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Proposed Rule

Medicare Program; Medicare Prescription Drug Benefit

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Information about this document as published in the Federal Register.

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AGENCY:

Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would implement the new Medicare Prescription Drug Benefit. This new voluntary prescription drug benefit program was enacted into law on December 8, 2003, in section 101 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA). 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. Please see the executive summary in the SUPPLEMENTARY INFORMATION section for further synopsis of this rule.

DATES:

To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on October 4, 2004.

ADDRESSES:

In commenting, please refer to file code CMS-4068-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

You may submit comments in one of three ways (no duplicates, please):

1. Electronically. You may submit electronic comments to http://www.cms.hhs.gov/​regulations/​ecomments (attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word).

2. By mail. You may mail written comments (one original and two copies) to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-4068-P, P.O. Box 8014, Baltimore, MD 21244-8014.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3. By hand or courier. If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7197 in advance to schedule your arrival with one of our staff members.

(Because access to the interior of the HHH Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.)

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

Submission of comments on paperwork requirements. You may submit comments on this document's paperwork requirements by mailing your comments to the addresses provided at the end of the “Collection of Information Requirements” section in this document.

For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section.

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FOR FURTHER INFORMATION CONTACT:

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

Wendy Burger (410) 786-1566 (for issues related to marketing and user fees).

Vanessa Duran-Scirri (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 or Tony Hausner (410) 786-1093 (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.)

Terese Klitenic (410) 786-5942 (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).

Frank Szeflinski (303) 844-7119 (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; employer group waivers and options; also 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.)

Tracey McCutcheon (410) 786-6715 (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.)

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.)

For general questions: Please call (410) 786-1296.

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SUPPLEMENTARY INFORMATION:

Executive Summary. Generally, coverage for the prescription drug Start Printed Page 46633benefit 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, the PDP or MA-PD plan 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 proposed rule provides for subsidy payments to sponsors of qualified retiree prescription drug plans.

We intend to implement the drug benefit to permit and encourage a range of options for Medicare beneficiaries to augment the standard Medicare coverage for drug costs above the initial coverage limit ($2250 in 2006) and below the annual out-of-pocket threshold ($5100 in 2006). In addition to the coverage established by the statute for low-income beneficiaries, we seek comments on the best way to support options for expanding beneficiaries' drug coverage. Potential options include facilitating coverage through employer plans, MA-PD plans and/or high-option PDPs, as well as through charity organizations and State pharmaceutical assistance programs. We specifically seek comments on ways to maximize the continued use of non-Medicare resources (private contributions, employer/union contributions, state contributions, health plan contributions, and other sources) that currently provide at least partial coverage for three-fourths of Medicare beneficiaries. See sections II.C, II.J, and II.P, and II R of this preamble for further details on these issues. We are also considering establishing a CMS demonstration to evaluate possible ways of achieving such extended coverage, and we welcome all suggestions in this regard.

Throughout the preamble, we identify options and alternatives to the provisions we propose. We strongly encourage 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.

Although this proposed rule specifies most of the requirements for implementing the new prescription drug program, readers should note that we are also issuing a closely related proposed rule that concerns Medicare Advantage plans, which will usually combine medical and prescription drug coverage. In addition, although this proposed rule specifies requirements related to PDP regions it does not designate those regions. Regional boundary decisions will be made through a separate process. Additional non-regulatory guidance on this and other topics will also be forthcoming.

We have considered and, in some places, have identified how this proposed rule intersects with other Federal laws, such as the Health Insurance Portability and Accountability Act (HIPAA) of 1996 Certification of Creditable Coverage and the HIPAA Privacy Rule. We are interested in learning how this proposed rule may interact with other legal obligations to which the PDP sponsors and MA-PD plans may be subject and intend to make appropriate changes in the final rule to address such issues.

Submitting Comments: We welcome comments from the public on all issues set forth in this rule to assist us in fully considering issues and developing policies. Comments will be most useful if they are organized by the section of the proposed rule to which they apply. You can assist us by referencing the file code [CMS-4068-P] and the specific “issue identifier” that precedes the section on which you choose to comment.

Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. After the close of the comment period, CMS posts all electronic comments received before the close of the comment period on its public Web site. Comments received timely will be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 410-786-7197.

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.

I. Background

(If you choose to comment on issues in this section, please include the caption “Background” at the beginning of your comments.)

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 redesignating Part D as Part E and inserting a new Part D, which establishes 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 the Medicare Advantage Program 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 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 proposed rule is designed to ensure broad 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 Start Printed Page 46634establishes an optional prescription drug benefit for individuals who are entitled to or enrolled in Medicare benefits under Part A and/or Part B. Beneficiaries who qualify for both Medicare and Medicaid (full-benefit dual eligibles) will automatically receive the Medicare drug benefit. 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 broader coverage for no additional cost. If this required level of coverage is offered, the PDP or MA-PD plan may also offer supplemental benefits through 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 within each therapeutic class of drugs, and the ability to have a cost-sharing structure other than the statutorily defined structure, subject to certain actuarial tests. The 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. Organizational Overview of Part 423

The regulations set forth in this proposed rule will be codified in the new 42 CFR part 423—Prescription Drug Benefit Program. There are a number of places in which statutory provisions in Part D incorporate by reference specific sections in Part C of Medicare (the Medicare Advantage 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 believe it is appropriate to adopt the same organizational structure as part 422. MA coordinated care plans (defined in § 1851(a)(2)(A)) are a type of Medicare Advantage plan. For example, requirements relating to eligibility, election, and enrollment would be set forth in subpart B of new part 423, just as they now are set forth in subpart B of part 422. Therefore, wherever possible, we have modeled the proposed 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 the appeals of 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 Prescription Drug Benefit Plans: Utilization controls, quality assurance, medication therapy, and fraud, waste and abuse, 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 PDP Sponsors and MA Organizations Offering MA-PD Plans for All Medicare Beneficiaries for Qualified Prescription Drug Coverage: Data submission, payments and reconciliations for direct Start Printed Page 46635subsidies, 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, and procedures to facilitate calculation of true out-of-pocket 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 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 J and also referenced 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, Intermediate 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; contract requirements.

Subpart R, Payments to Sponsors of Retiree Prescription Drug Plans: Provisions for making retiree drug 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 proposed rule also provides changes to: 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 HMOs, part 460 relating to PACE organizations, and part 442 relating to Medicaid amendments.

II. Provisions of the Proposed Rule

A. General Provisions

(If you choose to comment on issues in this section, please include the caption “General Provisions” at the beginning of your comments.)

1. Overview

Section 423.1 of subpart A specifies the general statutory authority for the ensuing regulations and indicates that the scope of part 423 is to establish requirements for the Medicare prescription drug benefit program. Section 423.4 of subpart A provides definitions for terms that appear in multiple sections of part 423 and whose meaning we believe should be featured prominently in order to aid the reader.

Consistent with the MMA statute, we are in many cases proposing procedures that parallel those now in effect under the Medicare Advantage program (for example the regulations concerning PDP and MA-PD plan contract and appeal requirements). We anticipate receiving at least two categories of comments on such provisions: (1) Recommendations for changes that would impact only the proposed Part D provisions (based for example on underlying differences between the MA and Part D programs); and (2) recommendations for changes that would impact both the MA and Part D provisions. Our goal is to maintain consistency between these two programs wherever possible; thus we will evaluate the need for parallel changes in the MA final rule when we receive comments on provisions that affect both programs.

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

a. Introduction

For the most part, the definitions in the proposed rule are 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 are not 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

i. Discussion of the Meaning of Actuarial Equivalence

The concept of actuarial equivalence is applied in different contexts in Title I of the MMA, including: Determinations related to creditable coverage (subpart B), determinations related to the value of drug coverage and bid components (subpart F); and determinations related to subsidy payments for employer or union sponsors of qualified retiree health plans that include prescription drugs (subpart R). 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 context, we propose 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 below and in those sections of this preamble, such as section II.F, where actuarial equivalence comes into play.Start Printed Page 46636

According to 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 the statute sets forth specific requirements for actuarial equivalence and valuation, there is no formal definition of actuarial equivalence. Also, in each of the contexts described above, we must address the question of whether actuarial equivalence is determined from the perspective of the plan, or the beneficiary.

In the sections dealing with actuarial equivalence throughout this proposed rule, we have tried to avoid being overly prescriptive, in order to maintain flexibility to adjust and refine the needed valuation processes as we gain more experience with the administration of the new benefit. Thus, we fully expect to provide additional guidance in the future on these provisions.

ii. Discussion of the Meaning of Creditable Prescription Drug Coverage

The types of coverage considered creditable prescription drug coverage in proposed 42 CFR 423.4 are discussed in the preamble to subpart B.

In the preamble to subpart T, we discuss in more detail the effect of Part D on Medigap policies, one of the forms of drug coverage that may be creditable if it meets the actuarial equivalence test.

iii. Prescription Drug Plan Regions

Prescription drug plan regions are areas in which a contracting PDP plan must provide access to covered Part D drugs. Although we have included specifications for regions in § 423.112, the regions themselves are not set forth in this proposed rule. To the extent feasible, we intend that the PDP regions will be consistent with the regions established for the MA program (see § 422.455 of the MA proposed rule). In establishing the regions for both programs, we will use the results of a market survey that includes the examination of current insurance markets. MMA specifically states that there will be 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.

iv. Service Area

Medicare beneficiaries are 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.” As noted above, for PDPs, this is the Region established by CMS pursuant to proposed § 423.112, 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.

Prior to this rulemaking, we had not considered how this access requirement in the MA plan Service Area definition would apply to a jail or prison within the boundaries of a plan Service Area. Beneficiaries incarcerated there clearly would not have access to services as required under § 422.112. Such an area thus would not meet the coordinated care plan definition of “Service Area,” which requires that such access standards be met. This issue never arose under the MA program because there would be no reason for an individual to enroll in an MA plan while incarcerated, since services typically are all covered by the jail or prison and the prisoner could always enroll in an MA plan without penalty upon being released.

We have however, considered this issue in the context of Part D benefits. If a prison or jail is located within the boundaries of a PDP region, or an MA PDP-plan Service Area, a Medicare-eligible individual incarcerated there technically would reside within the service area, and be eligible to enroll to receive Part D benefits. Under this scenario, such an individual then would have to pay a penalty for not enrolling while in prison if he or she enrolled in Part D upon being released.

We do not believe this to be an equitable result, as the beneficiary would face the choice of paying for services he or she would not be receiving, or paying a penalty at a later time. We also do not believe that it would be appropriate for a PDP or MA-PD plan to receive monthly Part D payments for such an individual, since drugs typically would be covered for the individual by the prison or jail. Such payments would represent an unwarranted “windfall” for services the PDP or MA-PD would not have to deliver.

In focusing on this situation, we have decided to propose 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.

We note that the analysis above would apply equally to a beneficiary who lives abroad, and does not reside within the boundaries of any PDP Region or MA-PD Service Area.

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

The last section of subpart A proposes regulations implementing the user fees provided for in section 1857(e)(2) of the Act, as incorporated by section 1869D-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 telephone line, community based outreach to support State health insurance assistance programs (SHIPs), and other enrollment and information activities required under section 1851 of the Act and counseling assistance under section 4360 of the Omnibus Budget Reconciliation Act of 1990 (Pub. L. 103-66).

The MMA expands the user fee to apply to PDP sponsors as well as MA plans. The expansion of the application of user fees recognizes the increased Medicare beneficiary education activities that we would require as part of the new prescription drug benefit. In 2006 and beyond, user fees would 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.

In fiscal year 2006 and thereafter, the MMA authorizes up to $200,000,000 to be spent on beneficiary education and enrollment activities reduced by the fees collected from MA organizations and PDP sponsors in that fiscal year. In each year, the total amount of collected user fees could not exceed the estimated costs in the fiscal year for carrying out the enrollment and dissemination of information activities in the MA and Part D prescription drug programs or the applicable portions (described below) of $200,000,000, whichever is less.

Finally, these user fee provisions would establish the applicable aggregate Start Printed Page 46637contribution portions for PDP sponsors and MA organizations. There are two calculations. First, we calculate the PDP sponsors' applicable portion as a group; their portion is the estimate of the total proportion of expenditures under Title 18 that are attributable to expenditures made to PDP sponsors for prescription drugs under Part D. The applicable portion of the user fee for MA organizations would be equal to the total expenditures for Medicare Part C, as well as for payments under Part D that are made to MA organizations, as a percent of Title 18 expenditures. Then, we calculate the fees charged to individual PDP sponsors and MA plans.

c. Definitions of Frequently Occurring Terms

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.

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

MA means Medicare Advantage, which refers to the program authorized under Part C 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 or enrolled in Medicare benefits under Part A and/or 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.

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.

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), and/or pharmaceutical manufacturers may be subject to the anti-kickback statute and, if the relationship involves a physician, the Stark statute. These financial relationships could potentially implicate the anti-kickback and physician self-referral statutes, therefore, they should be structured appropriately to comply with legal requirements. Nothing in this regulation should be construed as implying that financial relationships described in the regulations 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 these laws. Therefore, PDPs are not prevented from paying pharmacists, for instance, for medication therapy management, provided that the PDPs do not violate anti-kickback and physician self-referral laws.

B. Eligibility and Enrollment

1. Eligibility To Enroll (§ 423.30)

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 by enrolling in a PDP plan or an MA-PD plan. In accordance with section 1860D-1(a)(3) of the Act, a “Part D eligible individual” is defined as an individual who is entitled to or enrolled in Medicare benefits under Part A or enrolled in Part B. In order to enroll in a PDP plan, the individual must reside in the plan's service area, and cannot be enrolled in an MA plan, other than an MSA plan or private fee-for-service plan that does not provide qualified prescription drug coverage. This residency requirement flows from the statute's direction for us to use enrollment rules similar to MA (which has such a requirement) and the drug benefit's basic structure, which designates regions within which PDPs are to provide services.

Section 1860D-1(b)(1)(B)(i) requires that we adopt a residency requirement similar to the Part C residency requirements under section 1851(b)(1)(A) of the Act, which stipulates that a beneficiary is eligible to enroll in a plan only if the beneficiary resides in the plan's service area. Because a PDP's service area may consist only of one or more PDP regions, individuals who reside outside of the United States would be ineligible to enroll in a PDP or MA-PD plan. Consequently, these individuals are ineligible to enroll in Part D.

Under section 1860D-1(b)(1)(B)(i) of the Act, which incorporates into Part D section 1851(b)(1)(A) of the Act, the Secretary may provide exceptions to the general rule that an individual is eligible to enroll in a PDP serving the geographic area in which the individual resides. We note also that section 1860D-1(b)(1)(B) of the Act directs us to adopt enrollment rules “similar to,” but not necessarily identical to, those under Part C, giving us some flexibility to modify the Part C enrollment rules as appropriate. We believe that incarcerated individuals should be ineligible to enroll in a PDP. We therefore provide in § 423.4 of the proposed rule that a PDP's service area would exclude areas in which incarcerated individuals reside (that is, a correctional facility).

Were we not to adopt these rules, individuals who are incarcerated or who live outside of the U.S. and who fail to enroll in a PDP or MA-PD when first eligible, or remain enrolled thereafter, would face a late enrollment penalty if they later decide to enroll in Part D. In accordance with section 1860D-13(b) of the Act and § 423.46 of the proposed rule, individuals are subject to a late penalty if there is a continuous period of eligibility of at least 63 days, beginning after the termination of the individual's initial enrollment period, during which the individual was not enrolled in a PDP or MA-PD plan. Thus, in order to avoid such a penalty, these individuals would have to enroll in a PDP or MA-PD, but would not be able to avail themselves of the plan's services while they are incarcerated or outside of the plan's service area. Under our proposed rule, individuals residing outside the U.S. and incarcerated individuals would be ineligible to enroll in a PDP. Thus, there would not be a continuous period of eligibility of at least 63 days during the time of the individuals' residency abroad or incarceration. Consequently, these individuals would not need to enroll in Part D in which they would not be able to receive services or benefits in order to avoid the late penalty.

Generally, a Part D eligible individual enrolled in an MA plan that does not provide qualified prescription drug coverage (that is, an MA-PD plan) may not enroll in a PDP; however, there are two exceptions. Section 1860D-1(a)(1)(B) of the Act permits a Part D eligible individual who is enrolled in either a MA private fee-for-service plan (as defined in section 1859(b)(2) of the Start Printed Page 46638Act) that does not provide qualified prescription drug coverage or an MSA plan (as defined in section 1859(b)(3) of the Act) to enroll in a PDP. We have provided for these exceptions in § 423.30(b) of the proposed rule.

Except as provided above, in accordance with section 1860D-1(a)(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 42 CFR 422.50 through 422.68 of proposed regulations.

As discussed in § 423.859, section 1860D-3(a)(1) of the Act requires the Secretary to ensure that each Part D eligible individual will have available a choice of enrollment in at least two qualifying plans, at least one of which must be a PDP. If this choice is not available, in accordance with section 1860D-2(b) of the Act, a fallback prescription drug plan will be made available and individuals will be eligible to enroll in that fallback plan if eligible for Part D. As discussed in § 423.855 of the proposed rule, a fallback prescription drug plan is a prescription drug plan offered by an eligible fallback entity that provides only standard prescription drug coverage (without supplemental benefits), provides access to negotiated prices, and meets the requirements for PDP sponsors (except as otherwise indicated), and other requirements specified by CMS.

2. Part D Enrollment Process (§ 423.34)

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 rule for MA-PD plans under certain provisions of section 1851 of the Act. As such, we have incorporated, where possible, the MA enrollment and disenrollment requirements provided under 42 CFR 422.50-422.80. In accordance with section 1860D-1(b)(1)(C) of the Act, we would establish a process to automatically enroll a full benefit dual-eligible individual (as defined under section 1935(c)(6) of the Act) who has failed to enroll in a PDP or MA-PD plan by either the end of the individual's initial enrollment period or upon becoming dual eligible after his/her initial enrollment period. Prior to this automatic enrollment process, a widespread education and information campaign (described later in this subpart at § 423.48) will equip full benefit dual eligible individuals with information designed to explain options and encourage these individuals to take an active role in their enrollment rather than wait to be automatically enrolled.

An full benefit dual eligible individual who fails to enroll in a PDP or MA-PD would be automatically enrolled into a prescription drug plan that has a monthly beneficiary premium equal to or below the subsidy amount available to low-income beneficiaries in accordance with section 1860D-14(a)(1)(A) of the Act. This premium may not exceed the low-income benchmark premium amount established under section 1860D-14(b)(2) of the Act. The calculation of the low-income benchmark premium is further described in § 423.780(a) of the proposed rule.

Section 1860D-1(b)(1)(c) of the Act also directs us to enroll full benefit dual eligible individuals who fail to elect a PDP or MA-PD plan on a random basis if more than one PDP within an area has a monthly beneficiary premium equal to or below the low-income benchmark premium. To ensure that each full benefit dual eligible individual will have access to at least one PDP in each region, section 1860D-14(b)(3) of the Act provides that the premium subsidy amount for eligible individuals (including full benefit dual eligible individuals) cannot be less than the lowest monthly beneficiary premium for a PDP in a region. A more detailed discussion of the premium subsidy is found at § 423.780 of the proposed rule.

Two major issues require resolution because the statutory provisions are inherently contradictory in their requirements. The first is how to provide qualified prescription drug coverage to those full benefit dual eligible individuals who are in an MA-only plan and who have failed to enroll in a PDP or MA-PD plan. The second issue is how to provide qualified prescription drug coverage to a full benefit dual eligible enrolled in the Medicare Advantage program when the premium for the MA-PD plan(s) offered by an individual's MA organization exceeds the low income benchmark premium. We discuss each of these issues below and request comments on how best to reconcile these conflicting provisions.

A literal reading of section 1860D-1(b)(1)(C) of the Act would seem to preclude automatic enrollment of full benefit dual eligible individuals into MA-PD plans. The language requires automatic enrollment into a “prescription drug plan” whose premium meets the aforementioned requirements. However, section 1860D-1(a)(1)(B)(ii) of the Act precludes Part D eligible individuals enrolled in MA (not MA-PD) plans (other than those in some private fee-for-service or MSA plans) from enrolling in PDPs. To reconcile this apparent conflict, we propose that that the reference in section 1860D-1(b)(1)(C) of the Act to “prescription drug plans” be interpreted as including both PDPs and MA-PD plans, thereby allowing automatic enrollment of an MA full benefit dual eligible into a MA-PD plan offered by the same MA organization offering his or her MA plan if the basic premium for such plan does not exceed the low-income benchmark premium amount.

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 harmonizes and gives full effect to competing provisions of the statute. The rationale for automatic enrollment is to ensure that full-benefit dual eligible individuals receive outpatient drug coverage under Part D because Medicaid will no longer provide medical assistance for covered Part D drugs to such individuals. For full benefit dual eligible individuals enrolled in MA plans, we believe this objective is best accomplished by enrolling them in one of the MA-PD plans offered by their MA organization.

To the extent that the MA-only portion of the MA-PD plan parallels the coverage under a full benefit dual eligible individual's MA plan, enrolling the individual in the MA-PD plan would be similar to permitting the individual to remain enrolled in the MA plan while simultaneously enrolling the individual in a PDP. In other words, enrolling the individual in a MA-PD plan offered by the same MA organization is, in effect, simply adding qualified prescription drug coverage to the individual's MA benefits. For this reason, we believe the reference to “prescription drug plans” in section 1860D-1(b)(1)(C) of the Act should be interpreted as requiring enrollment of a full benefit dual-eligible into a plan that will provide the individual with Part D drug benefits in addition to any other benefits the individual receives under Start Printed Page 46639Medicare, whether through Medicare Part A and/or Part B, or through enrollment in the Medicare Advantage program under Part C. We believe this interpretation promotes the policies underlying sections 1860D-1(b)(1)(C) and 1860D-1(a)(1)(B)(ii) of the Act, giving full effect to both statutory provisions. However, in the above situation, if the basic premium for the MA-PD plan exceeds the low-income benchmark premium amount, under section 1860D-1(b)(1)(C) of the Act, we could not permit automatic enrollment of a full-benefit dual eligible into that MA-PD plan.

One possible solution for an MA full benefit dual eligible enrolled in an MA organization in which all of its MA-PD premiums exceed the allowable amount might be to allow that individual to remain in the MA plan and to automatically enroll him or her into a PDP that meets the premium requirements. However, according to section 1860D-1(a)(1)(A) of the Act, only a part D eligible individual who is not enrolled in an MA plan may enroll in a PDP, thereby precluding this option.

Another possibility would be to involuntarily withdraw MA full benefit dual eligible individuals from their MA plan, which would default them to Original Medicare and then automatically enroll them into a PDP. However, there is no statutory authority to involuntarily disenroll the individual from his or her MA plan. In fact, we believe doing so would violate section 1851(c)(3)(B) of the Act, which provides that an individual who makes an MA election is considered to have continued to have made this election until he or she voluntarily changes the election, or the plan is discontinued or no longer serves the individual's service area.

Enrolling an MA full dual eligible individual whose MA organization's MA-PD plan premiums exceed the benchmark amount into a MA-PD plan offered by another MA organization whose premiums are equal to or below the benchmark would be problematic as well since this would violate section 1851(c)(3)(B) of the Act. In addition, this would not be possible if the monthly premium amount of any available MA-PD plan is greater than the low-income benchmark premium amount. Similarly, we believe that requiring these full benefit dual eligibles to disenroll from the Medicare Advantage program so that we may automatically enroll them into less expensive PDPs would violate section 1851(c)(3)(B) of the Act.

One last option would be to allow the beneficiary to go without outpatient prescription drug coverage unless the beneficiary chooses a MA-PD plan on his or her own accord. We do not see this as a reasonable option because it appears to violate section 1860D-1(b)(1)(C) of the Act and would leave a vulnerable beneficiary without outpatient drug coverage. While the statute prescribes an automatic enrollment process for full benefit dual eligibles who fail to elect a PDP or MA-PD plan, it is important to note that such full benefit dual eligible individuals may decline the enrollment or change the enrollment if they so choose. One option for such a process could be to provide notice to the individual to allow him or her to choose another option. Since the statute affords full benefit dual eligible individuals a special election period, they would be able to make a change in their election of PDP or MA-PD plans. Furthermore, while automatic enrollment of these individuals could be restricted to plans with premiums at or below the low-income benchmark premium, these dual eligible individuals would not be restricted to electing only such plans. However, if they select a high premium plan, they would be responsible for paying the difference between the premium and the low-income subsidy amount.

In implementing the automatic enrollment process for full benefit dual eligible individuals, we are considering which entity is best suited to perform the automatic and random enrollment function. The options include CMS or the State performing this function, or a contracted entity or entities on their behalf. If we (or a contractor on our behalf) performed the auto assignment, we would expect consistent, clear oversight of the process, thus making the process uniform nationally; this might also reduce the need to transmit data from CMS to the States. However, this would be highly dependent on receiving timely, accurate Medicaid eligibility data from States and would also make us responsible for a new national workload of indeterminate size. An alternative is for States (or their contracted entities) to be responsible for performing the automatic enrollment. This approach may be appropriate because States have experience with random assignments through their Medicaid programs and have more immediate access to changes in Medicaid eligibility. We would define random assignment, establish standards for notification, and so forth, to ensure consistency. If we were to pursue this option, we could consider this function as necessary for the proper and efficient administration of the State plan. We would need to provide States with accurate and timely Part D data. States could be compensated for this effort through Federal financial participation (FFP) in their administrative expenses or through contractual or other arrangements. We invite comment on the most appropriate method of performing automatic assignment of dual eligibles and the appropriate entity to do so.

3. Part D Enrollment Periods (§ 423.36)

a. General Enrollment Periods

The MMA directs us to establish three coverage enrollment periods: (1) The initial enrollment period; (2) the annual coordinated election period; and (3) special enrollment periods (SEPs). Generally, in accordance with section 1860D-1(b)(2)(B) of the Act, the initial enrollment period for Part D is the same as the initial enrollment period established for Part B. Specifically, this period is the seven-month period that begins three months before the month an individual first meets the eligibility requirements for Part B and ends three months after that first month of eligibility. However, if an individual's initial enrollment period for Part B ends prior to May 15, 2006, his or her initial enrollment period under Part D will be extended to May 15, 2006. 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 would establish 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.

Examples:

Month individual first entitled to part A or enrolls in part BInitial enrollment period for part D
June 1, 2005November 15, 2005-May 15, 2006.
November 1, 2005November 15, 2005-May 15, 2006.
December 1, 2005November 15, 2005-May 15, 2006.
Start Printed Page 46640
January 1, 2006November 15, 2005-May 15, 2006.
February 1, 2006November 15, 2005-May 31, 2006.
May 1, 2006February 1, 2006-August 31, 2006.
June 1, 2006March 1, 2006-September 30, 2006.

In accordance with section 1860D-1(b)(1)(B)(iii) of the Act, the annual coordinated election period for Part D is concurrent with the annual coordinated election period for the Medicare Advantage program under section 1851(e) 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. The annual coordinated election period for MA and MA-PD plans will also occur during this time. 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 would be November 15 through December 31 for coverage beginning on January 1 of the following year.

b. Special Enrollment Periods

The MMA also establishes special enrollment periods (SEPs). Special enrollment periods allow an individual to disenroll from one PDP and enroll in another PDP. Special enrollment periods are available as follows:

(i) Involuntary Loss, Reduction, or Non-notification of Creditable Coverage

As discussed below in § 423.56, Part D eligible individuals who fail to enroll in Part D during their initial enrollment period will not be subject to late penalties if they had creditable prescription drug coverage during the time they were not enrolled in Part D. Part D eligible individuals who involuntarily lose creditable prescription drug coverage, such as the loss of employment and associated health benefits, or the loss of coverage due to the death of a spouse, would have an SEP to enroll in a Part D plan, in accordance with section 1860D-1(b)(3)(A) of the Act. Pursuant to section 1860D-1(b)(3)(A)(iii) of the Act, this SEP does not apply when the individual loses creditable coverage because of his or her failure to pay premiums for that coverage, since this would be considered a voluntary loss of coverage for purposes of this section.

The SEP would also apply if the individual was never informed that the coverage that he or she had was not creditable or if current creditable coverage was reduced so that it was no longer creditable coverage under this part. In cases where the coverage is reduced, the SEP applies only when the current creditable coverage is reduced by the issuer or group through which the individual has such coverage. Therefore, if the covered individual voluntarily reduces the coverage, for example, to reduce his or her premium costs, this SEP would not apply because that action is voluntary.

(ii) Erroneous Enrollment

Section 1860D-1(3)(B) of the Act provides for an SEP for an individual who has been subject to enrollment errors, similar to those provided for both Part A and Part B under section 1837(h) of the Act. We are using the same language provided for this SEP at § 423.36(c)(3) of the proposed rule as provided under § 407.32, which establishes a special enrollment period for enrollment errors for Part B. Specifically, § 407.32 refers to misrepresentation, inaction, or error by the Federal government that affects an individual's enrollment rights.

(iii) Individuals With Medicaid Coverage

Section 1860D-1(b)(3)(D) of the Act provides an SEP for an individual who is eligible for both Medicare and full benefits under a State's Medicaid program, as those individuals are described in section 1935(c)(6) of the Act. This would be available to individuals who are determined full benefit dual eligible after the initial enrollment period. This would also provide these individuals who have been automatically assigned to a plan the opportunity to change PDPs or MA-PDs at any time.

(iv) Individuals Age 65

During the Part D eligible individual's initial enrollment period, the individual has several options available, including remaining in original Medicare and enrolling in a PDP or enrolling in an MA-PD plan. Section 1860D-1(b)(3)(E) of the Act provides an SEP to an individual who enrolls in a MA-PD plan upon first becoming eligible for benefits under Part A at age 65 and then discontinues that enrollment and elects coverage under original Medicare and a PDP at any time during the 12-month period beginning on the effective date of the MA-PD plan election. This specific provision applies only to an individual who elects an MA-PD plan during his or her initial enrollment period, as defined under section 1837(d) of the Act, which surrounds his or her 65th birthday. This SEP will only apply to individuals who elect an MA-PD plan, and does not pertain to individuals who elect an MA-only plan.

(v) Exceptional Circumstances

Finally, in addition to providing for special enrollment periods as mentioned above, section 1860D-1(b)(3)(C) of the Act authorizes us to establish SEPs in exceptional circumstances. CMS has historically included in regulation those SEPs that have been specifically named in the statute and established the SEPs for exceptional circumstances in our manual instructions rather than through regulation. While we intend to continue establishing these exceptional SEPs through this process, we seek public input on other SEPs that should be considered through our manual process.

In addition to those SEPs established by the MMA, we intend to apply certain SEPs established under the MA program. The SEPs that will be included from the MA program under this section will include the following conditions—

(1) The PDP terminates its service area or is terminated in the area in which the individual resides;

(2) The individual moves out of the plan's service area; or

(3) The individual demonstrates to us, in accordance with guidelines that we establish, that the PDP offering the plan substantially violated a material provision of its contract with regard to the individual or the organization, its agent, representative, or the PDP materially misrepresented the plan's Start Printed Page 46641provisions in marketing the plan to the individual.

There is a disconnect issue between the enrollment period provided for individuals eligible to enroll in a Part D plan at section 1860D-1(b)(1)(iii) of the Act and the open enrollment periods provided for MA eligible individuals under section 1851(e)(2) of the Act that we believe can be addressed through a special election period. Section 1851(e)(2) of the Act provides for an open enrollment period for MA eligible individuals in which they may change their election once. Beginning in 2006, this period is limited to 6 months from January through June and in 2007, to 3 months, from January through March. The MMA, at Section 102 (a)(6), further limits individuals' elections during this open enrollment period to a specific “type” of plan. Specifically, an individual who is enrolled in an MA-PD plan may elect another MA-PD plan or elect original Medicare and a PDP, but cannot elect an MA-only plan. However, there is no corresponding enrollment period that would allow the individual to elect a PDP during this time. We propose to remedy this situation by establishing an SEP for these individuals under our aforementioned authority to establish SEPs for exceptional circumstances.

In addition, section 1851(e)(2)(D) of the Act provides for a continuous open enrollment period for institutionalized individuals throughout the year. We also propose establishing an SEP for this through our exceptional circumstance authority in our manual instructions.

4. Effective Dates of Coverage and Change of Coverage (§ 423.38)

Section 1860D-1(b)(1)(B)(iv) of the Act authorizes us to apply the effective date requirements provided under the MA program at section 1851(f) of the Act. The three enrollment periods provided under Part D are the initial enrollment period, the annual coordinated election period, and special enrollment periods. The effective dates for these enrollment periods are as follows:

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 or enrollment in Medicare benefits under Part A and/or Part B is effective the first day of the month the individual is entitled to or enrolled in Part A or Part B. Since the Part D provisions are not effective until January 1, 2006, we would clarify that in no case may enrollment in Part D be effective prior to this date. We are also clarifying 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 or enrollment in Medicare benefits under Part A and/or Part B is effective the first day of the calendar month following the month in which the enrollment in Part D is made. We have reflected these provisions in § 423.38(a) of our proposed rule.

b. Annual Coordinated Election Period

In accordance with section 1851(f)(2) of the Act, as incorporated into Part D under section 1860D-1(b)(1)(B)(iv) of the Act, an enrollment made during the annual coordinated election period is effective as of the first day of the following calendar year, that is, January 1st. We have reflected this provision in § 423.38(b) of the proposed rule.

c. Special Enrollment Period

A special enrollment period is effective in a manner that we determine to ensure continuity of health benefits coverage. We have reflected this provision in § 423.38(c) of the proposed rule.

5. Coordination of Beneficiary Enrollment and Disenrollment Through PDPs (§ 423.42)

Section 1860D-1(b)(1)(A) of the Act authorizes us to establish a process for enrollment in and disenrollment from prescription drug plans. We have outlined the coordination of enrollment and disenrollment through PDP organizations in the regulations at § 423.42. A Part D eligible individual who wishes to make, change, or discontinue an enrollment during applicable enrollment periods may do so by filing an enrollment with the PDP directly. We envision a paper enrollment form process and recognize the opportunity for other possible mechanisms that may prove secure, convenient for beneficiaries, and valuable to the efficient administration of the program. We request comments on other possible enrollment mechanisms that address data security and integrity, privacy and confidentiality, authentication, and other pertinent issues.

We have added a provision at § 423.42(e) of the proposed rule that would ensure that beneficiaries are not disenrolled from their PDP at the end of the calendar year. We are including this provision to clarify that beneficiaries will remain enrolled in their PDP without having to actively re-enroll in that PDP at the beginning of the calendar year.

6. 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. We are applying the provisions of section 1851(g)(3) of the Act that provide authority for the basis of terminations for MA plans. We codify these in 42 CFR 422.74. The disenrollment provisions for PDPs are outlined in § 423.44 of our proposed rules, including the basis for disenrollment—both optional and required—and guidance for notice requirements.

Specifically, a PDP is required to disenroll an individual who dies, who 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 who knowingly misrepresents to the PDP that he or she has received or expects to receive reimbursement for covered Part D drugs through third-party coverage. A PDP is also required to disenroll an individual if the PDP's contract is terminating.

We are particularly interested in receiving comments about the requirement to disenroll individuals from a PDP if they no longer reside in the service area. Under the MA rules at 42 CFR 422.74, individuals who are out of the service area for more than 6 months will be disenrolled, unless the MA plan offers visitor or traveler benefits. We recognize the inherent difference between PDPs and MA plans (in particular, the range of services each provides) and that it may not be reasonable to apply the disenrollment requirements established under MA in the same way for PDPs. For example, while we have a limit on the length of time an MA enrollee may be out of the service area, this limit may not be necessary as long as there are specific assurances from the PDP that individuals will have access to PDP benefits while out of the area (provided the individual remains in the United States). For example, a regional PDP may either have a corporate or other relationship with a PDP in another region or have a network of pharmacies in other regions (or nationwide) that would provide access to prescription drugs outside of the region on the same basis as in-network pharmacies within the enrollee's region of residence. We Start Printed Page 46642would appreciate any comments on this area.

In addition to providing requirements for disenrollments that are required by the PDP, we also provide under § 423.44(d) of our proposed rule that PDPs may disenroll individuals who do not pay monthly premiums or whose behavior is disruptive. However, we believe there are important beneficiary implications for those PDPs who disenroll individuals for these reasons. An individual who is disenrolled for failure to pay monthly PDP premiums, disruptive behavior, or misrepresentation of third party reimbursement will not be provided an SEP permitting him or her to enroll in another PDP. Since the individual generally will not be able to enroll in either a PDP or an MA-PD until the next annual coordinated election period, he or she may be subject to late enrollment penalties under § 423.46 of the proposed rule.

We plan to establish re-enrollment guidelines under the MA program for optional disenrollment for nonpayment of premium and disruptive behavior. We recognize, however, that this policy may not be appropriate for PDPs. If the individual is prohibited from re-enrolling in each of the MA plans available in an area, original Medicare is always available to provide and deliver services to that that individual. Under the PDP infrastructure, if the individual was prohibited from re-enrolling in each PDP available, there is no other option available. We would appreciate comments regarding the applicability of prohibiting re-enrollment in a PDP.

As with the MA program, PDP sponsors will be required to provide proper notice to the beneficiary and afford him or her due process in accordance with the procedures outlined in our manual instructions. For example, a PDP that wishes to disenroll a beneficiary for disruptive behavior must receive prior approval from CMS and must demonstrate to CMS” satisfaction that it has made a good faith effort to resolve the issue prior to requesting the disenrollment. CMS reviews 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.

7. 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 PDP or MA-PD. The calculation of the amount of the penalty is described in § 423.286(d)(3) of our proposed rule. Specifically, the penalty amount for a Part D eligible individual for a continuous period of eligibility is the greater of an amount that CMS determines is actuarially sound for each uncovered month in the same continuous period of eligibility that is subject to this penalty; or 1 percent of the base beneficiary premium for each uncovered month in the period. An uncovered month is any month in which individual does not have creditable coverage at any time during that month. Because Part D is a voluntary benefit, it is susceptible to selection bias, where predominantly sicker beneficiaries, with higher than average prescription drug expenses enroll, and healthier, less expensive beneficiaries defer participation. Such a dynamic would make the initial premium levels higher than Congress expected at the time of MMA's enactment. Left unchecked, the selection bias would be exacerbated, potentially resulting in what has been called an insurance “death spiral.” To ensure the affordability of the Part D benefit and the stability of the associated premium, we believe there is a strong public policy value in creating an incentive for immediate, widespread enrollment in this new, heavily subsidized benefit.

The process for documenting creditable coverage is discussed in § 423.56 of the proposed rule.

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

As provided under section 1860D-1(c)(1) of the Act, we would conduct activities designed to broadly disseminate information about Part D coverage to individuals who were either eligible or prospectively eligible for Part D benefits. This information would be made available to beneficiaries at least 30 days prior to their initial enrollment period as provided under § 423.38 of our proposed rule. The information dissemination activities for Part D would 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 would include the following comparative information with respect to 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 would not provide information on quality and performance or consumer satisfaction surveys during—

(1) The first plan year; or

(2) The next plan year if it were impracticable to obtain that information, or if the information were not available.

As stated in section 1860D-1(c)(4) of the Act, we would also 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 anticipate conducting 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 would place an emphasis on ensuring that low-income individuals eligible for or currently enrolled in Part D benefits were 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 State health insurance assistance programs (SHIPs)—and would coordinate with other Federal programs providing assistance to low-income individuals. In addition, we would 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, and private community organizations serving Medicare beneficiaries. Materials and information would be made available in languages other than English, where appropriate.

We would require, as described in § 423.48 of our proposed rule, that each organization offering a prescription drug plan or MA-PD plan provide us Start Printed Page 46643annually with the information to disseminate to individuals who are currently or prospectively eligible for Part D benefits. This information would enable beneficiaries to make informed decisions regarding their Part D coverage options. Organizations offering a prescription drug plan or MA-PD plan would be required to provide this information in a format and to use standard terminology that we would specify in further operational guidance.

Under the recently implemented Medicare Prescription Drug Discount Card and Transitional Assistance Program (42 CFR parts 403 and 408), we took the unprecedented step of establishing a price comparison Web site available through http://www.medicare.gov to provide beneficiaries with information about drug card sponsors' negotiated drug prices in actual dollars—including dispensing fee information—for the purpose of comparing negotiated prices across approved card programs. The prices and fees on the price comparison Web site reflect an estimate of the maximum prices beneficiaries will experience at the point of sale. The Web site also includes information about generic substitutes. 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 propose extending 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 http://www.medicare.gov. Our drug card experience shows that providing drug price information can significantly reduce prices and we believe that information about negotiated drug prices will assist beneficiaries in deciding which Part D plan will offer them the greatest financial advantage. We propose building on our experience in implementing the drug discount card price comparison Web site as we develop requirements for the Part D price comparison Web site, and we are seeking comments on how to provide information in the drug benefit to help achieve maximum drug savings.

Since the introduction of http://www.medicare.gov in 1998, CMS has 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 http://www.medicare.gov is the most reliable and consistent information available.

Much of the information available through http://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. As a result of the Medicare Modernization Act (MMA), we are receiving the largest call volume ever for 1-800-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 coverage. The caller can always talk to a live person at 1-800-MEDICARE to get the facts they need. When a beneficiary calls 1-800-MEDICARE, we can send them a personalized brochure that allows them to look at discount cards based on their drug needs and their preferences about how to get their medicines, and their enrollment forms. 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.

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

Section 1860D-1(b)(1)(B)(vi) of the Act directs CMS to use rules similar to those established under section 1851 of the Act to review PDP's marketing materials and application forms. While all entities with which CMS does business with are required to adhere to all Federal laws, with regard to marketing, it is important to refer here to section 1140 of the Act, prohibiting the misuse of symbols, emblems, or names in reference to Social Security or Medicare. While we have not reiterated this provision in our proposed rule, we believe that it is important to provide such reference in this discussion.

We are generally replicating the marketing provisions established under § 422.80 for MA plans as appropriate for PDPs. Therefore, § 423.50(a) of our proposed rule would provide guidance for our review of marketing materials, definition of marketing materials, deemed approval, and standards for PDP marketing.

While we generally replicated MA provisions, we recognize that the differences between PDPs and MA plans may require different marketing requirements. For example, while we prohibit enrollment forms from being accepted in provider offices or other places where health care is delivered under the MA rules at 42 CFR 422.80, this may not be appropriate to extend to relationships between PDP sponsors and pharmacies with respect to marketing a PDP. We invite comment regarding the applicability of the MA marketing requirements to PDPs.

We are proposing to add § 423.50(a)(3) in order to establish a program that recognizes consistent compliance with marketing guidelines by providing for streamlined approval of marketing materials submitted by PDP sponsors that have demonstrated such compliance. Called the “File and Use” program, organizations that have demonstrated to us that they continually meet a specified standard of performance will have certain types of marketing materials (such as advertising materials or other materials that do not describe plan benefits) deemed to be approved by us if they are not disapproved within five days of submission to us for prior approval. Thus, under these circumstances, organizations only need submit material for our approval five days prior to their distribution.

The advantages of File & Use are that the organization can decrease the time it takes to begin using certain marketing materials and improve planning and Start Printed Page 46644budgeting for publication of these materials. Since PDPs will be new to the CMS marketing review process, we intend to not allow PDPs to qualify for the File & Use program until they have been in the program for a specified period of time, as determined by us, and establish consistent compliance with marketing guidelines.

We are also aware that the ability to provide additional products (for example, financial services) to Medicare beneficiaries could provide additional tools to help beneficiaries manage their expenses and financial security, and could be a strong incentive for potential PDP sponsors to participate in Part D. We ask for comments on the advisability of allowing such products to be provided in conjunction with PDP services and the appropriate limitations on such activities. We note that in accordance with HIPAA privacy rules, the PDP sponsor may have to obtain beneficiary authorization to market certain products.

10. Information Provided to PDP Sponsors and MA Organizations

Section 1860D-1(b)(4)(A) of the Act authorizes us to provide PDP sponsors and MA organizations with information about Part D eligible individuals so that their organizations may facilitate the marketing and enrollment of beneficiaries in their PDP and MA-PD plans and is intended solely for these purposes. That information is intended to assist in the outreach to individuals to ensure participation in the Part D program, as well as to reduce costs to those plans.

While the statute provides us with broad authority to share information with PDPs and MA organizations, we have operational questions, especially regarding any potential adverse impact on beneficiaries. To the extent we were to share such information with PDP sponsors and MA organizations, should beneficiaries be given the ability to choose not to have their information shared with these entities? To the extent that such information is shared for purposes of marketing, should PDP sponsors and MA organizations be able to use this information to contact beneficiaries only through written communications, or should telephone contacts be permitted, and, if so, under what circumstances? We also have questions as to whether such information should be provided by CMS upon request, or only at specific, scheduled times during the year (for example, just prior to the Annual Coordinated Election Period). Further, we would like to know what specific information we could provide to PDP or MA organizations that would facilitate their marketing and enrollment activities. The new authority provided in section 1860D-1(b)(4)(A) of the Act gives us the ability to permit plans to interact with prospective enrollees on a different basis. At the extreme, plans would be permitted to market directly to Medicare beneficiaries, based on contact information we provide, using approved materials, but otherwise bypassing CMS. At the other extreme, current rules regarding the marketing activities of MA plans would remain unchanged. Because Part D is an entirely new, voluntary benefit that would not otherwise be available to beneficiaries absent positive enrollment, there arguably exists a compelling difference in beneficiary interests relative to marketing under Part D (including both PDP and MA-PDs) versus under Part C (for purposes of MA only). We therefore encourage input from the public on these specific concerns and the provision in general.

While this section and discussion may appear to raise HIPAA Privacy rule issues with regards to disclosure of information between CMS and PDPs sponsors or MA-PD organizations, the statute explicitly provides for these activities. Therefore, the Privacy Rule, including the disclosure of protected health information, does not apply to the uses provided for by this section.

11. 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 this section of our proposed rule, that must disclose whether the prescription drug coverage that they provide to their members who are Part D eligible is creditable coverage.

Section 1860D-13(b)(4)(A)-(G) of the Act lists seven forms of creditable coverage: Coverage under a PDP or under an MA-PD; 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. However, the definition of a Medicare supplemental (Medigap) policy, is under CMS' jurisdiction. This term is being clarified in subpart T of this regulation to coordinate with implementation of the Medicare prescription drug benefit.

In addition to the forms of creditable coverage identified in section 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 coverage. In 42 CFR 423.56, we propose expanding the list of types of creditable coverage to include health insurance policies sold in the individual market (with the exception of policies that meet the definition of excepted benefits under section 2791 of the Public Health Service (PHS) Act, 42 U.S.C. 300gg-91). This category would include any policies that included prescription drug coverage, whether as part of a more comprehensive policy or as an independent “stand-alone” drug policy, that may have been sold to Medicare beneficiaries. Such stand-alone policies do not meet the definition of an excepted benefit under the Federal statute, even though States may regulate them as “limited” or “supplemental” benefit plans. It would also include comprehensive individual market policies with drug coverage that may have been sold to individuals before they became eligible for Medicare.

It is important to include these policies as creditable coverage. There are a variety of reasons why Medicare beneficiaries may have had individual market coverage, instead of Medigap coverage, after becoming eligible for Medicare. For example, as discussed in the preamble for subpart T, certain policies which will be regulated as Medigap policies after January 1, 2006, do not meet the definition of a Medigap policy prior to that date. Therefore they do not come within the scope of the statutory list of types of creditable coverage. Similarly, if an individual purchased a policy with prescription drug coverage before becoming eligible for Medicare, under title XXVII of the PHS Act, 42 U.S.C. 300gg, et seq., the individual has a guaranteed right to continue to renew the policy. Again, while the policy might have met the definition of a Medigap policy had it been marketed and sold to Medicare beneficiaries, it does not meet those criteria, and does not come within the scope of the statutory list.

We believe it is appropriate to give beneficiaries credit for this coverage, which does not fall within the scope of any of the types of creditable coverage listed in the statute, but which clearly fits within Congress' intent to provide credit for prior prescription drug coverage, and require that the individuals be informed of whether Start Printed Page 46645their drug coverage is creditable and of the choices they will need to make relative to Part D enrollment.

We are also adding coverage provided by the medical care program of the Indian Health Service, Tribe or Tribal organization, or Urban Indian organization (I/T/U) which is described under the Indian Health Improvement Act, 25 U.S.C. 1601 et seq. As a result of adding individual market and Indian Health Service coverage to the list of creditable coverage, beneficiaries with both of these types of drug coverage would receive notice of whether this coverage is creditable. We invite comments as to whether there are still more forms of coverage that we should consider creditable coverage.

As discussed above 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 would 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 * * *”

We are interpreting “to the individual” in this case as being to the average individual under the plan, as opposed to the sponsor of the plan. We believe that the relevant concern in this case is whether the beneficiary has been in a risk pool that on average provided benefits of equal value to Part D. Consequently, for purposes of determining creditable coverage, we are proposing to evaluate the actuarial value of the alternative coverage by means of a single test applied to all coverage: Will the expected plan payout on average under the coverage be at least equal to the expected plan payout under the standard benefit? For example, we propose to require sponsors of group health plans to determine the actuarial equivalency of each group health plan to the standard if, on average, the actuarial value of enrollee drug coverage under the plan as a whole is at least equal to the actuarial value of standard prescription drug coverage under Part D. (This approach set forth in Subpart R of this proposed rule concerning payments to sponsors of retiree prescription drug plans.) In other words, the calculation of actuarial equivalence would be based on the average plan payout across all benefit packages and all participants and beneficiaries receiving coverage under the sponsor's group health plan. We seek comments on our assumption that this approach is both familiar to employers (and unions) and imposes minimum burden on sponsors.

We are also proposing that any entity seeking to offer creditable prescription drug coverage must attest to this actuarial equivalence (or non-equivalence) 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 other words, we would not require CMS approval of this analysis, but would require that it be submitted to CMS and made available to participants upon request.

In coordination with the provisions regarding the late enrollment penalty in § 423.46 of our proposed rule, we would establish a process under which these entities would disclose the creditable status of their prescription drug coverage to us and to each part D eligible beneficiary enrolled in such coverage.

We intend to describe the process for providing this disclosure, including guidance on the content, placement, and timing of the disclosure. The content of this notice and its timely receipt will be important components in the decision making process for beneficiaries, as the creditable status of the beneficiary's drug coverage will have a direct impact on the assessment of late enrollment penalties associated with Part D premiums. Equally important is the notification to the beneficiary of any subsequent changes in the creditable status of his or her coverage. Because beneficiaries have a limited time in which to make decisions about their Part D coverage without facing a penalty, it is important that the notice of creditable status be provided in a timely and conspicuous manner. However, we are also concerned about the potential administrative burden imposed by this requirement and are therefore soliciting comments on the format, placement, and timing of such a notice.

There are several approaches we will consider. One approach would be to incorporate the required disclosure into materials these entities routinely disseminate to their Part D eligible beneficiaries. We could provide standard language to be inserted into such materials. We would benefit from comments regarding the types of materials that could provide an appropriate vehicle for this purpose and ways to ensure that the notice is conspicuous and readily identified by recipients, particularly in those instances where the coverage is not creditable. Another approach would be to require each entity to issue a separate notice to each Part D eligible enrollee. This type of notice would be most conspicuous and would therefore increase the likelihood that beneficiaries would become aware of the creditable status of their prescription drug coverage. Because beneficiaries are subject to financial penalties for the failure to maintain creditable coverage when they enroll in Part D, a separate notice may better inform beneficiaries and ensure that they take appropriate action to avoid such penalties.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA), Pub. L. 101-93, requires that certain entities that offer health coverage provide covered individuals with a document, called a “certificate of creditable coverage,” that establishes the time period during which the coverage was in effect. Implementing regulations provide a model “Certification of Creditable Coverage.” Those regulations require that a certificate be produced and disseminated to individuals when their coverage ends. We have considered requiring that information about the creditable status of prescription drug coverage be included in this certification. However, since the certification required under HIPAA is not required to be provided until after such coverage has ended (or upon request), it would arrive too late to assist beneficiaries in deciding whether to enroll in Part D. However, the HIPAA certification may serve as a useful model and we invite comments about the administrative burden associated with producing and disseminating a similar notice of creditable status to beneficiaries.

The timing and frequency of these notices is also a key consideration. The initial notice of creditable status could be coordinated with the first Annual Coordinated Enrollment Period for Part D, which begins November 15, 2005, to ensure that beneficiaries have this information when making decisions regarding their Part D coverage. Another option would be to coordinate this disclosure with the end of the first Part Start Printed Page 46646D initial enrollment periods and the annual coordinated election period, both of which end May 15, 2006. Beneficiaries would also need to know about any change in the creditable status of existing coverage before such a change becomes effective so that they have sufficient time to decide whether to obtain Part D coverage. If a beneficiary's creditable drug coverage ends or is changed to the extent that it is no longer creditable, the beneficiary has a Special Enrollment Period (SEP) during which the beneficiary can enroll in Part D without financial penalty. Thus, we believe that such notice should be provided, at a minimum, at these two important times, as well as upon the beneficiary's request.

We invite comments on how best to ensure that beneficiaries receive timely and adequate notice of the creditable status of their prescription drug coverage without imposing a significant administrative burden on entities that provide such coverage. We also note that the statute requires entities to disclose the creditable status of this coverage to us, and we invite comments on the possible methods of providing such disclosure. Given the importance of knowing whether coverage constitutes “creditable coverage,” we would like to receive feedback regarding whether it would be a significant administrative burden for group health plans and other sponsors to include in disclosures an indication of the value of their drug benefit, the total amount of the annual premium for their drug benefit, and the amount of the annual drug benefit premium that the beneficiary will be required to pay.

Section 1860D-13(b)(6)(C) of the Act provides that an individual who was not adequately informed that his or her prescription drug coverage was not creditable may apply to CMS to have such coverage treated as creditable coverage for purposes of not having the late penalty imposed. We envision establishing a process in which an individual could apply for reconsideration of the late enrollment penalty based upon not being adequately informed. In this process, we would instruct beneficiaries as to the type of information that should be submitted as well as where the beneficiaries should submit the information. The process could also include CMS, or an entity with which CMS may contract, receiving and reviewing information related to the reconsideration, including validating that the entity in which the individual had previously been covered had provided the required disclosure. We appreciate comment on this process.

C. Voluntary Prescription Drug Benefit and Beneficiary Protections

1. Overview and Definitions (§ 423.100)

Subpart C of part 423 implements 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 Social Security Act. This subpart sets forth requirements regarding—

  • The benefits offered by PDP sponsors and MA organizations that offer qualified prescription drug coverage.
  • The establishment of prescription drug plan service areas.
  • Access standards with regard to covered Part D drugs.
  • Information dissemination by PDP sponsors and MA Organizations offering qualified prescription drug coverage.
  • Disclosure to beneficiaries of pricing information for generic versions of covered Part D drugs.
  • Privacy, confidentiality, and accuracy of PDP sponsors' beneficiary records.

