WAIS Document Retrieval

[Federal Register: June 26, 1998 (Volume 63, Number 123)]
[Rules and Regulations]
[Page 35017-35066]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[[pp. 35017-35066]] Medicare Program; Establishment of the Medicare+Choice Program

[[Continued from page 35016]]

[[Page 35017]]

relationships with entities that they placed under contract to perform
certain functions that otherwise would be the responsibility of the
organization to perform including management and provision of services.
This section therefore addresses these relationships and establishes
requirements that the M+C organizations must adhere to in order to
provide HCFA assurances that the M+C organization will be accountable
for all contract requirements.
Specifically, this section gives HHS, the Comptroller General or
their designee, the authority to audit, evaluate and/or inspect
documents, papers, records of all of the organizations mentioned in
Sec. 422.502(i); and to obtain information from the M+C organization
and other entities described here, six years following the close of a
contract or audit. Paragraph (i)(3) of Sec. 422.502 describes
provisions that must be included in contracts and other written
arrangements between M+C organizations and other entities described in
this section.
<bullet> Section 422.502(j), which is derived from section 1857(e),
states that the contract will contain other terms and conditions
consistent with this part as HCFA may find necessary and appropriate.
<bullet> Under Sec. 422.502(k), we require that all M+C contracts
be severable as discussed previously.
Finally, pursuant to our authority in section 1856(b)(1) to
establish standards under Part C by regulation, we are requiring in
paragraphs (l) and (m) that an M+C organization request payment on
document that certify the accuracy and completeness of relevant data as
a condition for receiving its capitation payment and, in the case of
the ACR, for retaining the portion of capitation payment associated
with the ACR amount (rather than providing additional benefits).
Section 422.502(b) also states that the M+C organization's CEO or CFO
certify the accuracy of encounter data, and, in instances when
encounter data are generated by a related entity, contractor, or
subcontractor, such entity likewise certifies the accuracy of the
encounter data.
In all of these cases, when an M+C organization submits the data in
question to HCFA, we believe that it is making a ``claim'' for
capitation payment in the amount dictated by the data submitted, or in
the case of the ACR submission, a ``claim'' to retain the portion of
the capitation payment that is under the ACR amount, rather than
providing additional benefits. We believe it is important that when an
M+C organization is claiming payment (or the right to retain payment)
in a particular amount based upon information it is submitting to HCFA,
it should be willing to certify the accuracy of this information. We
believe that these certifications will help ensure accurate data
submissions, and assist HCFA and the Office of Inspector General in
anti-fraud activities.
4. Effective Date and Term of Contract (Sec. 422.504)
Section 1857(c) provides that each contract under section 1857 will
be for a term of at least 1 year, as determined by the Secretary. This
section also provides that the effective date and term of the contract
will be specified in the contract, except that in no case will a
contract under this section that provides for coverage under an M+C MSA
plan be effective before January 1999 with respect to such coverage.
Based on these provisions, Sec. 422.504(b) of this rule provides that
beginning in 2002, contracts will be for a period of 12 months
beginning on January 1 and ending on December 31. We include an
exception at Sec. 422.504(d) which indicates that prior to January 1,
2002, HCFA may at its discretion approve contracts for periods longer
than 12 months, that begin on a date other than January 1.
HCFA has decided not to exercise the discretion provided in section
1857(a)(1) to make contracts automatically renewable (section
1857(a)(1) provides that contracts ``may'' be automatically renewable
from term to term.) Instead, we specify at Sec. 422.504(c) that the
contract may be renewed annually only if HCFA affirmatively authorizes
a renewal, and the M+C organization has not given HCFA a notice of
nonrenewal. We believe that this approach is consistent with HCFA's
role as a prudent purchaser and is in the best interest of the tax
payer, the Medicare beneficiary and the Medicare program.
Under the current 1876 risk contract program, HCFA receives
applications on a continuous basis and also awards contracts on a
continuous basis as soon as the review process is complete, and a
decision for approval has been reached. We have decided to maintain
this process for the next few years under the M+C program. The BBA,
however, provides a framework that has encouraged us to consider
changing this in the future. The requirements for a coordinated open
enrollment policy and printed plan comparison charts and the advent of
the lock-in periods starting in 2002 suggests that HCFA move toward a
policy of establishing a cutoff date for awarding contracts annually.
This cutoff date would be timed to ensure that all new plans are
included in the printed plan comparison charts. If we established a
cutoff phase, HCFA would implement this change to the application and
award processes in the year 2001 in time for the first year of the
lock-in. We invite comments on this issue.
5. Nonrenewal of Contract (Sec. 422.506)
Section 422.506(a) discusses the process that an M+C organization
must follow if it decides not to renew its contract. If the M+C
organization does not want to renew its contract, it must notify HCFA
in writing by May 1 of the year preceding the year that the M+C
organization intends to no longer contract with HCFA. In addition, the
M+C organization must notify each Medicare enrollee by mail at least 90
days before the effective date of the nonrenewal. It must 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 of the newspapers
of general circulation located in the M+C's geographic area.
We also provide that HCFA may accept a nonrenewal notice of an M+C
organization's decision not to renew its contract submitted after May 1
if the M+C organization complies with the requirements concerning
enrollee and public notification and acceptance would not otherwise
jeopardize the effective and efficient administration of the Medicare
program. The May 1 deadline is timed to coincide with the ACR
submission and internal HCFA timelines that require the timely
submission of information necessary for developing annual health fair/
open enrollment materials that will be made available to new and
already-enrolled Medicare beneficiaries. We believe that the conference
committee reports make it clear that the Congress intends for Medicare
beneficiaries to make informed choice based on accurate, comparative
M+C plan information. The Conferees further make it clear that the
Secretary must take all steps necessary to ensure that all Medicare
beneficiaries are provided the information needed to make informed
choices about health coverage. We assert that the date-specific
deadlines by which an M+C organization must notify HCFA of its decision
not to renew its contract is a necessary step that promotes and
represents the best intent of the law.
Section 1857(c)(4) provides that the Secretary cannot enter into an
M+C contract with an M+C organization if, within the preceding five
years, that organization has had an M+C contract

