not contract with particular Part D plans. Other commenters believe that it is sufficient to require that long-term care pharmacies be offered standard contracting terms and conditions by Part D plans.

Response: Section 1860D-4(b)(1)(C)(iv) of the Act provides that, in establishing rules for convenient access to network pharmacies, we may include standards with respect to access to long-term care pharmacies for Part D enrollees who reside in long-term care facilities. For a variety of reasons, including the quality aspects of Federal nursing home regulations, it is generally the case that long-term care facilities have chosen to contract with a single long-term care pharmacy. Given this state of affairs, our proposed rule assumed that Part D enrollees residing in a long-term care facility could not reasonably be expected to access their Part D drugs at another pharmacy if their facility's long-term care pharmacy is not part of their Part D plan's network. In the proposed rule, we proposed that enrollees residing in long-term care facilities whose contracted long-term care pharmacies did not participate in their Part D plans' networks could continue to use those long-term care pharmacies consistent with our proposed out-of-network access policy. However, given the narrow statutory authority to establish out-of-network access rules provided by section 1860D-4(b)(1)(C)(iii) of the Act, we do not believe as discussed in greater detail elsewhere in this preamble that access to out-of-network pharmacies on a routine basis can be justified. Thus, beneficiaries residing in long-term care facilities that do not contract with a pharmacy included in their Part D plan network will not be able to access covered Part D drugs at the out-of-network long-term care pharmacy through the out-of-network access rules in § 423.124 of our final rule.

However, it is important to note that we will provide a SEP for prescription drug plan enrollment and disenrollment for beneficiaries entering in, living in, or leaving an institution. In addition, individuals enrolled in an MA-PD plan have an unlimited open enrollment period for institutionalized individuals (OEPI). While MA organizations may choose individually, at the plan level, whether or not to be open for enrollments during this period, they must always accept disenrollments.

Given the risk associated with institutionalized beneficiaries, relying on the market alone to ensure that Part D plans include a sufficient number of long-term care pharmacies in their networks may not be sufficient. We note that relying on the pharmacy access standards in § 423.120(a)(1) of our final rule will also not ensure sufficient access to long-term care pharmacies, since many of these pharmacies are not retail pharmacies and therefore would not count toward those requirements. Absent a contracting mandate, Part D plans may view contracting with long-term care pharmacies given the risk associated with institutionalized beneficiaries as too risky. To the extent that we require Part D plans to solicit long-term care pharmacies in their service areas to join their networks, plans may be forced to negotiate preferential contracting terms and conditions (relative to the terms they would offer any other pharmacy willing to participate in its network) for long-term care pharmacy-specific specialized packaging and services with a number of long-term care pharmacies in order to meet our requirement. In addition, although the statute includes an “any willing pharmacy” requirement, even if we require Part D plans to contract with any long-term care pharmacy in a service area, we cannot compel long-term care pharmacies to accept the plans' terms and conditions.

We believe it is essential to inject competition into the long-term care pharmacy market while preserving the relationships and levels of service that long-term care facilities now enjoy vis-à-vis their contracted long-term care pharmacies. To that end, we have used our authority under section 1860D-4(b)(1)(C)(iv) of the Act to require, in § 423.120(a)(5) of our final rule, that Part D plans offer standard contracting terms and conditions, including performance and service criteria for long-term care pharmacies that we will specify in operational guidance to all long-term care pharmacies in their service areas. In other words, we are establishing an “any willing pharmacy” requirement specifically for long-term care pharmacies, coupled with a requirement that Part D plans develop standard contracting terms and conditions for long-term care pharmacies, such that any pharmacy in a service area could become an eligible long-term care pharmacy by certifying that it meets certain performance and service criteria for providing pharmacy services to long-term care facilities. These criteria would be incorporated into a Part D plan's standard contracting terms and conditions for long-term care pharmacies. We will provide further detail regarding these criteria in operational guidance, but we expect that they will address access to urgent and emergency medications on a 24/7 basis, standardized prescribing systems, and the availability of one of several standard delivery packaging and delivery systems for routine medications. We expect to review the reasonableness of Part D plans' standard contracting terms and conditions for long-term care pharmacies. We note that entities other than current long-term care pharmacies (for example, retail pharmacies) could become an eligible long-term care pharmacy by meeting these standards of practice, so long as they also meet specific State law requirements, if any, for such entities. Plans in a region would be required to contract with any willing long-term care pharmacy in that region, provided those pharmacies were able to reach agreement with Part D plans on all standard contract terms and conditions including payment rates.

As provided in § 423.120(a)(5) of our final rule, we will require Part D plans to demonstrate that they have contracts with a sufficient number of long-term care pharmacies to ensure convenient access to prescription drugs for institutionalized beneficiaries within the service area. We will provide more detailed information in CMS guidance regarding what constitutes convenient access, but we expect that Part D plans will demonstrate convenient access based in part on the number of enrollees in their service areas and the geographic distribution, capacity, and contracting relationships with long-term care facilities of long-term care pharmacies in those service areas.

We expect that each long-term care facility will select one or more eligible network pharmacies to provide a Part D plan's long-term care drug benefits to all of its residents enrolled in a Part D plan. In order to minimize the number of pharmacy suppliers and maintain patient safety, long-term care facilities will likely select long-term care pharmacies that meet Part D standards and participate in the largest number of Part D plan long-term care networks. To maintain convenient access and minimize out-of-pocket expenses, Part D plan enrollees would obtain Part D benefits from the eligible long-term care pharmacy selected by the facility. The SEP and OEPI available to institutionalized beneficiaries, which will provide beneficiaries with the ability to change Part D plans to the extent that their current Part D plan does not include their facility's long-term care pharmacy in its network, will further incentivize long-term care pharmacies to participate in as many Part D plan long-term care networks as possible.

All long-term care pharmacies in a region will have to negotiate terms and conditions with as many Part D plans as possible or risk losing this business to another more competitive long-term care pharmacy. This competition will preserve the one-to-one long-term care pharmacy long-term care facility relationship favored by so many commenters, but will require a negotiation between the long-term care pharmacy and the Part D plan to maintain that relationship. Given our rules for access to Part D drugs for institutionalized Part D enrollees, all Part D products and services would be removed from existing long-term care pharmacy contracts because payments for drugs for dual eligible individuals under Medicaid will become obsolete. This will likely necessitate the renegotiation of existing long-term care facility/long-term care pharmacy contracts. Separating the cost of the drug and dispensing fee from other long-term care pharmacy specialized services (for example, drug administration) may provide for more appropriate negotiation of these services and costs between long-term care facilities and pharmacies. We note that Part D plan payments under medication therapy management programs, described in further detail elsewhere in this preamble, may represent an additional revenue stream to long-term care pharmacy services for some of the special services provided by these pharmacies but not reimbursed through dispensing fees.

We believe that our long-term care pharmacy access rules will align incentives to accomplish several goals, including ensuring that long-term care pharmacies come to the table in good faith; negotiation of more competitive pricing than currently exists in the long-term care pharmacy market; and allowing for the one long-term care facility-one long-term care pharmacy relationship to remain intact, to the extent that long-term care facilities would like to keep it that way.

Comment: Two commenters favored the carve-out of beneficiaries in long-term care facilities through the establishment of a separate PDP region in which plans could bid, at risk, to serve this population.

Response: We understand that, given the institutionalized population's special needs, a carve-out of this population may seem logical. However, given the risk associated with institutionalized beneficiaries, we believe that carving out such a high-risk population would result in significant adverse selection and could result in unsustainable beneficiary premiums for the institutionalized population. In addition, our research related to risk adjustment is still in progress, and until that research is completed, we cannot be certain as to whether our risk adjustment model could adequately mitigate the risk inherent in this population under the highly unique circumstances of a plan serving only a carved-out institutionalized population. Consequently, particularly in the first few years after the implementation of the Part D program, we wonder whether potential Part D sponsors would be willing to serve a carved-out institutionalized population and therefore ensure access to Part D drugs for Part D enrollees residing in long-term care facilities. We are also concerned that beneficiaries entering and leaving long-term care facilities will be forced to change Part D plans to the extent that institutionalized beneficiaries are carved out into a separate PDP region. For these reasons, we will not create a separate PDP region for institutionalized beneficiaries and, as discussed above, will ensure convenient access to covered Part D drug in long-term care facilities as provided in § 423.120(a)(5) of our final rule.

Comment: We requested comments regarding whether we should use our authority under section 1860D-4(b)(1)(C)(iv) of the Act to require-or, instead, strongly encourage-that Part D sponsors approach any I/T/U pharmacies in their Part D plan service areas with at least the same terms available under the plan's standard pharmacy contracting terms and conditions.

Some commenters believe that we must use our authority under section 1860D-4(b)(1)(iv) of the Act to require Part D plans to contract with I/T/U pharmacies because, without this requirement, private plans will have little or no financial incentive to contract given the uniqueness of both the AI/AN population and I/T/U pharmacies. Simply encouraging contracts will not work because of the uniqueness and remoteness of I/T/U facilities and the perceived cost and time to contract with these pharmacies. These commenters urge us to require, in regulation, that Part D plans contract with I/T/U pharmacies using specific contract provisions. They urge us to consider one of several approaches to ensuring that I/T/U pharmacies experience no reduction in revenue as a result of the transition from Medicaid to Medicare Part D: supplemental payments from Part D plans or the Federal government to supplement the difference between the amount paid by the Part D plan and the amount the I/T/U pharmacy would have received under Medicaid, a carve-out of AI/AN enrollees for Part D plans willing to serve only those beneficiaries through I/T/U pharmacies, and an exemption of dual eligibles from Part D (with continued prescription drug coverage under Medicaid).

Response: There are currently 235 I/T/U pharmacies serving 107,000 senior and disabled AI/ANs in 27 States. In some areas, I/T/U pharmacies may be the only facilities capable of providing medication therapy management services to certain AI/AN beneficiaries due to language and cultural barriers. It is our understanding that I/T/U pharmacies are not currently well integrated in commercial pharmacy networks. We agree with the commenters who believe that—in the absence of a contracting requirement—Part D plans may make assumptions regarding the administrative costs (whether real or perceived) of contracting with I/T/U pharmacies and may not actively solicit the inclusion of these pharmacies in their networks. The lack of I/T/U pharmacies in Part D plan networks would render enrollment in Part D of little use to AI/AN beneficiaries who rely primarily on I/T/U facilities for their health care. For this reason, we have added a provision to our final regulations, at § 423.120(a)(6), requiring that Part D plans offer contracts to all I/T/U pharmacies in their service areas.

However, we recognize that contracting with I/T/U pharmacies is potentially more complex than contracting with retail pharmacies given that there are a number of provisions in the standard contracts of commercial health plans that would likely need to be modified or deleted given statutory or regulatory restrictions to which I/T/U pharmacies are subject, as well as the particular circumstances of I/T/U pharmacies (for example, I/T/U pharmacies purchase drugs off the Federal Supply Schedule (FSS) or through the 340B program; can only serve AI/ANs; may have less experience than retail pharmacies, or none at all, with point-of-sale technology; are not typically well integrated into commercial pharmacy networks; generally stock a more limited range of drugs than would be required under a Part D formulary; and always waive co-pays). Thus, standard contracting terms and conditions will not be sufficient for Part D plans to obtain the participation of I/T/U pharmacies in their networks. We are therefore requiring Part D plans to include a special addendum to their standard contracting terms and conditions in order to account for these differences. We will work with major stakeholders to develop a model special addendum that will take the special circumstances of I/T/U pharmacies into account. As provided in § 423.120(a)(6) of our final rule, we will require Part D plans to demonstrate that they have contracts with a sufficient number of I/T/U pharmacies to ensure convenient access to prescription drugs for AI/AN enrollees within the service area. We expect to review the reasonableness of Part D plans' standard contracting terms and conditions for I/T/U pharmacies.

While we understand the Indian Health Service's concerns regarding reductions in revenue resulting from the transition of drug coverage from Medicaid to Medicare, we clarify that we do not have the statutory authority to require supplemental payments from Part D plans or the Federal government to supplement the difference between the amount paid by the Part D plan and the amount the I/T/U pharmacy would have received under Medicaid; a carve-out of AI/AN enrollees for Part D plans willing to serve only those beneficiaries through I/T/U pharmacies; or an exemption of dual eligibles from Part D (with continued prescription drug coverage under Medicaid). As we develop the model special addendum for I/T/U contracts, we will consider how, within our statutory authority, we might ensure that I/T/U pharmacies do not experience significant revenue losses as a result of the transitioning of drug coverage from Medicaid to Part D for dual eligible AI/ANs.

Comment: Several commenters noted that many small I/T/U pharmacies and dispensaries carry a limited stock of drugs, and that an exemption from formulary requirements (and the ability to use permissible substitutes) is necessary in order to accommodate the fact. In addition, these commenters note that another factor in whether I/T/U pharmacies will stock a particular drug is whether it is available from the Federal Supply Schedule or 340B program, which are the principal sources of drugs purchased by I/T/U pharmacies. Thus, a Part D plan may choose one particular cholesterol-lowering agent on its formulary because it is able to negotiate a greater discount for that particular Part D drug. However, I/T/U pharmacies may be able to access a different medication for a similar, or perhaps lower, price and therefore include that drug on its formulary.

Response: We are aware that most Tribes and Tribal Organizations (operating under health programs pursuant to contracts under the Indian Self-Determination Education and Assistance Act, 93) and all IHS facilities use the Department of Veterans Affairs Pharmaceutical Prime Vendor (PPV) for purchasing their pharmaceuticals. By ordering through the PPV, IHS and Tribes (but not Urban programs) are able to access FSS Contract, National Standardization Contract, and Blanket Purchasing Agreement pricing for pharmaceuticals. In addition to FSS pricing, Tribes and Urban programs that have been designated as Federally Qualified Health Centers (FQHCs) and have been approved by the Health Resources and Services Administration (HRSA) are eligible for HRSA 340B drug pricing. Since I/T/U facilities have access to different pricing than commercial health plans, their formulary selections reflect the drugs for which this pricing is available. As previously mentioned, we are requiring Part D plans to include a special addendum to their standard contracting terms and conditions in order to account for the differences between retail and I/T/U pharmacies and therefore facilitate contracting with these pharmacies. We will work with major stakeholders to develop a model special addendum that will take the special circumstances of I/T/U pharmacies into account, including the limited stocking of drugs at these facilities.

Comment: Several commenters said that the any willing pharmacy rule should apply to mail order as well as retail pharmacies, and that Part D plans should not be able to exclusively use a plan-owned mail order facility.

Response: We agree that the any willing pharmacy requirement at section 1860D-4(b)(1)(A) of the Act applies to all pharmacies—including non-retail pharmacies such as mail-order pharmacies—notwithstanding a Part D plan's ability to designate certain of its network pharmacies as preferred pharmacies with lower cost-sharing, or to negotiate terms better than those in its standard terms and conditions with certain pharmacies. We clarify that a Part D plan could have standard terms and conditions for retail pharmacies and a second, separate set of standard terms and conditions for mail order pharmacies in light of those pharmacies' different characteristics. For example, a plan's contracting terms and conditions for mail-order pharmacies could reflect the full cost of adding another mail-order vendor, as well as the differential costs of strong data controls involved with having multiple network mail-order pharmacies.

Comment: One commenter said it was not clear how the any willing pharmacy rule applies to facilities that are owned and operated by a Part D plan. The commenter said such plans should be permitted to maintain a limited network of contract pharmacies for purposes of meeting the access standard in order to maximize cost savings.

Response: We agree with this commenter that the any willing pharmacy requirement makes little sense in the context of Part D plans that own and operate their own pharmacies particularly since the pharmacy access rules in § 423.120(a)(1) of our final rule will be waived for MA-PD plans and cost plans that can demonstrate comparable pharmacy access under § 422.112. As provided in § 423.458(b) of our final rule, we may waive any Part D provision as applied to an MA-PD plan if it duplicates, or is in conflict with, provisions otherwise applicable to the MA organization or MA-PD plan under Part C of Medicare, or if waiver of a Part D provision is necessary in order to improve coordination of benefits under Part D with those offered under Part C. Similarly, § 423.458(d) provides that we may waive any Part D provision as applied to a cost plan if it duplicates, or is in conflict with, provisions otherwise applicable to the cost plan under section 1876 of the Act, or if waiver of a Part D provision is necessary in order to improve coordination of benefits under Part D with those offered by the cost plans. We will consider waiving this requirement for Part D plans that own and operate their own pharmacies to the extent that they request such waiver as provided in § 423.458(b)(2) and § 423.458(d) of our final rule.

Comment: We sought comment on whether, in order to guarantee that any pharmacy willing to meet a Part D sponsor's contracting terms and conditions could participate in a Part D plan's pharmacy network, we should require that a Part D sponsor make available to all pharmacies a standard contract for participation in their Part D plans' networks.

A number of commenters thought that Part D plans should be required to have a standard or model contract for use with all pharmacies. Other comments said that we should not require a standard contract. Alternatively, several commenters said that even with a standard contract, Part D plans should have maximum flexibility to vary their contracting terms and conditions in order to reflect local conditions. Some questioned whether we should try to evaluate whether pharmacy contract terms are “reasonable and relevant,” as proposed in subpart K of our proposed rule.

Response: We concur with the majority of commenters on this issue and will require, under § 423.505(b)(18) of our final rule that Part D plans offer pharmacies reasonable and relevant standard terms and conditions for network participation. We do not intend to define “reasonable and relevant” in order to provide Part D plans with maximum flexibility to structure their standard terms and conditions.

However, it is unreasonable to assume—the any willing pharmacist requirement notwithstanding—that a Part D plan could establish a network using a uniform set of terms and conditions throughout a service area because it will likely need to modify contracting terms and conditions to ensure access to certain pharmacies (for example, rural and long-term care pharmacies). We clarify that standard terms and conditions particularly for payment terms may vary to accommodate geographic areas or types of pharmacies) and that this is acceptable, provided that all similarly situated pharmacies are offered the same standard terms and conditions. Thus, for example, provided Part D plans offer all mail-order pharmacies in a particular area with the same standard terms and conditions, they may offer separate standard terms and conditions to mail-order pharmacies. With standard terms and conditions as a “floor” of minimum requirements that all similarly situated pharmacies must abide by, Part D plans may modify some of their standard terms and conditions to encourage participation by particular pharmacies.

Comment: Many commenters disagreed with our interpretation of the “any willing pharmacy” provision, specifically with allowing Part D plans to construct networks of preferred and non-preferred pharmacies that have different requirements for beneficiary cost sharing. These commenters argued that allowing preferred networks undermines the any willing pharmacy rule and runs counter to Congressional intent. Many said that allowing Part D plans to steer beneficiaries to preferred pharmacies would impede pharmacy access and disrupt existing relationships between pharmacists and patients. Some argued that our interpretation would disadvantage small, independent, and rural pharmacies. Others said that a designation of “non-preferred” would carry a negative connotation about the pharmacy's quality of service.

Several other commenters concurred with the any willing pharmacy policy in our proposed rule. One commenter said that State any willing pharmacy laws should be expressly preempted, while another commenter said we should clarify that State any willing provider laws continue to apply to Part D plans' non-Medicare business. One commenter asked us to clarify the extent to which we will allow Part D plans to vary their cost sharing for preferred networks.

Response: We believe that we have correctly interpreted the two related provisions in sections 1860D-4(b)(1)(A) and (B) of the Act, which require Part D plans to allow any willing pharmacy to participate in their pharmacy networks, while also allowing Part D plans to reduce cost-sharing differentially for network pharmacies. General principles of statutory interpretation require us to reconcile two seemingly conflicting statutory provisions whenever possible, rather than allowing one provision to effectively nullify the other provision. Consequently, when a statutory provision may reasonably be interpreted in two ways, we have an obligation to adopt the interpretation that gives full effect to competing provisions of the statute. We believe that our policy of permitting cost-sharing discounts for preferred pharmacies, as codified in § 423.120(a)(9), strikes an appropriate balance between the need for broad pharmacy access and the need for Part D plans to have appropriate contracting tools to lower costs.

We note, however, that while these within network distinctions are allowed, the statute also requires that such tiered cost-sharing arrangements in no way increase our payments to Part D sponsors. Therefore, tiered cost-sharing arrangements based on within-network distinctions could be included in Part D plans' benefits subject to the same actuarial tests that apply to formulary-based tiered cost-sharing structures. Thus, a reduction in cost sharing for preferred pharmacies in a Part D plan network could be offered through higher cost sharing for non-preferred pharmacies (or as alternative prescription drug coverage). We also note that differential cost-sharing in the context of preferred and non-preferred pharmacies does not raise the cost-sharing obligation of low-income subsidy eligible enrollees above the levels specified in sections 1860D-14(a)(1) and (2) of the Act.

We recognize the possibility that Part D plans could effectively limit access in portions of their service areas by using the flexibility provided in § 423.120(a)(9) of our final rule to create a within-network subset of preferred pharmacies. In other words, in designing its network, a Part D plan could establish a differential between cost-sharing at preferred versus non-preferred pharmacies—while still meeting the access standards in § 423.120(a)(1) of our proposed rule—that is so significant as to discourage enrollees in certain areas (rural areas or inner cities, for example) from enrolling in that Part D plan. We emphasize that such a network design has the potential to substantially discourage enrollment by certain Part D enrollees, and that we have the authority under section 1860D-11(e)(2)(D) of the Act to disallow benefit designs that are discriminatory. We clarify that State any willing pharmacist laws would be preempted as applicable to plans' Part D business. This is consistent with section 1860D-12(g) of the Act, which extends the State preemption provisions under section 1856(b)(3) of the Act to Part D plans.

Comment: Several commenters thought that Part D plans should only be allowed to have differential cost sharing for preferred pharmacies if they exceed the TRICARE access standard.

Response: We see no statutory basis for such a rule. Moreover, it would be difficult to construct and operationalize such a policy.

Comment: Several commenters wrote that special needs enrollees should be exempted from higher cost sharing at non-preferred pharmacies.

Response: We see no statutory basis for such a rule, and we believe that Part D plans will provide sufficient access for all Part D enrollees under our access standards in § 423.120(a)(1). As noted in our proposed rule, we will use the authority provided under section 1860D-11(e)(2)(D) of the Act to review, as part of the bid negotiation process, how Part D plan networks make preferred and non-preferred distinctions among their network pharmacies and disallow them if such proposed network designs would substantially discourage enrollment by certain beneficiaries in any part of a Part D plan's service area. We believe that special needs enrollees will be sufficiently protected by this review. To the extent that special needs enrollees are also eligible for low-income subsidies, as indicated above, differential cost-sharing based on preferred pharmacy status does not raise the cost-sharing obligation of low-income subsidy eligible enrollees above the levels specified in the Act.

Comment: Several commenters suggested that the TRICARE access standards be applied to Part D plans' “preferred” networks rather than its general network. Several other commenters concurred with the regulation as drafted in the proposed rule.

Response: Section 1860D-4(b)(1)(B) of the Act clarifies that a Part D sponsor has the option of reducing cost-sharing for covered Part D drugs dispensed through network pharmacies below the level that would have otherwise applied. Because the statute provides that such distinctions can be made within a network, we do not believe that only preferred pharmacies constitute a Part D plan's network for the purposes of meeting the access standards in § 423.120(a)(1) of our final rule. Rather, both preferred and non-preferred pharmacies form part of a Part D plan network, and plans may count both of these types of network pharmacies toward their access standards.

Comment: Several commenters recommended that beneficiaries be able to get an extended supply of drugs, greater than a 30-day supply, from network retail pharmacies and mail-order pharmacies.

Response: We clarify that section 1860D-4(b)(1)(D) of the Act, and § 423.120(a)(10) of our final rule, require Part D plans to permit enrollees to receive extended supplies (for example, 90-day supplies) of covered Part D drugs through a network retail pharmacy.

Comment: Some commenters noted that our proposed regulations would unfairly allow Part D plans to charge beneficiaries more when they obtain their prescriptions at a community pharmacy than when they use mail order. One commenter notes that seniors benefit from face-to-face interaction with a pharmacist more than other age groups, which would be precluded under mail order and would limit enrollees' ability to use the pharmacy and pharmacist of their choice.

Many commenters recommended that we specifically prohibit Part D plans from using economic incentives for beneficiaries to use mail order that could create significant differences in cost sharing for mail order versus retail pharmacy prescription, or that plans make such difference minimal. One commenter recommended that Part D plans use the same average wholesale price (AWP) basis to determine the reimbursement rate for mail order and retail pharmacies. Another commenter noted that there is substantial evidence that seniors, particularly low-income seniors, are victims of theft from their mailboxes, undermining the financial incentive of mail order. This commenter recommended that we allow beneficiaries to pay the mail order price at a retail pharmacy when they can demonstrate their mailbox is not secure.

Response: As provided in section 1860D-11(i) of the Act, we have no authority to interfere with the negotiations between Part D plans and pharmacies and therefore cannot mandate that Part D plans negotiate the same, or similar, reimbursement rates with all pharmacies. Provided Part D plans offer all pharmacies standard terms and conditions, they may modify their contracting terms—including payment provisions as necessary, as long as all similarly situated pharmacies are subject to the same minimum terms and conditions. Moreover, section 1860D-4(b)(1)(B) of the Act provides Part D plans with the authority to designate some network pharmacies, including mail-order pharmacies, as preferred pharmacies offering plan enrollees lower cost sharing.

Comment: One commenter noted that MA organizations that own and operate their own pharmacies usually have internal systems for providing prescription services by mail that are fully integrated with the overall pharmacy operation. As a result, it is difficult to provide an incentive to beneficiaries to use less costly mail services. The commenter said we should permit these organizations to establish differential benefit levels for mail delivery as opposed to in-facility pickup.

Response: As noted above, Part D plans have the flexibility to establish different cost-sharing requirements for the pharmacies in their networks consistent with section 1860D-4(b)(1)(B) of the Act. Accordingly, Part D plans have the flexibility to establish differential cost-sharing requirements for mail delivery and in-facility pickup.

Comment: One commenter recommended that we require Part D plans to contract with pharmacies that offer home delivery service, noting that same-day or next day need for medications makes mail-order an impracticable option.

Response: We do not believe there is a compelling rationale to require Part D plans to contract with pharmacies that offer home delivery service. As discussed elsewhere in this preamble, we have defined the term “dispensing fees” in § 423.100 of our final rule to include reasonable pharmacy costs, including delivery costs, associated with ensuring that possession of the appropriate covered Part D drug is transferred to a Part D enrollee. We clarify that reasonable delivery costs include only those costs appropriate for the typical beneficiary in a particular pharmacy setting. Thus, while it would be appropriate for Part D plans to reimburse long-term care, mail-order, and home infusion pharmacies for home delivery costs via the dispensing fee, this would not be the case for retail pharmacies (where the term “delivery” would be limited to the transfer of a covered Part D drug from the pharmacist to the patient at the point of sale) because the typical retail customer does not require home delivery. While retail pharmacies may offer home delivery services, Part D plans may not reimburse those pharmacies for these costs, and the delivery cost must be borne by the beneficiary.

Comment: Two commenters expressed their support for our interpretation of the term “insurance risk” and asked that we include in our regulations a statement that the prohibition against the assumption of risk by Part D plans' network pharmacies not preclude performance-based measures of activities within the control of a pharmacy (for example, formulary compliance and generic drug substitution).

Response: We clarify that our definition of the term “insurance risk” in § 423.4 of the final rule specifically excludes “payment variations designed to reflect performance-based measures of activities within the control of a pharmacy, such as formulary compliance and generic drug substitutions.”

b. Formulary Requirements

1. PT Committee Requirements

To the extent that a Part D sponsor uses a formulary to provide qualified prescription drug coverage to Part D enrollees, it will be required to meet the requirements of section 1860D-4(b)(3)(A) of the Act to use a pharmaceutical and therapeutic (PT) committee to develop and review that formulary.

The majority of members comprising the PT committee will be required to be practicing physicians or practicing pharmacists. In addition, at least one practicing pharmacist and one practicing physician member will have to be experts in the care of elderly and disabled individuals. Section § 423.120(b)(1)(ii) of the proposed rule also provided that at least one practicing pharmacist and one practicing physician members on a Part D plan's PT committee be independent experts.

When developing and reviewing the formulary, the PT committee will be required, in accordance with section 1860D-4(b)(3)(B) of the Act, to base clinical decisions on the strength of scientific evidence and standards of practice, including assessing peer-reviewed medical literature. Section § 423.120(b)(1)(viii) of our proposed rule required that any decisions made by the PT committee regarding development or revision of a Part D plan's formulary be documented in writing.

Except as otherwise provided below, the final rule adopts the requirements related to PT committees set forth in § 423.120(b)(1) of our proposed rule.

Comment: Many commenters thought that PT committee decisions regarding a Part D plan's formulary should be binding on a plan. Other commenters thought that PT committee recommendations should be advisory, and not binding. Several others believed that only clinical decisions should be binding on the Part D plan and that the ultimate responsibility for overall formulary design should reside with the plan and ultimately involved business leaders and technical experts. One commenter stated that it was not likely that a PT committee comprised of non-employee clinicians would be able to make coverage determination in the Part D plan's and enrollees' best interests, particularly since many benefit design decisions have a financial, as well as a clinical, component.

Response: We agree with commenters who sought to draw a distinction between clinical and overall formulary design issues. We believe that the function of a PT committee is to provide expertise on clinical issues, and not financial or benefit design issues. We interpret the requirement in section 1860D-4(b)(3)(A) of the Act and § 423.120(b)(1) of our final rule that Part D plan formularies be developed and reviewed by a PT committee to mean that committee recommendations regarding which drugs are placed on a plan's formulary be binding on the Part D plan. Although § 423.120(b)(vi) and (b)(vii) of our final rule envision a role for the PT committee in reviewing policies that guide exceptions and other utilization management processes including drug utilization review, generic substitution, quantity limits, and therapeutic interchange and in evaluating and analyzing treatment protocols and procedures related to the Part D plan's formulary at least annually, PT committee recommendations in these areas should be considered advisory and not binding. We clarify, for example, that while the PT committee may be involved in providing clinical recommendations regarding the placement of a particular Part D drug on a formulary cost-sharing tier, the ultimate decision on such formulary design issues is the Part D plan's, and that decision weighs both clinical and non-clinical factors. Thus, a PT committee's role in formulary cost-sharing tiers, while important, would be advisory and not binding.

Comment: Many commenters recommended that we strengthen the statutory requirement in section 1860D-4(b)(3)(A)(ii) of the Act and require that more than just one practicing physician and one practicing pharmacist are independent and free of conflict. Suggestions for new requirements included that all, a majority, two-thirds, one-half, 40 percent, and at least four (at least two practicing physicians and two practicing pharmacists) members of a Part D plan's PT committee be independent and free of conflict in order to ensure that formulary development is in line with beneficiary and not plan or pharmaceutical manufacturer interests. One commenter supported our current requirement requiring that at least one practicing physician and one practicing pharmacist on the committee be independent and free of conflict

Response: We appreciate commenters' suggestions and agree that maintaining the impartiality and objectivity of PT committee members is an important goal. We have retained the proposed rule requirement that at least one practicing pharmacist and one practicing physician on the PT committee be independent and free of conflict—in § 423.120(b)(1)(ii) of our final rule, though Part D plans should view this requirement as a floor which we encourage them to exceed. To balance concerns about conflicts of interest with regard to PT committee members, and as proposed in the draft benefit design review criteria we recently issued for public comment, we would require all PT committee members to sign a conflict of interest statement revealing economic or other relationships with entities that could influence pharmaceutical decisions, and to disclose such conflicts to other committee members. If PT committee discussions center around a drug that presents a conflict of interest issue for a particular committee member, he or she would recuse himself or herself from any discussions or votes associated with that drug. We believe this requirement is necessary to ensure that the PT committee's clinical decisions regarding development and review of the formulary are based on the strength of scientific evidence and standards of practice, safety and efficacy considerations, and other such appropriate information and considerations in accordance with section 1860D-4(b)(3)(B) of the Act. In addition, this requirement is consistent with best practices in pharmacy benefit management, and we expect that Part D plans will implement disclosure of conflicts and recusal procedures consistent with standard industry practice.

Comment: Many commenters requested clarification regarding our definition of the term “independent and free of conflict” with respect to a Part D sponsor and a Part D plan. Several commenters asked to clarify that our regulations regarding independence and freedom from conflict not preclude individuals from serving on a PT committee simply because they are members of a Part D plan's provider network.

Response: In our proposed rule, we interpreted the language at section 1860D-4(b)(3)(A)(ii) of the Act requiring certain members of the PT committee to be “independent and free of conflict” to mean that such PT committee members could have no stake, financial or otherwise, in formulary determinations. We believe this interpretation is still appropriate, but clarify that we believe a PT committee member not to be free of conflict of interest if he or she has any direct or indirect financial interest in any entity—including Part D plans and pharmaceutical manufacturers—that would benefit from decisions regarding plan formularies.

Thus, Part D plan network providers may be considered to be independent and free of conflict, provided they are not plan employees or contract workers and do not otherwise have any conflicts of interests that would compromise their independence. In cases of staff model HMOs, panel providers may be determined to be independent and free of conflict to the extent that any remuneration received from a Part D plan is limited to his or her clinical responsibilities for the care of plan enrollees.

Comment: In our proposed rule, we interpreted the language at section 1860D-4(b)(3)(A)(ii) of the Act requiring certain members of the PT committee to be “independent and free of conflict” to mean that such PT committee members would be required to be independent and free of conflict not only with respect to a Part D sponsor and its Part D plan, but also for pharmaceutical manufacturers. Some commenters supported such a requirement. A few commenters opposed such a requirement, however, claiming that our interpretation imposes a more stringent requirement than is permitted under the MMA. A number of other commenters cautioned us that our interpretation could exclude a significant number of individuals who are engaged in pharmaceutical and clinical research funded by pharmaceutical manufacturers.