Section 423.100 of our proposed rule also includes definitions for terms that are frequently used in this subpart. Generally, we clarify the definitions in § 423.100 in the relevant parts of section II.C of this preamble. However, we believe that additional clarification is needed with regard to the terms “covered Part D drug” and “dispensing fee” in order to provide necessary context for the Part D benefit requirements in this subpart. We are providing that clarification below.

a. Covered Part D Drug

The definition of a covered Part D drug in § 423.100 of our proposed rule closely follows the statutory definition in section 1860D-2(e) of the Act. According to this definition, a covered Part D drug must be 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 would include prescription drugs, biological products, and 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 includes “medical supplies associated with the injection of insulin (as defined in regulations of the Secretary).” We propose 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 would specifically exclude drugs or classes of drugs, or their medical uses, which may be excluded from coverage or otherwise restricted under Medicaid, 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. We are concerned that the aforementioned exclusion of 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 (item 7 above) may prove too narrow to address inappropriate tying arrangements. We may consider expanding this exclusion and solicit public comments on how to reduce the risk of abusive tying arrangements.

The definition of a covered Part D drug would also exclude 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). By including the language “as so prescribed and dispensed or administered,” section 1860D-2(e)(B) makes a distinction between what would be paid for under Part D as opposed to Part B. This language indicates that Congress was aware that some covered Part D drugs could qualify for payment under Part B in some circumstances and Part D in other circumstances, depending on the way those drugs were dispensed or administered. Dispensation or administration should be interpreted to include the setting, personnel, and method involved, and not simply the route of administration.

One goal of Part D is to fill any gaps in existing Part B coverage of drugs. Part B has a limited and specific drug benefit covering drugs furnished “incident to” a physician's service (for example, certain injectable drugs that are not usually self-administered and furnished incident to Start Printed Page 46647a physician office visit); drugs furnished as a supply to covered items of durable medical equipment; certain oral drugs (immunosuppressive, and certain oral anti-cancer and anti-emetic drugs); certain immunizations; and several other drugs and biologicals. Part D cannot pay for these drugs because payment is available under Part B.

Section 1860D-2(e)(2)(B) of the Act that 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 interpret this to mean that if payment could be available under Part A or B to the individual for such drug, then it will not be covered under Part D. This will be the case even if a beneficiary has Part A, but not Part B or vice versa, since, as we explain in section F of this preamble and at § 423.265(c) of the Act, PDP sponsors must offer a uniform benefit package in order to carry out 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 PDP 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. 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. Thus, for all Part D eligible individuals, drugs covered under Parts A and B are available if they choose to pay the appropriate premiums.

We believe that the phrase “for that individual” in 1860D-2(e)(2)(B) of the Act is intended to capture the fact that under local medical review policies (LMRPs), a drug that might be covered under Part B for an individual in one area of the country might not be covered in another area of the country. Thus, what is covered “under Part B for that individual” may be, as discussed earlier, different in different geographic regions. Under this reading, in a region where a drug is covered under Part B, it would be considered “available” to “that individual” whether he or she had elected to enroll in Part B or not.

The Part D drug coverage described in this proposed rule does not alter the coverage or associated rules for drugs that are currently covered by Medicare prior to the MMA, such as those included in the following list, which offers examples but is not meant to be exhaustive—

1. Drugs furnished incident to a physician's service that are not usually self-administered by the patient.

2. Drugs used in immunosuppressive therapy furnished to a beneficiary who receives an organ transplant for which Medicare makes payment.

3. Drugs administered to ESRD patients and separately billed by dialysis facilities. These would include erythropoetin (EPO), both when administered in the dialysis facility or furnished to an ESRD patient for self-administration.

4. Drugs taken orally during cancer chemotherapy provided that they have the same active ingredients as chemotherapy drugs and are used for the same indications as chemotherapy drugs which would be covered if they were not self-administered and were administered as incident to a physician's professional service, and certain oral drugs prescribed for use as an acute antiemetic as part of an anticancer chemotherapeutic regimen if the drug is administered by a physician.

5. Blood clotting factors for hemophilia patients competent to use such factors to control bleeding without medical supervision, and items related to the administration of those factors.

6. Supplies (including drugs) necessary for the effective use of covered durable medical equipment, including those which must be put directly into the equipment and furnished to a beneficiary via the equipment (for example, amphotericin B, an anti-fungal agent, administered with an infusion pump, or inhalation drugs furnished to a beneficiary via a nebulizer).

7. Pneumococcal pneumonia vaccines, hepatitis B vaccines, and influenza virus vaccines.

We intend to ensure that the Part D benefit “wraps around” Part B drug benefits to the greatest extent possible. For example, Part D would cover immunosuppressive drugs furnished to Medicare beneficiaries who did not have their transplant paid for by Medicare (e.g., a beneficiary who had his or her transplant paid for by a private insurer when he or was employed, and the beneficiary has now enrolled in Part B). Part D could pay for these immunosuppressive drugs for these beneficiaries since Part B is prohibited by statute from paying for them. Therefore, we are soliciting comments concerning any drugs that may require specific guidance with regard to their coverage under Part D, and any gaps that may exist in the combined “Part D & B” coverage package.

b. Dispensing Fees

The Medicare Modernization Act (MMA) does not define the term “dispensing fee,” although the terms “dispensing fee” and “dispense” appear several times throughout the Act. Section 1860D-2(d)(1)(B) states that negotiated prices available under Part D, “shall take into account negotiated price concessions * * * and include any dispensing fees for such drugs.” Sections 1860D-15(b)(3) and (e)(1)(b) of the Act provide that reinsurance and risk corridor payments will be based on allowable costs that include “costs directly related to the dispensing of covered part D drugs during the year.” The costs used in calculating the retiree drug subsidy also include the “costs directly related to the dispensing of covered part D drugs during the year” as provided in section 1860D-22(a)(3)(C)(ii) of the Act. Section 1860D-2(e)(1)(B) of the Act specifically includes the medical supplies associated with the injection of insulin (as defined in our proposed rule); this is the only reference to supplies associated with drug administration in the Part D drug benefit provisions of the MMA.

Because the statute is ambiguous on the meaning of “dispensing fee,” in this proposed rule we are not proposing a specific definition of “dispensing fee,” but instead are offering three different options we believe would be reasonable, permissible definitions of the term. We invite comments on each of the definitions proposed below.

Option 1: The dispensing fee would 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 would 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 1 would differentiate between “dispensing” a covered Part D drug and “administering” one in order to restrict the scope of these fees to include only those charges for pharmacy services related to the preparation and delivery of a covered Part D drug. Under option 1, the dispensing fee could not include Start Printed Page 46648any charges associated with administering the drug once the drug has already been transferred to the beneficiary. Thus, for example, the fee would not include any professional fees (such as skilled nursing services), durable medical equipment (such as an external infusion pump or an IV pole), supplies (such as tubes and dressings), or even follow-up telephone calls from the pharmacy to the patient to check on the patient's progress with the drug.

Option 2: The dispensing fee would include the activities included in Option 1, but in addition would 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 would include the activities in Option 2, but in addition would 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.

Our proposed options 2 or 3 would also frame the definition so that supplies, equipment, and the professional services associated with administering the drug would be limited to cases where: (a) A typical patient with the condition at issue could not receive the benefit of the medication in the absence of the associated supplies, equipment or professional services, and (b) the patient is receiving home infusion therapy.

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

However, we also recognize that options 2 or 3 would eliminate current gaps in coverage relative to home infused drugs. We have limited options 2 and 3 to cases of home infusion because this is the only circumstance we know of where the additional services associated with administering the drug would not already be covered under Medicare Part A or B and would be necessary to ensure effective delivery of the drug. (For example, infusion therapy provided in a hospital outpatient setting or in a physician office could be covered under Part B. Infusion therapy by a hospice could be covered as part of the hospice benefit, if a patient meets the conditions for hospice care.) However, there may be related issues with respect to the administration of other drugs (for example, vaccines and injectable long-acting antipsychotic drugs), and we solicit comments regarding any implications for our proposed options for defining dispensing fees.

Home infusion therapy equipment, supplies, and services typically are used in order to administer medications to patients using intravenous, subcutaneous, and epidural routes. Drug therapies commonly administered via infusion include antibiotics, chemotherapy, pain management, parenteral nutrition and immune globulin. Generally, home infusion therapy includes coordinating the varied services a patient might need in order to receive infusion in the home. For example, a home infusion company might provide, or facilitate the provision of, skilled nursing services, durable medical equipment (such as an external infusion pump or an IV pole), supplies (such as tubes and dressings), education of the patient, pharmacy services (including mixing the drugs if necessary), and delivery services. A home infusion company might also call the patient periodically to monitor care. Based on our research, home infusion is covered under the medical benefits of most commercial insurers and MA plans as a cost-effective alternative to inpatient care for administering drugs that cannot be self-administered for treatment of acute or chronic medical conditions in patients who are sufficiently ill to be unable to visit an outpatient clinic or physician's office to receive the necessary therapy. Home infusion providers generally bill private insurance plans for these services by billing separately for the drug, and also charging a per diem for other services. The per diem charge represents the average daily expense associated with non-pharmaceutical expenses (including nursing services), such as equipment, supplies, labor, and non-nurse clinical services involved in the compounding, preparation, delivery, administration, and monitoring for a given drug therapy.

While Parts A and B pay for some home infusion therapies (through, for example, the drugs and supplies that are provided incident to the provision of a home infusion pump), in other cases home infusion therapies would not be covered by Medicare Parts A and B (for example, when the drug is administered in the home through an intravenous drip and not a pump). In addition, infusion therapy policies may vary from region to region based on local DMERC coverage policies.

Options 2 and 3 would therefore allow us to include in the Part D dispensing fee items and services that might be considered essential in order to effectively utilize the drug benefit. However, it would also extend the definition of dispensing fee beyond the mere transfer of possession of the drug. Also, to the extent that professional services are included in the definition of dispensing fees, we are concerned about 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. In addition, as discussed in subpart D of this preamble, PDP sponsors and MA organizations offering MA-PD plans will be required to offer quality assurance and medication therapy management programs. These programs could be used for pharmacies to follow up with patients and ensure that patients are properly administering their drugs or adhering to their drug regimens. We are concerned about beneficiaries being charged for quality assurance services as part of the dispensing fee, when such charges might have already been included in the cost of the premium.

Finally, we note that any definition we adopt for purposes of Part D would 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. In addition, the Secretary is not required to pay any dispensing fee under section 1842(o)(2) of the Act, while in Part D, the dispensing fee is included in the negotiated price of a drug.

c. Long-Term Care Facility

We request comments regarding our definition of the term long-term care facility in § 423.100, which we have 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 are Start Printed Page 46649particularly interested in whether intermediate care facilities for the mentally retarded or related conditions (ICF/MRs), described in § 440.150, should explicitly be included in this definition given Medicare's special coverage related to mentally retarded individuals. It is our understanding that there may be individuals residing in these facilities who are dually eligible for Medicaid and Medicare. Given that payment for covered Part D drugs formerly covered by Medicaid will shift to Part D of Medicare, individuals at these facilities will need to be assured access to covered Part D drugs. Our proposed definition limits our definition to skilled nursing and nursing facilities because it is our understanding that only those facilities are bound to Medicare conditions of participation that result in exclusive contracts between long-term care facilities and long-term care pharmacies. However, to the extent that ICF/MRs and other types of facilities exclusively contract with long-term care pharmacies in a manner similar to skilled nursing and nursing facilities, we would consider modifying this definition.

2. Requirements Related to Qualified Prescription Drug Coverage (§ 423.104)

Under section 1860D-11(e)(2)(A) of the Act, we may approve as PDP sponsors or MA organizations offering MA-PD plans 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 and § 423.104(d) of our proposed rule, qualified prescription drug coverage may consist of either standard prescription drug coverage or alternative prescription drug coverage. Alternative prescription drug coverage may include supplemental benefits, and this coverage is referred to as “enhanced alternative coverage” (these concepts are discussed in detail below).

We would review and approve current and potential PDP sponsors' proposed prescription drug plans and current and potential MA organizations' proposed MA-PD plans consistent with the rules described in section II.F.6 of this preamble. We will further articulate requirements regarding the approval of qualified prescription drug coverage in written policy guidelines and other CMS instructions.

Section 1860D-1(b)(1) of the Act provides that we establish an enrollment process for prescription drug plans that uses rules similar to, with limited exceptions, those governing enrollment in an MA plan under various subsections of 1851 of the Act, including portions of 1851(g). Section 1851(g)(1) of the Act provides that an MA organization must accept without restrictions individuals who are eligible to elect enrollment in its MA plan. Accordingly, section § 423.104(b) of our proposed rule provides that a PDP sponsor offering qualified prescription drug coverage would be required to offer its plan to all Part D eligible individuals residing in the plan's service area. We note that, unlike a local MA-PD plan, a prescription drug plan is not eligible for a capacity waiver as described in 42 CFR 422.60(b) of our proposed rule.

a. Standard Prescription Drug Coverage

As provided under section 1860D-2(b) of the Act and codified in § 423.104(e) of our proposed rule, “standard prescription drug coverage” would consist 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 would be $250, the initial coverage limit would be $2,250, and the out-of-pocket threshold would be $3600. Once a Part D enrollee reached the annual out-of-pocket threshold, his or her nominal cost-sharing would 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.)

A multiple source drug is defined under section 1927(k)(7)(A)(i) of the Act as a drug for which there are two or more drug products that are (1) rated as therapeutically equivalent by the Food and Drug Administration (FDA), (2) are pharmaceutically equivalent and bioequivalent, as defined in section 1927(k)(7)(C) of the Act, and as determined by the FDA, and (3) are sold or marketed in a State during the relevant time period. Section 423.100 of our proposed rule provides definitions for therapeutically equivalent and bioequivalent drugs based on the definitions provided in sections 1927(k)(7)(A) of the Act and section 505(j)(8) of the Food, Drug, and Cosmetic Act, respectively. The term therapeutically equivalent refers to drugs that are rated as therapeutic equivalents under the Food and Drug Administration's most recent publication of “Approved Drug Products with Therapeutic Equivalence Evaluations.” Section 423.4 of our proposed rule defines a generic drug as a drug for which an application under section 505(j) of the Federal Food, Drug, and Cosmetic Act is approved. To clarify, generic drugs are both bioequivalent and therapeutically equivalent to an innovator drug. Section 423.100 of our proposed rule also clarifies that a preferred drug refers to a covered Part D drug on a prescription drug plan or MA-PD plan's formulary for which beneficiary cost-sharing is lower than for a non-preferred drug on the formulary.

According to section 1860D-2(b)(4)(C) of the Act, and as defined in § 423.100 of the proposed rule, beneficiary costs for covered Part D drugs are only considered incurred (for purposes of applicability toward beneficiary spending against the annual out-of-pocket limit) if they are—

1. Incurred 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. Incurred 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 State Pharmaceutical Assistance Program (SPAP) described in § 423.454 of the proposed rule; and

3. Incurred with respect to covered Part D drugs that are either included in a prescription drug plan or MA-PD plan's formulary or treated as being included in a plan's formulary as a result of a coverage determination, redetermination, or appeal under §§ 423.566, 423.580, and 423.600 of our proposed rule.

As a point of clarification, we also propose that beneficiary costs incurred under the following circumstances count as incurred costs consistent with the definition of that term in § 423.100 of our proposed rule (with plans explicitly accounting for such price differentials in the actuarial valuation of their coinsurance in their bids):

  • 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, as described in section II.C.4.a of this preamble, and
  • Any differential between an out-of-network pharmacy's usual and customary price for a covered Part D Start Printed Page 46650drug purchased in accordance with the out-of-network access rules described in section II.C.5 of this preamble and the plan allowance for that covered Part D drug.

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, would count as incurred costs. This provision thus creates a distinction between all enrollee out-of-pocket expenditures and those that are counted toward the out-of-pocket threshold (incurred costs).

In § 423.100 of our proposed rule, we define the terms “person,” “insurance or otherwise,” “group health plan,” and “third-party payment arrangement” in such a way as to strike what we believe to be an appropriate balance between: (1) allowing certain individuals or charitable organizations to provide financial assistance to Part D enrollees that would be counted toward those enrollees' incurred costs, and (2) reducing incentives for current employers, other insurers, and government programs to reduce their current levels of coverage and replace that coverage with Part D wrap-around benefits, thereby requiring Medicare to pay for drug costs that were previously borne by other payers. We propose defining “person” in such a way that other individuals, such as family members, could pay for covered Part D drug cost-sharing on behalf of Part D enrollees. The term “person” is also defined more broadly than a human being based on legal definitions of the term that include corporate entities or organizations. This definition of “person” is consistent with other statutory definitions of the term “person,” including 1 U.S.C. 1, which provides that in interpreting an Act of Congress, unless the context indicates otherwise, the term “person” includes corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals.

We believe that bona fide charities unaffiliated with employers or insurers could not be excluded from financially assisting Part D enrollees with covered Part D drug expenditures and having those expenditures count toward enrollees' incurred costs. Although allowing such financial contributions to count toward incurred costs could increase Medicare expenditures by allowing more beneficiaries to qualify, and to qualify sooner, for coverage above the out-of-pocket threshold, we expect that the number of people who are both assisted by charitable organizations and have expenditures high enough to qualify for protection against high out-of-pocket expenditures would be small. Since there will be many Part D eligible beneficiaries with incomes higher than the low-income subsidy eligibility limits described in § 423.782 of our proposed rule, we believe it is a desirable goal to allow appropriate charitable assistance to count toward enrollees' incurred costs. This interpretation is consistent with (1) our interpretation of the term “person” and (2) our interpretation of the terms “insurance or otherwise,” “group health plan,” and “third-party payment arrangement” (as discussed subsequently in this preamble section). In addition, we note that any arrangements pursuant to which a charitable organization pays a Medicare beneficiary's cost-sharing obligations must comply with the 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 are considering whether assistance in paying enrollees' out-of-pocket cost-sharing obligations provided through prescription drug patient assistance program sponsored by pharmaceutical manufacturers would be allowed under the aforementioned Federal fraud and abuse laws.

We have defined the term “insurance or otherwise” consistent with our policy goal of reducing incentives for current employers, other insurers, and government programs to reduce their current levels of coverage and replace that coverage with Part D wrap-around benefits. The use of the term “insurance or otherwise” in section 1860D-2(b)(4)(C)(ii) of the Act suggests that the Congress understood that programs other than insurance programs would be helping beneficiaries pay for covered Part D drugs.

Section 1860D-24 of the Act, which extends the coordination of benefits provisions required for SPAPs to other types of plans—including Medicaid programs, Section 1115 waiver demonstrations, group health plans, 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”—appears to support our proposed definition of “insurance or otherwise,” in § 423.100 of our proposed rule, as a plan (other than a group health plan) or program that provides, or pays the cost of, medical care (as defined in section 2791(a)(2) of the Public Health Service Act). We note that our definition of “insurance or otherwise” 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.

Therefore, “insurance or otherwise” would include the following programs and entities:

  • Government programs and entities (for example, Department of Veterans Affairs (VA), Department of Labor Federal Workers' Compensation Program, and Federally Qualified Health Centers (FQHCs);
  • Government insurers (for example, Medicaid 1115 demonstrations and the State Children's Health Insurance Program (SCHIP); and
  • Government-sponsored funds (for example, 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).

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 Part D wrap-around coverage provided to beneficiaries by these entities would not count toward incurred costs. Wrap-around coverage provided to Part D enrollees by group health plans and other third-party payment arrangements would also not count as incurred costs. We have defined the term “group health plan” to have the same meaning as in 42 CFR 411.101. In addition, we have defined the term “third party payment arrangements” to mean any contractual or similar arrangement under which a person has a legal obligation to pay for covered Part D drugs.

We request comments regarding the treatment of health savings account (HSAs) vis-à-vis our definition of “group health plan,” “insurance or otherwise,” and “third party payment arrangements.” Our strong preference is not to treat HSAs as group health plans, insurance or otherwise, or third party payment arrangements and therefore to allow HSA contributions to count toward incurred costs, since we see these funds as essentially analogous to a beneficiary's bank account. We also seek comments on how to treat FSAs, health reimbursement accounts (HRAs), and Medicare savings accounts (MSAs), relative to our definitions of group Start Printed Page 46651health plan, insurance or otherwise, and third party payment arrangements.

In proposing this policy, an assessment was made of the need for coordination of the Part D benefit with the Department of Health and Human Services' programs, including the Indian Health Service (IHS) and AIDS drug assistance programs. The IHS is the agency that fulfills the Secretary's unique relationship to provide health services to American Indians and Alaska Natives (AI/ANs) based on the government-to-government relationship between the United States and tribes. The Department has a long history of recognizing AI/AN beneficiaries' dual eligibility for services both from the HIS and from other Department programs. We expect many AI/AN beneficiaries will qualify for full and partial low-income subsidies under Part D. For those not receiving a full or partial subsidy, the IHS may wish to pay for premiums to eliminate any barriers to Part D benefits.

For AI/ANs not eligible for the low-income subsidies and enrolled in a prescription drug plan or MA-PD plan, the costs of covered Part D drugs obtained at an I/T/U pharmacy or a non-IHS retail pharmacy (through an appropriate IHS contract health services referral) will be applied to meet the beneficiary's deductible under qualified prescription drug coverage. These payments will not count as incurred costs towards meeting the out-of-pocket threshold, however. This will ensure that an IHS beneficiary receives a benefit for IHS expenditures between the deductible and the out-of-pocket limit. Once the deductible is met, the IHS will benefit from Part D coverage because the I/T/U pharmacy will be reimbursed for 75 percent of spending (on average) between the deductible and the initial coverage limit. We seek comments on how I/T/U pharmacies and IHS beneficiaries will achieve maximized participation in Part D benefits.

We also assessed the role of the Ryan White CARE Act, and in particular the AIDS Drug Assistance Program (ADAP), which addresses the pharmaceutical needs of the neediest HIV/AIDS population. The implementation of Part D will enable approximately one-half of the ADAP enrollees who are potentially eligible for Part D to qualify for full Medicare low-income subsidies, and an additional 30 percent may qualify for partial low-income subsidies. In addition, for those not receiving a full or partial subsidy, the Part D benefit would pay—depending on the cost-sharing structure employed by the particular prescription drug plan or MA-PD plan—75 percent, on average, of an enrollee's covered Part D drug expenditures between the deductible and initial coverage limit. Although ADAP may realize savings with the implementation of Part D, these may be offset by the increased costs of picking up expenses no longer covered by Medicaid for the dual eligible population.

To ensure coordination of benefits for the HIV/AIDS population, the ADAP program may wish to pay for this population's premiums to eliminate any barriers to Part D benefits. ADAP may also subsidize costs incurred toward a Part D plan's deductible or cost-sharing for those patients unable to afford these costs. It should be noted, however, that when ADAP does subsidize these costs, they would not count as incurred costs and thus may make it less likely that an eligible person would incur costs above the annual out-of-pocket threshold and thus qualify for catastrophic cost-sharing.

ADAPs and other Ryan White “titled” programs are eligible to participate in what is known as the 340B Drug Pricing program and are encouraged to do so. Under Section 340B of the Public Health Service Act, discounted outpatient drugs are available to certain Federally-funded grantees, such as Federally qualified health centers (FQHCs), AIDS drug assistance programs, and certain disproportionate (DSH) hospitals. Upon successful registration, these covered entities are eligible to purchase outpatient prescription medications from drug wholesalers and pharmaceutical manufacturers at significantly reduced prices. All but three ADAPs, which have State-based programs, participate in 340B. About one-half of these States purchase their drugs directly and receive an upfront discount. The other half operate under the rebate model and receive a rebate from manufacturers. Studies have indicated that the States receiving an upfront discount benefit more fully from the 340B program than those States receiving a rebate. States are encouraged to move toward the model of purchasing their drugs directly, as they can realize more savings than States using the rebate model.

We welcome comments on how to maximize the savings for people in need of HIV/AIDS medications under the 340B program. In particular, is it feasible for ADAP programs to participate with prescription drug plans so that the drugs offered to individuals with HIV/AIDS can be offered at 340B prices? In addition, because it is of critical importance for Medicare beneficiaries with HIV/AIDS to comply with their drug regimens, we are soliciting comments regarding the coordination of ADAP and Medicare Part D benefits.

We note that nothing precludes an insurer, group health plan, or other third party arrangement from paying for a Part D enrollee's deductible costs; while these payments will not count as incurred costs vis-à-vis the out-of-pocket threshold, they will not prevent a Part D enrollee from receiving a benefit for expenditures between the deductible and the out-of-pocket 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. Please refer to section II.J of this preamble for a detailed discussion regarding the collection of information regarding third-party reimbursement for covered Part D drugs for the purpose of determining enrollees' incurred costs.

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 and as provided in § 423.104(e)(5)(iv) of our proposed rule, these amounts would be increased over the previous year's amounts by the annual percentage increase in average per capita aggregate expenditures for covered Part D drugs for the 12-month period ending in July of the previous year. The amounts for the annual deductible, initial coverage limit, out-of-pocket threshold, and catastrophic cost-sharing amounts would be rounded to the nearest $5, $10, $50, and $0.05, respectively, as required by sections 1860D-2(b)(1)(B), (b)(3)(B), (b)(4)(B)(ii), and (b)(4)(A)(ii) of the Act, and codified in §§ 423.104(e)(1)(ii), (e)(3)(ii), (e)(5)(iii)(B), and (e)(5)(i)(A)(2) of our proposed rule.

We anticipate that in the first several years after the implementation of Part D, determining the annual percentage increase will be difficult and will require the use of alternative sources of data. We request comments regarding possible alternative data sources we could use to determine the annual percentage increase in the first several years of the Part D program. We will provide further detail regarding the methods and data sources we would use to determine this annual percentage increase in operational guidance to PDP sponsors and MA organizations offering Start Printed Page 46652MA-PD plans prior to the deadline for bid submissions. [FLC#]

Table C-1.—Standard Prescription Drug Coverage Benefits for 2006

Cost-sharing percentageBeneficiary out-of-pocket costsPlan payment percentagePlan payment
Annual Deductible ($0-$250 in spending on covered Part D drugs covered under the plan)100$2500$0
Initial Benefit ($251-$2,250 in spending on covered Part D drugs covered under the plan)25150027511,500
No coverage of costs ($2,251-$5,100 3 in spending on covered Part D drugs covered under the plan)1002,85000
Catastrophic Coverage (after the enrollee has incurred out of-pocket costs on covered Part D drugs covered by the plan greater than $3,600; this is generally equivalent to $5,100 3 in covered spending)The greater of: (1) 5; or (2) $2 for a generic or preferred multiple source drug/$5 for other drugs 195
1 Entities 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.
3 This figure may, in fact, be higher to the extent that a Part D enrollee is reimbursed for out-of-pocket costs for covered Part D drugs covered under his/her plan by a group health plan, insurance or otherwise, or other third party arrangement.

We have 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.” Defined standard coverage basically constitutes standard prescription drug coverage as defined in the statute—with 25 percent coinsurance for costs above the deductible but below the initial coverage limit and cost-sharing for costs above the annual out-of-pocket limit equal to the greater of: (1) A copayment (for 2006, and adjusted annually as specified earlier in this preamble) of $2 for a generic or preferred multi-source covered Part D drug, or $5 for other drugs; or (2) 5 percent coinsurance. Actuarially equivalent standard coverage is used to describe standard coverage with actuarially equivalent alternatives to these cost-sharing requirements and consistent with section 1860D-2(b) of the Act.

Section 1860D-2(b)(2)(A)(ii) of the Act provides that PDP sponsors and MA organizations offering actuarially equivalent standard prescription drug coverage would be permitted to substitute cost-sharing requirements (including tiered structures tied to plan formularies or particular pharmacies in a plan's network) for costs above the annual deductible and up to the initial coverage limit, provided that those alternative cost-sharing requirements were 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. Plans with cost-sharing arrangements that are actuarially more generous than standard prescription drug coverage would be considered enhanced alternative coverage, as defined in section II.C.2.b.ii of this preamble. (Section II.F.2 of this preamble explains the methodology for determining actuarial equivalence).

Based on our interpretation of section 1860D-2(b)(5) of the Act, we also propose allowing plans offering actuarially equivalent standard coverage to establish cost-sharing of an amount that is actuarially equivalent to the expected cost-sharing under § 423.104(e)(5)(i) (taking into account both 5 percent coinsurance and $2/$5 copayments for costs above the out-of-pocket threshold required under defined standard coverage). As previously discussed, section 1860D-2(b)(5) of the Act indicates that plans cannot be prevented from reducing to $0 the cost-sharing applicable to preferred or generic drugs. While this provision only references reductions based on the need to retain a standard benefit, we propose 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 5 percent coinsurance or $2/$5 copayments. Our proposed requirement would function in the same manner as the requirement for actuarial equivalence to alternatives to the 25 percent coinsurance structure for costs above the deductible and below the initial coverage limit, as discussed in further detail in section II.F.4.b of this preamble. Any such alternative cost-sharing arrangements would be reviewed, along with the rest of a plan's benefit design, to ensure that they do not discriminate against certain Part D eligible individuals.

b. Alternative Prescription Drug Coverage

Section 1860D-2(c) of the Act and § 423.104(f) provide that a PDP sponsor offering a prescription drug plan or an MA organization offering an MA-PD plan may offer an alternative prescription drug benefit design, provided that the PDP sponsor or MA organization applies for and receives our approval for the proposed alternative. In order to receive approval to offer an alternative prescription drug benefit design, a PDP sponsor offering a prescription drug plan or an MA organization offering an MA-PD plan would have to meet the requirements related to actuarial equivalence described in section 1860D-2(c)(1) of the Act and discussed in further detail Start Printed Page 46653below (as well as in section II.F.3 of this preamble). It is important to note that, in modifying the standard coverage design to offer alternative prescription drug coverage per the following requirements, plans would have to use defined standard coverage (and not actuarially equivalent standard coverage) as a fixed point of comparison. Because numerous variants of actuarially equivalent standard coverage are possible, it would not be feasible to use actuarially equivalent standard coverage as a point of comparison for alternative prescription drug coverage.

As provided under section 1860D-2(c)(2) of the Act and codified in § 423.104(f)(1) of our proposed rule, any alternative prescription drug benefit design would be required to include a deductible that was no greater than the deductible offered under standard prescription drug coverage. Section 1860D-2(c)(3) of the Act requires that alternative coverage provide the coverage required under section 1860D-2(b)(4), which specifies the requirements for coverage to protect beneficiaries against high out-of-pocket expenditures. As provided in § 423.104(f)(2) of our proposed rule, we are interpreting this requirement to mean that prescription drug plans and MA-PD plans must provide coverage above the out-of-pocket threshold that is at least as generous as that provided under defined standard coverage. In other words, plans could—at their option—reduce cost-sharing below that included under defined standard coverage (the greater of 5 percent coinsurance or $2/$5 copayments).

In addition, section 1860D-2(c)(1)(B) of the Act and § 423.104(f)(3) of our proposed rule would require that the actuarial value of alternative prescription drug coverage's unsubsidized coverage is at least equal to the actuarial value of unsubsidized defined standard coverage. Section 1860D-2(c)(1)(C) of the Act and § 423.104(f)(4) of our proposed rule would require that, under alternative prescription drug coverage, the plan payout at the dollar value of the initial coverage limit under standard coverage, for an individual whose total spending exceeds that limit, is at least equal to that provided under defined standard coverage.

i. Basic Alternative Coverage

Beyond the required parameters for alternative coverage discussed above, we are interpreting 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 would refer to alternative coverage that is actuarially equivalent to defined standard prescription drug coverage, as described in section II.C.2.a of this preamble. Enhanced alternative coverage would refer to alternative coverage that exceeds defined standard coverage by offering supplemental benefits and is discussed in section II.C.2.b.ii of this preamble.

Within the parameters for alternative prescription drug coverage described above, a PDP sponsor offering a prescription drug plan or an MA organization offering an MA-PD plan with a basic alternative prescription drug benefit design could theoretically—by combining features such as a reduction in the deductible, changes in cost-sharing (for example, benefit designs that use tiered copayments or coinsurance in an actuarially equivalent manner to the 25 percent cost-sharing above the deductible and below the initial coverage limit under defined standard coverage), and a modification of the initial coverage limit—still be able to maintain an actuarial value of coverage equal to defined standard prescription drug coverage.

Although basic alternative prescription drug coverage within the parameters described above is allowed, it is unclear because of utilization effects whether PDP sponsors and MA organizations could, in fact, offer coverage that meets the statutory requirements other than by modifying cost-sharing as already allowed under actuarially equivalent standard coverage. We invite comments on whether there are basic alternative benefit designs that go beyond actuarially equivalent standard coverage.

ii. Enhanced Alternative Coverage

Section 423.104(g) of our proposed rule would permit PDP sponsors and MA organizations offering an MA-PD plan to provide qualified prescription drug coverage that includes supplemental benefits. Because the actuarial value of any prescription drug coverage benefit package that includes supplemental benefits would exceed that of standard coverage, such coverage must always be alternative drug coverage as described in section II.C.2.b of this preamble. Thus, we refer to any Part D benefit package that includes supplemental benefits as “enhanced alternative coverage.”

Enhanced alternative coverage would include 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 and § 423.104(g)(1)(ii) of our proposed rule. These supplemental benefits would supplement basic prescription drug coverage, providing for a package of benefits that exceeds the actuarial value of defined standard coverage. Supplemental benefits could consist of:

  • 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 described in § 423.104(e)(2), provided these reductions in cost-sharing increase the actuarial value of the benefits provided above the actuarial value of basic prescription drug coverage); and/or
  • Coverage of drugs that are specifically excluded as covered Part D drugs under section 1860D-2(e)(2)(A) of the Act and § 423.100 of our proposed rule.

We propose interpreting “value” to mean the total value as described in section 1860D-2(c)(1)(A) of the Act. We request comments on this interpretation.

Under section 1860D-2(a)(2)(B) of the Act, and proposed in § 423.104(g)(2), 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 offered a plan that provided only basic prescription drug coverage in that same area. Section 1860D-2(a)(3) of the Act defines basic prescription drug coverage as either—

(a) Standard prescription drug coverage (as described in proposed § 423.104(e) and in section II.C.2.a of this preamble) with access to negotiated prices; or

(b) Basic alternative drug coverage (as described in § 423.100 and section II.C.2.b.i of this preamble) with access to negotiated prices.

Similarly, as provided under section 1860D-21(a)(1)(A) and codified in § 423.104(g)(3)(i) of our proposed rule, beginning on January 1, 2006, an MA organization could not offer an MA coordinated care plan, as defined in 42 CFR 422.4 of our proposed rule and section 1851(a)(2)(A) of the Act, 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, required prescription drug coverage, for the purposes of an MA organization Start Printed Page 46654offering an MA-PD plan, would include either: (1) Basic prescription drug coverage, or (2) enhanced alternative coverage, provided there is no MA monthly supplemental beneficiary premium applied under the plan. Such enhanced alternative coverage could be provided without a monthly supplemental beneficiary premium only if a 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 chose to provide enhanced alternative coverage for no additional premium through the application of rebate dollars, such enhanced alternative coverage would constitute required coverage for the purposes of meeting the requirement in section 1860D-21(a)(1)(A) of the Act.

This provision is similar in intent to the restrictions on the offering of enhanced alternative coverage by PDP sponsors found in § 423.104(g)(2) of our proposed rule. As previously mentioned, PDP sponsors are required to offer at least one plan offering basic prescription drug coverage in all areas they serve in order to offer any plan that enhances or supplements that basic coverage. The objective of both of these requirements is to assure that PDP sponsors and MA PD organizations offer at least one option for Part D coverage for a premium at the cost of basic prescription drug coverage.

As a note of clarification, provided a PDP sponsor offers at least one plan in a service area that provides basic prescription drug coverage only, it can offer as many plans that offer enhanced alternative coverage as it wishes. Similarly, an MA organization that offers at least one MA-PD plan that meets the aforementioned test of providing required prescription drug coverage is free to offer plans that provide other types of enhanced alternative coverage for which they can charge a monthly supplemental beneficiary premium, as well as plans that offer no qualified prescription drug coverage.

As provided under section 1860D-21(a)(1)(B)(i) of the Act and codified in our proposed rule at § 423.104(g)(3)(ii)(A), an MA organization could not offer prescription drug coverage (other than that required under Parts A and B of Medicare) to enrollees of an MSA plan. Under section 1860D-21(a)(1)(B)(ii) and § 423.104(g)(3)(ii)(B) of our proposed rule, 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 as articulated previously in this preamble section.

c. Negotiated Prices

Section 1860D-2(d)(1) of the Act requires, as implemented under § 423.104(h) of our proposed rule, that a PDP sponsor or MA organization offering an MA-PD plan 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 would 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 would have to 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. We are interpreting 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 out-of-pocket threshold. In that expenditure range, a beneficiary enrolled in standard prescription drug coverage would be responsible for 100 percent cost-sharing, and the plan would pay no benefits. We are also interpreting the phrase “or other cost-sharing” as a reference to plan designs that may include, as a part of their formulary design, access to negotiated prices on certain drugs but at a tier within their formulary in which the plan would pay no benefits and the beneficiary would be responsible for 100 percent cost-sharing (in other words, a negotiated price would be available and the drug would be on the plan's formulary, but the beneficiary would be responsible for 100 percent of that drug's negotiated price).

As required under section 1860D-2(d)(1)(C) of the Act, prices negotiated with manufacturers for: (1) Covered Part D drugs by either a prescription drug plan or an MA-PD plan; or (2) a qualified retiree prescription drug plan, as described in § 423.882 of our proposed regulation on the Medicare retiree drug subsidy program, with respect to covered Part D drugs provided on behalf of part D eligible individuals would not be taken into account in making “best price” determinations under the Medicaid program. Under current Medicaid best price policy, the largest discount a pharmaceutical manufacturer negotiates in the private market must be passed along to the Medicaid program; however, prices negotiated with manufacturers for covered Part D drugs would not be factored into these calculations as provided under § 423.104(h)(2) of our proposed rule.

Section 423.104(h)(3) would require, as stated in the provisions of section 1860D-2(d)(2) of the Act, that PDP sponsors offering a prescription drug plan and MA organizations offering an MA-PD plan 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, and/or (2) lower covered Part D drug prices at the point of sale. We note that plans may fulfill this requirement through the data submission requirements articulated in proposed § 423.336(c)(1) and § 423.343(c)(1) and discussed in further detail in section II.G.4 of this preamble. In other words, we should be able to determine the proportion of total aggregate price concessions that are passed through to either the Medicare program or to beneficiaries based on the cost data plans would be required to submit to CMS.

As provided under section 1860D-2(d)(2) of the Act and § 423.104(h)(3)(ii) of our proposed rule, information on negotiated prices reported to CMS for the purposes of ascertaining the level of pass-through would be protected under the confidentiality provisions applicable to Medicaid pricing data under section 1927(b)(3)(D) of the Act. We note, however, that these confidentiality protections would not preclude audit and evaluation of negotiated price concession information by the HHS Office of the Inspector General (OIG) and, in fact, that such audits and evaluations may be necessary for carrying out the requirements of section 1860D-4(d)(1) of the Act.

We would specify in operational guidance the format and frequency of these reports. As discussed in section II.G.4 of this preamble, we are proposing to require plans to ensure that price concessions are accounted for separately Start Printed Page 46655from any fair market value administrative fees pharmaceutical manufacturers may pay PDP sponsors or MA organizations. For a more detailed discussion of data submission requirements, please refer to section II.G.4 of this preamble.

As provided under section 1860D-2(d)(3) of the Act and codified in § 423.104(h)(4) of our proposed rule, we would be authorized to conduct periodic audits—either directly or through contracts with other organizations—of the financial statements and records of PDP sponsors and MA organizations pertaining to the prescription drug plans and MA-PD plans they offer. As required in section 1860D-2(d)(3) of the Act, this auditing would 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. Section 423.504(d) of our proposed rule includes additional requirements with respect to auditing of PDP sponsors as a safeguard against fraud and abuse. These fraud and abuse protections incorporate those protections applicable to MA organizations under section 1857(d)(2)(B) of the Act and are discussed in detail in section II.K.6.a of this preamble.

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

Section 1860D-11(a)(1) of the Act requires that a prescription drug plan's service area encompass an entire PDP region, as established by us under § 423.112(b), and § 423.112(a) of our proposed rule codifies that requirement. However, as provided under § 423.112(e) of our proposed rule, a prescription drug plan can be offered in more than one PDP region (provided the plan encompasses the entire PDP region for each region where offered), as well as nationally.

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 under 42 CFR 422.445 of our proposed rule. Section 1860D-11(a)(2)(B) stipulates that PDP regions must be, to the extent practicable, consistent with MA regions as established under section 1858(a)(2) of the Act. As provided under § 423.112(b)(2), however, if we determine that access to Part D benefits would be improved by establishing PDP regions that are different than MA regions, we may establish PDP regions that vary from MA regions. Section 423.112(d) of our proposed rule would allow us to revise the PDP regions we establish as necessary.

In accordance with section 1860D-14(a)(3)(F) of the Act, residents of United States territories are not eligible for the Part D subsidies otherwise provided to low-income individuals. Such territorial residents, however, would be eligible for financial assistance for prescription drug expenses under section 1935(e) of the Act. Note that a new section 1935 of the Act was added by section 103 of the Medicare Modernization Act (MMA) through a redesignation of the current section 1935 as section 1936. The U.S. territories, unlike the 50 United States and the District of Columbia, may continue to receive federal Medicaid grants under section 1108 of the Act to compensate them for drug coverage provided to Part D eligible individuals under specific conditions. For this reason, section 1860D-11(a)(2)(C) of the Act and § 423.112(c) of our proposed rule stipulate that CMS designate a separate PDP region (or regions) for the U.S. territories.

We intend to initially designate both PDP and MA regions by January 1, 2005. In accordance with section 1858(a)(2)(C)(i) of the Act, there will be between 10 and 50 PDP regions within the 50 States and the District of Columbia and at least one PDP region covering the United States territories. The PDP regions, like the MA regions, will become operational in January 2006.

We conducted a public meeting on July 21, 2004, in order to obtain broad public comment on the methodology we should use in establishing both the PDP regions and MA regions for MA regional plans, which would operate as preferred provider organizations (PPOs). The information on that meeting is available at https://www.cms.hhs.gov/​medicarereform/​mmaregions. Using the feedback from that meeting and other research, we are considering a number of issues, including: how we should design PDP regions in order to ensure that all beneficiaries have access to prescription drug plans; how best to ensure access to prescription drug plans through the design of PDP regions that are the same as (or, if necessary, different than) MA regions; how to design a PDP region (or regions) in the U.S. territories; and how we can best discuss with the public the development of both the PDP and MA regions. Separate guidance on the designation of regions will be forthcoming.

Whereas § 423.112 provides that a prescription drug plan's service area must encompass one or more PDP regions, an MA-PD plan's service area would consist of either: (1) one or more MA regions (for a regional MA plan), or (2) one or more MA local areas (for a local MA plan). “MA region” is defined in 42 CFR 422.455(b) of our proposed rule as a region within the 50 States and the District of Columbia as established by CMS. As provided in § 423.112(b)(2) of our proposed rule, we will attempt to establish PDP regions that coincide with MA regions to the extent practicable. “Local MA area” is defined in 42 CFR 422.252 of our proposed rule as a payment area consisting of county or equivalent area that we specify.

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, prescription drug plans and MA-PD plans would be required to 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 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, § 423.120(a)(1) of our proposed rule would require that prescription drug plans and MA-PD plans establish pharmacy networks in which:

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

For the purposes of meeting these access standards, as also provided in DoD's statement of work of solicitation #MDA906-03-R-0002—

  • Urban would be defined as a five-digit ZIP Code in which the population Start Printed Page 46656density is greater than 3,000 persons per square mile;
  • Suburban would be defined as a five-digit ZIP Code in which the population density is between 1,000 and 3,000 persons per square mile; and
  • Rural would be defined as a five-digit ZIP Code in which the population density is less than 1,000 persons per square mile.

We are interpreting the access standard under § 423.120(a)(1) such that a prescription drug plan or regional MA-PD plan would have to meet or exceed the access standards across each region in which it operates, and a local-MA-PD plan would have to meet or exceed the access standards in its local service area. 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 region of its multi-region or national service area. We believe that such an interpretation maximizes plan flexibility while assuring the best possible access to pharmacies for Part D enrollees, and we request comments on our proposed approach.

While prescription drug plans and MA-PD plans would not be precluded from including non-retail pharmacies (for example, institution-based pharmacies) in their networks under our proposed rule, we interpret the access requirements in section 1860D-4(b)(1)(C) of the Act as requiring prescription drug plans and MA-PD plans to count only retail pharmacies as part of their networks for the purpose of meeting the access standard in § 423.120(a)(1). We would consider a retail pharmacy to be any licensed pharmacy from which covered Part D enrollees could purchase a covered Part D drug without being required to receive medical services related to that particular covered Part D drug from a provider or institution affiliated with that pharmacy. In other words, prescription drug plans and MA-PD plans could—and would be encouraged to—include non-retail pharmacies (for example, hospital and clinic pharmacies) in their networks; however, given the limited populations served by such non-retail pharmacies, plans could not count these pharmacies toward our pharmacy access requirements.

We recognize, however, that prescription drug plans and MA-PD plans operating in rural areas with high concentrations of American Indian/Alaska Native (AI/AN) individuals may have a difficult time meeting our access standards if they cannot count pharmacies that are operated by the Indian Health Service, Indian tribes and tribal organizations, and urban Indian organizations (hereinafter referred to as “I/T/U pharmacies”) toward their pharmacy access requirements. We are considering allowing prescription drug plans and MA-PD plans to count I/T/U pharmacies toward their network access requirements, provided: (1) Such pharmacies are under contract with the plan; and (2) 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 an I/T/U pharmacy (or pharmacies) in that count because there is not a sufficient number of non-I/T/U pharmacies in those areas willing or able to contract with the PDP sponsor or MA organization in accordance with its terms and conditions. We invite comments on this proposed exception to our pharmacy access rules, including any impact it might have on pharmacy access for non-AI/AN Part D enrollees residing in those areas.

Section 423.120(a)(1) of our proposed rule would not in any way preclude PDP sponsors or MA organizations offering an MA-PD plan from contracting with pharmacies outside their plans' service areas, provided that the plans meet the pharmacy access requirements within their service areas. Such a feature would be of particular benefit to beneficiaries who spend significant amounts of time outside their prescription drug plan's or MA-PD plan's service area (for example, “snowbirds”) and could make a particular prescription drug plan or MA-PD plan more attractive to them. In addition, the fact that beneficiaries would have access to network pharmacies outside their plan's service area would obviate the need for out-of-network access (discussed in greater detail in section II.C.5 of this preamble) to covered Part D drugs in many cases. Thus, contracting with pharmacies outside a plan's service area could ultimately represent a cost-savings both to plans and beneficiaries, particularly if a plan enrolls a high proportion of beneficiaries who regularly travel outside the plan's service area.

Section 1860D-4(b)(1)(C)(iv) of the Act provides that, in establishing rules for convenient access to network pharmacies, we may include standards with respect to access to long-term care pharmacies for Part D enrollees who reside in skilled nursing facilities and nursing facilities (hereinafter referred to as “long-term care facilities”), as well as for American Indian/Alaska Native (AI/AN) Part D enrollees who obtain their prescription drugs at I/T/U pharmacies. We recognize that given their specialized missions and the narrowly defined subsets of beneficiaries they serve, access to long-term care and I/T/U pharmacies should be preserved. Such access would greatly enhance Part D benefits for enrollees in long-term care facilities, as well as for AI/AN enrollees.

As discussed in section II.C.5 of this preamble, we expect that the out-of-network access requirement articulated in § 423.124(a)(2) would assure access to covered Part D drugs provided by long-term care pharmacies for Part D enrollees residing in long-term care institutions that do not contract with their prescription drug plans or MA-PD plans. Since it is generally the case that long-term care facilities contract with a single long-term care pharmacy, Part D enrollees residing in a long-term care facility could not reasonably be expected to access their covered Part D drugs at another pharmacy if their facility's long-term care pharmacy is not part of their plan's network.

However, we are also considering whether to use the authority provided under section 1860D-4(b)(1)(C)(iv) of the Act to require prescription drug plans and MA-PD plans to approach some or all long-term care pharmacies in their service areas with at least the same terms available under their plans' standard pharmacy contracts. Given Federal nursing home regulations, nursing facilities contract with a long-term care pharmacy to provide prescription drugs and services to their residents. In the absence of direct collaboration between a plan and a Part D enrollee's long-term care pharmacy, it would be difficult for nursing facilities to meet Federal pharmacy management standards.

We are concerned, however, that to the extent that we require 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) with a number of long-term care pharmacies in order to meet our requirement.

We also expect that long-term care pharmacies will be concerned about appropriate reimbursement for services (for example, clinical consultations, emergency medication access with 24-hour-a-day deliveries, specialized packaging, and IV and infusion therapies) that they currently provide long-term care facility residents. It is Start Printed Page 46657possible that recognition of appropriate services would be addressed by provisions arranged by prescription drug plans and MA-PD plans and network pharmacies, with any resulting dispensing charges reflected in permissible dispensing fees. Section II.C.1 of this preamble discusses several options for defining the term “dispensing fees.” However, it is our goal to balance convenient access to long-term care pharmacies with appropriate payment for dispensing fees of efficient facilities. To the extent that we require plans to contract with long-term care pharmacies, it is our goal to assure that long-term care pharmacies charge reasonable dispensing fees to plans (and indirectly to CMS through the direct subsidy paid to prescription drug plans and MA-PD plans). We welcome 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.

Alternatively, we would not require that plans contract with long-term care pharmacies and would, instead, strongly encourage PDP sponsors and MA organizations offering MA-PD plans to negotiate with and include long-term care pharmacies in their plans' pharmacy networks. We seek public comment regarding the advantages and disadvantages of these two approaches.

Similarly, we are considering two options for assuring access to I/T/U pharmacies by AI/AN Part D enrollees per the provisions of section 1860D-4(b)(1)(C)(iv) of the Act. There are currently 201 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. I/T/U pharmacies are unique in several different ways, including that they purchase drugs off the Federal Supply Schedule (FSS); 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.

One approach to assuring access to I/T/U pharmacies under Part D would be to use our authority under Section 1860D-4(b)(1)(C)(iv) of the Act to require that PDP sponsors and MA organizations approach any I/T/U pharmacies in their plan service areas with at least the same terms available under the plan's standard pharmacy contract. We are aware, however, 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. Some examples of standard contract clauses that could be problematic for I/T/U pharmacies include:

  • Prohibitions on waiving copays;
  • Required provision of all drugs on a plan's drug formulary;
  • Requirements that providers bill and/or receive funds electronically to participate in the network;
  • Requirements that claims be submitted within a specific timeframe;
  • Requirements that plans serve all patients without discrimination;
  • Requirements that providers carry private malpractice insurance;
  • Requirements that providers be licensed in the state in which they provide services; and
  • Requirements that binding arbitration be used in the event that any dispute arises with regard to performance or interpretation of any terms of the agreement and the parties are unable to resolve the dispute in an informal fashion.

We expect that, to the extent that we require plan inclusion of I/T/U pharmacies in plan networks, we would provide plans with a model addendum to their standard contracts (should we require them) that would take the special circumstances of I/T/U pharmacies into account. Such an addendum could also be useful for facilitating the inclusion in prescription drug plan or MA-PD plan pharmacy networks of other types of pharmacies (Federally Qualified Health Centers, for example, which are subject to some of the same limitations described above for I/T/U pharmacies that make many standard contract clauses impracticable).

A requirement that plans contract with I/T/U pharmacies could potentially expand plans' market share in areas with high concentrations of AI/ANs. Plans may also benefit from cost-savings as a result of doing business with I/T/U pharmacies given I/T/U pharmacies' heavy reliance on the dispensing of generic drugs. Also, given that IHS/tribal government subsidies of Part D cost-sharing on behalf of beneficiaries will not, as discussed in section II.C.2.a of this preamble, count toward incurred costs, most IHS beneficiaries would almost never incur costs above the out-of-pocket limit; this would likely provide plans with additional cost-savings. On the other hand, we recognize that there is some potential for increased administrative costs for prescription drug plans and MA-PD plans given the need to modify standard contracts (should we require them) and, given the limited electronic capabilities of most I/T/U pharmacies, the processing of paper claims. In addition, the AI/AN population is one with which commercial health plans have little, if any, experience. Given these potential administrative costs, we are reluctant to require contracts with I/T/U facilities if that requirement discourages PDP sponsors and MA organizations from offering plans in service areas with large concentrations of AI/ANs.

Another option for assuring access to I/T/U pharmacies under Part D would be not to require that plans contract with I/T/U pharmacies and, instead, to strongly encourage PDP sponsors and MA organizations offering MA-PD plans to negotiate with and include I/T/U pharmacies in their plans' pharmacy networks. We are concerned, however, that—in the absence of a contracting requirement—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. It is our understanding that I/T/U pharmacies are not currently well integrated in commercial pharmacy 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. We encourage comments regarding these two approaches, their advantages and disadvantages, and their ramifications for AI/AN enrollees who are eligible to enroll in Part D.

As noted earlier, federally qualified health centers (FQHCs) and rural pharmacies face many of the same barriers to inclusion in commercial plan networks as do I/T/U pharmacies. Beneficiaries served by FQHCs and rural pharmacies are often served in those settings because of their financial and geographic circumstances. Plans may have to contract with these pharmacies in order to meet the access requirements in § 423.120(a)(1) of our proposed rule—particularly in rural areas. However, to the extent that they are able to meet the access requirements without doing so, we are concerned about compromised access to network pharmacies by low-Start Printed Page 46658income beneficiaries who rely on FQHC and rural pharmacies for their health care. We solicit comments on permissible ways for us to assure Part D enrollees' access to FQHC and rural pharmacies, among others.

As stated above, we have proposed three options for defining “dispensing fees.” Two of these options take into account some of the costs associated with administering infused covered Part D drugs to the beneficiary. Based on our research, most commercial health plans cover home infusion drugs and services under their medical benefits, given the cost-savings resulting from averted hospitalizations. However, because prescription drug plans do not offer a medical benefit under which to experience cost-savings, we do not believe that prescription drug plans would have an incentive to include home infusion pharmacies in their networks. We are considering using the authority in section 1860D-4(b)(1)(C) of the Act to require that both MA-PD plans and prescription drug plans contract with a sufficient number of home infusion pharmacies in their service area to provide reasonable access for Part D enrollees. Such a requirement would be allowed under Section 1860D-4(b)(1)(C) of the Act because the rules established with respect to convenient access to network pharmacies for Part D enrollees would be at least as favorable to enrollees as those used under the TRICARE Retail Pharmacy program. We seek public comment regarding the advantages and disadvantages of such an approach, how such a requirement could be structured, and any other issues we should consider.

We recognize that some beneficiaries may prefer to obtain their prescription drugs from mail-order pharmacies. While prescription drug plans and MA-PD plans could not offer a mail-order-only option to their beneficiaries or count mail-order pharmacies as part of their networks for the purpose of meeting the access standard in § 423.120(a)(1), prescription drug plans and MA-PD plans would be permitted, as provided under § 423.120(a)(2), to offer a home delivery option via a mail-order pharmacy. Any such home delivery option would be in addition to the retail pharmacies in a 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 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. However, in order for the pharmacy access standards to be waived, the MA-PD plan in question would be required to have a pharmacy network that, per our determination, provides comparable pharmacy access to its enrollees. We would evaluate whether such a plan's network provides comparable access to covered Part D drugs to its enrollees using the same considerations we currently use to evaluate MA plans' other provider networks under 42 CFR 422.112 of our proposed rule.

Similarly, § 423.120(a)(3)(ii) would codify section 1860D-21(d)(2) of the Act, which 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 would be charged under standard prescription drug coverage—the pharmacy access requirements at § 423.120(a)(1) would also be waived.