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that was ``terminated at the request of the organization,'' except ``in
circumstances that warrant special consideration, as determined by the
Secretary.'' While Congress used the word ``terminated'' rather than
``nonrenewed,'' the only way that a contract could end solely ``at the
request of the organization'' would be as the result of a notice of
nonrenewal of the contract. In the case of a termination by mutual
consent, discussed below, this only occurs if HCFA agrees that a
termination of the contract is in the best interests of beneficiaries.
Even in the case of a termination by the M+C organization under
Sec. 422.512 (discussed below), an organization does not have the right
simply to ``request'' termination of the contract. Rather, it must show
HCFA noncompliance with HCFA's obligations. This has never happened
under the Part 417 counterpart of this authority for an organization to
terminate its contract (Sec. 417.494(c)). Thus, we have always
interpreted similar language in section 1876 to apply when an
organization nonrenews its contract. We therefore make this
interpretation explicit in Sec. 422.506(a)(4).
HCFA decision not to authorize renewal. In accordance with
Sec. 422.506, contracts are renewed annually only if (1) HCFA informs
the M+C organization that it authorizes a renewal and (2) the M+C
organization has not provided HCFA with a nonrenewal notice. Section
422.506(b)(1) provides that HCFA may decline to authorize a renewal of
a contract for any of the following reasons:
<bullet> The M+C organization has not fully implemented or shown
discernable progress in implementing quality improvement projects;
<bullet> The M+C organization demonstrates insufficient enrollment
growth. As participation in the M+C program grows it is inevitable that
some contracting entities will not enroll sufficient numbers of
Medicare beneficiaries to justify the administrative costs associated
with regulating meet the applicable minimum enrollment requirements at
Sec. 522.514.
<bullet> For any of the reasons listed in Sec. 422.510(a) which
would also permit HCFA to terminate the contract.
<bullet> The M+C organization has committed any of the acts in
Sec. 422.752(a) which would support the imposition of intermediate
sanctions or civil money penalties under Subpart O.
We believe that these aforementioned reasons for not authorizing
renewal of a contract are consistent with HCFA's intent to fulfill its
role as a prudent purchaser of health care services.
Section 422.506(b)(2) provides that if HCFA decides not to
authorize the renewal of a contract, HCFA gives written notice to--
<bullet> The M+C organization by mail by May 1 of the current
calendar year;
<bullet> The M+C organization's enrollees at least 90 days before
the end of the current calendar year; and
<bullet> The general public, by publishing a notice in one or more
newspapers of general circulation in each community or county located
in the M+C organization's service area, at least 90 days before the end
of the current calendar year.
Section 422.506(b)(3) provides that HCFA give the M+C organization
written notice of its right to appeal the nonrenewal decision in
accordance with subpart N.
6. Modification or Termination of a Contract by Mutual Consent
(Sec. 422.508)
We provide guidance at Sec. 422.508(a) that allows for contract
termination by mutual consent. If a contract is terminated by mutual
consent, except as provided in the Sec. 422.508(b), the M+C
organization must provide notice to its Medicare enrollees and the
general public as provided in Sec. 422.512(b) (2), and (3). If the
contract terminated by mutual consent is replaced on the following day
by a new M+C contract, the notice specified above does not need to be