Response: Section 1860D-4(b)(3)(A)(ii)(I) of the Act requires that at least one practicing physician and at least one practicing pharmacist on a Part D plan's PT committee be independent and free of conflict only with respect to a Part D sponsor and its Part D plan. However, given the requirement in section 1860D-4(b)(3)(B) of the Act that the PT committee base clinical decisions on the strength of scientific evidence and standards of practice, and taking into account therapeutic advantages in terms of safety and efficacy, we believe it is necessary for those committee members who are “independent and free of conflict” to be so with respect to pharmaceutical manufacturers as well. We agree that PT committee members could have certain non-employee relationships with pharmaceutical manufacturers (for example, consulting, advisory, or research relationships) and still be considered independent and free of conflict, provided those relationships do not constitute significant sources of their income and they do not otherwise have any conflicts of interests that would compromise their independence. As already mentioned, our draft benefit review criteria (recently issued for public comment) would require all PT committee members to sign a conflict of interest statement revealing economic or other relationships with entities that could influence pharmaceutical decisions. This requirement is consistent with best practices in pharmacy benefit management, and we expect that it will be met consistent with industry standards for conflict of interest disclosures.

Comment: Several commenters supported requiring that a plurality of PT committee members be experts in the care of elderly and disabled patients. Some commenters recommended that use of the certified geriatric pharmacist credential would be an appropriate way to ensure that at least one pharmacist on the PT committee has expertise in care of the elderly. One commenter opposed requiring that at least one practicing physician and one practicing pharmacist be experts in the care of elderly and disabled patients. Another commenter thought that at least one member of Part D plans' PT committees should be a State Medicaid representative.

Response: As provided in § 423.120(b)(1)(iii) of our final rule, we are retaining the requirement that at least one practicing physician and one practicing pharmacist on a PT committee have expertise in the care of elderly or disabled persons, though plans should view this requirement as a floor which they can certainly exceed. As proposed in the draft benefit design review criteria we recently issued for public comment, we would require PT committee members to represent various clinical specialties. This requirement is consistent with best practices in pharmacy benefit management and will ensure that appropriate expertise—including in the areas of care of disabled and elderly populations—is included on Part D plans' PT committees and that their clinical decisions are based on the strength of scientific evidence and standards of practice, and safety and efficacy considerations. We expect that PT committee members will represent a mix of clinical specialties in order to ensure that PT committees have the breadth of expertise necessary to adequately evaluate scientific evidence, standards of practice, and other information.

Comment: A number of commenters suggested that we should require that PT committees include experts in certain clinical specialties (for example, nephrology, oncology, rheumatology, dermatology, mental health, long-term care, and many others) or, at the very least, that such experts serve as consultants to PT committees.

Response: We agree that PT committee members should represent various clinical specialties in order to provide the depth of expertise needed to develop an adequate formulary and utilization management processes for the Medicare population. As proposed in the draft benefit design review criteria we recently issued for public comment, we would require PT committee members to represent various clinical specialties. This requirement is consistent with best practices in pharmacy benefit management. In addition, we note that, since committee members must base clinical decisions on the strength of scientific evidence and standards of practice, it is not essential that every specialty be represented—either as a PT committee member or as a consultant. For some issues, the use of peer-reviewed medical literature—including randomized clinical trials, pharmacoeconomic studies, outcomes research data, and other such information—may be sufficient.

Comment: We received a number of comments regarding our requirements for the basis of clinical decisions by Part D plan PT committees. One commenter supported our characterization of the appropriate role of quality and cost considerations in Part D plan formulary development. Some commenters emphasized that cost considerations should be secondary to clinical issues in formulary development and review. One commenter suggested segregating cost and clinical reviews to preserve objectivity. Several commenters specifically suggested that we require Part D plan PT committees to use classes of data that are included in the Academy of Managed Care Pharmacy (AMCP) format for Formulary Submissions—including clinical trials, health outcomes studies, and economic and budget impact models—as well as clinical guidelines issued by medical specialty societies. Several other commenters encouraged us to require Part D plans to consider data addressing total health care costs, if available, rather than pharmacy costs, in any cost considerations used for clinical decision-making.

Response: As required in section 1860D-4(b)(3)(B) of the Act, PT committees will be required to base clinical decisions on the strength of scientific evidence and standards of practice, including assessing peer-reviewed medical literature (for example, randomized clinical trials, pharmacoeconomic studies, outcomes research data, and other such information as the committee determines appropriate). In addition, a PT committee must take into account whether including a particular Part D drug on the Part D plan's formulary (or on a particular formulary tier) has any therapeutic advantages in terms of safety and efficacy. Where applicable, therapeutic advantage should be considered in relation to the interaction of a drug therapy regimen and the use of other health care services.

We agree with commenters who urged that Part D plans consider data addressing total health care costs, if available, rather than pharmacy costs, in any cost considerations used for clinical decision-making. Since Part D sponsors have discretion with regard to the actual information their PT committees use, we cannot mandate that all Part D plans use pharmacoeconomic studies, for example. However, in our subsequent guidance we intend to make clear that to the extent that the Part D plan considers costs in making its decision, it will take into account total health care costs rather than just drug costs. For example, to the extent that a particular drug has been shown to be more effective in preventing the need for hospital care or better at controlling acute flare-ups requiring the use of other services, we expect PT committees to take these things into account in their determinations of drug efficacy. Given these requirements for evidence-based decision-making, it is our expectation that committee members will balance any relevant cost considerations with clinical considerations.

Comment: Some commenters supported a role for PT committees in designing formulary tiers and any other clinical program implemented to encourage the use of preferred drugs. One commenter supported such a role, provided that PT committees are not required to be engaged in other benefit design issues.

However, several commenters believed that PT committees should have no involvement in the development of utilization management programs including development of cost-containment tools, medication therapy management programs, and quality assurance programs, as well as more specific benefit design issues such as the development of cost-sharing tiers and should instead be limited to providing Part D plans with clinical recommendations on formularies. Other commenters thought that we should provide Part D plans with flexibility to determine how utilization management programs are designed and administered.

Response: We believe that the requirement in section 1860D-3(c)(1) of the Act that Part D sponsors establish an appropriate cost-effective drug utilization management program supports a role for PT committees in the development of formulary management practices and policies—including prior authorization, step therapy, generic substitution, quantity limits, and other drug utilization management activities that affect access to covered Part D drugs. Furthermore, section 1860D-4(b)(3)(F) of the Act and § 423.120(b)(1)(vii) of our final rule require Part D plans to periodically evaluate and analyze treatment protocols and procedures. Clinical input is critical in the development of these policies in order to ensure that formulary management decisions balance economic and clinical factors to achieve appropriate, safe, and cost-effective policies. The review by PT committees of Part D plan policies that guide exceptions and other utilization management processes is not only an important component in ensuring that plans adopt appropriate utilization management activities consistent with the statutory requirements, but also is consistent with best practices in pharmacy management policy. However, as previously stated, we believe that the primary function of a PT committee is to provide clinical and not financial or benefit design—expertise.

Comment: Some commenters suggested that PT committees review formularies regularly, with some suggesting a quarterly review and others an annual review

Response: As proposed in the draft benefit design review criteria we recently issued for public comment, we expect that PT committees will meet on a regular basis, but not less frequently than on a quarterly basis. This standard is consistent with best practices in pharmacy management policy.

Comment: One commenter urged us to specify minimum timeframes for periodic evaluation of Part D plan treatment protocols and formulary-related procedures under § 423.120(b)(4) of our proposed rule. A number of commenters recommended that protocol reviews be conducted on an ongoing basis at least quarterly, whereas some specified that such reviews be conducted at least annually.

Response: As specified in § 423.120(b)(1)(vii) of our final rule, Part D plan PT committees will be required to evaluate and analyze treatment protocols and procedures related to the plan's formulary at least annually.

Comment: A number of commenters also asked us to require that PT committees have processes for making formulary revisions between regularly scheduled meetings when new clinical information becomes available or the FDA approves new medications.

Response: As proposed in the draft benefit design review criteria we recently issued for public comment, we expect that PT committees will review new Part D drugs, or drugs for which new clinical information is made available by the Food and Drug Administration, within 90 days of the availability of new information. This will allow for appropriate formulary changes to be made with all due speed and ensure that a Part D plan's formulary is based on the most recently available scientific evidence, standards of practice, and drugs' relative therapeutic advantages in terms of safety and efficacy. However, we expect that drugs pulled from the market by the FDA or manufacturers will be removed from Part D plan formularies immediately.

Comment: Many commenters suggested additional requirements for ensuring PT committee accountability, including requiring Part D plans to have a PT committee regardless of whether they have a formulary or not; including a patient advocate on the committee to represent interests of patients; developing an oversight mechanism similar to local Medicare carrier advisory committees; requiring PT committee meetings to be held publicly in order for consumers and stakeholders to have an opportunity to hear committee deliberations; requiring Part D plans to include a charge ensuring that the interests of beneficiaries are protected by their benefit design decisions; requiring thorough documentation of the rationale for PT committee decisions; and requiring PT committee decisions to be issued to the public upon request within a reasonable period of time.

Response: These requirements are not consistent with standard practice in pharmacy benefit management. We believe that our requirements in § 423.120(b)(1) of the final rule, as well as our formulary review which will consider the structure and utilization of an organizations PT committee will sufficiently ensure that PT committees function as a forum for evidence-based formulary review. As an added safeguard, and as provided in § 423.120(b)(1)(viii) of our final rule, we will require Part D plan PT committees to document in writing the basis of their decisions regarding formulary development and revision and utilization management activities.

2. Plan Formularies

As provided under section 1860D-4(b)(3)(C)(ii) of the Act, we requested that the U.S. Pharmacopoeia (USP) develop a model set of guidelines that consists of a list of drug categories and classes that may be used by Part D sponsors to develop formularies for their qualified prescription drug coverage, including their therapeutic categories and classes. For more information about the USP model guidelines and the model guidelines themselves, please consult http://www.usp.org/drugInformation/mmg/.

Section 1860D-4(b)(3)(C) of the Act provides, and § 423.120(b)(2) of our proposed rule required, the inclusion of drugs in each therapeutic category and class of Part D drugs in a Part D plan's formulary, although not necessarily all drugs within such categories and classes. As discussed in the proposed rule, we interpreted this provision to require coverage of at least two Part D drugs within each therapeutic category and class of Part D drugs, unless only one Part D drug existed in a particular therapeutic category and class of Part D drugs.

We sought comments on ways to balance Part D plans' flexibility to use utilization management mechanisms to maximize covered Part D drug discounts and lower enrollee premiums with the needs of certain special populations of Part D enrollees, including Part D enrollees residing in long-term care facilities.

In accordance with section 1860D-4(b)(3)(C)(iii) of the Act, Part D sponsors cannot change therapeutic categories and classes in a formulary other than at the beginning of a Part D plan year, except as we would permit to take into account new therapeutic uses and newly approved Part D drugs. Section 423.120(b)(4) of our proposed rule specified that, in accordance with section 1860D-4(b)(3)(F) of the Act, Part D sponsors will periodically be required to evaluate and analyze treatment protocols and procedures related to their formularies to ensure that their Part D plan members were receiving the best possible care for conditions related to their use of covered Part D drugs.

In addition, section 1860D-4(b)(3)(E) of the Act requires that Part D sponsors provide “appropriate notice” to us, affected enrollees, authorized prescribers, pharmacists, and pharmacies regarding any decision to either: (1) remove a drug from its formulary; or (2) make any change in the preferred or tiered cost-sharing status of a drug. Section 423.120(b)(5) of our proposed rule implemented this requirement by defining appropriate notice as at least 30 days prior to such change taking effect during a given contract year.

As provided under § 423.120(b)(6) of our proposed rule, we proposed that Part D sponsors be prohibited from removing a covered Part D drug or from changing the preferred or tiered cost-sharing status of a covered Part D drug between the beginning of the annual coordinated election period described in § 423.38(b) and 30 days subsequent to the beginning of the contract year associated with that annual coordinated election period.

Each Part D sponsor will also be required to establish policies and procedures to educate and inform health care providers and enrollees about its formulary, according to the provisions of section 1860D-4(b)(3)(D) of the Act. As required under section 1860D-4(b)(3) of the Act, the requirements regarding the development and application of formularies discussed in this preamble section may be met by a Part D sponsor directly, or through contracts or other arrangements between a Part D sponsor and another entity or entities.

Except as otherwise provided below, the final rule adopts the rules for Part D plan formularies set forth in § 423.120(b) of the proposed rule.

Comment: We received a significant number of comments that directly and indirectly relate to the USP draft model guidelines issued for public comment in August 2004. In general, the USP related comments can be grouped into two categories. On one side, many comments claim that the current draft model guidelines lack the necessary detail to ensure that beneficiaries will have access to a comprehensive drug benefit, often citing specific examples of medications that are necessary for the treatment of the most frail and vulnerable populations and could be excluded from Part D plan formularies that comply with the model guidelines.

On the other hand, many comments recommended that the USP model guidelines allow Part D plans the flexibility they need to develop clinically sound formularies that offer a prescription drug benefit at the lowest possible cost. Most of these commenters believe that the draft model guidelines, while in need of some specific modifications, are closer to reasonable than unreasonable. However, these commenters claim that the minimum “drugs” requirements for each category and class could significantly increase benefit costs if the categories and classes increase to a level of detail that interferes with Part D plans' ability to negotiate with manufacturers.

Response: We believe that the USP model guidelines identify a reasonable number of categories and classes that balance the need for a comprehensive Part D benefit with the need to allow Part D plans flexibility to develop their own formularies and manage costs. These model guidelines will provide us with a useful, standard format as a starting point for our review of Part D plan benefit packages, since we expect many plans will adopt the model guidelines as the basis for their formulary classifications and submissions.

The model guidelines, while important in creating a template for a formulary classification system, are not the only determinant of an adequate formulary. Plans will be required to include the types of drugs most commonly needed by Part D enrollees, as recognized in national treatment guidelines, in their formularies. Regardless of whether a Part D plan chooses to use the model guidelines or not, we will review the drugs chosen to populate plan formularies under our authority in section 1860D-11(e)(2)(D) of the Act to ensure that plan benefit design does not discourage enrollment by certain classes of Part D eligible individuals. However, formulary structure—including tiered cost-sharing structures -utilization management processes, PT committee utilization and structure, and exceptions and appeals processes are just as important in ensuring a comprehensive benefit, and we intend to review these benefit design features as part of our comprehensive benefit package review. We discuss our benefit design review criteria in greater detail elsewhere in this preamble.

Comment: Several commenters disagreed with our interpretation of the statutory term “drugs” as requiring coverage of at least two Part D drugs within each therapeutic category and class of Part D drugs (unless only one Part D drug existed in a particular therapeutic category and class of Part D drugs), arguing that such an interpretation was too expansive, and requiring coverage of too many drugs in too many categories would diminish Part D plans' negotiating leverage. These commenters provided examples of drug categories for which a blanket requirement of two drugs is not appropriate, and an exception should be granted. One commenter recommended that we should allow an exception from this rule for categories and classes that only include two drugs, and allow enrollees to obtain the non-formulary drug in such categories via the exceptions process only.

In contrast, several commenters believed that requiring Part D plans to include two drugs in each therapeutic category and class of Part D drugs was not sufficient to ensure enrollee access to necessary medications. They were concerned that for some categories—including cancer treatments, rare diseases, mental illness, chronic pain, and other conditions—requiring only two drugs per drug category and class would be inadequate for Part D plans in terms of the statutory requirement that plan design not discourage enrollment.

Several commenters urged us to clarify that this minimum two-drug requirement must be met through drugs or biologicals offered on an unrestricted basis (for example, not subject to utilization management processes, such as prior authorization or step therapy, non-preferred cost-sharing tiers, or other such restrictions on access to necessary therapies), with some specifically urging us to impose restrictions on step therapy by Part D plans. Some asked us to specify that the two drugs must be distinct chemical entities. One commenter recommended that we do not allow any Part B-covered drugs to count toward the two-drug-per-category requirement.

Response: Section 1860D-4(b)(3)(C) of the Act requires that Part D plans' formularies include “drugs within each therapeutic category and class of Part D drugs, although not necessarily all drugs within such categories and classes.” We believe that our interpretation of “drugs” as “at least two drugs” is consistent with Congressional intent, and that it strikes an appropriate balance between providing Part D plans with the necessary leverage to negotiate with manufacturers for significant discounts on covered Part D drugs and ensuring sufficient drug choice for beneficiaries. We have therefore retained the two-drug minimum requirement in § 423.120(b)(2)(i) of our final rule.

However, we recognize that Part D categories and classes may exist for which there are only two Part D drugs, and that including both of those drugs on a formulary may be problematic if the two drugs are vastly different in their clinical effectiveness. Given that section 1860D-4(b)(3)(C) of the Act requires that Part D plan formularies include “drugs within each therapeutic category and class of Part D drugs, although not necessarily all drugs within such categories and classes,” we will allow plans to request exceptions to the requirement in § 423.120(b)(2)(i) of our final rule to the extent they can demonstrate that there are only two Part D drugs available for a particular Part D drug category or class and that one of those drugs is clinically superior to the other. We have incorporated this provision at § 423.120(b)(2)(ii) of our final rule.

In response to comments that our proposed requirement is insufficient to provide adequate access to medically necessary treatments for Part D enrollees, we clarify that we will require Part D plans to adopt policies that ensure that beneficiaries have reasonable access to medically necessary drugs. Although Part D plans will not be required to include every Part D drug on their formularies, we will—as codified in § 423.120(b)(2)(iii) of our final rule—require that plans include adequate access to the types of drugs most commonly needed by Part D enrollees, as recognized in national treatment guidelines, on plan formularies. We are establishing this requirement consistent with section 1860D-11(d)(2)(B) of the Act, which provides us with authority similar to that provided to the Director of the Office of Personnel Management for setting “reasonable minimum standards” for health benefits plans. We are looking to existing national standards to inform our review at the drug level, and Part D plans will be expected to accommodate national guidelines and offer complete treatment options for a variety of medical conditions, including (but not limited to) asthma, diabetes, depression, lipid disorders, hypertension, and HIV. This is necessary in order to ensure that Part D plans do not substantially discourage enrollment by certain Part D eligible individuals based on exclusions of certain classes of drugs from their formularies. In addition to examining specific drugs on Part D plan formularies, and as discussed in greater detail elsewhere in this preamble, we will review other aspects of plan benefit designs—including tiered cost-sharing formulary structures, PT committee structure and utilization, utilization management policies and processes, and exceptions and appeals processes—to ensure that Part D plans generally meet the requirements under Part D, including the provision of an adequate benefit.

We do not agree with comments asking that the two-drug requirement be met through drugs offered on an unrestricted basis. We recognize that Part D plans may establish utilization management processes in such a way as to substantially discourage enrollment by certain beneficiaries. On the other hand, utilization management restrictions may be entirely appropriate for specific drugs or categories of drugs. Furthermore, the statute specifically allows plans to utilize tiered cost-sharing structures provided they meet certain actuarial equivalence tests. As previously mentioned, part of our benefit design review will focus not only on the specific drugs included on a Part D plan's formulary, but also on a plan's utilization management policies and procedures, to ensure that plans do not discriminate against certain enrollees.

In addition, while drugs covered under Part B cannot be covered under Part D, as provided in section 1860D-2(e)(2)(B) of the Act, this exception to Part D coverage is limited to the drugs “as so prescribed and administered” under Part B. Thus, the fact that a beneficiary can have a particular drug covered under Part B “incident to” a physician service or as part of a hospital outpatient procedure does not mean that a prescription for the same drug should be denied by a Part D plan. We will provide more guidance on this issue, but we clarify that the number of drugs that may be denied coverage under Part D on the basis of the drug itself is limited. One category of drugs that can clearly never be covered under Part D is the list of oral cancer drugs covered under Part B. Such drugs and limited number of others may not be counted toward the two-drug minimum.

Finally, we clarify that our two-drug minimum requirement must be met through the provision of two chemically distinct drugs. In other words, Part D plans may not include two dosage forms or strengths of the same drug, or a brand-name drug and a generic equivalent, in a particular category or class and meet the requirement in § 423.120(b)(2)(i) of our final rule.

Comment: One commenter recommended that Part D plans' formularies include a wide variety of available dosage forms to the extent that was feasible. Another commenter asked us to clarify that we would not allow Part D plans to count different dosages of the same active ingredient as two separate drugs for the purposes of our two drug requirement. A third commenter asked us to clarify that it is acceptable for Part D plans to favor some dosages over others on their formularies.

Response: We stated in our proposed rule that it was our expectation that the drugs included in each therapeutic category or class would include a variety of strengths and dosage forms, and we stand by that expectation in our final rule. However, we clarify that Part D plans will not have to provide equal access to all strengths and dosage forms of a particular Part D drug, although beneficiaries will have the right to pursue coverage of additional strengths and dosage forms through the appeals process. We have clarified in § 423.120(b)(2)(i) of our final rule that Part D plans must include two chemically distinct Part D drugs in each therapeutic category and class of drugs, with different strengths and doses available for each of those drugs. Thus, Part D plans may not meet this requirement by only including two or more different dosages of the same Part D drug in a particular drug category or class.

Comment: Many commenters were concerned that our regulations will create barriers to physicians prescribing the best medication for their patients, including off-label uses of medications, which are common for many conditions and are the norm for some conditions. In actuality, off-label use is critically important and may be the mainstay of medical practice for successfully managing certain conditions, such as mental illnesses, chronic pain, chronic heart failure, arthritis, Parkinson's, HIV/AIDS and dementia. The FDA recognizes that “off-label use of drugs by prescribers is often appropriate and may represent the standard of practice.” A number of commenters opposed our position that the USP model guidelines should not be required to include classes of drugs if there is no FDA approved drug with an on-label indication for each class, even though there are FDA-approved drugs with commonly accepted off-label uses that would fall within a class. One commenter noted that any action taken by us regarding off-label use of medications would have a ripple effect on other public and private programs.

Some commenters requested that we clarify the formulary requirements in our final rule to require Part D plans to cover medically accepted off-label use of prescription drugs. They believe this is consistent with Congressional intent and past practice under the Medicare and Medicaid programs. In addition, one commenter is concerned that by assigning a drug to a specific class for formulary purposes, a Part D plan may not cover it for other medically accepted indications. One commenter suggested formularies should be required to include off-label uses for drugs for the prevention and treatment recommended in clinical guidelines issued by government agencies and medical societies, whether on-label or off-label. Another commenter said that off-label use must be accessible through a Part D plan's exceptions process for non-formulary drugs.

Response: We recognize the value of off label prescribing, particularly with regard to certain medical conditions. As mentioned in the proposed rule, we expect that the model categories and classes developed by USP will be defined so that each includes at least one drug that is approved by the FDA for the indication(s) in the category or class. That is, no category or class will be created for which there is no FDA approved drug and which would therefore have to include a drug based on its “off label” indication. We expect Part D plans using alternative drug classification systems to include at least one drug that is approved by the FDA for the indication(s) in each drug category or class. However, this would not preclude physicians and other prescribers from prescribing drugs for off label indications, provided the drug is prescribed for a “medically accepted indication,” as defined in section 1927(k)(6) of the Act. Further, we clarify that the USP model guidelines would not preclude Part D sponsors from assigning an FDA approved drug to a category or class based on an off label use for that drug, provided the FDA has not made a determination that the drug is unsafe for that use.

We do not have the authority to require that Part D plans cover the off-label use of certain Part D drugs. However, as discussed in greater detail elsewhere in this preamble, we will thoroughly evaluate plan benefit design to ensure that Part D plans provide an adequate benefit and do not discriminate against certain classes of Part D enrollees—including a review of plan utilization management policies and processes, formulary structure, and plan exceptions and appeals processes. We believe that these safeguards will ensure Part D enrollee access to Part D drugs dispensed for medically appropriate off label indications.

Comment: Multiple commenters were concerned that it is inappropriate for physicians to be given the new burden to “document and justify” off-label use in their Part D enrollees' clinical records due to the administrative burden and the interference with the practice of medicine by physicians. Many commenters mentioned that the FDA has recognized the right of physicians to use approved drugs and devices as they believe appropriate and never suggested there is a need to document such use. One commenter noted this documentation requirement is unprecedented and steps beyond well-established boundaries by inserting us into an individual physician's professional decision-making. If documentation is required, one commenter asked us to clarify what constitutes sufficient documentation.

One commenter, however, noted the need for documentation on prescriptions for off label use to enable pharmacists to conduct drug utilization review. Another commenter recommended regular reviews by us and by PT committees through drug utilization and provider interviews as is customary in commercial plans.

Many commenters urged us to mandate that Part D plans give deference and flexibility to physicians when making coverage determinations since a patient's physician has clinical expertise and intimate knowledge of patients' medical needs. One commenter suggested that we specify that Part D plans may not prohibit providers from prescribing drugs for discretionary use if such use is supported by one or more standard reference compendia or by one or more scientific studies published in peer-reviewed medical journals or by generally accepted standards of clinical care. One commenter suggested that MMA regulations should restrict the ability of Part D plans to limit physician prescribing for off-label purposes unless there is objective medical evidence that such prescribing is inefficacious or harmful to the individual patient.

Commenters noted that onerous administrative hurdles associated with medically necessary off-label use could result in barriers to patient access to essential therapies. Without specific guidance, Part D plans could simply minimize financial risk through delay tactics disguised as Federal documentation requirements. One commenter recommended that at a minimum, we should clarify that there is nothing to prevent a Part D plan from covering an off-label use that does not meet the statutory definition of “medically accepted indication” if, based on expert advice, the plan determines that such use is appropriate. Multiple commenters suggested that the final rule guidance for Part D drugs should be at least as flexible as the current coverage policies for drugs covered under Medicare Part B. Under Part B, the definition of a “medically accepted indication” includes indications published in peer-reviewed literature; current Part B coverage policy regarding off-label drug use is also consistent with these norms.

Response: By stating in the proposed rule preamble that we strongly encouraged physicians and other prescribers to clearly document and justify off-label use in their Part D enrollees' clinical records, we did not intend to establish a new documentation requirement for prescribers. We agree with commenters that physicians must have sufficient latitude to prescribe drugs as necessary based on their patients' particular medical needs and consistent with medical standards of practice, and our statement should not be interpreted as imposing new and onerous reporting requirements on prescribers. As previously mentioned, we will thoroughly review plan benefit designs to ensure that Part D plans meet all applicable requirements under Part D including the provision of an adequate benefit. We expect that onerous documentation requirements for off-label prescribing could potentially be cause for finding that a Part D plan's proposed benefit structure does not meet Part D requirements.

We note that a drug is considered to be a Part D drug only if prescribed for a “medically accepted indication” as defined under section 1927(k)(6) of the Act. Drugs may not be covered under Part D even if they are not prescribed for a medically accepted indication. Coverage for other than a medically accepted indication is not permitted under the statute, since such drugs would not be considered Part D drugs. Plans have the flexibility to decide how to monitor whether a drug is prescribed for a medically accepted indication, as well as to determine whether the statutory definition of “medically accepted indication” is met with regard to the particular use of a drug.

Comment: We received numerous comments regarding our authority under section 1860D-11(e)(2)(D)(i) of the Act to review Part D plan benefit designs including any formulary or tiered formulary structure to ensure that plans do not discriminate against certain Part D eligible individuals. Many commenters urged us to use this authority to thoroughly, comprehensively, and judiciously review Part D plan design and benefits including formulary structure to prevent discriminatory practices. Some of these commenters were adamant that such a review not be limited only to the particular drugs included on a formulary list, but also to tiered cost-sharing (including the use of 100 percent cost-sharing tiers), and utilization management requirements (for example, appeals, prior authorization, and step therapy requirements).

Several other comments cautioned us not to be overly prescriptive in our formulary review criteria and avoid unintentionally limiting the ability of Part D plans to manage the costs of the Part D benefit. One commenter suggested that our formulary review standards should provide substantial deference to PT committees including on cost-sharing, step-therapy, and prior authorization processes, and that we should not establish our own requirements in these areas.

Other commenters asked that greater specificity regarding our criteria for formulary review, as well as practices that would be considered discriminatory, be provided either in regulation or in separate guidance, or both. Several commenters urged us to use defined performance metrics to make formulary discrimination assessments. Several commenters encouraged us to establish a flexible and readily accessible process for dialogue with a variety of stakeholders to create appropriate formulary review criteria, and one commenter urged us to actually involve States in the review process.

Several commenters thought our formulary review process should be performed annually and that contract renewal should be contingent upon passing our review. Others thought that Part D plan formularies should be reviewed more often given plans' ability to make formulary changes mid-year.

Response: We will comprehensively review Part D plans' proposed benefit structure to ensure that they generally comply with all applicable standards under Part D. We intend to conduct a reasonable review, providing guidelines that Part D plans can use in building formularies and structuring their bids. We recently shared with the public a first draft of our benefit package review criteria and, based on public comments received on that document, will finalize and make available publicly our final review criteria in early 2005.

Consistent with the authority provided under section 1860D-11(e)(2)(D)(i) of the Act, we will review Part D plan formularies to ensure that plans do not discriminate against certain classes of Part D eligible individuals by adopting a benefit design (including any formulary or tiered formulary structure) that would substantially discourage enrollment by certain beneficiaries. Nothing in the statute would foreclose us from concluding that a Part D plan's formulary substantially discourages enrollment even if the plan's classes and categories are considered non-discriminatory (for example, because the plan uses the USP model guidelines to structure its formulary). Although Part D plans will not be required to include every Part D drug on their formularies, we will require Part D plans to offer an adequate benefit. For example, we have the discretion to find that failure to include a specific drug would substantially discourage enrollment by beneficiaries with a condition that may only be treated by that drug. We are looking to existing national standards to inform our review at the drug level, and Part D plans will be expected to accommodate these national guidelines.

We believe that other aspects of Part D plan benefit design including formulary structure (including tiered cost-sharing structures), the structure and utilization of a plan's PT committee, a plan's utilization management policies and procedures (for example, prior authorization, step therapy, and generic substitution), and a plan's exceptions and appeals processes are as important as a plan's formulary list of drugs in ensuring that beneficiaries are offered an adequate benefit that generally complies with all applicable standards under Part D. Therefore, we intend to review these plan features as part of our comprehensive review of Part D plan benefit designs.

We will review tiered cost-sharing arrangements to ascertain that the cost sharing associated with certain drugs or classes of drugs does not discourage enrollment by certain beneficiaries for example, those with certain diseases or medical conditions. We will also review a Part D plan's PT committee structure and processes to ensure that plans comply with the requirements of section 1860D-4(b)(3)(B) of the Act, which creates standards designed to ensure impartial, clinically-based decision-making by PT committees.

A Part D plan's utilization management policies and processes must ensure that beneficiaries have continuous, timely, and appropriate access to Part D drugs, and that such policies are structured on evidence-based criteria that are reviewed by a Part D plan's PT committee. Section 1860D-4(c)(1)(A) of the Act requires Part D plans to establish cost-effective drug utilization management programs (including incentives to reduce costs when medically appropriate). Our review of plan utilization management policies and processes will ensure that those policies and processes are medically appropriate and do not discriminate against certain beneficiaries.

We clarify that a non-formulary drug is not necessarily a non-covered Part D drug. The MMA provides for an exceptions process whereby enrollees and prescribers can request Part D coverage at more favorable cost sharing than for non-preferred drugs, as well as access to non-formulary drugs at formulary cost-sharing levels. As discussed elsewhere in this preamble, we interpret section 1860D-4(h)(2) of the Act as requiring Part D plans to cover a non-formulary drug on appeal when, upon review, a physician determination of medical necessity is upheld. Thus, while Part D plans are not required to approve a non-formulary Part D drug in the first instance at the point of sale, plans are required to provide access to Part D drugs, both formulary and non-formulary, on appeal, where there is a legitimate medical need. We will review Part D plans' exceptions and appeals processes to ensure that evidence-based criteria are used to ensure medically appropriate access to all Part D drugs, including those drugs that are not favorably placed on a plan's formulary or not on the formulary at all.

Section 1860D-11(d)(2)(B) of the Act provides us with authority similar to that provided to the Director of the Office of Personnel Management with respect to health benefits plans; this includes setting “reasonable minimum standards” for plans. As we finalize our guidelines, we will look to existing national standards and guidelines, such as those established by the Utilization Review Accreditation Commission (URAC), the National Committee for Quality Assurance (NCQA), the American Society of Health Systems Pharmacists (ASHP), and the Academy of Managed Care Pharmacy (AMCP) to develop a framework for formulary management. The principles embodied in these standards and guidelines represent commercial best practice, and we believe Part D enrollees should be granted the same rights and protections under their Part D plan as generally available to those enrolled in commercial plans.

Comment: Many commenters supported establishing rules for special treatment, to include alternative or open formularies and other special provisions and exemptions, for certain classes of enrollees. Commenters suggested a number of classes of beneficiaries that we may want to consider “special populations” for the purpose of offering such special rules, including dual eligibles, institutionalized beneficiaries, individuals with certain diseases or medical conditions, and minority populations. Other commenters opposed any requirement that special populations be subject to special rules. Instead, they argued that we should provide Part D plans the flexibility to manage and design benefits consistent with their enrollees' needs. They felt that prescriptive guidance was not necessary and that our review for discrimination should be sufficient to ensure adequate access to all medically necessary drugs.

Response: We share commenters' concerns about access to all medically necessary Part D drugs by vulnerable Part D enrollees. However, after much consideration, we disagree with commenters who advocated for specific requirements in regulation that would create special rules applicable only to certain classes of Part D enrollees. We believe commenters' concerns regarding access to Part D drugs for vulnerable populations will be addressed via our review of Part D plan benefit packages.