As provided under section 1860D-4(b)(1)(A) of the Act and implemented in § 423.120(a)(4)(i), PDP sponsors and MA organizations offering an MA-PD plan would be required to permit the participation in their plan networks of any pharmacy that was willing to accept the plan's terms and conditions. However, it is unreasonable to assume that a PDP sponsor or MA organization could establish a network using a uniform set of terms and conditions throughout a service area. Modification of contracting terms and conditions might be necessary, for example, to assure access in remote rural areas or for beneficiaries who obtain their drugs from long-term care pharmacies. Varying terms and conditions might also be required in order for the sponsor to provide a cost effective benefit through rebates and price concessions. The cost estimates for Part D assume that PDP sponsors and MA organizations offering an MA-PD plan would be able to achieve savings from retail prices through formulary and network design. Thus, the requirement at § 423.120(a)(4)(i) of our proposed rule does not mandate a single set of terms and conditions for participation in a pharmacy network.

We seek comment on whether, in order to guarantee that any pharmacy willing to meet a PDP sponsor's or MA organization's contracting terms and conditions could participate in a plan's pharmacy network, we should require that PDP sponsors and MA organizations offering an MA-PD plan make available to all pharmacies a standard contract for participation in their plans' networks. That requirement would not preclude PDP sponsors and MA organizations from negotiating terms and conditions different from those in the standard contract with a subset of pharmacies. These varying terms and conditions would therefore not have to be made available to all pharmacies. We note that, if required, it is our expectation that these standard contracts would require network pharmacies (except for pharmacies—long-term care, I/T/U, and rural pharmacies, for example—for which paper claims are the norm given technology access or coordination of benefits issues) to maintain systems to adjudicate drug claims at the point-of-sale.

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 PDP sponsor's or MA organization's pharmacy network. As defined in § 423.4, “insurance risk” in relation to a network pharmacy refers to risk of the type commonly assumed only by insurers licensed by a State. Insurance risk does not include payment variations designed to reflect performance-based measures of activities within the control of a 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, productivity).

Section 423.120(a)(5) of our proposed rule, based on section 1860D-4(b)(1)(B) of the Act, clarifies that a PDP sponsor or MA organization offering an MA-PD plan would 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 interpret this provision as not restricting PDP sponsors and MA organizations offering MA-PD plans from varying cost-sharing not only based on type of drug or formulary tier, but also on a particular pharmacy's status within the plan's pharmacy network—in essence authorizing distinctions between “preferred” and “non-preferred” pharmacies. We believe that the statute allows these within network (preferred versus non-preferred pharmacy) distinctions to be made despite the “any willing provider” Start Printed Page 46659provision at § 423.120(a)(4)(i) of our proposed rule.

While these within network distinctions are allowed, the statute also requires that any such tiered cost-sharing arrangements in no way increase our payments to PDP sponsors or MA organizations. We are therefore proposing that tiered cost-sharing arrangements based on within-network distinctions could be included in plans' benefits subject to the same actuarial tests that apply for tiered cost-sharing structures based on formulary. Thus, a reduction in cost-sharing for preferred pharmacies could be offered through higher cost-sharing for non-preferred pharmacies or as alternative prescription drug coverage. For further discussion of actuarial equivalence, please see section II.F.4 of this preamble.

We recognize the possibility that plans could effectively limit access in portions of their service areas by using the flexibility provided in § 423.120(a)(5) of our proposed rule to create a within-network subset of preferred pharmacies. In other words, in designing its network, a 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 plan. Our intent is to use the authority provided under section 1860D-11(e)(2)(D) of the Act to review, as part of the bid negotiation process described in § 423.272 of our proposed rule, the design of proposed prescription drug plan and MA-PD plan designs to ensure that they are not likely to substantially discourage enrollment by certain part D eligible individuals. Such a review would preclude the approval of bids submitted by plans that attempt to use strategies such as that outlined above to limit enrollment in portions of their service areas that are more difficult or costly to serve.

We recognize that some beneficiaries may prefer to purchase their prescription drugs at a community pharmacy rather than through a mail-order pharmacy and that community pharmacies typically dispense only 30-day supplies of prescription drugs at a time. Section 1860D-4(b)(1)(D) of the Act would require PDP sponsors and MA organizations offering an MA-PD plan to allow their enrollees to receive benefits at a network retail pharmacy instead of a network mail-order pharmacy, if they so choose. Such benefits could include an extended supply (for example, 45-day, 60-day, 90-day supply) of covered Part D drugs that is typically available only through a network mail-order pharmacy. However, because mail-order pharmacies are often able to provide lower prices to individuals than retail pharmacies, it is possible that the negotiated price for an extended supply (for example, a 90-day supply) of a covered Part D drug would be more costly at a network retail pharmacy than through the network mail-order pharmacy assigned to the enrollee by their prescription drug plan or MA-PD plan. Thus, as provided under § 423.120(a)(6) of the proposed rule, a plan enrollee who chooses to obtain an extended supply of a covered Part D drug through a network retail pharmacy would 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. Since any such differential costs would be associated with benefits covered under a Part D plan, we seek comments on our proposal that this price differential be counted as an incurred cost against the annual out-of-pocket threshold consistent with the definition of “incurred cost” in § 423.100. Under this approach, plans would be required to explicitly account for such price differentials in the actuarial valuation of their coinsurance in their bids. In addition, any such differential would also count toward the deductible for covered Part D expenditures between $0 and the plan's deductible.

b. Formulary Requirements

To the extent that a PDP sponsor or MA organization uses a formulary to provide qualified prescription drug coverage to Part D enrollees, it would be required to meet the requirements of § 423.120(b)(1) and section 1860D-4(b)(3)(A) of the Act to use a pharmaceutical and therapeutic (P&T) committee to develop and review that formulary. As a note of clarification, we interpret the requirement at section 1860D-4(b)(3)(A) of the Act that a formulary be “developed and reviewed” by a P&T committee as requiring that a P&T committee's decisions regarding the plan's formulary be binding on the plan. However, we request comments on this interpretation. In addition, it is our expectation that P&T committees will be involved in designing formulary tiers and any clinical programs implemented to encourage the use of preferred drugs (e.g., prior authorization, step therapy, generics programs).

The majority of members comprising the P&T committee would be required to be practicing physicians and/or practicing pharmacists. In addition, at least one practicing pharmacist and one practicing physician member would have to be experts in the care of elderly and disabled individuals. However, we would also encourage that plans select P&T committee members representing various clinical specialties in order to ensure that all disease states are adequately considered in the development of plan formularies. Section 423.120(b)(1)(ii) of the proposed rule also provides that at least one practicing pharmacist and one practicing physician members on a plan's P&T committee be independent experts. We interpret the statutory language at section 1860D-4(b)(3)(A)(ii) of the Act requiring certain members of the P&T committee to be “independent and free of conflict with respect to the sponsor and plan” to mean that such P&T committee members must have no stake, financial or otherwise, in formulary determinations. In other words, these individuals would be required to be independent and free of conflict with respect not only to a PDP sponsor and its prescription drug plan or an MA organization and its MA-PD plan, but also with respect to pharmaceutical manufacturers. In addition, we solicit public comment with respect to the appropriateness of strengthening the statutory requirement in section 1860D-4(b)(3)(A)(ii) of the Act by requiring, in our final regulations, that more than just one pharmacist and one physician on the P&T committee be independent and free of conflict.

When developing and reviewing the formulary, the P&T committee would be required, under § 423.120(b)(1)(iii) and 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 (for example, randomized clinical trials, pharmacoeconomic studies, outcomes research data, and such other information as the committee determined appropriate). We note that the Public Health Service has developed guidelines for the treatment of HIV disease and related opportunistic infections that may also be useful to plan's P&T committees; these guidelines can be found at http://www.aidsinfo.nih.gov/​guidelines/​. Pharmacoeconomic studies may be considered in clinical decision making by a P&T committee with respect to formulary development. It is our expectation, however, that any cost considerations will be balanced with Start Printed Page 46660clinical considerations in the development and revision of a plan's formulary. The P&T committee would also take into account whether including a particular covered drug in the formulary (or in a particular formulary tier) had any therapeutic advantages in terms of safety and efficacy, per § 423.120(b)(1)(iv) of our proposed rule. Section 423.120(b)(1)(v) of our proposed rule would require that any decisions made by the P&T committee regarding development or revision of a plan's formulary be documented in writing.

As provided under section 1860D-4(b)(3)(C)(ii) of the Act, we will request the U.S. Pharmacopeia (USP) to develop a model set of guidelines that consists of a list of drug categories and classes that may be used by PDP sponsors and MA organizations to develop formularies for their qualified prescription drug coverage, including their therapeutic categories and classes. 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 would 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. However, this would not preclude physicians and other prescribers from prescribing drugs for off label indications, though we strongly encourage prescribers to clearly document and justify off-label use in their Part D enrollees' clinical records. Additionally, the USP model guidelines would not preclude PDP sponsors or MA organizations 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. In addition to developing these initial model guidelines, the USP will revise its classification periodically to reflect changes in therapeutic uses of covered Part D drugs and any additions of new covered Part D drugs. As explained below, PDP sponsors and MA organizations will have some flexibility in developing formularies for prescription drug plans and MA-PD plans.

We expect that the development of these guidelines will require USP to conduct outreach to beneficiary groups and major industries affected by the development of model guidelines. We specifically envision USP conducting multiple consultations and a public meeting with related health care industries and providers (including national representatives of pharmacies); Medicare physicians and other practitioners, including pharmacists; other provider groups, including long-term care providers; the managed care industry; the health insurance industry; pharmacy benefit managers (PBMs); and Medicare beneficiary advocacy groups). These consultations would be conducted with the goal of researching current best practices in formulary development and existing commercial and other standards (for example Medicaid, the Medicare Prescription Drug Discount Card), as well as obtaining informed recommendations concerning the development of the Part D model guidelines. The goal of the public meeting would be to solicit comments on a draft of the model guidelines, which would be developed on the basis of the aforementioned consultations, as well as USP's research and recommendations. As our work with USP gets underway, we will provide further detail on the USP classification in upcoming operational guidance to entities wishing to become PDP sponsors or MA organizations offering MA-PD plans. Also, we wish to make clear that any guidelines established by the USP are applicable only to Part D benefits. They do not require the Secretary to make any decisions or take any actions with regard to classifying or categorizing drugs for any purpose other than implementing the Part D benefit.

Although the USP will develop guidelines, under section 1860D-4(b)(3) of the Act PDP sponsors and MA organizations would have the flexibility to develop their own classification schemes. The USP listing would simply serve as a model set of guidelines. As specified in 1860D-11(e)(2)(D)(ii) of the Act, if the therapeutic classifications within a plan's formulary conform to the USP classification model, we could not determine, based on the formulary's therapeutic classifications, that the plan violates the provision at 1860D-11(e)(2)(d)(i) of the Act and § 423.272(b)(2) that prohibits the design of a plan and its benefits (including any formulary and tiered formulary structure) that substantially discourages enrollment by certain Part D eligible individuals. It is important to note, however, that even if a plan's formulary classifications conform to the USP classification model, its overall formulary design could still be found to substantially discourage enrollment by certain Part D individuals (for example, based on particular drugs selected for inclusion in the formulary and/or proposed cost-tiering structure). If, on the other hand, a PDP sponsor or MA organization offering an MA-PD plan designs its formulary using therapeutic classes and categories that vary from the USP classification model, CMS would evaluate the submitted formulary design to ensure that the proposed therapeutic classification system does not substantially discourage enrollment by certain Part D eligible individuals. We invite comments regarding standards and criteria that we could use to determine that a PDP sponsor or MA organization's formulary classification system that is not based on the model classification system does not in fact discriminate against certain classes of Part D eligible beneficiaries.

Section 1860D-4(b)(3)(C) of the Act and § 423.120(b)(2) require the inclusion of “drugs” in each therapeutic category and class of covered Part D drugs in a plan's formulary, although not necessarily all drugs within such categories and classes. We interpret this requirement to mean that a PDP sponsor or MA organization's formulary would be required to include at least two drugs within each therapeutic category and class of covered Part D drugs within the PDP sponsor or MA organization's formulary (unless there is only one drug in a particular therapeutic class or category, in which case the inclusion of only one drug would be required). Section 423.120(b)(2) of our proposed rule would also require that the drugs included in each therapeutic class or category include a variety of strengths and doses to the extent this is feasible. We believe that the inclusion of at least two drugs in each therapeutic class or category (except for those classes or categories that include only one drug) strikes an appropriate balance between providing 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 note, however, that it is our expectation that plans' formularies will provide Part D enrollees a comprehensive benefit—one that covers an amount and variety of drugs sufficient to treat all disease states. In addition, given that discounts on commonly used generic drugs are typically made available to enrollees under current industry practice and produce cost-savings both for plans and enrollees, we expect that prescription drug plan and MA-PD plan formularies will include a wide range of generic drugs.

As elaborated above, we will evaluate the formularies of plans using a classification system different from the USP model guidelines to ensure that the formulary does not discriminate against certain classes of beneficiaries. We also Start Printed Page 46661intend to strictly enforce rules regarding plans' P&T committees, as described above, as well as coverage determination, reconsideration, and appeals processes, to ensure that Part D enrollees are able to access the drugs they need.

Within the aforementioned parameters, it is certainly possible that a prescription drug plan or MA-PD plan could develop a formulary that employs a number of strategies—for example, financial incentives to encourage use of generics, tiered cost-sharing and other mechanisms that create strong incentives for manufacturers to negotiate favorable prices for covered Part D drugs, prior authorization procedures, therapeutic interchange, step therapy, and use of mail order—to produce cost-savings both for plans and for Medicare. While we are open to these types of strategies as a way to minimize costs for enrollees and for the Medicare program, it is possible that certain vulnerable populations (enrollees in long-term care facilities or those suffering from mental illness or chronic diseases such as AIDS, for example) may be negatively impacted financially if they do not have access to a wide range of drugs in certain therapeutic classes and categories. We seek comments on ways to balance plans' flexibility to use some of the mechanisms described above to maximize covered Part D drug discounts and lower enrollee premiums with the needs of certain special populations of Part D enrollees.

One such population is Part D enrollees residing in long-term care facilities. Given the changes in Medicaid drug coverage introduced by the MMA, we believe it is particularly important to ensure that the drug needs of institutionalized Part D enrollees—most of whom are dually eligible for Medicare and Medicaid—are met. The institutionalized population is generally more sensitive to and less tolerant of many medications. Long-term care pharmacies typically provide an open formulary to prescribing physicians that allows immediate access to a wide variety of medications in many different dosages and delivery forms. We request comments regarding any special treatment (for example, offering certain classes of enrollees an alternative or open formulary that accounts for their unique medical needs, and/or special rules with respect to access to dosage forms that may be needed by these populations but not by other Part D enrollees), we should consider requiring of plans with respect to special populations, as well as suggestions regarding the particular special populations for whom we may want to make allowances.

Under § 423.120(b)(3) of our proposed rule and in accordance with section 1860D-4(b)(3)(C)(iii) of the Act, PDP sponsors and MA organizations could not change therapeutic categories and classes in a formulary other than at the beginning of a plan year, except as we would permit to take into account new therapeutic uses and newly approved covered Part D drugs. Section 423.120(b)(4) of our proposed rule specifies that, in accordance with section 1860D-4(b)(3)(F) of the Act, PDP sponsors and MA organizations offering MA-PD plans would periodically be required to evaluate and analyze treatment protocols and procedures related to their formularies to ensure that their plan members were receiving the best possible care for conditions related to their use of covered Part D drugs. We invite comments as to minimum timeframes for periodic evaluation and analysis of protocols and procedures related to a plan's formulary by PDP plans and MA organizations offering MA-PD plans (for example, quarterly, annually).

In addition, section 1860D-4(b)(3)(E) of the Act requires that PDP sponsors and MA organizations 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) would implement that requirement by defining appropriate notice as at least 30 days prior to such change taking effect during a given contract year. We interpret the statutory term “affected enrollee” as referring to a plan enrollee who is currently taking a covered Part D drug that is either being removed from a plan's formulary, or whose preferred or tiered cost-sharing status is changing. In other words, plans would 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. We note that plans would still be required to provide at least two drugs within each therapeutic category and class of covered Part D drugs within the PDP sponsor or MA organization's formulary (unless there is only one drug in a particular therapeutic class or category), even if they choose to remove a covered Part D drug from their formularies in the middle of a contract year. In addition, we refer the reader to section II.M.5 of this preamble, which discusses formulary exceptions procedures and may be important for enrollees of plans whose formularies change mid-year.

We recognize that both current and prospective enrollees of a prescription drug plan or an MA-PD plan will need to have the most current formulary information by the time of the annual coordinated election period described in § 423.36(b) in order to enroll in the Part D plan that best suits their particular covered Part D drug needs. To this end, and as provided under § 423.120(b)(6) of our proposed rule, PDP sponsors and MA organizations would 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 § 423.36(b)(2) and 30 days subsequent to the beginning of the contract year associated with that annual coordinated election period. We believe this requirement will prevent situations in which prescription drug plans or MA-PD plans change their formulary early in the contract year, without providing appropriate notice, as described in § 423.120(b)(5), to new enrollees. Given that we are proposing that plans provide at least 30 days notice to affected enrollees prior to making formulary changes, it seems reasonable to require, as we propose doing in § 423.120(b)(6), that all marketing materials distributed during the annual coordinated election period reflect the formulary a plan will offer at the beginning of the contract year for which it is enrolling Part D eligible individuals.

As discussed in sections II.C.6.c and II.C.6.d of this preamble, PDP sponsors and MA organizations can get information regarding formulary changes to beneficiaries via an Internet Web site, as well as via explanations of benefits sent to enrollees who utilize their Part D benefits. However, other methods (for example, notification by mail) will have to be used to provide notice to CMS, all affected enrollees, authorized prescribers, pharmacists, and pharmacies about impending formulary changes.

Each PDP sponsor and MA organization offering qualified prescription drug coverage would 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 § 423.120(b)(7) and 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 Start Printed Page 46662be met by a PDP sponsor or MA organization directly, or through contracts or other arrangements between a PDP sponsor or MA organization and another entity or entities.

c. Use of Standardized Technology

In accordance with the requirements of section 1860D-4(b)(2)(A) of the Act, § 423.120(c) of our proposed rule would require that PDP sponsors and MA organizations 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. These standards would be compatible with the administrative simplification requirements of Title XI of the Act and could be based on standards developed by a standard setting organization.

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 are proposing basing 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 PDP sponsors or MA organizations in time for these entities to use the standards (and have their cards approved for use by us) beginning January 1, 2006. It is our intent, however, that these standards require that plans use something other than an enrollee's social security number as an identifier on their cards.

5. Special Rules for Access to Covered Part D Drugs at Out-of-Network 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. We reviewed the definition of an “emergency medical condition” (see § 422.113(b)(1)(i) of our proposed rule) under the MA program to determine whether the “prudent layperson” standard was an appropriate standard for ascertaining whether the need for a covered Part D drug constitutes an emergency. However, we do not believe that the definition of an emergency medical condition, or a variation thereof, is entirely appropriate to prescription drugs. To the extent that a physician (or other prescriber) prescribes a covered Part D drug, we consider that covered Part D drug to likely be medically necessary. The issue of urgency or emergency is difficult to determine from a clinical perspective, however.

Given the inherent difficulties in establishing emergency access standards for covered Part D drugs, we propose to meet the requirements of section 1860D-4(b)(1)(C)(iii) by establishing a broader out-of-network access requirement. As provided in § 423.124(a) of our proposed rule, we would require that PDP sponsors and MA organizations offering MA-PD plans assure 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. We expect that out-of-network access would 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 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 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.

We believe that enrollees under the aforementioned circumstances could not reasonably be expected to access a network pharmacy and must therefore be assured access to an out-of-network pharmacy as provided under § 423.124(a) of our proposed rule. We request comments on our proposed out-of-network access requirements.

We are aware that routine access to out-of-network pharmacies by Part D enrollees may undermine a plan's cost-savings incentives. However, provided adequate access is assured under § 423.124(a), PDP sponsors and MA organizations offering MA-PD plans would have some flexibility to design their out-of-network coverage policies. PDP sponsors and MA organizations offering MA-PD plans may therefore establish reasonable rules to assure that enrollees use out-of-network pharmacies appropriately. For example, PDP sponsors and MA organizations offering MA-PD plans could limit the amount of covered Part D drugs dispensed at an out-of-network pharmacy, require the use of mail order pharmacies as appropriate for extended out-of-area travel, and/or require a plan notification process for individuals who fill their prescriptions at out-of-network pharmacies.

As a point of clarification, enrollees would not be permitted to access prescription drugs that were not considered covered Part D drugs due to application of the prescription drug plan's or MA-PD plan's formulary at an out-of-network pharmacy. Enrollees who require a covered Part D drug that is not on their prescription drug plan or MA-PD plan's formulary would be required to use the coverage determination process described in § 423.566 of our proposed rule.

Both the enrollee and his or her prescription drug plan or MA-PD plan would be financially responsible for covered Part D drugs obtained at an out-of-network pharmacy as described in § 423.124(a) of our proposed rule (in other words, when an enrollee cannot reasonably be expected to access his or her covered Part D drugs at a network pharmacy), though we note that paper claims may have to be filed and payment reconciled after the drug purchase instead of (as would be the case with most, if not all, network pharmacies), at the point of sale. Section 423.124(b)(1) of our proposed rule would require that the Part D enrollee be liable for any cost-sharing, including a deductible, that would have otherwise applied had the covered Part D drug been obtained at a network pharmacy. Such cost-sharing would be applied relative to the plan allowance for that Start Printed Page 46663covered Part D drug, which we propose defining in § 423.100 as the amount prescription drug plans and MA-PD plans use to determine their payment and Part D enrollees' cost-sharing for covered Part D drugs purchased at out-of-network pharmacies in accordance with the requirements of proposed § 423.124(b). We request comments on how to further define the term “plan allowance.” Our understanding is that it is current industry practice to define the plan allowance as the lowest of the contractual discount offered to pharmacies in a plan's standard contract (as described above, we are soliciting public comment regarding whether we should require PDP sponsors and MA organizations to offer a standard contract to all pharmacies), maximum allowable cost (MAC), or the pharmacy's usual and customary price (described below).

Thus, for example, if the beneficiary would have been liable for 25 percent coinsurance at a network pharmacy, he or she would pay 25 percent of the plan allowance for that covered Part D drug. If, on the other hand, the beneficiary would have been liable for a $10 copay at a network pharmacy, he or she would still pay $10 at the out-of-network pharmacy.

In addition to this cost-sharing, and as provided under proposed § 423.124(b)(2), the enrollee would be responsible for any difference in price between the out-of-network pharmacy's usual and customary (U&C) price and the plan allowance for that covered Part D drug. The term “usual and customary price” refers to the price that a pharmacy would charge a customer who does not have any form of prescription drug coverage. Thus, for example, if an out-of-network pharmacy's U&C price for a covered Part D drug were $100, the plan's allowable cost (including beneficiary cost-sharing) for that covered Part D drug were $90, and the negotiated price for the covered Part D drug at the beneficiary's network pharmacy were also $90, a beneficiary obtaining a drug at the out-of-network pharmacy would pay the cost-sharing that would have otherwise applied at a network pharmacy (for example, 25 percent of the $90 plan allowance), plus the $10 difference—a total of $32.50, in this case (compared to $22.50 at the network pharmacy). We request public comments regarding our definition of usual and customary price. We are concerned that, given our proposed out-of-network access policy, pharmacies may increase their U&C prices to increase their total reimbursement. This would be prejudicial not only to beneficiaries in need of out-of-network access, but also to uninsured individuals purchasing drugs at retail pharmacies, and we seek feedback on permissible ways to prevent such an outcome.

When an enrollee purchases a covered Part D drug at an out-of-network pharmacy consistent with § 423.124(a) of our proposed rule, the cost-sharing he or she pays relative to the plan allowance ($22.50 in the example above) counts as an incurred cost against his or her annual out-of-pocket threshold because such out-of-network access to a covered part D drug is a covered benefit under those circumstances. As with the price differential that a beneficiary could incur by purchasing an extended supply (for example, 90-day) of covered Part D drugs purchased at a retail pharmacy rather than a mail-order pharmacy (discussed in section II.C.4.a of this preamble), the price differential between out-of-network pharmacies' U&C costs and the plan allowance would also be counted as an incurred cost against a beneficiary's annual out-of-pocket threshold. We seek comments on our proposal that this price differential 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. Under this approach, plans would be required to explicitly account for such price differentials in the actuarial valuation of their coinsurance in their bids. In addition, any such differential would also count toward the deductible for covered Part D expenditures between $0 and the plan's deductible.

The plan in the example above would be responsible for payment of the plan allowance for the covered Part D drug minus the applicable beneficiary cost-sharing—$67.50, in this case—which is the same amount as the plan would have paid for that covered Part D drug at the network pharmacy. Given our proposed rules regarding financial responsibility for out-of-network access to covered Part D drugs, plans would in effect be financially held harmless for out-of-network use by their enrollees under § 423.124(a) of our proposed rule. We believe this is necessary in order to curb unnecessary use of out-of-network pharmacies and to ensure that plans can achieve cost-savings for both beneficiaries and the Medicare program. We welcome public 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.

6. Dissemination of Plan Information (§ 423.128)

Section 423.128 of our proposed rule would establish beneficiary protection requirements concerning the dissemination of Part D information by PDP sponsors and MA organizations to enrollees in, and individuals eligible to enroll in, a prescription drug plan or MA-PD plan. Part D information disseminated by PDP sponsors and MA organizations to current or prospective Part D enrollees would constitute marketing materials, as described in § 423.50(b) of the proposed rule, and must be approved by us. For more information regarding the approval of marketing materials, please refer to section II.B.9 of this preamble).

As explained in greater detail below, we note that—with the exception of the drug-specific information dissemination requirements—many of the requirements of § 423.128 of the proposed rule duplicate information dissemination requirements contained in § 422.111 of our proposed rule that are applicable to all MA plans, including MA-PD plans. We have proposed applying the requirements of § 423.128 to MA-PD plans to ensure that Part D eligible enrollees have access to comparable drug-specific information from both prescription drug plans and MA-PD plans. We solicit comments on how best to coordinate the requirements of § 423.128 and § 422.111 of our proposed rule for MA-PD plans.

a. Content of Plan Description

Sections 423.128(a) and (b) of our proposed rule complies 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) of our proposed rule.

In order to ensure that individuals who are either eligible for, or enrolled in, a plan offering qualified prescription drug coverage receive the information they need to make informed choices about their Part D coverage options, PDP sponsors and MA organizations offering an MA-PD plan would be required to disclose, to each enrollee in a plan offering qualified prescription drug coverage, a detailed description of that plan. This description would be provided in a clear, accurate, and standardized form at the time of enrollment and annually, at a minimum, after enrollment. The information provided would be similar to the information MA plans must disclose to Start Printed Page 46664their enrollees under § 422.111(b) of our proposed rule. The plan description would include information about:

  • The service area;
  • Benefits offered, including information on cost-sharing requirements (for example, tiered or other copayment level applicable to a drug or class of drugs, deductibles, coinsurance), cost-sharing requirements for subsidy eligible individuals, and how a beneficiary may obtain further information about those cost-sharing requirements;
  • How any formulary used by the plan works, the process for obtaining an exception to a prescription drug plan's or MA-PD plan's tiered cost-sharing structure, and how to obtain a copy of the formulary as well as information about formulary changes;
  • Access to network pharmacies;
  • Out-of-network coverage provided by the plan;
  • Grievance, coverage determination, exceptions, reconsideration, and appeals procedures;
  • A description of the plan's quality assurance program, including the medication therapy management program required under § 423.153(d) of our proposed rule; and
  • Disenrollment rights and responsibilities.

b. Disclosure of Information Upon Request

In addition, according to section 1860D-4(a)(2) of the Act and as codified in § 423.128(c) of our proposed rule, a beneficiary who is eligible to enroll in a PDP sponsor's prescription drug plan or an MA organization's MA-PD plan would have the right to obtain, upon request, more detailed plan information. This information would be similar to that which MA organizations are required to disclose to their enrollees upon request under sections 1852(c)(2)(A), (B), and (C) of the Act and 42 CFR 422.111(c) and (f) of our proposed rule, and would include:

  • General coverage information (for example, enrollment procedures; grievance, coverage determination, reconsideration, exceptions, and appeals procedural rights; the potential for the PDP sponsor or MA organization contract termination or service area reduction; benefits; premiums; formulary; service area; and quality and performance indicators);
  • The procedures the organization would use to control utilization of services and expenditures;
  • The number of disputes and their disposition in the aggregate; and
  • The financial condition of the PDP sponsor or MA organization.

c. Provision of Specific Information

As required under section 1860D-4(a)(3) of the Act and § 423.128(d) of our proposed rule, PDP sponsors and MA organizations offering an MA-PD plan would 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 would include:

  • A toll-free customer call center;
  • An Internet Web site; and
  • Responses in writing upon beneficiary request.

As provided in § 423.128(d)(1)(i) and (ii) of our proposed rule, plans' customer call centers would 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 recommend, however, that 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 (for example, on out-of-network pharmacy access) and request comments on whether we should require the more stringent 24-hour-a-day/7-day-a-week standard in our final regulations.

In addition, we are proposing requiring that plans maintain Web sites as one means of disseminating information to current and prospective Part D enrollees. The Internet has proved to be an inexpensive and widely available source of information on health plans. Almost all Federal Employees Health Benefits (FEHB) plans, most large employer plans, and almost all managed care organizations maintain websites for the convenience of enrollees. Such Web sites typically contain information on drug formularies, preferred providers, plan access and emergency procedures, claims procedures, and a wide array of other useful information. Health plans have found that up-to-date formulary and provider information can be conveyed to enrollees far more quickly, reliably, and inexpensively via Internet than through traditional paper processes. Survey evidence shows that roughly half of the elderly routinely use the Internet. Even those who do not have direct access usually have friends or family who can assist them in obtaining information from the Internet. Libraries and senior support and counseling groups are almost always able to provide Internet Assistance. Thus, a great number of Medicare beneficiaries could benefit from the existence of prescription drug plan and MA-PD plan Web sites.

As provided in § 423.128(d)(2)(i) of our proposed rule, PDP sponsors and MA organizations offering MA-PD plans would be required to include the detailed plan description information described in section II.C.6.a of this preamble. In addition, per §§ 423.128(d)(2)(ii) and (iii) of our proposed rule, plans would have to post current versions of their formularies, update those formularies at least weekly, and use the website as one mechanism to provide notice (at least 30 days in advance, as discussed in section C.4.b of this preamble) of upcoming formulary changes, including the removal of covered Part D drugs from a formulary or changes to the tiered or preferred status of covered Part D drugs. Plan websites would have to be available both to current and prospective Part D enrollees. We note that plans would continue to be required to make information available to Part D eligible individuals in written formats as is currently the case for MA plans, and the provision of plan information via the Internet would simply be one additional mechanism for plans to communicate with enrollees and potential enrollees.

Finally, prescription drug plans and MA-PD plans would be required to respond to beneficiary requests for specific information in writing, upon request. This requirement is codified in § 423.128(d)(3) of our proposed rule.

d. Claims Information

In accordance with the requirements of section 1860D-(4)(a)(4) of the Act, and as codified in § 423.128(e) of our proposed rule, PDP sponsors would furnish to enrollees who receive covered Part D drugs an explanation of benefits. Explanations of benefits would be required to be written in a form easily understandable to beneficiaries.

As provided in §§ 423.128(e)(1)-(5) of our proposed rule, plans' explanations of benefits would have to 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.Start Printed Page 46665

We would require, under § 423.128(e)(6) of our proposed rule, that an explanation of benefits be provided at least monthly for those utilizing their prescription drug benefits in a given month. This proposed requirement is consistent with our policy regarding the Medicare Summary Notice, which is provided monthly for beneficiaries with Part A or Part B utilization. It is also consistent with the standards followed by banking and other financial organizations, which provide their clients with monthly statements provided there is activity on their accounts.

A PDP sponsor or MA organization offering an MA-PD plan could provide the notice of benefits electronically in cases in which a beneficiary elected to receive notices in that form. If technically feasible, a PDP sponsor or MA organization could also provide the notice of benefits at the point of sale; this would allow the PDP sponsor or MA organization to provide enrollees with additional information (for example, this could facilitate the provision of information regarding the availability of lower-cost generic availability required under § 423.132 of the proposed rule).

7. Public Disclosure of Pharmaceutical Prices for Equivalent Drugs (§ 423.132)

Under § 423.132(a) of our proposed rule, which codifies the requirements of section 1860D-4(k)(1) of the Act, PDP sponsors offering a prescription drug plan and MA organizations offering an MA-PD plan would 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 plan at that pharmacy. Under § 423.132(b) of our proposed rule, this information would 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 would 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 and § 423.132(c) of our proposed rule, 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 prescription drug plan enrollees at the point of sale (or at the time of delivery of a drug purchased through a mail-order pharmacy). Accordingly, we are proposing waiving the requirement in § 423.132(a) that information on lowest-priced generic drug equivalents be provided to enrollees for covered Part D drugs purchased by prescription drug plan and MA-PD 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).

Section 1860D-21(d)(2) of the Act specifically requires us to waive the public disclosure requirement for private fee-for-service MA plans meeting the criteria described above. Section 423.132(c)(1) of our proposed rule implements this waiver for private fee-for-service MA plans that meet those criteria.

Our rationale for proposing waiver of the public disclosure requirement for out-of-network pharmacies, as provided under § 423.132(c)(2) of our proposed rule, is that such a requirement necessitates a contract between a PDP sponsor or MA organization and a pharmacy. Since, by definition, out-of-network pharmacies are not under contract with a PDP sponsor or an MA organization, complying with the public disclosure requirement would be impracticable.

We also propose waiving the requirement in § 423.132(a) when prescription drug plan enrollees obtain covered Part D drugs in I/T/U pharmacies, as provided under § 423.132(c)(3) of our proposed rule. Because I/T/U pharmacies do not charge American Indians/Alaska Natives (AI/ANs) for drugs obtained at I/T/U pharmacies, AI/ANs obtaining drugs from these pharmacies would not benefit from the provision of information about covered Part D drug price differentials. Furthermore, because I/T/U pharmacies generally only stock the generic versions of brand name drugs, AI/ANs obtaining drugs from these pharmacies would already be receiving a generic equivalent of any brand name part D drug prescribed to them.

We believe it is appropriate to waive the public disclosure requirement for PDP sponsors when covered Part D drugs are provided in network pharmacies located in the territories given that few PBMs and health plans currently have contractual relationships with retail pharmacies in the territories. Our goal in waiving this requirement, as provided in § 423.132(c)(4) of our proposed rule, would be to reduce the administrative complexity of PDP sponsors and MA organizations' contracts with participating retail pharmacies in the territories, which we believe would enhance organizations' willingness to offer qualified prescription drug coverage in the territories. However, mail order drugs sent to residents of the territories would be required to include information about the price differential between a covered Part D drug and its lowest-priced generic version in the same manner as such information would be provided to Part D enrollees in the 50 States and District of Columbia who obtain mail order drugs under Part D.

Finally, as provided in § 423.132(c)(5) of our proposed rule, we propose waiving the public disclosure requirement in § 423.132(a) under such circumstances as we deem to be impossible or impracticable. We request comments on the appropriateness of the circumstances we have proposed for waiver of the requirements in § 423.132(c), as well as any additional circumstances we may wish to consider. We note that a similar public disclosure requirement was waived for endorsed discount card sponsors under the Medicare Prescription Drug Discount Card (42 CFR 403 and 408) for covered discount card drugs dispensed under several of the same circumstances as those described above.

In § 423.132(d)(1) of our proposed rule, we propose 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 prescription drug plan and MA-PD plan enrollees at the point of sale when prescription drug plan enrollees obtain covered Part D drugs in long-term care pharmacies. Long-term care pharmacies generally provide drugs directly to the skilled nursing facilities and nursing facilities where the patient resides, not directly to the patient, under a medical benefit. They also engage in a significant coordination of benefits effort that would require that at least some claims be processed off-line, and not in real time. Given the manner in which long-term care pharmacies provide prescription drugs to residents of long-Start Printed Page 46666term care facilities, as well as the way in which they process claims, it would be impracticable for these pharmacies to provide beneficiaries with information regarding covered Part D drug price differentials at the point of sale. Although long-term care network pharmacies would be exempt from the requirement that information about lower-priced generic alternatives be provided at the point of sale, they would not be exempt from the public disclosure requirement in § 423.132(a) altogether. We request comments regarding appropriate standards with regard to the timing of such disclosure by long-term care pharmacies to the institutionalized Part D enrollees they service. We note, as well, that under § 423.132(d)(2) of our proposed rule, we may modify the timing of the public disclosure requirement under such other circumstances as we deem compliance with that requirement to be impossible or impracticable.

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 would require 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. PDP sponsors would therefore 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 would be considered covered entities under the HIPAA Privacy Rule because they meet the definition of “health plan,” as described 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 Rules violations. Thus, any violations by an endorsed sponsor with respect to its obligations under the Privacy Rule as a covered entity are subject to such enforcement by OCR. OCR maintains a Web site with frequently asked questions and other compliance guidance at http://hhs.gov/​ocr/​hipaa.

D. Cost Control and Quality Improvement Requirements for Prescription Drug Benefit Plans

1. Overview (§ 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 following requirements:

  • Cost and Utilization Management Programs, Quality Assurance Programs, Medication Therapy Management Programs (MTMP), and Programs to control fraud, abuse, and waste for PDP sponsors and MA Organizations offering MA-PD plans that offer qualified prescription drug coverage;
  • CMS consumer satisfaction surveys of PDP and MA-PD plan enrollees.
  • Electronic prescription programs.
  • Compliance deemed on the basis of accreditation.
  • Accreditation organizations.
  • Procedures for the approval of accreditation as a basis for deeming compliance.

2. Cost and Utilization Management, Quality Assurance, Medication Therapy Management, and Programs To Control Fraud, Abuse, and Waste (§ 423.153)

Section 423.153(a) of our proposed rule would require each PDP sponsor or MA Organization offering a MA-PD plan that provides qualified prescription drug coverage under a prescription drug plan to establish a cost-effective drug utilization management program, a quality assurance program, a MTMP, and a program to control fraud, abuse, and waste as described in §§ 423.153(b), 423.153(c), 423.153(d), and 423.153(e), respectively.

We have combined these requirements into one section of the proposed regulation because each of these requirements would impact the quality and cost of care provided to beneficiaries. Our intent is to ensure that the prescription drug benefit would be provided using state of the art cost management and quality assurance systems. We also understand the overlapping nature of these requirements and that provisions under one requirement might complement another requirement. For example, drug utilization management early-refill edits used to prevent stockpiling of medications could also identify potential medication misuse by patients.

Although these requirements are similar in their underlying goals, they can also be quite different. For example, drug utilization management and quality assurance systems are generally considered to be population based, while medication therapy management involves targeted, direct patient care.

While we understand that some members of industry use various quality assurance measures and systems for controlling utilization and reducing medication errors, less information is available regarding medication therapy management. Medication therapy management has been used to describe a broad range of professional activities and responsibilities. We are familiar with state Medicaid programs (for example, Wisconsin, Mississippi) paying for cognitive services as part of their prescription drug benefit, but we have less information about current similar practices in the private sector. Therefore, our regulatory approach for utilization management, quality assurance, and controlling fraud, abuse, and waste will be different than our approach for medication therapy management. We particularly ask for comments on this section of the proposed regulation.

In general, and within the parameters described later in this preamble and in regulation, PDP sponsors and MA Organizations offering MA-PD plans would have flexibility to design drug utilization management programs, quality assurance measures and systems, MTMPs, and programs designed to control fraud, abuse, and waste.

a. Cost Effective Drug Utilization Management

Section 423.153(b) of our proposed rule would require each PDP sponsor or MA Organization offering a MA-PD plan that provides qualified prescription drug coverage under a prescription drug plan to provide a cost-effective drug utilization management program. The program would include incentives to reduce costs when medically appropriate, such as through the use of multiple source drugs as defined in section 1927(k)(7)(A)(i) of the Act. For example, plans could utilize different dispensing fees that would encourage the use of these multiple source drugs as opposed to more expensive single source drugs. This should not be Start Printed Page 46667confused with the practice of “switching” one branded drug product with another similar branded drug product, commonly referred to as “therapeutic substitution.” Therapeutic substitution would always require explicit prescriber notification and approval.

We believe that a cost-effective drug utilization management program could also employ the use of prior authorization, step therapy, tiered cost-sharing, and other tools to manage utilization. We are aware that these are tools commonly used today to manage pharmacy benefit costs for many commercial and State programs. We believe that the competitive bidding and premium setting processes, combined with the requirements for transparency and information availability, provide powerful incentives for plans to innovate and adopt the best techniques available. We invite comment on whether there are industry standards for cost effective drug utilization management and whether CMS should adopt any of these standards for PDPs and MA-PDs.

Although we have not included proposed regulations, we are considering for the final rule a requirement that these tools should be under the direction and oversight of a Pharmacy and Therapeutics Committee to ensure an appropriate balance between clinical efficacy and cost effectiveness. We seek comments on this issue. We also seek comments on requiring the direct involvement of a Pharmacy and Therapeutics Committee not only with cost containment measures, but also with other areas of quality assurance and medication therapy management. Again, although we have not included proposed regulations requiring this standard, we are considering this standard for our final rule.

In addition, appropriate drug utilization management programs would have policies and systems in place to assist in preventing overutilization and underutilization of prescribed medications. PDP sponsors and MA Organizations offering MA-PD plans must inform enrollees of program requirements and procedures in order to prevent unintended interruption in drug therapy. For example, enrollees would be made aware of how to proceed if special circumstances require their prescriptions to be refilled before the targeted refill date.

b. Quality Assurance

Section 423.153(c) of our proposed rule would require each PDP sponsor or MA Organization offering a MA-PD plan that provides qualified prescription drug coverage under a prescription drug plan to provide a quality assurance program. That program would include quality assurance measures and systems for (1) reducing medication errors, (2) reducing adverse drug interactions, and (3) improving medication use.

We are proposing that quality assurance programs include requirements for drug utilization review, patient counseling, and patient information record-keeping. We believe these requirements would generally need to comply with section 4401 of the Omnibus Reconciliation Act of 1990 as codified in 42 CFR 456.705 and section 1927(g)(2)(A) of the Act, and we are considering such specific requirements for the final rule. Although these regulations were written specifically for the Medicaid population, we understand that they describe currently accepted standards for contemporary pharmacy practice and our intent is to require plans to continue to comply with contemporary standards. We solicit comment on whether the Medicaid standards are 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. Therefore, we have chosen not to add further specification in the regulation text. We also understand that some members of industry use additional quality assurance measures and systems. We invite comments on whether there are industry standards, above and beyond those mentioned above, that we might adopt. Furthermore, PDP sponsors and MA Organizations offering MA-PD plans will be required to have systems and measures established to ensure that network pharmacy providers are complying with their quality assurance requirements. We are requesting comments on the costs and challenges associated with these systems and measures.

The elements that are currently viewed as desirable for quality assurance systems are—(1) electronic prescribing (which will become a requirement in the future as discussed later in this preamble); (2) clinical decision support systems; (3) educational interventions, which could be provided by QIOs or could rely on other mechanisms; (4) bar codes; (5) adverse event reporting systems; and (6) provider and patient education. We do not expect PDPs and MA-PD plans to adopt all of these elements. However, we expect 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 invite comments on which, if any, elements of a quality assurance system should be contained in our program requirements. We are 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 this data could be best communicated to providers and beneficiaries to improve medication use.

We note that the MMA does not define or explain the term “medication error.” Nevertheless, we believe a common definition is important. In the future, we may require quality reporting that includes error rates. We could use this information to evaluate plans. In addition, we may publish this information for enrollees to use when comparing and choosing their individual plans. Therefore, we particularly invite comments on how we could evaluate PDPs and MA-PDs based on the types of quality assurance measures and systems they have in place, how error rates can be used to compare and evaluate plans, and how this information could best be provided to beneficiaries to assist them in making their choices among plans.

Medication error reduction programs and requirements have been discussed in many venues and various definitions of “medication error” have been used. For example, in its proposed rule requiring bar codes on most human drug products, the Food and Drug Administration adopted the following definition of a medication error:

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)).

This definition of “medication error” is identical to that used by the National Coordinating Council for Medication Error Reporting and Prevention (NCC MERP). (See National Coordinating Council for Medication Error Reporting and Prevention, “What is a Medication Error?” (Undated)).

We are citing this definition in this preamble as one that we would use initially in interpretive guidance. We believe that this definition could be Start Printed Page 46668applied to, and include, adverse drug events and interactions as they pertain to quality assurance. As the state of industry practice evolves, we may, from time to time, update this definition by manual issuance. We invite comments on this definition.

c. Medication Therapy Management Programs

Section 1860D-4(c)(1)(C) of the Act requires PDP sponsors and MA organizations offering MA-PD plans to establish a MTMP, and § 423.153(d) would codify that requirement. As stated earlier, neither we, nor many private insurers, have extensive experience requiring or reimbursing for MTMPs. As a result, we seek comments on what requirements and/or guidelines for MTMPs should be formulated in our regulation. In this section of the preamble, we are providing a broad overview of the types of activities that a PDP sponsor or MA organization offering a MA-PD plan could provide as part of a MTMP. We also discuss various options for determining which beneficiaries might qualify as “targeted individuals” and what types of clinicians might provide MTMP services. We plan to conduct further research and seek comments before establishing requirements with respect to MTMPs. We are interested in current MTMP best practices, essential components of MTMPs, and which quality assurance requirements, if any, should be included in MTMPs. We are also interested in measures and information on effective MTMP services that could be publicized and used by beneficiaries who wish to use these services. We are particularly interested in the most effective steps to make valuable, proven MTMP services available to beneficiaries to improve health care quality and reduce costs. We are mindful of the importance of stimulating the evolution of the most appropriate and efficient form of MTMPs, without stifling innovation or prematurely locking-in specific attributes.

The description of a MTMP in section 1860D-4(c)(2) of the Act would allow for plans to establish a broad range of additional services. The purpose of a MTMP is to provide services that will optimize therapeutic outcomes for targeted beneficiaries. Specific services to be provided under a MTMP would be distinct from those required for dispensing medication. Medication therapy management services would be reimbursable when adopted by a plan and only when provided to targeted beneficiaries as defined in § 423.153(2) of our proposed rule and discussed later in this preamble.

Section 1860D(4)(c)(2)(B) of the Act states 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, and other compliance programs and other appropriate means).
  • Detection of adverse drug events and patterns of overuse and underuse of prescription drugs.

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 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-approved collaborative drug therapy management. We would also anticipate that these services could be offered as components of more coordinated disease management programs, but would not expect provision of these services to be limited to such programs.

In addition to MTMPs providing for different types of services, we would also anticipate the need for different levels of service based on the individual requirements of targeted beneficiaries. For example, one beneficiary may require only a fifteen-minute phone consultation, while another would be better served by a one-hour in-person visit with the pharmacist. The level of service should be determined by time and resources required to accommodate the specific needs of the individual beneficiary. Therefore, we would anticipate that a MTMP would include policies and procedures for ensuring targeted beneficiary access to the appropriate types and levels of service offered by the particular PDP or MA-PD plan.

Within this broad framework, we believe that PDP sponsors and MA Organizations offering MA-PD plans can customize their MTMPs and that a competitive market supported by useful information on MTMP services will provide the best mechanism for establishing optimal MTMPs. We believe that MTMPs can lead to improved overall health for individuals, while at the same time decreasing overall healthcare costs resulting from improper medication use and adverse drug events. We may provide a mechanism for plans to demonstrate the types of services, levels of service, and quality outcomes associated with their MTMPs to further aid beneficiaries with choosing the plan that will best meet their needs.

In addition, as provided in § 423.153(d)(3), a MTMP, as adopted by a plan, would have to be developed in cooperation with licensed practicing pharmacists and physicians.

Beyond these broad parameters for a MTMP, there are several issues to consider as we provide additional guidance to PDP sponsors and MA organizations. First, we consider MTMPs to be administrative activities similar to quality assurance drug utilization review or measures to control fraud, abuse and waste. Like these other quality improvement services intrinsic to the drug plan, MTMP services would not involve direct beneficiary cost-sharing and Part D enrollees would not be required to pay separate fees for these services (although the cost could be reflected in the premium rate). The cost of a MTMP is considered an administrative cost incident to appropriate drug therapy and, therefore, not an additional benefit. Nevertheless, unlike the general quality assurance and fraud, abuse, and waste control requirements, MTMP services can be limited to targeted beneficiaries. To the extent that MTMPs reduce drug spending by more than their costs, they have the potential to lower overall Part D costs. To the extent that MTMP services lower overall medical costs for beneficiaries with chronic illnesses, we also seek comment on how to integrate MTMP services and financial incentives into the Medicare Chronic Care Improvement program (section 721 of the Act).

Second, section 1860D4(c)(2)(A)(ii) of the Act requires that MTMP services be provided only for targeted individuals. In other words, not all members of a plan would be entitled to receive these services. As provided under § 423.153(d)(2), “targeted beneficiaries” would be plan enrollees who have multiple chronic diseases, are taking multiple Part D covered drugs, and are likely to incur annual costs that exceed a certain level that we determine. We Start Printed Page 46669invite comments on how we should provide guidance to drug plans in defining “multiple chronic diseases” and “multiple covered Part D drugs” for the purposes of determining which Part D enrollees would qualify for MTMP services, or whether such determinations are best left to the plans as part of their benefit design.

While the statute states that CMS sets the level of annual costs that must be incurred by a beneficiary to qualify for the receipt of MTMP services, our preferred policy is to delegate this function to the private drug plans, as they would be able to evaluate their patients with greater specificity and information. We request comments on this policy as both a policy and legal matter. We believe that, given current evidence, the level of annual costs that must be incurred by a beneficiary to qualify for the receipt of MTMP services should be determined by the drug plan. We do not think there is sufficient evidence at this point to specify a threshold of annual drug costs to be used for targeting these services to particular Part D enrollees. However, we seek comments on what guidance we could provide to plans to ensure these services are targeted in the most efficient manner and to the most appropriate beneficiaries.

In addition, we are concerned about the method that plans should use to determine the costs that enrollees are “likely to incur” to ascertain whether they qualify as targeted beneficiaries. Once plans have historical data on specific patients, determining how to target such services should become easier and more effective. For example, based on their previous experience with providing prescription drug services, plans could qualify enrollees for MTMP services based on whether the enrollees have multiple chronic diseases and whether they are using multiple drugs. As they develop more experience with their Medicare enrollees, past medication history might become another useful guide.

We believe that plans would benefit from additional guidance on interpreting the level above which a beneficiary's incurred costs would qualify him or her for MTMP services. We invite comments on all the disease, drug, and cost issues that we should consider in further refining the definition of a targeted beneficiary for receipt of MTMP services.

Another issue to be considered relates to which clinicians would be providing MTMP services and the method for providing those services. Section 1860D-4(c)(2)(A)(i) of the Act specifically states that a pharmacist may furnish MTMP services. While we believe that pharmacists will be the primary providers of these services, MTMPs could also include other qualified health care professionals as providers of services. The individual needs of the targeted beneficiary should determine the appropriate provider and setting for MTMP services. For example, consultant pharmacists will likely provide services to beneficiaries in long-term care facilities; retail pharmacists could provide those same services to ambulatory beneficiaries.

Furthermore, we believe beneficiary choice and on-going beneficiary-provider relationships should play a role in determining the best provider for MTMP services. Improved therapeutic outcomes through MTMP services will frequently require active beneficiary, or caregiver, participation. While population based quality assurance and cost control measures might adequately be served by impersonal telephone services, we believe that telephone services are only one mode of providing medication therapy management services. Active beneficiary participation and consistent delivery of quality MTMP services will require developing and maintaining on-going beneficiary-provider relationships. Therefore, to the extent that these services are adopted by plans in their MTMPs, we would expect the range of services offered to reflect this important component and maximize beneficiary participation by considering beneficiary preference and existing beneficiary-provider relationships in determining the appropriate provider and setting for delivery of MTMP services.

Section 1860D-4 (c)(2)(E) of the Act states that in establishing fees for pharmacists or others providing MTMP services, to the extent that these services are adopted by a plan in its MTMP, a PDP sponsor must take into account the resources and time associated with implementing the MTMP. Section 423.153(d)(5) codifies that requirement. We propose to implement this requirement as follows:

(1) First, we would expect potential PDP sponsors to describe, as part of their applications, their plan to consider the resources used and the time required to implement their MTMP in establishing fees for pharmacists and others providing services under the MTMPs.

(2) Second, in the event that we receive complaints that a PDP sponsor is not paying pharmacists or others in accordance with the fees discussed in the application for the MTMP it has elected to adopt, we would investigate further.

While section 1860D-4(c)(2)(E) of the Act specifies that the time and resources necessary to implement the MTMP must be taken into account when establishing fees, it does not specify how these fees should be paid. We believe that fees associated with provision of medication therapy management services are separate and distinct from dispensing fees discussed in section § 423.100 of the preamble for this proposed regulation. Although section 1860D-4(c)(2)(E) of the Act states that PDP 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).

Therefore, costs associated with MTMPs, including these management fees, are included as part of the general administrative overhead costs in the plan bid. For purposes of evaluating the administrative component of a PDP's bid, we will ask a PDP sponsor or MA organization 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 would be protected under the confidentiality provisions of section 1927(b)(3)(D) of the Act. Under those provisions, we would be 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 Congressional Budget Office 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.

While we expect to perform the due diligence described above through application review and potentially following up on any complaints we do not believe we have the authority to mandate that PDP sponsors or MA organizations pay pharmacists or other providers a certain amount for MTMP services. We also would not adjudicate any specific disputes between PDP sponsors or MA organizations and pharmacists or other providers Start Printed Page 46670regarding the specific fees due for MTMP services.

Finally, as specified in section 1860D-4(c)(2)(D) of the Act, we are required to establish guidelines that MTMPs operated by PDP sponsors are coordinated with the “chronic care improvement program” (CCIP) under section 1807 of the Act. The 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. Therefore, we anticipate that our guidelines will be targeted toward PDP sponsors and not to MA organizations that offer MA-PD plans. As stated above, the CCIP is a new program. By statute, the first agreements under that program with chronic care improvement organizations should be entered into within 12 months of the MMA's date of enactment. On April 23, 2004, we published in the Federal Register (69 FR 22065-22079), the solicitation for the CCIP program. Because the program has not yet been established, however, we cannot provide a great deal of guidance at this time regarding how the MTMPs under Part D would coordinate with the CCIP. We are concerned with the possibility of beneficiaries receiving duplicative services. We seek comments on how MTMP services provided through CCIP can be effectively coordinated with MTMP services provided by PDPs. There are several different ways that communication could take place so that a beneficiary enrolled in both the CCIP and a PDP receives efficient assistance with managing their chronic diseases. For example, the CCIP might collect information at intake, obtain a beneficiary information release, and inform the PDP of enrollment. An alternate approach is for us to use the enrollment files from the two programs to communicate to the respective parties. We invite comments on this issue and these proposed options. We may provide further interpretive guidance on coordination with the CCIP once the section 1807 agreements are finalized and the new program is in place. We invite comments from interested parties relating to specific key issues that should be addressed in this guidance.

d. Fraud, Abuse and Waste

Section 423.153(e) of our proposed rule would require PDP sponsors and MA Organizations offering MA-PD plans that provide qualified prescription drug coverage under a prescription drug plan to provide a program to control fraud, abuse, and waste. These requirements overlap to some extent with those in subpart K of this regulation, but cover somewhat different territory.