As discussed in great detail elsewhere in this preamble, we will comprehensively review Part D plans' proposed benefit structure to ensure that they generally comply with all applicable standards under Part D—including the provision of a benefit that provides for adequate coverage of the types of drugs most commonly needed by Part D enrollees, as recognized in national treatment guidelines. We intend to conduct a reasonable review, providing guidelines that Part D plans can use in building formularies and structuring their bids. We recently shared with the public a first draft of our benefit package review criteria and, based on public comments received on that document, will finalize and make available publicly our final review criteria in early 2005.

Comment: A number of commenters urged us to place strict limits on Part D plans' ability to remove drugs or increase the cost sharing associated with certain formulary drugs mid-year. One commenter suggested we allow for changes only at the beginning of a contract year so that changes are announced to current and prospective enrollees prior to the open enrollment period and Part D plans are able to market their new formulary for the upcoming plan year. Another commenter recommended that we allow formulary changes only from October 1 [st] to November 14 [th] of a given year.

Several commenters suggested that Part D plans be required to provide justification for any decision to remove a drug from the formulary. Another commenter stated that Part D plans should be required to document any decision to remove a drug from the formulary based on detailed scientific and clinical evidence. This commenter noted that reasons for discontinuing coverage could include new clinical evidence that a drug is unsafe, contraindicated for particular indications, or a manufacturer's withdrawal from the market. Other commenters noted that Part D plans should only be allowed to remove drugs from their formulary when new information about a drug's safety becomes available.

Response: The goal of the MMA was to encourage private sector organizations who meet the law's requirements to offer a range of Part D plan options for Medicare beneficiaries by providing flexibility in plan design and management. This flexibility is modeled after the way consumers in the private sector receive drug benefits. Although the statute requires us to limit changes in the therapeutic categories and classes of a Part D plan's formulary to the beginning of each plan year (except as we permit to take into account new therapeutic uses and newly approved Part D drugs), it does not give us similar authority to preclude mid-year changes to a Part D plan's formulary list. However, as provided in section 1860D-4(b)(3)(E) of the Act, codified in § 423.120(b)(5) of our final rule, and discussed in greater detail elsewhere in this preamble, Part D plans must provide appropriate notice to affected enrollees, among others, prior to removing a drug from their formulary or changing the preferred or tier status of a formulary drug. Such notice will provide beneficiaries with ample time to transition to a covered Part D drug that meets the enrollee's needs, or to request a coverage exception.

Comment: We received a number of comments urging us to consider requirements related to the “grandfathering,” on the same terms as previously available, of covered Part D drugs that are either removed from Part D plan formularies, or whose cost-sharing tier or preferred status changes, mid-year. One commenter stated that patients with chronic diseases who are stabilized by a plan-covered drug at the beginning of the year should not experience a higher copayment or be denied coverage of a drug based on a formulary change.

Other commenters thought the grandfathering should apply more broadly. Some commenters said that Part D plans should be required to grandfather a drug for anyone taking the medication prior to its removal from their formulary (unless removed due to FDA safety concerns). One commenter recommended that we require Part D plans to grandfather coverage of chronic medications until the next open enrollment period. Other commenters noted that, if we do not include rules placing strict limits on formulary changes during the year, Part D plans should be required to continue coverage of the discontinued drug for the remainder of year, at the same price, for all individuals taking the drug as part of an ongoing treatment regimen. One commenter suggested that Part D plans be required to provide patients with a 72-hour supply of a drug if it has been removed from the formulary. However, some commenters also clarified that such a requirement should not be meant to prohibit a Part D plan from asking physicians to voluntarily switch patients to less costly drugs through a therapeutic substitution initiative.

Response: Although the MMA does not preclude mid-year formulary changes by Part D plans, it does require that plans provide appropriate advance notice to affected enrollees of any removal of a covered Part D drug from a formulary, or any change in the preferred or tiered cost-sharing status of a covered Part D drug. As detailed elsewhere in this preamble, we have interpreted “appropriate notice” to mean at least 60 days prior to such change taking effect. We believe that 60 days, which is consistent with National Association of Insurance Commissioners (NAIC) model guidelines, provides affected enrollees with ample time to either switch to a therapeutically appropriate alternative medication, or obtain a redetermination by the Part D plan, reconsideration by the independent review entity, and request an administrative law judge hearing before the change becomes effective. To the extent that Part D plans do not provide such 60-day advance notice, they will be required to provide such notice and a 60-day supply of the drug at the same terms covered previously when affected enrollees request refills of their prescriptions. Once notice is provided, enrollees will have a 60-day window to either switch to a therapeutically appropriate alternative medication, or obtain a redetermination by the Part D plan, reconsideration by the independent review entity, and request an administrative law judge hearing before the 60-day supply is exhausted.

Comment: A number of commenters voiced support for some kind of transition period for beneficiaries, particularly full-benefit dual eligibles, transitioning to Medicare Part D from other drug coverage. These commenters argue that, under Medicaid, many beneficiaries—especially those with certain conditions (HIV/AIDS and mental illness, for example, as well as those residing in long-term care facilities)—may experience relatively unfettered access to medically necessary drugs. This may not be the case when these enrollees transition their drug coverage from Medicaid to Part D, since different Part D plans will have different formularies, cost-sharing tiers, and utilization management requirements. Commenters are concerned that vulnerable beneficiaries may elect, or may be auto-enrolled in, a Part D plan that does not cover the drugs these beneficiaries need. More generally, several commenters noted that many beneficiaries—and not just those who are considered vulnerable or special populations—could face a significant loss of continuity of care if Part D plans' formularies are substantively different from each other or from commercial plans. They advocate for an additional coverage clause for patients transitioning into or changing Part D plans in order to avoid disruptions in care.

Response: We agree with commenters that Part D plans should have processes in place to transition current enrollees from their old coverage to their new Part D plan coverage, particularly in cases where new enrollees are currently taking Part D drugs that are not included on the Part D plan's formulary at the time of enrollment. However, we envision that the need for such a transition period will be limited for several reasons.

In reviewing a Part D plan's benefit package, we have the discretion to find that failure to include a specific drug on the formulary would substantially discourage enrollment by beneficiaries with a condition that may only be treated with that drug. For example, we expect that ensuring that beneficiaries with certain conditions, such as HIV/AIDS, are not as a group substantially discouraged from enrolling in a Part D plan will require that all or substantially all drugs in a particular therapeutic class be covered. In addition, in our review of plan benefit packages and our general oversight to ensure that Part D plans comply with all applicable requirements, we will examine not only the inclusion of particular drugs on a formulary, but also the structure and utilization of a plan's PT committee, formulary structure (including tiered cost-sharing structures), a plan's utilization management policies and procedures (for example, prior authorization, step therapy, and generic substitution), and exceptions and appeals processes and how such processes guide access to both formulary and non-formulary drugs. Given such a review of the overall benefit package, we would expect that the majority of transition concerns vis-à-vis special populations will be obviated prior to beneficiary enrollment, as Part D plans will know our benefit package review criteria in advance of the bidding process. In addition, and as described in detail elsewhere in the section of this preamble discussing exceptions and appeals, we are adopting a substantive rule requiring coverage of non-formulary drugs on appeal provided that a medical necessity determination is upheld upon review.

To address the needs of new Part D plan enrollees who are transitioning to Part D from other prescription drug coverage, and whose current drug therapies may not be included in their Part D plan's formulary despite the safeguards noted above, we are requiring—in § 423.120(b)(3) of our final rule—that Part D plans establish an appropriate transition process for new enrollees which we would review as part of our benefit package review process. Section 1860D-11(d)(2)(B) of the Act provides us with authority similar to that provided to the Director of the Office of Personnel Management (OPM) with respect to health benefits plans; as provided in 5 U.S.C. 8902(e), this includes the authority to “prescribe reasonable minimum standards for health benefits plans.” It is our understanding that OPM, in its contract negotiations with FEHBP plans, requires a transition policy. Furthermore, many commercial plans include transition processes for new enrollees. Failure to appropriately transition certain beneficiaries could result in aggravation of certain medical conditions including, in some cases, hospitalization which could ultimately increase costs to Medicare under Parts A and B. Thus, requiring Part D plans to establish appropriate transition policies for new enrollees appears to be consistent with our authority to prescribe reasonable minimum standards for Part D plans.

We believe that a requirement for an appropriate transition process for new enrollees prescribed Part D drugs that are not on the Part D plan's formulary appropriately balances the protection of certain vulnerable populations with flexibility for Part D plans to develop a transition process that dovetails with plans' specific benefit designs. We will provide additional guidance regarding transition process requirements as part of our benefit package review criteria. However, we expect that a Part D plan's transition process would address procedures for medical review of non-formulary drug requests and, when appropriate, a process for switching new Part D plan enrollees to therapeutically appropriate formulary alternatives failing an affirmative medical necessity determination. Such a policy should also focus on particularly vulnerable populations, including dual eligibles and individuals with certain medical conditions (for example, enrollees with HIV/AIDS, mental illness, and those with other cognitive disorders).

Comment: Some commenters requested that we establish a standard process for making formulary changes that Part D plans are required to follow, including standard policies and procedures for communicating changes to beneficiaries, pharmacists, and physicians. Another commenter suggested that we develop a standard formulary change form.

Response: As provided in section 1860D-4(b)(3)(E) of the Act, and codified in § 423.120(b)(5)(i) of our final rule, we will require that Part D plans provide appropriate notice regarding any removal of a covered Part D drug from their formulary or any change in the preferred or tiered cost-sharing status of a drug to affected enrollees and other parties. We believe that Part D plans should have the flexibility to develop formulary change notices that meet their particular needs, provided they include the information elements we specify at § 423.120(b)(5)(ii) of our final rule and discussed in greater detail elsewhere in this preamble.

Comment: One commenter suggested that notice not be required when the enrollees' cost sharing is being reduced. This commenter also suggested that notice not be required when generic competitors have dropped out of the market, leaving only one supplier, and the generic drug as a result becomes effectively treated as a single-source “brand name” drug. Another commenter noted that the requirement for written notice should extend beyond changes in covered medication and should also be sent when the Part D plan changes procedures for accessing a particular medicine. Some commenters suggested we define “appropriate notice” differently for the expansion of a formulary versus the removal of a drug from the formulary to be consistent with the private market.

Response: Section 1860D-4(b)(3)(E) of the Act requires Part D plans to provide notice before making “any change in the preferred or tiered cost-sharing status of a drug.” Plans must therefore provide notice regarding any cost-sharing changes be they increases or reductions, consistent with the requirements of § 423.120(b)(5) of our final rule. The previously cited statutory language limits the provision of notice of formulary changes to the removal of a drug from a formulary or any change in the preferred or tier status of a drug, meaning that Part D plans will not be required to provide notice regarding a change in utilization management processes associated with a particular drug. However, we encourage Part D plans to do so to the extent practicable. We agree with the commenter who asks that we make a distinction between drugs added to and removed from a formulary. As provided in § 423.120(b)(5)(i) of our final rule, Part D plans will only be required to provide advance notice of formulary changes to affected beneficiaries when drugs are removed from a formulary; at their option, Part D plans may also wish to notify enrollees of new additions to their formularies.

Comment: Some commenters support the 30-day notice provision in our proposed regulation. Other comments specifically noted that there should be exceptions to the 30-day requirement in cases where there has been an FDA directive to remove a drug from the market.

However, many commenters were concerned that the 30-day notice provision in the proposed regulation would not provide the adequate time frame for enrollees to make the necessary changes in their drug treatment and ensure continuity of care particularly for enrollees with chronic conditions. Many commenters suggested a 90-day notice requirement. Several commenters suggested that beneficiaries be notified directly in writing at least 60 days before any change, and one commenter noted that NAIC model regulations for drug benefit changes require a 60-day notice.

Response: We appreciate the feedback on our interpretation of “appropriate notice” in the proposed rule as consisting of advance notice of at least 30 days. To ensure that Part D enrollees are provided with sufficient time either to switch to a therapeutically appropriate alternative medication, or obtain a redetermination by the Part D plan, reconsideration by the independent review entity, and request an administrative law judge hearing, we have defined appropriate notice as at least 60 days in § 423.120(b)(5)(i)(A) of our final rule. In addition to affording enrollees more time to manage the consequences of mid-year formulary changes, a 60-day requirement is consistent with the NAIC model guidelines for drug benefit changes. As provided in § 423.120(b)(5)(i)(B) of our final rule, Part D plans also have the option to the extent that they are not able to provide a 60-day advance notice to provide the notice and provide 60 days' coverage of the Part D drug, under the same terms as previously available under the Part D plan, at the time the enrollee fills his or her prescription. Once notice is provided, enrollees will have a 60-day window to either switch to a therapeutically appropriate alternative medication, or obtain a redetermination by the Part D plan, reconsideration by the independent review entity, and request an administrative law judge hearing before the 60-day supply is exhausted.

We note that, in order for the requirement regarding plan changes during the beginning of a contract year in § 423.120(b)(6) of our final rule to be consistent with the 60-day advance notice requirement in § 423.120(b)(5)(i)(A) of the final rule, we have changed the requirement in the proposed rule such that a Part D sponsor may not remove a covered Part D drug from its Part D plan's formulary, or make any change in the preferred or tiered cost-sharing status of a covered Part D drug on its plan's formulary, between the beginning of the annual coordinated election period and 60 days after the beginning of the contract year associated with that AEP. As previously mentioned, we had proposed a period of 30 days in § 423.120(b)(6) of our proposed rule.

We note that, in cases in which the FDA requires the removal of a covered Part D drugs from the market or a manufacturer pulls the drug from the market for safety reasons, 60-day advance notice will not be required, as provided in § 423.120(b)(5)(iii) of our final rule. However, Part D plans will be required to provide notice to affected enrollees (as well as to SPAPs, entities providing other prescription drug coverage, authorized prescribers, network pharmacies, pharmacists, and us) about the removal of a such a covered Part D drug from their formularies as quickly as possible after the drug is actually removed from the formulary. This notification must comply with our notification requirements in § 423.120(b)(5)(ii)(A) through (b)(5)(ii)(D).

Comment: Some commenters asked for clarification on what is considered as “appropriate notice”. Many commenters urged us to require Part D plans provide notice in writing and mail directly to each enrollee who is affected by the change. The commenters noted that without specifying that the notice must be provided in writing, Part D plans may believe they satisfy requirement by posting this information on their plan websites. Several commenters noted that website notification is inadequate. One commenter asked that Part D plans be allowed to give notice electronically if the enrollee opts for that communication method.

Another commenter asked that Part D plans, primarily MA plans, receive more flexibility in giving notice to enrollees. One commenter noted that Part D plans should be allowed to convey certain types of formulary changes through pre- and post-enrollment materials such as sales brochures, enrollment forms, evidence of coverage, or summaries of benefits.

Response: We agree that Part D plans must provide any formulary change notice in writing, and deliver it directly to affected enrollees. This requirement is reflected in § 423.120(b)(5)(i)(A) of our final rule. As provided in § 423.128(d)(2)(iii) of the final rule, Part D sponsors must also provide this notice to all current and prospective Part D enrollees via their plan websites. However, we agree with commenters who assert that website notification, on its own, is an inadequate means of providing specific information to the enrollees who most need it. Website notification will simply be an additional way in which Part D plans may provide notice of formulary changes to affected enrollees. We therefore require Part D plans to provide this notice directly to affected beneficiaries. As an alternative to providing this notice to affected beneficiaries via U.S. mail, to the extent that plan enrollees affirmatively elect to receive such notice electronically rather than in writing, via U.S. mail, Part D plans may provide notice electronically only.

We do not believe that the formulary change notice requirements should apply any differently to MA-PD plans (or to cost plans offering qualified prescription drug coverage) than they do to prescription drug plans. In order to ensure that enrollees receive and process information about formulary changes in a timely way, we believe that a notice of formulary changes is the most efficient way to do so, and that other materials (including pre- and post-enrollment materials such as sales brochures, enrollment forms, evidence of coverage, or summaries of benefits) are not the most appropriate mechanisms to convey such information.

Comment: Many commenters recommended requiring Part D plans to include information about enrollees' rights to request an appeal or exception with their formulary change notification. One commenter urged that if the notice of the change in formulary involves the addition of a medication, the notice should also explain how the medication will be classed, if the Part D plan uses a tiered co-pay system or step therapy system. The notice should also indicate expected cost to the beneficiary. If a medication is being removed from the formulary, the notice should indicate what medication is available for individuals who were prescribed the medication being removed.

Response: In response to the helpful public comments received on what “appropriate notice” of formulary changes should comprise, § 423.120(b)(5)(ii) of our final rule requires that Part D plans include the following information on their formulary changes notices: (1) the name of the affected covered Part D drug; (2) whether the plan is removing such covered Part D drug from the formulary, or changing its preferred or tiered cost-sharing status; (3) the reason why the plan is removing such covered Part D drug from the formulary, or changing its preferred or tiered cost-sharing status; (4) alternative drugs in the same therapeutic category or class or cost-sharing tier and expected cost-sharing for those drugs; and (5) the means by which enrollees may obtain a coverage determination under § 423.566 or exception under § 423.578 of our final rule. These required information elements will provide enrollees with the information they need to request an independent review or to switch to an alternative formulary drug.

Comment: Several commenters noted that advance notice of formulary changes should only be required for enrollees currently using a particular drug, per our proposal in our notice of proposed rulemaking. One commenter asked that our interpretation of the term “affected enrollee” be further expanded to include an enrollee who has been dispensed a drug that has been removed, or whose status has changed, within the last 90 days. Other commenters urged us to require Part D plans to provide all enrollees (not just those taking the affected drug) with advance notice of formulary changes.

Response: We interpret the statutory term “affected enrollee” as referring to a Part D enrollee who is currently taking a covered Part D drug that is either being removed from a Part D plan's formulary, or whose preferred or tiered cost-sharing status is changing. In other words, Part D plans will not be required to notify all enrollees regarding formulary changes during a contract year only those directly affected by changes with respect to a particular covered Part D drug. This will minimize Part D plan administrative costs while getting information to those individuals who need it. We have incorporated this definition of the term “affected enrollee” in § 423.100 of our final rule.

Comment: Several commenters recommended that Part D plans notify prescribers, pharmacists and pharmacies through information posted on plans' websites or through routine communication to prescribers and pharmacists rather than contacting all prescribers and pharmacies directly. More than one commenter stated that sending a mailed notification to all beneficiaries, affected physicians, and pharmacists would be an enormous undertaking and expense. This commenter believes that it is appropriate to mail notifications to those taking the medication and provide it electronically to physicians, pharmacists, and other beneficiaries via the Part D plan website and upon request.

Response: We agree with commenters that we should provide greater flexibility in terms of the mechanism by which they provide notice to parties other than affected enrollees to whom they are required to provide advance notice of formulary changes (including authorized prescribers, pharmacists, pharmacies, and us). As provided in § 423.120(b)(5)(i) of our final rule, we do not specify that written notice is required to be provided to these parties. Thus, Part D plans can determine the most effective means by which to communicate formulary change information to these parties, including electronic means.

Comment: Several commenters suggested Part D plans also notify SPAPs, State retiree plans, and State Medicaid programs of formulary changes, and another commenter suggested State Medicaid offices as well.

Response: Section 1860D-4(b)(3)(E) of the Act requires that “appropriate notice” of formulary changes be made specifically to the Secretary, affected enrollees, physicians, pharmacies, and pharmacists. However, we expect Part D plans to coordinate with SPAPs and other plans providing benefits that supplement the benefits available under Part D coverage to Part D enrollees. Provision of formulary change information to these health plans and programs will be important in ensuring effective coordination. Given that section 1860D-24(a)(2)(F) of the Act provides us with flexibility to establish coordination of benefits requirements regarding other administrative processes not specified in section 1860D-24(a)(2) of the Act, we believe it is reasonable to require Part D plans to notify SPAPs and other health plans and programs (as defined in § 423.454(f)(1) of our final rule) regarding formulary deletions or changes to the tiered cost-sharing status of a drug. We have incorporated this requirement into § 423.120(b)(5) of our final rule.

Comment: One commenter recommended that Part D sponsors should include in their formulary notice to us a certification that they are still meeting the statutory formulary requirements.

Response: We note that, notwithstanding any formulary changes Part D plans make mid-year, plans will still be required to meet all the formulary requirements in § 423.120(b) of our final rule, and we will review all formulary changes to ensure that this is the case.

c. Use of Standardized Technology

In accordance with the requirements of section 1860D 4(b)(2)(A) of the Act, Part D sponsors must issue (and reissue, as appropriate) a card or other technology that enrollees could use to access negotiated prices for covered part D drugs. Section 1860D-4(b)(2)(B)(i) of the Act mandates that we develop, adopt, or recognize standards relating to a standardized format for a card or other technology for accessing negotiated prices to covered Part D drugs. Section 1860D 4(b)(2)(B)(ii) of the Act requires us to consult with the National Council for Prescription Drug Programs (NCPDP) and other standard setting organizations, as appropriate, to develop these standards.

Except as otherwise provided below, the final rule adopts the rules regarding use of standardized technology set forth in § 423.120(c) of the proposed rule.

Comment: A number of commenters support our using a standardized identification card using NCPDP standards. These commenters note that a standardized card using the NCPDP format will create increased efficiencies such as reduced waiting times for dispensing medications that will benefit pharmacy providers and beneficiaries. A few commenters suggested that we provide MA organizations with the flexibility to integrate their drug card with their medical benefits card rather than issuing a separate card if the MA organization chooses to do so and others requested clarification that MA organizations could issue a single card for both their medical and drug benefits. One commenter expressed concern about using an identification number other than the beneficiaries' Medicare Identification Number because this number is familiar and known by the beneficiaries. In certain situations, if the card were lost or stolen, beneficiaries could easily remember their drug card number.

Response: As provided under section 1860D 4(b)(2)(B)(ii) of the Act, we will consult with the National Council for Prescription Drug Programs (NCPDP) and other standard setting organizations, as appropriate, to develop these standards. Given that NCPDP is recognized as the industry standard for current prescription drug programs, and we relied on its standards in developing requirements for discount card sponsors' cards under the Medicare Prescription Drug Discount Card and Transitional Assistance Program, we expect to base our card standards on NCPDP's “Pharmacy ID Card Standard.” This standard is based on the American National Standards Institute ANSI INCITS 284-1997 standard titled Identification Card—Health Care Identification Cards, which may be ordered through the Internet at http://www.ansi.org. We will provide further operational guidance regarding our standards for a card (or other technology) to entities wishing to become Part D sponsors in time for these entities to use the standards (and have their cards approved for use by us) beginning January 1, 2006. We understand that Part D sponsors would like flexibility to integrate their medical and drug benefit cards and will provide Part D sponsors with that flexibility consistent with our approach under the Medicare Prescription Drug Discount Card and Transitional Assistance Program. It is our intent, however, that these standards require that Part D plans use something other than an enrollee's social security number (SSN) as an identifier on their cards given rising concern over the increasing number of cases regarding identity fraud using an individual SSNs and privacy concerns. We understand that this number is the most familiar and known to the beneficiaries but we will work to make the drug card identification number and process easy and convenient for beneficiaries.

5. Special Rules for Out-of-Network Access to Covered Part D Drugs at Pharmacies (§ 423.124)

Section 1860D-4(b)(1)(C)(iii) of the Act requires us to establish pharmacy access standards that include rules for adequate emergency access to covered Part D drugs by Part D enrollees. Given the inherent difficulties in establishing emergency access standards for covered Part D drugs, we proposed to meet the requirements of section 1860D 4(b)(1)(C)(iii) of the Act by establishing a broader out-of-network access requirement. We proposed requiring that Part D sponsors ensure that their enrollees had adequate access to drugs dispensed at out-of-network pharmacies when they could not reasonably be expected to obtain covered Part D drugs at a network pharmacy. In the proposed rule, we stated that we expected out-of-network access to be guaranteed under at least the following four scenarios:

  • In cases in which a Part D enrollee meets all of the following: is traveling outside his or her Part D plan's service area; runs out of or loses his or her covered Part D drug(s) or becomes ill and needs a covered Part D drug; and cannot access a network pharmacy;
  • In cases in which a Part D enrollee cannot obtain a covered Part D drug in a timely manner within his or her service area because, for example, there is no network pharmacy within a reasonable driving distance that provides 24-hour-a-day/7-day-per-week service;
  • In cases in which a Part D enrollee resides in a long-term care facility and the contracted long-term care pharmacy does not participate in his or her Part D plan's pharmacy network; and
  • In cases in which a Part D enrollee must fill a prescription for a covered Part D drug, and that particular covered Part D drug (for example, an orphan drug or other specialty pharmaceutical typically shipped directly from manufacturers or special vendors) is not regularly stocked at accessible network retail or mail-order pharmacies. Both the enrollee and his or her Part D plan would have been financially responsible for covered Part D drugs obtained at an out-of-network pharmacy as described. In the proposed rule, we specified that such cost-sharing would have been applied relative to the plan allowance for that covered Part D drug. We requested comments on how to further define the term “plan allowance.”

In addition to this cost-sharing, and as provided under proposed § 423.124(b)(2), the enrollee would have been responsible for any difference in price between the out-of-network pharmacy's usual and customary (UC) price and the plan allowance for that covered Part D drug. We requested public comments regarding our definition of usual and customary price. We also sought comments regarding our proposal that the price differential between out-of-network pharmacies' UC costs and the plan allowance be counted as an incurred cost against the out-of-pocket threshold consistent with the definition of “incurred cost” in § 423.100 of the proposed rule. Finally, we requested general comments regarding our proposed payment rules for covered Part D drugs obtained at out-of-network pharmacies when enrollees cannot reasonably obtain those drugs at a network pharmacy.

Except as otherwise provided below, the final rule adopts the out-of-network access rules set forth in § 423.124 of the proposed rule.

Comment: Many commenters generally supported our proposed out-of-network pharmacy proposal and said beneficiaries—particularly those in rural areas—should not be penalized for going out-of-network when necessary. However, some commenters felt the proposal's list of situations in which access to out-of-network pharmacies would be allowed was overly broad and recommended limiting such access to emergency situations only. Some commenters expressed support for plans having the discretion to establish out-of-network access requirements, but not being given a specific list of requirements. Some expressed concern that the message to beneficiaries might be that they can go to out-of-network pharmacies at will, resulting in increased costs.

A number of commenters stated that as proposed, allowing access to out-of-network pharmacies is impractical because these pharmacies cannot determine if beneficiaries have met their deductibles, are in the coverage gap, or the amount their Part D plan would pay had they gone to a participating pharmacy. Out-of-network pharmacies do not have access to data needed to calculate payment rates other than their own usual and customary price. These commenters asked that we clarify that out-of-network pharmacies may charge beneficiaries their usual and customary price that beneficiaries must be responsible for submitting claims for out-of-network medications they purchase to their Part D plans, and that plans must accept claims submitted to them by beneficiaries once such a purchase is made. One commenter recommended Part D plans be given time to retroactively modify claims databases to accommodate paper claims tracking, suggesting that we minimize these requirements and be specific in the timeline under which these modifications are required (for example, 60 days).

Some commenters stated that the proposal is inadequate for emergency situations and should require Part D plans to cover a temporary supply of drugs. One commenter recommended that we require Part D plans to establish a mechanism to guarantee payment for at least a 72-hour supply of any medically necessary, covered Part D drug obtained out-of-network. One commenter disagreed with the proposal entirely, stating that if the TRICARE access standards were met by a Part D plan, this should be a sufficient guarantee of adequate network access.

Response: We expect that, given our pharmacy access standards, Part D enrollees will have adequate access to network pharmacies. However, section 1860D-4(b)(1)(C)(iii) of the Act requires us to establish pharmacy access standards that include rules for adequate emergency access to covered Part D drugs by Part D enrollees. Given the inherent difficulties in establishing what constitutes an “emergency,” we believe it is most appropriate to establish a broader out-of-network access requirement. Section 423.124(a)(1) of our final rule clarifies that Part D plans are required to ensure that their enrollees have adequate access to drugs dispensed at out-of-network pharmacies when they cannot reasonably be expected to obtain covered Part D drugs at a network pharmacy. Provided that such access to out-of-network pharmacies is not routine, we expect that Part D plans would guarantee out-of-network access in cases in which an enrollee: (1) is traveling outside his or her plan's service area, runs out of or loses his or her covered Part D drugs or becomes ill and needs a covered Part D drug, and cannot access a network pharmacy; (2) cannot obtain a covered Part D drug in a timely manner within his or her service area because, for example, there is no network pharmacy within a reasonable driving distance that provides 24/7 service; (3) must fill a prescription for a covered Part D drug, and that particular drug (for example, an orphan drug or other specialty pharmaceutical) is not regularly stocked at accessible network retail or mail-order pharmacies;; and (4) is provided covered Part D drugs dispensed by an out-of-network institution-based pharmacy while a patient is in an emergency department, provider-based clinic, outpatient surgery, or other outpatient setting. We are not incorporating these scenarios into our final regulations but will closely monitor out-of-network access to ensure that Part D plans are adequately meeting beneficiaries' out-of-network access needs. In addition, plans must provide coverage of drugs in physician's offices in cases in which a beneficiary is administered a vaccine covered by Part D (or another covered Part D drug that is appropriately dispensed and administered in a physician's office).

We understand commenters' concerns that routine access to out-of-network pharmacies could undermine a Part D plan's ability to achieve cost-savings for both beneficiaries and the Medicare program. For this reason, we would like to clarify that § 423.124(c) of our final rules requires Part D plans to establish reasonable rules to ensure that enrollees use out-of-network pharmacies in an appropriate manner—provided they ensure adequate access to out-of-network pharmacies on a non-routine basis when enrollees cannot reasonably access network pharmacies. For example, Part D plans may wish to limit the amount of covered Part D drugs dispensed at an out-of-network pharmacy, require that a beneficiary purchase maintenance medications via mail-order for extended out-of-area travel, or require a plan notification or authorization process for individuals who fill their prescriptions at out-of-network pharmacies. Plans will be required to disseminate information to enrollees about their out-of-network access policies as provided in § 423.128(b)(6) of our final rule.

We wish to clarify that enrollees obtaining covered Part D drugs at out-of-network pharmacies, which by virtue of not being under contract with an enrollee's Part D plan will not have access to the data needed to calculate Part D plan payment rates, will have to pay the pharmacy's UC price at the point-of-sale, submit a paper claim to their Part D plan, and wait for reimbursement from the plan. Out-of-network pharmacies will therefore be made whole, relative to their UC price for a covered Part D drug, at the point of sale.

Comment: One commenter stated that patients in emergency departments, provider-based clinics, outpatient surgery, or under observation are often administered drugs (self-administered drugs or insulin, for example) under physician order for medically necessary conditions. These drugs are not covered under Part A or Part B and are billed to patients as a patient liability. For safety and quality of care reasons, patients often cannot bring their own medications into hospitals or outpatient settings when they are being treated for other conditions. This commenter asked for clarification regarding whether Part D plans will cover self-administered prescription drugs dispensed by hospital pharmacies; if so, how beneficiaries will avail themselves of their Part D benefits; and, if not, whether hospitals will have to provide drug coding and other detail on billing statements for beneficiaries so they can submit those statements to their Part D plans for reimbursement.

Response: As provided elsewhere in this preamble, Part D plans may include institutional pharmacies, including hospital-based pharmacies, in their networks, although these pharmacies will not count toward the access requirements Part D plans must meet under § 423.120(a)(1) of our final rule. To the extent hospital pharmacies are included in Part D plan networks, Part D enrollees who are furnished covered Part D drugs by those pharmacies, the situations noted by the commenter will not be an issue. However, we recognize that enrollees who are provided covered Part D drugs by hospital and other institution—based pharmacies under the circumstances described by this commenter cannot reasonably be expected to obtain needed covered Part D drugs at a network pharmacy. We therefore clarify that we expect that Part D plans guarantee out-of-network access to covered Part D drugs in cases in which an enrollee is provided covered Part D drugs dispensed by an out-of-network institution-based pharmacy while a patient in an emergency department, provider-based clinic, outpatient surgery, or other outpatient setting.

Comment: Two commenters recommended that Part D plan enrollees who live in different States during the year should be allowed access to out-of-network pharmacies, as with the other four instances we proposed. One commenter further argued that restricting pharmacy access to mail order during long absences from or trips out of a Part D plan's service area violates the prohibition on exclusive use of mail order pharmacies.

Response: The statutory authority for our proposed out-of-network access policy derives from the requirement, in section 1860D-4(b)(1)(C)(iii) of the Act, that our network access rules include provisions for adequate emergency access for Part D enrollees. Given that narrow statutory authority, we do not believe that access to out-of-network pharmacies on a routine basis can be justified under our out-of-network access rules. Through our educational efforts, we will encourage enrollees who live in different States during a year (snowbirds, for example) to enroll in national or regional Part D plans that will provide coverage in multiple areas, or in Part D plans that include out-of-area pharmacies in their networks. However, to the extent that a beneficiary is enrolled in a Part D plan that does not provide such access, plans may not allow routine out-of-network access consistent with § 423.124(a)(2) of our final rule.

Comment: Two commenters emphasized the need to allow out-of-network access for specialty medications, such as orphan drugs, that are not typically stocked in a retail pharmacy. Their argument was echoed by commenters who emphasized the need to allow for out-of-network access to home infusion therapy.

Response: We expect that Part D plans will provide out-of-network access to specialty pharmacies in cases in which specialty medications, such as orphan drugs, are not available at a network pharmacy, as this is a case in which enrollees could not reasonably be expected to access their medications at a network pharmacy. However, given that out-of-network access to covered Part D drugs may not be provided routinely, consistent with § 423.124(a)(2) of our final rule, Part D cannot not provide access to out-of-network access to a specialty pharmacy on an ongoing basis. As discussed elsewhere in this preamble, our final rule requires that Part D plans provide adequate access to home infusion pharmacies. We established this access requirement to mitigate the need for routine out-of-network access to home infusion drugs. However, in cases in which an enrollee cannot reasonably access a home infusion pharmacy in his or her Part D plan's network, we expect that plans will provide access to an out-of-network home infusion pharmacy consistent with § 423.124(a) of our final rule.

Comment: Some commenters stated that the final rule should clarify that beneficiaries residing in a long-term care facility should be allowed access to long term care pharmacies as out-of-network pharmacies, should the pharmacy contracting with the long-term care facility in which they reside not participate with their chosen Part D plan. Another commenter thought that our proposed policy vis-à-vis beneficiaries residing in long-term care facilities is inappropriate given that our authority for establishing such requirements is based on emergency access only.

Response: As noted previously, we agree with the commenter who questioned our authority for allowing access to out-of-network long-term care pharmacies on a routine basis. The statutory authority for our proposed out-of-network access policy derives from the requirement, in section 1860D-4(b)(1)(C)(iii) of the Act, that our network access rules include provisions for adequate emergency access for Part D enrollees. Given that narrow statutory authority, we do not believe that access to out-of-network pharmacies on a routine basis including in cases where a beneficiary resides in a long-term care facility whose contracted long-term care pharmacy is not in his or her Part D plan's network can be justified under our out-of-network access rules.

Comment: One commenter said that physician offices should be considered out-of-network pharmacies insofar as they supply covered Part D drugs.

Response: We note that vaccines (and other covered Part D drugs that are appropriately dispensed and administered in a physician's office) administered in a physician's office will be covered under our out-of-network access rules at § 423.124(a)(2) of our final rule, since Part D plan networks are defined as pharmacy networks only. A scenario under which a Part D enrollee must obtain a Part D-covered vaccine in a physician's office constitutes a situation in which out-of-network access would be permitted because a beneficiary could not reasonably be expected to obtain that vaccine at a network pharmacy. We expect that the application of this requirement will be limited to vaccines and a handful of drugs (for example, some injectable long-acting anti-psychotics) that are appropriately dispensed and administered in a physician's office and are not covered under Part B, and that plans may establish utilization management policies and procedures to ensure that out-of-network coverage is limited to such covered Part D drugs. Enrollees will be required to self-pay the physician for the cost of the vaccine (or other covered Part D drug appropriately dispensed and administered in a physician's office) and submit a paper claim for reimbursement by their Part D plan.

Comment: Commenters generally recommended the beneficiary pay the difference between the network price applicable to that beneficiary and the maximum price charged to any Part D plan with which the pharmacy participates. However, they argue, determining that amount would be difficult because out-of-network pharmacies do not have access to the data necessary to calculate that amount. Some commenters specified that beneficiaries purchasing drugs from an out-of-network pharmacy in an emergency situation should not be charged anything more than the network amount. Several commenters urged us to exempt low-income beneficiaries from any differential costs incurred for visiting an out-of-network pharmacy. One noted that we should monitor usage of out-of-network pharmacies by low-income beneficiaries.

Response: As provided in § 423.124(b) of our final rule, if a Part D plan offers coverage other than defined standard coverage, it may require enrollees to not only be responsible for any cost-sharing, including a deductible, that would have otherwise applied had the covered Part D drug been purchased at a network pharmacy, but also any differential between the out-of-network pharmacy's (or provider's) usual and customary (UC) price and the enrollee's cost-sharing. However, given the cost-sharing requirements for defined standard coverage in § 423.104(d)(2)(A) of our final rule, under which the cost-sharing between the deductible and initial coverage limit must be 25 percent of the actual cost of a drug at the point of sale, Part D plans offering defined standard coverage may not offer such an out-of-network differential. Instead, a Part D plan offering defined standard coverage must simply require its enrollees to pay any deductible or cost-sharing, relative to the out-of-network pharmacy's (or provider's) usual and customary price. The Part D plan will pay the difference between the out-of-network pharmacy's (or provider's) UC price and the enrollee's cost-sharing.

In either case, enrollees will likely be required to pay more for a covered Part D drug purchased out-of-network than one purchased at a network pharmacy, though, as explained below, any such differential will count toward an enrollee's TrOOP limit. In order to curb unnecessary out-of-network use and preserve Part D plans' ability to achieve cost-savings based on network pharmacy use, we believe it is appropriate that beneficiaries pay more for out-of-network access to covered Part D drugs.

As explained below, we will pay any out-of-network differential for appropriate non-routine use of out-of-network pharmacies (or providers) for full and other subsidy-eligible individuals as part of our low-income subsidy under subpart P of the final rule.

Comment: Some commenters asked us to clarify whether subsidy eligible individuals who reside in long-term care facilities will have to pay any out-of-network differentials when obtaining drugs from an out-of-network long-term care pharmacy. Many recommended that we pay the out-of-network differential for institutionalized enrollees who are subsidy eligible.

Response: We agree that for full and other subsidy-eligible individuals—whether they are institutionalized or not—we should pay any out-of-network differential for appropriate non-routine use of out-of-network pharmacies. As provided in § 423.104(d)(2) of our final rule, we define enrollee cost sharing in relation to the total cost of the drug to the Part D plan and the beneficiary (actual costs). Therefore, in cases where the total payment is not limited by the plan allowable because a drug is obtained out-of-network, the cost sharing can be defined as the total paid by beneficiary, or in the case of a subsidy eligible individual, as the total cost sharing paid by both the beneficiary and by us. This approach reconciles the need to charge the OON differential and to hold the subsidy eligible individual liable for only the statutorily allowed copayment amounts ($1/$3, $2/$5, or $0 in the case of institutionalized full subsidy individuals who are full-benefit dual eligible individuals).

Comment: A few commenters argued that enrollees accessing covered Part D drugs at out-of-network FQHC, rural and I/T/U pharmacies should also be exempt from any out-of-network differentials.

Response: We do not believe there exists a compelling rationale to exempt beneficiaries who access their drugs at FQHC, rural, or I/T/U pharmacies. However, to the extent such individuals qualify as full or partial subsidy eligible individuals, they will be responsible only for the cost-sharing amounts required in subpart P.

Comment: Comments on the definition of “UC price” fell into three groups. Some commenters felt that the UC price should be defined as that amount charged to cash paying customers, excluding sales tax. Others argued that the UC price should be the amount typically charged to senior groups or other cash customers who are directly given some sort of discount as an inducement to make a purchase from a given supplier. A third group of commenters felt that the UC price should be the maximum the pharmacy charges any customer covered by a Part D plan. Several commenters noted that we should not allow pharmacies to manipulate their UC prices and should check them periodically to be sure they were less than or equal to the average wholesale price.

Response: We appreciate commenters' suggestions. We believe our proposed definition of the term “usual and customary price” the price that a pharmacy (or provider) charges a customer who does not have any form of prescription drug coverage is adequate and are retaining it in § 423.100 of our final rule. We note, in response to several commenters' suggestions, that we do not have the authority to require out-of-network pharmacies to accept a particular price (for example, the maximum price a pharmacy charges any of its customers enrolled in Part D plans) as their UC price. We believe that Part D plans, not CMS, should be responsible for monitoring of UC prices for covered Part D drugs at out-of-network pharmacies, since, given that any price differential paid by a beneficiary would count toward the TrOOP threshold, they ultimately have a vested interest in limiting the costs associated with out-of-network use.

Comment: With regard to the definition of “plan allowance,” several commenters recommended that it be defined as “the lowest of contractual discounts offered in a standard contract or UC price.” One commenter recommended defining the term in CMS guidance to permit consultation with affected parties. One commenter pressed for Part D plan flexibility so that they could ensure the lowest prices for their members.

Response: We have retained our proposed definition of “plan allowance” in § 423.100 of our final rule in order to provide Part D plans with maximum flexibility to establish the most appropriate plan allowance for drugs obtained out-of-network.

Comment: One commenter asked for clarification of the appeals process relating to adverse coverage decisions for out-of-network drugs.

Response: As provided under § 423.566(b)(1) of our final rule, a Part D plan's failure to pay for a covered Part D drug furnished by an out-of-network pharmacy is an action that is a coverage determination.

Comment: Another commenter wanted to be sure that out-of-network pharmacies did not advertise their services as Medicare covered so that beneficiaries would not be confused.

Response: We believe that beneficiaries should always receive accurate and clear information about their pharmacy benefits, and we believe pharmacies must ensure that out-of-network beneficiaries are not misled. However, we have no authority under the MMA to regulate pharmacies' marketing activities. Marketing activities of pharmacies may implicate other Federal or State laws, however, including, but not limited to, consumer protection laws. Pharmacies may also be subject to sanction under section 1140 of the Social Security Act if they misrepresent an affiliation with, or endorsement by the Medicare program.

6. Dissemination of Plan Information (§ 423.128)

Our proposed rule established beneficiary protection requirements concerning the dissemination of Part D information by Part D sponsors to enrollees in, and individuals eligible to enroll in, a Part D plan. Part D information disseminated by Part D sponsors to current or prospective Part D enrollees will constitute marketing materials and must be approved by us.

With the exception of the drug-specific information dissemination requirements, many of the proposed requirements duplicated information dissemination requirements contained in § 422.111 of our proposed MA rule that are applicable to all MA plans, including MA-PD plans. We proposed applying the requirements of section 1860D-4(a) of the Act to other Part D plans to ensure that all Part D eligible enrollees have access to comparable drug-specific information about Part D plans.

a. Content of Plan Description

Proposed § 423.128(a) and (b) complied with the stipulation in section 1860D-4(a)(1) of the Act that requirements for the dissemination of Part D information be similar to the information dissemination requirements for MA organizations under section 1852(c)(1) of the Act and as interpreted in § 422.111(b).

In order to ensure that individuals who are either eligible for, or enrolled in, a Part D plan receive the information they need to make informed choices about their Part D coverage options, Part D sponsors would be required to disclose, to each enrollee in a Part D plan offering qualified prescription drug coverage, a detailed description of that plan. This description must be provided in a clear, accurate, and standardized form at the time of enrollment and annually, at a minimum, after enrollment. The information provided will be similar to the information MA plans must disclose to their enrollees.

Except as otherwise provided below, the final rule adopts the requirements pertaining to plan content description set forth in § 423.128(b) of the proposed rule.

Comment: One commenter sought clarification regarding what we mean by “standardized” in our requirement that Part D plans provide information to enrollees in a “clear, accurate, and standardized form.”

Response: We expect Part D plans to provide information about their benefit packages in a manner that is consistent with marketing guidelines that we will make available to plans.

Comment: Several commenters requested that we allow Part D plans the flexibility to make plan information available through the Internet. For the convenience of beneficiaries as well as to control costs, these commenters recommend that we encourage the use of more efficient information distribution channels (for example, Internet and email) to disseminate detailed Part D plan information and thus limit the distribution of paper materials to situations in which that makes sense. Another commenter recommended that we clarify that, with the express consent of the enrollee, Part D plans may waive enrollees' right to request and receive any required information in writing and allow for the enrollee to obtain that information via a plan website or email.

Response: We agree that some beneficiaries may prefer to receive Part D plan information electronically and that the provision of plan information through electronic means has the potential to significantly reduce Part D plans' costs. However, a number of Medicare beneficiaries still do not have access to the Internet or prefer to receive their information in written formats. We have modified § 423.128(a) of our final rule to note that we may specify the manner in which plan information must be disseminated to beneficiaries. We clarify that information disseminated by Part D plans as part of a plan description under § 423.128(b), as well as information disclosed upon enrollee request under § 423.128(c), must be provided in a written format and delivered to beneficiaries via U.S. mail unless a beneficiary explicitly consents—by actively opting in—to receive information electronically or via telephone rather than by mail. The electronic provision of Part D plan information should simply be one additional mechanism for Part D plans to communicate with enrollees and potential enrollees.

Comment: One commenter recommended that Part D plans provide information regarding any prior authorization processes required for certain drugs as part of their information dissemination efforts regarding formularies.

Response: We agree with this commenter and have modified that language at § 423.128(b)(4) to clarify that Part D plans must disclose information about any utilization management procedures they may use as part of the formulary information they must disseminate to beneficiaries.

Comment: One commenter recommended that Part D plans be required to provide a list of pharmacies in their networks since the proposed rule requires information only about the types of pharmacies in plans' networks.

Response: We believe the commenter misinterpreted the provision at § 423.128(b)(5) of our proposed rule. This provision, which we have retained in our final rule, requires Part D sponsors to disseminate information about “the number, mix, and distribution (addresses) of network pharmacies.” We believe that requiring Part D plans to disseminate information about the addresses of network pharmacy at which an enrollee may reasonably be expected to obtain covered Part D drugs is, in fact, tantamount to requiring plans to provide a list of network pharmacies serving enrollees' service areas. We therefore clarify that Part D plans will be expected to provide enrollees with a list of network pharmacies, including addresses, as well as information about the number and mix of network pharmacies available.

Comment: One commenter requested greater detail regarding the contents of the description of quality assurance policies and procedures that Part D plans must provide under § 423.128(b)(8) of our proposed rule. Another commenter states that, as written, the provision requiring Part D plans to describe their quality assurance policies and procedures did not indicate a clear CMS-directed oversight and enforcement structure. This commenter argues that compliance monitoring and enforcement would at best be indirect, leaving us reliant on the results of deemed status arrangements as set forth in our proposed § 423.165.

Response: We expect plans to provide descriptions of their policies and procedures for concurrent drug utilization review, retrospective drug utilization review, and internal medication error identification and reduction systems. We also expect plans to provide descriptions of their medication therapy management programs, including information describing which enrollees are eligible for such services. With respect to CMS-directed oversight and enforcement, we have added reporting requirements to § 423.153(c) and § 423.153(d) of our final rule, and we will specify the details of these reporting requirements in separate guidance.

Comment: One commenter was concerned that the transition of full-benefit dual eligible individuals from Medicaid to Medicare Part D on January 1, 2006 will likely lead full-benefit dual eligible individuals to contact Medicaid agencies for more information regarding their new pharmacy benefits. This commenter recommended that we require Part D plans to include information in their enrollee materials that clarifies that State Medicaid agencies are no longer the primary providers of pharmacy benefits and cannot answer questions about the Medicare benefit, except as pertains to limited supplemental coverage that Medicaid may provide.

Response: Our education and outreach efforts will ensure that beneficiaries receive detailed information regarding their transition from Medicaid to Medicare for prescription drug coverage. Therefore, we do not believe it is necessary to require Part D plans to include this information in their materials.

b. Disclosure of Information upon Request

In addition, in accordance with section 1860D-4(a)(2) of the Act, the proposed rule at § 423.128(c) provided that a beneficiary who is eligible to enroll in a Part D sponsor's Part D plan will have the right to obtain, upon request, more detailed plan information. Except as otherwise provided below, the final rule adopts the standards set forth in § 423.128(c) of the proposed rule.

Comment: A number of commenters are supportive of the provision in the proposed rule that required Part D plans to make available information about how to obtain information about the formulary, but thought that this requirement was insufficient given that beneficiaries will need precise and detailed formulary information to make informed choices about enrollment. These commenters recommend requiring Part D plan descriptions to include a detailed formulary listing not only the drugs on the formulary, but also any formulary tiers and corresponding copayment amounts.

Response: We agree that it will be critically important for Part D enrollees and prospective enrollees to have access to complete formulary information in order to make the best possible Part D plan selection for their particular medical and prescription drug needs. For this reason, we have modified the formulary information requirements under § 423.128(b)(4) such that Part D plans will be required to include not only information about the manner in which the formulary functions (including tiering structures and any utilization management procedures used), a process for obtaining an exception to a Part D plan's tiered cost-sharing structure or formulary, and a description of how an enrollee may obtain additional information on the formulary, but also an actual list of drugs included on the Part D plan's formulary. For each drug, this list must indicate any cost-sharing tier information applicable to that drug and whether utilization management programs apply.

Comment: Several commenters urged us to expand the requirement that Part D plans disclose, upon request, information about the number of disputes and their disposition in the aggregate to include exceptions. Another commenter noted that we appeared to have made a mistake in terms of our references to the provisions on grievances and reconsiderations in § 423.128(c)(3) of our proposed rule.

Response: We agree with these commenters. We have corrected the reference errors in § 423.128(c)(3) of our final rule and have expanded this requirement such that Part D plans must disclose, upon request, information about the number of exceptions and their disposition in the aggregate. We did not originally include a reference to exceptions in our proposed because section 1852(C)(2) of the Act, on which the requirements in our proposed § 423.128 were based, did not envision an exceptions process for the MA program.

Comment: Several commenters noted that § 423.128(c)(1)(iii) of our proposed rule required Part D plans to inform enrollees about the potential for contract termination, but only upon request. However, these commenters felt strongly that this information needed to be included in all plan descriptions and marketing materials, and not just if requested by an enrollee or prospective enrollee, particularly in light of previous experience with volatility in the Medicare+Choice market.

Response: We agree with these commenters and have moved the requirement that Part D plans disclose information about the potential for contract termination upon request only, to § 423.128(b)(10), under which plans will be required to disclose this information as part of the plan description provided at the time of enrollment and at least annually thereafter.

c. Provision of Specific Information

As required under section 1860D-4(a)(3) of the Act and proposed at § 423.128(d) of our proposed rule, Part D sponsors will be required to have in place a mechanism for providing, on a timely basis, specific information to current and prospective enrollees upon request. Such mechanisms will include:

  • A toll-free customer call center;
  • An Internet website; and
  • Responses in writing upon beneficiary request.

As proposed at § 423.128(d)(1)(i) and (d)(1)(ii), Part D plans' customer call centers will be required to be open during usual business hours and provide customer telephone service, including to pharmacists, in accordance with standard business practices. We strongly recommended, however, that Part D plans provide some sort of 24-hour-a-day/7 day-a-week access to their toll-free customer call centers in order to provide timely responses to time-sensitive questions. In addition, we proposed requiring that Part D plans maintain websites as one means of disseminating information to current and prospective Part D enrollees that would include the detailed plan description information described in § 423.128(b) of our proposed rule. Finally, Part D plans would be required to respond to beneficiary requests for specific information in writing, upon request. This requirement was codified in § 423.128(d)(3) of our proposed rule.

Except as otherwise provided below, the final rule adopts the specific information disclosure standards set forth in § 423.128(d) of the proposed rule.

Comment: Several commenters recommended against requiring a 24-hour/7-day-a-week call center because of the high costs associated with operating a call center during off-hours. These commenters support operating a call center during normal business hours as required in the proposed regulations. One commenter suggested Part D plans consider developing a website and IVR system that allows beneficiaries to access their accounts to determine their TrOOP balance.

Other commenters recommended requiring Part D plans to operate 24/7 call centers, stating that the need for prescription drugs may arise outside of normal business hours and would necessitate timely assistance and resolution of coverage issues. These commenters noted that the implications of delayed access are potentially very serious. One commenter stated that advice hotlines should be available 24-hour/7-days a week to assist enrollees and pharmacies in understanding Part D plan formularies. Another commenter urged requiring extended service hours especially during the initial enrollment period and also ensuring that language specialists are available.

Response: We have retained our proposed requirement (in § 423.128(d)(1) of our final rule) that Part D plans maintain a toll-free customer call center that is open during usual business hours and provides customer telephone service, including to pharmacists, in accordance with standard business practices. However, Part D plans should view this requirement as a floor which they can exceed—particularly at times such as annual open enrollment periods. Access to bilingual customer service representatives may also be appropriate in certain parts of the country. Given the need for Part D plans to provide timely information on certain time-sensitive issues, however, we strongly recommend that Part D plans also provide access to 24/7 clinical advice hotlines as is customary for many health plans.

Comment: One commenter recommended that we require formulary updates to plans' websites only when actual changes are made, but no more than once per month.

Response: We agree with this commenter. We recognize the need for formulary information to be kept as current as possible to allow enrollees and prospective enrollees to make the best possible decisions regarding coverage of their particular Part D drugs. However, PT committees typically meet quarterly, and we expect that most formulary changes recommended by a PT committee will be implemented following regular committee meetings. We have therefore changed the requirement in § 423.128(d)(2)(ii) of our proposed rule, which required weekly updates of formulary information on Part D plan websites, to require monthly updates instead. This requirement is codified at § 423.128(d)(2)(ii) of our final rule.

Comment: One commenter asked us to clarify that formulary information will be made available through means other than plan websites.

Response: As previously stated, enrollees and prospective enrollees will be able to obtain specific Part D plan information, including formulary information, upon request via telephone and in writing. In addition, we have revised our final rule at § 423.128(b)(4) to require Part D plans to provide enrollees with an actual list of drugs included on the plan's formulary.

Comment: One commenter requested clarification that our requirement that formulary information be posted on a Part D plan website be limited to including only a list of formulary drugs and not the full range of clinical information associated with those drugs.

Response: Plans will only be required to include a list of drugs included on their formularies—and not the clinical information associated with those drugs—under our information dissemination requirements.

d. Claims Information

In accordance with the requirements of section 1860D-(4)(a)(4) of the Act, § 423.128(e) of the proposed rule required Part D sponsors to furnish to enrollees who receive covered Part D drugs an explanation of benefits (EOB). EOBs will be required to be written in a form easily understandable to beneficiaries. In § 423.128(e)(6) of our proposed rule, we proposed that an EOB be provided at least monthly for those utilizing their prescription drug benefits in a given month.

We also proposed in § 423.128(e)(1)-(5) that Part D plans' EOBs include:

  • A listing of the item or service for which payment was made, as well as the amount of such payment for each item or service;
  • A notice of the individual's right to request an itemized statement;
  • Information regarding the cumulative, year-to-date amount of benefits provided relative to the deductible, the initial coverage limit, and the annual out-of-pocket threshold for that year;
  • A beneficiary's cumulative, year-to-date total of incurred costs (to the extent practicable); and
  • Information about any applicable formulary changes.

Except as otherwise provided below, the final rule adopts the EOB standards set forth in § 423.128(e) of the proposed rule.

Comment: Some commenters supported the requirement to mail enrollees an EOB each month that the drug benefits are provided, as stated in the proposed regulations. Some commenters recommended dissemination of the EOBs quarterly and upon request of the enrollees rather than monthly when prescription drug benefits are provided.

Several commenters urged us to allow Part D plans the flexibility to provide an EOB to enrollees through means other than mail, such via a plan website, electronically through email, or by telephone inquiry. One commenter noted that it is not current practice for health plans to mail enrollees an EOB monthly and that this would raise administrative costs. Some commenters expressed their objection to providing an EOB at pharmacies, stating this would be far beyond pharmacies' technological capabilities, and that provision of the EOB via mail or electronically should be plans' responsibility.

Some commenters expressed that the EOBs should also include information about appeals right and processes, information about formulary information and plan terminations, and information regarding whether the deductible and out-of-pocket thresholds have been met. Another commenter stated that the EOB should be modified to be applicable to beneficiaries who are subsidy eligible individuals due to the differences in the deductibles and cumulative spending limits for these individuals.

Response: We appreciate commenters' feedback regarding our proposed EOB requirements. As provided in § 423.128(e)(6) of our final rule, we are retaining our proposed requirement that an EOB be provided at least monthly for those enrollees utilizing their prescription drug benefits in a given month. This requirement is consistent with our policy regarding the Medicare Summary Notice, which is provided monthly for beneficiaries with Part A or Part B utilization.

We believe it is most appropriate for enrollees to receive a written EOB, via U.S. mail, and have provided for this under § 423.128(e) of our final rule. Plans may offer additional mechanisms for the provision of such information—for example, via a website or call center. Plans may provide the EOB through alternative means electronically via email, for example only to the extent that enrollees affirmatively elect to receive their EOBs in such a manner. In the preamble, we suggested that Part D plans might explore provision of EOBs at the point-of-sale, but that statement was in no way intended to impose a requirement on pharmacies to provide Part D plan information in the absence of the technological capacity to do so.

We do not believe that the EOB is the most appropriate mechanism for provision of information about appeals rights and processes or information about plan terminations; this information will be provided through other mechanisms. We clarify, however, that EOBs will be required to include information regarding the cumulative, year-to-date amount of benefits provided relative to the deductible, the initial coverage limit, and the annual out-of-pocket threshold for that year, as well as information about any upcoming formulary changes. For low-income beneficiaries, the information about the cumulative, year-to-date total of incurred costs provided by the Part D plan in the EOB will include CMS subsidy amounts that count toward incurred costs.

7. Public Disclosure of Pharmaceutical Prices for Equivalent Drugs (§ 423.132)

Under section 1860D-4(k)(1) of the Act, Part D sponsors will be required to ensure that pharmacies inform enrollees of any differential between the price of a covered Part D drug to an enrollee and the price of the lowest priced generic version of that drug and available under the Part D plan at that pharmacy. As stipulated in our proposed rule, this information will have to be provided at the time the plan enrollee purchases the drug, or in the case of drugs purchased by mail order, at the time of delivery of that drug. Disclosure of this information will not be necessary, however, if the particular covered Part D drug purchased by an enrollee was the lowest-priced generic version of that drug available at a particular pharmacy.

As provided under section 1860D-4(k)(2)(B) of the Act, we are permitted to waive the requirement that information on differential prices between a covered Part D drug and generic equivalent covered Part D drugs be made available to Part D plan enrollees at the point of sale (or at the time of delivery of a drug purchased through a mail-order pharmacy). Accordingly, we proposed waiving the requirement that information on lowest-priced generic drug equivalents be provided to enrollees for covered Part D drugs purchased by Part D plan enrollees when those covered Part D drugs are purchased at:

  • Any pharmacy, when the individual is enrolled in an MA private fee-for-service plan that offers qualified prescription drug coverage and provides plan enrollees with access to covered Part D drugs dispensed at all pharmacies, without regard to whether they are contracted network pharmacies, and does not charge additional cost-sharing for access to covered Part D drugs dispensed at all pharmacies;
  • Out-of-network pharmacies;
  • I/T/U network pharmacies; and
  • Network pharmacies located in any of the U.S. territories (American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, and the Virgin Islands). We requested comments on the appropriateness of the circumstances we proposed for waiver of the requirements in § 423.132(c) of our proposed rule, as well as any additional circumstances we may wish to consider.

We also proposed waiving the requirement that information on differential prices between a covered Part D drug and generic equivalent covered Part D drugs be made available to Part D plan enrollees at the point of sale when Part D plan enrollees obtain covered Part D drugs in long-term care pharmacies. We requested comments regarding appropriate standards with regard to the timing of disclosure of generic price differentials to institutionalized Part D enrollees.

Except as otherwise provided below, the final rule adopts the standards for public disclosure of pharmaceutical prices for equivalent drugs set forth in § 423.132 of the proposed rule.

Comment: One commenter was concerned about the administrative burden the disclosure requirement would impose at the community pharmacy level and believed it was essential for us to develop appropriate guidance to minimize potential problems. The commenter noted that the administrative burden required to calculate cost-sharing differences should cause us to consider compliance with the requirements to be impracticable in all pharmacy settings because while many community pharmacies' prescription processing systems currently compare retail prices for brand-name and generic medications, the systems are not equipped to compare the discount price calculated by a Part D plan with the potential discount price by a plan for a generic drug. According to this commenter, obtaining this discounted generic price would require the pharmacy to process and submit a second prescription transaction for the generic, and then require the pharmacy to calculate the difference between the two prescriptions; the need to compare the enrollee's cost-sharing under the two scenarios would add more challenges. Other commenters assured us that this requirement is not burdensome for retail pharmacies.

Response: As provided in section 1860D-4(k) of the Act, Part D plans must provide that each pharmacy in their networks with the exceptions that we note in § 423.132(c) of our final rule complies with the requirement to disclose to beneficiaries information about less expensive therapeutically equivalent and bioequivalent covered Part D drugs. Given this statutory requirement, we cannot waive it wholesale for all community pharmacies. We do not expect this requirement will be burdensome for community pharmacists since, given that, under § 423.132(b) of our final rule, we are requiring disclosure of generic differential information after a claim has been adjudicated and for informational purposes only. We clarify that we do not expect pharmacies to become involved in substituting a generic equivalent in order for Part D plans to comply with the disclosure requirement in § 423.132(a) of our final rule. We expect that Part D plans will work with their network pharmacies to operationalize this requirement, but we do not expect that it will be burdensome to the pharmacy industry given the prevalence of generic substitution and information programs established by private plans in the market today.

Comment: One commenter asked that we define “lowest price” as determined by the Part D plan at the point of sale. Another commenter asked that we clarify that “price” is defined as what the enrollee would pay at the pharmacy subject to the applicable cost sharing. Two commenters recommended that pricing comparison should be between the brand name drug and the Maximum Allowable Cost (MAC) established by the Part D plan for the generic equivalent to the branded drug. Another commenter suggested allowing an estimated price differential between brand and non-MAC generics to be made available to enrollees rather than the exact cost differential between the price of a covered Part D drug and the lowest priced generic version because of the technical limitations of plans (for example, plans do not have a record of generics in stock at all network pharmacies). This commenter claims that, otherwise, this requirement would involve enormous administrative efforts and costs for Part D plans. This commenter suggested a reasonable alternative would be allowing plans to utilize historical dispensing patterns and costs to have available relative price information in the form of an estimate of the price differential transmitted to pharmacies in the electronic claim response when a prescription is filled, and that Part D plans would contractually require pharmacies to share this information at the point-of-sale.

Response: Under section 1860D-4(k) of the Act, Part D plans must provide that each pharmacy in their networks complies with the requirement to disclose to beneficiaries information about less expensive therapeutically equivalent and bioequivalent covered Part D drugs. Specifically, Part D plans must provide information about the differential between the price of the covered Part D drug to the enrollee (factoring in any applicable cost-sharing) and the price of the lowest-priced therapeutically equivalent and bioequivalent drug available at that pharmacy. We expect that Part D plans will work with their network pharmacies to operationalize this requirement in the most efficient way possible, and in a manner that complies with our requirements under § 423.132 of our final rule.

Comment: One commenter recommended that disclosure of the generic drug price be the lowest priced generic available at that pharmacy because most pharmacies do not carry multiple generic drug options for the same generic entity.

Response: We agree with the commenter and clarify that § 423.132(a) requires pharmacies to disclose the differential between the price of a covered Part D drug and the price of the lowest-priced generic version of that drug available at that pharmacy, consistent with section 1860D-4(k)(1) of the Act.

Comment: One commenter recommended only requiring pharmacists to inform patients of price differentials if they are dispensing a high cost version of a “multiple source” drug that is available at that pharmacy. This commenter noted that in many cases these off-patent innovator brands, also known as “multiple source” drugs, are less costly than their generic counterparts (for example, some brand name version antibiotics are often equal or lower in price than their generic counterparts). Without this technical correction, these drugs may not be considered by some Part D plans as generics and the pharmacists would not inform the beneficiary that these lower cost “multiple source” drugs are available. Another commenter stated that generics should be further defined to include “multiple source” brand name drugs.

Response: Section 1860D-4(k) of the Act requires that each pharmacy that “dispenses a covered Part D drug shall inform an enrollee of any differential between the price of the drug to the enrollee and the price of the lowest priced generic covered part D drug under the plan that is therapeutically equivalent and bioequivalent and available at such pharmacy.” While we appreciate the commenter's point that off-patent innovator drugs may also be available to enrollees at low prices, and that this information should be disclosed at the point of sale, the statute very specifically applies the requirement to the lowest priced generic covered Part D drug available at that pharmacy. Our definition of “generic drug” at § 423.4 of the final rule does not encompass an off-patent innovator drug, however. In addition, given that section 1860D-2(b)(4)(A)(i)(I) of the Act specifically distinguishes between a “generic drug” and a “preferred drug that is a multiple source drug,” we do not believe it is appropriate to define a generic drug to include a “multiple source” brand-name version of a drug. However, nothing in the statute would prohibit Part D plans from requiring their network pharmacies to provide pricing information about lower priced off-patent innovator drugs, and we encourage Part D plans to do so in the interest of ensuring Part D enrollees get the best prices available for their covered Part D drugs.

Comment: One commenter concerned with the burden on pharmacies to disclose pricing information stated that the disclosure requirement should be limited to cases in which an enrollee asks for this information at the pharmacy.

Response: As provided in section 1860D-4(k) of the Act, Part D plans must require network pharmacies, except for those which we have specifically exempted from the requirement, to disclose information about price differentials. We cannot limit this requirement to circumstances in which an enrollee specifically asks for the information. Furthermore, we believe such disclosure will provide enrollees—many of whom may not know that less expensive generic equivalents are available—with valuable information that will save money for beneficiaries, Part D plans, and Medicare.

Comment: One commenter recommended disclosure only when a brand name drug is prescribed and the prescriber has not stated “Do Not Substitute.”

Response: As provided in section 1860D-4(k) of the Act, Part D plans must require network pharmacies, except for those which we have specifically exempted from the requirement, to disclose information about price differentials. We cannot limit this requirement to circumstances in which a prescriber has written a prescription for a brand name drug and has not specifically stated that the pharmacy must not substitute the brand name drug for a generic drug. We believe such disclosure will provide enrollees many of whom may not know that less expensive generic equivalents are available with valuable information that will save money for beneficiaries, Part D plans, and Medicare.

Comment: Two commenters suggested that we clarify that the lowest price generic version that is “therapeutically equivalent and bioequivalent” is an AB-rated generic equivalent, as AB rated drugs have been proved to be bioequivalent (rather than presumed to be bioequivalent). Another commenter suggested that we limit disclosure requirements to products with “A” code, as specified in the FDA Orange Book.