We would expect these plans, as prudent purchasers, to implement programs to control their expenditures. We would be interested in comments on the following discussion as to possible requirements in this area over and above the incentives operating in at risk plans. We would also like comments on the value added from requiring plans to develop comprehensive performance standards for use in evaluating internal processes that would appropriately and efficiently research, identify, monitor, and take immediate action to mitigate fraud, abuse, and waste. Fraud, abuse, and waste apply not only to both the PDPs and MA-PDs and their staffs, but also to the PBMs, pharmacies, physicians, and other providers that they deal with. For instance, PDPs and MA-PDs need to determine whether or not physicians are illegally prescribing narcotics. In addition to available appropriate data that might be supplied by us, the plans could develop and utilize methods such as data analysis, record audit of PBMs, pharmacies, physicians, and other providers, DUR (note these DURs overlap with those described previously, but these focus on those related to fraud, abuse, and waste), and methods used to consider and resolve disputes related to pharmacies, physicians’, and other provider's dissatisfaction to ensure the integrity of all entities (government, beneficiary, PDP sponsor, PBMs, pharmacies, physicians, and other providers).

One area of concern is inappropriate switching of prescriptions by a PDP or MA-PD plan without consulting a prescribing physician. For instance, switching from brand to generic may be appropriate, but switching brands, e.g. Lipitor to Zocor, may not without consultation.

We also seek comments on the appropriateness, value and need for requiring the plans to test program integrity analytic tools for effectiveness, efficiency, and adaptability to the Medicare Benefit environment. For example, one approach could require the plans to provide any of the following in periodic reports: (1) Summary of data analysis activities, (2) resources, (3) tools, or (4) trend analysis. Alternatively, the plans could be required to develop their strategy and propose what each plan determines to be the best approach for detecting and deterring fraud and abuse. Furthermore, the plans could be asked to demonstrate that the agreed upon activities and outcomes that the plans achieve are in relation to priorities established by us. We seek comments on the likely value of these requirements. We also seek comments on the implementation, scope, and operation of an effective and robust fraud, abuse, and waste control program for plan sponsors.

e. Exception for Private Fee for Service Plans

Section 423.153(f) of our proposed rule would implement section 1860D-421(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 would still be required to establish a quality assurance program and program to control fraud, abuse and waste as described in § 423.153(c) and § 423.153(e), respectively.

3. Consumer Satisfaction Surveys (§ 423.156)

Under § 423.156, we would conduct consumer satisfaction surveys among enrollees of PDPs and MA Organizations offering MA-PD 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 that in which they are currently conducted under § 422.152(b) (that is, annually) for MA plans by using the Consumer Assessment of Health Plans (CAHPS). We believe 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. As we have done in the past in developing surveys of Medicare beneficiaries in various settings, we will work 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 will provide further information regarding this survey as it is developed.

4. Electronic Prescription Program (§ 423.159)

Section 1860D-4(e) of the Act contains provisions for electronic prescription programs. The statute Start Printed Page 46671contains specific provisions on when voluntary initial standards may be adopted (not later than September 1, 2005), and when final standards should be published (not later than April 1, 2008) and then effective (not later than 1 year after the date of promulgation of final standards).

The statute requires the National Committee on Vital and Health Statistics (NCVHS) to develop recommendations, in consultation with a specific group of constituencies, for possible adoption by the Secretary according to the schedule set forth above. Those constituencies include physicians, hospitals, pharmacists and pharmacies, PBMs, State boards of pharmacy and medicine, Federal agencies and other electronic prescribing experts for uniform standards. The law also requires a pilot project once the Secretary has adopted or announced the initial standards. The pilot will run from January 2006 through December of that year, and it will be completed prior to the promulgation of the final standards. The law further states that a pilot is not needed if there is already adequate industry experience with whatever standards the Secretary is planning to adopt.

To fulfill the statute's responsibilities, the NCVHS’ Subcommittee on Standards and Security has already held two public hearings on issues related to e-prescribing. The hearings on March 30 and 31, 2004, and May 25, 26, and 27, 2004 included testimony from e-prescribing networks, providers, software vendors, and industry experts on patient safety and drug knowledge databases. National electronic prescribing studies were also presented. In order to further refine their recommendations to the Secretary, the NCVHS Subcommittee on Standards and Security will continue to hold additional hearings on the state-of-the-art of electronic prescribing including testimony from a broad representation of stake holders in July, August and September 2004. Readers interested the NCVHS’ hearing schedule for e-prescribing standards, testimony presented at the hearings and standards recommendations should consult the NCVHS Web site at http:/www.ncvhs.hhs.gov/​.

Many in the industry urge us to move expeditiously to establish electronic prescribing standards. However, the statute intentionally provided for a deliberative process by directing the NCVHS to study, select and recommend electronic prescribing standards. Any comments received in response to this proposed rule will be considered along with the NCVHS’ recommendations in the development of the proposed rule on the electronic prescribing standards. We are particularly interested in comments that help us identify consensus or reach consensus on e-prescribing standards ahead of the statutory time frame, and to help us identify and evaluate industry experience based on pilot programs engaged in e-prescribing activities in 2004 and 2005.

To ensure that our regulations are as comprehensive as possible, we have included language at § 423.159(a) that would require PDP sponsors and MA Organizations offering MA-PD plans to have the capacity to support e-prescribing programs in accordance with the final e-prescribing standards established by the Secretary, including any standards that are established before the drug benefit begins in 2006. In addition, once final standards are set, any prescriptions that are transmitted electronically under the Part D drug benefit for Medicare beneficiaries will have to conform to those standards. Aside from PDP and MA-PD plans having the capacity to support final e-prescribing standards, there is, however, no requirement that prescriptions be written or transmitted electronically (by for example physicians or pharmacies). Until e-prescribing standards are effective, of course, our regulations at § 423.159(a) also will not be in effect.

Although there is no requirement that physicians write prescriptions electronically, our regulations state that PDP sponsors and MA Organizations offering MA-PD plans who participate in the Part D program must be able to support the final e-prescribing program as specified in section 1860D-4(e)(2) of the Act. The statutory language is quite specific that e-prescribing will not just be used for a physician to send a prescription to a pharmacy, but also will transmit data that can only be supported by the PDP sponsor or MA organization offering an MA-PD plan. For example, the e-prescribing program is intended to ensure that pharmacies receive electronic information on the drugs included on the PDP's or MA-PD's formulary, any tiering of the formulary, the patient's medical history, the possibility of any adverse drug-interactions (based on other prescriptions the patient is already taking) and the availability of lower-priced, alternative prescriptions. Since the PDP sponsor or MA organization offering an MA-PD plan will most likely be the warehouse for all this information, without participation of the PDP sponsors or MA Organizations offering MA-PD plans, the e-prescribing program would not be able to provide the results the Congress intended. In addition, if plans do not have this program, beneficiaries participating in those plans would not benefit from the patient safety aspects of the program. Also, under section 1860D-12(b)(3)(D) of the Act, we have the authority to add additional contract terms to the PDP and MA-PD contracts.

While PDP sponsors and MA Organizations offering MA-PD plans will be required to support the final e-prescribing standards issued by us, they will not be required to support the pilot standards, which are voluntary under section 1860D 4(e)(4)(C) of the Act. Therefore, only those entities that participate in a pilot testing of certain e-prescribing standards will be required to implement an e-prescribing program using the initial standards adopted by the Secretary. Others in the health care industry will not be required to use the initial standards at the time they are issued, but will be encouraged to do so.

Finally, we note that the pilot test specified in the MMA is not required if there is adequate industry experience with the standards. In that case, the Secretary may propose them as final standards in a proposed rule, thereby expediting a portion of the standards adoptions process. Therefore, to the extent we determine, after consultation with affected standard setting organizations and industry users, that there already is adequate industry experience with certain standards, we may propose to finalize those standards through notice and comment rulemaking even if we have not completed the pilot testing of other standards so that a portion of the standards adoptions process could be expedited. We seek comments on the desirability of this strategy, including any concerns about potential unintended consequences.

In order to facilitate electronic prescribing by a PDP or MA-PD sponsor, we invite public comment on additional steps to spur adoption of electronic prescribing, overcome implementation challenges, and improve Medicare operations. For example, we have added regulations at § 423.159(b) of this proposed rule that would 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 Start Printed Page 46672electronic prescription drug program that meets standards established under section 1860D-4(e) of the Act. These differential payments are to reward physicians for using electronic prescriptions rather than handwritten ones. These payments would not be used to encourage physicians to prescribe more frequently or inappropriately steer their use of particular drugs. Since the standards established under section 1860D-4(e) of the Act include the initial, voluntary standards, which may be tested on a pilot basis as early as January 1, 2006, we believe the differential payments envisioned by section 102 of the MMA may occur as early as January 1, 2006 (for physicians who prescribe in accordance with the standards adopted by the Secretary in September 2005). We believe the fact that section 102 of MMA has an effective date of January 1, 2006, supports this determination. Differential payments, at the MA organization's discretion, could take into consideration the cost to the physician in implementing the program and could be increased for participating physicians who use e-prescribing to significantly increase—

(1) Formulary compliance where medically appropriate;

(2) Use of lower cost, therapeutically equivalent alternatives;

(3) Reductions in adverse drug interactions as evidenced by appropriate use of drug interaction checking functions in electronic prescribing; and

(4) Efficiencies in filling and refilling prescriptions through reduced administrative costs.

The additional or increased payments made to the physicians could be structured in the same manner as fees for services under § 423.153(d) of this proposed rule. We have not provided a great deal of specificity in our regulations regarding how the differential payments may be structured because we believe the MA Organizations offering MA-PD plans should have discretion in structuring these added payments, if any.

We note that any payments 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. We are soliciting the public's view of the application of these legal authorities to the differential payments described in this section. We will share any comments regarding the anti-kickback statute with the Office of Inspector General.

We also seek comment on measures of MA-PD plan quality related to the use of e-prescribing, and other MA-PD quality measures that reflect effective e-prescribing systems. The use of electronic prescribing shows promise for improving Medicare operations by reducing costs in the administration of the Part D drug benefit and in the use of prescription drugs, for example promoting generic drug use and creating timely interface with formularies supported by up-to-date evidence. Likewise, it has the potential to improve the quality of the care provided to Medicare beneficiaries through the therapeutic monitoring of allergies and adverse events. Yet, implementing electronic prescribing effectively poses a number of challenges. While electronic prescribing is gradually gaining acceptance by health care providers, fewer than 10 percent of U.S. doctors currently engage in the practice. The adoption rate is particularly low among solo practitioners, those in rural areas, and certain medical specialties. The electronic prescribing process and the technology that enables it must be cost effective, the systems must be fast and easy to use, and alerts and other data passed backed to the prescriber must demonstrate value. We invite comments on these challenges and on possible Federal activities that would promote the effective use of e-prescribing by providers, including publishing best practices, and making technical information on e-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 seek additional information on how those populations may view electronic prescribing and what step may be taken to get them to use this modality and, thus, take advantage of the safety and quality benefits it offers.

We also invite 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 grants authorized in § 423.159(b) of this proposed rule, we invite comments on what incentives could be used to spur more widespread adoption, especially for early implementers. We also invite your 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 seek public input on the ways electronic prescribing can further reduce costs to the Medicare program and promote quality of care to beneficiaries.

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, MA organizations, and PDP sponsors quality improvement assistance pertaining to health care services, including those related to prescription drug therapy. We plan to issue guidance on how QIOs can provide this assistance and would coordinate the activities of the QIOs with the quality related activities of other stakeholders.

To fulfill this responsibility, QIOs would need access to data from the transactions between pharmacies and PDPs and MA-PD plans providing the Part D benefit. This data would be extracted from the claims data submitted to us. Although the agency is still developing plans for the QIO activities related to the Part D benefit, we expect that this data primarily from the NCPDP telecommunications format between pharmacies and plans will be used. The data would include payment-related information (that is, plan identification, beneficiary HIC, date prescription filled, NDC, quantity dispensed, ingredient cost, dispensing fee, and pharmacy zipcode) and additional items such as prescriber identifiers, pharmacy identifiers, dose, days supply, and other dispensing information. Potentially, the information gathered will be aggregated in our data warehouse, and then distributed to QIOs to fulfill their requirements for quality improvement as specified in their contracts and in response to requests.

We have been consulting, on an individual, organization by organization basis, with representatives from pharmacy benefit managers, managed care organizations, programs that have monitored drug utilization, and others who have utilized pharmacy claims data. We welcome comments related to the collection and use of information for providing quality improvement assistance related to Part D.

We are proposing that any information collected by the QIOs would be subject to confidentiality requirements in Part 480 of our regulations. For purposes of applying these confidentiality regulations, we are also proposing that MA organizations offering MA-PD plans and PDP sponsors fall within the definition of health care facilities. This means that Start Printed Page 46673the confidentiality provisions in Part 480 of our regulations would apply to PDP sponsors and MA-PD plans in the same manner as they apply to institutions.

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 PDP sponsors with respect to—(1) access to covered Part D drugs including the pharmacy access requirements and the use of standardized technology and formulary requirements; (2) quality assurance, drug utilization review, medication therapy management, and a program to control fraud, abuse and waste; and (3) 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.

A PDP sponsor may be deemed to meet the requirements that relate to access to covered Part D drugs; quality assurance, drug utilization review, medication therapy management, and a program to control fraud, abuse, and waste; and confidentiality and accuracy of enrollee records, if it is accredited and periodically reaccredited by a private national accrediting organization under a process that we have determined meets a process and standards that are no less stringent than our applicable requirements. National accreditation organizations are those entities that offer accreditation services that are available in every State to every organization wishing to obtain accreditation status. The process that we would use to deem compliance with PDP requirements would mirror the process used for deeming compliance with fee-for-service requirements and the MA program.

Section 423.165 would provide the conditions under which a PDP sponsor may be deemed to meet our requirements permitted under paragraph (b) of this section. The first condition would be that the PDP plan be fully accredited (and periodically reaccredited) by a private, national accreditation organization that we approve. The second condition would be that the PDP organization be accredited using the standards that we approved for the purposes of assessing the PDP sponsors' compliance with Medicare requirements.

Consistent with our approach in the MA program, we would analyze on a standard-by-standard basis whether an accreditation organization applies and enforces requirements no less stringent than those in part 422 with respect to the standard at issue. We would determine the scope of the accreditation organization's approval (and, thus, the extent to which PDP organizations accredited by the organization are deemed to meet our requirements) based on a comparison of the accreditation organization's standards and its procedures for assessing compliance with our deemable requirements and our own decision-making standards. We would make those determinations on the basis of the application materials submitted by accreditation organizations seeking our approval in accordance with § 423.168. We would also conduct surveys to validate the accreditation organization's enforcement on a standard-by-standard basis.

Section 423.165(d) would establish the obligations of deemed PDP sponsors. A PDP sponsor would have to submit to our surveys that are intended to validate an accreditation organization's process and authorize the accrediting organization 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). These activities are part of our ongoing oversight strategy for ensuring that the accreditation organization applies and enforces its accreditation standards in a manner comparable to ours.

Section 423.165(e) would address removal of deemed status. We would remove part or all of a PDP sponsor's deemed status if—

(1) We determine, on the basis of our own survey or the results of the accreditation survey, that the PDP organization does not meet the Medicare requirements for which deemed status was granted.

(2) We withdraw our approval of the accreditation organization that accredited the PDP organization; or

(3) The PDP fails to meet the requirements of § 423.165(d).

Section 423.165(f), would explain that we retain the authority to initiate enforcement action against any PDP 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 expect the accreditation organization to have a system in place for enforcing compliance with our standards (such as sanctions for motivating correction of deficiencies), but we cannot delegate to the accreditation organization the authority to impose the intermediate sanctions established by section 1860D-12 of the Act or termination of the PDP contract.

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.

Section 423.168 would discuss the 3 conditions for our approval of an accreditation organization. We could approve an accreditation organization if the organization applies and enforces standards for PDP 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.

Section 423.168(c) of our proposed rule would establish ongoing accreditation organization responsibilities. These responsibilities largely parallel those currently imposed upon accreditors under original Medicare. One exception is the proposed requirement that an accreditation organization notify us in writing within 3 days of identifying, with respect to an accredited PDP sponsor, a deficiency that poses immediate jeopardy to the PDP sponsor's enrollees or to the general public.

Section 423.168(d) of our proposed rule would establish specific criteria and procedures for continuing oversight and for withdrawing approval of an accreditation organization. Oversight consists of equivalency review, validation review, and onsite observation.

We could withdraw our approval of an accreditation organization at any time if we determine that deeming based on accreditation no longer guarantees that the PDP organization 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 accreditation organization has failed to meet its obligations under § 423.165 through § 423.171.

Section 423.171 of our proposed rule would address the procedures for approval of accreditation as a basis for deeming compliance. As mentioned, the process that we would use to deem compliance with PDP requirements is virtually identical to the process that is being used for deeming compliance with fee-for-service requirements. One proposed requirement that would Start Printed Page 46674appear in § 423.171, and which also appears in regulations governing MA plans at § 422.158(a)(11), but does not appear in regulations governing original Medicare, is the requirement that an accreditation organization applying for approval of deeming authority submit the name and address of each person with an ownership or control interest in the accreditation organization. This information would be used to determine whether the accreditation organization is controlled by the organizations it accredits for the purposes of § 423.168. Section 423.171 would further provide for reconsideration of adverse determinations of accreditation applications.

F. Submission of Bids and Monthly Beneficiary Premiums: Determining Actuarial Valuation

1. Overview

Subpart F would 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.

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 would 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 would 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 would be required to submit a bid for prescription drug coverage for each plan it intends to offer. Most bids would 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. A risk bid (whether full risk or limited risk) could not be accepted from any entity applying to become a PDP sponsor or MA organization offering an MA-PD plan that—(1) also submits a bid for the same year to act as a fallback plan; (2) will be offering a fallback plan in any region for the upcoming year; or (3) currently offers a fallback plan in the region for which they are submitting the bid. In determining whether an entity is barred from submitting a risk bid according to these rules, we would use, as our reference point, the calendar year that they are submitting their bids. For example, the limitation would work as follows:

An applicant submitting a risk bid for sponsoring a PDP in 2009 would be excluded from the risk bidding if it—

(1) Also submits a bid to act as a fallback plan in 2009 (where 2009 is the first year of a multi-year fallback contract);

(2) Already is approved to act as a fallback in any PDP region for 2009; or

(3) Offers a fallback in 2008 for the same region for which they would be submitting their 2009 risk bid.

This fallback prohibition also applies if an applicant (or related entity) acted as, or will act as a subcontractor to an entity offering a fallback plan. In other words, an entity would be treated as having submitted a bid under the fallback contracting process, and thus not be an eligible risk bidder, if that entity was acting as a subcontractor for an integral part of the drug benefit management activities of an eligible fallback entity. Thus, for example, if an applicant was a subcontractor to a fallback in 2008, it cannot submit a risk bid for the same region for 2009. Similarly, an applicant for a 2009 risk bid cannot include as its subcontractor an entity already approved or applying to act as a fallback plan for 2009. Because awards for 2006 will not be known at the time the initial bids are due in 2005 (for contracts in 2006), any entity that bids as a fallback plan (or a subcontractor to a fallback plan) is barred from bidding as a non-fallback plan in any and all regions for that year.

Bids would 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 would 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 would 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 proposed 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 would 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.) We are interested in providing information to potential bidders to help eliminate the uncertainty of drug trend for Medicare beneficiaries and in delaying the submission of pricing information as long as we can under the law and consistent with our need to inform beneficiaries. We solicit comment on Start Printed Page 46675the 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 should be those for which the plan would actually be responsible. Given the structure of qualified prescription drug coverage, these costs would 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 would 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 would 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 would require that, with the exception of potential employer group waivers under section 1860D-22(b) and 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 would be subject to the same cost sharing structure and would 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 would 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.

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

As directed by section 1860D-11(c) of the Act, we would 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 are currently considering 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) would be required to demonstrate the actuarial equivalence of their variations.
  • Sponsors offering basic or enhanced alternative prescription drug coverage would be required to demonstrate that—

+ The actuarial value of total or gross plan coverage is at least equal to the actuarial value of total or gross coverage of the defined standard benefit.

+ The actuarial value of total coverage of their alternative is at least equal to the actuarial value of defined standard coverage;

+ 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 would 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 would also be required to determine the actuarial value of coverage beyond basic coverage.
  • We anticipate that we would specify data sources, methodologies, assumptions, and other techniques in accordance with generally accepted actuarial principles as either recommended or required in further guidance. We would also specify the data elements (including format) to be sent to us for evaluation. We would then evaluate the analysis and assumptions for compliance and reasonableness. For example, we would 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 would also have reported and separately identified 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 would likely focus primarily on outliers from the competitive range identified in the bids received. All proposals would contain a description of how certain costs (those related to appeals that result in payment for non-formulary drugs) are included in the calculations. Processes and methods for determining actuarial valuation would 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 would have to be loaded into the supplemental portion of the bid. In other words, since the existence of supplemental coverage would increase total average per capita spending, that increase over the average spending (if coverage were limited to basic coverage) would be included in the portion of the Start Printed Page 46676bid 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 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 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 encouraging PDP sponsors and MA organizations that do not employ qualified actuaries, to use outside actuaries in their processes. We propose 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.

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. We plan to address the application of actuarial equivalence within these separate contexts in this discussion and in separate detailed guidance to the industry. Thus, we plan to use 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 assure 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 Start Printed Page 46677constant 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. We are requesting comments on this approach.

In trying to assess the impact of the test of total value (section 1860D-2(c)(1)(A) of the Act) and the test of unsubsidized value (section 1860D-2(c)(1)(B) of the Act), we have been unable to identify an example of a plan meeting the first test but not the second. We are seeking comment with regard to this question.

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 “with respect to 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 defined standard benefit 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 Start Printed Page 46678excluded from this calculation. (Any alternative coverage that does not include supplemental coverage would be, by definition, actuarially equivalent to standard coverage. In this case, there is no need to make a further utilization adjustment since the test of actuarial equivalence for the 25 percent cost-sharing requirement has already taken into account utilization.) Any utilization effect that supplemental coverage has on the basic benefit should be priced into the supplemental portion of the bid.

5. Information Included With the Bid

a. Bid Format

We have not yet determined the exact format for the bid submission and we would provide future guidance on these requirements. We believe that we would develop a fully automated process that would include electronic signatures for certifications of the actuarial analysis and the plan benefit package. Section 1860D-11(c)(1)(D) of the Act specifies “the use of generally accepted actuarial principles and methodologies.” We would 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 would develop the bid submission format to facilitate the submission of bids for multiple regions and in all regions, and we would take 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.

The information included with the bid should 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. As provided in section 1860D-11(b)(2) of Act and § 423.265(d) of this proposed 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 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 we would welcome comments on facilitating risk bidding; and
  • Any other information that we would require.

b. Risk Adjustment of Supplemental Premium

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

Table F-1.—Supplemental Premium Risk Adjustment

Plan APlan BPlan C
Plan Average Risk Profile0.801.001.10
1.0 Supplemental Premium100100100
Supplemental Premium if Risk-Adjusted80100110
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 Start Printed Page 46679meet 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 are proposing to require additional information on the projected risk profiles of its 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 would 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 would 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.

6. Review and Negotiation of Bid and Approval of Plans

a. Authority To Review Bids

We would 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. The MMA grants use 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 would have similar concerns about the reasonableness of a sponsor's trend assumptions. OPM is concerned about cost-sharing changes proposed by plans, and we would have similar concerns with regard to supplemental benefits. OPM wants to maintain high member satisfaction and ensure top quality service by plans, and we would have similar interests.

Chapter 89 of title 5 U.S.C. gives OPM broad discretion to negotiate prices and levels of benefits. For example, 5 U.S.C. 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, rates may be determined “on a basis which, in the judgment of the Office, is consistent with the lowest schedule of basic rates generally charged for new group health benefit plans issued to large employers.” OPM is permitted to ensure that any adjustment in rates from one year to the next is consistent with the general practice of carriers which issue group health benefit plans to large employers. We interpret this to mean that we would have the authority not only to determine whether the bids submitted accurately reflect the costs of the plan, but also to determine whether the bids are in keeping with premiums charged in other insurance contexts. If bids increase at a rate higher than the premiums in the general insurance market (with appropriate adjustments for comparable populations), we may determine that further negotiations are needed. 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 U.S.C. 8902(c).) We are considering similar regulations to those used by OPM in 48 CFR Chapter 16 and are soliciting comments on this subject. To the maximum extent feasible and consistent with the appropriate discharge of our responsibilities, we prefer to rely on competition rather than negotiation.

b. Bid and Benefit Package Review

We believe 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 would evaluate administrative costs for reasonableness in comparison to other bidders and in comparison to a PDP sponsor's other lines of business. We would examine aggregate costs to determine whether the revenue requirements for qualified prescription drug coverage are reasonable and equitable. We would be interested in steps that the sponsor is taking to control costs, such as through various programs to encourage use of generic drugs. We would examine and discuss any proposed benefit changes. Finally, we would discuss indicators and any identified issues with regard to plan management, such as customer service.

In addition to the negotiation process, we would assure that bids and plan designs meet statutory and regulatory requirements. In general, we would examine bids to determine whether the bid meets the standard of providing qualified prescription drug coverage, as described in § 423.104(b) of this proposed rule and in subpart C of this preamble. We would examine the actuarial analysis accompanying the bid to ensure that it has been prepared in accordance with our actuarial guidelines and properly certified. We would 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 bases and reasonably and equitably reflect revenue requirements for benefits provided under the plan, less the sum of the actuarial value of reinsurance payments. We would also Start Printed Page 46680review 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 would review cost sharing both above and below the out-of-pocket threshold with regard to its impact on groups of beneficiaries. We would 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 would review benefit plans for features that, when applied, have differential impacts on beneficiaries with particular medical conditions. Factors we would 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 would 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 would 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 would 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 would be over compensated or under compensated by enrollees for supplemental benefits. Therefore, on the basis of this authority, we are proposing to 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 would review and negotiate that information, and would 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 would 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 would be based on estimates of monthly beneficiary premiums. Some of these MA-PD plans would 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 would 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 proposed regulatory approach would 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 would 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 would result in a $35.00 monthly beneficiary premium for basic coverage, and that it would 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 would end up below the benchmark and its base beneficiary premium would be adjusted by subtracting the difference between the bid and national average monthly bid amount. Therefore, the plan's monthly beneficiary premium would be less than the projected premium, for instance, $34.00, and the $35.00 amount allocated Start Printed Page 46681from the Part C rebate for Part D premium buy-down would be excessive. In that case, we would 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 would 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 would be adjusted by adding the difference between the bid and national average monthly bid amount. Therefore, the plan's monthly beneficiary premium would 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 would no longer be sufficient to eliminate the Part D premium as planned. In that case, we would 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 would be optional since the Part C rebate has already been provided to the enrollee. We would not permit an MA organization to simply eliminate a minimal premium instead of reallocating the rebate because doing so would 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.

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 would take place between PDP sponsors or MA organizations (or their subcontractors) and pharmacies and pharmaceutical manufacturers. (Section 1860D-11(i) precludes CMS 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 would 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 would be higher costs for patients or the plans. The nature of the negotiations that we propose to conduct with bidders is discussed later with respect to full-risk and limited-risk bids, and in subpart Q of this preamble with respect to fallback plans.

We expect that the private negotiations between PDP sponsors and drug manufacturers would 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 proposed 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)). 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 will evaluate the number of categories in formularies that do not meet the model guidelines and the choice of drugs available in those categories with respect to 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).

f. Bid Level Negotiation

The FEHBP standard in 5 U.S.C. 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 expect to 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 Start Printed Page 46682negotiating changes upward or downward in the utilization and cost per script assumptions underlying the bid's actuarial basis. We ask for comment on the most effective and least burdensome way to obtain pricing and utilization data for use in our actuarial review, as well as comments on the broader issues discussed in this section.

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 would be able to inquire as to the “net cost” of drugs since this is the key dollar value we would 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 would 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 would be using the authority in 5 U.S.C. 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 would have the authority to negotiate the bids down to a level that is more in keeping with bids that a private market would provide. While there is not a private drug-only insurance market, we could look at the rates used in overall coverage or determine which part of such coverage is made up by drug coverage, and make appropriate adjustments for Medicare utilization differentials. 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 would 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.

Under the previous M+C program, we permitted M+C organizations to waive premiums or to offer mid-year benefit enhancements to their benefit packages. However, in order to maintain the integrity of the bidding process, we believe that it is no longer appropriate to allow either MA organizations or PDP sponsors to waive premiums or offer mid-year enhancements as they would be de facto adjustments to benefit packages for which bids were submitted earlier in the year. These adjustments would be de facto acknowledgement that the revenue requirements submitted by the plan were overstated. Allowing premium waivers or mid-year benefit enhancements would render the bid meaningless. Excessive amounts included in the bid will be subject to recovery by the government in the risk corridor calculations following the coverage year.

Consequently, we are proposing to interpret the statutory provisions on competitive price negotiation as prohibiting us from setting a regulated price of any particular drug or imposing by regulation an average discount in the aggregate on any group of drugs (such as single-source brand-name drugs, multiple-source brand name drugs, or generic drugs), but as allowing justification of aggregate price levels for groups of drugs. In addition, we could, under the specific circumstances previously discussed, negotiate regarding the level of the overall risk bid. This approach would allow us to exercise the authority similar to FEHBP as visualized in the MMA to ensure that per capita rates charged “reasonably and equitably” reflect the cost of the benefits provided, and that beneficiaries receive the full benefits of vigorous price negotiation by their drug plans.

g. Approval of Plans

After negotiations on the terms and conditions of the bid, we must approve or disapprove the bid. After negotiations, we would approve a plan only if—

  • The plan is found to be in compliance with requirements specified in this regulation;
  • The plan meets the actuarial valuation requirements; and
  • The plan design does not discourage enrollment by certain eligible beneficiaries.

In § 423.272(c), we would approve limited risk plans only if fewer than two qualifying prescription drug plans offered by different entities, one of which must be offered by a stand-alone PDP sponsor, were submitted and approved in a region. We would approve only the minimum number of limited risk plans needed to meet these access requirements and would give priority to plans bearing the highest levels of risk; however, we may take into account the level of the bids submitted by these plans. Except as authorized under section 1860D-11(g) of the Act and in § 423.863 with regard to fallback plans, we would not, under any circumstances, approve a plan that elected to bear no risk or a minimal level of risk.

h. Special Rules for PFFS Plans

As provided in section 1860D—21(d) of the Act, and codified in § 423.272(d), PFFS plans that offer prescription drug coverage are exempt from review and negotiation (under sections 1860D-11(d) and (e)(2)(C)) of their prescription drug bids and premium amounts but are otherwise subject to all other requirements under this part, with the following exceptions. While we will not negotiate PFFS bids, those bids must meet the actuarial valuation requirements applicable to all risk bids. These plans are not required to negotiate discounted prices for prescription drugs. If they do negotiate, the proposed requirements under § 423.104(h) related to negotiated prices would apply. If the plan provides coverage for drugs purchased from all pharmacies, without charging additional cost sharing, and without regard to whether they are participating pharmacies. § 423.120(a) and § 423.132 of this proposed rule (requiring certain network access standards and the disclosure of the availability of lower cost bioequivalent generic drugs) would not apply to the plan. PFFS plans are also exempt from drug utilization management program and medication therapy management program requirements.

Finally, we note that section 1860D-21(d)(7) of the Act provides that costs incurred for off-formulary drugs will not be excluded in determining whether a beneficiary has reached the out-of-pocket threshold if a PFFS plan does not use a formulary. We believe that section 1860D-21(d)(7) is a tautology and simply states that PFFS plans without formularies, by definition, cannot have Start Printed Page 46683non-formulary drugs to exclude from the out-of-pocket threshold calculation.

7. National Average Monthly Bid Amount

In § 423.279, we outline the calculation of the national average monthly bid amount. For each year, beginning in 2006, we would compute a national average bid based on approved bids in order to calculate the national base beneficiary premium. As a practical matter, we realize that we might need to calculate and announce the national average monthly bid amount before negotiations on all bids were completed in order to allow time for finalization of premiums and benefit packages. Therefore, we anticipate that we would identify a date by which the national average monthly bid amount would be published, and we would use the bids that had passed a certain level of approval as of that date as the basis for the calculation.

As provided in section 1860D-13(a)(4)(A) of the Act, in computing the national average monthly bid amount, we would exclude bids submitted for MA private fee-for-service (PFFS) plans, specialized MA plans for special needs individuals, PACE programs under section 1894 of the Act (pursuant to section 1860D-21(f) of Act) and reasonable cost reimbursement contracts under section 1876(h) of the Act (according to section 1860D-21(e) of the Act). The exclusion from the calculation of bids of PFFS, cost plans, specialized MA plans, and PACE suggests that they are different from, and not comparable to, the average bid in some way. We interpret this difference to be based solely on price levels because the legislation—

  • Does not define any other basis for determining these bids;
  • Continues to compare these bids to the national average bid amount to determine adjustments to enrollee premiums; and
  • Provides for payments to such plans (including risk adjustment) in the same manner as to non-excluded plan types.

Therefore, these excluded plan types would still submit bids on the same basis as all other plans, that is, the 1.0 risk prescription drug plan beneficiary, even though these bids are not included in the national average bid amount at this time.

The national average bid amount would be equal to the weighted average of the standardized bid amounts for each PDP and for each MA-PD plan described in section 1851(a)(2)(A)(1) of the Act. The national average monthly bid amount would be a weighted average, with the weights being equal to the proportion of Part D eligible individuals enrolled in each respective plan in the reference month (as defined in § 422.258(c)(1)). For calendar year (CY) 2006, we would determine the enrollment weights on the basis of assumptions that we would develop. One possible approach would be to use the following procedure to assign weights to individual bids for PDPs and MA-PD plans for CY 2006:

  • Obtain total Medicare enrollment by region, and enrollment in each (local) MA plan that offers a drug benefit by region. These enrollments would be as of a specific date, for example, March 31, 2005.
  • Assign each (local) MA-PD plan in each region a weight equal to its MA enrollment.
  • Subtract the MA enrollment from the total Medicare enrollment for each region to arrive at the PDP-eligible enrollment.
  • Divide the PDP-eligible enrollment for each region by the number of companies offering PDPs in each region to arrive at the weight for each company in each region.
  • For each company in a region, divide the company weight by the number of plans offered by that company to arrive at the PDP weight.
  • The regional average monthly bid amount would be calculated by weighting each plan's bid by its assigned weight.
  • The national average monthly bid amount would be calculated by weighting each regional average monthly bid amount by the region's proportion of Part D eligible individuals (Medicare enrollment) and summing these products.

Using this methodology, after subtracting MA enrollments, each company offering PDP(s) in a region gets equal weight. An exception might occur based on capacity limits indicated by MA-PD plans. This assumes that beneficiaries would select a company, and then select a plan from that company. It also dilutes the effect of any potential artificially high bids designed solely to increase the national average monthly bid amount. If a company offers multiple plans in a region, each plan gets an equal allocated share of its company's assigned weight.

New MA-PDs would get a zero weight. This treatment is consistent with the weight assignment specified in the statute for subsequent years. Starting with the second year, all new plans would get zero weight because they have no prior year enrollment. We request comments on the “unequal” inclusion of plans in the calculation of the national average monthly bid. We note that many MA-PDs would operate in small geographic areas with small potential enrollment, and so we believe that the impact of this approach for new local MA-PDs is likely limited. We recognize, however, that this approach is perhaps more problematic related to the treatment of the new regional MA-PD plans, as these plans in a given region are likely to have larger enrollment than local MA-PD plans. This particular approach implicitly assigns persons in new MA-PD plans (both local and regional) to the PDP weights, hence giving potentially too much weight to the PDPs.

Alternatively, assigning equal weights to PDPs and new MA-PD plans (even if limited to just the regional MA-PDs) could likely assign too much weight to the new regional MA-PD plans, which at least in 2006 are expected to have lower enrollment. Another possible alternative would be to base weights on regional MA-PD plan projections of enrollment, subject to our assessment of reasonableness of the estimates. In this approach we would use the proportion of projected enrollment for each plan as weights. However, particularly in the first year or so, projections may be quite inaccurate, leading to a distorted and unrepresentative benchmark. We welcome comments on these and other alternative approaches for how to weight bids in 2006.

The assigned weights are price inelastic, that is, the recommended weight assignment methodology implies that price is not a factor in plan selection. In the absence of experience on which to base the relationship between price and plan choice in this population, and, therefore, on how many people would be expected to join each plan, we believe that the fairest method for 2006 is simply to assume an equal weight for each plan.

In subsequent years, the weights for the weighted average would be calculated as a percentage with the numerator equal to the number of Part D eligible individuals enrolled in the plan in the reference month and the denominator equal to the total number of Part D eligible individuals enrolled in all plans (except for those plans whose bids are not include in the national average bid amount, as described above) in the reference month. It represents the proportion of the Part D eligible enrolled individuals in the plan. We would multiply the portion of each plan bid attributable to basic benefits by its proportion of total Part D enrolled individuals and sum each product to arrive at the national average monthly bid. In § 423.279(c), we would also establish an appropriate methodology Start Printed Page 46684for adjusting the national average monthly bid amount to take into account any significant differences in prices for covered Part D drugs among PDP regions. We welcome comments on the existence of regional price variation in drug prices and on any factors that could lead to that variation. As part of carrying out the Congress' requirement that our geographic adjustment methodology be “appropriate,” we believe the method would first require gathering data from PDPs and MA-PDs on regional drug prices. Therefore, we may not implement a geographic adjuster for the first few years of the program unless we have acquired sufficient information on pricing to accurately characterize that variation. If we were to determine that there is significant geographic variation in prices, we anticipate that we would announce the adjustment factors in advance of the bidding process for any year in which geographic adjustment would be applied to bids in the calculation. (This would be subject to notice and comment like any other change in payment methodology.) If we were to determine that there is only minimal price variation, we would not implement a geographic adjuster for the national average monthly bid calculation. Additionally, we would implement any geographic adjuster in a budget neutral manner to avoid a change in aggregate payments from the total amount that would have been paid if we had not applied an adjustment.

8. Rules Regarding Premiums

In § 423.286, we propose that the monthly beneficiary premium would be the result of the calculation of a national base beneficiary premium subject to certain adjustments. Congressional intent was to arrive at an average monthly beneficiary premium in CY 2006 representing a certain percentage of the average total estimated benefit provided by the drug plans on a national basis (including benefits subject to Federal reinsurance subsidies). Taking into account that projected reinsurance subsidies are excluded from plan bids, the applicable percentage becomes approximately 32 percent, which is applied to the national average monthly bid amount.

To determine the uniform plan premium, in § 423.286(d), we would adjust the base beneficiary premium for certain plan characteristics including whether the plan's bid would be above or below the national average bid, and whether the plan offers supplemental benefits. (Since the bid has to be approved and premiums established for the entire year, we are interpreting the phrase “if for a month” in section 1860D'13(a)(1)(B)(i) of the Act and 1860D'13(a)(1)(B) (ii) of the Act as referring to the beneficiary premium as a monthly amount.) The base premium is adjusted to reflect the full difference between the plan's standardized bid amount and the national average monthly bid amount (which may be adjusted for regional price differences). To the extent that the plan's standardized bid amount is below the national average monthly bid amount, the base premium is adjusted downward by the difference. To the extent that the plan's standardized bid amount is above the national average monthly bid amount, the base premium is adjusted upward by the difference. The base premium would also be adjusted by adding the premium amount approved after negotiations for risk adjustment of the supplemental benefits, if any (as discussed above). Table F-2 illustrates a calculation of the base beneficiary premium and the adjustment for the difference between the bid and the national average monthly bid amount.

Table F-2.—Premium Illustration

BenchmarkPlans in regionBidsBeneficiary premium
National average monthly bid amount 1PlansApproved plan bidAmount by which bid exceeds benchmarkAmount by which bid is below benchmarkApplicable percent of nat'l premium ± difference
Plan 112514.000.00$50
111Plan 21110.000.0036
Plan 31010.00(10.00)26
Est. Reinsurance Percentage21.25(Assumed)
Applicable Percent =0.3238(25.5 /(100− 21.25)
Base Beneficiary Premium =36.00(111 * .3238) 2
1 A. Assumes no geographic adjustment.
2 B. Rounded to nearest dollar.

The sum of the base beneficiary premium, the adjustment for difference between the bid and the national average bid, and the supplemental benefit premium would be the monthly beneficiary premium. The monthly beneficiary premium (except for any supplemental premium) would be eliminated or reduced for low-income subsidy-eligible individuals, as described in section 1860D-14 of the Act and § 423.780. (This adjustment reflects the fact that the government would pay all or a portion of the monthly beneficiary premium for subsidy-eligible individuals.)

In § 423.286(d)(3), the monthly beneficiary premium would be increased for enrollees subject to the late enrollment penalty. The penalty amount for a Part D eligible individual for a continuous period of eligibility (as described in § 423.46) would be the greater of an amount that we determine is actuarially sound for each uncovered month in the same continuous period of eligibility; or 1 percent of the base beneficiary premium for each uncovered month in that period. The beneficiary premium amount is cumulative which means that each month the beneficiary is subject to a penalty, the penalty accumulates. Once the beneficiary enrolls in Part D, that accumulated penalty would be added to their premium amount each month. So for example, if the penalty amount is $.36 per month in 2004, and is subject to 12 months of this penalty, the beneficiary would pay an additional $.36 * 12 or $4.32 per month for as long as they are enrolled in Part D. During the first several years of the program, we currently expect that we would specify Start Printed Page 46685the penalty amount would be 1 percent of the base beneficiary premium per month. Once we have sufficient data on experience under the program with respect to individuals who enroll after their Initial Enrollment Periods, we will be able to determine the appropriate penalty amount, that is, either one percent or a greater amount to be adopted.

We note that achieving very high (indeed, virtually universal) access to prescription drug coverage for beneficiaries who participate in Part D was a key Congressional consideration in enacting MMA. We would encourage comments from insurers, actuaries, and others with experience, data, or expertise in this area. We are particularly interested in receiving comments on the most appropriate level for the late enrollment penalty, the likelihood of whether a $.36 per month of delay penalty (that is, 1 percent for each month of delayed enrollment) constitutes an adequate safeguard against selection bias, and the importance of strongly encouraging widespread enrollment to maximize the affordability and stability of Part D premiums.”

Except as provided with regard to any enrollment penalty, low-income assistance, or employer group waivers under section 1857(i) and section 1860D-22(b) of the Act and § 423.458(c) (as discussed in Subpart J of the preamble to our proposed rule), the monthly beneficiary premium for a prescription drug plan or MA-PD in a PDP region must be the same for all Part D eligible individuals enrolled in the plan. The monthly beneficiary premium charged under a fallback plan is discussed in § 423.867 of our proposed rules and in Subpart Q of this preamble.

9. Collection of Monthly Beneficiary Premiums

a. Means of Collection

In § 423.293(a), the beneficiary would have the same options on the method for premium payments as under Part C. Section 1860D-13(c)(1) of the Act applies the provisions of section 1854(d) of the Act (as amended by the MMA) to Part D premium collection. The beneficiary would have the option of having the amount withheld from his or her social security benefit check similar to the way Part B premiums are withheld. Beneficiary premium payments could also be paid directly to the PDP sponsor or MA organization through an electronic funds transfer mechanism (for example, an automatic charge of an account at a financial institution or a credit or debit card account). We could specify other means of payment, including payment by an employer or under employer-based retiree health coverage (as defined in section 1860D-22(c)(1) of the Act) on behalf of an employee or former employee (or dependent). All premium payments withheld from social security checks would be credited to the appropriate Trust Fund (or Account) and would be paid by us to the PDP sponsor or MA organization involved. Premiums from beneficiaries enrolled in fallback plans would not be collected by the plan. Instead, these premiums would be withheld from social security checks (or from other benefits as permitted under section 1840 of the Act). Beneficiaries who do not receive social security checks or otherwise have premiums deducted from other benefits or annuities would pay us directly. Failure to make premium payments could result in disenrollment as provided under section 1854(d)(1) of the Act and § 423.44(d) of our proposed regulations.

b. Collection of Late Enrollment Penalties

Concerning collection of the late enrollment penalty calculated under § 423.286(d)(3), after the early years of the program we would estimate and specify the portion of the penalty that would be attributable to increased actuarial costs assumed by the PDP sponsor or MA organization (and not taken into account through risk adjustment provided under § 423.329(b)(1) or through reinsurance payments under § 423.329(c)) as a result of that late enrollment. When the premium is withheld from social security benefits, we would pay only the portion of the late enrollment penalty attributable to the increased actuarial costs to the PDP sponsor or MA organization. When the premium is paid directly to the plan, we would reduce payments otherwise made to the PDP sponsor or MA organization by an amount equal to the amount of the enrollment penalty not attributable to increased actuarial cost. (Fallback plans would not receive any enrollment penalties applicable to their enrollees because they are not at risk.)

At least in the initial years of the program we do not anticipate paying plans additional funds related to late enrollment individuals. In the initial years there will not be a significant number of people who can have delayed enrollment for a significant period of time. Moreover, in the initial years of the program the risk corridors are more generous and afford more protection. Consequently we do not think it is necessary to provide a portion of the enrollment penalty to plans until experience indicates that actual risk has increased.

G. Payments to PDP Sponsors and MA Organizations Offering MA-PD Plans for All Medicare Beneficiaries for Qualified Prescription Drug Coverage

1. Overview (§ 423.301)

Subpart G of part 423 implements section 1860D-15 and the deductible and cost sharing provisions of 1860D-14(a) of the Act. This section sets forth rules for the calculation and payment of CMS direct and reinsurance subsidies for prescription drug plans and MA-PD plans; the application of risk corridors and risk-sharing adjustments to payments; and retroactive adjustments and reconciliations to actual enrollment and interim payments. References to part 422 of our regulations are to the new MA rules published elsewhere in this issue of the Federal Register.

2. Definitions

We propose definitions for a number of terms used in the computation of payments under this subpart, such as “allowable reinsurance costs”, “actually paid” and “coverage year” in § 423.308 of our regulations, but discuss these separately in the appropriate sections of this preamble. We do this because these terms are complex and are best clarified in the context of the discussion of the pertinent provisions.

3. General Payment Provisions (§ 423.315)

The payment provisions required by section 1860D-15 of the Act include 4 different payment mechanisms. The first payment mechanism involves monthly payments that (along with reinsurance subsidies) subsidize on average 74.5 percent of the value of the basic prescription drug benefit, thereby maintaining beneficiary premiums for basic coverage on average at 25.5 percent. The direct subsidy is determined based on a national bidding process. Sponsors who wish to offer plans submit bids based on the projected costs of an average beneficiary. After our review and approval, these bids become the basis for the direct subsidy that is equal to the plan's standardized bid, risk-adjusted for health status as provided in § 423.329(b), minus the base beneficiary premium (as determined in § 423.286(c) and as adjusted for any difference between the standardized plan bid and the national average monthly bid amount (as described under § 423.286(d)(1))). The risk-adjustment Start Printed Page 46686applied to the bid compensates the plan for individual enrollee differences in health status from the average beneficiary and thus reduces the impact from any adverse risk selection. Further adjustments to the direct subsidy payments would be made to account for actual enrollment and updated health status information.

The second and third payment mechanisms would substantially reduce the uncertainty and risk of participating in this new program. Since the Medicare prescription drug benefit is new, there is uncertainty surrounding the utilization, costs, and risk profiles (participation rates and characteristics) of potential enrollees. Federal reinsurance subsidies and risk corridor payment adjustments work along with the risk-adjustment included in the direct subsidy to substantially reduce the uncertainty and risk of participating in this new program. Through reinsurance subsidies, in which we act as the re-insurer, we would subsidize a large portion of any catastrophic expenses (defined as expenses over an individual's out-of-pocket limit) through a reinsurance subsidy. Through risk corridor arrangements, exposure to unexpected non-catastrophic expenses would be limited. These risk sharing arrangements are structured by the statute as symmetrical risk corridors, that is, agreements to share a portion of the losses or profits resulting from expenses above or below expected levels, respectively.

Finally, according to section 1860D-14 of the Act, PDP sponsors and MA organizations would receive payments to cover certain premium, cost-sharing, and extended coverage subsidies for low-income subsidy eligible individuals. With the exception of interim estimated payments of cost-sharing subsidies, these payments are discussed separately in subpart P of this preamble and in § 423.780 of our proposed regulations.

Certain payments would be exceptions to these general payment provisions. Under private fee-for-service (PFFS) plans, reinsurance would be calculated differently and risk sharing would not be available. Reinsurance subsidies and risk sharing would not be available for fallback plans, and are paid in accordance with contractual terms related to actual costs and management fees tied to performance measures.

4. Requirement for Disclosure of Information (§ 423.322)

a. Data Submission.

As provided under sections 1860D-15(c)(1)(C), 1860D-15(d)(2) and 1860D-15(f) of the Act and in § 423.322 of our proposed regulations, we would condition program participation and payment upon the disclosure and provision of information needed to carry out the payment provisions. Such information would encompass the quantity, type, and costs of pharmaceutical prescriptions filled by enrollees that can be linked to individual enrollee data in our systems; that is, linked to the Medicare beneficiary identification number (HIC#). We would appreciate comments on the content, format and optimal frequency of data feeds. We believe that more frequent feeds than annually (weekly, monthly, quarterly) would allow us to identify and resolve data issues and assist the various payment processes.

We are evaluating our minimum data requirements with regard to prescription drug claims. Our goal would be to determine the least burdensome data submission requirements necessary to acquire the data needed for purposes of accurate payment and appropriate program oversight. Our view is that we will need at least the following data items for 100 percent of prescription drug claims for the processes discussed below:

  • Beneficiary name (first, middle initial, last).
  • Beneficiary HIC#.
  • Beneficiary birth-date.
  • Eleven-digit NDC code.
  • Quantity dispensed.
  • Prescription drug cost before co-payment (ingredient cost, dispensing fee, sales tax amount).
  • Beneficiary co-payment amount, and
  • Date prescription filled.

We assume that ingredient cost and dispensing fee reflect point of sale price concessions in accordance with purchase contracts between plans (or their agents, such as PBMs) and pharmacies, but do not reflect subsequent price concessions from manufacturers, such as rebates. We anticipate that we will need similar data on prescription drug claims for appropriate risk-adjustment, reconciliation of reinsurance subsidies, calculation of risk sharing payments or savings, and program auditing. Data will also be required for assessing and improving quality of care. We will welcome comments on the nature and format of data submission requirements for the following processes:

  • Risk adjustment process would require 100 percent of drug claims in order to develop and calibrate the weights for the model for this new benefit. Consequently, PDP sponsors and MA organizations offering MA-PD plans would be required to submit 100 percent of prescription drug claims for Part D enrollees for the coverage year. Risk adjustment would require the submission of prescription drug agent identifying information, such as NDC codes and quantity, in order to allow the standardized pricing of benefits in the model. Because we would use standardized pricing, cost data on each prescription is not a requirement for risk adjustment, although it is needed for other purposes.
  • The reinsurance subsidy payment process would require 100 percent of claims for each enrollee for whom the plan claimed allowable reinsurance costs. (Although reconciliation of the reinsurance subsidy does not require NDC codes or quantities, it does require member, cost and date of service data.) All claims for enrollees with expenses in excess of the out-of-pocket limit would be necessary to verify that the costs were allowable because the totality and order in which the claims are incurred would define which claims would be eligible for reinsurance payments. While the start of reinsurance payments begins with claims after the out-of-pocket threshold has been reached, which is $5,100 in total spending (2006) for defined standard coverage, it may be associated with a higher dollar total spending amount under alternative coverage. Whatever the level, we would need to receive all claims by date of service including the amount of beneficiary cost sharing in order to determine the occurrence of the out-of-pocket threshold. Any plan-incurred costs for claims for supplemental benefits cannot be included in determining whether the out-of-pocket threshold has been met.
  • The risk sharing process would require 100 percent of claims for all enrollees for the calculation of total allowable risk corridor costs. The plan would need to segregate costs attributable to supplemental benefits from those attributable to basic benefits since supplemental benefit costs are not subject to the risk corridor provisions. Again, all claims would be necessary to verify that the costs were allowable because the order in which the claims were incurred would help determine whether the claims were solely for basic coverage. For instance, a claim processed between a beneficiary's deductible and initial coverage limit (in standard coverage) would count towards risk sharing, but another claim (processed identically but immediately after the initial coverage limit has been reached) would not. Unlike the reinsurance subsidy, which is limited to Start Printed Page 46687individuals with expenses in excess of the out-of-pocket threshold, risk sharing involves costs (net of discounts, chargebacks and rebates, and administrative costs) for all enrollees for basic coverage, but only those costs that are actually paid by the sponsor or organization. Because all plans participate in risk sharing, potentially all claims for all Part D enrollees in all plans must be reviewed. Like the reinsurance reconciliation, risk sharing does not require NDC codes or quantities, but does require member, cost, and date of service data.
  • The program audit process would require at least a statistically valid random sample of all Part D drug claims. We believe that several points of reference including HIC#, cost, date of service, and NDC code would be required for unique identification of individual claims in any random sample drawn from the population. If we receive 100 percent claims to support the payment processes, this sample could be drawn from our records. We believe it would be useful to obtain the prescribing physician's National Provider Identifier (NPI) number, as required by the administrative simplification provisions of HIPAA, in the elements of collected data for purposes of fraud control once it is available. Prior to May 2007 when the NPI is expected to be used, we would be interested in alternative means for identifying the physician prescriber.

(Nothing in this data collection discussion should be construed as limiting OIG authority to conduct any audits and evaluations necessary for carrying out our proposed regulations.)

b. Allowable Costs

Section 1860D-15(b)(2) and 1860D-15(e)(1)(B) of the Act and § 423.308 of our proposed regulations, specify that to determine “allowable costs” for purposes of both the reinsurance and risk corridor payments, only the net costs actually paid after discounts, chargebacks, and average percentage rebates, as well as administrative costs, are to be counted. We encourage comments on appropriate methodologies and data sources that can be used in making these adjustments. For example, we would like to receive comments on how price concessions (discounts, chargebacks, rebates, or any other periodic financial remuneration) would be most accurately and efficiently applied to prescription drug claims data to satisfy this requirement. We would also be interested in any information or data on the effect on costs such adjustments can be expected to yield. We are particularly interested in how data would be appropriately allocated and applied to the reinsurance subsidy tied to individual expenses in excess of the out-of-pocket limit.

We understand that much of the rebate accounting is not applied in the context of point of sale claims data, but rather in periodic accounting adjustments, and that rebates are frequently reported along with administrative fees paid by the manufacturer. We are concerned that these accounting practices would be incompatible with the need to report all price concessions for purposes of determining allowable reinsurance and risk corridor costs and we, therefore, are proposing to require that they be segregated. Moreover, we are proposing to require that any administrative fees paid to Part D plans be based on the fair market value of services rendered, and that any fees determined to be above or below fair market value would be considered additional price concessions.