Response: We agree with these commenters and clarify that the disclosure requirement in § 423.132(a) of our final rule applies only with respect to AB-rated alternatives that are therapeutically equivalent and bioequivalent to the covered Part D drug in question.

Comment: A number of commenters recommended requiring mail-order pharmacies to provide price differentials before the prescription is filled and delivered rather than at the time of delivery. The commenters noted that notification by the time of delivery may be too late for beneficiaries to receive possible savings, especially since mail-order pharmacies provide a 90-day supply and generally have lower dispensing rates than retail pharmacies.

Response: We do not believe it is practicable to require a mail-order pharmacy to contact an enrollee with price differential information prior to filling and delivering their prescription. We believe such a requirement will delay the delivery of needed drugs and could potentially compromise beneficiaries' privacy given attempts by mail-order pharmacies to contact plan enrollees. In addition, such a requirement would be inconsistent with the requirement for retail pharmacies in § 423.132(b) of our final rule, which does not require that Part D plans provide price differential information before the drug is purchased. We have therefore retained our requirement, in § 423.132(b) of our final rule, that disclosure must occur at the time of delivery of the drug when a drug is dispensed by a mail-order pharmacy.

Comment: One commenter recommended that we not waive the public disclosure requirement for private fee-for-service plans offering qualified prescription drug coverage because there are many opportunities for generic savings that might not be realized in the absence of this requirement.

Response: Section 1860D-12(d)(2) of the Act specifically requires us to waive the public disclosure requirement for private fee-for-service MA plans that offer qualified prescription drug coverage and provide plan enrollees with access without charging additional cost-sharing for covered Part D drugs dispensed at all pharmacies.

Commenter: One commenter strongly urged that we waive the public disclosure requirement for I/T/U pharmacies because these pharmacies bear beneficiaries' out-of-pocket costs for covered Part D drugs, obviating the need for AI/AN Part D enrollees obtaining covered Part D drugs at these pharmacies to have this price comparison information.

Response: As provided both in our proposed rule and in our final rule at § 423.132(c)(3), we will waive the public disclosure requirement for I/T/U pharmacies.

Comment: One commenter requested that MA-PD plans be allowed to request a waiver of the public disclosure requirement.

Response: As provided in § 423.132(c)(5), we will consider waiving the public disclosure requirement under circumstances other than those specified in § 423.132(c)(1)-(4) to the extent that we deem such compliance to be impossible or impracticable. MA-PD plans seeking a waiver of the public disclosure requirement for any of their network pharmacies will therefore have to demonstrate to us that compliance with the public disclosure requirement in § 423.132(a) is impossible or impracticable. In addition we note that, as provided in section 1860D-21(c), we will waive any Part D requirement for an MA-PD plan that conflicts with or duplicates a requirement under Part C, or the waiver of which is necessary to promote coordination between benefits provided under Parts C and D.

Comment: Another commenter suggested that we specifically waive the disclosure requirement for MA-PD plans that own and operate their own pharmacies because these pharmacies may carry only one version of any particular generic drug at any one time (except when transitioning from one manufacturer's product to another).

Response: We do not believe the commenter has provided us with sufficient information to determine that the public disclosure requirement is impossible or impracticable for Part D plans that own and operate their own pharmacies and should therefore be waived in regulation. However, we note that MA-PD plans may also wish to consider seeking a waiver of the public disclosure requirement if, as provided in section 1860D-21(c) of the Act, they can demonstrate that this requirement conflicts with or duplicates a requirement under Part C, or that such waiver is necessary to promote coordination between benefits provided under Parts C and D.

Comment: Several commenters supported the applicability of disclosure requirements to long-term care pharmacies because many long-term care facility residents and their families would be interested to know if additional savings are possible. Two commenters opposed requiring price disclosure at long-term care pharmacies because most long-term care beneficiaries do not have a choice regarding long-term care pharmacies and will likely qualify for low-income subsidies for institutionalized Part D enrollees who are full-benefit dual eligible individuals (which means they will have no out-of-pocket costs for covered Part D drugs). Thus, this information will have little effect on the drugs used by this population and will increase administrative burden for long-term care pharmacies.

Response: We agree with commenters who thought long-term care residents and their families would be interested to know if additional covered Part D drug savings are possible through the use of generic drugs, particularly since not all long-term care patients will qualify as full subsidy eligible individuals. We are therefore retaining the requirement we proposed at § 423.132(d)(1) of our proposed rule, but clarify—in § 423.132(d)(1) of our final rule—that long-term care pharmacies will have to provide information about differential price information required under § 423.132(a) of our final rule to Part D plans, which will, in turn, provide that information to their institutionalized enrollees via the explanation of benefits required under § 423.128(e) of our final rule.

8. Privacy, Confidentiality, and Accuracy of Enrollee Records (§ 423.136)

To the extent that the prescription drug plan offered by a PDP sponsor maintains medical records or other health information regarding Part D enrollees, § 423.136 of our proposed rule required the PDP sponsor to meet the same requirements regarding confidentiality and accuracy of enrollee records as MA organizations offering MA plans must currently meet under 42 CFR 422.118, according to the stipulations of section 1860D 4(i) of the Act. We clarify that the requirements of § 423.136 do not apply to PACE organizations and cost plans offering qualified prescription drug coverage, since these plans are subject to similar requirements under § 460.200(e) and § 460.210, and § 417.486, respectively.

PDP sponsors will be required to—

  • Abide by all Federal and State laws regarding confidentiality and disclosure of medical records or other health and enrollment information, including the Health Insurance Portability and Accountability Act (HIPAA) of 1996 and the privacy rule promulgated under HIPAA;
  • Ensure that medical information is released only in accordance with applicable Federal or State law;
  • Maintain the records and information in an accurate and timely manner; and
  • Ensure timely access by enrollees to records and information pertaining to them.

Prescription drug plans will be covered entities under the HIPAA Privacy Rule because they meet the definition of “health plan,” as defined in 45 CFR 160.103. The HHS Office for Civil Rights (OCR) is responsible for implementing and enforcing the HIPAA Privacy Rule. OCR has authority to investigate complaints, to conduct compliance reviews, and to impose civil money penalties for HIPAA Privacy Rule violations. Thus, any violations by PDP sponsor for its obligations under the Privacy Rule as a covered entity are subject to such enforcement by OCR. OCR maintains a website with frequently asked questions and other compliance guidance at http://hhs.gov/ocr/hipaa.

Comment: One commenter thought that we should detail the confidentiality and disclosure requirements set forth in § 423.136 of our proposed rule in the final rule, instead of simply referencing the requirements in § 422.118. This commenter believes that because of the importance of privacy protections, it is necessary that required protections are reiterated in our final rule and that PDP sponsors adequately understand their responsibilities to safeguard the health information of Medicare beneficiaries. Without privacy safeguards built directly in the regulation, beneficiaries could be vulnerable to another amendment.

Response: We agree with this commenter and have incorporated the provisions of § 422.118 directly into § 423.136 of our final rule rather than only referencing the provisions of § 422.118.

Comment: One commenter recommends that we make privacy provisions stronger for PDP sponsors, not only reiterating the protections under § 422.118, but also including specific rules regarding uses and disclosures of beneficiary information that both incorporate the provisions of important laws (such as the notice and authorization provisions of the HIPAA privacy rule) and strengthen the provisions of those laws to better protect the health information of Medicare beneficiaries.

Response: The requirements in § 423.136 of our final rule make clear that PDP sponsors must abide by all Federal and State laws regarding confidentiality and disclosure of medical records, or other health and enrollment information. This obligation includes compliance with the provisions of the HIPAA privacy rule and its specific rules regarding uses and disclosures of beneficiary information. Because section 1860d-4(i) of the Act stipulates that the privacy provisions under section 1852(h) apply to prescription drug plans in the “same” manner as they apply to MA plans under Medicare Part C, we do not have the statutory authority to expand upon those provisions as the commenter suggests.

Comment: One commenter recommends that we permit MA organizations and PDP sponsors to prevent pharmacies in their networks and out-of-network pharmacies from releasing prescriber data to third parties. Some MA organizations are concerned that providing data to drug manufacturers will have the negative effect of assisting manufacturers in targeting their marketing of unnecessary, expensive drugs in a more effective manner.

Response: Pharmacies that engage in electronic transactions are covered entities under HIPAA and are thus required to comply with the HIPAA Privacy Rule. As provided in 45 CFR 164.508, such pharmacies, as covered entities, would be prohibited from releasing individually identifiable health information to drug manufacturers for the purpose of the manufacturers' marketing unless a patient specifically authorizes the disclosure of his or her information for this purpose. However, the Privacy Rule protects patient information only, and is therefore not implicated regarding the sharing of information about prescribers.

D. Cost Control and Quality Improvement Requirements for Part D Plans

1. Overview (Scope) (§ 423.150)

Subpart D of part 423 implements provisions included in sections 1860D 4(c), 1860D-4(d), 1860D-4(e), 1860D-4(j), and 1860D-21(d)(3) of the Act and sections 102(b) and 109 of Title I of the MMA. This subpart sets forth the requirements related to the following:

  • Drug utilization management programs, Quality assurance measures and systems, and Medication Therapy Management programs (MTMP) for Part D sponsors;
  • Consumer satisfaction surveys of Part D plans;
  • Electronic prescription program;
  • Quality Improvement Organization (QIO) activities;
  • Compliance deemed on the basis of accreditation;
  • Accreditation organizations;
  • Procedures for the approval of accreditation as a basis for deeming compliance.

Below we summarize the proposed provisions and respond to comments. (For a detailed discussion of our proposals, please refer to the proposed rule (69 FR 46666)).

2. Drug Utilization Management, Quality Assurance, and Medication Therapy Management Programs (MTMPs) (§ 423.153)

Proposed § 423.153(a) required each Part D sponsor to establish a drug utilization management program, quality assurance measures and systems, and a MTMP.

We combined these requirements into one section of the regulation because each of these requirements will impact the quality and cost of care provided to beneficiaries. We stated that our intent was to ensure that the prescription drug benefit was provided using state of the art cost management and quality assurance systems. We stated that we also understood the overlapping nature of these requirements and that provisions under one requirement might complement another requirement.

We also explained in the proposed rule that although these requirements were similar in their underlying goals, they could also be quite different, and that while we understood that some members of the industry use various quality assurance measures and systems for controlling utilization and reducing medication errors, less information was available regarding MTMPs.

After receiving many comments on our proposals, our final policy, generally stated, is that cost control and quality improvement requirements describe minimum standards for drug utilization management, quality assurance, and MTMP so as to provide plans with flexibility to develop, implement, and update their programs and systems to reflect changing best practices and to continue to provide beneficiaries with the best quality prescription drug benefit at the lowest possible cost. We expect plans to continuously monitor their programs and processes, identify opportunities for improvement, and develop improvement plans and strategies.

As we stated in the proposed rule, we believe that the different program and system requirements in this subpart frequently overlap and therefore, plans need flexibility to coordinate among the different requirements. Moreover, flexibility is required to ensure that plans can support forthcoming electronic prescribing standards that we envision will dramatically affect the utilization management and quality assurance landscape. Nevertheless, despite the lack of specificity in our requirements, we expect plans to continually pursue innovative improvements for their programs and systems, and maximize technological advances when appropriate.

Ultimately, the evaluation of these programs and systems needs to be based upon their impact on therapeutic outcomes. As part of our commitment to improving therapeutic outcomes through the Medicare Prescription Drug Benefit, we intend to work with industry and other stakeholders to develop a comprehensive strategy for evaluating plan performance that collectively considers multiple standards and services affecting the cost and quality of drug therapy. As industry practices evolve, including the expected expansion of electronic prescribing, we believe meaningful performance measures can be identified that will validate best practices and provide benchmarks that will spur further program and system improvements. Accordingly, we will work with industry to identify new standards for quality and performance that could eventually become plan requirements. Our goal is to ensure that the Medicare Prescription Drug Benefit will always provide beneficiaries with the highest quality prescription drug benefits at the lowest possible cost.

In addition to our efforts to work with industry and stakeholders to develop future performance measures and standards for Part D plans, we also intend to implement a plan for utilizing Medicare prescription drug data to improve the evidence on risks, benefits, and overall costs of drug therapies for the chronically ill and other Medicare beneficiaries. This plan will be developed through a public process and implemented in a manner that preserves the confidentiality of beneficiary information.

a. Drug Utilization Management

Proposed § 423.153(b) provided flexibility to Part D sponsors in their design of drug utilization management, and included minimum requirements for drug utilization management programs. These requirements were: (1) that plans maintain a program that includes incentives to reduce costs where medically appropriate; and (2) that plans maintain policies and systems to assist in preventing over-utilization and under-utilization of prescribed medications. The proposed rule also stated that Part D sponsors must inform enrollees of program requirements, such as those involving allowable refill timeframes, in order to prevent unintended interruption in drug therapy.

In addition, the proposed rule contained a discussion about whether drug utilization management techniques should be under the direction and oversight of a PT Committee to ensure an appropriate balance between clinical efficacy and cost effectiveness. The discussion on PT Committees and their oversight of drug utilization management is contained in subpart C of this final rule.

We invited comments on whether there are industry standards for drug utilization management and whether we should adopt any of these standards.

Comment: We received numerous comments on our proposed standards, with several commenters supporting the flexibility we proposed and stating that there are no current, widely-accepted standards in the area of drug utilization management. Others supported additional detail in the regulations and suggested that we should further specify drug utilization management program standards. Some expressed concern that plans could use drug utilization management programs to restrict utilization inappropriately. In addition, several commenters recommended that we require plans to focus equally on over-utilization and under-utilization to ensure appropriate utilization by enrollees and to monitor plan performance in these areas.

Response: Based on a literature review by Booz-Allen-Hamilton [3] , and the public comments received on this topic, we are not adopting further specifications for drug utilization management requirements in the final rule. While drug utilization management is common practice, plans appropriately employ a number of different approaches (for example, formularies, step therapy, tiered cost sharing, prior authorization) and different combinations of those approaches, and therefore, while we will consider additional standards in the future, we are adopting the flexibility we proposed in the proposed rule. As we stated in the proposed rule, we believe the competitive bidding and premium setting processes, combined with the requirements for transparency and information availability, will provide powerful incentives for plans to innovate and adopt the best techniques available.

Nevertheless, our requirement for inclusion of incentives to reduce costs when medically appropriate must be interpreted broadly to mean that all drug utilization management techniques must be medically appropriate, and § 423.153(b) requires the utilization management program established by plans to be “reasonable and appropriate.” As outlined in the formulary guidance that will follow this final rule, we will review plans' drug utilization management requirements to ensure that beneficiaries are given appropriate access to medically necessary drugs in a timely manner. In order to ensure that plans appropriately employ drug utilization management techniques, and to develop or adopt further drug utilization management performance measures, we agree with commenters who recommended we track plan performance in this area. Therefore, we are adding a reporting requirement at § 423.153(b)(3) and we will specify the information that we will require in separate guidance.

Comment: One commenter stated that there are no standard measures for drug utilization management and recommended that we investigate using HEDIS (Health plan Employer Data and Information Set) measures as well as a number of other specific measures. Another commenter suggested that we use total health care costs as a measure.

Response: As discussed in the previous response, we intend to develop or adopt further drug utilization management performance measures in the future. While we agree that no universally accepted performance measures currently exist, and are therefore not prepared to specify further requirements in regulation, we also understand that there are some performance measures being utilized today and that these could provide valuable information. We intend to evaluate existing measures, such as HEDIS, and could include these or similar performance measures in our formulary guidance or drug utilization management reporting guidelines that will follow publication of this rule. In general, we expect drug utilization management programs to ensure that beneficiaries have appropriate access to medically necessary drugs in a timely manner.

b. Quality Assurance

As with the proposed regulations for drug utilization management programs, the proposed rule for quality assurance measures and systems provided minimum standards for quality assurance measures and systems, while for the most part giving plans flexibility to design such measures and systems. Proposed § 423.153(c) required Part D sponsors to include quality assurance measures and systems for: (1) reducing medication errors; (2) reducing adverse drug interactions; and, (3) improving medication use. It also proposed to require plans to establish requirements for: (1) drug utilization review (DUR); (2) patient counseling; and, (3) patient information record-keeping.

In the proposed rule, we stated that the DUR, patient counseling and patient information record-keeping requirements would generally need to comply with section 4401 of the Omnibus Reconciliation Act of 1990 as codified in § 456.705 and section 1927(g)(2)(A) of the Act, and we stated that we were considering such specific requirements for the final rule. Although those regulations were written specifically for the Medicaid population, we stated that we understood that they describe currently accepted standards for contemporary pharmacy practice, and our intent was to require plans to continue to comply with contemporary standards. We solicited comment on whether the Medicaid standards were in fact industry standards, whether they are appropriate standards for part D, and if they are, how they should be adapted for use in Part D. We also stated our understanding that some members of industry use additional quality assurance measures and systems. We invited comments on whether there were additional industry standards that we might adopt. Furthermore, we proposed that Part D sponsors will be required to have systems and measures established to ensure that network pharmacy providers are complying with the plans' quality assurance requirements. We requested comments on the costs and challenges associated with these systems and measures.

Comment: Most commenters agreed that the relevant parts of OBRA 90 for DUR, patient counseling and patient information record-keeping describe widely accepted standards for pharmacy practice. While no other suggestions for widely accepted standards of pharmacy practice were offered, one commenter indicated that these requirements will not adequately cover appropriate standards for home infusion pharmacies, which the commenter recommended should also require patient interviews and clinical assessments. Alternatively, several commenters recommended that we defer to State laws and State board of pharmacy regulations regarding pharmacy practice standards instead of creating a redundant Federal standard for pharmacy practice.

Response: The overwhelming majority of comments confirmed our understanding that the relevant parts of OBRA90 for DUR, patient counseling, and patient information record-keeping generally describe widely accepted standards of pharmacy practice for both Medicaid and Non-Medicaid patients. We find that almost all of the State boards of pharmacy have adopted regulations for pharmacy practice that, at a minimum, generally reflect these relevant parts of the OBRA 90 requirements. However, upon reconsideration, since our intent was to ensure that plans provided access to network providers that are required to comply with contemporary pharmacy practice standards, and not to create a new Federal standard for pharmacy practice, we agree with commenters that recommended that we defer to existing authority for regulating pharmacy practice. In fact, this is consistent with the Department of Health and Human Service's (HHS) general position of deferring to States for regulating the practice of pharmacy. Therefore, our requirement at § 423.153(c)(1) in the final rule states that plans must provide us with representation that their network providers are required to comply with minimum standards for pharmacy practice established by the States.

While we understand that additional quality standards might apply to specific pharmacy practice-settings such as home infusion pharmacy, specialty pharmacy and long-term care pharmacy practice, we are not prepared to adopt additional, practice-setting specific Federal standards at this time. We believe that current pharmacy practice standards established by the States, whether or not a State has additional standards for specific pharmacy practice-settings, still provide applicable minimum standards for all pharmacy practice-settings. Nevertheless, we encourage plans and their network pharmacy providers to establish and agree upon additional quality assurance standards as necessary, including those required for accreditation by recognized accrediting organizations.

Comment: Several commenters stated that concurrent and retrospective drug utilization review (DUR) systems illustrate successful examples of industry practices that help prevent inappropriate drug therapy. Concurrent DUR systems are used to identify potential inappropriate drug therapy before a patient receives a prescription while retrospective DUR systems can often identify patterns of potential inappropriate prescribing and drug utilization based upon drug claim history.

Response: Based upon these comments as well as similar information provided in the Booz-Allen-Hamilton report, we agree that concurrent and retrospective DUR must be components of the quality assurance systems and measures to be implemented by Part D plans. Accordingly, we have specified requirements for concurrent and retrospective DUR systems, policies, and procedures at § 423.153(c)(2) and § 423.153(c)(3), respectively.

In the proposed rule, we stated that elements we viewed as desirable for quality assurance systems were: (1) electronic prescribing; (2) clinical decision support systems; (3) educational interventions; (4) bar codes; (5) adverse event reporting systems; and, (6) provider and patient education.

While we did not expect Part D plans to adopt all of these elements, we stated that we expected substantial innovation and rapid development of improved quality assurance systems in the new competitive and transparent market being created by the new Part D benefit.

We invited comments on which, if any, elements of a quality assurance system should be contained in our program requirements. We were particularly interested in best practices in quality assurance, costs and benefits associated with each element, the challenges involved in implementing quality assurance measures and systems, types of data useful for reducing medication errors, associated costs and challenges with collecting this data, and how these data could best be communicated to providers and beneficiaries to improve medication use.

We noted that the MMA does not define or explain the term “medication error.” Nevertheless, we stated that we believe a common definition was important. Therefore, we cited the following definition as one that we might use initially in interpretive guidance, which was previously adopted by the FDA in its proposed rule requiring bar codes on human drug products:

“Any preventable event that may cause or lead to inappropriate medication use or patient harm while the medication is in the control of the healthcare professional, patient, or consumer. Such events may be related to professional practice; healthcare products, procedures, and systems, including prescribing; order communication; product labeling, packaging, and nomenclature; compounding; dispensing; distribution; administration; education; monitoring; and use.” (See 68 FR 12500 (March 14, 2003)).

We indicated that in the future we may require quality measures that include error reports and stated that we could use this information to evaluate plans. In addition, we indicated that we may publish this information for enrollees to use when comparing and choosing their individual plans. Therefore, we invited specific comments on how we could evaluate Part D plans based on the types of quality assurance measures and systems they have in place, on this proposed definition of “medication error”, on how error rates can be used to compare and evaluate plans, and on how such information could best be provided to beneficiaries to assist them in making their choices among plans.

Comment: A number of commenters recommended we include all elements discussed in the proposed rule including decision support, electronic prescribing, bar codes, adverse event reports, and provider and patient education. Most of them recommended that we require adverse event and medication error tracking systems. However, many commenters recommended that these tracking systems be used internally and that reports not be sent to CMS or made public. These commenters argued that there is too much inconsistency in the definitions used in the field and that an external reporting requirement would actually be counter productive for quality improvement. While several commenters generally thought our proposed definition for “medication error” was accurate, these same commenters stated that such a definition would need to be narrowed to prove useful for consistent reporting among the plans.

Response: As to all the elements that we listed in the preamble, we agree with the many industry organizations that there are no well accepted industry standards to make these mandatory requirements. The Booz-Allen-Hamilton report [4] supports this finding. We continue to believe that these are desirable goals and have found that many organizations are already using them. We expect that electronic prescribing will greatly increase the availability of clinical decision support. We intend to work with various stakeholders to further develop these and other quality assurance systems enhancements.

We agree with commenters that there are inconsistencies associated with the reporting of adverse events and medication errors. Moreover, we are not convinced, based upon many of the comments received, that an external reporting requirement for medication errors, even if we provided a more specific and narrow definition of “medication error”, will lead to improved quality of care. Therefore, instead of requiring plans to report medication errors to us, we require plans to implement internal medication error identification and reduction systems, and we have added this requirement at § 423.153(c)(4). We are also requiring plans to provide us with information concerning their quality assurance measures and systems, in accordance with guidelines published by us. In addition, we encourage plans to utilize the FDA Medwatch form for reporting adverse events, as well as educating prescribers and pharmacy providers about its availability. Finally, although we will not require external medication error reporting at this time, we maintain that our proposed definition of “medication error” can still serve as appropriate guidance for internal medication error identification and reduction systems.

c. Medication Therapy Management Programs (MTMPs)

Proposed § 423.153(d) required Part D sponsors to establish an MTMP described in section 1860D-4(c)(2) of the Act that is designed to optimize therapeutic outcomes for targeted beneficiaries by improving medication use and reducing adverse drug events, including adverse drug interactions, that may be furnished by a pharmacist, and that may distinguish between services in ambulatory and institutional settings. We stated that MTMPs may include elements designed to promote (for targeted beneficiaries):

  • Enhanced enrollee understanding—through beneficiary education counseling, and other means that promotes the appropriate use of medications and reduces the risk of potentially adverse events associated with the use of medications.
  • Increased enrollee adherence to prescription medication regimens (for example, through medication refill reminders, special packaging, compliance programs, and other appropriate means).
  • Detection of adverse drug events and patterns of over-use and under-use of prescription drugs.

We proposed that in order to promote these elements and optimize therapeutic outcomes for targeted beneficiaries, we envision MTMPs potentially spanning a range of services, from simple to complex. In addition to those mentioned in the statute, services could include, but may not be limited to, performing patient health status assessments, formulating prescription drug treatment plans, managing high cost specialty medications, evaluating and monitoring patient response to drug therapy, providing education and training, coordinating medication therapy with other care management services, and participating in State-permitted collaborative drug therapy management.

We specifically sought comment on MTMP best practices, essential components of successful MTMPs, appropriate MTMP providers, service level requirements, quality assurance requirements for MTMPs, information on effective MTMP services that could be publicized and used by beneficiaries, and other effective steps to make valuable, proven MTMP services available to beneficiaries.

Comment: Numerous commenters recommended that we specifically define a minimum package of services that all plans must offer for MTMPs, because plans will not have the economic incentives to offer adequate MTMP services otherwise, or because different plans will offer such different services that the quality of services provided will vary significantly. Although comments suggested a wide variety of possible MTMP services, common elements identified in several best practice examples provided in the comments included: (1) Initial assessment/patient interview; (2) Development of a drug plan identifying goals for therapy; and, (3) Monitoring and evaluation of therapy. Nevertheless, a number of commenters recommended that we maintain the level of specificity contained in the proposed rule. These commenters stated that no widely accepted MTMP standards exist and plans need flexibility to develop and implement MTMPs that can best meet the needs of their specific patient populations and therefore, achieve the best outcomes.

Response: After reviewing extensive comments and conducting additional research, we believe that insufficient standards and performance measures exist to support further specification for MTMP services and service level requirements, and therefore we are adopting the flexibility proposed in the proposed rule. Although best practice examples identified some common elements, neither the Booz-Allen-Hamilton report, nor any comments submitted to us, showed that these MTMPs reflected widely accepted standards of practice. In fact, until the Pharmacist Provider Coalition's recent publication of their definition of MTMP, no widely agreed upon definition of MTMP existed, let alone standards and measures. While we understand the concern with potential disincentives for part D plans to develop robust MTMPs, we are not adopting additional regulatory requirements at this time because it us unclear which specific, additional requirements would enhance MTMPs, and ultimately improve therapeutic outcomes for part D beneficiaries.

We continue to believe that MTMPs can and must offer appropriate services for targeted beneficiaries. However, we are concerned that further premature regulatory requirements at this time might not only fail to improve MTMPs, but could negatively impact their development. Requiring a universal set of minimum services and service levels, without fully understanding how they could effectively be implemented on a much larger platform than illustrated in best practice examples, could result in MTMPs becoming perfunctory services offered just to satisfy regulatory requirements as opposed to patient focused services aimed at improving therapeutic outcomes. For example, several of the best practice examples stressed the importance of collaboration with prescribers to ensure that MTMP is successful. However, simply requiring specific services and service delivery mechanisms will not do anything to ensure successful collaboration. Therefore, we believe that at the outset of the Medicare Prescription Drug Benefit, plans must have maximum flexibility to develop MTMPs that can achieve the statutory goal of improving therapeutic outcomes.

Notwithstanding the lack of current MTMP standards and performance measures, we believe that MTMP must evolve and become a cornerstone of the Medicare Prescription Drug Benefit. With an understanding that the introduction of MTMP requirements can significantly impact the current practice of pharmacy, we intend to utilize the Medicare Prescription Drug Benefit as a platform for driving the quality improvement of prescription drug therapy. We require plans to report details on their respective MTMPs, and we intend to collaborate further with industry to develop measures that can be used to evaluate programs and establish appropriate standards. Our goal is to evaluate MTMPs within the context of an overall strategy that evaluates not only MTMP, but also other quality of care programs, standards, and services, such as drug utilization management, drug utilization review, chronic care improvement programs, and the role of QIOs. In so doing, we believe that we will identify best practices that will evolve into industry practice standards and could eventually be adopted as our standards.

Comment: Several commenters recommended that we require plans to allow beneficiaries to receive MTMP services from their network/non-network provider of choice. In addition, several commenters recommend that we require plans to offer MTMPs that favor face-to-face consultations over other forms of intervention.

Response: Consistent with our overall approach to MTMPs, at this time we believe plans need the discretion to decide on which methods and which providers are best for providing MTMP services available under their specific MTMP. We assume that such providers will include some network pharmacy providers, but plans are not obligated to use any specific providers as long as those providing services for the plan are qualified to provide such services. Furthermore, although we indicated in the proposed rule that we believe pharmacists will be the primary providers of these services, and that we believe beneficiary choice and on-going beneficiary-provider relationships should play a role in determining the appropriate providers, we recognize that such determinations must be made in the context of the specific, overall program design. Moreover, while we understand that face-to-face consultations can offer advantages over other methods of service delivery, it is still but one component of a successful MTMP. Successful MTMPs will need to consider and coordinate not only the method of communication and the providers of services, but also other components such as the content of the service, the qualifications of the providers, the identification of targeted beneficiaries, and the documentation requirements associated with services performed. Because plans are responsible for designing the programs to improve therapeutic outcomes, plans will be in position to make the determinations that will maximize overall MTMP effectiveness, taking into account all factors that influence successful MTMP.

In addition, while section1860D-4(b)(1)(C)(iii) of the Act requires us to establish pharmacy access standards that include rules for adequate emergency access to covered part D drugs, we do not believe the same authority applies to out of network access for MTMP services. Unlike situations when patients face an urgent need for covered Part D drugs but do not have access to a network provider, we do not believe this urgent need rationale reasonably applies to MTMP. In addition, the Congress clearly knows how to require out-of-network access and did so specifically for Part D drugs in emergency situations. Accordingly, we can not require plans to offer MTMP services through out-of-network pharmacies.

Comment: One commenter noted that MTMP services will fall under the consideration of State boards of pharmacy and how States have defined the practice of pharmacy and scope of services which pharmacists are legally able to provide to patients. Therefore, this commenter requested that we work with States and their boards of pharmacy to prevent conflicts between MTMP under the Medicare Prescription Drug Benefit and State definitions of pharmacy practice and scope of allowable pharmacist activities.

Response: Generally, unless there is a conflict with Federal law, we will defer to State laws and regulations pertaining to the practice of pharmacy. We do not believe our current MTMP requirements pose any conflicts with State laws and therefore, plans need to develop MTMPs that comply with State laws and regulations.

Comment: Several commenters recommended that we clarify that providers can offer MTMP to non-targeted beneficiaries and bill the beneficiaries for these services.

Response: We agree that providers can offer MTMP services to non-targeted beneficiaries because MTMP in these circumstances is not part of the Medicare Prescription Drug Benefit. Providers need to notify beneficiaries receiving these services that the services are not offered as part of the Medicare Prescription Drug Benefit and therefore, the beneficiary is responsible for all of the cost of the MTMP.

Similarly, if plans choose to offer MTMP to non-targeted beneficiaries, beneficiaries must be notified that they are responsible for 100 percent of the cost. Moreover, the costs for these services fall entirely outside the Part D cost sharing structure and do not count for purposes of tracking beneficiaries' total costs, out-of-pocket costs, or for purposes of reinsurance and risk sharing with Medicare.

Comment: Several commenters recommended that we prohibit plans from implementing MTMPs as a utilization management tool geared towards shifting market share as opposed to improving therapeutic outcomes.

Response: We agree that MTMPs are more than utilization management programs focused on shifting market-share. Part D plans must implement MTMPs designed to optimize therapeutic outcomes by improving medication use and reducing the risk of adverse drug events, including adverse drug interactions. Plan sponsors will need to coordinate their MTMPs and utilization management strategies to improve therapeutic outcomes at the lowest possible costs.

In the proposed rule, we proposed that MTMP fees be treated as administrative fees and incorporated into the premium, rather than being billed to the beneficiary on a case-by-case basis. We noted that while section 1860D-4(c)(2)(E) of the Act specifies that the time and resources necessary to implement the MTMPs must be taken into account when establishing fees, it does not specify how these fees should be paid. We stated our belief that fees associated with provision of MTMP services are separate and distinct from dispensing fees discussed in § 423.100. Although section 1860D-4(c)(2)(E) of the Act states that Part D sponsors must disclose to the Secretary the amount of “any such management or dispensing fees”, it merely governs disclosure and does not require that MTMP be included in the dispensing fee (indeed the Act distinguishes management fees from dispensing fees that are part of individual prescriptions).

Comment: Most commenters agreed with our interpretation that MTMP should be considered an administrative cost as opposed to a benefit, thereby preventing direct beneficiary cost sharing for MTMP services.

Response: We agree that direct beneficiary cost sharing for MTMP services could negatively impact targeted beneficiary participation and therefore, our final policy is to consider MTMP as an administrative cost (included in the plan bid), incident to appropriate drug therapy, and not an additional benefit.

Comment: Many commenters recommended that we include reporting requirements in the final regulation, specifying, for example, that plans provide detailed policies and procedures for implementing their MTMPs and associated performance measures for evaluating the impact on therapeutic outcomes.

Response: We agree with these commenters that we must include a reporting requirement for MTMPs. As we work with industry and other stakeholders to improve the therapeutic outcomes by optimizing prescription drug therapy, we will need detailed information about each MTMP. Therefore, we are adding a reporting requirement at § 423.153(d)(6) and we will specify the information that we will require in separate guidance.

Comment: Several commenters suggested that we specifically involve QIOs with the collecting and analyzing of data from MTMPs and establish a mechanism for QIOs to secure information from medical claims to identify targets.