Due to the nature and timing of rebate accounting, we believe that this will require a form of step-down cost reporting in which rebates received at the aggregate level may be apportioned down to the level of plan enrollees incurring reinsurance expenses on a reasonable basis. Since Medicare beneficiaries would be expected to have higher per capita prescription drug utilization than other populations, we believe it would be appropriate to allocate rebates (and other similar price concessions) on the basis of percentage of dollars spent rather than of covered lives. Alternatively, one could create a ratio of total rebate amounts to total spending and reinsurance-related spending to total spending to derive the share of rebates to be allocated to reinsurance, and then adjust down the reinsurance amount. A similar ratio could be created for risk corridor spending. Another way that the current market expresses these relationships is in an average rebate per script value that could even be differentiated by brand versus generic rebates per script. In apportioning rebates and other financial remunerations to Medicare costs, we would look to ensure that plans appropriately take into account the distribution of claims between basic and supplemental benefits, and apportion price concessions in a proportionally accurate way.

In whatever manner price concessions will be apportioned, plans must require and keep accurate records on all price concessions and ensure that these are clearly accounted for and segregated from administrative fees. All cost reporting would be subject to inspection and audit (including periodic audits) by us and the OIG. As stated below, to the extent either we or the OIG discover that a sponsor was overpaid for reinsurance or risk sharing (that is, the records do not support the payments made, or there is insufficient documentation to determine whether the payments are correct), we may recoup the overpayments. The reopening and overpayment provisions are discussed at the end of this part G.

c. Coverage Year

In § 423.308 we propose that the term “coverage year” would mean a calendar year in which covered Part D drugs are dispensed if the claim for such drugs (and payment on such claim) is made not later than 3 months after the end of the year. In other words, drug claims paid past the close of the 3-month period would not be considered part of that coverage year (or the next), and would not be used to calculate that year's payments or in reconciling risk adjustment payments for the year.

This limit would be imposed in order to provide timely closure for payment determination processes such as reinsurance, risk corridors and employer subsidies. While the period of 3 months would be significantly less than the fee-for-service Medicare medical claims standard of 18 months, we believe that a shorter period is warranted due to the highly automated and point of sale nature of prescription drug claim processing. We understand that the vast majority of prescriptions are not filled without the claim being simultaneously processed and therefore, there is a much shorter claims lag to be considered. We believe that the number and value of drug claims that would potentially be missed would be immaterial, consisting primarily of paper claims. The 3-month close-out window would not limit the liability of the plan or its claims processing contractor for reimbursing any lagging claims, but would simply establish a timely cut-off for finalizing payments. Any rebates for the coverage year not reflected in the fourth quarter data (sent to close out the year) must be credited against future payments. Although we are closing the year for claims purposes, the plan must account for all rebates that occur throughout the coverage year and send us all the data.

A shorter period would allow for payment processes that are dependent on the knowledge of total allowable costs for each coverage year to be concluded on approximately the same schedule as other reconciliations involving enrollment or risk adjustment data. On this schedule, calculations of Start Printed Page 46688risk sharing could begin as soon as five to six months after the close of the payment year. If the claims submission standard were a longer period, final reconciliations would be significantly delayed. We are interested in receiving comments on this timetable, specifically whether we should adopt a shorter or longer period than 3 months, and including data with which to estimate the proportion and value of drug claims that could be excluded with a 3-month close-out window.

5. Determination of Payment (§ 423.329)

a. Direct Subsidies

As directed in section 1860D-15(a)(1) of the Act and codified in § 423.329(a), we would provide direct subsidies to PDP sponsors and MA organizations offering MA-PD plans. These subsidies would be in the form of advance monthly payments. Payments would be equal to the plan's standardized bid, risk adjusted for health status as provided in § 423.329(b), minus the base beneficiary premium (as determined in § 423.286(c) and adjusted for any difference between the standardized plan bid and the national average monthly bid amount (as described under § 423.286(d)(1))). The standardized bid would be the portion of the plan's bid attributable to basic coverage. This portion would be risk-adjusted by multiplying by the prescription drug risk score attributable to each enrollee. Between the government direct subsidy and the adjusted base beneficiary premium, the plan would receive its entire risk-adjusted standardized bid in advance each month. Payment for supplemental benefits would come from enrollees in the form of additional premium. By statute, the sponsor must bear all risk for such supplemental benefits.

We would note that a plan's total per capita payment could never exceed its bid, risk-adjusted for the beneficiary's health status. This would be the case even if the difference between the plan's bid and the national average monthly bid amount were greater than the beneficiary monthly premium, mathematically resulting in a “negative premium” amount. We do not believe that the statute envisions plan payments in excess of negotiated costs, since this would violate the revenue requirements provisions discussed in the Subpart F of this preamble.

b. Risk Adjustment

In section 1860D-15(c)(1) of the Act, we are directed to develop and publish a prescription drug risk adjustment methodology taking into account the similar methodologies under § 422.308(c)(1) to adjust payments to MA organizations for benefits under Part C on the basis of costs incurred under original Medicare. In § 423.329(c) we propose to establish this risk adjustment methodology. We would develop and publish this risk adjustment methodology in the 45-day notice for the announcement of 2006 Medicare Advantage rates. Section 1860D-15(c)(1)(D) of the Act requires us to publish the risk adjustment for Part D at the same time we publish risk adjustment factors under section 1853(b)(1)(B)(i)(II) of the Act. Because these risk adjustment factors under Part C can only be published after 45-day advance notice under section 1853(b)(2) of the Act, we would use the same notice procedures we use under Part C for risk adjustment. We believe this would promote consistency and uniformity in the process, and, especially for MA-PD plans, allow entities to review notices published on the same day for purposes of commenting on or learning about risk adjustment. As usual, the 45-day notice would solicit public comment on any change in proposed payment methodologies. We are expecting that this new prescription drug risk adjustment methodology would initially be based on the relationship of prescription drug utilization within the entire Medicare population to medical diagnoses, and that it would be applied at the individual beneficiary level. Our longer-term plan would be to refine the risk adjustment model to account for predictable risk based on both medical and drug claim data.

Section 1860D-15(c)(1)(C) of the Act and § 423.329(b)(3) of this proposed rule authorize us to specify and require the submission of data from PDP sponsors regarding drug claims that can be linked at the individual level to part A and part B data in a form and manner similar to the Medicare Advantage process provided in § 422.310 and such other information as we determine necessary. Similarly, MA organizations that offer MA-PD plans must submit data regarding drug claims that can be linked at the individual level to other data that these organizations are required to submit to us. A primary requirement, therefore, would be claims linked to the Medicare beneficiary HIC#. Other proposed data submission elements are discussed in section 3(a) of this part of the preamble. We may also be interested in linking this data to the plan level and would then require the inclusion of the PDP or Medicare Advantage plan identifier (H#). We would use this data to further refine our prescription drug risk adjustment factors and methodology in order to make payments that accurately reflect plan risk.

Any risk adjustment methodology we adopt should adequately account for low-income subsidy (LIS) individuals (and whether such individuals incur higher or lower-than average drug costs). Our risk adjustment methodology should provide neither an incentive nor a disincentive to enrolling LIS individuals, and we request comments on this concern and suggestions on how we might address this issue.

Our particular concern is that a risk adjustment methodology, coupled with the statutory limitation restricting low-income subsidy (LIS) payments for premiums to amounts at or below the average, could systematically underpay plans with many LIS enrollees (assuming LIS enrollees have higher costs than average enrollees). If the risk-adjustor fails to fully compensate for the higher costs associated with LIS recipients, an efficient plan that attracts a disproportionate share of LIS eligible individuals would experience higher costs to the extent the actual costs of the LIS beneficiaries are greater than the risk-adjustment compensation. Failing to discourage enrollment by LIS beneficiaries in 2006, the plan would experience higher than expected costs in that year and presumably be driven to reflect these higher costs (due to adverse selection, not efficiency) in its bid for 2007. In this hypothetical, plans would have a disincentive to attracting a disproportionate share of LIS beneficiaries. One possible solution would be to assure that the initial risk-adjustment system, which will be budget neutral across all Part D enrollees, does not undercompensate plans for enrolling LIS beneficiaries. In fact, to the extent that an initial risk-adjustor might at the margin tend to overcompensate for LIS beneficiaries, plans would have a strong incentive to disproportionately attract such beneficiaries. Plans could attract LIS beneficiaries both by designing features that would be attractive to such beneficiaries but also by bidding low. We would appreciate comments on this concern and suggestions on how we might address this potential problem.

c. Risk Adjustment Budget Neutrality

In accordance with section 1860D-15(c)(1)(A) of the Act and § 423.329(b)(1), our risk adjustment methodology would be implemented in a budget-neutral manner. A requirement for budget neutrality assumes that there is a known budget. We interpret the statute to require that the risk Start Printed Page 46689adjustment methodology must not result in a change in aggregate amounts payable in section 1860D-15(a)(1) of the Act, that is, the risk adjustment methodology must be “budget neutral” to some aggregate of direct subsidy payments made before risk adjustment. (Since direct subsidy payments are made only to full-risk or limited risk plans, this budget by definition would not include payments to fallback plans.)

For comparison, in the current M+C (now Medicare Advantage) program the budget for risk-adjustment budget neutrality is defined to be the aggregate government payments made to plans under the 100 percent demographic payment system. Since the health-status-risk-adjustment methodology currently results in lower aggregate payments than the demographic methodology, M+C budget neutrality distributes among participating plans the difference between total payments under the 2 methodologies via a factor that allocated the difference in the same proportion as the allocation of risk-adjusted payments. However, there is no corresponding predetermined limit to aggregate payments in Title I, that is, to the aggregate government direct subsidy payments made before risk adjustment, so there is no amount to use as a basis for comparison in determining budget neutrality.

In the M+C program, the reason for the difference between the total payments under the demographic methodology and total payments under health status risk adjustment is that the average health status of enrollees in M+C is different than the average health status for the program as a whole (that is, M+C plus original Medicare). In Part D, there is no equivalent to original Medicare since beneficiary access subsidized coverage through enrollment in private plans. The Part D risk adjustment system would be based on these enrollees. Since there is no group of beneficiaries outside the system like there is under Part C, total payments with and without risk adjustment are always equal or budget neutral. Therefore, we believe that risk adjustment as applied to Part D benefits should be budget neutral to the risk of the individuals who actually enroll without any additional adjustment. We would appreciate comments on this approach.

d. Reinsurance Subsidies

i. Allowable Reinsurance Costs

As provided in section 1860D-15(e) of the Act and § 423.329(c), we would reduce the risk of participating in this new program by providing reinsurance subsidies. Subsidies would be limited to 80 percent of allowable reinsurance costs for drug costs incurred after an enrollee has reached the annual out-of-pocket threshold. The annual out-of-pocket threshold would be $3,600 in 2006. Under standard coverage this corresponds to total gross covered prescription drug costs of $5,100, and would be increased annually as provided in section 1860D-2(b)(4)(B)(i)(II) of the Act and 1860D-2(b)(4)(B)(ii) (with regard to rounding).

In meeting the various actuarial tests required of alternative coverage, there could be instances where a sponsor wanting to provide basic alternative coverage would have to enhance plan benefits in order to meet the test of equal total actuarial value relative to defined standard coverage. This could occur with the use of a tiered co-pay benefit structure that could shift utilization to a cheaper set of drugs, thus allowing plans to lower cost sharing to achieve the same total dollar value as defined standard coverage. In these instances, since cost sharing is reduced relative to defined standard coverage, the out-of-pocket threshold would be associated with a higher total drug costs than the $5,100 under standard coverage in 2006. For sponsors offering enhanced alternative coverage, the out-of-pocket threshold would also be associated with higher total drug spending. In this instance, however, it would be due to fact that the plan's supplemental benefits would be displacing part of the cost sharing that enrollees would otherwise have incurred.

Allowable reinsurance costs are a subset of gross covered prescription drug costs. Gross covered prescription drug costs are those costs incurred under the plan, excluding administrative costs, but including costs related to the dispensing of covered Part D drugs during the year and costs relating to the deductible. These costs are determined whether paid by the individual or under the plan, and regardless of whether the coverage under the plan exceeds basic prescription drug coverage. Allowable reinsurance costs, on the other hand, are the subset of these costs that are attributable solely to basic or standard benefits and that are actually paid by the sponsor or organization or by (or on behalf of) an enrollee under the plan. Actually paid—means that these costs must be net of any discounts, chargebacks, and average percentage rebates, and would exclude any amounts not actually incurred by the sponsor. The reinsurance payments are then calculated by determining the portion of allowable reinsurance costs that are incurred after the enrollee has reached the out-of-pocket threshold ($3,600 out of pocket in 2006). The reinsurance subsidy would provide 80 percent of such excess amount.

ii. Payment of Reinsurance Subsidy

Since allowable reinsurance costs can only be fully known after all costs have been incurred for the payment year, we would propose to make payments on an incurred basis to assist PDP sponsors and MA organizations with cash flow. Under § 423.329(c)(2)(i), we would provide for payments of reinsurance amounts based on plan actual reinsurance-eligible allowable costs with a one-month lag period. In other words, no payments would be made until enrollees reached the true out-of-pocket threshold. This would require timely submission of drug claim data. In this approach rebates would be recognized in the month after they were received and would be offset against the previous month's actual costs.

Alternatively, we could consider payments of reinsurance amounts on a monthly prospective basis based on the reinsurance assumptions submitted and negotiated with each plan's approved bid. We would take these assumptions into account in developing either a plan-specific or program-wide approach. We note that any program-wide approach involving some kind of average of the amounts included in the bids would have to adjust for the fact that plans providing enhanced alternative benefits would incur lower reinsurance costs. We are also aware that allowable reinsurance costs would be predominantly incurred in the latter parts of the coverage year and are considering the most appropriate methodology for distributing interim payments. One possible approach would require the submission of a schedule of the estimated timing of incurred allowable reinsurance costs along with the bid. For example, we might take schedules from each plan or we could propose an incremental schedule (X% of the total in January, Y% in February, etc.). We are aware that the prospective payment of estimated costs would create an incentive to overstate reinsurance, however, and are interested in ensuring that payments are not excessive. Since equal payments would be most compatible with our systems, in the first two years of the program (and for the first two years of new plans thereafter) we could also consider another approach paying 1/12th of the net present value of estimated allowable reinsurance costs in each month of the coverage year. The net Start Printed Page 46690present value would be calculated on the basis of all estimated reinsurance payments due at the end of the year and discounted by the most recently available rate for one-year Treasury bills. We would welcome comments on these approaches and on the appropriate treatment of interest in such a system.

For subsequent years of the program, we could consider an approach of paying 1/12th of the two-year prior year's actual expenses. Such an approach would need to be trended forward by an appropriate index to account for expected growth in plan costs. In other words, in 2008 the interim payments would be based on actual reconciled reinsurance payments for 2006 trended forward by an estimated two-year growth factor. Regardless of which process we used for making reinsurance payments, as discussed below, if, at the end of the year, the data demonstrates the sponsor was overpaid through the interim payments—or if there is insufficient evidence to support the reinsurance payments claimed—we would recover the overpayments either through a lump sum recovery or by reducing future payments during the coverage year. Similarly, if the data demonstrates that the sponsor was underpaid, we would pay the sponsor.

iii. Adjustments to Reflect the True Out-of-Pocket Threshold

The statute provides that the reinsurance subsidy would be paid only for the plan's share of individual expenses in excess of an enrollee's true out-of-pocket (TrOOP) threshold. As indicated above, if the PDP sponsor offers enhanced alternative coverage or an MA-PD plan offers benefits beyond basic coverage as part of its supplemental benefits, the plan's spending for these benefits would not count toward the TrOOP threshold. Since benefits beyond basic coverage reduce cost sharing that would otherwise be incurred, they shift the effective prescription drug catastrophic limit beyond the associated total spending under the standard benefit ($5,100 in 2006) and raise the effective reinsurance attachment point at the same time.

In addition, to the extent that plan cost sharing is paid or reimbursed by secondary insurance coverage or otherwise, that cost sharing does not count toward the out-of-pocket threshold. Beneficiaries are required to report the existence of secondary coverage or other types of coverage we identify and plans must identify these payments and ensure that true out-of-pocket spending is accounted for accurately in claims processing. This is more fully discussed in subpart C and subpart J of this preamble.

iv. Adjustments for the Insurance Effect of Supplemental Coverage

Supplemental benefits increase the level of total drug spending after which reinsurance payments begin (reinsurance attachment point). Assuming 2 identical groups of enrollees with respect to utilization, one enrolled in enhanced alternative coverage and one in defined standard coverage, the total allowable reinsurance costs for the group with standard coverage would be greater than for the group with enhanced alternative coverage. Thus, one might hold that the differences in benefit packages are accounted for without the need for further adjustment. If one would examine average total spending for both groups, however, one would find that the average spending under enhanced alternative coverage would be greater than the average under defined standard coverage because of the impact of the insurance effect (or “moral hazard”, that is, the tendency of increased coverage resulting in increased utilization due to decreased financial stake in the costs associated with utilization). All other things being equal, this higher total spending would result in higher allowable reinsurance costs than would otherwise occur if the total spending under enhanced alternative coverage were comparable to that under standard coverage.

We are therefore proposing (in the definition of allowable reinsurance costs) to adjust allowable reinsurance costs to reflect the impact of this induced utilization. We would make this adjustment to comply with the requirement in section 1860D-15(b)(2) of the Act that in no case shall the allowable reinsurance costs exceed the costs “that would have been paid under the plan if the * * * coverage * * * were standard prescription drug coverage”. We are looking for comments on whether this adjustment should be made and how best to adjust the experience of PDPs with enhanced alternative coverage or MA-PD plans offering supplemental coverage to account for the insurance effect.

v. Reinsurance Subsidies to Private Fee-For-Service Plans

As provided under section 1860D-21(d)(4) of the Act and proposed in § 423.329(c)(3), we would base reinsurance payments for PFFS plans on an alternative methodology. Rather than negotiating reinsurance assumptions submitted with the PFFS plan bid or otherwise adjusting for potential price level differences between PFFS and other MA organization bids, we would estimate the amount of reinsurance payments that would be payable if the plan were an MA-PD plan described in section 1851(a)(2)(A)(i) of the Act. In doing so we would take into account the average reinsurance payments made under § 423.329(c)(2) for basic benefits for populations of similar risk under such MA-PD plans. Estimated payments would not be subject to any reconciliation process to compare the amounts paid to the actual allowable reinsurance expenses, and would not allow for payment recoveries in the event that actual allowable reinsurance costs exceed payments.

6. Low-Income Cost-Sharing Subsidy Interim Payments

As provided under section 1860D-14 of the Act and in § 423.780 of our proposed regulations, CMS will provide additional assistance for certain low-income beneficiaries in the form of premium, deductible and cost-sharing subsidies. Since actual expenses incurred by these low-income beneficiaries can only be fully known after all costs have been incurred for the payment year, we would propose to make estimated payments on an interim basis to assist PDP sponsors and MA organizations with cash flow. Under § 423.329(d)(2)(i), we would provide for interim payments of low-income deductible and cost-sharing amounts on a monthly prospective basis based on estimates of low-income cost sharing submitted and negotiated with each plan's approved bid. Like the possible option of reinsurance subsidy interim payments discussed above, a decision on whether these assumptions would be taken into account in developing a plan-specific or program-wide approach has yet to be determined.

We are aware that low-income cost sharing would not necessarily be incurred evenly throughout the coverage year and are considering the most appropriate methodology for distributing interim payments. Since equal payments would be most compatible with our systems, in the first two years of the program (and for the first two years of new plans thereafter) we are considering an approach paying 1/12th of the net present value of estimated low-income cost sharing in each month of the coverage year. The net present value would be calculated on the basis of all estimated costs due at the end of the year and discounted by the most recently available rate for one-year Treasury bills. An alternative approach would require the submission of a schedule of the estimated timing of Start Printed Page 46691incurred low-income cost sharing along with the plan bid. For example, we might take schedules from each plan or we could propose an incremental schedule (X% of the total in January, Y% in February, etc.). We are aware that the prospective payment of estimated costs creates an incentive to overstate low-income cost sharing, and are interested in ensuring that our interim payments are not excessive. We would welcome comments on these approaches and on the appropriate treatment of interest in any methodology. For subsequent years of the program, we are considering an approach of paying 1/12th of the two-year prior year's actual expenses. Such an approach would need to be trended forward by an appropriate index to account for expected growth in plan costs. In other words, in 2008 the interim payments would be based on actual reconciled low-income cost sharing subsidy payments for 2006 trended forward by an estimated two-year growth factor. Again, any reconciliation at the end of the year would need to be based on the sponsor providing adequate information in order to determine the subsidy amounts for the year. If the sponsor could not provide such information, interim payments would be recovered. In addition, the low-income payments would be subject to the same inspection and audit provisions applying to the other payments made under section 1860D-15 of the Act.

7. Risk Sharing Arrangements

a. Risk Sharing Methodology and the Target Amount

As provided under section 1860D-15(e) of the Act and proposed in § 423.336, we would establish risk corridors. Risk-sharing payments would limit exposure to unexpected expenses not already included in the reinsurance subsidy or taken into account through risk adjustment. These would be structured as symmetrical risk corridors that are agreements to share a portion of the losses or profits resulting from expenses for basic benefits either above or below expected levels, respectively. However, plans would always be at full financial risk for all spending on supplemental drug coverage. In addition, in accordance with section 1860D-21(d)(5) of the Act and section 1860D-15(g) of the Act, the risk sharing provisions are not available to PFFS and fallback plans.

The expected level of expenses for basic benefits included in the standardized bid is known as the “target amount”. The target amount for any plan would be equal to the total amount of direct subsidy payments from us, and premium payments from enrollees to that plan for the year based upon the risk-adjusted standardized bid amount, less the administrative expenses and return on investment assumed in the standardized bid. Since the standardized bid is the portion of the accepted bid amount attributable to basic prescription drug coverage, the target amount can be thought of as “prepayments” of prescription drug expense for basic benefits. The standardized bid has also taken into account (and excludes) any utilization effects of offering supplemental coverage. The objective of risk sharing would be to compare total actual incurred prescription drug expenses to the prepayments, to compute the difference, and to reimburse or recover a portion of the difference.

In § 423.336(a)(2)(A), we would establish risk corridors, defined as specified risk percentages above and below the target amount. For instance, in § 423.336(a)(2)(ii), for 2006 and 2007, the first risk corridor is defined as 2.5 percent above the target amount and the second as 5 percent above the target amount. This means that, for 2006 and 2007, the first risk corridor is between 100 percent and 102.5 percent of the target amount and the second risk corridor is between 102.5 percent and 105 percent of the target amount. A third risk corridor is above 105 percent of the target amount.

The term, symmetrical risk corridors—means that the same size corridors exist below the target amount as above it. The actual upper or lower limits of each corridor equal the target amount plus or minus the product of the risk percentage times the target amount, as illustrated in Table G-1. Since these risk corridors would be symmetrical, plans with adjusted allowable costs below the 1st threshold lower limit would have to share the savings with the government.

b. Allowable Risk Corridor Costs

The costs applicable to the computation of risk sharing are known as allowable risk corridor costs. These costs are defined in section 1860D-15(e)(1)(B) of the Act and proposed in § 423.308 as the part of costs for covered Part D drugs that are only attributable to basic benefits. Allowable risk corridor costs cannot include costs attributable to benefits outside the basic benefit. We would interpret this as both the actual differences in benefits structure and the insurance effect of supplemental coverage on basic coverage. In section 1860D-15(e)(1)(B) of the Act, reference is made to section 1860D-11(c)(2) of the Act that provides for a utilization adjustment using as its reference point standard prescription drug coverage. We are interpreting this to mean the statutorily defined standard prescription drug coverage described in Subpart C. Also, allowable risk corridor costs must actually be paid by the sponsor or organization under the plan and must be net of any chargebacks, discounts or average percentage rebates. The allowable risk corridor costs also do not include any administrative expenses of the sponsor or organization. (Administrative expenses would not include costs directly related to dispensing of Part D drugs during the year.) Note that unlike allowable reinsurance costs, allowable risk corridor costs do not include any amount paid by the enrollee. In § 423.336(a)(1), we propose that allowable risk corridor costs must be adjusted in accordance with section 1860D-15(e)(1)(A) of the Act, by subtracting expenses reimbursed through other separate payments. Thus, reinsurance payments made under § 423.329(c)(2) and the non-premium low-income subsidy payments made under § 423.782 [in Subpart P] of these proposed regulations to the sponsor of the plan for the year must be subtracted. The PDP sponsor or MA organization would already have received compensation for these costs, and thus they do not fall within the construct of risk corridors that are directed at limiting exposure to unexpected expenses.

If adjusted allowable risk corridor costs exceed the prepayments by a certain amount, we would reimburse a percentage of the difference to help plans with a portion of the unanticipated expenses associated with their drug coverage. On the other hand, if prepayments exceed adjusted allowable risk corridor costs, we would reduce future payments or otherwise recover a percentage of the difference to reduce the impact on the Trust Fund of excessive bids.Start Printed Page 46692

Table G-1.—Illustration of Risk Sharing Arrangements for Hypothetical Plan

A. Assumptions in bidActual costs for basic benefit
PMPMTotalsPMPMTotals
Enrollees10,000
(Subsidy-eligible)0
Avg. Payment114.00
Premium30.60
Avg. Direct Subsidy83.40
Admin17.00
Est. Allowable Cost97.00970,000100.001,000,000
Reinsurance Cost0.00
Total Premiums306,000
Total Direct Subsidy834,000
Less Total Admin(170,000)
Target Amount970,000
B. Risk corridor limitsRisk corridor limit %C. ThresholdRisk sharing %Allowable costs minus threshold
2nd upper limit.0501,018,50080%
1st upper limit.025994,25050%5,750
Target Amount.000970,0000%
1st lower limit(.025)945,750(50%)
2nd lower limit(.050)921,500(80%)

In Table G-1, a hypothetical plan with average payments of $114 per-member-per-month (PMPM), based on expected prescription drug costs of $97 PMPM, actually incurs costs equal to $100 PMPM. In this simplified example there are no reinsurance or low-income subsidies. The actual incurred costs are compared to the “prepayment” included in the risk-adjusted standardized bid (in this case the target amount of $970,000) by looking at the risk corridors in which they fall. The risk corridors have been calculated based on the target amount plus or minus the risk percentages associated with each risk corridor limit. For instance the 1st upper limit is defined as the target amount ($970,000) plus 2.5 percent of the target amount ($24,250), so the 1st upper limit is calculated to be $994,250. The actual allowable costs of $1,000,000 fall between the 1st upper limit and the 2nd upper limit, so the costs eligible for risk sharing is the difference between the allowable costs ($1,000,000) and the 1st threshold upper limit ($994,250), or $5,750. Since the amount of risk sharing in this corridor is set at 50 percent, the actual change in payment due to risk sharing is 50 percent of $5,750, or an additional $2,875.

As mentioned above, in order to arrive at a value for actual risk corridor costs that can be appropriately compared to the target amount, allowable risk corridor costs would be adjusted to remove expenses reimbursed through total reinsurance payments and non-premium low-income subsidy payments. The statute indicates that allowable risk corridor costs should be reduced by reinsurance payments and by the subsidy payments for low-income individuals. The subsidy payments for low-income individuals under section 1860D-14 of the Act include subsidies for both premium and for cost sharing. We are proposing to interpret “the total subsidy payments made under section 1860D-14” under section 1860D15(e)(1)(A)(ii)(II) of the Act in the context of “costs incurred by the sponsor or organization” in the definition of allowable risk corridor costs. Since premiums are not a cost, we propose to limit our interpretation of “the total subsidy payments” to payments related to cost sharing.

In proposing this interpretation, we note that when adjusted allowable risk corridor costs are calculated by subtracting only non-premium subsidies, as we are proposing to do, the results are the same as for an identical plan without any subsidy-eligible individuals. However, if the adjusted allowable risk corridor costs are calculated by subtracting total low-income subsidies (that is, for premiums, cost sharing and coverage above the initial coverage limit), the risk sharing calculation results in lower recouped costs on the part of the plan and a different outcome from that in a plan without subsidy-eligible individuals. Since there should be no difference in these amounts, the calculation subtracting only non-premium subsidies must be the appropriate one. We believe that to do otherwise would result in a major disincentive for PDP and MA-PD plans to enroll individuals eligible for the low-income subsidies, and we do not believe that this would be the logical outcome that was intended by the statute. We would welcome comments on our interpretation.

c. Changes in Risk Corridor Limits and Percentages (§ 423.336(a) and (§ 423.336(b))

The risk corridors and the percentage of risk to be shared would be set at certain levels for 2006 and 2007 with flexibility for us to increase the risk sharing percentage if bids, and therefore target amounts, are off during the early years of the program by a certain percentage set by the statute in section 1860D-15(e)(2)(B)(iii) of the Act. During 2006 and 2007, plans would be at full risk for adjusted allowable risk corridor costs within 2.5 percent above or below the target. Plans with adjusted allowable costs above 102.5 percent of the target would receive increased payments. If their costs were between 102.5 percent of the target (1st threshold upper limit) and at or below 105 percent of the target (2nd threshold upper limit), they would be at risk for 25 percent of the increased amount; that is, their additional payments would equal 75 percent of adjusted allowable costs for spending in this range. If their costs were above 105 percent of the target they would be at risk for 25 percent of the costs between the first and second threshold upper limits and 20 percent of the costs above that amount. That is, their additional payments would equal 75 percent of the difference between the first and second Start Printed Page 46693threshold upper limits and 80 percent of the adjusted allowable costs over the second threshold upper limit. Conversely, if plan spending fell below the 97.5 percent of target, plans would share the savings with the government. They would have to refund 75 percent of the savings for any costs less than 97.5 percent of the target amount but at or above 95 percent of the target level, and 80 percent of any savings below 95 percent of the target.

In § 423.336(b)(2)(iii) the program will cover a higher percentage of the risk for costs between the 1st and 2nd upper threshold limits would apply in 2006 and 2007 if we were to determine that (1) 60 percent of prescription drug plans and MA-PD plans have adjusted allowable costs that are more than the first threshold upper limit for the year; and (2) these plans represent at least 60 percent of beneficiaries enrolled in such plans. In this case, additional payments to plans would increase from 75 percent to 90 percent of adjusted allowable costs between the first and second upper threshold limits. Conversely, there would be no change in savings shared with the government if costs fell below 97.5 percent of the target level.

For 2008-2011, the risk corridors and the percentage of risk to be shared would be modified so that PDP and MA-PD sponsors would assume an increased level of risk. Plans would be at full risk for drug spending within 5 percent above or below the target level. Plans would be at risk for 50 percent of spending exceeding 105 percent and at or below 110 percent of the target level. Additionally, they would be at risk for 20 percent of any spending exceeding 110 percent of the target level. Payments would be increased by 50 percent of adjusted allowable costs exceeding the first threshold upper limit and up to the second threshold upper limit and 80 percent for any additional costs exceeding the second threshold upper limit. Conversely, if plan spending fell below the target, plans would share the savings with the government. They would have to refund 50 percent of the savings if costs fell between 95 percent and 90 percent of the target level, and 80 percent of any amounts below 90 percent of the target.

For years after 2011, we would establish the risk threshold percentage as deemed necessary to create incentives for plans to enter the market. The only required parameters would be that the first threshold risk percentage could not be less than 5 percent and the second threshold risk percentage could not be less than 10 percent of the target amount.

d. Risk Sharing Payments or Recoveries

As proposed in § 423.336(c), we will make payments or recover savings after a coverage year after obtaining all of the information necessary to determine the amount of payment. In § 423.336(c)(1) we are proposing that within six months of the end of a coverage year, the PDP sponsor or MA organization offering a MA-PD plan would provide us with the information necessary to calculate the risk sharing as discussed in section 3(a) of this part of the preamble. This would include prior final reconciliation of reinsurance and low-income subsidies since allowable risk corridor costs must be reduced by the total reinsurance payments and non-premium low-income subsidies for the year. Once this information has been received, under § 423.336(c)(2) we would either make lump-sum payments or adjust monthly payments in the following payment year based on the relationship of the plan's adjusted allowable risk corridor costs to the predetermined risk corridor thresholds in the coverage year. We would not make payment if we did not receive the necessary information from the PDP sponsor or MA organization. In addition, as stated, below, we are considering certain corrective actions to recoup risk-sharing payments, in the event of lack of information.

8. Retroactive Adjustments and Reconciliation (§ 423.343)

In § 423.343(a) and § 423.343(b) we propose to make retroactive adjustments to the aggregate monthly payments to a PDP or MA-PD for any difference between the actual number and characteristics, including health status, of enrollees and the number and characteristics on which we had based the organization's advance monthly payments. Reconciliation of actual payments made would be done as needed. In order for total payments to be properly accounted for in all steps, the order of reconciliation processes would be first, enrollment; second, risk adjustment; third, low-income cost sharing; fourth, reinsurance; and finally, risk sharing.

Under § 423.343(c) and (d), we would provide for a final reconciliation process to compare the payments for reinsurance subsidies and low-income cost-sharing subsidies made during the coverage year to actual allowable reinsurance expenses and low-income cost sharing and to make additional payments or payment recoveries accordingly. The form and manner in which actual allowable reinsurance costs would be submitted for reconciliation has yet to be determined. We are proposing that PDP sponsors and MA organizations offering a MA-PD plan would provide us with the information necessary to finalize reinsurance payments as discussed in section 3(a) of this part of the preamble within six months of the end of a coverage year. Once complete data were received for a coverage year, we would compare 80 percent of the allowable reinsurance costs attributable to that portion of gross covered prescription drug costs incurred in the coverage year after an individual has incurred costs that exceed the annual out-of-pocket threshold to the monthly reinsurance payments and compute the difference. We would then either make lump-sum payments or adjust monthly payments throughout the remainder of the payment year following the coverage year to pay out or recover this difference.

If an entity did not provide us with sufficient documentation for us to reconcile payments, we would reconcile by recovering payments for which the entity lacked documentation. For example, if CMS makes interim payments during the year for the low-income subsidy, but at the end of the year, the PDP sponsor or MA organization cannot provide documentation demonstrating the amounts of beneficiary cost-sharing, the reconciliation process would involve recouping the interim payments for such subsidy. The need to provide sufficient documentation to support final payment determinations applies even in the event of a change of ownership. Thus, new owners of a PDP sponsor or MA organization would be responsible for obtaining the documentation necessary to support payment, and the reconciliation process would be used to recover any payments for which the new owner lacked documentation. We believe this authority stems from the direction of the Congress that each PDP sponsor and MA-PD organization “provide the Secretary with such information as the Secretary determines is necessary to carry out this section,” (section 1860D-15(f)(1)(A) of the Act) and that “payments under this section * * * are conditioned upon the furnishing to the Secretary in a form and manner specified by the Secretary, of such information as may be required to carry out this section,” (section 1860D-15(d)(2)(A)of the Act)).

We also request comment on the remedy that should be imposed in the event a PDP sponsor or MA organization offering an MA-PD plan fails to provide us with adequate information regarding risk-sharing arrangements. In the case of Start Printed Page 46694risk corridor costs, the organization or sponsor may owe the government money if, for example, prepayments exceed adjusted allowable risk corridor costs. In this case, failure to provide information could result in a shortfall to the government, since the entity would not have the information necessary for the Secretary to establish the proper amount owed. Although we have not proposed regulations on this issue, some of the remedies we are considering for the final rule are: (1) Assume that the sponsor's or organization's adjusted allowable risk corridor costs are 50% of the target amount; (2) assume that the sponsor's or organization's adjusted allowable risk corridor costs are the same percentage of the target amount as the mean (or median) percentage achieved by all PDPs or MA-PDs whose costs are lower than the target amount; (3) assume that the sponsor's or organization's adjusted allowable risk corridor costs are the same percentage of the target amount as the mean (or median) percentage achieved by all PDPs or MA-PDs (whose costs are both higher and lower than the target amount). We use a 50% threshold for option (a) because we believe this threshold would constitute a lower limit; and it would be unlikely for any organization or sponsor to have costs lower than 50% of their total payments. We request comments on these options, as well as proposals of other options that would allow us to recoup risk-sharing payments in the event a sponsor fails to provide us the adequate information necessary to determine appropriate risk-sharing payments.

9. Reopening (423.346)

Finally, we believe that the provision in 1860D-15(f)(1) of the Act providing the Secretary with the right to inspect and audit any books and records of a PDP sponsor or MA organization regarding costs provided to the Secretary would not be meaningful, if upon finding mistakes pursuant to such audits, the Secretary were not able to reopen final determinations made on payment. In addition, we believe that sections 1870 and 1871 of the Act provide us with the authority to reopen final determinations of payment to PDP sponsors and MA organizations. Therefore, we propose in this rule to include reopening provisions patterned after those used in Medicare claims reopening, found in Part 405 of the regulations, subparts G and H. Including reopening provisions would allow CMS to ensure that the discovery of any overpayments or underpayments could be rectified. Under our proposed provisions, reopening could occur for any reason within one year of the final determination of payment, within four years for good cause, or at any time when there is fraud or similar fault. CMS could initiate a reopening on its own, or a sponsor or organization could request reopening, but such requests would be at the discretion of CMS. The Supreme Court has determined that in the context of reopening cost reports, a fiscal intermediary's decision not to reopen a final determination is not subject to judicial review, see Your Home Visiting Nurse Services, Inc. v. Shalala, 525 U.S. 449, 456 (1999), and we believe the same reasoning would apply in the context of Part D.

Good cause would be interpreted in the same manner as in Part 405 (see Medicare Carriers Manual section 12100). Thus, good cause would exist, if (a) new and material evidence, not readily available at the time of the determination, is furnished; (b) There is an error on the face of the evidence on which such determination or decision is based; or, (c) There is a clerical error in determination. In order to meet the standard under (a) the evidence could not have been available at the time the determination was made. A clerical error constitutes such errors as computational mistakes or inaccurate coding. An error on the face of the evidence exists if it is clear based upon the evidence that was before CMS when it reached its initial determination that the initial determination is erroneous. Thus, for example, good cause would exist in cases where it is clear from the files that rebates or administrative costs were not appropriately accounted for, where computation errors had been made, where a sponsor or organization included non-Part D drugs in their calculations, where individuals not enrolled in the plan were included in calculating payment, and in similar situations. Reopening could occur at any time in cases of fraud or similar fault, such as in cases where the sponsor or organization knew or should have known that they were claiming erroneous Medicare payment amounts.

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

1. Overview

In our proposed regulation at § 423.401 we would implement the requirements of section 1860D-12(a) of the Act that address licensing, 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. The provisions of this section specify that a sponsor of a PDP must be organized and licensed under State law as a risk bearing entity eligible to offer health insurance or health benefits coverage in each State that it offers a PDP. However, as required by section 1860D-12(a)(1) of the Act, we have provided in our proposed regulations at § 423.410 for a waiver of the State licensure requirement for the reasons and under the conditions set forth under section 1860D-12(c) of the Act. In addition, under the requirements of section 1860D-12(a) of the Act, to the extent an entity is at risk, it must assume financial risk on a prospective basis for covered benefits that are not covered by reinsurance. The PDP sponsor can obtain insurance or make other arrangements for the cost of coverage provided to enrollees to the extent that the sponsor is at risk for providing the coverage.

In § 423.420, we specify that sponsors that have been granted a waiver by us or those operating in States that do not have licensing requirements for PDPs must maintain reasonable financial solvency and capital adequacy. We intend to develop these reasonable standards through guidance, after consulting with the National Association of Insurance Commissioners (NAIC), as required by statute. The guidance would be issued by January 1, 2005. Although we believe these standards would be interpretive guidance, we are interested in receiving comments on the issue. In addition, as noted in § 423.410, we would establish an application and certification process for waiver applicants.

We expect that the development of solvency standards for purposes of PDP sponsors under Part D will be less complex than the situation presented to us by the development of solvency standards for provider-sponsored organizations (PSOs) under the Balanced Budget Act of 1997. (PDP sponsors in contrast to PSOs are fairly straightforward insurance risk models whereas the PSO situation involved having to consider such issues as the role that physical plant assets played in establishing solvency standards.) Although drug only plans are not a common product in the insurance market today, there are other single lines of business plans licensed by States (for example, dental plans, behavioral mental health plans) that can provide some possible models.

We also have experience from determining solvency standards for federally qualified health maintenance organizations under Title XIII of the Public Health Service Act and competitive medical plans under Start Printed Page 46695Section 1876 of the Social Security Act. In addition, we are aware that the solvency standards have been applied to at least two drug-only plans (Medica and PacifiCare) and believe that these could also provide a model for the licensing of the entities. However, we believe that these two products are lines of business operated under a current insurance license, and therefore, our greatest concern would be how to go about developing standards for organizations that may have experience managing a drug benefit but have not had any experience as risk bearing entities and/or are not structured as risk-bearing entities. We would welcome comments regarding this issue.

Factors which may be considered in discussions with the NAIC include the ability of an organization to maintain assets greater than total unsubordinated liabilities and the ability of the organization to generate a surplus on a consistent basis as demonstrated by history or an acceptable financial plan.

2. Waiver To Expand Choice

a. Overview

In our regulations at § 423.410 we would implement the provisions of section 1860D-12(c) of the Act that address waiver of certain requirements to expand choice. Generally, section 1860D-12(c) of the Act specifies that in order to expand access to prescription drug plans, we may waive the State licensure requirement under circumstances similar to those permitted under Part C for provider-sponsored organizations, as described in section 1855(a) of the Act. However, we note that the States would be expressly preempted from regulating in all areas except licensure and solvency (see section 1860D-12(g) of the Act and § 423.440). Additional requirements referenced under section 1855(a) of the Act such as State consumer protection and quality standards, do not apply to and are not incorporated in these regulations

b. Waiver When State Imposes Certain More Stringent Standards

Section 1860D-12(c) of the Act provides that a prospective PDP sponsor may request a waiver from State licensure requirements from us under the waiver provisions at section 1855(a)(2)(B), 1855(a)(2)(C) and 1855(a)(2)(D). Because the Congress directed us to use many of the same grounds for approving a waiver as used pursuant to § 1855(a)(2)(B), § 1855(a)(2)(C), and § 1855(a)(2)(D), We have adopted the regulatory provisions in proposed § 422.372. Thus, our regulation at § 423.410(c)(1) would use the same standard used in § 422.372(b)(1) and allows a waiver when the State has failed to complete action on a licensing application within 90 days of receipt of a substantially complete application.

c. Distinct Waivers

Proposed § 423.410(c)(2) uses the same standards as used in § 422.372(b)(2) for determining when a State has denied an application based on discriminatory treatment. The regulation provides that the following activities may also constitute a basis for us to waive State licensure requirements: (1) The State denies an application based on requirements that are not generally applicable to PDP sponsors or other entities engaged in a similar business or (2) the State requires as a condition of licensure that the PDP sponsor offer any product or plan other than a prescription drug plan.

Section 423.410(c)(3) of our proposed regulations, addresses denial of an application based on application of different solvency requirements—when a State imposes solvency requirements that are more stringent than the solvency standards that would be established by us under § 423.420. In addition, a waiver may be granted if the State imposes procedures or standards relating to solvency that are different from the solvency requirements established by us. CMS will utilize a waiver application process similar to that used under its federally waivered PSO program in which the waiver applicant will be required to submit certain documents that would indicate that the State is imposing procedures or standards relating to solvency that are different from CMS standards. CMS would utilize this documentation in its waiver determination process.

In our regulations at § 423.410(c)(4), we would implement section 1860D-12(c)(2)(A)(ii) of the Act, which provides that we may grant a waiver when a State imposes requirements other than those required under Federal law.

Section 1860D-12(c)(2)(B) of the Act also establishes special rules for the approval of a waiver by us. We propose to implement these special rules at § 423.410(d) and (e) of these regulations. The special rules allow that we will grant a waiver when a State does not have any licensing process for PDP sponsors. Also, even if a State does have a licensing process for years beginning before January 1, 2008, a waiver will be granted if the PDP sponsor merely submits its completed application for licensure to the State. The PDP sponsor seeking a waiver will submit a waiver application indicating its understanding of State law which CMS will confirm through contacts with the State regulator.

d. Relationship of Waiver to State Regulation

The statute requires, at section 1860D-12(c)(3) of the Act, that the waivers granted under the provisions of section 1855 of the Act must also meet the conditions of approval established at section 1855(a)(2)(E), 1855(a)(2)(F) and 1855(a)(2)(G) of the Act. Accordingly, we would implement the applicable waiver requirements from section 1855(a)(2)(E) and 1855(a)(2)(F) that relate to licensure or solvency in the regulations at § 423.410(f)(1) through § 423.410(f)(3).

Section 423.410(f)(1) of our proposed regulations establishes that except in States without a licensing process for PDP sponsors and except in the case of regional plan waivers described in § 423.410 (b), a waiver only applies to a specific State, is effective for 36 months and cannot be renewed. We propose to implement section 1855(a)(2)(F) of the Act at § 423.410(f)(2) where we specify our requirement concerning prompt action on applications. This requirement would establish that we would grant or deny a waiver application under this section within 60 days after we determine that a substantially complete waiver application has been filed. A substantially complete application would have to clearly demonstrate and document a PDP sponsor's eligibility for a waiver. In addition, section 1860D-12(c)(3) of the Act establishes that if a State does not have a licensing requirement for PDP sponsors, then the requirements of section 1855(a)(2)(E)(i) and section 1855(a)(2)(E)(ii) do not apply. We propose to implement these provisions at § 423.410(f)(3) where we would establish that if a State does not have a licensing process for PDP sponsors, we would approve a waiver for a PDP sponsor that meets our solvency standards and that this waiver would not be time limited.

With respect to section 1855(a)(2)(E)(i) of the Act, we believe that the most reasonable interpretation of this provision is that when a PDP sponsor is granted a waiver (because the State does not have a PDP sponsor licensing process), one waiver that we grant can be applied to all States in which there are no PDP sponsor licensing requirements. However, the waiver granted on the basis that a State does not have a licensing process cannot be applied in a State that does have a Start Printed Page 46696PDP sponsor licensing process. In a State that may have denied licensure to the entity in question, one of the other bases for approving a waiver may be applicable. In addition, a waiver granted for other reasons such as failure to act on an application on a timely basis, or denial based on discriminatory treatment will apply only to the States in question and not other States.

We would implement the regional plan waiver rule provided at section 1860D-12(c)(1)(B) of the Act in the regulations at § 423.410(b) of our proposed rule. This allows us to use the proposed waiver authority at section 1858(d) of the Act—Temporary Waiver of State Licensure Requirement for the licensing of PDPs. This temporary waiver would be available in the event a prospective PDP sponsor proposes that its prescription drug plan would cover a multi-State region, but is not yet licensed in all of the States. (Under those circumstances, we can waive the State licensure requirement until the State has completed processing of the application.) In the interim, the PDP sponsor would be required to comply with the solvency standards established by us. In the event the State ultimately denies the application, we can extend the waiver through the contract year as we deem appropriate to provide for transition.

3. Preemption of State Laws and Prohibition of Premium Taxes

Section 1860D-12(g) of the Act incorporates section 1856(b)(3) of the Act which states: “the standards established under this part shall supersede any State law or regulation (other than State licensing laws or State laws relating to plan solvency) for MA organizations under this part.” Accordingly, we specify in our proposed regulations that to the extent there are Federal standards, those standards supersede any State Law. For purposes of this section, with the exceptions of State licensing laws or State laws related to plan solvency, State laws do not apply to prescription drug plans and PDP sponsors.

We do not believe, however, that the language in 1856(b)(3) means that each and every State requirement applying to PDP sponsors would now become null and void. In areas where we have neither the expertise nor the authority to regulate, we do not believe that State laws would be superseded or preempted. For example, State environmental laws, laws governing private contracting relationships, tort law, labor law, civil rights laws, and similar areas of law would, we believe, continue in effect and PDP sponsors in such States would continue to be subject to such State laws. Rather, our Federal standards would merely preempt the State laws in the areas where Congress intended us to regulate-such as the rules governing pharmacy access, formulary requirements for prescription drug plans, and marketing standards governing the information disseminated to beneficiaries by PDP sponsors. We believe this interpretation of our preemption authority is in keeping with principles of Federalism, and Executive Order 13132 on Federalism, which requires us to construe preemption statutes narrowly.

By the same token, in areas where Congress specifically stated that State law would not be preempted—that is, State licensing laws and State laws related to plan solvency—we would construe the preemption exception narrowly, and only view the exception as applying to true licensing or solvency requirements. By this we mean that if a State conditioned licensing on a PDP sponsor meeting requirements in an area we also regulate outside of licensure or solvency, then such condition could not be viewed as a “licensing” law and would not be excepted from preemption. For example, if a State conditioned licensure on a PDP sponsor adhering to the State's guidelines for prescription drug plan marketing materials, we would not view the marketing guidelines as a licensure requirement and we would still view the Federal marketing rules as preempting the State requirements.

Additionally, in accordance with the incorporation of section 1854(g) of the Act into section 1860D-12(g) of the Act, States are expressly prohibited from imposing a premium, or similar type of tax, on premiums paid by us to prescription drug plans or PDP sponsors, on premiums applicable to Medicare enrollees of the prescription drug plans under Part F, or on any other payments made by us to PDP sponsors under subpart G of the regulations,—including the direct subsidy, reinsurance payments and risk corridor payments.

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

1. Overview and Terminology

We propose in subpart J of part 423 to implement sections 1860D-2(a)(4), 1860D-2(b)(4)(C), 1860D-2(b)(4)(D), 1860D-11(j), 1860D-21(c), 1860D-22(b), 1860D-23(a), 1860D-3(b), 1860D-23(c), 1860D-24(a), 1860D-24(b), and 1860D-24(c) of the Act that were added by section 101 of the MMA. We provide a brief summary of each of these provisions. Following this overview we provide a more detailed discussion of how we propose implementing each of these statutory provisions in this subpart.

We propose to implement section 1860D-21(c) of the Act at § 423.458 of the proposed rule and explain that the requirements of Part D generally apply under Part C for prescription drug coverage offered by MA-PD plans although certain waivers are available. We propose to implement section 1860D-22(b) of the Act at our proposed § 423.458(c) that provides employer group waiver authority for prescription drug plans.

We outline options that we have identified related to the data-exchange that will be necessary between both State pharmaceutical assistance programs and other insurers and Part D plans in order to accurately apply incurred costs to appropriate Part D enrollee records. For purposes of this subpart, provisions in the statute that address coordination requirements generally apply in a similar manner to both State pharmaceutical assistance programs and other drug plans and to both prescription drug plans and MA-PD plans. The main difference between coordination requirements related to SPAPs and other drug plans is that we are prohibited from charging user fees to SPAPs. On the other hand, Part D plans may impose fees only related to the cost of coordination on both SPAPs and other drug plans.

We propose to implement section 1860D-11(j) of the Act at § 423.464(a) of the proposed rule and require sponsors of Part D plans to coordinate with State pharmaceutical assistance programs and other prescription drug plans. In this section we specify the other plans with which Part D plans must coordinate benefits in accordance with section 1860D-24(b) of the Act and define State Pharmaceutical Assistance Programs, in accordance with section 1860D-23(b) of the Act.

a. Part D Plans

Wherever we mention or reference “Part D plans” we mean any or all of “MA-PD plans, prescription drug plans (PDPs) and fallback prescription drug plans”. Likewise, the term “Part D plan sponsor” refers to MA organizations offering MA-PD plans, PDP sponsors, and eligible fallback entities offering fallback plans. If a statement or reference applies exclusively to a specific type of plan, we use that exact term to limit the reference.Start Printed Page 46697

b. Employer-sponsored Group Prescription Drug Plan

Section 1860D-22(b) applies to “employment-based retiree health coverage” that is defined under section 1860D-22(c)(1) of the Act. This term means coverage for individuals (or their spouses and dependents) under a group health plan based on their status as retired participants. We use the term “employer-sponsored group prescription drug plan” to mean a prescription drug plan under a contract between a PDP sponsor and employers, labor organizations, or the trustees of funds established by one or more employers or labor organizations to furnish prescription drug benefits under employment-based retiree health coverage.

c. State Pharmaceutical Assistance Program

A State Pharmaceutical Assistance Program is a program operated by or under contract with a State for purposes of this part if it: (1) Provides financial assistance for the purchase or provision of supplemental prescription drug coverage or benefits on behalf of Part D eligible individuals; (2) provides assistance to Part D eligible individuals in all Part D plans without discriminating based upon the Part D plan in which an individual enrolls; (3) meets the benefit coordination requirements specified in this part; and (4) does not change or affect the primary payor status of a Part D plan. Since an SPAP cannot discriminate under the Part D plans with respect to either eligibility or the amount of assistance provided, in accordance with section 1860D-23(b)(2) of the Act and in our proposed rule at § 423.464(e)(1)(ii), to the extent that a program does discriminate it cannot, by definition, be considered an SPAP. A non-conforming State program that did discriminate in either of these ways (eligibility or amount of assistance provided) would not meet the definition of a State Pharmaceutical Assistance Program.

We are interpreting the non-discrimination language to mean that SPAPs, if they offer premium assistance or supplemental assistance on Part D cost sharing, must offer equal assistance by all PDPs or MA-PD plans available in the State and may not steer beneficiaries to one plan or another through benefit design or otherwise. State programs cannot, for example, use the threat of withholding SPAP enrollees to negotiate coverage, premium or formulary changes with PDPs or MA-PD plans. Violations of the non-discrimination rule will jeopardize the program's special status with respect to true out-of-pocket costs. That is, a State program that discriminates does not qualify under the definition of an SPAP, and consequently, its contributions to cost sharing do not count toward the out-of-pocket limit.

Section 1860D-23(b) of the Act also provides that an SPAP is a State program that provides financial assistance for the purchase or provision of prescription drugs, and we interpret this to mean that it provides that assistance with State funds. Therefore, the definition of SPAP would exclude State Medicaid programs, section 1115 demonstration programs, and any program where program funding is from Federal grants, awards, contracts, entitlement programs, or other Federal sources of funding. (We would clarify that this does not exclude some Federal administrative funding or incidental Federal monies.)

For purposes of this part, we are proposing that a Pharmacy Plus demonstration waiver under section 1115 of the Act shall not be considered a State pharmaceutical assistance program. Pharmacy Plus waivers are granted to allow states to treat these individuals as Medicaid eligible for the purposes of receiving drugs and primary care services. Expenditures for these limited services receive federal matching payments in the same manner as do services for full benefit Medicaid beneficiaries. We do not believe that these waivers, having expenditures that are federally matched in this manner, should be considered SPAPs as the effect of this would be to allow federally matched payments to be used to meet an out of pocket expense to gain further payments from the Federal Medicare program.

2. Application of Part D Rules to MA-PD Plans on and After January 1, 2006 (§ 423.458)

In accordance with section 1860D-21(c)(1) of the Act, and as provided under proposed § 423.458(a), the provisions of Part D apply under Part C to prescription drug coverage provided by an MA-PD in lieu of other Part C provisions that would apply to such coverage, unless otherwise provided. As permitted under section 1860D-21(c)(2) of the Act, we will waive Part D provisions to the extent that we determine they duplicate, or conflict with, provisions under Part C, or as necessary in order to improve coordination of Part D benefits with the Part C program. For instance, under section 1860D-21(c)(3) of the Act, we will waive the pharmacy network access requirements as described at § 423.120(a)(3) of the proposed rule in the case of an MA-PD plan that provides access (other than through mail'order pharmacies) to qualified prescription drug coverage through pharmacies owned and operated by the MA organization if we determine that the organization's pharmacy network is sufficient to provide comparable access for enrollees under the plan. As discussed in other parts of this preamble, Part D rules generally apply to section 1876 cost HMOs/CMPs and PACE organizations in the same or in a similar manner as the rules apply to MA-PD local plans. The waiver provision under section 1860D-21(c)(2) of the Act applicable to MA-PD plans similarly extends to section 1876 cost HMOs/CMPs and PACE organizations. We provide for this waiver authority for cost HMOs/CMPs and PACE organizations by adding a paragraph (d) to section 423.458 of our proposed rule.

In reviewing requested waivers we will follow a process similar to the process we initially established under the M+C program related to the employer group waiver authority provided in section 1857(i) of the Act and codified in regulation at § 422.106(c). Under § 422.106(c), MA organizations could submit written requests to our permission to waive requirements that hinder the design of or offering of MA plans to employers. We would make approved waivers available to all similarly situated MA organizations that meet the conditions of the waiver. Accordingly, we will use a similar approach to the one we established under § 422.106(c) in implementing our authority to waive those Part D provisions that can be shown to (1) duplicate or conflict with Part C requirements or (2) should be waived in order to improve coordination of the benefits provided under Parts C and D of Medicare. However, we will not, under our waiver authority, waive Part D rules that are specifically directed to MA-PDs or to the Part C program. We ask for your comments on both the process we propose for authorizing additional waivers under this section and for what additional waivers should, or should not, be permitted under this waiver authority.

3. Application to PACE Plans

Section 1860D-21(f) of the Act indicates that Part D provisions shall apply to PACE organizations in a manner that is similar to those of an MA-PD local plan and that a PACE organization may be deemed to be an MA-PD local plan. As discussed in detail in Subpart T, PACE organizations Start Printed Page 46698would not be deemed as MA-PD plans but would be treated in a manner that is similar to MA-PD plans for purposes of payment. Proposed § 423.458(d) establishes regulatory authority for CMS to waive Part D provisions for PACE organizations and indicates that PACE organizations may request waivers from CMS. Because many of the Part D requirements duplicate, conflict with, or inhibit coordination of existing PACE requirements, we anticipate a significant number of waivers would necessary for PACE organizations. We are concerned about the potential burden this would place on PACE organizations and propose to include a provision that would allow for CMS to identify all Part D provisions requiring waivers and waive these provisions on behalf of PACE organizations. In other words, we are considering a special rule for PACE organizations that would automatically apply the waivers granted in the final rule (see discussion in subpart T of this preamble) without a plan-specific application process.

We would like to receive comments on this proposed approach and on any other related suggestions for minimizing burden on PACE plans.

4. Application to Employer Groups

a. Employer Group Waivers

Section 1860D-22(b) of the Act extends the waiver authority that is provided for MA organizations related to Part C by section 1857(i) of the Act and implemented at § 422.106(c) to prescription drug plans related to Part D. This waiver authority is intended to provide prescription drug plans an opportunity, similar to the opportunity afforded MA organizations under Part C, to furnish Part D benefits to participants or beneficiaries of employment-based retiree health coverage sponsored by employers and labor organizations in the most efficient and effective manner possible. Section 1860D-21(b) of the Act specifically authorizes prescription drug plans to establish separate premium amounts for Part D enrollees who are participants or beneficiaries of employment-based retiree health coverage sponsored by employers and labor organizations. It also contemplates separate Part D plans for participants and beneficiaries of such employment-based retiree health coverage. In administering this waiver, we propose to follow the template first established at § 422.106(c) that we created under Part C to implement the waiver authority under section 1857(i) of the Act.

While we discuss coordination of Part D coverage with employment-based retiree health coverage at some length later in this part, we believe it is important to include a brief discussion here on the Part D waivers that we specifically would not permit related to employer group retiree coverage under the authority provided in section 1860D-22(b) of the Act. Although the statute permits “* * * in relation to employers, including authorizing the establishment of separate premium amounts for enrollees in a prescription drug plan * * *” we interpret “separate premium amounts” to mean the amount of premium the retiree or the enrollee pays. Under the MA program many employer groups subsidize the premiums that would otherwise be payable by their retirees through partial or full payment or subsidization of the MA plan premiums on their members' behalf. We believe that a similar practice related to PDP Part D plan premiums would be permissible and find support in section 1860D-22(a)(6)(B) of the Act. Alternatively, we do not believe that the statutorily defined Part D premium could be different for employees or retirees than it is for individuals enrolled in the same PDP plan. Thus, the combined Part D premium contributed by the employee or retiree and the employer group would need to be identical to the premium charged to an individual enrolled in the same PDP plan. These principles apply to waiver requests by MA-PD plans under section 1857(i) of the Act.

Generally, we also would not permit waivers that directly increase Medicare spending. For example, a section 1860D-22(b) waiver would not be permitted that had the effect of changing the definition (in Subpart C of our proposed rules) for incurred costs (which are defined for purposes of calculating the true out-of-pocket threshold—TrOOP). An alternative example of a waiver we would not permit would be a waiver that would increase the premium subsidy. We also note that section 1860D-22(b) applies to “prescription drug plans,” not non-Part D plans that “wrap around” or supplement the benefits provided under, the PDP. Consequently, section 1860D-22(b) of the Act would not apply to a request to waive rules under this Part that effect an employer-sponsored non-Part D plan that wraps around a Part D plan, including the TrOOP rules. The exclusion of costs paid by group health plans from TROOP is irrelevant when the group health plan is itself a part D plan (in other words, the exclusion applies when the group health plan pays costs not otherwise covered under the part D plan).

We invite comment on the process we propose for authorizing additional waivers that prescription drug plan sponsors can request under this section. We also ask for comment on the manner in which additional waivers should be permitted and what additional waivers, if any, we should not allow.

b. Employer Options

The enactment of Title I of the MMA has provided sponsors of retiree prescription drug plans with multiple options for providing drug coverage to their retirees. For the benefit of the employers and unions, we discuss these options. We believe the availability of these various options will make it easier for sponsors to continue to assist their retirees in having access to high-quality prescription drug coverage.

Generally, employers and unions who offer drug benefits to their retirees (and their dependents) who are eligible for Medicare Part D may do so as follows:

1. Provide prescription drug coverage through employment-based retiree health coverage. If those coverage is at least actuarially equivalent to the standard prescription drug coverage under Part D, the sponsor is eligible for a special Federal subsidy for each individual enrolled in the sponsor's employment-based retiree health coverage who is eligible for Part D but elects not to enroll in Part D, directly reducing the cost of providing a high-quality drug benefit. It is important to note that employers can still make arrangements with Medicare Advantage organizations to offer a Medicare Advantage (MA) only plan without the Part D benefit, but then still take the retiree drug subsidy and through a separate private contract with the MA organization arrange for an employer-sponsored retiree drug benefit that is not subject to the application of the true out-of-pocket provision and retains the employer's flexibility to design a benefit that is at least equivalent to the Part D benefit.

2. Provide prescription drug coverage that supplements, or “wraps-around,” the coverage offered under the PDP or MA-PD plans in which the retirees (and their dependents) enroll. For example, this option would permit beneficiaries who receive retiree coverage from employers who provide some financial assistance, but not enough to qualify for the retiree drug subsidy, to supplement the new drug benefit subsidy from Medicare with their existing employer assistance and thereby receive more generous coverage than they have now.

3. Subsidize the monthly beneficiary premium for whatever PDP or MA-PD plan in which the employer or union's Start Printed Page 46699retirees (and their dependents) elect to enroll.

4. Provide a prescription drug plan (PDP) or Medicare Advantage-prescription drug plan (MA-PD plan) either under contract with a PDP sponsor or Medicare Advantage (MA) organization or by directly sponsoring a PDP or an MA-PD plan. This plan may consist of enhanced alternative coverage (as defined under proposed § 423.104(g)), or drug coverage that is more generous than that offered under the standard prescription drug coverage under Part D (as defined under proposed § 423.104(e)). Medicare would subsidize the cost of this coverage through direct and reinsurance subsidies (as calculated under proposed § 423.329(a)(1) and (2)). At its option, the employer or union may elect to subsidize the monthly beneficiary premium (as calculated under proposed § 423.286). Many employers already have arrangements with Medicare Advantage plans and we expect that this will continue, as well as new arrangements being established.

The first option is the subject of subpart R of this preamble. The latter three options, all of which involve the employer or union's retirees (and their dependents) enrolling in Part D, are discussed in this subpart.

We note that if employers or unions elect to sponsor enhanced alternative coverage under Part D or to provide supplemental coverage that wraps around Part D, either election will have an impact on when its retirees (and their dependents) are eligible for the additional Medicare subsidies for catastrophic drug coverage. By delaying the provision of government-financed catastrophic coverage, these plans would lower the cost of Part D to the Federal government by lowering our reinsurance payments while preventing beneficiaries from facing any gaps in coverage. As discussed in Subpart C, individuals enrolled in a PDP or MA-PD plan are eligible for Medicare subsidies on top of their employer subsidies for catastrophic drug coverage after they incur out-of-pocket drug costs in the amount specified under proposed § 423.104(e)(5)(iii). Under the reinsurance provisions discussed in subpart G, Medicare would reimburse PDP sponsors and MA organizations offering MA-PD plans 80 percent of their gross costs for providing this catastrophic coverage (excluding administrative costs and net of discounts, rebates, and similar price concessions). Only drug costs paid by a Part D enrollee, or on behalf of a Part D enrollee by another person, would count toward the annual out-of-pocket threshold, with the exception of amounts reimbursed by insurance or otherwise, a group health plan, or another third-party payment arrangement. We refer to those drug expenditures that count toward the out-of-pocket threshold as “true out-of-pocket (TrOOP) expenditures.”

Under these rules, employers and unions who provide retirees (and their dependents) enhanced alternative coverage or wrap-around coverage in effect push out the total drug spending that triggers the Medicare subsidy for catastrophic coverage, since participants in the plan will have lower cost-sharing, and thus have lower out of-pocket costs. This approach limits the “crowd-out” of employer contributions by the new Medicare subsidy, resulting in more comprehensive coverage at a lower cost to the Federal government by lowering reinsurance payments.

When an employer or union elects to provide a PDP or MA-PD plan under contract with the PDP or MA-PD sponsor, the PDP sponsor, under proposed § 423.458(c), or the MA organization, under 42 CFR 422.106(c), may submit written requests to us for permission to waive requirements under Part D that hinder the design of or offering of PDP or MA-PD plans to employers. We believe these waivers will help efficient administration and integration of their enhanced Part D coverage with other retiree health benefits offered by the sponsor. For example, the PDP sponsor or MA organization could request permission to restrict enrollment in its PDP or MA-PD plan to the sponsor's retirees (and their dependents) and offer a benefit that resembles or enhances the sponsor's existing coverage. We encourage employers and unions to carefully review each option and determine which one is most beneficial to it and its retirees (and their dependents). The variety of options gives employers many ways to retain and enhance drug coverage for their retirees, and we seek comment on how we can use all of these subsidized options to maximize enhancements in retiree coverage.

c. Implications for Beneficiaries

For beneficiaries, the significance of the above discussion, as well as of the earlier discussion (in subpart C) of incurred costs that count toward the true out-of-pocket threshold, is that these rules would lead to new options for drug coverage. All Medicare Part D coverage would at a minimum provide basic coverage, funded with a generous Federal subsidy that did not exist before. In addition, there would be a number of ways in which some beneficiaries can get access to more comprehensive benefits, such as filling in any coinsurance requirements in coverage in whole or in part. Such access will be dependent on individual eligibility for other subsidies or coverage, and individual willingness to continue to pay for enhancements in their coverage, such as:

  • If they are eligible for a more comprehensive retiree health benefits policy sponsored by their former employer, their retiree plan sponsor may qualify for a subsidy payment.
  • If they have limited income, they may be eligible for Part D low-income subsidies of premium and cost sharing through a Part D plan.
  • They may be eligible for financial assistance through a State Pharmaceutical Assistance Program that can pay for an enrollee's cost sharing and still have these payments count toward the out-of-pocket limit.
  • They may qualify for charitable assistance from bona fide non-profit charities that can also pay for an enrollee's cost sharing and still have these payments count toward the out-of-pocket limit.
  • They may have access to a PDP or MA-PD (through either individual enrollment or employer group enrollment) that offers an enhanced alternative prescription drug plan for an additional premium. In this case, either the plan sponsor and/or the beneficiary must bear some of the drug costs that would otherwise have been subsidized by Part D reinsurance subsidies. While they would consequently not receive the additional subsidy until they reached a higher level of drug expenditures, the substantial savings in drug costs as a result of the highly subsidized, standard drug benefit would permit such coverage to be financed while still saving money for the beneficiary and the plan sponsor.

5. Medicare Secondary Payer Procedures

Section 1860D-2(a)(4) of the Act extends the Medicare secondary payer (MSP) procedures applicable to MA organizations under section 1852(a)(4) of the Act and 42 CFR 422.108 to PDP sponsors. Section 1852(a)(4) of the Act provides that an MA organization may charge or authorize a provider to seek reimbursement for services from a beneficiary or third parties to the extent that Medicare is made a secondary payer under section 1862(b)(2) of the Act. Accordingly, under § 423.462 of this proposed rule, PDP sponsors would be required to follow the same rules as MA organizations regarding:Start Printed Page 46700

  • Their responsibilities under MSP procedures;
  • Collection of payment from insurers, group health plans and large group health plans, the enrollee, or other entities for covered Part D drugs; and
  • The interaction of MSP rules with State laws.

Because Medicare would not pay for covered Part D drugs to the extent that there is a third party that is to be the primary payer under the provisions of section 1862(b)(2) of the Act and 42 CFR part 411, PDP sponsors must, for each prescription drug plan: (1) identify payers that are primary to Medicare under section 1862(b)(2) of the Act and 42 CFR part 411, (2) determine the amounts payable by those payers, and (3) coordinate their benefits to plan enrollees with the benefits of the primary payers.

The PDP sponsor may charge other individuals or entities for covered Part D drugs for which Medicare is not the primary payer. If an enrollee receives from a PDP sponsor covered Part D drugs that are also covered under State or Federal workers' compensation, no-fault insurance, or any liability insurance policy or plan, including a self-insured plan, the PDP sponsor may charge the insurance carrier, the employer, any other entity that is liable for payment for the covered Part D drugs under section 1862(b) of the Act and 42 CFR part 411, or the prescription drug plan enrollee, to the extent that he or she has been paid by the carrier, employer, or entity for covered Part D drugs.

When Medicare, and thus a Part D plan, is secondary to other payers, beneficiary costs incurred for covered Part D drugs would not be considered “covered” costs under the Part D plan. Consequently, these costs would be excluded from a beneficiary's incurred costs, as described in section II.C.2.a of this preamble and would not count as incurred costs against the annual deductible or the out-of-pocket threshold.

When Medicare is a secondary payer to employer coverage in the case of certain working Medicare beneficiaries, a PDP sponsor may charge a group health plan (GHP) or large group health plan (LGHP) for covered Part D drugs it furnishes to a Medicare enrollee who is also covered under the GHP/LGHP, and may charge the Medicare enrollee to the extent that he or she has been paid by the GHP/LGHP.

Because Medicare Part D coverage is a Federal program operated under Federal rules, State laws do not—and should not—apply, with the exception of State laws regarding licensing or related to plan solvency or as otherwise provided by statute or regulation. Given the requirement in section 1860D-2(a)(4) of the Act that we extend MSP procedures applicable to MA organizations to PDP sponsors, PDP sponsors would also be permitted, under section 1852(a)(4) of the Act, to fully recover from liable third parties according to section 1862(b)(2) of the Act. In accordance with section 1860D-12(g) of the Act that extends the State preemption provisions under section 1856(b)(3) to Part D, under § 423.462 of our proposed rule that mirrors § 422.108(f), States would be prohibited from exercising authority over prescription drug plans in any area governed by Medicare Part D (including our regulations under chapter 423) other than State licensing laws and State laws relating to plan solvency. This is consistent with specific preemption authority now provided by section 1856(b)(3) of the Act with respect to MA organizations.

6. Coordination Of Benefits With Other Providers Of Prescription Drug Coverage

Section 1860D-23(a) of the Act authorizes us to establish procedures and requirements to promote the effective coordination of benefits between a Part D plan and a State Pharmaceutical Assistance Program with respect to payment of premiums and coverage, and payment for supplemental prescription drug benefits. We are to establish procedures and requirements before July 1, 2005, to ensure effective coordination. In developing these procedures and requirements, we are to consult with State pharmaceutical assistance programs, prescription drug plan sponsors, MA organizations, States, pharmaceutical benefit managers, employers, data processing experts, pharmacists, pharmaceutical manufacturers, and other experts. In addition, as specified at section 1860D-24(a) of the Act and implemented in this section of the regulations, we will apply the coordination requirements for State pharmaceutical assistance programs to other prescription drug plans including Medicaid (including a plan operating under a waiver under section 1115 of the Act), group health plans, the Federal employees health benefits plan, military coverage (including TRICARE), and other coverage that we specify. Under section 1860D-23(c)(1) of the Act, coordination between State pharmaceutical assistance programs and Part D plans does not change or affect the primary payor status of a Part D plan with respect to a State pharmaceutical assistance program. Nor does it affect the primary or secondary payment position of the Part D plan related to the payments made by other plans providing prescription drug coverage. Under the requirements of section 1860D-11(j) of the Act, Part D plan sponsors will not be permitted to impose fees on SPAPs or other plans providing prescription drug coverage that are unrelated to the costs of that coordination.

The elements to be coordinated would include enrollment file sharing, claims processing, payment of premiums for both basic and supplemental drug benefits, third-party reimbursement of out-of-pocket costs, application of protection against high out-of-pocket expenditures (defined in section 1860D-2(b)(4) of the Act), and other administrative processes and requirements that we specify. Enrollment file sharing might include information such as beneficiary name, date of birth, health insurance claim number, sex, name and address of benefit administrator, insured's identification number, electronic transaction routing information (RxBin, RxPCN, RxGRP), group number, patient relationship, and coverage effective dates. Claims processing information might include collecting information similar in nature to that currently contained in a Medicare provider Remittance Advice statement. Information must be sufficient to successfully link with enrollment files and in order to allow Part D plans to make a correct determination of true out-of-pocket (TrOOP) expenditures on the part of beneficiaries.

On rare occasions Part D plans would also be required to coordinate benefits with other Part D plans. In the event that a beneficiary disenrolled from one plan mid-year and enrolled in another, the two plans would be required to exchange information sufficient to allow the beneficiaries' claims to be processed as if there had been no break in enrollment. Specifically, the second plan would need to obtain the enrollee's claim data and adjust its claims processing system accumulators to reflect that a certain level of expenditures and out-of-pocket costs had already been incurred in order that the correct sequence of claims processing could be maintained. This is not to say that the second plan could claim the first plan's costs as their own allowable costs, but that their systems would process future claims as if the earlier costs had been incurred by the second plan. We solicit comments on any other issues that may be involved in Start Printed Page 46701coordination of benefits between Part D plans.

We may impose user fees for the transmittal of information necessary for benefit coordination related to third party reimbursement (other than by a SPAP) of Part D enrollees' costs for covered Part D drugs. Please see our later discussion on options we are considering related to coordination of benefits under the Part D program and also the critical nature of securing accurate and timely information for purposes of the TrOOP calculation. As we mention in that discussion, the statute permits us to impose user fees on the employer (or other third party) plan, but not on SPAPs under any method of operation, for the transmittal of benefit coordination information under Part D. Section 1860D-24(a)(3) of the Act specifically provides authority for imposing user fees under Part D similar to the authority under section 1842(h)(3)(B) of the Act for collection of user fees (otherwise known as “claim-based cross-over fees”) under fee-for-service coordination with Medicare supplemental policies. However, we are also provided authority to retain a portion of these users fees to offset costs we incur for determining whether enrollee out-of-pocket costs are being reimbursed by third parties and for alerting Part D plans when, in fact, they are being reimbursed.

As we also later discuss in this preamble, any user fees, if collected, would not be assessed until the benefit is implemented in 2006. Before that time, we will fund the development and implementation of coordination of benefit requirements. We will also fund the development and implementation of a system to assist in the coordination of benefits—if and when it is determined that our development of the system is the appropriate option. We request comment on the method we should employ in imposing user fees and especially concerning whether it would be advisable to impose user fees on a monthly or quarterly basis based on the volume of data exchanged, and whether we should require electronic payment of user fees.

In section 1860D-24(c)(1) of the Act, a Part D plan sponsor may continue to use cost management tools (including differential payments) when administering benefits. This could include cost management tools related to managing supplemental benefits financed by a State pharmaceutical assistance program or another plan providing prescription drug coverage offered through a Part D plan. However, we believe that the intent of the statute at section 1860D-24(c)(1) of the Act is clear in allowing Part D plans to continue to use cost management tools (such as tiered or differential cost sharing) even if an SPAP or other drug plan provides wrap-around or supplemental coverage for individuals enrolled in the Part D plan. We solicit comment on how we can ensure that wrap-around coverage offered by SPAPs and other insurers does not undermine or eliminate the cost management tools established by Part D plans. We also request comment on the most effective way to administer this provision without creating undue administrative burden on either Part D plans or the SPAPs and other insurers that might choose to provide wrap-around coverage for eligible individuals.

a. Coordination With SPAPs

The statute envisions a closer coordination of benefits between SPAPs and Medicare drug plans. For example, as provided in § 1860D-23(c) and in § 423.464(e)(3), a Part D enrollment card may also be used to access benefits under an SPAP, and the SPAP's emblem may be used on the card. Additionally, payments for beneficiary cost sharing made by an SPAP may be counted toward the incurred costs that count in the calculation of the true out-of-pocket (TrOOP) threshold in providing protection against catastrophic costs as provided in § 1860D-2(b)(4)(C)(ii) and in § 423.464(e)(2) of this proposed rule. SPAPs have filled a significant gap in prescription drug coverage for many Medicare beneficiaries in the absence of a Medicare drug benefit. Now that so many States are involved and so many beneficiaries have relationships with these programs, it will be important to ensure that coordination between Medicare Part D and SPAPs occurs as efficiently and effectively as possible. However, section 1860D-23(c)(5) of the Act provides that nothing in the statute should be construed to require that a State Pharmaceutical Assistance Program coordinate or provide financial assistance with respect to any Part D plan.

For purposes of this part, we are proposing that a Pharmacy Plus demonstration waiver program under section 1115 of the Act not be considered an SPAP. We grant Pharmacy Plus waivers that allow States to treat individuals participating in these waiver programs as Medicaid eligible only for the purpose of receiving prescription drug and primary care services. We do not believe that Pharmacy Plus waiver programs should be considered SPAPs. The statute makes a clear distinction between SPAPs, defined in section 1860D-23(b) of the Act, and the Medicaid program (which includes State plans operating under Title XIX of the Act as well as State plans operating under a waiver under section 1115 of the Act) described in section 1860D-24(b)(1) of the Act. In so far as the Pharmacy Plus waiver programs operate under 1115 waivers, they are considered part of the Medicaid program and thus are not considered SPAPs. This distinction is important for purposes of the application of TrOOP. Section 1860D-2(b)(4)(C)(ii) of the Act is clear in allowing only a person, CMS, or an SPAP to make payments that will count toward TrOOP for an individual Part D enrollee. In so far as beneficiary cost sharing is reimbursed under Title XIX of the Act, including a waiver operating under section 1115 of the Act, or through any other mechanism including public assistance, it cannot be counted toward TrOOP. However, since the MMA allows states to use state-only SPAP funds to assist beneficiaries with out-of-pocket expenditures, States would be better off using their current contributions to wrap around the Federal Medicare Part D benefit than in continuing their Pharmacy Plus programs.

Medicare Part D plans may coordinate with SPAPs in a number of ways including accepting premiums for basic Part D or enhanced alternative coverage; accepting a lump sum per capita payment from the State for enrollee coverage through Part D plans; and coordinating on a claim-specific basis when Part D plan pays first and the SPAP is the secondary payor. All data exchanges between SPAPs and Part D plans are to be consistent with applicable privacy laws, in order to ensure the confidentiality of individually identifiable beneficiary information. In accordance with section 1860D-23(c)(2) of the Act, and in order to help coordination between State pharmacy assistance programs and Part D plans, a single card may be used to access benefits under both Part D and State pharmacy assistance programs. These cards may contain an emblem or symbol indicating that a connection between the two programs exists. We do not know how SPAPs will actually choose to coordinate with Medicare drug plans, and we welcome comment in this regard—particularly from States. We would like to better understand what SPAPs plan to do in 2006 relative to Part D interaction (such as in payment of premiums or claim-specific wrap-around), and how Medicare can assist State preferences in this regard. Our goal is to make the coordination of benefits process as functional for the Start Printed Page 46702beneficiary, pharmacy, and States as possible.

We assume that some SPAPS will pay Part D plans' premiums on behalf of enrollees. For SPAPs that choose to wrap-around coverage rather than paying premiums, we propose to include SPAP information in a coordination of benefits system described below. In this way, pharmacies will know that a claim should be sent to the SPAP following adjudication by the Part D plan.

We request comment on this proposed approach, including the feasibility of the approach for SPAPs and the ease of administration for pharmacies. We also request comment on whether or not SPAPs that choose to coordinate benefits on a wrap-around basis should be required to provide feedback on how much of the remainder of the claim they have actually paid. Since SPAP payments count as true out-of-pocket spending toward catastrophic coverage, the Part D plans could simply assume that any amounts not paid by the Part D plan and sent to an SPAP for reimbursement would count toward calculating TrOOP. We are concerned that we may need information from SPAPs to determine more precisely the SPAP contribution or payment. But we are also mindful of systems implications for States and would appreciate comments in this regard, particularly from SPAPs.

b. Coordination With Other Prescription Drug Coverage

Other plans providing prescription drug coverage that Part D plans would need to coordinate with are any of the following (1) Medicaid programs (including a State plan operated under a waiver under section 1115 of the Act); (2) Group health plans, as defined in § 411.101; (3) FEHBP; (4) Military Coverage (including TRICARE) under chapter 55 of title 10 of the United States Code; and (5) other prescription drug coverage as we specify. We discuss coordination issues in detail in sections (d) and (e), below.

There is a relatively limited applicability of coordination of benefits between Part D plans and State Medicaid programs under the statute. The drugs that must be excluded from Medicare coverage are, with limited exception, drugs that may also be excluded from Medicaid coverage under section 1927(d)(2) of the Act. We anticipate that there may be situations involving State Medicaid programs that choose to continue coverage of a drug that is excluded from Medicare Part D coverage. For example, States may wish to continue coverage for barbiturates, benzodiazepines, or prescription vitamins. In these situations, a Part D plan providing primary coverage would need to coordinate this coverage with a State on behalf of a dually eligible beneficiary. We request public comment on other situations that may involve benefit coordination between States and Part D plans (other than situations where the State is acting as an employer). In general, we invite comment on the other administrative processes and requirements that we might identify in order to help coordination between Part D of Medicare and other prescription drug plans.

c. Coordination of Benefits

Sections 1860D-23(a)(1) and 1860D-24(a)(1) of the Act require that, by July, 1, 2005, we establish requirements for coordination of benefits between Part D plans and SPAPs and other insurers including Medicaid programs, group health plans, the Federal Employees Health Benefits Plan (FEHBP), military coverage (including TRICARE), and other coverage we may specify at a later date. As discussed previously, the elements that are to be coordinated must include: Enrollment file sharing; claims processing and payment; application of the protection against high out-of-pocket expenditures (by tracking TrOOP and the annual out-of-pocket threshold); and, other processes we specify.

We envision a system of information sharing between Medicare, Part D plans, SPAPs, group health plans, insurers, and other third-party arrangements. Our goal is that the design and implementation of a Part D coordination of benefits system enable pharmacies to obtain information about secondary insurers as well as the correct billing order. Ideally, we would anticipate that a pharmacy would query the system and be provided with information it can use to bill all the insurers involved in the correct order, as well as ascertaining and applying the correct TrOOP calculation in order to assess the correct beneficiary co-payment at the point of service. Since prescription drug benefits are administered at the point of sale, coordinating insurance coverage at the point of sale is a technical communications challenge. In the case of administering a drug benefit, the goal is that the beneficiary pays the correct coinsurance or co-payment at the point of sale and that the pharmacy is subsequently reimbursed the correct amount from the other source or sources. Unlike coordination of benefits under Medicare when data is exchanged in only a single direction (from Medicare to the employer or other insurer), coordination of benefits for beneficiaries enrolled in Part D plans must include a reliable feedback loop of paid claims data from the employer, union or other insurer back to the Part D plan for purposes of tracking TrOOP. Additionally, given the real-time claims environment for pharmacy benefits, the feedback would ideally be in real-time so that beneficiary liability (if any) can be known at the point of sale, the correct insurer pays the correct share of the total drug cost, and the TrOOP calculation can be updated as quickly and accurately as possible. This suggests the need for an organized system to share, update, and push data back and forth between pharmacy benefit managers and pharmacies. This will be further discussed in the section on tracking true out-of-pocket (TrOOP) costs, below.

As mentioned above, under section 1860D-23(c)(1) of the Act, coordination between State pharmaceutical assistance programs and Part D plans does not change or affect the primary payor status of a Part D plan with respect to a State pharmaceutical assistance program. Nor does it affect the primary or secondary payment position of the Part D plan related to the payments made by other plans providing prescription drug coverage. Part B of Medicare has historically included limited coverage of certain outpatient prescription drugs. Part A of Medicare covers prescription drugs more extensively, but only when an individual is an inpatient in a Medicare-certified facility receiving Medicare-covered inpatient care. In additional circumstances, for instance when a person has elected Medicare hospice coverage, prescription drugs are also covered under original Medicare.

The new statutory definition of a covered Part D drug excludes drugs covered and paid for under Part A or Part B of Medicare for a given individual. Section 1860D-2(e)(2)(B) of the Act provides that a drug that would otherwise be a covered Part D drug will not be so considered if payment for the drug as so prescribed and dispensed or administered is available under Parts A or B for that individual. This language indicates that the Congress was aware that some drugs could qualify for payment under Part A or B in some circumstances, and Part D in other circumstances, depending on setting of dispensing or administration. This means, for example, that if a form of administration of a drug is covered under Part B in a region when injected incident to a physician office visit, that drug administered in that manner in that setting cannot meet the definition Start Printed Page 46703of a covered Part D drug. However, that same drug can be covered under Part D when picked up at a retail pharmacy to be self-administered by the patient. For another example, in certain instances a drug could be covered under Part B at certain times and under Part D at other times. Many patients, for instance, take their medicines at specific times throughout the day. If these patients receive a service in a hospital outpatient department and remain in the hospital for several hours of post surgery observation, he/she may receive one or more doses from the hospital pharmacy. This medication would be considered part of their Part B service and covered under the hospital OPD payment.

We note that individuals can elect Part D of Medicare if they are entitled to Part A or enrolled in Part B. This means that individuals with only Part A or only Part B will still have access to Part D. Although most Medicare beneficiaries have both Parts A and B, there are nearly 2 million Medicare beneficiaries who have only Part A, while there are approximately 500,000 Medicare beneficiaries who have only Part B. We interpret the definition of covered Part D drug to exclude coverage under Part D for drugs otherwise covered and available under Parts A or B for individuals who choose not to enroll in either program. We interpret the words “payment is available” to mean that payment would be available to any individual who could sign up for A or B, regardless of whether they are actually enrolled. 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 and, in almost all instances, not eligible for premium-free Part A. However, they are eligible to buy into Part A for a premium. Thus, for all Part D individuals, Part A drugs and Part B drugs are “available” if they choose to pay the appropriate premiums. Consequently, Part D would not be required to pay for drugs covered under Parts A and B on the basis of a Part D eligible individual's status with regard to Parts A and B. In addition, we believe that the phrase “for that individual” in § 1860D-2(e)(2)(B) of the Act is intended to capture the fact that under local medical review policies, a drug that might be covered under Part B for an individual in one area of the country may not be covered under Part B in another area of the country. Thus, what is covered “under Part B for that individual” may be different in different geographic regions. The result of these interpretations would be that any drug covered under A or B could not be covered under D, whether it was covered for that individual or not.

We would wish to ensure that Part D coverage coordination works seamlessly for beneficiaries with Parts A and B of Medicare, and that beneficiaries do not lose Medicare coverage otherwise available to them due to unforeseen difficulties encountered in the coordination process. This is a critical consideration for effective and efficient coordination between the original Medicare program and the new coverage provided under Part D. Specific options concerning coordination of benefit procedures that we are considering are outlined below.

Pharmacy-dispensed drugs covered by Part B (for instance, DME drugs, immunosuppressive drugs, and oral anti-cancer drugs) are not reimbursed unless the pharmacy has a Medicare supplier number; thus, a beneficiary could lose Part B coverage by filling a prescription at the wrong pharmacy. (We recognized this problem in the interim final rule on the discount card program and stated that, for drugs potentially covered by Part B, “non-Medicare participating pharmacies should refer the beneficiary to a participating pharmacy.” See 68 FR 69840, 69852). To reduce this risk, we are proposing to—

1. Encourage Part D plans to enroll pharmacies with Medicare supplier numbers in their networks;

2. Encourage Part D plans to inform beneficiaries whether their network pharmacies have a Medicare supplier number, and explain why this is important when filling prescriptions for drugs potentially covered by Part B; and

3. Develop educational materials reminding pharmacies without Medicare supplier numbers that they must refund any payments collected from beneficiaries enrolled in Part B for Part B drugs unless they first notify the beneficiary (through an advanced beneficiary notice (ABN)) that Medicare likely will deny the claim.

Statutory “refund requirements” apply to claims for “medical equipment and supplies” that Medicare denies because the supplier lacked a supplier number, unless—

1. The beneficiary signed an ABN notifying him or her that Medicare would deny payment, and agreed to be personally responsible for payment; or

2. The supplier did not know and could not reasonably have known that Medicare would deny payment.

For this purpose, coverage of medical equipment and supplies includes durable medical equipment (DME), certain drugs and other supplies necessary for use of an infusion pump, oral immunosuppressive drugs and anti-cancer drugs, and “such other items as the Secretary may determine.” (See the Medicare Claims Processing Manual, Chapter 30, sections 150.1.3 and 150.1.5.) Suppliers are presumed to know that Medicare will not pay for medical equipment and supplies furnished by a supplier that lacks a supplier number. (See section § 150.5.4 of Chapter 30 of the Medicare Claims Processing Manual.) We are considering whether a drug denied Part B coverage for this reason should become a covered Part D drug, and the claim should thus be processed under Part D, and would like to receive comments on the relative likelihood of this occurrence and on alternative means of addressing such circumstances.

We are also considering whether a drug denied Part B coverage for any other reason should become a covered Part D drug. For instance, we believe that a drug denied Part B coverage and payment for therapeutic inappropriateness, drug-disease contraindication, incorrect drug dosage, duration of drug treatment or for similar reasons related to medical necessity should not be considered a covered Part D drug. Rather, we believe that such a denial or non-coverage decision under Part B, while appealable under Part B, would not cause the drug to become a covered Part D drug. We welcome comment in this area.

For drugs potentially covered by Part B that are dispensed by a pharmacy that is a Medicare supplier, we are considering the development of automatic cross-over procedures. That is, we are considering requiring that: (1) The pharmacy submit the claim to the appropriate Part B carrier; and (2) the carrier, if it denies the claim, submit the claim automatically to the PDP (or its claims processing agent) through which the beneficiary has Part D coverage. This assumes that the beneficiary receives Part D through a PDP. For beneficiaries enrolled in MA-PD plans, coordination of benefits will generally occur internally within the MA organization. (Similar cross-over procedures are used today in connection with dual-eligibles—individuals entitled to both Medicare and Medicaid and related to coordination between Medicare and Medicare supplemental insurers.)

We also believe that similar cross-over procedures for any physician-administered drugs that may be covered under Part B or Part D will need to be developed. This would involve: (1) The physician submitting the claim to the appropriate Medicare carrier; and (2) the Start Printed Page 46704carrier automatically submitting the claim to the Part D plan (or its claims processing agent) if it denies payment under Part B. We particularly welcome comment on the feasibility of these proposed Part D and Part B coordination of benefits proposals and welcome suggestions on other methods or procedures that might be more efficient or better suited to coordination of prescription drug benefits.

Another type of coordination of benefits occurs when Medicare pays secondary to another insurance (MSP). Medicare currently pays secondary when payment has been made or can reasonably be expected to be made by another party such as workers compensation, automobile insurance, a liability insurance policy, or another health insurance policy (for example, when a beneficiary's spouse has primary insurance through their employment). Beneficiaries provide information, when available, regarding third party coverage as part of the initial enrollment questionnaire. Medicare also attempts to identify additional situations in which Medicare should pay secondary, and when we believe this is the case we follow up with employer plans for information. We do not anticipate significant changes to this mechanism, except that Medicare will now, in relatively limited circumstances, pay secondary for a Part D beneficiary who has other insurance. We do not know how many beneficiaries with employer-sponsored insurance that is the primary payor to Medicare will enroll in Part D. We do know that approximately two-thirds of individuals with primary employer-sponsored insurance do voluntarily pay for Part B coverage. We request public comment on the likelihood that beneficiaries with primary employer-sponsored insurance will elect Part D. We believe that the number of instances where automobile, workers' compensation or liability insurance will be paying primary on behalf of Part D enrollees will be relatively small. So, generally, we believe that most instances of coordination of benefits of under Part D will occur when Medicare is primary and another insurer is secondary.

d. Collection of Data on Third Party Coverage

Section 1860D-2(b)(4)(D)(i) of the Act authorizes us to establish procedures for determining whether a beneficiary's Part D out-of-pocket costs are actually reimbursed by a group health plan, insurance or otherwise, or another third-party arrangement. These procedures provide for—

  • Determining whether costs for a Part D enrollee are being reimbursed through insurance or otherwise, a group health plan, or other third-party arrangement; and Alerting Part D plans in which beneficiaries are enrolled about reimbursement of prescription drug costs they receive through insurance or otherwise, a group health plan, or other third party arrangement.
  • Section 1860D-2(b)(4)(D)(ii) of the Act permits Part D plans to request information on third party insurance from beneficiaries. We would expect Part D plans to update Medicare records based on the information provided by beneficiaries to reflect changes in coverage, including the primary or secondary status of such coverage relative to Medicare. As discussed in the subpart B preamble, beneficiaries who materially misrepresent (as defined in standards and processes we propose to establish in § 423.108(b)(4)(iv) of the proposed rule) information on third parties may be disenrolled from any Part D plan for a period specified by CMS and may also be subject to late enrollment penalties upon enrollment in another plan.

In the current Medicare fee-for-service claims processing environment, coordination of benefits when Medicare is the primary payor and another insurer is secondary (for example, employer-based retiree insurance, Medicaid, or Medigap) is performed as a convenience to the beneficiary and employer plan (coordination of benefits is required by statute for claims involving Medigap plans) and is voluntary on the part of the employer plans. The coordination of so-called “cross-over” claims is a one-way communication of claims information from Medicare to the secondary plan. This “cross-over” does not occur in real time. Instead, Medicare communicates with employer plans on a batch basis, and claims information may not reach the secondary insurer until weeks after the covered service is rendered. Coordination of benefits is, nonetheless, a valuable service to employers and Medicaid since these payors get an electronic claim that has already been subjected to claims edits and on which Medicare has already paid its portion. As a matter of fact, the service is so cost effective that employers willingly pay Medicare for the “cross-over” service. We have agreements with numerous employers purchasing “cross-over” data. In 2004 Medicare expects approximately 550 million Part A and Part B claims to “cross-over” to a secondary insurers including Medigap, Medicaid, employers, other insurers, and third party administrators providing wrap-around coverage.

Section 1860D-2(b)(4)(D)(i) of the Act authorizes us to establish procedures for determining if costs for Part D enrollees are reimbursed by other payors, and for alerting Part D plans about such arrangements. This provision could be read to mean that we only have to determine the presence of alternative coverage and merely has to alert Part D plans of such. However, it could also be read to mean that we have to determine if specific claim costs have been reimbursed by alternative coverage. In contrast, section 1860D-24(a) of the Act directs us to establish requirements for Part D plans to coordinate benefits with other payors in the same manner as we are directed to coordinate Part D benefits with SPAPs. This provision could mean that the responsibility for coordination of benefits lies with the Part D plans. However, section 1860D-24(c)(2) of the Act provides that the requirements of section 1860D-24 shall not affect the application of procedures established under section 1860D-2(b)(4)(D) of the Act. This arguably preserves the flexibility CMS has under the later section to impose requirements on alternative coverage arrangements. In addition, section 1871 of the Act generally authorizes us to prescribe such regulations as may be necessary to carry out administration of the insurance programs under title XVIII of the Act that now includes Part D.

We assume that employer and union plans may respond to the new Medicare prescription drug benefit in a number of ways. We expect that many of the employers and unions that currently provide supplemental drug coverage to their retirees will opt to pay premiums to Part D plan sponsors. In today's Medicare Advantage market, the most prevalent model is one that employers and unions pay premiums to MA organizations. We expect this model to continue to have wide appeal under Part D. In the case of the PDP market, while many employers and unions may choose to pay premiums to PDPs for Part D for their retirees, others may choose to coordinate benefits with PDPs. In general, employers and unions that continue to offer assistance to Medicare-eligible retirees will either (1) provide qualified coverage of prescription drugs in such a way that retiree-beneficiaries do not need to enroll in Part D of Medicare, in which case the employer may qualify for a Federal subsidy under section 1860D-22(a) of the Act; or (2) provide assistance that requires retiree-beneficiaries to enroll in Part D (either by paying Part D basic or supplemental Start Printed Page 46705premiums); or (3) provide supplemental (“wrap-around”) benefits through alternative secondary coverage. The last option has implications for coordination of benefits between Part D plans and employer/union-sponsored retiree drug coverage, and in particular, on the accurate processing of claims with respect to the out-of-pocket threshold.

e. Tracking True Out-of-Pocket (TrOOP) Costs

As we discuss in the preamble to subpart C of this rule, section 1860D-2(b)(4)(C) of the Act provides that beneficiary costs for covered Part D drugs are only considered incurred when those costs are incurred by a Part D enrollee for covered part D drugs covered under (or treated as covered under) a Part D plan that are not paid for under the Part D plan due to the application of any annual deductible or other cost-sharing rules for covered part D drugs prior to the Part D enrollee satisfying the out-of-pocket threshold under proposed § 423.104(e)(5)(iii), including any price differential for which the Part D enrollee is responsible under proposed § 423.120(a)(6) and § 423.124(b)(2). Further, section 1860D-2(b)(4)(C)(ii) of the Act provides that costs shall be treated as incurred by a Part D eligible individual only when they are paid by another person (such as a family member, on behalf of the individual) and the individual (or other person) is not reimbursed by insurance or otherwise, a group health plan, or other third-party arrangements, with the exception of amounts reimbursed by a SPAP or under the low-income subsidy provided for under proposed § 423.782. We refer to beneficiary expenditures for covered Part D drugs meeting these requirements as “true out-of-pocket costs”, or TrOOP. We are considering a number of options for facilitating the exchange of data needed to track TrOOP, and will discuss alternatives around both mandatory versus voluntary reporting of claim and out-of-pocket costs, and centralized versus distributed responsibility for tracking the information in the extended discussion, below.

The case in which the employer or union arranges wrap-around coverage through a third party administrator or insurer other than through a Part D plan in which the retiree-beneficiary is enrolled is the potentially complex and challenging to administer, especially given the true out-of-pocket costs (TrOOP) requirements. The degree of difficulty in making coordination of benefits work with respect to wrap-around coverage is related to the ability of plans to efficiently coordinate insurance coverage at the point of sale. We cannot estimate the number of employer/labor plans that might choose to wrap-around prescription drug coverage other than through a Part D plan. We welcome comment that would help us estimate the scope and impact of such coverage, as well as the impact on the operational capabilities of plans (and their subcontractors).

Medicare Part D plans will need to be particularly involved with employer/union plans that wrap-around Part D coverage due to the implications such wrap-around coverage has for administering TrOOP maximums. Payments made on behalf of a beneficiary by a third party (such as by employer/labor-sponsored supplemental prescription drug coverage) are not considered incurred costs and, therefore, do not count in the TrOOP calculation. Thus, employer/labor-sponsored wrap-around coverage effectively pushes out the total spending “attachment point” or starting point at which protection from high out-of-pocket beneficiary expenditures begins.

As discussed in subpart G of this preamble, although Part D plans will receive reinsurance payments from us for a portion of the costs they incur for prescription drug coverage provided to beneficiaries after the true out-of-pocket threshold has been met, Part D plans will also bear “risk” for a portion of the costs they incur above the threshold. The critical nature of the TrOOP calculation makes coordination of benefits under the Part D program of vital interest to all parties. Both CMS and Part D plans must know how much an employer/union-based plan or other plan pays on a prescription drug claim following adjudication of that claim by the Part D plan. Likewise, beneficiaries have a vested interest in the TrOOP calculation due to the financial relief they receive after meeting the annual out-of-pocket threshold.

Responsibility for tracking TrOOP costs is somewhat unclear. On the one hand, the government is given authority to establish procedures for tracking TrOOP costs. For instance, as we discuss later in this preamble section and as we propose to codify in regulation at § 423.464(c), section 1860D-24(a)(3) of the Act authorizes us to impose user fees for disseminating information necessary for benefit coordination. On the other hand, responsibility for obtaining and applying the necessary information to prescription drug claims is assigned to the Part D plan sponsors. It is of great importance to establish clear responsibilities for TrOOP tracking and calculation processes in regulation in order to ensure that qualified beneficiaries receive appropriate coverage once they have met the out-of-pocket cost limit.

There is sufficient ambiguity in the statutory language to support a proposal to mandate that group health plans, insurers, and otherwise, and other third-party arrangements provide claims data for Part D enrollees to us for purposes of administering TrOOP. Exercising such authority would not be in violation of HIPAA confidentiality requirements. However, exercising such authority would impose administrative burden on group health plans, insurers, and otherwise, and other third-party arrangements that provide coverage or reimbursement of health care expenses to Medicare Part D beneficiaries. Moreover, mandatory reporting of enrollment file and claims data will not be sufficient, in and of itself, to capture all forms of enrollee cost-sharing reimbursement.

For instance, if the third party reporting of claims payments and reimbursements are strictly voluntary, serious challenges to implementing a system for tracking TrOOP will continue to exist. A voluntary system would be incomplete and all payors that rely on voluntarily reported data would need to have back-up procedures for accounting for initially unreported data. A voluntary system would also leave CMS and Part D plans open to criticism that the data is incomplete and that benefits paid out based on TrOOP calculations are inaccurate. However, group health plans, insurers and otherwise, and other third-party arrangements might prefer a voluntary system.

By way of comparison, the current (voluntary) Medicare Secondary Payor (MSP) program achieves $4.5 billion in savings. This means that there is some compliance with the provisions even though there is no mandatory insurer-reporting requirement. However, under the MSP provisions there are enforcement provisions. There are tax penalties for non-compliance with the MSP rules. In addition, there is a mandated reporting of some information through the IRS/SSA/CMS data match project that obtains tax and spousal information from the IRS and SSA. Our contractor then sends the employer a questionnaire concerning the identified Medicare beneficiary or spouse of a beneficiary to determine if there is coverage that is primary to Medicare. Failure to complete the questionnaire can result in the imposition of a Civil Monetary Penalty. However, even with these enforcement provisions, it is estimated that Medicare is still losing millions of dollars where employer Start Printed Page 46706plans should be primary. Payments made by plans primary to Medicare under the Medicare Secondary Payer provisions 1862(b) would not count against the TrOOP.

In the cross-over area discussed previously in this section of the preamble, we are more successful, but there are still numerous payers who do not have cross-over agreements with us. So although there is substantial participation related to cross-over claims, there is also significant room for improvement. In the context of the current discussion, the issue is primarily that the sending of paid claims data to us for its use in the TrOOP calculation will be an added administrative cost on third-party payers, which (without explicit reporting requirements in the statute or an even an enforcement mechanism) may lead to lower compliance.

We are considering the following options for operationalizing the data exchange related to the Part D coordination of benefits system and TrOOP accounting:

Option 1: The PDPs and MA-PD plans would be solely responsible for tracking TrOOP costs. This option places the entire responsibility for tracking TrOOP costs with the PDPs and MA-PD plans. As part of their overall benefit management responsibility they would be responsible for establishing the systems infrastructure and ensuring that all data points are reporting timely and accurate data about beneficiaries' Part D costs. Each PDP and MA-PD plan must establish arrangements with all payers for enrollment file sharing and claims payment information exchanges. This coordination applies equally to plans that are primary or secondary payer to Medicare. Under this scenario, any payer who had a beneficiary on behalf of whom they expected to make either a primary or secondary payment to Medicare Part D would need to be able to (1) identify the Part D plan in which the beneficiary was enrolled, (2) establish the telecommunications links; (3) transmit enrollment information to the specific PDP or MA-PD plan in which their covered individual is enrolled, and (4) transmit claims payment data to the PDP or MA-PD each time a claim was paid which may need to be included in the TrOOP calculation. Data collected by a PDP or MA-PD plan would be annotated to the Medicare Beneficiary Database and be available to pharmacies for the purposes of proper billing.

Option 2: We would procure a TrOOP facilitation contractor to establish a single point of contact between payers, primary or secondary. Under this scenario, we would procure a TrOOP facilitation contractor based on a strategy of voluntary compliance, similar to the existing MSP coordination of benefits model. We would procure a contractor to receive enrollment and claims payment information from all plans primary and secondary to Medicare. This would establish a single point of contact between the Medicare program and employers, State Pharmacy Assistance Programs, as well as primary and secondary payers for enrollment and claims payment information.

Under this single point of contact option, a payer primary or secondary to a Part D plan would be required to send an enrollment file to the TrOOP facilitation contractor (a contractor procured by us). The TrOOP facilitation contractor would match the payer enrollment information to Medicare enrollment records and update the Medicare Beneficiary Database with the information. The other payer enrollment file information would also be used the TrOOP facilitation contractor to match claims payment data which would also be submitted to the TrOOP facilitation contractor. Once a claim was matched against the enrollment data, the TrOOP facilitation contractor would aggregate the claim records files by Part D plan and transmit the information. The PDP or MA-PD plan would be responsible for using the data in applying the TrOOP and applying other TrOOP requirements such as the application of a formulary.

PDPs and MA-PD plans would also request information about other coverage during the enrollment process and could add change or delete information input into the system by the TrOOP facilitation contractor. We can use existing fee-for-service coordination of benefits processes to implement many of the processes needed to implement these provisions. Information concerning primary and secondary plans would be shared with and PDPs and MA-PD plans, as well as annotated in the Medicare common working file/Medicare Beneficiary Database to enhance pharmacy billing and beneficiary customer service.

Under either option, we would enter into voluntary data sharing agreements with employers/unions and other plans to participate in a shared system. The same mechanism would accept information provided directly by Part D plans, SPAPs, group health plans, FEHBP, military plans, and other insurance or payors as we may specify.

We are committed to ensuring that claims are processed appropriately under Part D. Therefore, to foster proper billing and coordination of benefits we are also considering the establishment of the Medicare beneficiary eligibility and other coverage query system using the HIPAA 270/271 eligibility query. Information collected under this section for the purpose of TrOOP application would be available to be queried by pharmacies to facilitate proper billing. We are concerned that with the significant expansion of health care options available to beneficiaries that providing information to pharmacies about Medicare and other coverage is essential to facilitate proper claims processing. We are requesting comments concerning the development of this system.

In either event, the system(s) would need to be operational by January 1, 2006. Note that user fees might be imposed on third-party payers (but not on SPAPs) for the transmittal of information under either model. Were responsibility to reside solely with Part D plans to develop and operate a coordination of benefits system or systems (without a defined role for us in such development and operation), the statute would still permit imposition and collection of user fees. Please see our preamble discussion on user fees earlier in this preamble related to proposed § 423.464(c).

We could propose (with or without mandatory reporting by insurers) placing requirements on Part D plans and enrollees that would facilitate private market arrangements to report the data. We are considering mandating that beneficiaries enrolling in Part D plans provide third-party payment information and consent for release of data held by third parties as part of their enrollment application and which could be validated through a HIPAA-compliant beneficiary “release” or authorization. For instance, if we were to clearly require that all Part D plans coordinate benefits and that all Part D enrollees provide consent for release of third-party data on their Part D enrollment forms, the Part D plans would have the authority to implement inter-plan reporting mechanisms in order to coordinate benefits. However, back-up procedures would still be necessary to capture expense reimbursements made outside prescription drug claim processing systems as, for instance, by HRA administrators. Thus, although the statute is unclear as to which entity should have primary responsibility for tracking TrOOP costs (CMS or the Part D plans), to facilitate the accurate calculation of TrOOP we could do this either through reliance on data collection provisions in section 1860D-15(c)(1)(C) of the Act, or in reliance on Start Printed Page 46707our authority to collect information related to contracting in section 1860D-12(b)(3)(D) of the Act that incorporates into Part D section 1857(e) of the Act, allowing the contract to require the contracting organization to provide to us the information as we decide necessary and appropriate. However, section 911(c)(2) of the MMA strictly forbids matches of data between Medicare contractors and us to identify MSP situations. The fact that the MMA is silent with regard to matches or data exchanges for the purposes of Part D TrOOP cost administration could be taken in different ways. One way to read the statute would be that the omission was intentional and the Congress specifically intended for the type of exception not to be applicable for TrOOP. However, an equally good case could be made that TrOOP administration procedures were to be defined by us and therefore the spirit of the provision contained in 911(c)(2) should be considered as it applies to TrOOP.

We ask for comment on these options and are seeking input on the best means to ensure an efficient and effective coordination of benefits related to the Part D Medicare program. We are also interested in discussion of other temporary or phased-in approaches that may be necessary or advisable given the short timeframe between publication of the final rule and program implementation. Under any of the scenarios presented it is clear that the ultimate responsibility for calculating TrOOP belongs to the Part D plan. The only issues are what role in facilitating TrOOP tracking CMS should have, if at all.

It is important to note that the sequencing of primary and secondary insurance claims will be a critical issue for tracking TrOOP costs. If, for example, a secondary plan does not provide feedback to the system in real time, it is possible that the TrOOP cost information the Part D plan has access to may not be entirely up to date at any given time. Also, if a paper claim is submitted after the fact to the Part D plan or supplemental insurer (due to an appeal reversal, for instance), the TrOOP calculation would not be up to date in real time at the point of service. Another complicating factor in the sequencing of claims is cancelled prescriptions. Generally, a claim is adjudicated when a prescription is filled. If the prescription is not picked up, and is eventually cancelled, the claim needs to be cancelled. If, in the meantime, other claims have been adjudicated, the sequencing is thrown off by the cancelled prescription, potentially disrupting the calculation of the initial deductible and TrOOP, and making coordinating benefits and tracking TrOOP costs more difficult.

Ideally, we would prefer that the system actually coordinate the adjudication of claims and provide real-time claims processing across multiple insurers, but we do not believe that such a complex and unique system could be operational by January 1, 2006. And, as previously mentioned, we do not have statutory authority to enforce a mandatory reporting requirement that employers, group health plans, other insurance or third-party arrangements participate in such a system. We believe, however, that the type of voluntary system we envision would provide information sufficient to permit the coordination of benefits that the statute requires and that beneficiaries and pharmacies desire. In any case, the goal would be to minimize the prevalence of paper claims submitted post point of service. In addition, we request public comment on methods for Part D plans to receive information from beneficiaries or others regarding payment made by entities that do not participate in this coordination of benefits system, since there is no requirement that third-party payers participate in this voluntary system.