Response: We believe that QIOs could play a significant role with MTMPs and this will be reflected in our contracts with the QIOs. Specific technical assistance could include collecting and analyzing MTMP data.

Comment: Several commenters responded to our request for incentives that would help drive the creation and evolution of significant MTMPs by suggesting pay-for-performance incentives and minimum renewal criteria, both based upon mutually agreed upon thresholds of patient care.

Response: We have a more complete discussion of pay-for-performance in the quality improvement section of the preamble to the final Title II rule. We are conducting several demonstrations to test this approach and we are very interested in studying this direction for plans. Plans are free to develop such arrangements with their providers, and we encourage them to do so. Such arrangements have existed for a number of years in the Medicare Advantage program. Plans will need to be mindful of any restrictions imposed by the anti-kickback statute, and those needing further clarification may want to use the OIG's advisory opinion process to obtain guidance relating to specific transactions and arrangements.

Comment: CMS should clarify that MTMP services are voluntary and that targeted beneficiaries are under no obligation to participate with programs in order to receive prescription drug benefits.

Response: We agree that beneficiaries must not be obligated to participate in MTMPs. While we hope that beneficiaries will participate to improve their therapeutic outcomes, beneficiaries must not be denied access to prescription drugs based upon failure to participate in MTMPs.

Comment: One commenter recommended that we require Part D plans to separate MTMP services agreements with providers from standard network provider contracts to reduce potential conflict of interest.

Response: Since we do not know who will be providing MTMP services, it is premature for us to require specific terms and conditions for such contracts. While MTMP service providers will likely include some network pharmacy providers, Part D plans will need to specify, in their applications, their approach to determining MTMP fees which accounts for the time and resources necessary to perform the services. In addition, plans need to comply with any restrictions imposed by the anti-kickback statute.

Comment: One commenter recommended that we change the language at § 423.153(d)(1)(i) from “must assure” to “must have processes in place so that.”

Response: Upon review of the proposed language, we agree that § 423.153(d)(1)(i) must be changed. We have changed “must assure” to “is designed to ensure.” We believe this language does not impact the intent but better reflects what is required of MTMPs.

Section 1860D-4(c)(2)(A)(ii) of the Act describes targeted beneficiaries as Part D individuals who: (1) have multiple chronic diseases (such as diabetes, asthma, hypertension, hyperlipidemia, and congestive heart failure); (2) are taking multiple covered part D drugs; and (3) are identified as likely to incur annual costs for covered Part D drugs that exceed a level specified by the Secretary, and we codified this requirement at proposed § 423.153(d)(2).

We invited comment on further defining “multiple chronic diseases” and “multiple covered Part D drugs,” and whether we should add further specifications or leave such determinations to the plans. Furthermore, we invited comment on whether we should set the cost threshold for determining targeted beneficiaries or if this determination could also be left up to the plans. Generally, we invited comment on disease, drug and cost issues that we should consider in further refining the definition of targeted beneficiary.

Comment: Many commenters recommended that we specify which chronic diseases, the number of chronic diseases, and the number of covered part D drugs that will qualify a beneficiary for MTMP services. Moreover, several commenters suggested that specific patient populations, such as beneficiaries in long term care, should automatically be considered eligible for MTMP services in all plans. Alternatively, many commenters suggested that such determinations are best left to the individual plans for designing their plan specific MTMPs.

Response: At this time, we believe these determinations must be left to the plans. Although we are not adding further specific requirements for chronic disease and multiple drugs, we do recommend that plans take notice of the statutory examples of chronic diseases when developing MTMPs. We plan to monitor the programs developed by the plans to learn from them as to whether or not further guidance is desirable.

Comment: Many commenters provided recommendations on the level of annual costs for Part D drugs likely to be incurred by a beneficiary that should be used as a threshold for MTMP eligibility. Some commenters argued that any cost threshold is inappropriate because it does not indicate those that could benefit from MTMP and in fact, could exclude beneficiaries that would benefit most. Others recommended various cost thresholds including specific dollar amounts and percentage based thresholds (for example, top 5 percent). Most comments suggested that we should make this determination and not delegate it to the plans.

Response: Despite our discussion in the proposed rule about leaving this determination to the plans, we do not believe we have the authority to delegate the cost threshold determination to plans and therefore, we will set a cost threshold. While cost might not the be best proxy for identifying patients that could benefit most from MTMP, the statute requires us to set a threshold and our goal is to identify a manageable target population so that plans offer truly valuable services to beneficiaries that will benefit from such services. Factors we will consider include typical costs associated with the most common chronic diseases and co-morbidities for Medicare beneficiaries, the relationship between cost and the number of medications a beneficiary is taking, the impact specific cost thresholds have on the size of the target population, and the alignment of incentives for providing MTMP services within the standard part D benefit structure. We intend to provide the specific cost threshold in separate guidance.

Comment: Several commenters recommended that we should require plans to allow providers and beneficiaries (self-referral) to identify appropriate MTMP targets in addition to plans utilizing system edits to identify eligible MTMP targets.

Response: The identification of targeted beneficiaries will be determined by individual plan policies. Therefore, plans will decide if and how providers and beneficiaries can participate with identifying targets. Once again, we believe that successful MTMPs must be coordinated and that plans need to develop appropriate mechanisms for notifying and identifying targeted beneficiaries that are eligible for MTMP services.

Section 1860D-4(c)(2)(C) of the Act requires Part D sponsors to develop their MTMPs in cooperation with licensed and practicing pharmacists and physicians, and we codified this requirement at § 423.153(d)(3).

Comment: Several commenters recommended that we specify that practicing pharmacists and physicians must be licensed in the United States.

Response: Part D sponsors must comply with State licensure requirements for pharmacy practice, and therefore, we believe further specific licensure requirements are not warranted.

Section 1860D-4(c)(2)(D) of the Act requires us to establish guidelines for the coordination of MTMPs with chronic care improvement programs established under section 1807 of the Act for targeted beneficiaries, and we codified this requirement at § 423.153(d)(4).

The Chronic Care Improvement Program (CCIP) is a new program established by section 721 of the MMA, which added a new section, section 1807, to the Act. The new section 1807 creates a method for us to assist beneficiaries with multiple chronic conditions in managing their care. The program is targeted only to beneficiaries in original fee-for-service Medicare not beneficiaries enrolled in MA plans.

We invited comment on how services provided through CCIP could be effectively coordinated with MTMP services provided by PDPs. We also sought comment on how to integrate MTMP services and financial incentives into the CCIP under section 721 of the Act.

Comment: Several commenters recommended that we share CCIP enrollment information with PDPs so that these individuals will be excluded from MTMP services. In addition, several other commenters recommended that we require PDPs to share their drug data with CCIPs.

Response: We agree that Part D plans need to share drug data with CCIPs and have specified this requirement in our regulation text at § 423.153(d)(4). CCIPs need this valuable data in order to provide the comprehensive care management that is intended under the CCIP. However, plans must determine, in conjunction with CCIPs, whether or not it is desirable to offer MTMP services to persons participating in CCIPs. We note that in sharing the data, both the CCIP and the Part D sponsor will need to abide by the HIPAA privacy rules including transmitting only the minimum data necessary. We strongly encourage Part D plans to consult with their privacy counsel to ensure that the transmission of data complied with all aspects of the HIPAA privacy rules.

In the proposed rule we also discussed the requirement in section 1860D-4(c)(2)(E) of the Act specifying that the time and resources necessary to implement MTMP be taken into account when establishing fees for pharmacists or others providing MTMP services under the plan. We stated that to implement this section, in evaluating the administrative component of a Part D plan's bid, we will ask a Part D sponsor to disclose the fees it pays to pharmacists or others, including an explanation of those fees attributable to MTMP services. The fee information provided to us under this authority will be protected under the confidentiality provisions of section 1927(b)(3)(D) of the Act. Under those provisions, we are prohibited from disclosing the specific fees in a manner that links the fees to the particular pharmacy or other provider providing the MTMP services except to the extent necessary to administer the Part D program, to permit the Comptroller General to review the information, or to permit the Director of the CBO to review the information. If we were to discover situations in which plans systematically did not pay the fees described in their applications-and, if those errors were not corrected upon notification, we might, at our discretion, employ the broad ranges of intermediate sanctions or termination provisions available under subparts K and O of the regulations.

We stated, however, that while we expected to perform the due diligence described above through application review and potentially following up on any complaints, we did not believe we have the authority to mandate that Part D sponsors pay pharmacists or other providers a certain amount for MTMP services. We also stated that we will not adjudicate any specific disputes between Part D and pharmacists or other providers regarding the specific fees due for MTMP services.

Comment: Many commenters recommended that we provide further requirements for MTMP fees, including establishing a fee schedule, identifying a particular documentation and billing mechanism, and requiring plans to reimburse for MTMP services provided by out of network providers.

Response: These details are up to the plans and their arrangements with pharmacists and other providers. We do not believe the MMA provides us with the authority to establish fee schedules or interfere with the contracts between plans and providers. While we are familiar with the recommendation and accompanying efforts to pursue a CPT coding mechanism for MTMP services, which would provide for common billing and documentation procedures, the American Medical Association's (AMA) Current Procedural Terminology (CPT) Editorial Panel will make that determination and it does not directly involve us. Therefore, in the final rule, we are adopting our proposed policy to require sponsors to discuss their MTMP fees in their applications, but neither to mandate any specific MTMP fees nor become involved in payment disputes regarding MTMP between pharmacies and sponsors.

Section 423.153(e) in the proposed rule discussed fraud, waste and abuse programs required by section 1860D-4(c)(1)(D) of the Act. In an effort to consolidate, the requirements and preamble discussion pertaining to fraud, waste and abuse programs, we moved § 423.504(b)(4)(vi)(H) to subpart K, and included as a component of a Part D sponsor's general compliance plan.

d. Exception for Private Fee for Service Plans

Proposed § 423.153(f) implemented section 1860D-21(d)(3) of the Act by exempting private fee for-service MA plans that offer qualified prescription drug coverage from the requirement to establish a drug utilization management program and a MTMP; however, these private fee-for-service MA plans are still required to establish quality assurance measures and systems and a program to control fraud, waste and abuse as described in § 423.153(c) and § 423.504(b)(4)(vi)(H), respectively.

We did not receive any comments on these provisions and they have been adopted in the final rule at § 423.153(e).

3. Consumer Satisfaction Surveys (§ 423.156)

As proposed under § 423.156, we will conduct consumer satisfaction surveys of enrollees of Part D plans in order to provide comparative information about qualified prescription drug coverage to enrollees as part of our information dissemination efforts. Section 1860D 4(d) of the Act specifies that these surveys be conducted in a manner similar to how they are conducted under § 422.152(b) for MA plans by using the Consumer Assessment of Health Plans (CAHPs).

In the proposed rule, we stated that we believed a CAHPs-like instrument (or perhaps a modification of CAHPs for MA organizations offering MA-PD plans) will most likely be the vehicle used to collect this information. In addition, we stated that we anticipated working with the Agency for Healthcare Research and Quality (AHRQ) to develop a survey measuring the experience of beneficiaries with their qualified prescription drug coverage, a sampling strategy, and an implementation strategy. We also indicated that we will provide further information regarding this survey as it is developed.

Comment: Commenters had several suggestions and questions regarding the design and implementation of the survey, including the following: CMS and CAHPs should provide draft models of the survey instruments to the Part D plans for input prior to final draft and distribution; CAHPs/AHRQ should differentiate satisfaction with the benefit versus the service provided by the network pharmacy; if all plans are actuarially equivalent as approved by CMS, how will we differentiate consumer satisfaction; the first surveys should be conducted starting in 2006 with the results available before the fall open season; consumers must be included in the survey design process; and, surveys should be sent and the results analyzed by CMS, prior to the annual May notification to plans about whether or not their contracts will be renewed.

Response: We plan to have a public comment process in the development of the survey, and solicit input from key stakeholders. We expect that consumers will be included in the design process through focus groups, cognitive interviews and testing of the instrument. The purpose of the satisfaction survey is to provide information in a timely manner for purposes of beneficiary plan choice which occurs during the fall of the year. We are still determining the timing for survey administration. One major constraint is pilot testing of the survey cannot begin until early in 2006.

Since the purpose of the survey is to help consumers choose among the plan options, during the development process we will try our best to focus on things that may vary across plans versus satisfaction with the overall benefit. Although the plans are actuarially equivalent, there will be differences in formularies, customer service, informational materials, etc.

Comment: Additional comments focused on the fact that fully integrated MA organizations, unlike other MA organizations and PDP sponsors, own and operate their own pharmacies. As a result, survey instruments may be confusing to beneficiaries enrolled in these organizations if the instrument is designed only for network model plans. In addition, to the extent that survey instruments do not reflect satisfaction ratings with retail pharmacies under contract to network model plans, comparisons between network plans and integrated organizations will be unlikely to result in apples-to-apples comparisons. In addition, consumer satisfaction ratings in health care are notoriously suspect to regional variation. In reporting satisfaction levels, we should attempt to adjust for these variations.

Response: We agree that making appropriate comparisons and adjustments will be essential to take into account certain factors that may impact satisfaction but are not under the control of the Part D plans. In the development work, we will be exploring what are the appropriate adjusters for this survey.

4. Electronic Prescription Program (§ 423.159)

Section 1860D-4(e) of the Act contains provisions for electronic prescription programs. The statute contains specific provisions on when voluntary initial standards may be adopted (not later than September 1, 2005), and when final standards must be published (not later than April 1, 2008) and then effective (not later than 1 year after the date of promulgation of final standards).

While we included a fairly long discussion of electronic prescribing in the proposed rule, shortly we will issue another proposed rule devoted to the standards that will be used for electronic prescribing and have reserved § 423.159(a) and § 423.159(b) of this final rule for such electronic prescribing standards. Therefore, the proposals we made for such standards are not being addressed in this final rule. Moreover, comments received in response to such proposals may be considered in the electronic prescribing-specific proposed rule. In addition, commenters who wish to provide additional comments on electronic prescribing will be permitted to do so after publication of the electronic prescribing proposed rule.

One standard we are finalizing is the requirement that Part D sponsors have the capacity to support electronic prescribing, once final standards are in effect, including any standards that are established before the drug benefit begins in 2006. We proposed such language at § 423.159(a) of the proposed rule. Since Part D sponsors will in fact have to support electronic prescribing, once standards are in place, we have modified the language in § 423.159(c) to make clear that Part D sponsors must not just have the capacity to support electronic prescribing but will actually have to support it. We received no comments on this proposal and are adopting it at § 423.159(c).

We also proposed at § 423.159(b) to allow an MA-PD plan to provide a separate or differential payment to a participating physician who prescribes covered Part D drugs in accordance with electronic prescription standards. (Note that this provision only applies to MA-PD plans and not to PDPs) Section 102(b) of the MMA makes it clear that this differential payment may occur when a participating physician prescribes drugs in accordance with an electronic prescription program that meets standards established under section 1860D-4(e) of the Act. We solicited comments on the differential payments provision described in § 423.159(b) of the proposed rule as it relates to the application of various legal authorities including “the physician self-referral prohibition at § 1877 of the Act” and the Federal anti-kickback provisions at section 1128B(b) of the Act. In order to facilitate electronic prescribing by a Part D sponsor, we also invited public comment on additional steps to spur adoption of electronic prescribing, overcome implementation challenges, and improve Medicare operations.

Comment: Many commenters supported the provision of a separate or differential payment to a participating physician that prescribes covered Part D drugs in accordance with electronic prescription standards.

Response: We agree that participating physicians have a substantial role in electronic prescribing and will have upfront and on-going costs of implementation. For this reason, the regulation permits an MA organization offering an MA-PD to provide a separate or differential payment to a participating physician that prescribes covered Part D drugs in accordance with electronic prescription standards, including both voluntary standards promulgated by HHS and final standards established by HHS once final standards are effective.

Comment: Many commenters also encouraged us to allow MA-PD plans to make similar incentive payments to participating pharmacies and pharmacists.

Response: We agree that pharmacies and pharmacists have a substantial role in electronic prescribing and will have upfront and on-going costs of implementation. The MMA statute provided for such incentives directly to physicians; however MA plans could in compliance with the Federal anti-kickback and Stark self-referral statutes offer incentives to pharmacies and pharmacists through individual plan contract agreements. HHS may consider this issue when developing the pilot programs.

Comment: One comment stated that differential payments should also be permissible by PDPs. While “PDPs sponsors will not have network contracts with physicians in the way that MA organizations will, PDPs may have service contracts with physicians to provide MTMP services.” The commenter noted that we have the authority to permit such payments under section 1860D-4(c)(1)(B) of the Act as part of a quality assurance program.

Response: We disagree. The MMA statute was specific in the use of incentives by MA-PD plans to participating physicians that prescribe covered Part D drugs in accordance with an electronic prescription program that meet the standards established under section 1860D-4(e) of the Act.

Comment: Many commenters expressed concern that separate or differential payments should not inappropriately influence physician prescribing behavior or restrict provider choice or decision making. Many also suggested that we provide guidance to plans to guarantee that such incentives do not impact prescribing judgment and that any incentives utilized in e-prescribing programs focus on rewarding improvements in patient safety and quality.

Response: We agree with the commenters that incentives must not inappropriately influence physician prescribing patterns. We will be providing guidance to plans on physician incentives.

Comment: Many commenters agreed that any differential payments provision must be in compliance with other Federal and State laws including the physician self-referral prohibition at section 1877 of the Act and the Federal anti-kickback provisions at section 1128B(b) of the Act. They urged the Secretary to consider extending the applicability of the safe harbor provisions beyond Part D programs and to include monetary and non-monetary remuneration.

Response: As outlined in the preamble in the proposed rule, we are sharing any comments regarding the anti-kickback statute with the OIG. Additionally, in response to comments we have added language at § 423.159(d) that such payments be subject to compliance with applicable Federal and State laws and regulations related to fraud and abuse.

In the proposed rule, we also sought comment on measures of MA-PD plan quality related to the use of electronic prescribing and other MA-PD quality measures that reflect effective electronic prescribing systems.

We invited comments on the challenges and on possible Federal activities that will promote the effective use of electronic prescribing by providers, including publishing best practices, and making technical information on electronic prescribing products available. In addition, receptivity to the use of electronic prescribing by consumers is not well understood especially among the elderly and disadvantaged populations. We requested additional information on how those populations may view electronic prescribing and what steps may be taken to get them to use this modality and, thus, take advantage of the safety and quality benefits it offers.

We also invited comments on how to promote the use of electronic prescribing by providers, health plans and pharmacies and other entities involved in the provision and payment of health care to Medicare beneficiaries. Beyond the differential payments authorized in § 423.159, we invited comments on what incentives could be used to spur more widespread adoption, especially for early implementers. We also invited comments on what educational efforts or data analyses might be undertaken to help health practitioners understand, or empirically confirm, and ultimately realize, the benefits of electronic prescribing. Lastly, we sought public input on the ways electronic prescribing can further reduce costs to the Medicare program and promote quality of care to beneficiaries.

We received numerous comments in response to our requests.

Comment: HHS received universal support from all those who commented on § 423.159 regarding the establishment of electronic prescribing standards and its potential for improved quality of care through reduced medication errors, better therapeutic compliance and better process and cost efficiencies.

Response: We agree with the commenters that electronic prescribing has great potential to improve the health of Medicare beneficiaries and reduce medication errors.

Comment: Many commenters suggested that HHS should evaluate how electronic prescribing may improve patient compliance, clinical outcomes and patient safety and facilitate other electronic prescribing processes. Additionally commenters provided a variety of areas to focus educational efforts and data analyses.

Response: We agree with the commenters that MA-PD plan quality, related to electronic prescribing, must be evaluated to further promote quality of care for beneficiaries. We will take these suggested areas under consideration as we develop quality measures for MA-PD plans. Furthermore, for quality improvement purposes, we will make any plan information on electronic prescribing available to our QIOs either directly from the Part D plans or through us.

Comment: Many commenters stated that HHS should publish best practices and make technical information on electronic prescribing products available so that providers can make informed comparisons. Many agreed that these efforts will also spur effective adoption and use of electronic prescribing.

Response: HHS appreciates these thoughtful comments and will take them into consideration as we implement electronic prescribing.

Comment: A few commenters responded that electronic prescribing will result in procedural and behavioral changes by beneficiaries. They suggested that HHS work to ensure patients are aware of and comfortable with the new prescribing method and should disseminate information and educate enrollees on the changes resulting from electronic prescribing.

Response: We agree that electronic prescribing will result in procedural and behavioral changes in our beneficiaries. We will consider these suggestions as we work with the Part D sponsors on information dissemination and outreach.

Comment: One commenter stated that HHS should work with National Center for Vital and Health Statistics (NCVHS) to study the use of reduced malpractice insurance premiums as a financial incentive to promote the adoption of electronic prescribing.

Response: HHS will share this comment with the NCVHS.

Comment: Many commenters provided a variety of areas to focus educational efforts and data analyses to spur more widespread adoption.

Response: We will take these suggested areas for data analyses under consideration as we develop our educational efforts and quality improvement strategies by making such information on electronic prescribing available to our QIOs either directly from the Part D plans or through us.

Comment: Many commenters stated that developing standards for electronic prescribing will reduce costs to the Medicare program. Many commenters stated that the primary benefits of electronic prescribing are increased quality of care, reductions in the use of medical resources, and improved patient safety, specifically in the areas of reduced adverse events. Additionally, many stated that electronic prescribing improves the efficiency of processing prescriptions.

Response: We agree with the commenters that these electronic prescribing areas have great potential to reduce costs to the Medicare program.

5. Quality Improvement Organizations (QIO) Activities (§ 423.162)

Section 109 of the MMA expands the work of QIOs to include Part C and Part D. This provision explicitly covers the full range of Part C organizations. QIOs are required to offer providers, practitioners, and Part D sponsors quality improvement assistance pertaining to health care services, including those related to prescription drug therapy.

In the proposed rule, we stated the QIOs will need access to data from transactions between pharmacies and Part D plans. We offered examples of the types of data that would likely be required by QIOs and also discussed our role in potentially aggregating and distributing the data. Finally, we proposed that any information collected by the QIOs will be subject to confidentiality requirements in part 480 of our regulations. For purposes of applying these confidentiality regulations, we also proposed that Part D sponsors fall within the definition of health care facilities and that part 480 would apply in the same manner as that Part applies to institutions.

As the QIOs activities under Part D are developed within the 8 [th] Scope of Work, and basic decisions are made about the collection, storage and use of Part D claims data, CMS will work with QIOs and Part D plans to develop a strategy to provide QIOs with data necessary to accomplish their task and safeguard patient confidentiality.

Comment: One commenter believes that PDPs may need additional data to identify enrollees to be targeted for MTMP services. They believe QIOs could provide that data to plans using information from medical claims submissions.

Response: QIOs cannot share with Part D plans beneficiary-specific identifiable data that it has acquired as part of its function as a QIO, but we could provide the data necessary to identify enrollees to be targeted for MTMP services to the Part D plans if appropriate. QIOs can provide other types of technical assistance to Part D plans.

Comment: One commenter recommends that serious evaluations be designed to compare the effectiveness of different MTMP services, delivery, and payment methodologies. Another commenter wrote that QIOs could potentially perform a valuable role in collecting and analyzing the data to be made available to plans for use in establishing or revising their MTMP services.

Response: Once Title I has been implemented, we expect that outcome measures will be developed to allow the QIOs to assess the effectiveness of the MTMP services. We expect that both plans and pharmacies will be able to request technical assistance from QIOs to improve their MTMPs.

Comment: One commenter recommended that the last sentence of § 423.162(b) be deleted. [“PDP sponsors and MA plans offering MA-PD plans are required to provide specified information to CMS for distribution to the QIOs as well as directly to QIOs”] They support the voluntary nature in terms of whether a Part D plan must contract with a QIO. They are concerned about the submission of undefined information to CMS for passing through to QIOs as well as directly to QIOs regardless as to whether a Part D plan works with a QIO. In addition, it is unclear to which QIO such information will be provided, particularly since some drug plans may serve more than one State. Another commenter stated QIOs must have access to pharmacy and medical claims for quality improvement projects and oversight of the PDPs.

Response: We do not believe that the last sentence of § 423.162(b) must be deleted. QIOs need, and have the authority under section 1154 of the Act and section 109 of the MMA, to access specified data from the transactions between pharmacies and Part D plans providing the Part D benefit. However, the determination of what actual data, if any, that will be made available to QIOs will be made in subsequent guidance after QIOs activities under Part D are developed within the 8 [th] Scope of Work, and basic decisions are made about the collection, storage and use of Part D claims data. We could provide specific data to QIOs to use for quality monitoring and extract these data from data already required by us for other administrative functions of the Title I program, thus not increasing the Part D plans' burden. We could also make data available to a QIO from plans that do not contract with the QIO but are directly related to the QIO's responsibilities as negotiated with us under its 8 [th] scope of work. QIOs may also have access to additional data provided by plans working directly with a QIO.

Other QIO Activities

Comment: While PBMs have processes in place to monitor pharmacy dispensing and alert a pharmacy in cases where dispensing a medication may not be safe for a particular patient, it is critical the PBM or drug plan not be held accountable or responsible for activities that are beyond its control. Drug plans can be evaluated for having such process measures in place but should not be held accountable for problems outside their control, such as physician, pharmacist or manufacturer errors.

Response: We expect that the QIOs will work with physicians, pharmacists, and plans to improve the quality of beneficiaries' medication therapies. The QIOs' goal is to improve quality of care, not to assign blame. They can assist each of these players to design systems to facilitate the delivery of quality of care.

Comment: One commenter stated that QIOs should establish educational programs to assist drug plans and prescribers in the implementation of best practice guidelines through treatment algorithms.

Response: The QIOs' scope of work is being described in their contracts rather than in the regulation. The contracting mechanism allows flexibility to adjust the QIOs' tasks to be responsive for the need for quality improvement. The QIOs' activities will address quality improvement for both prescribers and plans.

Comment: The confidentiality of information collected by QIOs should be protected, as CMS has proposed.

Response: The QIOs will protect the confidentiality of the collected information, as specified in part 480. We have clarified § 423.162(c) in this final rule to make clear that the provisions of part 480 apply in the same manner as they apply to institutions.

Comment: There were several commenters who expressed concern regarding how QIOs will handle beneficiaries' complaints about the quality of care in Part D. The final rule in § 423.153(c) needs to state clearly that the QIOs will review quality of care complaints and lack of access complaints to requested services, as well as to clarify how this traditional QIO function will be carried out in the unique environment of Part D plans.

Response: Section 423.564(c), not § 423.153(c), states that QIOs must review enrollees' written complaints about the quality of services they have received under the Medicare program, as specified in section 1154(a)(14) of the Act. For any complaint submitted to a QIO, the Part D sponsor must cooperate with the QIO in resolving the complaint. For further discussion, please refer to the preamble to subpart M.

Comment: The final regulation should reflect the information contained in the summary of the 8 [th] scope of work (SOW) for QIOs. The commenter added the regulation should specify that quality improvement projects will be performed by the QIO or by a third party (independent of the Part D plan) contracted by the QIO.

Response: This information is typically conveyed in the SOW of the contract between each QIO and us rather than in the regulation because a contract allows us the flexibility to modify the QIOs' activities without modifying the regulation. The contract is an effective way to ensure that these important tasks are accomplished.

Comment: Educational interventions are best done by QIOs or a third party independent of the Part D plan contracted by the QIO.

Response: QIOs will likely do educational interventions either with their own staff or with subcontractors, but we do not want to exclude other entities from also providing objective, evidence-based educational interventions.

Comment: Oversight of formulary decisions and subsequent review of Part D sponsors' formulary decisions could be key components necessary for QIO's to assess quality, especially in the dual-eligible long term care patients.

Response: We believe that decisions concerning which medications are on a plan's formulary are administrative decisions of the plan. These do not fall within the quality review functions of the QIO. The QIO will review beneficiary complaints that the plan's rules were not executed correctly. We will conduct reviews of plans' applications to ensure that formularies are not discriminatory, as well as review through program monitoring.

Comment: MA organizations delivering benefits through their owned and operated pharmacies are likely to rely on specialized pharmacy information systems that differ from the systems designed for PDP sponsors to communicate with their contract network pharmacies. As a result, it is possible that pharmacy data may be misinterpreted by a QIO. If QIOs will be using data from integrated MA organizations to assess quality, it will be important to work closely with the organizations to understand the data, or to develop more efficient methods to achieve the same result-an appropriate assessment of quality performance.

Response: We expect that QIOs will work cooperatively with plans. Because QIOs work with identified organizations, they will have the opportunity to understand the context of the data they are analyzing.

Comment: One commenter suggests that QIOs examine the prescription drug claims submitted to the plan, specifically looking at the number of claims that are rejected and appealed.

Response: QIOs' activities focus on quality improvement. The number of claims rejected is an administrative function, and we do not expect the QIOs to be active in this area. It is likely the administrative performance of plans will be assessed by our program monitoring.

6. Treatment of Accreditation (§ 423.165, § 423.168, and § 423.171)

Section 1860D-4(j) of the Act requires that the provisions of section 1852(e)(4) of the Act relating to the treatment of accreditation will apply to Part D sponsors for:

  • Access to covered Part D drugs including the pharmacy access requirements and the use of standardized technology and formulary requirements;
  • Drug utilization management, Quality assurance, Medication Therapy Management, and a program to control fraud, waste and abuse as described in subpart K § 423.504(b)(4)(vi)(H);
  • Confidentiality and accuracy of enrollee records.

Thus, the requirements in § 423.165, § 423.168, and § 423.171 are similar to the requirements found in § 422.156, § 422.157, and § 422.158 for the MA program, except for subject areas that are deemed.

Proposed § 423.165 provided the conditions under which a Part D sponsor may be deemed to meet our requirements permitted under paragraph (b) of that section. We stated that the first condition will be that the plan be fully accredited (and periodically reaccredited) by a private, national accreditation organization (AO) that we approve. The second condition will be that the plan be accredited using the standards that we approved for the purposes of assessing compliance with Medicare requirements.

Consistent with our approach in the MA program, in the proposed rule we proposed that we will analyze on a standard-by-standard basis whether an AO applies and enforces requirements that are no less stringent than those in part 423 for the standard at issue. We proposed that we will determine the scope of the AO's approval (and, thus, the extent to which Part D plans accredited by the organization are deemed to meet our requirements) based on a comparison of the AO's standards and its procedures for assessing compliance with our deemable requirements and our own decision-making standards. We stated that we will make those determinations on the basis of the application materials submitted by AOs seeking our approval in accordance with § 423.168. We also proposed to conduct surveys to validate the AO's enforcement on a standard-by-standard basis.

Proposed § 423.165(d) established the obligations of deemed Part D sponsors. A Part D sponsor will be required to submit to our surveys. We stated that the proposed surveys were intended to validate an AO's process and authorize the AO to release to us a copy of its most current accreditation survey, together with any information related to the survey that we may require (including corrective action plans and summaries of our unmet requirements). We stated that such activities will be part of our ongoing oversight strategy for ensuring that the AO applies and enforces its accreditation standards in a manner comparable to ours.

Proposed § 423.165(e) addressed removal of deemed status and proposed § 423.165(f) explained that we retain the authority to initiate enforcement action against any Part D sponsor that we determine, on the basis of our own survey or the results of the accreditation survey, no longer meets the Medicare requirements for which deemed status was granted. We stated that we expected the AO to have a system in place for enforcing compliance with our standards (such as sanctions for motivating correction of deficiencies), but we also stated that we could not delegate to the AO the authority to impose the intermediate sanctions established by section 1860D-12 of the Act or termination of the contract.

In the proposed rule, we acknowledged that deeming applies only to our enforcement of this regulation, and neither our enforcement of this regulation nor accreditation by an accrediting body undercuts the Office for Civil Rights enforcement of the HIPAA privacy rule.

Proposed § 423.168 discussed the three conditions for our approval of an AO if the organization applies and enforces standards for Part D sponsors that are at least as stringent as Medicare requirements and, if the organization complies with the application and reapplication procedures proposed in § 423.171.

Proposed § 423.168(c) established ongoing AO responsibilities. These responsibilities largely parallel those currently imposed upon accreditors under original Medicare. One exception was the proposed requirement that an AO notify us in writing within three days of identifying, for an accredited Part D sponsor, a deficiency that poses immediate jeopardy to the Part D sponsor's enrollees or to the general public.

Proposed § 423.168(d) established specific criteria and procedures for continuing oversight and for withdrawing approval of an AO. Oversight consists of equivalency review, validation review, and onsite observation.

In the proposed rule, we stated that we could withdraw our approval of an AO at any time if we determine that deeming based on accreditation no longer guarantees that the Part D plan meets the Medicare requirements, that failure to meet those requirements could jeopardize the health or safety of Medicare enrollees or constitute a significant hazard to the public health, or that the AO has failed to meet its obligations under § 423.165 through § 423.171.

Proposed § 423.171 addressed the procedures for approval of accreditation as a basis for deeming compliance. As mentioned, the process that we stated will be used to deem compliance with Part D requirements is virtually identical to the process that is being used for deeming compliance with fee-for-service requirements. One requirement proposed in § 423.171, and which also appeared in regulations governing MA plans at § 422.158(a)(11), but did not appear in regulations governing original Medicare, is the requirement that an AO applying for approval of deeming authority submit the name and address of each person with an ownership or control interest in the AO. We proposed that we will use this information to determine whether the AO is controlled by the organizations it accredits for the purposes of § 423.168. Section 423.171 further provided for reconsideration of adverse determinations of accreditation applications.

Comment: Several consumer groups oppose deeming because they believe it will diminish beneficiary protections. Several different types of organizations, such as pharmacy organizations, and others want to have input into the process, and asked who will be the AOs, how will they operate, and what standards will be used. They also commented that AOs will not be in place prior to the initiation of the program.