We anticipate that the majority of employers, group health plans and other third-party payment arrangements would participate in a voluntary system since they would receive a clean claim from the pharmacy that has already been adjudicated by the Part D plan. In return for the clean claim, we would request that third-party payers provide information back to the coordination of benefits system regarding how much they paid on the claim for purposes of calculating the TrOOP under Part D. We anticipate that there will be times that the information in the system is not consistent with what the beneficiary informs the pharmacy is the most current state of insurance. We request comment and relevant information (if any exists from current market practices) on how these situations should be resolved under Part D at the point of sale.

K. Proposed Application Procedures and Contracts With PDP Sponsors

(If you choose to comment on issues in this section, please include the caption “Subpart K—Proposed Application Procedures and Contracts with PDP Sponsors” at the beginning of your comments.)

1. Overview

Subpart K of proposed part 423, would implement provisions established by sections 1860D-12(b)(1), 1860D-12(b)(3)(A), 1860D-12(b)(3)(B), 1860D-12(b)(3)(C), 1860D-12(b)(3)(D) and 1860D-12(b)(3)(F) of the Act that relate to contract requirements for PDP sponsors. The proposed provisions in this rule would address conditions necessary to contract with Medicare as a PDP sponsor, as well as contract requirements and termination procedures that would apply to Medicare-contracting PDP sponsors.

2. Background

Section 1860D-12(b)(1) of the Act provides that an entity seeking to participate in the Medicare program as a PDP sponsor must enter into a contract with us for that offering. The contract may cover more than one prescription drug plan in a region or across multiple regions and would require the PDP sponsor to adhere to all applicable requirements and standards included in Part D of Title XVIII of the Act and our provisions at proposed part 423, as well as the terms and conditions for payments described in regulation and the statute. While the provisions discussed in proposed subpart K would, in general, also apply to “fallback plans”, eligibility limitations and contract requirements for applicants that have offered or are offering “fallback plans” are discussed in proposed subpart Q of this preamble.

Section 1860D-12(b)(3) of the Act states that certain MA contracting provisions in the Act should be applied to contracts with PDP sponsors in the same manner that they apply to contracts with MA organizations. Therefore, it is our intent to apply, where applicable, the contracting provisions used for MA organizations to contracts with PDP sponsors. The contracting provisions in this proposed rule are, for the most part, the current MA contract requirements with some changes made to accommodate the differences between MA and PDP sponsors and to implement specific changes mandated in the Act. However, we realize that the programmatic differences between this proposed rule and the existing MA contracting provisions will require changes. We are studying this issue, requesting comments and planning to implement the appropriate changes in the final rule.

We discuss the following five requirements in this subpart:

  • Protection against fraud and abuse (proposed § 423.504(d));Start Printed Page 46708
  • Contract provisions (proposed § 423.505);
  • Effective date and term of contract (proposed § 423.506);
  • Procedures for non-renewal (proposed § 423.507) and termination (proposed § 423.508 through § 423.510); and
  • Minimum enrollment (proposed § 423.512).

The sixth requirement (intermediate sanctions) identified in section 1860D-12(b)(3) of the Act is discussed in more detail in proposed subpart O of this preamble.

In addition, section 1860D-12(b)(3)(D) of the Act incorporates section 1857(e) of the Act, which provides the Secretary the authority to include in the contract “such other terms and conditions not inconsistent with this part * * * as the Secretary may find necessary and appropriate.” Since the contracting aspects of the proposed MA and PDP programs are quite similar, as are the procedures and requirements, we need to support their contracts. We propose to apply the provisions of part 422 to PDP sponsor contractors and applicant organizations, with few exceptions, in proposed subpart K. In some cases it was necessary to make changes to accommodate differences between MA and PDP sponsors, for example, application timeframes, payment, provider contract requirements, and certifications. We have noted these changes where they occur throughout the preamble.

We are interested in receiving comments on the contracting provisions of this rule. We are interested in receiving comments on provisions that should not be applied, and whether for PDPs there are other contracting considerations that are not addressed in these MA contract provisions. Specific issues on which we seek comment include: the type of business transactions which should be reported to CMS, the proposed required administrative and management arrangements, how these provisions should be applied to large companies with multiple business units, and the record maintenance requirements.

Maintenance of a single application and evaluation procedure, and a single set of contract requirements for both the MA and PDP programs would bring simplicity, consistency, and reduced administrative burden for those entities that are managing both programs. The requirements at proposed § 423.501 through § 423.516 would be similar to the requirements in § 422.500 through § 422.524. A summary of our proposed provisions are discussed below.

3. Definitions

In proposed § 423.501, we would define contract-related terms that would be limited to use in this proposed subpart. These definitions would be almost the same as those in § 422.500 for application to the MA program except in cases where the MA definition is inapplicable—such as in definitions that reference hospitals or hospital services. Of particular note are the proposed terms “first tier” and “downstream” entity because a PDP sponsor may often accomplish its responsibilities under its Medicare contract by contracting with these entities. For purposes of this proposed subpart the following definitions would apply:

Business transaction would mean any of the following kinds of transactions:

(a) Sale, exchange, or lease of property.

(b) Loan of money or extension of credit.

(c) Goods, services, or facilities furnished for a monetary consideration, including management services, but not including—

(1) Salaries paid to employees for services performed in the normal course of their employment; or

(2) Health services furnished to the PDP sponsor's enrollees by pharmacies and other providers, and by PDP sponsor staff, medical groups, or independent practice associations, or by any combination of those entities.

Significant business transaction would mean any business transaction or series of transactions of the kind specified above in the definition of “business transaction” that, during any fiscal year of the PDP sponsor, have a total value that exceeds $25,000 or 5 percent of the PDP sponsor's total operating expenses, whichever is less.

Downstream entity would mean a party that enters into a written arrangement below the level of the PDP sponsor's contract with the “first tier” entity. These written arrangements would continue down to the level of the ultimate provider of both health and administrative services. Usually in the context of the drug benefit the ultimate provider would be the pharmacist but it might also include other entities, such as an organization providing medication therapy management.

First tier entity would mean any party that enters into a written arrangement with a PDP sponsor or contract applicant to provide administrative services or health services for a Medicare eligible individual under Part D.

Party in interest would mean the following:

(a) Any director, officer, partner, or employee responsible for management or administration of a PDP sponsor.

(b) Any person who is directly or indirectly the beneficial owner of more than 5 percent of the organization's equity; or the beneficial owner of a mortgage, deed of trust, note, or other interest secured by and valuing more than 5 percent of the organization.

(c) In the case of a PDP sponsor organized as a nonprofit corporation, an incorporator or member of such corporation under applicable State corporation law.

(d) Any entity in which a person described in paragraphs (a), (b), or (c) of this definition—

(1) Is an officer, director, or partner; or

(2) Has the kind of interest described in paragraphs (a), (b), or (c) of this definition.

(e) Any person that directly or indirectly controls, is controlled by, or is under common control with the PDP sponsor.

(f) Any spouse, child, or parent of an individual described in paragraphs (a), (b), or (c) of this definition.

Related entity would mean any entity that is related to the PDP sponsor by common ownership or control and—

(a) Performs some of the PDP sponsor's management functions under contract or delegation;

(b) Furnishes services to Medicare enrollees under an oral or written agreement; or

(c) Leases real property or sells materials to the PDP sponsor at a cost of more than $2,500 during a contract period.

4. Proposed Application Requirements

Under proposed § 423.502, in order to obtain a determination on whether it meets the requirements to become a PDP sponsor, an entity, or an individual authorized to act for the entity (the applicant), would be required to complete and submit a certified application in the form and manner required by us. In addition to the application, the entity or individual authorized to act for the entity would be required to submit documentation of appropriate State licensure or State certification that the entity is able to offer health insurance or health benefits coverage that meets State-specified standards as described in proposed subpart I of this proposed part; or submit a Federal waiver as described in proposed subpart I of this proposed part. The authorized individual would be required to describe thoroughly how the entity would meet the proposed Start Printed Page 46709requirements described in this proposed part.

We would be responsible for determining whether an entity is qualified to be a PDP sponsor and if that entity meets the proposed requirements of part 423. Also, in this proposed section, we would specify that an applicant that submits material that he or she believes would be protected from disclosure under 5 U.S.C. 552, the Freedom of Information Act, or because of exceptions provided in 45 CFR part 5 (the Department's regulations providing exceptions to disclosure), would have to label the material “privileged” and include an explanation of the applicability of an exception described in 45 CFR part 5.

Current fallback plans, entities that bid to be fallback plans, and, in some circumstances, entities that served as fallback plans the prior year would not be eligible to apply as a PDP sponsor. (See proposed subparts F and Q of this preamble for details on proposed “fallback plans”.)

5. Proposed Evaluation and Determination Procedures For Applications To Be A Sponsor

Proposed § 423.503 would establish procedures for us to evaluate and determine an entity's application for a contract as a PDP sponsor. These provisions mostly mirror the provisions applicable to MA specified at 42 CFR 422.502. This evaluation and determination of the application would be done on the basis of information contained in the application itself and any additional information that we would obtain through on-site visits, publicly available information, and any other appropriate procedures.

If the application is incomplete, we would notify the contract applicant, and we propose to allow 10 days from the date of the notice for the contract applicant to furnish the missing information. After evaluating all relevant information, we would determine if the contract applicant's application meets the applicable requirements of proposed § 423.504. We note that the MA provision in § 422.502(a)(2) currently provides a 30-day window for the MA program to furnish missing information. We believe a 10-day period is necessary for the Part D program because of the June bidding deadline specified at § 423.265(b). An organization would need to apply as close to the first of the year as possible in order to have its contract approved before submitting bids. Once a contract is approved, an organization is not required to reapply each year. See § 423.506(c) for renewal of contract information.

If a PDP sponsor, MA organization, or Medicare cost plan fails to comply with the terms of a previous year's contract with us under Title XVIII of the Act, or fails to complete a corrective action plan during the term of the contract, we may deny an application from a contract applicant based on the contract applicant's failure to comply with that prior contract with us even if the contract applicant meets all of the current proposed requirements.

We would notify each applicant that applies for a contract as a PDP sponsor under this part, of its determination on the application and the basis for the determination. The determination may be one of the following:

  • Approval of application. If we approve the application, we would give written notice to the contract applicant, indicating that it meets the requirements for a contract as a PDP sponsor.
  • Intent to deny. If we find that the contract applicant does not appear to meet the requirements for a PDP sponsor contract, we would give the contract applicant “notice of intent to deny” the application for a PDP contract and a summary of the basis for this preliminary finding. Within 10 days from the date of the notice, the contract applicant would have to respond in writing to the issues or other matters that would be the basis for our preliminary finding and would have to revise its application to remedy any defects we identify. We note that the MA provision in § 422.502(e)(2) currently provides a 60-day window for the MA program to remedy any defects we identify. We believe a 10-day period is necessary for the Part D program because of the June bidding deadline specified at § 423.265(b). An organization needs to apply as close to the first of the year as possible in order to have its contract approved prior to submitting a bid.

If we deny an application, written notice would be given to the contract applicant that would indicate the following:

  • That the contract applicant does not meet the contract requirements under Part D of Title XVIII of the Act.
  • The reasons why the contract applicant does not meet the contract requirements.
  • The contract applicant's right to request reconsideration in accordance with the proposed procedures specified in proposed § 423.645.

This proposed section would also establish oversight of a PDP sponsor's continued compliance with the proposed requirements for a PDP sponsor. If a PDP sponsor fails to meet those proposed requirements, we would terminate the contract in accordance with proposed § 423.509 of this proposed rule.

6. General Provisions

Proposed § 423.504 would specify the general provisions that would apply to PDP sponsor contracts. Again, for the most part, we would adopt the provisions that already apply to MA organizations through the regulations at 42 CFR 422.501. We have recently proposed changes to the compliance program requirements for MA organizations at 42 CFR 422.501(b)(3)(vi)(G) to include provisions that would require MA organizations to report misconduct it believes may violate various criminal, civil or administrative authorities. These self-reporting requirements are identified below in the discussion of the elements of a PDP compliance program. We have based the compliance program requirements for PDP sponsors on these new and recently proposed MA requirements. We believe that mandatory reporting of potential fraud by government contractors is critical, especially in light of the corporate fraud scandals that occurred over the past several years. It is also in keeping with the Sarbanes-Oxley Act of 2002, under which the Securities and Exchange Commission adopted new regulations designed to make corporate compliance and disclosure requirements stronger and more effective. In short, we believe that the self-reporting requirements included in this rule are keeping with the change in the legal, regulatory, and business climates since the compliance program requirements were first implemented. Subject to the provisions at proposed § 423.265(a)(1), in subpart F—Submission of bid, we are proposing that in order to enroll beneficiaries in any prescription drug plan it offers and be paid on behalf of Medicare beneficiaries enrolled in those plans, a PDP sponsor would have to enter into a contract with us. The contract could cover more than one prescription drug plan.

In accordance with those regulations, we also propose that any entity seeking to contract as a PDP sponsor would be required to meet the following conditions:

  • Complete an application as described in proposed § 423.502.
  • Be organized and licensed under State law as a risk bearing entity eligible to offer health insurance or health benefits coverage in each State in which it offers a prescription drug plan, or have secured a Federal waiver, as Start Printed Page 46710described in proposed subpart I of this preamble.
  • Meet the proposed minimum enrollment requirements of proposed § 423.512(a) unless waived under proposed § 423.512(b).
  • Have administrative and management arrangements satisfactory to us that could be demonstrated by at least the following:

+ A policy making body that would exercise oversight and control over the PDP sponsor's policies and personnel that would ensure that management actions would be in the best interest of the organization and its enrollees.

+ Personnel and systems that would be sufficient for the PDP sponsor to organize, implement, control, and evaluate financial and marketing activities, the furnishing of prescription drug services, the quality assurance, medication therapy management, and drug-utilization management programs, and the administrative and management aspects of the organization.

+ At a minimum, an executive manager whose appointment and removal would be under the control of the policy making body.

+ A fidelity bond or bonds, procured and maintained by the PDP sponsor, in an amount fixed by its policymaking body, but not less than $100,000 per individual, that would cover each officer and employee entrusted with the handling of its funds. The bond may have reasonable deductibles, based upon the financial strength of the PDP sponsor.

+ Insurance policies or other arrangements, secured and maintained by the PDP sponsor and approved by us, that would insure the PDP sponsor against losses arising from professional liability claims, fire, theft, fraud, embezzlement, and other casualty risks.

+ A compliance plan that would consist of the following:

− Written policies, procedures, and standards of conduct articulating the organization's commitment to comply with all applicable Federal and State standards.

− The designation of a compliance officer and compliance committee accountable to senior management.

− Effective training and education between the compliance officer and organization employees.

− Effective lines of communication between the compliance officer and the organization's employees.

− Enforcement of standards through well-publicized disciplinary guidelines.

− Procedures for internal monitoring and auditing.

− Procedures for ensuring prompt response to detected offenses and development of corrective action initiatives relating to the organization's contract as a PDP sponsor.

− If the PDP sponsor discovers from any source evidence of misconduct related to payment or delivery of prescription drug items or services under the contract, it must conduct a timely, reasonable inquiry into that misconduct;

− If, after reasonable inquiry, the PDP sponsor has determined that the misconduct may violate criminal, civil or administrative law, the sponsor must report the existence of the misconduct to the appropriate Government authority within a reasonable period, but not more than 60 days after the determination that a violation may have occurred. If the potential violation relates to federal criminal law, the civil False Claims Act, federal Anti-Kickback provisions, the civil monetary penalties authorities (primarily under sections 1128A and 1857 (as incorporated through section 1860D-12) of the Act), or related statutes enforced by the HHS Office of Inspector General, the report must be made to that Office.

− The PDP sponsor must conduct appropriate corrective actions (for example, repayment of overpayments, disciplinary actions against responsible employees, etc.) in response to the potential violation referenced above.

The PDP sponsor's contract must not have been non-renewed under proposed § 422.507 within the past 2 years, unless—

+ During the 6-month period beginning on the date the organization notified us of the intention to non-renew the most recent previous contract, there was a change in the statute or regulations that had the effect of increasing PDP sponsor payments in the payment area or areas at issue; or

+ We have otherwise determined that circumstances warrant special consideration.

Section 1860D-4(b)(1)(A) of the Act assures pharmacy access by requiring a PDP sponsor to permit the participation of any pharmacy that meets the terms and conditions under the plan. Based on this requirement, we are considering adding the following language to the contract provisions: The PDP sponsor would agree to have a standard contract with reasonable and relevant terms and conditions of participation whereby any willing pharmacy may access the standard contract and participate as a network pharmacy. We are interested in public comment on the inclusion of such a provision.

Section 1857(c)(5) of the Act, which is incorporated by section 1860D-12(b)(3)(B) of the Act, authorizes us to exercise the authority granted to the Secretary under Part D of Title XVIII without regard to provisions of the statute or regulations that we determine to be inconsistent with the furtherance of the purpose of Title XVIII of the Act. Based on this authority, we propose to provide, in proposed § 423.504(c) (Contracting authority), that we may enter into contracts under this proposed subpart without regard to Federal and Departmental acquisition regulations set forth in title 48 of the CFR. We note that some of the Federal Acquisition Regulation (FAR) provisions may apply to “fallback plans”. (See proposed subparts F and Q for any contracting provisions unique to fallback plans.)

In proposed § 423.504(d) (Protection against fraud and beneficiary protections), we set forth the proposed requirements that we would have in place to protect against fraud and abuse in our PDP sponsor contracts. As directed by the statute, these are the same requirements as those in sections 1857(d)(1) and (d)(2) of the Act. The proposed requirements are as follows:

  • We would annually audit the financial records (including, but not limited to, data relating to Medicare utilization, costs, reinsurance cost, low-income subsidy payments, and risk corridor cost) of at least one-third of the PDP sponsors, including fallback plans, offering prescription drug plans. We welcome comments on whether fallback plans, because of the payment arrangements, require a different audit approach, possibly more frequent. The Comptroller General would monitor these auditing activities.
  • Each contract under this proposed section would be required to provide that we, or any person or organization designated by us, would have the right to—

+ Inspect or otherwise evaluate the quality, appropriateness, and timeliness of services performed under the PDP sponsor's contract;

+ Inspect or otherwise evaluate the facilities of the organization when there is reasonable evidence of some need for such inspection; and

+ Audit and inspect any books, contracts, and records of the PDP sponsor that pertain to the ability of the organization or its first tier or downstream providers to bear the risk of potential financial losses; or services performed or determinations of amounts payable under the contract.

Section 1860D-12(b) of the Act allows contracts with PDP sponsors to cover more than one prescription drug plan. At proposed § 423.504(e) (Severability of contracts), we are proposing that the contract would provide, upon our Start Printed Page 46711request, that the contract could be amended to exclude any State-licensed entity, or a PDP plan specified by us; and a separate contract for any excluded plan or entity would be deemed to be in place when such a request is made.

7. Contract Provisions

Section 1860D-12(b)(3)(D) of the Act requires that provisions of section 1857(e) of the Act relating to additional contract terms of MA contracts would apply in the same manner to PDP sponsors. Section 1857(e) of the Act allows that the contract would contain other terms and conditions not inconsistent with Part D of the Act, including requiring the organization to provide us with the information that we may find necessary and appropriate. The additional contract provisions for the MA program are adopted for use in this proposed rule with modifications as necessary to accommodate differences between the MA program and the prescription drug program. Elsewhere in this preamble, we have also identified additional contract terms that would apply uniformly to both MA organizations offering MA-PDs and PDP sponsors (see, for example, subpart D discussing e-prescribing). In proposed § 423.505 (Contract provisions), we would require the contract between the PDP sponsor and us to contain the provisions specified in proposed § 423.505(b). The following is a summary of the proposed additional contract provisions that reflect any changes from the MA contract provisions:

  • Specific Provisions.

In proposed § 423.505(b), we would list the specific provisions that would be contained in the contract between the PDP sponsor and us. Changes were made from the MA provisions to accommodate the different bidding and payment system for PDP sponsors. The PDP sponsor would be required to agree to comply with the following proposed provisions:

+ All the applicable proposed requirements and proposed conditions set forth in this proposed part and in general proposed instructions.

+ To accept new enrollments, make enrollments effective, process voluntary disenrollments, and limit involuntary disenrollments, as provided in proposed subpart B of this proposed part.

+ To comply with the proposed prohibition in proposed § 423.34(a) on discrimination in beneficiary enrollment.

+ To provide the basic benefits as proposed under proposed § 423.108 and, to the extent applicable, supplemental benefits proposed under proposed § 423.112.

+ To disclose information to beneficiaries in the manner and the form prescribed by us under proposed § 423.128.

+ To operate quality assurance, cost and utilization management, medication therapy management, and fraud, abuse and waste programs as proposed under proposed subpart D of this proposed part.

+ To comply with all proposed requirements in proposed subpart M of this proposed part governing coverage determinations, grievances, and appeals.

+ To comply with the proposed reporting requirements in proposed § 423.514 and the proposed requirements in proposed § 423.329(b)(3) of proposed subpart G for submitting drug claims and related information to us for its use in risk adjustment calculations;

+ Each contract under this proposed part would provide that—

− The PDP sponsor offering a prescription drug plan would be required to provide us with the information as we determine is necessary to carry out proposed payment provisions in proposed subpart G of this proposed part; and

− We would have the right, as applied under section 1860D-12(b)(3)(C) of the Act and in accordance with section 1857(d)(2)(B) of the Act, to inspect and audit any books, contracts, and records of a PDP sponsor or MA organization that pertain to the information regarding costs provided to us under proposed § 423.504(d)(2)(iii) of this proposed section.

+ To be paid under the contract in accordance with the proposed payment rules in proposed subpart G of this proposed part.

+ To submit its bid, including all required information on premiums, benefits, and cost-sharing, by the proposed due date, as provided in proposed subpart F of this proposed part.

+ That its contract could possibly not be renewed or could be terminated in accordance with this proposed subpart and proposed subpart N of this proposed part.

+ To comply with the proposed confidentiality and proposed enrollee record accuracy requirements described in proposed § 423.136.

+ To comply with State Law and preemption by Federal Law requirements described in proposed subpart I of this proposed part.

+ To comply with the proposed coordination requirements with plans and programs that provide prescription drug coverage as described in proposed subpart J of this proposed part.

+ To provide benefits by means of point of service systems to adjudicate drug claims, except where necessary to provide access in underserved areas, I/T/U pharmacies (as defined in proposed § 423.100), and long-term care pharmacies.

  • Communication with CMS.

In proposed § 423.505(c), we would require the PDP sponsor to have the capacity to communicate with us electronically in the manner we specify.

  • Maintenance of records.

In proposed § 423.505(d), we are proposing to detail the proposed requirements for record maintenance and retention, which would be unchanged from the MA regulations. We would require PDP sponsors to maintain books, records, documents, and other evidence of accounting procedures and practices for a period of 6 years so as not to prematurely foreclose our ability to pursue fraudulent or other abusive activities. The other evidence of accounting procedures and practices would have to be sufficient to do the following:

+ Accommodate periodic auditing of the financial records (including data related to Medicare utilization, costs, and computation of the bid of PDP sponsors).

+ Enable us to inspect or otherwise evaluate the quality, appropriateness and timeliness of services performed under the contract, and the facilities of the organization.

+ Enable us to audit and inspect any books and records of the PDP sponsor that pertain to the ability of the organization to bear the risk of potential financial losses, or to services performed or determinations of amounts payable under the contract.

+ Properly reflect all direct and indirect costs claimed to have been incurred and used in the preparation of the PDP sponsor's bid and necessary for the calculation of gross covered prescription drug costs, allowable reinsurance costs and allowable risk corridor costs (as defined in proposed § 423.308).

+ Establish the basis for the components, assumptions and analysis used by the PDP in determining the actuarial valuation of standard, basic alternative, or enhanced alternative coverage offered in accordance with our guidelines described in proposed § 423.265(b)(3).

We would also require the PDP sponsor to include at least records of the following:Start Printed Page 46712

+ Ownership and operation of the PDP sponsor's financial, medical, and other record keeping systems.

+ Financial statements for the current contract period and 6 prior periods.

+ Federal income tax or informational returns for the current contract period and six prior periods.

+ Asset acquisition, lease, sale, or other action.

+ Agreements, contracts, and subcontracts.

+ Franchise, marketing, and management agreements.

+ Matters pertaining to costs of operations.

+ Amounts of income received by source and payment.

+ Cash flow statements.

+ Any financial reports filed with other Federal programs or State authorities.

+ All prescription drug claims for the current contract period and 6 prior periods.

+ All price concessions for the current contract period and 6 prior periods accounted for separately from other administrative fees. This includes concessions offered by manufacturers to PDP sponsors.

  • Access to Facilities and Records.

In proposed § 423.505(e), the PDP sponsor would be required to agree to the same access to facilities and records as under the MA program. The PDP sponsor would be required to agree to the following:

+ HHS, the Comptroller General, or their designee could evaluate, through inspection or other means—

− The quality, appropriateness, and timeliness of services furnished to Medicare enrollees under the contract;

− The facilities of the PDP sponsor; and

− The enrollment and disenrollment records for the current contract period and six prior periods.

+ HHS, the Comptroller General, or their designees could audit, evaluate, or inspect any books, contracts, medical records, patient care documentation, and other records of the PDP sponsor, related entity(s), contractor(s), subcontractor(s), or its transferee that pertain to any aspect of services performed, reconciliation of benefit liabilities, and determination of amounts payable under the contract, or as the Secretary may deem necessary to enforce the contract.

+ The PDP sponsor would have to agree to make available, for the purposes specified in this section, its premises, physical facilities and equipment, records relating to its Medicare enrollees, and any additional relevant information that we could require.

+ HHS, the Comptroller General, or their designee's right to inspect, evaluate, and audit extends through 6 years from the end of the final contract period or completion of audit, whichever is later unless—

− We determine there is a special need to retain a particular record or group of records for a longer period and notify the PDP sponsor at least 30 days before the normal disposition date;

− There is a termination, dispute, or allegation of fraud or similar fault by the PDP sponsor, in which case the retention may be extended to 6 years from the date of any resulting final resolution of the termination, dispute, or fraud or similar fault; or

− We determine that there is a reasonable possibility of fraud, in which case we may inspect, evaluate, and audit the PDP sponsor at any time.

  • Disclosure of Information.

Under proposed § 423.505(f), the PDP sponsor would be required to agree to submit to us certified financial information that would have to include the information, as we could require, that would demonstrate that the organization has a fiscally sound operation. The certified financial information would include the information, as we could require, pertaining to the disclosure of ownership and control of the PDP sponsor. Also, the certification would include all information that would be necessary for us to administer and evaluate the program and to simultaneously establish and facilitate a process for current and prospective beneficiaries to exercise choice in obtaining prescription drug coverage. This information would include, but would not be limited to—

+ The benefits that would be covered under a prescription drug plan;

+ The PDP monthly basic beneficiary premium and PDP monthly supplemental beneficiary premium, if any, for the plan;

+ The service area of each plan;

+ Plan quality and performance indicators for the benefits under the plan including—

− Disenrollment rates for Medicare enrollees electing to receive benefits through the plan for the previous 2 years;

− Information on Medicare enrollee satisfaction;

− The recent records regarding compliance of the plan with requirements of this part, as determined by us; and

− Other information determined by us to be necessary to assist beneficiaries in making an informed choice regarding PDP plans;

+ Information about beneficiary appeals and their disposition;

+ Information regarding all formal actions, reviews, findings, or other similar actions by States, other regulatory bodies, or any other certifying or accrediting organization; and

+ Any other information deemed necessary to CMS for the administration or evaluation of the Medicare program.

The PDP sponsor would also be required to disclose all informational requirements to its enrollees, under proposed § 423.128(b) and, upon an enrollee's request, the financial disclosure information required under proposed § 423.128(c)(4). (See proposed subpart C of this proposed part.)

  • Proposed Beneficiary Financial Protections.

Under proposed § 423.505(g), the PDP sponsor would be required to adopt and maintain arrangements satisfactory to us to protect its enrollees from incurring liability (that is, as a result of an organization's insolvency or other financial difficulties) for payment of any fees that would be the legal obligation of the PDP sponsor. The beneficiary financial protection provisions would remain unchanged from the MA program. To meet this proposed requirement, the PDP sponsor would have to ensure that all contractual or other written arrangements prohibit the organization's contracting agents from holding any beneficiary enrollee liable for payment of any such fees; and the PDP sponsor would have to indemnify the beneficiary enrollee for payment of any fees that would be the legal obligation of the PDP sponsor for covered prescription drugs furnished by non-contracting pharmacists, or that would not have otherwise entered into an agreement with the PDP sponsor, to provide services to the organization's beneficiary enrollees.

To meet these proposed requirements of this proposed section, other than the proposed provider contract requirements discussed above, the PDP sponsor would use contractual arrangements; insurance acceptable to us; financial reserves acceptable to us; or any other arrangement acceptable to us.

  • Proposed Requirements of Other Laws and Regulations.

One of the requirements we have incorporated from the existing MA rules is the requirement that plans comply with all Federal, State and local laws and regulations (see proposed § 422.505(h)). We have updated the list to include HIPAA Administrative and Simplification rules. Proposed Start Printed Page 46713§ 423.505(h) would require the PDP sponsor to comply with—

+ Title VI of the Civil Rights Act of 1964 as implemented by regulations at 45 CFR part 84.

+ The Age Discrimination Act of 1975 as implemented by regulations at 45 CFR part 91.

+ The Rehabilitation Act of 1973.

+ The Americans with Disabilities Act.

+ HIPAA Administrative Simplification rules at 45 CFR Parts 160, 162, and 164

+ Other laws applicable to recipients of Federal funds.

+ All other applicable laws and rules.

PDP sponsors receiving Federal payments under PDP sponsor contracts, and related entities, contractors, and subcontractors paid by a PDP sponsor to fulfill its obligations under its contract with us, would be subject to certain laws that are applicable to individuals and entities receiving Federal funds. PDP sponsors would be required to inform all related entities, contractors and subcontractors that payments they receive would be, in whole or in part, from Federal funds. These proposed provisions would remain unchanged from the MA program.

  • Proposed Requirements for PDP Sponsor Relationship with Related Entities, Contractors, and Subcontractors.

In proposed § 423.505(i), notwithstanding any relationship(s) that the PDP sponsor may have with related entities, contractors, or subcontractors, the PDP sponsor would maintain ultimate responsibility for adhering to and otherwise fully complying with all terms and conditions of its contract with us. The PDP sponsor would have to agree to require all related entities, contractors, or subcontractors that provide Part D items or services (including administrative services) to agree that—

+ The Department of Health and Human Services (HHS), the Comptroller General, or their designees would have the right to inspect, evaluate, and audit any pertinent contracts, books, documents, papers, and records of the related entity(s), contractor(s), or subcontractor(s) involving transactions related to our contract with the PDP sponsor; and

+ HHS’, the Comptroller General's, or their designee's right to inspect, evaluate, and audit any pertinent information for any particular contract period should exist through 6 years from the final date of the contract period or from the date of completion of any audit, whichever is later.

This proposed section would also require all contracts or written arrangements between PDP sponsors and providers, related entities, contractors, subcontractors, “first tier”, and “downstream” entities that provide Part D items or services (including administrative services) to contain the specified proposed provisions. These proposed provisions would remain unchanged from the MA program.

  • Proposed Additional Contract Terms.

In proposed § 423.505(j), the PDP sponsor would agree to include, in the contract, other terms and conditions as we may find necessary and appropriate in order to implement proposed requirements in this proposed part.

  • Severability of Contracts.

In proposed § 423.505(k), the PDP sponsor would have to agree to include in the contract a severability provision that would establish that, upon our request, the contract would be amended to exclude any State-licensed entity, or PDP sponsor specified by us; and a separate contract for any excluded plan or entity would be deemed to be in place when the request is made.

  • Certification of Data that Determines Payment.

In proposed § 423.505(l), we would require, as a condition of receiving a monthly payment under proposed subpart G of this proposed part, the PDP sponsor to agree that its chief executive officer (CEO), chief financial officer (CFO), or an individual delegated the authority to sign on behalf of one of these officers, and who reports directly to the officer, would request payment under the contract on a document that certifies (based on best knowledge, information, and belief) the accuracy, completeness, and truthfulness of all data related to payment. The data could include specified enrollment information, claims data, bid submission data, and other data that we specify. We recommend that PDP sponsors collect such certifications from their downstream partners to support their best knowledge, information and belief in signing their own certifications. In addition, we propose a certification for when PDP sponsors submit updated drug pricing data to CMS for beneficiary enrollment purposes.

The CEO, CFO, or an individual delegated the authority to sign on behalf of one of these officers, and who reports directly to the officer, would be required to certify (based on best knowledge, information, and belief) that each enrollee for whom the organization would request payment is validly enrolled in a program offered by the organization and the information relied upon by us in determining payment) is accurate, complete, and truthful.

The CEO, CFO, or an individual delegated with the authority to sign on behalf of one of these officers, and who reports directly to the officer, would be required to certify (based on best knowledge, information, and belief) that the claims data it would submit under proposed § 423.329(b)(3) are accurate, complete, and truthful. If the claims data are generated by a related entity, contractor, or subcontractor of a PDP sponsor, the entity, contractor, or subcontractor would be required to similarly certify (based on best knowledge, information, and belief) the accuracy, completeness, and truthfulness of the data. The PDP sponsor or related entity, contractor, or subcontractor would acknowledge that the claims data would be used for the purpose of obtaining Federal reimbursement.

The CEO, CFO, or an individual delegated the authority to sign on behalf of one of these officers, and who reports directly to the officer, would be required to certify (based on best knowledge, information, and belief) that the information in its bid submission and assumptions related to projected reinsurance and low income cost sharing subsidies is accurate, complete, truthful, and fully conforms to the requirements specified in proposed § 423.265. The CEO, CFO, or an individual delegated the authority to sign on behalf of one of these officers, and who reports directly to the officer, must certify (based on best knowledge, information, and belief) that the information provided for purposes of supporting allowable costs, as defined in § 423.308, is accurate, complete, truthful, and fully conforms to the requirements in § 423.336(c) and § 423.343(c).

The CEO, CFO, or an individual delegated the authority to sign on behalf of one of these officers, and who reports directly to the officer, must certify (based on best knowledge, information, and belief) that the information provided for purposes of price comparison is accurate, complete, and truthful.

8. Effective Date and Term of Contract

Section 1860D-12(b)(3)(B) of the Act provides that we include the contract period and effectiveness requirements that are included in section 1857(c) of the Act. Proposed § 423.506 would provide that contracts be effective on the date specified in the contract, and that the contracts would be for a term of 12 months. The contract period for a fallback plan is specified in Start Printed Page 46714§ 423.871(b). In addition, contracts could be renewed from year to year, but only in the event that we inform the PDP sponsor that a renewal is authorized and only if the PDP sponsor does not provide us with a notice of intention not to renew. We do not require an application process for contract renewals. Because of the need for us to establish a national average monthly bid amount from approved bids in order to calculate the base beneficiary premiums, we propose to not allow a PDP contract to be effective at any time other than the first of the year. These proposed provisions would be similar to the MA provisions in § 422.505.

9. Non-Renewal of Contract

Section 1860D-12(b)(3)(F) of the Act requires that the provisions of section 1857(h) of the Act relating to procedures for termination (or non-renewal) of MA contracts would apply to PDP sponsors with respect to determinations and appeals. A non-renewal would be different from a termination in that either the PDP or us chooses to end the contract by following the proposed provisions described below.

In proposed § 423.507, we are proposing that a PDP sponsor could elect not to renew its contract with us as of the end of the term of the contract for any reason, provided it would notify us in writing by the first Monday of June in the year in which the contract would end. The PDP sponsor would also have to notify each Medicare enrollee, at least 90 days before the date on which the nonrenewal is effective. This notice would have to include a written description of alternatives available for obtaining Medicare prescription drug services within the PDP region, including MA-PDs, and other PDPs, and would have to receive our approval. The general public would also have to be notified at least 90 days before the end of the current calendar year, by publishing a notice in one or more newspapers of general circulation in each community or county located in the PDP sponsor's service area.

If a PDP sponsor chooses to non-renew a contract as described in proposed § 423.507(a)(3), we would not enter into a contract with the organization for 2 years unless there are special circumstances that warrant special consideration, as determined by CMS.

For purposes of this section, we could elect not to authorize renewal of a contract for any of the reasons listed in proposed § 423.509(a), which would also permit us to terminate the contract, or if the PDP sponsor commits any of the acts in proposed § 423.752 that supports the imposition of intermediate sanctions or civil money penalties under proposed § 423.750 of proposed Subpart O.

We would provide notice of our decision whether to authorize renewal of the contract to the PDP sponsor by May 1 of the contract year. If we decide not to authorize a renewal of the contract, we would provide notice to the PDP sponsor's Medicare enrollees by mail at least 90 days before the end of the current calendar year. We would also notify the general public at least 90 days before the end of the current calendar year, by publishing a notice in one or more newspapers of general circulation in each community or county located in the PDP sponsor's service area. We would give the PDP sponsor written notice of its right to appeal the decision not to renew in accordance with proposed § 423.642(b).

10. Modification or Termination of Contract by Mutual Consent

In proposed § 423.508, we are proposing that a contract could be modified or terminated at any time by written mutual consent. If the contract is terminated by mutual consent, the PDP sponsor would have to provide notice to its Medicare enrollees and the general public as provided in proposed § 423.507. If the contract is modified by mutual consent, the PDP sponsor would be required to notify its Medicare enrollees of any changes that we determine are appropriate for notification within timeframes specified by us. This proposed section would remain unchanged from the MA program.

11. Termination of Contract by CMS

In proposed § 423.509, we may terminate a contract with the PDP sponsor for any of the following reasons:

  • The PDP sponsor fails substantially to carry out the terms of its contract with us (proposed § 423.509(a)(1)).
  • The PDP sponsor carries out its contract with us in a manner that would be inconsistent with the effective and efficient implementation of this proposed part (proposed § 423.509(a)(2)).
  • We determine that the PDP sponsor no longer meets the proposed requirements of this proposed part for being a contracting organization (proposed § 423.509(a)(3)).
  • There is credible evidence that the PDP sponsor committed or participated in false, fraudulent, or abusive activities affecting the Medicare program, including submission of false or fraudulent data (proposed § 423.509(a)(4)).
  • The PDP sponsor experiences financial difficulties so severe that its ability to provide necessary prescription drug coverage is impaired to the point of posing an imminent and serious risk to the health of its enrollees, or otherwise fails to make services available to the extent that a risk to health exists (proposed § 423.509(a)(5)).
  • The PDP sponsor substantially fails to comply with the requirements in proposed subpart M of this proposed part relating to grievances and appeals (proposed § 423.509(a)(6)).
  • The PDP sponsor fails to provide us with valid risk adjustment, reinsurance and risk corridor related data as required under proposed § 423.329 (proposed § 423.509(a)(7)).
  • The PDP sponsor substantially fails to comply with the proposed service access requirements in proposed § 423.120 (proposed § 423.509(a)(8))
  • The PDP sponsor substantially fails to comply with the proposed marketing requirements in proposed § 423.128 (proposed § 423.509(a)(9)).
  • The PDP sponsor substantially fails to comply with the coordination with plans and programs that provide prescription drug coverage as described in proposed subpart J of this proposed part (proposed § 423.509(a)(10)).
  • The PDP sponsor substantially fails to comply with the proposed cost and utilization management, proposed quality improvement, proposed medication therapy management, and fraud, abuse and waste program requirements as described in proposed subpart D of this proposed part (proposed § 423.509(a)(11)).

If we decide to terminate a contract for reasons other than the grounds described above in proposed § 423.509(a)(4) or (a)(5), we would notify the PDP sponsor in writing 90 days before the intended date of the termination. The PDP sponsor would then notify its Medicare enrollees of the termination by mail at least 30 days before the effective date of the termination. The PDP sponsor would also notify the general public of the termination at least 30 days before the effective date of the termination by publishing a notice in one or more newspapers of general circulation in each community or county located in the PDP sponsor's service area.

We propose adding § 423.509(a)(4) as a reason for immediate termination without corrective action. If we have credible evidence that a PDP sponsor committed or participated in false, fraudulent, or abusive activities affecting the Medicare program, we may Start Printed Page 46715determine that providing the sponsor with additional time to submit a corrective action plan would only expose beneficiaries to a plan we have already determined engaged in fraudulent or abusive behavior. Therefore, we propose to terminate the contract as soon as possible in order to protect the beneficiaries enrolled with the affected sponsor as well as the Medicare trust fund.

For terminations based on violations described in proposed § 423.509(a)(4) or § 423.509(a)(5), we would notify the PDP sponsor in writing that its contract has been terminated effective the date of the termination decision by us. If termination is effective in the middle of a month, we would have the right to recover the prorated share of the prospective monthly payments made to the PDP sponsor covering the period of the month following the contract termination.

We would also notify the PDP sponsor's Medicare enrollees in writing of our decision to terminate the PDP sponsor's contract. This notice would occur no later than 30 days after we notify the plan of our decision to terminate the contract. We would also simultaneously inform the Medicare enrollees of alternative options for obtaining prescription drug coverage, including alternative PDP and MA-PDs in a similar geographic area. We would notify the general public of the termination no later than 30 days after notifying the plan of our decision to terminate the contract. This notice would be published in one or more newspapers of general circulation in each community or county located in the PDP sponsor's service area.

Before terminating a contract for reasons other than the grounds specified in proposed § 423.509(a)(4) or § 423.509(a)(5), we would provide the PDP sponsor with reasonable opportunity to develop and receive our approval of a corrective action plan to correct the deficiencies that are the basis of the proposed termination. If a contract is terminated based on § 423.509(a)(4) or § 423.509(a)(5), the PDP sponsor would not be given the opportunity to submit a corrective action plan. If we decide to terminate a contract, we would send written notice to the PDP sponsor informing it of its termination appeal rights in accordance with proposed § 423.642 of this proposed part.

12. Termination of Contract by the PDP Sponsor

In proposed § 423.510, we are proposing that the PDP sponsor may terminate its contract if we fail to substantially carry out the terms of the contract. The PDP sponsor would be required to give advance notice as follows:

  • To us, at least 90 days before the intended date of termination. This notice would have to specify the reasons why the PDP sponsor is requesting contract termination.
  • To its Medicare enrollees, at least 60 days before the termination effective date. This notice would have to include a written description of alternatives available for obtaining Medicare drug services within the services area, including alternative PDPs, MA-PDs, and original Medicare and would have to receive our approval.
  • To the general public at least 60 days before the termination effective date by publishing a notice approved by us in one or more newspapers of general circulation in each community or county located in the PDP sponsor's geographic area.

The effective date of the termination would be determined by us and is at least 90 days after the date we receive the PDP sponsor's notice of intent to terminate. Our liability for payment to the PDP sponsor would end as of the first day of the month after the last month for which the contract is in effect. We would not enter into an agreement with an organization that has terminated its contract within the preceding 2 years unless there are circumstances that warrant special consideration, as determined by us. This proposed section would remain unchanged from the MA program.

13. Proposed Minimum Enrollment Requirements

Section 1860D-12(b)(3)(A) of the Act applies the minimum enrollment requirements of section 1857(b)(1) and section 1857(b)(3) of the Act to Part D of the Act. However, the statute also gives the Secretary the authority to increase the minimum number of enrollees as the Secretary deems appropriate. In proposed § 423.512, we are proposing to retain the minimum enrollment requirements used for the MA program and that appear in section 1857(b)(1) of the Act. Our rationale for retaining the MA minimum enrollment level is to avoid conflicts that could occur if we adopted a higher minimum for Part D, which could imply that MA plans that could not meet the higher Part D standard would be unable to offer a drug benefit as required by law. In reality, we expect that stand-alone PDPs would have enrollments that far exceed these minimum levels. We are interested in receiving comments on whether these numbers should be increased for PDP sponsors. We are also interested in receiving comments on whether the 1,500 standard, which was directed at local MA organizations, has applicability in the context of PDPs. Thus, our regulations would provide that, in general, the Secretary would not enter into a contract with a prospective PDP sponsor, unless the organization has at least 5,000 individuals who are enrolled for the purpose of receiving prescription drug benefits from the organization. Another option would be for the prospective PDP sponsor to have a minimum enrollment number of 1,500 individuals if the organization primarily serves individuals residing outside of urbanized areas. Urban area is defined in § 412.62(f) as essentially including MSAs and NECMAs as defined by OMB. The PDP sponsor would be required to maintain a minimum enrollment as discussed in this proposed section, however, as directed by section 1860D-12(b)(3)(A)(ii) of the Act, the proposed minimum enrollment requirements would be waived for any PDP sponsor in its first contract year in a region.

14. Proposed Reporting Requirements

In proposed § 423.514, we would require each PDP sponsor to have an effective procedure to develop, compile, evaluate, and report to us, to its enrollees, and to the general public, at the times and in the manner that we require statistics indicating the following:

  • The cost of its operations;
  • The patterns of utilization of its services;
  • The availability, accessibility, acceptability of its services;
  • Information demonstrating that the PDP sponsor has a fiscally sound operation; and
  • Other information that we may require;

This proposed section would also contain proposed provisions for each PDP sponsor to report significant business transactions to us annually, within 120 days of the end of its fiscal year (unless for good cause shown, we authorize an extension of time). The information provided to us, would have to contain a description of significant business transactions as defined in proposed § 423.501 between the PDP sponsor and a party in interest. For those transactions, the PDP sponsor would be required to show that the costs of the transactions do not exceed the costs that would be incurred if these transactions were with someone who is not a party in interest; or if they do exceed, a justification that the higher costs are consistent with prudent Start Printed Page 46716management and fiscal soundness requirements.

For purposes of this proposed section, the PDP sponsor would be required to produce a combined financial statement for itself and a party of interest if 35 percent or more of the costs of operation of the PDP sponsor go to a party in interest or 35 percent or more of the revenue of a party in interest is from the PDP sponsor. We would require the combined financial statements to include the following information:

  • The display, in separate columns, of the financial information for the PDP sponsor and each of the parties in interest.
  • The elimination of inter-entity transactions in the consolidated column.
  • The examination of statements by an independent auditor in accordance with generally accepted accounting principles and include appropriate opinions and notes.

Upon written request from a PDP sponsor showing good cause, we could waive the proposed requirement that the organization's combined financial statement include the financial information discussed above for a particular entity.

In this proposed section, for any employees' health benefits plan that includes a PDP sponsor in its offerings, the PDP sponsor would be required to furnish, upon request, the information the plan needs to fulfill its reporting and disclosure obligations (for the particular PDP sponsor) under the Employee Retirement Income Security Act of 1974 (ERISA). The PDP sponsor would also be required to furnish the information to the employer or the employer's designee, or to the plan administrator, as the term “administrator” is defined in ERISA. This proposed section would also require each PDP sponsor organization to notify us of any loans or other special financial arrangements it makes with contractors, subcontractors and related entities and each PDP sponsor would be required to make the information reported to us under this proposed section available to its enrollees upon reasonable request. These provisions would remain unchanged from the MA regulations.

15. Proposed Prohibition of Midyear Implementation of Significant New Regulatory Requirements

In proposed § 423.516, we propose that we may not implement, other than at the beginning of a calendar year, provisions under this proposed section that would impose new, significant regulatory requirements on a PDP sponsor or a prescription drug plan.

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

(If you choose to comment on issues in this section, please include the caption “Subpart L—Effect of Change of Ownership or Leasing of Facilities During the Term of Contract” at the beginning of your comments.)

1. Overview

Proposed Subpart L of proposed part 423 would describe the impact that a PDP sponsor organization's “change of ownership” (CHOW) or leasing of facilities during the term of its contract would have on the status of the organization's contractual relationship with us, as well as required procedures to be followed by a contracting PDP sponsor to effect a CHOW.

2. Provisions

In developing the proposed provisions for this proposed subpart as it relates to PDP sponsor organizations, we reviewed the experience that MA contractors and we have had under the provisions of subpart L of Part 422. A single set of CHOW requirements for both MA and PDP contractors would simplify management, assure consistency, and reduce administrative burden for those entities that are managing both programs. To that end, as a starting point we are proposing that the requirements in proposed §§ 423.551, 423.552, and 423.553, of this proposed rule, for the PDP sponsor, would be essentially the same as the requirements found in §§ 422.550, 422.552 and 422.553 for the MA program. Those proposed requirements and procedures are summarized in section 3, below.

Since the impact of a change of ownership on a PDP sponsor's contract with us would be similar to its effect on an MA organization's contract, we believe that the two sets of requirements should be similar. However, we are considering the modification of existing change of ownership provisions in both rules in order to reduce the administrative burden of these requirements and to increase the effectiveness of these provisions. We request comments regarding how these provisions could be modified to accomplish these objectives. In particular, we seek comments regarding: the situations which constitute a change of ownership, how these provisions should be applied to large companies with multiple business units, the notification requirements related to a change of ownership, the novation agreement provisions, and the provision related to the leasing of a PDP's facilities.

3. Proposed General Provisions

In proposed § 423.551(a), we would present the three situations that constitute CHOW in the context of proposed subpart L. We would state that—

  • The removal, addition, or substitution of a partner, unless the partners expressly agree otherwise as permitted by applicable State law, constitutes a CHOW;
  • Transfer of substantially all the assets of the sponsor to another party constitutes a change of ownership; and
  • The merger of the PDP sponsor's corporation into another corporation, or the consolidation of the PDP sponsor's organization with one or more other corporations, resulting in a new corporate body, constitutes a CHOW.

We note that § 422.551(a)(2) if carried over from the MA rule would provide that a change of ownership occurs whenever there is a “[t]ransfer of title and property to another party * * *” This provision would seem to apply to any transfer no matter how small and, read literally, would include a partial transfer of the employer's assets such as a spin off or the sale of a single facility or operating division of the employer. Combined with the absolute assignment rule of (d), this has the potential to lead to absurd results. Therefore, in our proposed rule, we would change § 423.551(a)(2) to include only asset sales that are essentially transfers of the entire business enterprise. We request comments on situations where a sponsor transfers to another party substantial assets, but less than substantially all of its assets. In such comments, please describe the different scenarios that might develop under such circumstances, especially the extent to which benefits covered by the agreement might reasonably be expected to be provided by the old or new owner and the best approach for either transferring, issuing, or reissuing sponsor agreements.”

The proposed exception to the three provisions discussed above would be that a transfer of corporate stock or the merger of another corporation into the PDP sponsor's organization, with the PDP sponsor organization surviving, would not usually constitute a CHOW.

Proposed § 423.551(c) of this proposed section, would require a PDP sponsor that has a Medicare contract in effect under proposed § 423.502 of proposed Subpart K and is considering or negotiating a CHOW, to notify us at least 60 days before the anticipated effective date of the change. The PDP Start Printed Page 46717sponsor would also be required to provide updated financial information and a discussion of the financial and solvency impact of the CHOW on the surviving organization.

In this proposed section we would also state that if the PDP sponsor fails to give us the required notice in a timely manner, it would continue to be liable for payments that we make to it on behalf of Medicare enrollees after the date of the CHOW.

Proposed § 423.551(d) would define a novation agreement, the legal vehicle that we would use to recognize the new owner of a PDP sponsor organization's corporation, as the successor in interest to the Medicare contract. For this proposed rule, a novation agreement would be an agreement among the current owner of the PDP sponsor, the prospective new owner, and us. This agreement would have to be signed by all three parties and, to be effective, contain the proposed provisions at proposed § 423.552. The agreement would also have to allow us to recognize the new owner as the successor in interest to the current owner's Medicare contract. The new owner has to be sure to get adequate data to substantiate claims for reimbursement from the previous owner, because the new owner would be responsible at the time of the reconciliation process.

Proposed § 423.551(e) would detail the consequences of a CHOW that occurs without a novation agreement. Under this proposed section, if there is not a novation agreement, the existing Medicare contract would become invalid and, if the new owner wanted to participate in the Medicare program as a PDP sponsor, it would have to apply for, and enter into a contract in accordance with proposed subpart K of this proposed part.

4. Proposed Novation Agreement Requirements

Proposed § 423.552(a) would provide the three conditions that should be met for our approval of a novation agreement. Consistent with our approach in the MA program, we are proposing that the first condition would be for the PDP sponsor to give us notice, at least 60 days before the effective date of the CHOW. That notice would also include updated financial information and a discussion of the financial and solvency impact of the CHOW on the surviving organization. If notice were not timely, the contractor would continue to be liable for payments that we make to it on behalf of Medicare enrollees after the date of “CHOW” as described in proposed § 423.551(c)(2). The second proposed condition would be that the PDP sponsor would submit three signed copies of the novation agreement that contains the proposed provisions specified in proposed § 423.552(b) to us at least 30 days before the proposed CHOW date, and one copy of other relevant documents required by us. The final condition would be our determination after reviewing a novation agreement concerning the following:

  • The proposed new owner is in fact a successor in interest to the contract.
  • Recognition of the new owner as a successor in interest of the Medicare program.
  • The successor organization meets the requirements to qualify as a PDP sponsor under proposed subpart K.

Proposed § 423.552(b) would identify the four required provisions of a properly constituted novation agreement. In this proposed section, we would require the agreement to state that the new owner would assume all obligations under the Medicare contract and the previous owner would be required to waive its right to reimbursement for covered services furnished during the rest of the current contract period. The previous owner would also be required to guarantee performance of the contract by the new owner during the contract period, or post a performance bond that is satisfactory to us. The last condition would require the previous owner to agree to make its books, records, and other necessary information available to the new owner and to us to permit an accurate determination of costs for the final settlement of the contract period. We would have to be able to recognize the new owner as the successor in interest to the current owner's Medicare contract and the novation agreement would be effective, once signed by all three relevant parties.

5. Effect of Leasing of a PDP Sponsor's Facilities

Proposed § 423.553 would address provisions related to when a PDP sponsor leases its facilities to another party and its PDP sponsor contract with us. Specifically, we are proposing that if a PDP sponsor leases all or part of its facilities to another entity, the other entity would not acquire PDP sponsor status under section 1860D-12(b) of the Act. If a PDP sponsor leases all of its facilities to another entity, its Medicare contract would terminate. If the other entity wants to participate in the Medicare program as a PDP sponsor, it would be required to apply for and enter into a contract in accordance with proposed § 423.502. If the PDP sponsor leases part of its facilities to another entity, its contract with us would remain in effect while we survey the PDP sponsor to determine whether it continues to be in compliance with the applicable proposed requirements and qualifying conditions specified in proposed Subpart K of this part.

M. Grievances, Coverage, Reconsiderations, and Appeals

(If you choose to comment on issues in this section, please include the caption “Subpart M—Grievances, Coverage Determinations, Reconsiderations, and Appeals” at the beginning of your comments.)

1. Introduction

Proposed subpart M of part 423 would implement sections 1860D-4(f), 1860D-4(g), and 1860D-4(h) of the Act, which set forth the procedures PDP sponsors must follow with regard to grievances, coverage determinations, and appeals.

Under section 1860D-4(f) of the Act, a PDP sponsor must provide meaningful procedures for hearing and resolving grievances between the sponsor (including any entity or individual through which the sponsor provides covered benefits) and enrollees.