Response: Section 1860D-4(j) of Act provides for accreditation. We have successfully administered accreditation programs in:

  • Hospital settings, for example, JCAHCO;
  • Home health, for example, JCAHCO, NLN; and
  • Nursing homes and managed care, for example, NCQA, JCAHCO.

The advantages of AOs is that they eliminate duplication of efforts between us and AOs, since many private purchasers require AOs. Furthermore, it reduces the burden on government oversight.

AOs must demonstrate that their standards are at least as stringent as those in part 423 of our final regulations. Given that the regulations can only be finalized upon publication of this final rule, we agree with the commenters that AOs cannot be in place before the bids and contract applications for 2006 are due. Thus, at least in the first year of the program, applicants will have to determine on their own that they meet all of our standards. Once these rules are in effect, we can begin to consider applications for AOs; however, other program priorities will influence when we will be able to issue a public notice requesting applications. Currently, we do not believe that any AOs can meet our standards. Furthermore, it must be noted that in the Medicare Advantage program, it was several years before any AOs were accredited.

As to giving stakeholders a chance to comment, our regulation at § 423.168(b) provides that we publish a notice in the Federal Register whenever we are considering an AO's application. The public then has 30 days to comment.

We will be glad to meet with stakeholders to discuss these issues. The AOs must meet or exceed each of our standards. They can pass one or all standards, but will only be allowed to administer those standards for which they are approved.

The final rule has adopted the proposed rules on accreditation.

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

1. Overview

Subpart F will implement most of the provisions in sections 1860D-11 and 1860D-13 of the Act, as well as sections 1860D-12(b)(2)(on limitation on entities offering fallback plans), 1860D-15(c)(2)(on geographic adjustment of the national average monthly bid amount), 1860D-21(d) (on special rules for private fee-for-service (PFFS) plans), 1860D-21 (e)(3) (on cost contractors), and 1860D-21 (f)(3)(on PACE) of the Act. In this section we address submission, review, negotiation, and approval of bids for prescription drug plans and MA-PD plans; the calculation of the national average bid amount; and determination and collection of enrollee premiums. References to 42 CFR part 422 of our regulations are to the new MA rules. See Subpart T for additional information on PACE. Bidding is to be distinguished from the application process discussed in subpart K.

Although in this preamble we use the terminology, prescription drug plans and MA-PD plans, the regulations extend to all Part D sponsors (including PACE organizations and cost-based HMOs and CMPs) as these entities—just like PDP sponsors—will be required to submit bids for the prescription drug coverage they plan to offer. Therefore, we have changed the accompanying regulation text to use the terminology, “Part D sponsor,” throughout. We have also indicated in the regulation where separate rules would apply to fallback entities.

As discussed in subpart C, the statute provides a framework for the provision of subsidized prescription drug coverage. Within this framework, PDP sponsors and MA organizations have some flexibility to design coverage that is different from defined standard coverage to meet the needs of Part D-eligible Medicare beneficiaries. This framework plays a critical role in bid submissions, and the actuarial evaluation and approval of bids.

As part of our discussion we specify the actuarial equivalency tests plan sponsors will have to meet when offering coverage other than defined standard coverage. Please note that the coverage definitions are discussed in detail in subpart C of the preamble. In order to determine actuarial equivalency, plan sponsors will compare their plans to the defined standard coverage baseline to assess the various tests of actuarial equivalency that we discuss in detail in the sections below.

2. Requirements for Submission of Bids and Related Information

As provided under section 1860D-11(b) of the Act, each applicant to become a PDP sponsor or MA organization will be required to submit a bid for prescription drug coverage for each plan it intends to offer. Most bids will be expected to represent full risk plans, meaning that the prescription drug plan is not a limited risk plan or a fallback prescription drug plan, and is not asking for any modification of the statutory risk sharing arrangements. A bid from a full risk plan may be referred to as a full risk bid. PDP sponsors may choose to participate as limited risk plans, meaning that they provide basic prescription drug coverage and request a modification of risk level (as described in § 423.265(d)) in its bid submitted for the plan. A bid with a modified level of risk is referred to as a limited risk bid. This term does not include a fallback prescription drug plan. Bids will be due to us no later than the first Monday in June for each plan to be offered in the subsequent calendar year. This date stems from the requirement in section 1860D-11(b) of the Act that bid data from potential PDP sponsors be submitted at the same time and in a similar manner as the information described in section 1854(a)(6) of the Act for MA plans. Since section 1854(a)(1) of the Act requires initial data to be submitted on the first Monday of June of each year after 2004, we have also incorporated this date into our regulations. In the case of MA-PD plans, the prescription drug bid will be a component of the unified MA bid described in § 422.254(b)(1) with benefits beyond basic coverage (if any) incorporated into the supplemental benefits portion of the prescription drug benefit bid.

We are clarifying that this bid will represent the expected monthly average cost (including reasonable administrative costs) to be incurred by the plan applicant for qualified prescription drug coverage in the applicable area for a Part D eligible individual with a national average risk profile for the factors described in section 1860D 15(c)(1)(A) of the Act and in § 423.329(b)(1) of this rule. We plan to develop and publish the risk adjustment factors and identify the characteristics of an average individual no later than the date of the 45-day notice for the announcement of 2006 rates, which is February 18, 2005. Any modifications to these characteristics for subsequent years will be announced by the date of the annual 45-day notice. (For further discussion of prescription drug risk adjustment, see subpart G of this preamble.) In the August 2004 proposed rule we solicited comment on the nature of any additional information needed to prepare bids and suggestions for any other methods that the bid submission process could be structured to provide for later pricing data submission.

The costs represented in each plan bid must be those for which the plan will actually be responsible. Given the structure of qualified prescription drug coverage, these costs will not include payments made by the enrollee for deductible, coinsurance (including 100 percent coinsurance between the initial coverage limit and the out of-pocket threshold), copayments, or payments for the difference between a plan's allowance and an out-of-network pharmacy's usual and customary charge (as discussed in § 423.124(b). It also does not include costs reimbursed by us through the reinsurance subsidy. However, we require the separate identification, calculation, and reporting of costs assumed to be reimbursed by us through reinsurance. For standard coverage, defined or actuarial equivalent, these costs will include the plan's share of costs above the deductible and up to the initial coverage limit, as well as the plan's share of costs above the annual out of pocket limit. If enhanced alternative coverage is provided, the plan costs for supplemental benefits will be distinguished from those for basic coverage. The costs attributable only to basic coverage, once approved, are known as the standardized bid amount.

In § 423.265(c) we will require that, with the exception of potential employer group waivers under section 1860D-22(b) of the Act and section 1857(i) of the Act, late enrollment penalties and low-income premium and cost sharing subsidies, the bid represents a uniform benefit package based upon a uniform level of premium and cost sharing among all beneficiaries enrolled in the plan. This means that all enrollees in a given PDP or MA-PD plan will be subject to the same cost sharing structure and will be charged the same premium for benefits the PDP sponsor or MA organization chose to offer.

We note that while benefits are required to be uniform for all enrollees under the drug benefit, this is not the case for enrollees under a prescription drug discount card program. To avoid any confusion between these related programs, we would like to make this distinction clear. Because of the limited low-income assistance under the card program, card sponsors have been permitted to negotiate lower prices for low-income members. Also, in some cases there may be reduced cost sharing sponsored by manufacturers for low-income members after the $600 in transitional assistance is used that does not apply to other card members. Under the Part D prescription drug program, however, both the negotiated prices and the benefit structure will be the same for all enrollees in a given PDP or MA PD plan. While the low-income subsidies will result in low-income beneficiaries' actual out of pocket costs being lower than for beneficiaries who do not qualify for this assistance, the benefit structure to which the subsidies apply is the same for all enrollees in a plan.

Comment: Two commenters suggested that we assist bidders by making accessible relevant drug utilization data from sources such as Tricare, PBMs, the National Association of Chain Drug Stores and current Medicare Advantage plans with drug benefits.

Response: We either does not have access to such data or does not have the authority for public release. Most of the data suggested by the commenters would be considered proprietary. There are other data sets that are being used to meet industry's requests that we share information from public data sets that could help potential drug plan bidders to better understand or estimate the eligible Medicare beneficiary population's utilization of prescription drugs. They include: 1) data for Federal retirees 65+, enrolled in the Federal Employee Health Benefit national Blue Cross Blue Shield plan; 2) data from the Medicare Current Beneficiary Survey; and 3) Medicaid Pharmacy Benefit Use and Reimbursement in 1999 Statistical Compendium. The latter is prepared from Medicaid Analytic eXtract (MAX) files for calendar year 1999. For more information, or to download these data see http://www.cms.hhs.gov/pdps/default.asp.

Comment: Several comments urged that bids be rejected from PDPs that are owned or financially controlled by a drug manufacturer or group of manufactures.

Response: We note the concern that many stakeholders have had over manufacturer acquisition of PBMs in the 1990's. However, the Federal Trade Commission's response by imposing restrictions on manufacturers acquiring PBMs (for example, offer open formularies, include drugs that compete with the parent company's products, etc) has generally led manufacturers to divest from PBMs, or to alter their behaviors in order to prevent antitrust enforcement actions (see Christopher Sroka's November, 2000 report “Pharmacy benefit managers” for the Congressional Research Service and Regina Johnson's 2002 piece “PBMs: Ripe for regulation” in Volume 57, Issue 2 of the Food and Drug Law Journal). Regardless of future industry activity in this area, the statute does not give us the authority to implement a ban as suggested by the commenters.

Comment: One commenter indicated that Part D plans are required to submit bids no later than the first Monday in June to be offered in the subsequent calendar year. This is not sufficient time for SPAPs that need to coordinate benefits. SPAPs will need to know by June of 2005 what plans will be qualified sponsors and operating in their States.

Response: Section 1854 of the Act amended by the MMA sets the bid submission date as no later than the first Monday of June. PDP sponsors and MA organizations with MA-PDs need the maximum amount of time to put together a bid. PDPs and MA-PDs will need to keep SPAPs informed in order to complete the bid process, so communication between these entities should not be an issue.

Comment: One commenter suggested that plans should be required to provide for coverage of services to residents of Long Term Care facilities that are required by OBRA 1987 and under OBRA 1990. They recommended that this be added to the included costs in § 423.265(b)(1) under submission of bids. The commenter went on to state that Part D plans should not be exempt from providing the same services required under Medicare Part A or Medicaid to nursing facility residents and recommended that we require plans to incorporate the costs of paying for such services into their bid submissions, and that plans state clearly how they intend to pay qualified pharmacists for providing such services.

Response: Part D plans are only obligated to pay the negotiated price for covered part D drugs, which consists of the ingredient cost of the drug and a “dispensing fee” and that take into account any discounts, direct or indirect subsidies, rebates or other price concessions received by the Part D plan). The fee will include only those activities related to the transfer of possession of the covered Part D drug from the pharmacy to the beneficiary, including charges associated with mixing drugs, delivery, and overhead. The dispensing fee will not include any activities beyond the point of sale (that is, pharmacy follow-up phone calls) or any activities for entities other than the pharmacy. The dispensing fee does not include any charges associated with administering the drug once the drug has already been transferred to the beneficiary. This means that the pharmaceutical services listed under 1819(b)(4)(A)(iii) are included within the negotiated prices for covered part D drugs only if the term “dispensing fee” as defined in § 423.100 captures such services.

Comment: Several commenters asked for guidance regarding the costs that we view as administrative.

Response: Administrative costs are not clinical services unless part of a Medication Therapy Management Program. Administrative costs include such costs as: 1) crossover fees paid to obtain information from other payors in order to calculate TROOP (True Out-of-Pocket); 2) Medication Therapy Management Program expenses; 3) Marketing Sales; 4) Direct Administration (for example, customer service, billing and claims administration); 5) Indirect Administration (for example, corporate services, such as accounting operations, actuarial, legal and human resources); 6) Net Cost of Private Reinsurance (that is, reinsurance premium less projected reinsurance recoveries); 7) Medicare User Fees; 8)Uncollected Enrollee Premium; and 9) return on investment. Additional guidance on administrative costs will be given with the release of the bid submission tool. Instructions for the tool will include more detail defining administrative costs and guidance on how they are to be indicated in the bid submission.

Comment: One comment urged us to modify the timeline to permit bidders to submit a bid for approval before June 6, 2005.

Response: While bids can be submitted before the first Monday in June (June 6 in 2005), they cannot be approved before that date because they are reviewed collectively.

Comment: Several commenters urged that the bid submission process use electronic methods and be parsimonious for data requirements.

Response: We agree with the commenters that electronic methods are preferable. Accordingly, bid submitters will upload an electronic Plan Benefit Package (PBP) and bid submission pricing tool to the Health Plan Management System (HPMS). The bid is to represent the expected monthly average cost to be incurred by a plan applicant providing qualified prescription drug coverage in an applicable area for a Part D eligible beneficiary with a national average risk profile. We are cognizant of plan burden and therefore required submission data will be limited to what is absolutely necessary for us to fulfill its bid review, payment, and negotiation obligations.

Comment: One commenter asked if plans will get the rebates from manufacturers for drugs covered by SPAP wrap around.

Response: CMS does not have the authority to dictate how manufacturers pay rebates to plans. However, we would expect that drugs covered by secondary payers would still be subject to rebates.

3. General CMS Guidelines for Actuarial Valuation of Prescription Drug Coverage

As directed by section 1860D-11(c) of the Act, we will develop processes and methods using generally accepted actuarial principles and methodologies for determining the actuarial valuation of prescription drug coverage. Although we plan to provide additional information in the future in the form of interpretive guidance on these processes, we intend on using the following processes and methods for calculating “actuarial valuation” and “actuarial equivalence” in the context of risk bids:

  • Sponsors offering standard coverage with cost-sharing variants either to the 25 percent coinsurance (before the initial coverage limit) or the greater of 5 percent coinsurance or $2 generic/preferred/$5 any other drug (after the out-of-pocket threshold is met) will be required to demonstrate the actuarial equivalence of their variations.
  • Sponsors offering basic or enhanced alternative prescription drug coverage will be required to demonstrate that—

+The actuarial value of total or gross plan coverage of their alternative is at least equal to the actuarial value of total or gross coverage of the defined standard benefit.

+The actuarial value of unsubsidized coverage of their alternative is at least equal to the actuarial value of the unsubsidized portion of defined standard coverage; and

+The plan payout at the dollar value of the initial coverage limit under standard coverage, for individuals whose total spending exceeds that limit, is at least equal to that provided under defined standard coverage.

  • All sponsors will determine the actuarial value of the defined standard benefit, either because it is—

+Offered to the beneficiaries;

+Used as a comparison for either of the following:

  • Standard coverage with actuarially equivalent cost-sharing variants.
  • Alternative coverage; or

+Used to determine the basic component in enhanced alternative coverage.

  • Sponsors that offer enhanced alternative coverage will also be required to determine the actuarial value of coverage beyond basic coverage.
  • We will further specify in additional guidelines the data sources, methodologies, assumptions, and other techniques in accordance with generally accepted actuarial principles as either recommended or required in further guidance. We will also specify the data elements (including format) to be sent to us for evaluation. We will then evaluate the analysis and assumptions for compliance and reasonableness. For example, we will evaluate the source, size, and timeframe of data on which assumptions are based, the demographic characteristics of enrollees, the distribution of risk levels, the average costs in each cost-sharing tier, and the update factors used, among other considerations.
  • We will also require the separate identification of administrative costs. Since the level of the bid will directly affect the premium paid by the beneficiary and the attractiveness of the plan, we expect that plans will have a strong incentive to keep administrative costs and return on investment at reasonable levels. Any review of administrative costs will likely focus primarily on outliers from the competitive range identified in the bids received. All proposals will contain a description of how certain costs are included in the calculations. Processes and methods for determining actuarial valuation will take into account the effect that providing actuarially equivalent standard coverage or alternative prescription drug coverage (rather than defined standard coverage) has on drug utilization. This includes utilization effects attributable to different benefit structures, such as from tiered cost sharing, as well as those attributable to supplemental benefits. The utilization effect of supplemental benefits on basic benefits will have to be loaded into the supplemental portion of the bid. In other words, since the existence of supplemental coverage will increase total average per capita spending, that increase over the average spending (if coverage were limited to basic coverage) will be included in the portion of the bid attributable to supplemental coverage. Section 1860D-11(c)(1)(D) of the Act specifies “the use of generally accepted actuarial principles and methodologies.” We are interpreting this to require that a qualified actuary certify the plan's actuarial valuation (which may be prepared by others under his or her direction or review). Actuarial certification will give better assurance that the actuarial values in the bid were prepared in conformance with actuarial standards and methodologies.
  • Section 1860D-11(c)(3)(B) of the Act specifies that PDP sponsors or MA organizations offering MA-PD plans may use qualified independent actuaries in certifying the actuarial values in their bids. (The actuarial valuation may be prepared by others under the direction or review of a qualified actuary). We interpret this provision as requiring PDP sponsors and MA organizations that do not employ qualified actuaries, to use outside actuaries in their processes. We proposed in the August proposed rule to specify that a qualified actuary is an individual who is a member of the American Academy of Actuaries because members of the Academy must meet not only educational and experience requirements, but also a code of professional conduct and standards of practice. These standards create a common ground for actuarial analysis. Furthermore, a member of the Academy is subject to its disciplinary action for violations of the code and standards. This same requirement is specified in the SCHIP legislation at section 2103(c)(4)(A) of the Act. Moreover, the National Association of Insurance Commissioners (NAIC) imposes significantly stricter requirements on actuaries preparing the financial statements of insurance companies.

Comment: Several commenters asked for flexibility in the actuarial standards. One commenter specifically asked for flexibility in the use of methods and actuarial assumptions by permitting the use of internal data or normative claims databases.

Response: Section 1860D-11(c)(1) of the Act instructs the Secretary to “establish processes and methods for determining the actuarial valuation of prescription drug coverage including.the use of generally accepted actuarial principles and methodologies”. To the extent it is possible under this paradigm to be flexible, we will be. Use of internal data or normative claims databases is not only acceptable, but encouraged. We will however, review the assumptions and results of your analysis for reasonableness and appropriateness.

Comment: One commenter asserted that being a member of the American Academy of Actuaries should be a requirement, but should not be sufficient by itself.

Response: Our policy position is to require that an actuary have the skills and experience to perform the actuarial certification required. Accordingly, in § 423.265(c)(3) we state that a “qualified actuary must certify the plan's actuarial valuation, and must be a member of the American Academy of Actuaries to be deemed qualified.” By requiring membership in the American Academy of Actuaries we are both requiring a minimal standard, and providing an additional assurance that the actuary will be qualified. For the latter comment, the Code of Professional Conduct for Actuaries states “an Actuary shall perform Actuarial Services only when the Actuary is qualified to do so on the basis of basic and continuing education and experience.”

Comment: Two commenters expressed that there could be problems with the proposal that the costs associated with any increased utilization in the Part D basic benefit arising from enhanced alternative coverage would be included in the supplemental benefit portion of the bid. They assert that the application of this policy as it applies to the Part D program could be problematic because in many instances an enrollee will have supplemental coverage arising from another source that would not be part of enhanced alternative coverage of the sponsor or organization. One commenter gave the example of a beneficiary who may elect basic prescription drug coverage under a PDP or MA-PD plan and may also receive coverage under an employer/union group plan that wraps around the Part D benefit. They argue that in this case, if no supplemental benefits were included in the MA-PD plan or PDP, there would be no way to take into account in the bid the impact of any increased utilization unless it can be reflected in the bid for the basic benefit. This problem could be greater for special needs plans serving dually eligible beneficiaries who are eligible for substantial subsidies under the Part D program. In this instance, if no supplemental benefits are included in the MA-PD or PDP plan, the only avenue for taking increased utilization the may result from the subsidy into account would be the bid for the basic benefit. However, this could result in a bid above the benchmark that would produce a premium higher than the low-income premium subsidy resulting in an increase in the premium obligation for dual eligible enrollees. This situation could threaten the viability of a special needs plan.

Response: Plan bids will take into account the anticipated impact of induced utilization due to the structure of the plan benefit, other insurance coverage, and the low income subsidy. The impact of induced utilization will be addressed directly in the bid for enhanced alternative coverage. Note that this is for Part D only and is different from what is discussed for Part C in the Title II regulation. There are three major mechanisms for adjusting payment to account for the utilization of the actual enrolled population in any given plan, these are risk adjustment, reinsurance, and risk corridors. One intention of risk adjustment is to take into account the utilization of dual eligibles and adjust payment appropriately for the level of utilization in this population. For all bids, the anticipated impact of other insurance coverage on the bid and its effect on reinsurance will be taken into account. Risk corridors will serve to decrease the exposure of plans where allowed costs exceed plan payments for the basic Part D benefit.

4. Determining Actuarial Equivalency for Variants of Standard Coverage and for Alternative Coverage.

When considering the specific requirements for actuarial equivalence and valuation in the Act, we are aware that there is no official definition of actuarial equivalence. Moreover, the concept of actuarial equivalence is applied in multiple contexts. We must address actuarial equivalence requirements regarding cost sharing, expected benefits, and bid submissions. Thus, we are using interpretive guidance to further explain the process and methodology for determining actuarial equivalence and valuation. The processes and methods for determining actuarial equivalence and valuation would be in keeping with generally accepted actuarial principles. We would require prospective PDP sponsors and MA organizations wishing to offer MA-PD plans to include all of the requirements discussed in the following sections in the information submitted with the bid, when applicable. The MMA contains some specific requirements for actuarial equivalence or valuation. These actuarial equivalence tests are discussed below.

a. Actuarial Equivalence as Applied to Actuarially Equivalent Standard Coverage-Cost-Sharing

As required in section 1860D-2(b)(2)(A) of the Act, standard prescription drug coverage must have “coinsurance for costs above the annual deductible . . . and up to the initial coverage limit that is equal to 25 percent; or is actuarially equivalent . . . to an average expected payment of 25 percent of such costs.” We interpret this to mean that sponsors would be required to demonstrate that the actuarial value of their alternative cost-sharing as a percent of the actuarial value of both cost-sharing and plan payments for claims up to the initial coverage limit is the same percentage as for 25 percent coinsurance under defined standard coverage. In calculating these percentages, sponsors would reflect the utilization impacts of the two structures, but hold constant formulary (drug list), drug pricing (except to the extent that the plan incorporated differential pricing and cost sharing based on participation status within the plan's network), and the group whose utilization is modeled. This would allow plans to have variable co-payments or coinsurance, including tiered structures for preferred and non-preferred drugs, in the initial coverage interval as long as the actuarial equivalence test is met. As a simple example, a plan could have a tiered coinsurance benefit with coinsurance higher than 25 percent for brand name drugs and lower than 25 percent for generics. Some beneficiaries with expenses between the deductible and the initial coverage limit would be expected to pay more than 25 percent, and others to pay less, depending on their usage of brand versus generic drugs. Overall, however, the total coinsurance would have to be actuarially equivalent to an average of 25 percent for all beneficiaries with expenses in this interval, even if the total expenditures beneath the initial coverage limit ($2,250 in 2006) are lower than would be expected under defined standard coverage (due to increased use of generics, for example).

If sponsors wanted to provide a variant on defined standard cost sharing after the out-of-pocket threshold is met, an actuarial test similar to that described above for variants on the 25 percent coinsurance would apply. In this case, based on the group of individuals projected to exceed the out-of-pocket threshold, the sponsor would compute total cost sharing once the true out-of-pocket (TROOP) threshold has been met as a percentage of the sum of that cost sharing plus the comparable plan payout. This percentage would have to equal the percentage computed in the same manner using the defined standard benefit (that is, the greater of $2/$5 or 5 percent). We note that any variant in cost sharing could not lead to discrimination against certain beneficiaries, for example, by increasing the cost sharing of a drug used for a particular illness well above the cost sharing for other drugs.

b. Tests for Alternative Coverage

As required by section 1860D-2(c) of the Act, sponsors offering alternative coverage, that is, benefit structures different from standard coverage, must satisfy five tests (three of the five are actuarial equivalency tests). As discussed in subpart C, alternative coverage would include coverage actuarially equivalent to defined standard coverage (basic alternative coverage) or coverage that would include supplemental coverage (enhanced alternative coverage). All alternative coverage would have to meet all five of the coverage standards or tests discussed in section b.1-5 of this preamble. Tests one through three were established by the Congress to ensure that alternative coverage would be at least actuarially equivalent to standard coverage. Tests four and five are additional tests imposed by the Congress through section 1860D-2(c) of the Act.

(1) Test for Assuring at Least Equivalent Value of Total Coverage

As required in section 1860D-2(c)(1)(A) of the Act, a plan could offer alternative prescription drug coverage as long as the actuarial value of total or gross coverage is at least equal to total or gross coverage provided under standard coverage. Based on a typical distribution of enrollee utilization, the average plan payout (including costs reimbursed by Medicare through the reinsurance subsidy) would have to be at least equal to the sponsor's estimate of the payout under defined standard coverage (holding various factors constant as described above under section 4.a.).

Alternative benefit structures, such as a decrease in the deductible with an increase in coinsurance below the initial coverage limit, or a lower initial coverage limit with a corresponding decrease in coinsurance, or a lower initial coverage limit with a corresponding decrease in deductible, could be accommodated as basic alternative coverage as long as the actuarial value of this coverage equaled that of defined standard coverage. Alternative structures could not increase the deductible or provide less than the protection offered against high out-of-pocket expenditures described in section 1860D-2(b)(4) of the Act. To the extent that the alternative coverage exceeds the value of defined standard coverage, the plan would be offering enhanced alternative coverage, that is, alternative coverage that includes supplemental benefits (as discussed in subpart C).

(2) Test for Assuring Equivalent Unsubsidized Value of Coverage

In section 1860D-2(c)(1)(B) of Act, a plan could offer alternative coverage as long as the unsubsidized value of coverage (the value of the coverage exceeding subsidy payments) is at least equal to the sponsor's estimate of unsubsidized value under defined standard coverage (holding various factors constant as described above section 4.a.). We interpret the unsubsidized value of coverage to mean the value of the benefit attributable to the beneficiary share of the premium.

There is a basic question about how this test could be applied during the plan review and approval process. In order to determine the unsubsidized value of coverage, one would have to know the projected reinsurance payments, and the value of the direct subsidy. While the projected reinsurance payments would be known at the time of the submission (since the actuarial value of the benefit is reduced by projected reinsurance payments to produce the bid), the value of the direct subsidy would not be known (since it would require computing the national weighted average bid and bids have not yet been approved). In the face of this problem, one approach could be to remove reinsurance payments as estimated by the sponsor and to use an estimate of the direct subsidy that we would provide. For instance, in the first year we might provide the estimate used for budgeting purposes, and in subsequent years, an estimate based on prior years' actual experience updated for trend. Additional guidance will be released concerning this matter.

Comment: Two commenters suggested that we should waive the second test of actuarial equivalence because if a plan meets all of the other tests the second test would be redundant, and without knowing the true value of direct subsidy the second test would be difficult to conduct.

Response: The second actuarial equivalence test for alternative coverage ensures the equivalent unsubsidized value of coverage. As we are defining this test, the beneficiary premium for alternative coverage must be greater than or equal to the beneficiary premium for standard coverage. Since beneficiary premiums will not be determinable until after all bids have submitted and applied against the national average bid, we interpret the application of this provision to be that the total Part D bid for alternative coverage must be greater than or equal to the sponsor's bid for defined standard coverage. We note that the first test of actuarial equivalence guarantees that the total value (including reinsurance) of coverage for the basic alternative benefit must be equal to the total value of coverage of the standard benefit. The second test then precludes a basic alternative benefit structure that increases government reinsurance costs relative to define standard coverage. We note that the test imposes no additional burden beyond the first test (that is, if you constructed a bid and shown that you meet test #1, you would already have all the information available to show whether you meet test #2). Given that the program is just beginning and we have no practical experience to show that the second test adds no value beyond the first test, we see no basis for waiving this test at this time.

(3) Test for Assuring Standard Payment for Costs at Initial Coverage Limit

Under section 1860D-2(c)(1)(C) of the Act, sponsors are to determine the average payout “for costs incurred that are equal to the initial coverage limit” for “an actuarially representative pattern of utilization.” This projected payout is compared to a dollar amount that is equal to what defined standard coverage would pay for someone with costs equal to the initial coverage limit. Given the comparison, this raises the question of what represents “an actuarially representative pattern of utilization.” As with the other tests, we believe that it would be reasonable for plans to use either anticipated plan utilization or a typical utilization pattern based on the Medicare population. However, given the implicit comparison to payout under defined standard for someone with costs equal to the initial coverage limit, it would not be valid to include individuals with expenses below the value of the initial coverage limit. After excluding individuals with total expenses below the value of the initial coverage limit, the plan would compute the actuarial value of plan payout at the point where total expenses are equal to the initial coverage limit under standard coverage. Under this interpretation, a plan could offer alternative coverage as long as the coverage is designed to provide an actuarial value of plan payout that is equal to at least 75 percent of costs between the standard deductible and initial coverage limit ($1,500 in 2006). In other words, considering only plan enrollees with expected expenses greater than or equal to the dollar value of the standard initial coverage limit, the plan would have to demonstrate that the expected plan payout associated with expenses equal to that dollar value would be at least 75 percent of benefit costs between the deductible and initial coverage limit (75 percent of $2,000 per beneficiary in CY 2006) including taking into account their expected behavioral response to the different benefit structure. This test, combined with the prohibition on increasing the deductible under alternative coverage (described below), would ensure that the benefit below the dollar level of the standard initial coverage limit is always actuarially equivalent to standard coverage. As a result, it is not permissible to trade off benefits above the initial coverage limit for benefits below.

(4) Test for Assuring the Deductible Does not Exceed the Standard Deductible

In keeping with the requirements of section 1860D 2(c)(2) of the Act, alternative coverage could not be structured so that the deductible is any higher than what it is in standard coverage ($250 in 2006).

(5) Test for Assuring the Same Protection Against High Out of-Pocket Costs

As specified by section 1860D-2(c)(3) of the Act, any alternative coverage must provide “the coverage” specified for costs above the catastrophic limit in standard coverage. We interpret this to mean that both enhanced and basic alternative coverage would have to offer at least the coverage available above the catastrophic limit through defined standard coverage. We would apply this test in the same way that we do for standard coverage with a variant of cost sharing above the catastrophic limit. That is, examining the group of individuals the sponsor projects would exceed the out-of-pocket threshold, total cost sharing once TROOP has been met, as a percentage of the sum of such cost sharing plus comparable plan payout, must be less than or equal to the percentage computed using the defined standard benefit (that is, the greater of $2/$5 or 5 percent). Again, we note that any variant in cost sharing could not lead to discrimination against certain beneficiaries, for example, by increasing the cost sharing of a drug used for a particular illness well above the cost sharing for other drugs.

c. Value of Qualified Coverage

In accordance with section 1860D-11(b)(2)(B) of the Act, with the bid, each PDP sponsor and MA organization offering an MA-PD plan must submit the actuarial value of qualified coverage in the region for the Part D eligible individual with a national average risk profile for the factors described in section 1860D-15(c)(1)(A) of the Act. We interpret this to mean that the weighted average of the plan's expected risk-standardized costs will represent the plan's cost for the theoretical national average-risk Part D individual. Any increase in costs attributable to increased utilization as the result of enhanced alternative coverage must be excluded from this calculation. Any alternative coverage that does not include supplemental coverage would be, by definition, actuarially equivalent to standard coverage. Any utilization effect that supplemental coverage has on the basic benefit should be priced into the supplemental portion of the bid.

Comment: One commenter wants to ensure that they have the ability to establish flat copayments rather than the 25 percent coinsurance of the standard design. We should permit Part D providers to round flat copayments to the nearest $5 dollar level, as these are the benefit designs commonly offered in the market place.

Response: Any copayment structure must meet the test for either actuarially equivalent standard coverage or for alternative coverage. These tests are available to allow for flexibility in benefit design including use of copays rather than coinsurance. While we would anticipate that some rounding would be consistent with these tests, rounding to the nearest $5 dollar level may create too great a difference between rounded and unrounded values.

Comment: One commenter stated that the regulation text should allow for the value of any enhanced benefit design to reflect both the potential impact of utilization changes and mix shifts to less expensive drugs. Any test of benefit value should also take into account the impact of utilization management, which may increase utilization, but have a favorable impact on total costs.

Response: To the extent that a benefit design other than that of defined standard coverage will have a projected impact on the mix of drugs, this impact will be included in the pricing of that proposed design. We anticipate that utilization management will be held constant in the pricing of defined standard and the proposed design, as well as the population modeled; drug formulary; and drug pricing (except to the extent that the proposed design incorporates differential pricing and cost sharing based on participation status within the plan's network). These issues will be fully discussed in our guidance on “processes and methods using generally accepted actuarial principles and methodologies”.

5. Information Included with the Bid

a. Bid Format

The exact format for the bid submission is detailed in separate CMS guidelines with the bid submission tool. Section 1860D-11(c)(1)(D) of the Act specifies “the use of generally accepted actuarial principles and methodologies.” We require that an actuary (a member of the American Academy of Actuaries) certify the actuarial valuation, which may be prepared by others under his or her direction or review. Actuarial certification would give better assurance that the actuarial values in the bid were prepared in conformance with actuarial standards and methodologies. Section 1860D 11(c)(3)(B) of the Act permits use of outside qualified independent actuaries. We expect that plans would use outside actuaries, especially if they did not have qualified in-house actuaries.

As provided in section 1860D 11(b)(3) of the Act, we have developed (see Draft PDP Bid Instructions and Pricing Tool http://www.cms.hhs.gov/pdps/) the bid submission format to facilitate the submission of bids for multiple regions and in all regions, and we have taken this into account in process development. This approach would need to ensure that separate bids were provided for each region in order to calculate the national average monthly bid amount and any geographic adjustment required. Our overall approach would be to increase our flexibility to develop appropriate methodologies in response to program changes, while minimizing burden, rather than codifying these processes in regulation. We believe that we would have the authority to develop these methodologies through interpretive guidance because our regulations state that sponsors provide the actuarial value of their plans in accordance with generally accepted actuarial principles and methodologies.

In most cases the information included with the bid would be sufficient for our review of the acceptability of a proposed plan based on actuarial principles and for negotiation of terms and conditions of an entity's participation in the provision of Part D benefits. However, we may require additional information during the review to support the assumptions and methods accompanying the bid. As provided in section 1860D-11(b)(2) of Act and § 423.265(d) of this rule, the information that would accompany the bid submission would, at a minimum, include the following:

  • Information on the prescription drug coverage to be provided, including the structure of the benefit, including deductibles, coinsurance (including any tiers), initial (or subsequent) coverage limits at which coinsurance levels change, and out-of-pocket thresholds. This would also include the plan's formulary, utilization management techniques, and any drugs, or types of drugs, excluded from coverage, and all documents provided to beneficiaries explaining the benefit, including the Evidence of Coverage, and would be certified by an officer of the plan. We solicit comments on the best way to obtain clear information on what drugs are included in the formulary.
  • The actuarial value of the qualified prescription drug coverage in the region for a beneficiary with a national average risk profile certified by a qualified actuary.
  • The portion of the bid attributable to basic benefits.
  • The portion of the bid attributable to supplemental benefits, if applicable.
  • The actuarial basis for the portion of the bid attributable to basic coverage and to supplemental benefits, if applicable, certified by a qualified actuary.
  • The assumptions regarding reinsurance subsidy payments.
  • The assumptions regarding administrative expenses.
  • The plan's service area and the plan's network of pharmacies serving that service area.
  • (For PDP sponsors only) the level of risk assumed in the bid, including whether the sponsor requires a modification of risk level (see discussion below) and, if so, the extent of the modification. Although our procedures may subsequently seek this information, we may only review it to the extent that the initial submission of bids does not yield the statutory minimum number of full risk bidders in each region and area. Our goal in designing the bidding process will be to maximize the level of risk borne by contracting plans and to minimize the need for fallback plans; and
  • Any other information that we would require.

Response to public comment

Comment: Several comments were received concerning privacy protections for information submitted during the bidding process. Two manufacturers urged adoption of the “restriction on use of information” standard in § 423.322(b) for bidding information. Moreover, they believe that the Trade Secrets Act (18 USC § 1905) should apply and be inserted into the regulation to cover manufacturer pricing information. Three additional comments were received suggesting that we should limit our requests concerning specific pricing and cost information. These commenters while not referring to the Trade Secrets Act, did seek protection of any information submitted. Additionally, one pharmacy benefits manager and one health insurer expressed concern that bidding information will not be protected from disclosure under the Freedom of Information Act (FOIA).

Response: We believe that information submitted with the bid that is used to pay plans (such as estimations of reinsurance or administrative costs) would be protected under § 423.322(b) and sections 1860D-15(d)(2)(B) and 1860D-15(f)(2) of the Act. These sections protect information that is submitted to us for the purposes of carrying out section 1860D-15 of the Act. Because the direct subsidy in section 1860D-15(a) of the Act is based upon the plan's standardized bid amount, we believe that the portion of the standardized bid which is used in calculating that subsidy would be protected. On the other hand, information submitted with the bid that is not used in calculating the direct subsidy (such as the structure of the formulary or the utilization management techniques to be used by the applicant) would not be protected under sections 1860D-15(d)(2)(B) and 1860D-15(f)(2) of the Act. However, bidders can always seek to protect their information under the Freedom of Information Act and label truly proprietary information “confidential” or “proprietary.” When information is so labeled, the bidder is required to explain the applicability of the FOIA exemption they are claiming. When there is a request for information that is designated by the submitter as confidential or that could reasonably be considered exempt under Exemption 4, the Department is required by its FOIA regulation at 45 C.F.R. § 5.65(d) and by Executive Order 12,600 to give the submitter notice before the information is disclosed. To determine whether the submitter's information is protected by Exemption 4, the submitter must show that- (1) disclosure of the information is likely to impair the government's ability to obtain necessary information in the future; (2) disclosure of the information is likely to cause substantial harm to the competitive position of the submitter; or (3) the records are considered valuable commodities in the marketplace which, once released through the FOIA, would result in a substantial loss of their market value. Consistent with our approach under the Part C program, we would not release information under the Part D program that would be considered proprietary in nature or that would tend to stifle the availability of discounts or rebates from pharmaceutical manufacturers negotiated by Part D plans.

Bidders may identify trade secrets and confidential business information (CBI) with their submission. However, if they have not we will give them another chance when a FOIA request has been made on their records. In this case we will notify the business submitters that we are in receipt of FOIA requests for their records. We will then provide the business submitters with instructions and ask them to identify any trade secret or CBI in order to justify our application of Exemption 4. We will then review their justifications and highlighted information against FOIA case law to see if we can support their requested redactions. Under Executive Order 12600, if the business submitters disagree with our Exemption 4 analysis (which includes their justification) of their identified trade secret or CBI, they are provided the opportunity to seek a restraining order or injunction in Federal court prohibiting us from releasing their records under FOIA.

Comment: One commenter suggested that Pharmacy Benefit Managers be required to disclose all rebate arrangements with manufacturers.

Response: It is unclear to whom the commenter wants rebate disclosed to and in what context. The comment was made in reference to bidding and in this case information on rebates will generally be limited to the aggregate level. However, per § 423.272 more detailed information may be reviewed if necessary to ensure the reasonableness and appropriateness of the bid. Uniform requirements for detailed rebate information would unnecessarily increase the burden of the bidder. Detailed rebate information will be collected for reasons other than the bid.

b. Risk Adjustment of Supplemental Premium

The portion of the bid attributable to supplemental benefits (part of enhanced alternative coverage defined in § 423.104(g)) represents the supplemental premium for a beneficiary with a national average risk profile. The payment process provided in section 1860D-15 of the Act will only address risk adjustment of the basic portion of the bid, and there are no other provisions for risk adjusting the supplemental benefit portion of the bid. If not addressed, this would result in plans with average risk scores above 1.0 being under-compensated by enrollees for supplemental benefits, and plans with average risk scores below 1.0 being over-compensated, as illustrated below.

Table F-1 Back to Top Supplemental Premium Risk Adjustment Back to Top
Plan A Plan B Plan C
Plan Average Risk Profile 0.80 1.00 1.10
1.0 Supplemental Premium 100 100 100
Supplemental Premium if Risk-Adjusted 80 100 110
Over or (under) compensation $20.00 $0.00 $(10.00)

Table F-1 illustrates the case of three equally efficient plans that each estimate the cost of the same supplemental benefits at $100. Plan B has an average risk profile, that is, the arithmetic average of the risk scores of all of its enrollees is equal to 1.0. Plan A and Plan C, however, have healthier and sicker than average risk pools, with enrollee risk scores averaging .80 and 1.10, respectively. Plan A only needs an average risk-adjusted premium of $80 to meet the revenue requirements of providing those supplemental benefits to its healthier enrollees, but would receive $20 more on average from enrollees if it collects the whole $100 unadjusted premium. In contrast, Plan C needs to collect $10 more than it would receive from the unadjusted (1.0) premium to fully fund the expected needs of its sicker enrollees. Consequently, we will require additional information on the projected risk profiles of projected enrollees for accurate valuation of the supplemental portion of the bid with the bid submission. We intend, through the negotiation process, to reach agreement on a supplemental premium based on the bid submission that would account for the risk profile of enrollees and, thus, meet the plan's revenue requirements. Our goal is to maintain a level playing field that would facilitate the fair competition envisioned in the MMA. Review and approval of this information is discussed in section F.3. of this preamble.

c. Modification of Risk in PDP Bids

As provided under section 1860D-11(b)(2)(E) of Act and in § 423.265(d)(4), PDP sponsors may request a modification of certain risk sharing arrangements provided under section 1860D-15(e) of the Act, thus, becoming a limited risk plan. Modification of risk could include an increase in the Federal percentage assumed in the risk corridors or a decrease in the size of the risk corridors. Any modification of risk will have to apply to all PDP plans offered by a PDP sponsor in a region.

Section 1860D-11(b)(2)(E)(i) of the Act states that modification of risk will not be available to MA-PD plans. Therefore, in discussing the possibility of including in the bid a request for a modification of risk, we include only PDP sponsors. Limited risk plans will only be accepted if the access requirements in section 1860D-3(a) of the Act could not otherwise be met through the approval of a sufficient number of full risk plans. These requirements call for at least two qualifying plans offered by different entities, one of which must be a stand-alone prescription drug plan. If other bidders meet these requirements, a bid from a limited risk plan could not be approved and might not be reviewed.

Comment: The proposed rule offers no guidance as to what we view as “minimal risk.”

Response: While the statute allows “limited risk” arrangements to be accepted in order to ensure that the access requirements are met, such arrangements must provide for more than a “de minimis” level of risk. We would generally consider anything below 10 percent risk as “de minimis”. Any proposal for a level of risk above the “de minimis” but less than the standard full risk contract will be considered if there was a need to accept a “limited risk” arrangement.”

Comment: One commenter suggested that we should allow PDPs who wish to enroll low income subsidy beneficiaries to apply for limited risk, but be treated as a full risk plan.

Response: While it is unclear what the commenter meant by being “treated as a full risk plan,” while being limited risk, full risk plans get priority and we will only approve limited risk plans when there are not a sufficient number of full risk plans to meet the access requirements of section 1860D-3(a). Also, per section 1860D-11(f)(1), approval of a limited risk plan is conditioned on not being able to meet the access requirements but for the approval of such a limited risk plan. Thus, if there are sufficient full risk plans, we will not approve limited risk plans regardless of whether the PDP wishes to specifically enroll low income subsidy beneficiaries.

Comment: One commenter expressed confusion over how the low-income cost sharing amounts enter into the bid “calculation” since these amounts help to satisfy revenue needs already identified by the plans as part of the bid. The commenter went on to state that during the early years of the program it will be difficult for plans to estimate the number of low-income beneficiaries expected to enroll and the amounts that would be paid on their behalf. They requested that we recognize that these estimates are likely to be subject to error and include statement in the preamble to the final rules that a good faith standard will apply to these estimates.

Response: The commenter is correct that the low-income subsidy is not part of the bid since it represents a subsidy for enrollee cost-sharing liability rather than plan liability. We ask for PDP sponsors' or MA-PD plans' estimate of their low-income subsidy to assist us in determining an interim payment for this subsidy, which is separate from the direct and reinsurance subsidies. Their actual low-income subsidy payment will be based on the actual experience for this group. Estimates will be reviewed for reasonableness and appropriateness using “generally accepted actuarial principles and methodologies” as instructed by 1860D-11(c)(1)(D) of the Act.

Comment: One commenter urged that bids include information on how plans will coordinate with SPAPs for Part D wraparounds at the point of sale.

Response: Specific information elements included in the bid submission tool are not part of the regulatory text and will be released in separate additional guidance on the bidding process.

Comment: One commenter urged us to specify that bids must include information on specific drugs in each formulary tier and their corresponding co-pays, in addition to any prior authorization requirements.

Response: Specific details concerning the response fields will be released with the guidance materials accompanying the bid pricing tool and the Plan Benefit Package; however, formulary tiering structures and prior authorizations requirements will be information that we will review.

Comment: One comment stated that we should provide a sample actuarial pricing form that illustrates the type of information desired.

Response: Additional guidance on actuarial pricing will be made available in a timely manner.

6. Review and Negotiation of Bid and Approval of Plans

a. Authority to Review Bids

We will review the information filed by the PDP sponsor or MA organization in order to conduct negotiations on the terms and conditions proposed in the bid. In addition to general authority to negotiate terms and conditions of the proposed bid submitted and other terms and conditions of a proposed plan, the MMA grants use of the authority to negotiate bids and benefits “similar to” the statutory authority given the Office of Personnel Management (OPM) in negotiating health benefits plans under the FEHBP program. We believe that the Congress used “similar to” in the statute because of the differences between the two programs. For example, while the OPM authority applies to level of benefits, standard Part D drug coverage is defined. With regard to rates, in some cases the context for FEHBP negotiations is not applicable to Part D. For example, the rates for community-rated plans under FEHBP are related to the rate the entity provides to similarly sized groups, and there is no comparable concept in Part D. Arguably the degree of competition among plans, and price signaling through premium and benefits, might be significantly greater in Part D than in FEHBP. Although these differences do exist there are also similarities. OPM is concerned about trend factors used to establish the premium for experience-rated plans, and we will have similar concerns about the reasonableness of a sponsor's trend assumptions. OPM is concerned about cost-sharing changes proposed by plans, and we will have similar concerns with regard to supplemental benefits. OPM wants to maintain high member satisfaction and ensure top quality service by plans, and we will have similar interests.

Chapter 89 of title 5 USC gives OPM broad discretion to negotiate prices and levels of benefits. For example, 5 USC 8902(i) states that OPM may negotiate with carriers if it believes the rates charged do not “reasonably and equitably” reflect the cost of the benefits provided. In addition, OPM has broad authority to negotiate the level of benefits, including the ability to prescribe “reasonable minimum standards for health benefits plans.” (See 5 USC 8902(e).) Notwithstanding our broad negotiating authority and our negotiating authority “similar to” that of OPM, to the maximum extent feasible and consistent with the appropriate discharge of our responsibilities, we prefer to rely on competition rather than negotiation.

We note that the bid requirements will be negotiated and a denial of a contract based on a failure to come to an agreement on the bid will not be appealable under the administrative procedures for appealing a contract denial beginning with reconsideration in § 423.645. Only the application requirements, which are separate and distinct from bid negotiation, can be appealed as detailed in subpart N.

Comment: One commenter urged that we conduct a thorough review of Part D providers' estimates of reinsurance to ensure a “level playing field.”

Response: We will review estimates of reinsurance. Per section 1860D-11(c)(1) of the Act “an actuarial valuation of the reinsurance subsidy payments” will be conducted. Moreover, section 1860D-11(d) and (e) require a review of the entire bid including the estimates of reinsurance. Additional detail for this review will be released in documentation supporting the bid submission process.

b. Bid and Benefit Package Review

We have the authority to negotiate in four broad areas: (1) administrative costs; (2) aggregate costs; (3) benefit structure; and, (4) plan management, if dissatisfied with some or all aspects of bid submissions. We will evaluate administrative costs for reasonableness in comparison to other bidders and in comparison to a PDP sponsor's other lines of business. We will examine aggregate costs to determine whether the revenue requirements for qualified prescription drug coverage are reasonable and equitable. We will be interested in steps that the sponsor is taking to control costs, such as through various programs to encourage use of generic drugs. We will examine and discuss any proposed benefit changes. Finally, we will discuss indicators and any identified issues with regard to plan management, such as customer service.

In addition to the negotiation process, we will ensure that bids and plan designs meet statutory and regulatory requirements. In general, we will examine bids to determine whether the bid meets the standard of providing qualified prescription drug coverage, as described in § 423.104(b) of this rule and in subpart C of this preamble. We will examine the actuarial analysis accompanying the bid to ensure that it has been prepared in accordance with our actuarial guidelines and properly certified. We will examine bids to determine whether the revenue requirements for qualified prescription drug coverage are accurate and reasonable, and that the requirements relating to actuarial determinations are met. We note that section 1860D-11(e)(2)(c) of the Act requires that the portion of the bid attributable to basic prescription drug coverage must be supported by the actuarial basis and reasonably and equitably reflect revenue requirements for benefits provided under the plan, less the sum of the actuarial value of reinsurance payments. We will also review the structure of premiums, deductibles, copayments, and coinsurance charged to beneficiaries and other features of the benefit plan design to ensure that it is not discriminatory. We will review cost sharing both above and below the out-of-pocket threshold with regard to its impact on groups of beneficiaries. We will also look to see that there is no differential impact on groups of beneficiaries by geographical location within the plan's region or service area attributable to different levels of cost sharing between preferred and non-preferred network providers.

As required under section 1860D-11(e)(2)(D)(i) of the Act and in § 423.272(b)(2), the structure of the benefit design (including cost sharing provisions and formulary design) must not be discriminatory; that is, it must not discourage enrollment by any Part D eligible enrollee on the basis of health status, including medical condition (related to mental as well as physical illness), claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. In general, this means that we will review benefit plans for features that, when applied, have differential impacts on beneficiaries with particular medical conditions. Factors we will consider in determining whether a benefit structure is discriminatory include, but are not limited to: (1) the benefit design—including the initial coverage limit, the tiered cost-sharing, the use of categories and classes in a formulary, and the choice of drugs provided in each category. (For example, if the tiered cost-sharing for drugs used to treat HIV is much higher than the cost-sharing for other types of drugs, we will view this benefit structure to be discriminatory); (2) the use of any discriminatory limits such as 90-day limits or requirements for pre authorization; and (3) supplemental benefits such as supplemental coverage of drugs that will encourage a healthier population to join the PDP. As provided in section 1860D-11(e)(2)(D)(ii) of the Act, plans using formulary designs based on categories and classes that are consistent with the guidelines established by the U.S.P. as discussed in subpart C, will be recognized as satisfying the non-discrimination design related to formulary structure as it pertains to categories and classes. However, adopting the USP model categories and classes will not prohibit us from reviewing other aspects, including the use of any limits or tiers, as discussed above.

c. Approval of the Supplemental Premium

As provided under section 1860D-11(e)(2)(C)(ii) of the Act, we will determine that the portion of the bid attributable to supplemental benefits reasonably and equitably reflects the revenue requirements for that coverage under the plan. Unless the supplemental portion of the bid (which is paid by the enrollee in the form of the supplemental premium) is risk adjusted for the average level of risk among enrollees, plans with average risk scores above or below 1.0 will be over compensated or under compensated by enrollees for supplemental benefits. Therefore, on the basis of this authority, we will require additional information, consisting of estimates of the projected risk scores of the plan's enrollees in the subsequent year, to be submitted by each plan for purposes of negotiating the appropriate risk adjustment of the supplemental portion of the bid. We will review and negotiate that information, and will approve a uniform supplemental premium reflecting the average risk factor for the plan's expected enrollment.

d. Rebate Reallocation for MA-PD plans

The negotiation process for MA-PD plans could include the resubmission of modified benefit structures (other than changes in that portion of their supplemental benefits related to drugs) once we know the outcome of the national average monthly bid calculation and its impact on beneficiary premiums. Part D drug benefits, including benefits offered through supplemental Part D coverage) could not be changed during this process because any changes will have an impact on government reinsurance payments and, therefore, on the portion of the bid related to basic drug benefits. The MMA requires that all MA bid and benefit package submissions be provided to us no later than the first Monday in June. In the prescription drug program enrollee premiums must be based on a percentage of the national average monthly bid amount that can only be calculated once all bids have been received, if not actually approved. (While the enrollment weights are determined from the previous year's reference month, the bid amounts are not.) Therefore, the prescription drug portion of benefit packages submitted by MA-PD plans will be based on estimates of monthly beneficiary premiums. Some of these MA-PD plans will have allocated portions of their Part C rebates to buy-down of the Part D premium. Once the final national average monthly bid amount and the base beneficiary premium have been calculated, some of these rebate allocations in the bids could be either excessive or insufficient to achieve the desired premium level.

Excessive rebate allocation will result in a portion of the rebate that is not provided to the beneficiary as required by law, since a premium of less than zero is not permitted. Compliance with the statute will require a reallocation of the excessive portion of the rebate credit back to other allowed uses of the Part C rebate, that is, to supplemental benefits (including reduced cost sharing other than cost sharing for Part D drugs) or to credits to the Part B or supplemental premiums. On the other hand, insufficient rebate allocation may result in minimal premiums that may be seen as burdensome by plans, enrollees, and the financial institutions managing electronic funds transfer.

The statute does not address this situation, but section 1860D-11 of the Act does grant us broad authority to negotiate the terms and conditions of the proposed bids and benefit plans. Our regulatory approach will be to allow the negotiation process for MA-PD plans to include the resubmission of modified benefit structures once the outcome of the premium finalization process is known. MA PD plans will be able to redistribute their Part C rebates to correct for the difference between the projected and final national average monthly bid amounts and to achieve the previously proposed level of Part D premiums. Under no circumstances could plans submit modified bids.

For example, an MA-PD organization submitted its bid and benefit package based on the assumption that the levels of the national average monthly bid amount and its prescription drug standardized bid will result in a $35.00 monthly beneficiary premium for basic coverage, and that it will use $35.00 of its Part C rebate to completely buy down the Part D premium. If the national average monthly bid amount is determined to be higher than expected, the plan's bid will end up below the benchmark and its base beneficiary premium will be adjusted by subtracting the difference between the bid and national average monthly bid amount. Therefore, the plan's monthly beneficiary premium will be less than the projected premium, for instance, $34.00, and the $35.00 amount allocated from the Part C rebate for Part D premium buy-down will be excessive. In that case, we will require the MA organization to amend its benefit package to reallocate the excessive $1.00 of the Part C rebate credit to additional supplemental benefits (other than for Part D drugs) or to Part B or supplemental premium credits. These adjustments will be mandatory in order to ensure that the entire amount of the rebate was provided to the beneficiary in some form.

Under an alternative scenario, the national average monthly bid amount is determined to be lower than expected and the plan's bid ends up above the benchmark. In this case, the plan's base beneficiary premium will be adjusted by adding the difference between the bid and national average monthly bid amount. Therefore, the plan's monthly beneficiary premium will be higher than projected, for instance $36.00, and the $35.00 amount allocated from the Part C rebate for Part D premium buy-down will no longer be sufficient to eliminate the Part D premium as planned. In that case, we will allow the MA organization to amend its benefit package to reallocate an additional $1.00 of the Part C rebate credit from additional supplemental benefits (other than for Part D drugs) or from Part B or supplemental premium credits to eliminate the Part D premium. These adjustments will be optional since the Part C rebate has already been provided to the enrollee. We will not permit an MA organization to simply eliminate a minimal premium instead of reallocating the rebate because doing so will mean that the cost of providing the prescription drug benefit had been overstated. However, the MA organization could elect to charge the new increased premium and to amend its benefit package submission accordingly.

Comment: One comment suggested that we should also allow reallocation of rebate dollars to round off premiums and to support to support the availability of MA-PD plans to dual eligibles.

Response: Title II MA-PD rebate dollars (note this is to be distinguished from manufacturer rebates) could certainly be used to round off premiums (§ 422.266(b)(2)), and as stated our regulatory approach will be to have a negotiation process for MA-PD plans to include the resubmission of modified benefit structures once the outcome of the premium finalization process is known. Such a reduction in the Part D premium will, however, have to be uniform for all plan enrollees.

e. Private Sector Price Negotiation and Formulary Design

The Act envisions that most price negotiation including discounts, rebates, or other direct or indirect subsidies or remunerations will take place between PDP sponsors or MA organizations (or their subcontractors) and pharmacies and pharmaceutical manufacturers. We believe the Congress used the terms direct and indirect to be all inclusive in defining subsidies. Section 1860D-11(i) of the Act precludes us from interfering with negotiations between drug manufacturers and pharmacies, or PDP sponsors, or requiring a particular formulary or pricing structure. In other words, price negotiation with manufacturers will be conducted by the private drug benefit managers and plans that are already familiar with negotiating prices of prescription drugs on a local, regional or national basis. Moreover, we expect that providing information on discounted drug prices to beneficiaries will encourage further competition on lower prices. Because beneficiaries will choose a drug plan based on drug prices and formulary coverage, the plans have strong incentives to negotiate lower prices on drugs that beneficiaries use just as private benefit managers currently do on behalf of the Federal government, State governments, and employer and retiree plans. We expect that in addition to price levels for drugs, these negotiations will also include such terms as prohibitions on substitutions of drugs if the net result will be higher costs for patients or the plans. The nature of the negotiations that we will conduct with bidders is discussed later for full-risk and limited-risk bids, and in subpart Q of this preamble for fallback plans.

We expect that the private negotiations between PDP sponsors and drug manufacturers will achieve comparable or better savings than direct negotiation between the government and manufacturers, as well as coverage options that better reflect beneficiary preferences. This expectation reflects the strong incentives to obtain low prices and pass on the savings to beneficiaries resulting from competition, relevant price and quality information, Medicare oversight, and beneficiary assistance in choosing a drug plan that meets their needs. This is similar to the conclusion of other analyses, for example, CBO's recent statement that “Most single-source drugs face competition from other drugs that are therapeutic alternatives. CBO believes that there is little, if any, potential savings from negotiations involving those single-source drugs. We expect that risk-bearing private plans will have strong incentives to negotiate price discounts for such drugs and that the Secretary would not be able to negotiate prices that further reduce Federal spending to a significant degree. “In accordance with the Medicaid best price exemption provided under section 1860D-2(d)(1)(c) of the Act and codified in § 423.104(h)(2) of our rule, drug plans may even be able to negotiate better prices than those paid under Medicaid. It also reflects Medicare's recent experience with drug price regulation for currently-covered drugs, in which regulated prices for many drugs have significantly exceeded market averages.

By not allowing us to require any particular formulary, the statute ensures that the Pharmacy and Therapeutics committees of prescription drug plans and MA PD plans have the flexibility to make changes in their classifications and lists of preferred drugs based on the most current evidence-based information (subject to the limitations of § 423.120(b)). Additional CMS guidelines on formulary review will be made available. However, in summary we will evaluate plan formulary categories and classes in comparison to the model guidelines developed by U.S.P. In addition to evaluating any discriminatory features, as discussed above, we have the authority to develop minimum standards and to negotiate the terms and conditions of the bid under section 1860D-11(d) of the Act. We also have the authority to promulgate additional contract terms (section 1860D-12(b)(3)(D) of the Act). Finally, we believe the structure of the Part D benefit, as laid out in section 1860D-2 of the Act, with a requirement for catastrophic coverage, anticipates a structure where beneficiaries receive coverage for medically necessary drugs. Therefore, we will evaluate the number of categories in formularies that do not meet the model guidelines and the choice of drugs available in those categories for meeting the needs of the Medicare population. After the initial year of the program, we will also review the history of plan formulary appeals to identify issues with the plan's formulary. We will conduct additional research on evaluating formularies and drug benefit designs and we would welcome comments on evaluation. As noted previously, we may also review plan cost sharing (that is, tiers). Our formulary review will follow four important principles:

1. Rely On Existing Best Practices: Our review will rely on widely recognized best practices for existing drug benefits serving millions of seniors and people with disabilities to ensure non-discriminating, appropriate access;

2. Provide Access to Medically Necessary Drugs: We will require that drug plans provide access to medically necessary treatments for all and do not discriminate against any particular types of beneficiaries based on their expected drug costs;

3. Flexibility: We will allow plans to be flexible in their benefit designs to promote real beneficiary choice while protecting beneficiaries from discrimination; and

4. Administrative Efficiency: We will set up a process to conduct effective reviews of plan offerings within a compressed period of time.

Comment: Several comments were made regarding formulary structures that are likely to substantially discourage enrollment, with the majority merely expressing support for our regulatory text. Ten comments were received expressing concern over the definition of “substantially discourage”, three of which called for dropping the word “substantially” from the regulation. One commenter specifically argued that step therapy for psychopharmacology should be considered as substantially discouraging. Another commenter simply stated that step therapy should be reviewed for discriminatory impact.

Response: The term “substantially” comes directly from the statute in section 1860D-11(e)(2)(D)(i) of the Act and therefore we do not believe it should be eliminated as some commenters recommended. According to research conducted for the Agency by Booz Allen Hamilton (“Drug Utilization Management and Quality Assurance Best Practices and Standards”), step therapy is one method of benefit design currently used by industry for the purpose of managing costs by requiring more cost effective drugs to be used before more expensive options are prescribed. Other research indicated the widespread use of this technique. For example, in its June 2004 “Drug Trend Report,” Express Scripts, a large pharmacy benefits manager, stated that the use of step therapy had risen from 4.5 million to 9.8 million lives between 2002 and 2004 for their members. Moreover, they report that step therapy with psychotropics, in particular antidepressants, is common among these members. Step therapy is also common among State Medicaid programs. Indeed, a 2003 report by the Georgetown University Health Policy Institute on behalf of the Kaiser Commission on Medicaid and the Uninsured found that 28 Medicaid agencies in 2003 used step therapy in their drug programs. The review process will examine the use of step therapy as a utilization control, but a categorical ban would be inconsistent with Congressional intent in Section 1860D-4(c)(1(A) of the Act, which calls on PDPs to have “a cost-effective drug utilization management program, including incentives to reduce costs when medically appropriate.” As we have outlined, step therapy is one common method of drug utilization management. The Congress was aware that utilization management included step therapy, and they were also aware of that some stakeholders have objections to it as evidenced by the testimony given during the Subcommittee on Health of the Committee on Energy and Commerce hearing “Designing a Twenty-First Century Medicare Prescription Drug Benefit” on April 8, 2003. We will review step therapy and other formulary structures to ensure that they are not substantially discouraging. Accordingly, we will rigorously review formularies in a number of ways as part of the bid negotiation process. This review will include, but not be limited to: (1) reviewing the classes and categories in relation to the USP model; (2) reviewing the formulary to make sure that all appropriate treatments are available for certain complex diseases such as HIV; (3) where possible and appropriate, comparing the formularies and utilization management programs (including step therapies) to applicable treatment guidelines to make sure they support current treatment standards; and (4) comparing formularies between plans to identify outlier practices, which will include comparing plans for amount and specific drugs that they are including in step therapy, quantity limits and prior authorization.

Comment: One commenter indicated concern that SPAPs will incur significant costs if PDP sponsors' formularies are inadequate. We should establish a formulary evaluation criterion that would trigger a detailed evaluation of the adequacy for the formulary.

Response: Formularies will be evaluated according to the provisions of the statute. Regardless of the impact of specific plan formularies, we have estimated that Part D will save SPAPs approximately $3 billion between 2006—2010 (see the regulatory impact statement for more detail).

f. Bid Level Negotiation

The FEHBP standard in 5 USC 8902(i) requires us to ascertain that the bid “reasonably and equitably reflects the costs of benefits provided.” In addition, we note that section 1860D-11(e)(2)(c) of the Act requires that the portion of the bid attributable to basic prescription drug coverage must “reasonably and equitably” reflect revenue requirements . . . for benefits provided under that plan, less the sum ... of the actuarial value of reinsurance payments.” Analogous to the manner in which FEHBP views its management responsibilities, we see this requirement as imposing the fiduciary responsibility to evaluate the appropriateness of the overall bid amount.

In general, we will evaluate the reasonableness of bids submitted by at-risk plans by means of the actuarial valuation analysis. This would require evaluating the plan's assumptions regarding the expected distribution of costs, including average utilization and cost by drug coverage tier, for example, in the case of standard coverage: (1) those with no claims; (2) those with claims up to deductible; (3) those with claims between the deductible and the initial coverage limit; (4) those with claims between the initial coverage limit and the catastrophic limit; and (5) those with claims in excess of the catastrophic limit. We could test these assumptions for reasonableness through actuarial analysis and comparison to industry standards and other comparable bids. Bid negotiation could take the form of negotiating changes upward or downward in the utilization and cost per script assumptions underlying the bid's actuarial basis.

Arguably, appropriate assurance that plan bids reasonably and equitably reflect the revenue requirements associated with providing the Part D benefit requires knowing the final drug price levels the plans are paying that are implicit in their bids. Consequently, in addition to looking at final aggregate prices, if we found that a plan's data differed significantly from its peers without any indication as to the factors accounting for this result, we could also ask bidders to provide information about rebates and discounts they are receiving from manufacturers and others, in order to ensure that they are negotiating as vigorously as possible. Section 1860D 11(b)(1)(C) of the Act allows us to ask for necessary “information on the bid”. In other words, we will be able to inquire as to the “net cost” of drugs since this is the key dollar value we will need to make accurate “apples to apples” comparisons on drug prices between PDPs. Under this approach, if the particular bids appear to be unusually high (or low), we could go back to the bidders and request that they explain their pricing structure, the nature of their arrangements with manufacturers, and we might ask further questions and take further action to perform due diligence to ensure that there is no conflict of interest leading to higher bids. For instance, we will look at certain indicators, such as unit costs or growth rates in the bid amounts to see if they are in keeping with private market experience to the extent feasible for a comparable population (for example, retirees). (In this case, we will be using the authority in 5 USC section 8902(i) to negotiate bids that are “consistent with the group health benefit plans issued to large employers”.) If the overall bids were unjustifiably high, we will have the authority to negotiate the bids down to a level that is more in keeping with bids from other sponsors. We could exercise our authority to deny a bid if we do not believe that the bid and its underlying drug prices reflect market rates. Our strong expectation, however, is that we will be able to rely on the incentives provided by competitive bidding, and we will use our authority under this part only on the rare occasion we find that a plan's data differs significantly from its peers without any indication as to the factors accounting for this result.

Comment: Several comments were received on the MMA provision of “authority similar to the authority of the Director of the Office of Personnel Management” for the Federal Employee Health Benefits Program (FEHBP) when negotiating bids for Part D. One commenter referenced that in the preamble of the proposed rule, we stated that we were considering regulations similar to those used by Office of Personnel Management (OPM) in 48 CFR Chapter 16, which they note is comprised of 24 distinct parts and due to the lack of clarity with regard to the provisions of the OPM regulations were referring to they would be unable to comment