Section 1860D-4(g) of the MMA addresses the procedures for coverage determinations and redeterminations of PDP sponsors. In general, the MMA requires that a PDP sponsor's procedures meet the same requirements as those that apply to MA organizations (under paragraphs (1) through (3) of section 1852(g)) of the Act for organization determinations and redeterminations. This includes the same timeframes for making these determinations and redeterminations, including the requirements for expedited procedures when the standard timeframes could seriously jeopardize an enrollee's life, health, or ability to regain maximum function. In addition, section 1860D-4(g)(2) of the Act specifies that if a PDP sponsor has tiered cost sharing for formulary drugs, it must establish an exceptions process. Under the exceptions process, consistent with guidelines established by the Secretary, a nonpreferred drug could be covered under the terms applicable for preferred drugs if the prescribing physician determines that the preferred drug for treatment of the same condition either would not be as effective for the individual or would have adverse effects for the individual, or both.

Section 1860D-4(h) of the Act addresses appeals of a PDP sponsor's coverage determinations and redeterminations. Here, the MMA requires that the PDP sponsors follow Start Printed Page 46718appeals requirements that are similar to those applicable to MA organizations under paragraphs (4) and (5) of section 1852(g) of the Act (regarding independent review entity (IRE) review and ALJ hearings, respectively). As a result, in our regulations at § 423.612(b), we propose to require a 60-day timeframe for requesting an appeal, which has been a long-standing requirement throughout the entire Medicare managed care appeals process. To the extent the proposed requirements differ from the MA rules, we discuss these differences below. In addition, section 1860D-4(h)(2) of the Act specifies that appeals, involving coverage of a covered part D drug that is not on a PDP's formulary, are permissible only if the prescribing physician determines that all covered Part D drugs, on any tier of the formulary for treatment of the same condition, would not be as effective for the individual as the nonformulary drug, would have adverse effects on the individual, or both. The proposed regulations needed to implement the above provisions are discussed below.

2. General Provisions (§ 423.560 Through § 423.562)

Subpart M begins with proposed § 423.560, which sets forth several definitions for terms used in the subpart. These definitions are generally self-explanatory and mirror those used in subpart M of part 422 for MA, but have been modified to reflect applicability to Part D drug benefits.

Section 423.562, General Provisions, provides an overview of the responsibilities of PDP sponsors and the rights of PDP enrollees with respect to grievances, coverage determinations, and appeals. The responsibilities of PDP sponsors under § 423.562(a) include establishing and maintaining procedures for grievances, coverage determinations, exceptions to tiered cost-sharing formulary structures, requests for formulary exceptions, and appeals. This section would also specify that enrollees receive written information about the grievance and appeal procedures available to them through the PDP sponsor, and about the QIO complaint process available to enrollees. Like under the MA program, the proposed regulations indicate that if a PDP sponsor delegates any of its responsibilities under subpart M to another entity or individual through which the sponsor provides covered drug benefits, the PDP sponsor is ultimately responsible for ensuring that the applicable grievance, coverage determination, and appeal requirements are met.

Section 423.562(b) of our proposed rule explains the basic rights of PDP enrollees in relation to PDP sponsors under subpart M and references the regulations that explain the rights. These include, for example, the right to a timely coverage determination and appeal rights pursuant to that coverage determination.

Section 423.562(c) of our proposed rule specifies that an enrollee has no appeal right when there is no payment liability, or when benefits have been provided by a non-network provider (that is, a non-network pharmacy), except in those situations in which, under subpart C, the PDP is obligated to cover such drugs. Finally, § 423.562(d) explains that, unless otherwise noted, the general Medicare appeals rule under part 422, subpart M, is applicable for appeals to an Administrative Law Judge (ALJ) or the Medicare Appeals Council (MAC).

3. Grievance Procedures (§ 423.564)

As defined in § 423.560 of our proposed rule, a grievance means any complaint or dispute, other than one that constitutes a coverage determination, expressing dissatisfaction with any aspect of a PDP sponsor's operations, activities, or behavior, regardless of whether remedial action is requested. An enrollee might file a grievance, for example, if he or she has a complaint about the timeliness of filling a prescription, or the accuracy of the prescription. As required by section 1860D-4(f) of the MMA, the grievance procedures in this subpart generally mirror those found in part 422, Subpart M, for MA. Thus, our regulations would require that each PDP sponsor have procedures to ensure that grievances are heard and resolved in a timely manner, but they would not include prescriptive details on the procedures. The only exceptions to this approach, under § 423.564(d), involve certain limited situations where a PDP sponsor must respond to a grievance within 24 hours, such as a grievance over a PDP sponsor's decision to invoke an extension relating to a coverage determination or redetermination, or a PDP sponsor's refusal to grant an enrollee's request for an expedited coverage determination or redetermination where the enrollee has not yet purchased or received the drug that is in dispute.

Section 423.564(c) of our proposed rule explains the distinction between the grievance procedures of the PDP sponsor and the quality improvement organization (QIO) complaint process. This section further establishes that when an enrollee submits a quality of care complaint to a QIO, the PDP sponsor must cooperate with the QIO in resolving the complaint.

Section 423.564(e) of our proposed rule concludes the grievance procedures by proposing minimum record keeping requirements for a PDP sponsor, which include recording the receipt date of a grievance, its final disposition, and the date the enrollee is notified of the disposition.

4. Coverage Determinations (§ 423.566 Through § 423.576)

These proposed provisions implement the MMA requirement that PDP sponsors establish procedures for making coverage determinations and redeterminations regarding covered drug benefits that are essentially the same as those in effect for MA organizations under part 422, subpart M for MA. Therefore, for the drug benefits under Part D, we have continued standard and expedited requirements for coverage determinations and redeterminations.

Section 423.566(a) of our proposed rule specifies that each PDP sponsor must have a procedure for making timely coverage determinations regarding the drug benefits an enrollee is entitled to receive and the amount, if any, that an enrollee is required to pay for a benefit. The PDP sponsor is required to establish both a standard procedure for making coverage determinations and an expedited procedure for situations in which applying the standard procedure could seriously jeopardize the enrollee's life, health, or ability to regain maximum function.

As proposed in § 423.566(b), actions that would constitute coverage determinations include: a PDP sponsor's failure to provide or pay for a covered Part D drug (including failure to pay because the drug is not on the plan's formulary, because the drug is determined not to be medically necessary, because the drug is furnished by an out-of-network pharmacy, or because the sponsor determines that the drug otherwise would be excluded under section 1862(a) of the Act); failure to provide a coverage determination in a timely manner that would adversely affect the health of the enrollee; decisions on the amount of cost sharing; or decisions on whether the preferred drug is appropriate for an enrollee. Section 423.566(c) lists those individuals who can request a standard coverage determination as the enrollee (including his or her authorized representative) and the prescribing physician on behalf of the enrollee. We Start Printed Page 46719note that we have not included the legal representative of a deceased enrollee's estate (as is specified in § 422.566(c)(1)(iii)) since that individual would be considered an authorized representative. Those individuals who can request an expedited determination or an expedited redetermination are similarly an enrollee (including his or her authorized representative), or the prescribing physician on behalf of the enrollee. In these situations we propose that a prescribing physician need not be an appointed representative of the enrollee in order to assist in obtaining either a standard or an expedited coverage determination. We welcome comments on any additional individuals or entities that should be able to request a coverage determination.

The standard timeframes and notice requirements for coverage determinations are proposed in § 423.568. These requirements include a determination as expeditiously as the enrollee's health condition requires, but no later than 14 calendar days after receipt of the request if the request is for prescription drug benefits. An extension of the timeframe by up to 14 calendar days is allowable if the enrollee requests the extension, or if the PDP sponsor can justify how a delay is in the interest of the enrollee. For example, the receipt of additional medical evidence may change the outcome of the decision. An enrollee must be notified of the reasons for the delay, and informed of the right to file an expedited grievance if the enrollee disagrees with the sponsor's decision to invoke an extension. If the request is for payment, the determination must be made no later than 30 calendar days after receipt of the request. Consistent with § 1860D-4(g)(1) of the MMA, the timeframe and notice requirements for requests involving payment are the same as those that apply for clean claims under the Medicare Advantage program. This section also establishes the requirement for written notice for PDP sponsor denials and the form and content of the denial notice, including that the notice must explain the reason for the denial and the availability of appeal rights.

Sections 423.570 and 423.572 propose the requirements regarding expedited coverage determinations, including how an enrollee or an enrollee's prescribing physician can make an oral or written request (§ 423.570(b)), and how the PDP sponsor must process requests (§ 423.570(c)). We clarify in § 423.570(a) that requests for payment of prescription drugs already furnished for an enrollee cannot be expedited.

Section 423.570(b)(2) specifies that a prescribing physician may provide written or oral support for a request for expedition, and under § 423.570(c)(3)(ii), we clarify that when requests for expedition are made or supported by an enrollee's prescribing physician, the PDP sponsor must grant the request if the physician indicates that applying the standard timeframe could seriously jeopardize the enrollee's life or health, or the ability to regain maximum function. Section 423.570(d) proposes actions following a denial of a request and explains that when a sponsor denies a request for an expedited determination that the request automatically be transferred to and processed under the standard determination procedures, which require the determination within 14 calendar days. For accepted requests for expedited determination, § 423.572 proposes that the PDP sponsor must make its expedited determination and notify the enrollee and the prescribing physician, as appropriate, as expeditiously as the enrollee's health condition requires, but no later than 72 hours after receiving the request. Section 423.572(b) proposes the requirements for extensions, and includes the enrollee's right to file an expedited grievance if the enrollee disagrees with the PDP sponsor's decision to invoke an extension. Proposed § 423.572(c) explains that if the PDP sponsor first notifies an enrollee of an adverse expedited determination orally, then it must mail written confirmation to the enrollee within 3 calendar days. Finally, § 423.572(d) explains the requirements for the content of the expedited determination notice, and § 423.572(e) explains that a failure to provide a timely notice would constitute an adverse coverage determination, which may be appealed. Similar to the expedited requirements for MA under Part C, these sections would require that drug coverage determinations be made as expeditiously as the enrollee's health condition requires. Note that given the requirement that timing of determinations (and redeterminations) be based on an enrollee's health condition, the PDP sponsor has a responsibility to ensure that an enrollee's health situation and needs are fully considered in reviewing any requests (for example, if an enrollee has a chronic condition that has necessitated ongoing use of the drug in question). Again, however, if the enrollee already received the drug and the determination involves who should pay for the drug (or how much), there is generally no need for an expedited determination since the enrollee's health needs have been met.

5. Formulary Exceptions Procedures (§ 423.578)

a. Exceptions to a Plan's Tiered Cost-Sharing Structure

As noted above, section 1860D-4(g)(2) of the Act specifies that an enrollee may request an exception to a plan's tiered cost-sharing structure. Under such an exception, a “nonpreferred drug could (emphasis added) be covered under the terms applicable for a preferred drug” under certain conditions. At a minimum, the prescribing physician would have to determine that the preferred drug either would not be as effective for the individual or would have adverse effects for the individual, or both. The statute then requires that each PDP sponsor establish exceptions procedures consistent with guidelines issued by the Secretary for making determinations on such requests. Unfavorable determinations constitute coverage denials that would be subject to all the appeals rights discussed in subpart M of part 423.

How this section of the statute is implemented will have significant consequences for PDP sponsors and Medicare beneficiaries. Although the only specific criterion established by law for assessing exceptions requests is the prescribing physician's determination explained above, we believe that the statute's direction that exceptions be made in accordance with “guidelines established by the Secretary” indicates that PDP sponsors be able to establish additional criteria, subject to the Secretary's guidance. This flexibility raises two key, intertwined questions. First, to what extent should the Secretary limit a plan's discretion in establishing exceptions criteria? And second, how detailed must the criteria be? The absence of detailed criteria, although perhaps desirable for a PDP sponsor, may not afford Part D enrollees the type of drug access intended under the law. However, making tiering exceptions too easy to obtain could eliminate a sponsor's ability to obtain volume pricing discounts, and thus, offer optimal value to beneficiaries.

Based on existing models in the state and private sectors and on Federal managed care models, we believe that PDPs' formularies are likely to include tiered cost sharing; such tiering allows PDP sponsors to obtain better prices on preferred drugs, resulting in savings for both enrollees and the PDPs. Tiering will presumably be particularly critical for stand-alone PDPs (that is, non MA-PD plans), which will not have direct Start Printed Page 46720relationships with doctors and thus will have no clear method of cost/utilization control other than through their pricing structure.

However, it is very difficult to predict exactly how PDP sponsors will design their tiering structures. For example, although the statute refers to “preferred” and “nonpreferred” drugs, actual tiering structures are likely to include three or more classes of drugs (such as “generic,” “preferred brand,” “non-preferred brand,” etc.). We believe that this uncertainty strongly suggests that the proposed regulations not include overly prescriptive requirements with respect to a PDP's exceptions criteria. Instead, we would provide general guidance on the scope of issues that must be addressed under a PDP's exceptions criteria on the procedural elements of that process, but still allow for flexibility and innovation in this regard as we gain experience with the new program.

Thus, we would propose under § 423.578 that a PDP sponsor must establish an exceptions process that addresses each of the following sets of circumstances: (1) The enrollee is using a drug and the applicable tiered cost-sharing structure changes during the year; (2) the enrollee is using a drug and the applicable tiered cost-sharing structure changes at the beginning of a new plan year; and (3) there is no pre-existing use of the drug by the enrollee. For purposes of this subpart, “using a drug” means the enrollee is receiving the drug in the course of treatment, including time off if it is part of the treatment. A PDP's exceptions criteria would not necessarily need to be different under each scenario.

While we thought it necessary to require PDP sponsors to include certain criteria in the exceptions process, we also recognize the need to avoid a situation where a PDP sponsor's cost-sharing rules are effectively driven by the exceptions criteria, rather than the other way around. Thus, in § 423.578(a)(2) we have proposed a limited number of elements that must be included in any sponsor's exception criteria: (1) A description of the process used by the PDP to evaluate the physician's certification; (2) consideration of the cost of the requested drug compared to that of the preferred drug; (3) consideration of whether the formulary includes a drug that is the therapeutic equivalent of the requested drug; and (4) consideration of the number of drugs on the plan's formulary that are in the same class and category as the requested drug.

We also considered including a number of other exceptions criteria such as—(1) requiring PDP sponsors to establish a blanket rule permitting continued access to a drug at a given price when there is a mid-year change in the tiering structure; (2) requiring an enrollee who is using a drug that is subsequently removed from the sponsor's formulary or is no longer designated as the “preferred drug” to try a preferred drug(s), and experience adverse effects, before being permitted to resume using the original drug; (3) requiring a sponsor to establish exceptions criteria that are specific to particular classes of covered Part D drugs, such as cholesterol-lowering drugs; and (4) requiring sponsors to give enrollees an opportunity to request exceptions to a plan's tiered cost-sharing structure other than on a case-by-case basis. Additionally, we contemplated the possibility of establishing criteria for the review process used to evaluate plan formularies and tiering structures, and developing exceptions criteria that are specific to particular classes of covered Part D drugs. Based on public comment and any additional information that is available at the time on the formulary structure, we may add further detail to these criteria or include additional criteria in the final rule.

Consistent with existing MA rules, we are proposing that an enrollee, the enrollee's authorized representative or the prescribing physician may request an exception. The statutory requirement that the prescribing physician determine that the preferred drug either would not be as effective for the individual generally, or would have adverse effects for the individual, would constitute a minimum threshold for approving an exception request. Thus, we are proposing that a PDP sponsor may require a written certification to that effect from the prescribing physician, as well as certain limitations on the content requirements sponsors could impose for these certifications. However, we would permit PDP sponsors flexibility in how this standard is applied. For example, a PDP sponsor could require that a physician certify that the preferred drug would be less effective than the nonpreferred drug, or the PDP sponsor could choose to apply a more stringent standard (such as requiring that the prescribing physician's certification also include the enrollee's patient history or require the enrollee first try the preferred drug, absent medical contraindications).

A PDP's exceptions procedures would also be required to describe how a determination on an exception request would affect the enrollee's cost sharing obligations under the PDP's tiering structure. For example, would a request for a nonpreferred drug result in payment at the preferred brand drug level, or at the generic drug level, if available?

b. Exceptions and Appeals Rules for Non-Formulary Determinations

Section 1860D-4(h)(2) of the Act establishes a limitation on requests for exceptions when a particular drug is not on a plan's formulary at all. The statute specifies that an enrollee may appeal a determination not to provide coverage of a non-formulary drug “only if the prescribing physician determines that all covered Part D drugs on any tier of the formulary for treatment of the same condition would not be as effective for the individual as the nonformulary drug, would have adverse effects for the individual, or both.” Notably, this limitation is set forth under the “appeals” provisions of the statute, as opposed to under the preceding coverage determination and redetermination provisions that are discussed above for exceptions to tiered cost-sharing rules. Thus, we believe the intent of this provision is to limit appeals to cases where the prescribing physician has made the determination described by the law.

Unlike for the tiering exceptions, the statute does not specifically require that PDP sponsors develop an exceptions process to review requests for exceptions for non-formulary drugs. However, we do not believe that the statute intends to preclude an enrollee from obtaining a coverage determination from a PDP sponsor absent a determination by the prescribing physician, or to require that the physician's determination alone should result in a favorable coverage determination by the PDP. Thus, we propose to require that PDP sponsors also establish exceptions criteria for addressing these situations. Requiring sponsors to use an exceptions process to review requests for coverage of non-formulary drugs will create a more efficient and transparent process and will ensure that enrollees know what standards are to be applied. Additionally, requiring a similar exceptions process for conducting these types of reviews will help ensure that a PDP sponsor's formulary is based on scientific evidence rather than tailored to fit exceptions and appeals rules for formulary drugs.

Under this exceptions process, which we propose at § 423.578(b), a PDP must allow enrollees to request (1) Coverage of covered Part D drugs that are not on a sponsor's formulary; (2) continued coverage of a drug the sponsor has Start Printed Page 46721removed from its formulary; (3) an exception to a sponsor's policy regarding coverage for a step therapy; and (4) an exception to a sponsor's dosing limitation. A PDP's criteria would need to include a description of the criteria it will use to evaluate the prescribing physician's determination, clarify how the plan evaluates the relative safety and efficacy of the requested drug, and describe the cost-sharing scheme that will be applied if coverage is provided. Again, an enrollee, the authorized representative, or prescribing physician could request an exception, and the PDP sponsor may require a written certification from the prescribing physician that the non-covered drug is medically necessary to treat the enrollee's disease or medical condition. An enrollee would have a right to a redetermination by the PDP of any unfavorable coverage determination.

Like for tiering exceptions, we are proposing that enrollees be required to request reconsideration by an independent review entity (IRE), as opposed to having these cases automatically forwarded to the IRE. We welcome comments on both these issues.

c. Treatment of Determinations Regarding Exceptions Requests

From a procedural standpoint, we propose at § 423.578(c)(1) that determinations on exception requests constitute plan coverage determinations under § 423.566 and should be completed in the same timeframes. Enrollees would then have an opportunity to request a plan redetermination. Unfavorable redetermination decisions could then be appealed to the independent review entity. The IRE's review would focus on whether the PDP had properly applied its formulary exceptions criteria for the individual in question. If it determined that the PDP sponsor correctly applied its exceptions criteria, the sponsor's determination would be upheld. Thus, the IRE would not have any discretion with respect to the validity of the plan's exceptions criteria or formulary. (CMS would be responsible for evaluating and approving a PDP's exceptions criteria and formulary as part of the annual plan approval process.) In many instances, however, evaluating whether the criteria for a formulary exception had been satisfied would necessarily involve an element of medical judgment (e.g., would a patient suffer significant adverse effects by using the plan-preferred drug?). In those situations, the IRE's medical staff would be responsible for reviewing the sponsoring plan's determination as to whether the formulary exceptions criteria had been applied properly. Note that part D enrollees could subsequently access higher levels of the appeals process like for any other unfavorable coverage determination, consistent with the statutory reference to section 1852(g)(4) and (5) of the MA provisions.

Although not required by statute, we thought it important to put in place certain safeguards regarding the issuing and effect of a coverage determination made as part of the exceptions process. We believe that these safeguards will help to ensure that the exceptions process is both fair and efficient for enrollees. First, to ensure that enrollees who file exceptions requests for drugs that are being removed from a sponsor's formulary are not disadvantaged by a sponsor's failure to issue a timely decision, we establish in § 423.578(c)(1) and § 423.578(c)(2) that if a sponsor fails to issue a timely decision, the sponsor must continue to provide coverage until a decision is made on the request. Section 423.578(c)(2)(i) allows enrollees to receive up to a one-month supply of the requested drug, but a sponsor could adjust the supply to account for a shorter time frame.

Once a sponsor approves an exceptions request, we believe an enrollee should not have to continue filing exceptions requests for future refills of the drug. Therefore, we provide in § 423.578(C)(3) that once a sponsor approves a drug pursuant to the exceptions process, an enrollee is entitled to continue receiving refills of the drug for as long as the physician continues prescribing the drug and for as long as the drug continues to be considered safe and effective for treatment of the enrollee's disease or medical condition.

The final safeguard implemented under § 423.578 prohibits PDP sponsors from assigning drugs approved under either exceptions process to a special formulary tier, co-payment, or other cost-sharing requirement. In other words, sponsors must employ reasonable criteria (for example, the cost of the requested drug compared to the cost of other similar drugs on the plan's formulary) in determining the co-payments or other cost-sharing requirements of drugs approved for coverage under the exceptions process.

We recognize that these provisions represent a critical component of the new prescription drug benefit, and we particularly welcome suggestions from commenters on these proposals. Our goal is to foster the establishment of exceptions processes that employ criteria designed to maximize available drug benefits for all Medicare beneficiaries, while ensuring that plan sponsors have the flexibility they need to negotiate the best process on behalf of enrollees.

6. Appeals

a. Redeterminations (§ 423.580 Through § 423.590)

Sections 423.580 through § 423.590 explain the right to a redetermination and the requirements that apply to PDP sponsors for both standard and expedited redeterminations. If a decision regarding a coverage determination is unfavorable (in whole or in part) to the enrollee, the enrollee may file an oral or written request with the PDP or MA-PD plan for a redetermination on the decision. Note that, unlike the existing MA regulations, the proposed regulations would not identify Social Security Administration (SSA) field offices as a possible location for filing redetermination requests. Using any filing location other than the plan itself can significantly affect the speed with which the appeal is resolved. Moreover, given that section 931 of the MMA mandates the transfer of responsibility for Medicare appeals from SSA to DHHS by no later than October 1, 2005, we believe that an explicit regulatory reference to SSA field offices would not be appropriate.

For an expedited redetermination, an enrollee or the prescribing physician (acting on behalf of an enrollee) may submit an oral or written request for redetermination. However, requests for payment of drugs already received cannot be expedited. The proposed requirements for making standard redetermination determinations of covered benefits in § 423.590(a) specify that the PDP sponsor must issue its determination as expeditiously as the enrollee's health condition requires, but no later than 30 calendar days from the date of receipt of the request. Under § 423.590(b), for standard redeterminations involving requests for payment, the PDP sponsor must issue its redetermination no later than 60 calendar days from the date of receipt of the request. In the case of expedited redeterminations, § 423.590(d) specifies that a PDP sponsor must complete its redetermination and give the enrollee and the prescribing physician involved, as appropriate, notice of its decision as expeditiously as the enrollee's health condition requires, but no later than 72 hours after receiving the request. For both the standard and expedited redetermination for covered benefits, the PDP sponsor may extend the timeframe for making its determination Start Printed Page 46722by up to 14 calendar days if the enrollee requests the extension, or if the sponsor justifies a need for additional information and how the delay is in the interest of the enrollee. An extension would not be provided for redeterminations involving requests for payment.

If the PDP sponsor's redetermination results in an affirmation, in whole or in part, of its original adverse coverage determination, the sponsor must give written notification to the enrollee and advise the enrollee of the right to file an appeal with the IRE that contracts with CMS.

b. Independent Review Entity (IRE) Reconsideration (§ 423.600 Through § 423.604)

The MMA gives the Secretary the flexibility to establish an appeals process similar to that used for the MA appeals process. Thus, the proposed IRE reconsideration process set forth at § 423.600 through § 423.604 is much like that applicable to MA organizations under Part C. Note that when the PDP sponsor's redetermination affirms, in whole or in part, its adverse coverage determination, any issue remaining in dispute may be appealed by the enrollee to the IRE that contracts with CMS. However, unlike under the MA program, PDP sponsor redeterminations involving tiering issues or coverage of a non-formulary drug would not be automatically forwarded to the IRE. Instead, an enrollee would need to request an IRE review. This proposed requirement modifies the MA procedure that affords automatic referral to the IRE whenever the MA organization's original denial is upheld by the organization's redetermination. We believe that this change is appropriate given the statutory limitation that an appeal request be made only if the prescribing physician determines that all covered Part D drugs on the formulary would not be as effective or would have adverse effects. Moreover, many of the drug appeals may involve relatively small monetary amounts, raising doubts about the efficacy of forwarding all such cases to an IRE.

Thus, § 423.600 proposes that an enrollee who is dissatisfied with the PDP sponsor's redetermination may file a written request for reconsideration by the IRE. We also propose that when an enrollee files for an appeal, the IRE is required to solicit the views of the prescribing physician. Also, in order for an enrollee to request a reconsideration of a PDP sponsor's determination not to provide for a covered drug that is not on the PDP formulary, the prescribing physician must determine that all covered part D drugs on any tier of the formulary for treatment of the same condition would not be as effective for the individual as the nonformulary drug, would have adverse effects for the individual, or both.

Section 423.602 proposes the requirements for the IRE reconsideration determination notice, including the requirement that if the determination is adverse (that is, does not completely reverse the PDP sponsor's adverse coverage determination), the enrollee must be informed of the right to request an ALJ hearing and the procedures that must be followed to obtain the hearing.

Section 423.604 of our proposed rule explains that a reconsideration by the IRE is final and binding on the enrollee and the PDP sponsor, unless the enrollee requests an ALJ hearing.

c. Administrative Law Judge (ALJ) Hearings, Medicare Appeals Council (MAC) Appeals, and Judicial Review (§ 423.610 Through § 423.630)

As stated above, Section 1860D-4(h)(1) of the Act merely requires the Secretary to establish a reconsideration and appeals process that is “similar” (as determined by the Secretary) to the process used for MA organizations under the authority of 1852(g)(4) and (5) of the Act. Although we believe the Congress gave us a good deal of discretion in designing these procedural rules under Part D, we have determined as a policy matter to adopt most of the ALJ, MAC, and judicial review procedures currently used in the MA program.

Section 1852(g)(5) of the Act provides the right to a hearing and to judicial review for an enrollee dissatisfied by reason of the enrollee's failure to receive a covered Part D drug to which he or she believes he or she is entitled, and at no greater charge than he or she believes he or she is required to pay. Section 1852(g)(5) of the Act also specifies the amount in controversy needed to pursue a hearing and judicial review and authorizes representatives to act on behalf of individuals that seek appeals. In general, we would be implementing section 1869 changes that apply to Part D through cross-reference to the appropriate Part 405 regulations.

If the IRE's reconsideration determination is not fully favorable, the enrollee may request a hearing before an ALJ if the amount remaining in controversy meets the threshold requirement established annually by the Secretary. The threshold requirement will be published annually in the Federal Register. Although a PDP sponsor generally is not a party to the IRE appeal and may not request a hearing before an ALJ, the sponsor is considered a party to the ALJ hearing for the limited purpose of participation in the hearing. If the ALJ hearing does not result in a fully favorable determination, the enrollee may request MAC review of the ALJ decision.

Following the administrative review process, the enrollee is entitled to judicial review of the final determination if the amount remaining in controversy meets the threshold requirement established annually by the Secretary and published in the Federal Register.

7. Effectuation of Reconsideration Determinations (§ 423.636 Through § 423.638)

Sections 423.636 and 423.638 propose the requirements for effectuation of coverage determinations reversed by the PDP sponsor, redeterminations reversed by the independent review entity, or reversals by an ALJ or higher level of appeal. For example, § 423.636(a)(1) requires that for redeterminations of requests for benefits, if the PDP sponsor reverses its determination, it must authorize or provide the benefit under dispute as expeditiously as the enrollee's health condition requires, but no later than 30 calendar days after the date it receives the request for redetermination. When the PDP sponsor is reversed by the independent review entity, § 423.636(b)(1) requires that it must authorize the benefit under dispute within 72 hours from the date it receives notice reversing the redetermination, or provide the benefit as expeditiously as the enrollee's health requires, but no later than 14 calendar days from the date of the reversal notice. For redeterminations of requests for payment, § 423.636(a)(2) requires that if the PDP sponsor reverses its coverage determination, it must pay for the benefit no later than 60 calendar days after the date it receives the request for reconsideration. Under § 423.636(b)(2) if a sponsor's redetermination is reversed by the independent review entity, it must pay for the benefit no later than 30 calendar days from the date it receives notice reversing the redetermination.

Section 423.638 proposes that for expedited redeterminations reversed by the PDP sponsor or the independent review entity, the PDP sponsor must authorize or provide the benefit under dispute as expeditiously as the enrollee's health condition requires but no later than 72 hours after the date it receives the request for redetermination, or in the case of reversal by the independent review entity, from the date it receives the reversal notice.Start Printed Page 46723

Finally, for reversals by an ALJ or higher level of appeal, under § 423.636(c) and § 423.638(c) the PDP sponsor must pay for, authorize, or provide the benefit under dispute as expeditiously as the enrollee's health condition requires, but no later than 60 calendar days from the date it receives notice reversing its determination.

8. Federal Preemption of Grievances and Appeals

We believe that the grievance procedures for the Part D Drug Program under Title I should be the same as those that apply to the MA program under Title II.

Section 232(a) of the MMA amended 1856(b)(3) of the Act so that it now reads: “The standards under this part shall supersede any State law or regulation (other than State licensing laws or State law relating to plan solvency) with respect to MA plans which are offered by MA organizations under this part.” Section 1860D-12(g) of the Act then incorporates this preemption rule for PDP sponsors and prescription drug plans. As we discussed earlier in Part I of this preamble, we believe that these preemption provisions would not cause all State laws to be superseded—particularly in areas where we have no authority to regulate. In the context of our grievance and appeals rules, because our regulations provide for doing so, we would continue to defer to state law on the issue of authorized representatives of enrollees in the appeals process. We do not believe that the Congress intended for the Secretary to regulate matters for which the Secretary is not authorized to promulgate standards (for example, spousal rights, powers of attorney, or legal guardianship). Often, authorized representative matters are non-Federal issues. However, because we do have the authority to regulate in the field of grievances, we are concerned that state grievance requirements will now be preempted, and we may need to reexamine our Federal grievance requirements. We request comments on this preemption issue and the specific state grievance requirements that should be incorporated into Federal regulatory requirements at § 423.564.

We also note that tort law, and often contract law, are generally developed based on case law precedents established by courts, rather than by legislators through statutes or by state officials through regulations. In addition, we do not believe we would have the authority under Part D to set specific tort remedies or to govern resolution of private contracting disputes between PDPs and MA-PDs and their subcontractors. We believe that the Congress did not intend for our regulations to supersede each and every State requirement applying to MA-PDs and PDPs—even those for which the Secretary lacks expertise and authority to regulate. Thus, we do not believe, for example, that wrongful death or similar law suits based upon tort law would be superseded by the appeals process established in these regulations. Similarly, State contract law would continue to govern private contract disputes between PDPs or MA-PDs and their subcontractors.

Under principles of Federalism, and Executive Order 13132 on Federalism, which generally require us to construe preemption narrowly, we believe that an enrollee should still have state remedies available in cases in which the legal issue before the court is independent of an issue related to the organization's status as a stand alone PDP or an MA-PD plan.

9. Employer Sponsored Prescription Drug Programs and Appeals

The waiver provisions of section 1857(i) of the Act were incorporated into Part D through section 1860D-22(b) of the Act. When an employer, whether by contracting with MA-PDs or PDPs or otherwise, provides prescription drug benefits in addition to those covered under Part C and Part D of Title XVIII of the Social Security Act to their retirees, such employer may have established a group health plan governed by both Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and State law (to the extent such State law is not preempted by ERISA). In addition, when MA-PDs, PDPs, and programs described in 42 U.S.C. 1395w-132 offer benefits covered under Part D, they also would fall under the requirements of Part 423 of our proposed regulations, with respect to Part D benefits.

In drafting our Part C, MA rules, we consulted the Department of Labor (DOL), employer groups, and the health plan industry in trying to eliminate unnecessary Federal regulation of claims and appeals issues that impact matters within the jurisdiction of both DOL and DHHS. Based on our experience under Part C, we have reason to believe that some Medicare eligible individuals may receive integrated prescription drug benefits, i.e., Part D benefits through an MA-PD, PDP, or program described in 42 U.S.C. 1395w-132 and supplemental benefits through an ERISA-covered plan. For example, an employer-sponsored plan may pay the cost-sharing amount for a prescription drug that is offered by an MA-PD or PDP. Clearly, if the enrollee had a dispute about Part D coverage, he or she could file an appeal with the PDP sponsor. If the enrollee's dispute involved only the amount of cost sharing paid by the employer-sponsored plan, he or she would file an appeal in accordance with the procedures of the ERISA covered plan. In some cases, however, the dispute might involve independent coverage decisions under both Part D and the ERISA plan; possibly necessitating parallel appeal procedures on the same case. In this regard, we are soliciting comments on whether, and to what extent, the application of parallel procedures in this context might be a problem for plans, employers, and/or eligible individuals. We also are soliciting suggestions for addressing problems, if any, resulting from the application of parallel procedures.

N. Medicare Contract Determinations and Appeals

(If you choose to comment on issues in this section, please include the caption “Subpart N—Medicare Contract Determinations and Appeals” at the beginning of your comments.)

1. Overview

Section 1860D-12(b)(3)(F) of the Act directs that the “procedures for termination” in section 1857(h) of the Act be incorporated into contract requirements for PDP sponsors. To enhance the flow of this proposed rule, we have separated the provisions of section 1857(h) of the Act into two portions and addressed the two portions in different subparts of this part.

2. Proposed Provisions of the Subpart

As discussed above, § 423.509 of subpart K of this part implements the provisions of sections 1857(h)(1)(A) and 1857(h)(2) of the Act that address reasons for our termination of contracts, opportunity for PDP sponsors to develop a corrective action plan before termination, and procedures for immediate termination if we identify an imminent and serious health risk to enrollees.

Sections 423.641(b) through 423.669 specifies the procedures outlined in section 1857(h)(1)(B) of the Act. These sections specify that we would provide the organization with reasonable notice and opportunity for hearings (including the right to appeal an initial decision) before termination of its contract. Additionally, the requirements at § 423.641(a) specifies the procedures for making and reviewing our Start Printed Page 46724determination that an entity is not qualified to enter into a contract as a PDP sponsor under this part. Finally, § 423.641(c) identifies procedures for reviewing our decision as specified at § 423.507(b) not to renew a contract with a PDP sponsor.

Section 1860D-12(b)(3) of the Act states that we must apply certain specified provisions of section 1857 of the Act including the procedures for termination in section 1857(h) of the Act in the same manner as they apply to contracts under section 1857(a) of the Act. Therefore, we are proposing that a single set of procedures relating to contract determinations and appeals apply to both MA and PDP sponsor contractors. The requirements at § 423.641 through § 423.669 would mirror the requirements at § 422.641 through § 422.698 for the MA program.

A summary of the specific process and content of the proposed appeals and determination system for PDP sponsors found in this subpart are below.

Sections 423.641 through 423.669 of our regulations detail the specific process and content of the appeals and determinations system, as it relate to PDP sponsors. The topics covered in these sections fall into the following five categories:

(1) Contract determinations. Sections 423.641 through 423.643 would describe the types of contract determinations, the notice requirements, and the effect of contract determinations on the PDP sponsor contract.

(2) Reconsideration. Sections 423.644 through 423.649 would describe when a PDP sponsor organization may request a reconsideration of our contract determination, the procedures for requesting a reconsideration, the internal operation of the reconsideration, the notice requirements for relating the reconsideration determination to all parties, and the impact of this determination on the PDP sponsor's contract.

(3) Hearing. Sections 423.650 through 423.667 would discuss in detail the process surrounding a hearing, including when a hearing may be requested by a PDP sponsor and how to make the request, the internal operation of the hearing (for example, designation of participants in the hearing, witnesses and evidence that can be presented, and record of the hearing), and the notice and effect of the hearing decision on the PDP sponsor's contract. If the contractor has submitted a request for a hearing timely, the effective date of the contract determination may have been postponed pending the reconsideration determination. Finally, this section discusses the right for review of the hearing decision by the Administrator and the effect of that review decision.

(4) Reopening. Section 423.668 would present the opportunity for reopening of the contract or reconsidered determination of a hearing officer or the Administrator.

O. Intermediate Sanctions

(If you choose to comment on issues in this section, please include the caption “Subpart O'Intermediate Sanctions” at the beginning of your comments.)

1. Overview

Supbart O would implement most of the provisions of section 1860D-12(b)(3)(E) of the Act. This section of the statute provides that the contract requirements at section 1857(g) of the Act that govern “intermediate sanctions” for Medicare Advantage (MA) organizations, with a few exceptions, will apply to contracts for PDP sponsors. Therefore, with two exceptions, the requirements in § 423.750 through § 423.760 would mirror the requirements at § 422.750 through § 422.760. The two changes we are proposing to make to comply with the MA provisions are found below in the section called, “Basis for Imposing Sanctions.”

Freezing marketing or enrollments has generally been our first and most frequently used sanction authority. The MMA requires at least two qualified plans, that is a PDP per region. If we were to freeze the enrollment or marketing of a PDP sponsor, that is one of only two plans in a region, beneficiaries would no longer have the level of choice the MMA intended. If we are contemplating sanctioning a plan that is one of only two PDP sponsors in a region, we may have to consider using other remedies including civil monetary penalties to maintain an adequate level of choice for beneficiaries. However, we do not want to discriminate in our treatment of PDPs when imposing sanctions. Our goal would be to have consistent policies and procedures across all regions in regard to sanctions. Therefore, we request comment on whether closing enrollment should be used in any situation or should we generally rely on civil monetary penalties as a sanction for PDPs.

2. Kinds of Sanctions (§ 423.750)

Section 423.750 of our regulations would describe four types of sanctions that we may impose on PDP sponsors, if warranted under § 423.752. These sanctions are identical to those we have imposed on M+C contractors. The range of potential sanctions, and the fact that one or more of them may be imposed at any one time, would permit us to tailor our action to a specific situation.

Three of these sanctions would disrupt the operation of the PDP sponsor in relation to Medicare beneficiaries (that is, suspension of new enrollment (§ 423.750(a)(2), suspension of our payments to the PDP sponsor for enrolled beneficiaries (§ 423.750(a)(3), and suspension of all marketing activities (§ 423.750(a)(4)). We may keep the sanction in force until we are satisfied that the organization has corrected and will not repeat, the deficiency on which the sanction was based.

The fourth sanction that we could impose on an organization is civil monetary penalties ranging from $10,000 to $100,000, depending on the violation. Both the Office of the Inspector General (OIG) (§ 423.756(f)(2)) and CMS (§ 423.756(f)(3)) may impose civil monetary penalties.

3. Basis for Imposing Sanctions (§ 423.752)

Sections 423.752(a) and 423.752(b) of our regulations would list the seven violations for which sanctions may be imposed on a PDP sponsor organization. These violations are the same as those that warrant the imposition of sanctions for MA contractors, with the exception of two deletions we are proposing below. Specifically, sanctions would be imposed if the PDP sponsor engages in any of the following:

(1) Fails to provide required medically necessary services with adverse effect on the enrollee.

(2) Imposes premiums on beneficiaries that are in excess of those permitted in subpart F of part 423 of these proposed regulations.

(3) Expels or will not re-enroll a beneficiary in violation of this part.

(4) Engages in the practice of health screening or “cherry picking.”

(5) Misrepresents or falsifies information furnished to CMS, any other entity or individual under the Part D drug benefit program.

(6) Employs or contracts with an individual or entity excluded from participation in the Medicare program as specified under section 1128 or 1128A of the Act (or with an entity that employs or contracts with the individual or entity) for the provision of certain services.

Additionally, as an alternative to the sanctions listed above, we would be able to decline to authorize renewal of the organization's contract (or may elect to terminate the contract entirely in accordance with § 423.509). In addition, § 423.509(a) would provide that a PDP sponsor organization be sanctioned if it Start Printed Page 46725fails to carry out the terms of its contract as specified under this section.

Section 1860D-12(b)(3)(E) of the Act would specifically exclude two of the bases for sanctions at section 1857(g)(1) of the Act for MA contractors from application to PDP sponsor organizations as specified in part 423. Specifically, we would not impose sanctions on a PDP sponsor in the event it fails to enforce the limit on balance billing under a private-fee-for-service plan as required at § 422.216(a)(4), or fails to prohibit interference with practitioners' advice to enrollees, as required at § 422.206, since we do not believe these provisions are applicable in the context of the Part D drug benefit.

4. Procedures for Imposing Sanctions (§ 423.756)

Section 423.756 of our proposed regulations would specify our procedures for conducting the sanction process for PDP sponsor organizations. This process would mirror that used for the MA program. A brief summary of the process is as follows—

  • We must send a timely notification of sanction to the PDP sponsor, outlining the nature and basis of the proposed sanction, and copy OIG.
  • We must provide the PDP sponsor with an 15 or 30 day extension, to respond. If requested, an uninvolved CMS official will conduct an informal reconsideration of the determination with a written decision.
  • Non-monetary sanctions would be effective 15 days from the organization's receipt of a final notice of sanction and remain in effect until we determine that the violation is corrected. CMS or the OIG, depending on the basis for the sanction, may impose civil monetary penalties.

5. Maximum Amount of Civil Money Penalties Imposed by CMS (§ 423.758)

Section 423.758 of our proposed regulations would provide that we be given discretion, as we have been in the M+C program, to determine the amount of monetary penalty to impose on a PDP sponsor within the limits specified at § 423.758. Three situations where monetary penalty limits are listed are as follows—

(1) If the deficiency in which the determination was based has adversely affected the health of an enrollee (or has substantial probability of doing so), the penalty may be $25,000 per determination.

(2) We may apply a monetary penalty for each week that a deficiency remains uncorrected after the organization receives our notice of sanction or notice of reconsideration determination, up to $10,000 per week.

(3) If we determine that a PDP sponsor has terminated its contract without following the process required in subpart K at § 423.510, the penalty imposed may be either $250 per Medicare beneficiary enrolled in the organization at the time the PDP sponsor terminated its contract, or $100,000, whichever is greater.

6. Other Applicable Provisions (§ 423.760)

Section 423.760 of our proposed regulation provides that the provisions of section 1128A of the Act (except subsections (a) and (b)) apply to civil money penalties under this subpart to the same extent that they apply to a civil money penalty or procedure under section 1128A of the Act.

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

Section 1860D-14 of the Act establishes a program to provide subsidies for assistance with premium and cost-sharing amounts for Part D eligible individuals with lower income and resources. The proposed regulations in this subpart and in regulations published by the Social Security Administration (SSA) adding a subpart D to a new part 418 of title 20 of the Code of Federal Regulations implement section 1860D-14 of the Act.

The statute divides subsidy eligible individuals into two different groups based on income and resources: (1) Full subsidy eligible individuals; and (2) other low-income subsidy eligible individuals. The different groups are entitled to different amounts of subsidy assistance. In this proposed regulation, we are defining the eligibility criteria and the amounts of subsidy assistance provided.

1. Eligibility for the Low-Income Subsidy (§ 423.773)

In order to qualify for a full subsidy, an individual must live in one of the fifty States or the District of Columbia and have countable income below 135 percent of the Federal poverty level for the individual's family size. For purposes of this section, “federal poverty line” (FPL) has the meaning given that term in section 673(2) of the Community Services Block Grant Act (42 U.S.C. 9902(2)), including any revision required by that section.

In addition, an individual must have resources that do not exceed three times the resource limit under section 1613 for applicants for Supplemental Security Income (SSI) under title XVI, which in 2006 is $6,000 if single, or $9,000 if married. Thereafter, this resource limit will be increased annually by the percentage increase in the Consumer Price Index (all items, U.S. city average) as of September for the year before, rounded to the nearest multiple of $10.

Individuals not eligible for the full subsidy may be eligible for the partial subsidy if they live in one of the fifty States or the District of Columbia and have income below 150 percent of the FPL for their family size, and have resources in 2006 that do not exceed $10,000 if single, or $20,000 if married. Beginning in 2007 and for each subsequent year, the resource limit will be increased annually by the percentage increase in the Consumer Price Index (all items, U.S. city average) as of September for the year before, rounded to the nearest multiple of $10.

Low-income Part D eligible individuals who reside in the territories are not eligible to receive premium and cost-sharing subsidies under this subpart. Subpart S of this proposed rule addresses the provision of covered Part D drugs to low-income individuals residing in the territories.

In making income and resource determinations for the low-income subsidy for Part D, the statute refers to certain sections of the SSI program rules. For example, the MMA refers to income being determined in the same manner as for Qualified Medicare Beneficiaries (QMBs) under the Medicaid program, without use of the more liberal methodologies that States are permitted to use. The QMB provisions reference the SSI rules (specifically, section 1612 of the Act, which are the rules of the SSI program for determining income). Our proposed definition of income is consistent with the MMA in that it references SSI rules.

The MMA provides that we will compare the individual's income to the appropriate FPL applicable to “the family of the size involved.” As there is no reference in the MMA statute to using previous definitions of family size, we propose to define family size to include the applicant, his or her spouse who lives in the same residence, and the number of individuals related to the applicant who live in the same residence and who depend on the applicant or the applicant's spouse for at least one-half of their financial support.

We considered limiting family size to 1 or 2 individuals to more closely resemble the SSI rules where family size is not actually defined but where benefits are paid on the basis of an eligible individual or eligible couple. This is the definition we propose to use Start Printed Page 46726in determining eligibility for Transitional Assistance under the drug card. The decision to limit family size under the drug card was based on the short duration of that program (18 months), the limited benefit ($600 a year), and the fact that we would have to rely entirely on a computer and systems-based process for determining Transitional Assistance eligibility and verifying income and other information from applicants. However, we do not believe it was the intent of the Congress to similarly limit the definition for purposes of determining eligibility for subsidies under the Part D program. Unlike the provisions authorizing the Medicare-approved drug discount card program, there are no provisions with respect to the low-income subsidy program that give the Secretary specific authority to define family size. Instead, we are interpreting the term “family of the size involved.” We believe that this term implies a definition that is greater than an individual or couple and that includes other dependent relatives residing in the applicant's household. In addition, in order for the term “family size” to have meaning in the context of subsidy determinations, the notion of dependency needs to take into account the impact of a dependent on the relative need of the applicant or the applicant's spouse in attaining the subsidy. Accordingly, we have specified that dependents included in the calculation of family size are only those relatives residing in the residence who are financially dependent on the applicant or the applicant's spouse for one-half of their support.

In determining the income to be compared to the FPL for the size of the family involved, we would include income of the Medicare beneficiary and spouse, if any. Thus, if a married individual applies, both the income of the applicant and his or her spouse who lives in the same residence, regardless of whether the spouse is also an applicant, is counted and measured against the appropriate standard for the low-income subsidy. In our view, this best comports with the statutory reference to determining income in the manner described in section 1905(p)(1)(B) of the Act (for QMBs). In making a standard QMB income determination, States will consider the income of one spouse as available to the other spouse. Moreover, since both spouses will be considered in the family size determination, it would be counterintuitive to count a spouse's presence while not including that spouse's income. Other members who meet the one-half support test will be counted in the family size calculation, but income of these dependents will be ignored in the eligibility determination. The one-half support test ensures that a family member with sizable income is not erroneously counted as a dependent while that person's income is ignored.

The MMA (at section 1860D-14(a)(3)(D)) provides that resources will be determined according to section 1613 of the Act. The resource standard depends upon whether the applicant is a single individual or a member of a married couple and whether the resources will be measured against the basic or alternative resources standards. See section 1860D-14(a)(3)(D) and (E) and H.R. Conference Report No. 108-391 at 470. However, that section does not define resources, it defines what are not resources. The MMA also provides for the development of a simplified application in which applicants attest to their level of resources and submit only minimal documentation. The implication of this provision is that the Congress envisioned a simple process. In order to keep the process simple and minimize administrative cost, we intend to only consider liquid resources (that is, those that could be converted to cash within twenty days) and real estate that is not an applicant's primary residence as resources that are available to the applicant to pay for the Part D premiums, deductibles and copayments. Thus, we will not consider other non-liquid resources (for example, a second car) to be available to the applicant for this purpose.

We do not believe this policy will have a significant impact on program costs. We believe any such program costs associated with not counting non-liquid resources other than countable real estate would be offset by the administrative savings resulting from a more simplified program. As we indicate further in this section, we are working with SSA on a quality assurance strategy that will strike an appropriate balance between administrative costs and program goals and objectives.

Section 1860D-14(a)(3)(B)(v)(I) of the Act requires that full-benefit dual eligibles (as defined under section 1935(c)(6) of the Act) and individual receiving benefits under the SSI program be treated as full subsidy eligible individuals with respect to premium assistance, elimination of the deductible, continuation of coverage above the initial coverage limit, and elimination of cost-sharing above the annual out-of-pocket threshold. However, copayment subsidies for these individuals will vary depending on whether the individual is in an institution or has income below or above 100 percent of the FPL. Full benefit dual eligible individuals with income above 100 percent of the FPL will have copayments not to exceed $2 for a generic or a preferred multiple source drug or $5 for an other drug.

Under Medicaid, the term “dual eligibles” generally refers to low-income Medicare beneficiaries who qualify for some level of medical assistance. Those entitled to full benefits under Medicaid generally have most of their health care expenses, including prescription drugs, paid for by a combination of Medicare and Medicaid. However, Federal law also specifies several groups of dual eligibles who, while not entitled to full Medicaid benefits, are entitled to more limited medical assistance, specifically payment of Medicare Part A or Part B premiums and/or cost sharing, such as payment of Medicare deductibles and coinsurance. These groups are certain QMBs, specified low-income Medicare beneficiaries (SLMBs), qualified disabled and working individuals (QDWIs), and certain qualifying individuals (QIs).

For purposes of the low-income subsidy under Part D, we propose to define the term “full benefit dual eligible individual” as an individual who for any month has coverage under a PDP or MA-PD and is determined eligible by the State for medical assistance for full benefits under title XIX for the month under any eligibility category covered under the State plan or comprehensive benefits under a demonstration under section 1115 of the Act. Comprehensive benefits referred to in this section do not include those benefits received under section 1115 Pharmacy Plus demonstrations. For individuals who become medically needy by spending down excess medical expenses, the individual is not eligible as medically needy until he or she satisfies their spenddown obligation. This requirement is reflected in the proposed regulations at § 423.772.

Section 1860D-14(a)(3)(B)(v)(II) of the Act authorizes the Secretary to treat QMBs, SLMBs, and QIs who are not full benefit dual eligible individuals as full subsidy eligible individuals. This authority does not apply to QDWIs. As indicated in the proposed regulations at § 423.773(c), the Secretary proposes to elect to exercise this authority and treat these individuals as being eligible for full subsidy assistance. This decision is based on the fact that nearly all QMBs, SLMBs, and QIs, by definition, will likely meet the requirements to be considered a full subsidy individual. Generally, QMB, SLMB, and QI individuals have income below 135 Start Printed Page 46727percent of the FPL and resources that do not exceed twice the SSI limit. The exception will be in the few States that have more liberalized income and asset rules for these groups under section 1902(r)(2) of the Act. We do not believe that treating these groups as subsidy eligible will have a large cost impact. Further, we believe that it will ease the administrative burden of having to educate these individuals on the need to apply for the subsidy.

Section 1860D-14(a)(1) distinguishes between noninstitutionalized full benefit dual eligible individuals with incomes at or below 100 percent of the FPL and other non-institutionalized individuals covered as full subsidy eligibles. This distinction is made solely for purposes of the reduction in cost-sharing below the out of pocket threshold. Therefore, full benefit dual eligibles (and, as proposed above, at the Secretary's election QMBs, SLMBs, and QIs) receive a full premium subsidy, have no annual deductible, and have coverage above the initial coverage limit. However, with respect to cost-sharing below the out-of-pocket threshold, these individuals have a two-tiered system depending upon whether their incomes are at or below 100 percent of the FPL or above 100 percent of the FPL. For those noninstitutionalized full benefit dual eligible individuals below 100 percent of the FPL, a copayment is imposed that does not exceed the lesser of $1 for a generic or a preferred multiple source drug or $3 for any other drug, or the amount charged to other individuals with income below 135 percent of the FPL who meet the resource standard based on three times the SSI standard. For individuals in this group above 100 percent of the FPL, a copayment not exceeding $2 for a generic or a preferred multiple source drug is imposed, or $5 for an other drug.

Finally, the statute gives the Secretary the option to permit a State to make subsidy eligibility determinations by using the methodology it uses under section 1905(p) of the Act if the Secretary determines that this would not result in any significant difference in the number of individuals who are made eligible for the subsidy. This would permit a State to use the same resource methodologies that it uses to determine Medicaid eligibility for QMBs, SLMBs, and QIs if the Secretary determines that the use of those methodologies would not result in any significant differences in the number of individuals who are made eligible for a subsidy. This includes the less restrictive methodologies the State uses under section 1902(r)(2) of the Act to determine eligibility for QMBs, SLMBs, and QIs. At this time, the Secretary proposes not to exercise this option.

This means that when making eligibility determinations for other low-income subsidy eligibles, all States will use the same resource methodologies across the country. The rationale for not electing this authority is twofold. First, uniformity in the application process is a desired goal and having alternative resource methodologies that would vary among States would detract from that goal. Second, based on the administrative burden and complexity that would be involved in administering this alternative process, we see very little benefit in terms of the number of individuals who would be determined subsidy eligible.

2. Eligibility Determinations, Redeterminations and Applications (§ 423.774)

In accordance with section 1860D-14(a)(3)(B)(i) of the Act, an application for subsidy assistance may be filed with either a State's Medicaid program office or SSA. Inquiries made by individuals to PDPs or MA-PDs concerning application or eligibility for the low-income subsidy should be referred to State agencies or SSA. Eligibility determinations would then be made by the State for applications filed with the State Medicaid agency or by the Commissioner of Social Security for those filed with SSA. The Congress believes that more beneficiaries would enroll in the new Part D benefit if given the option to apply at the Social Security office as well as State Medicaid offices. While our goal is to provide a single application and determination process for the low-income subsidy, we recognize that the statute provides that redeterminations and appeals of eligibility determinations are to be made in the same manner as for medical assistance for those individuals who are determined eligible by the State Medicaid agency. Similarly, the Commissioner will decide how to conduct redeterminations and appeals for those subsidy determinations made by Social Security. We invite comments on State Medicaid agency procedures how to best implement the redetermination and appeal process that we believe would best be accomplished if the two separate processes produce the same outcome.

We note that eligibility determinations for low-income subsidies would be effective beginning with the first day of the month in which the individual applies for a subsidy, but no earlier than January 1, 2006, provided the applicant meets the requirements for eligibility when he or she applies and has enrolled with a prescription drug coverage provider or MA plan with prescription drug coverage. Initial eligibility determi