provided.
We have developed a mutual consent termination policy because we
believe that there are circumstances under which an M+C organization
may agree to a mutual termination by consent. This policy gives HCFA
the option to offer this alternative to affected M+C organizations.
Further, HCFA may decide that it is in the best interests of tax
payers, Medicare beneficiaries and the Medicare program to agree to let
an M+C organization terminate its contract midyear. Finally, we believe
this policy accommodates M+C organizations that may wish to terminate
their contract by mutual consent at the end of a calendar year and
enter into a new 12 month contract year on January 1 during the years
prior to 2002. We invite comment on this proposed policy.
In Sec. 422.508, with some modifications, we have retained the
provision for contract modification or termination by mutual consent
that applies to contracts under section 1876. As under Sec. 417.494(a),
contracts may be modified or terminated at any time by written mutual
consent. The two changes we have made are that (1) we have changed the
obligation to provide enrollees and the public with notice of a
termination to conform to the 60-day notice requirement in
Sec. 422.512(b) (2) and (3) (which retained the enrollee notice
requirement in Sec. 417.484(c)(2)); and (2) we have provided for an
exception to the notice requirement for cases in which a contract being
terminated by mutual consent is being replaced by a new contract on the
day the termination becomes effective. We continue to require that M+C
organizations notify their Medicare beneficiary enrollees of any
changes that may occur pursuant to a contract modification by mutual
consent within timeframes specified by HCFA.
7. Termination of a Contract by HCFA (Sec. 422.510)
Section 1857(c)(2) provides that the Secretary may at any time
terminate an M+C organization contract if the Secretary determines that
the M+C organization--
<bullet> Failed substantially to carry out the contract;
<bullet> Is carrying out the contract in a manner inconsistent with
the efficient and effective administrative of Medicare Part C; or
<bullet> No longer substantially meet the applicable conditions of
Medicare Part C.
In addition to repeating the above statutory language, we are
implementing this language by identifying specific circumstances that
we believe constitute examples of an M+C organization substantially
failing to carry out either its contract, or carrying out its contract
in a manner that is inconsistent with the effective and efficient
administration. Specifically, we have identified the following
circumstances: The M+C organization commits or participates in
fraudulent or abusive activities affecting the Medicare program; the
M+C organization substantially fails to comply with requirements in
Subpart M relating to grievances and appeals; the M+C organization
fails to provide HCFA with valid encounter data as required under
Sec. 422.257; the M+C organization fails to implement an acceptable
quality assessment and performance improvement program as required
under Subpart D; the M+C organization substantially fails to comply
with the prompt payment requirements in Sec. 422.520; the M+C
organization substantially fails to comply with the service access
requirements in Sec. 422.112 or Sec. 422.114; the M+C organization
fails to comply with the requirements of Sec. 422.208 regarding
physician incentive plans.
Section 1857(h)(2)provides authority for the Secretary to
immediately terminate a contract with an M+C organization in instances
where the

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Secretary determines that a delay in termination resulting from
compliance with the procedures in section 1857(h)(1) discussed below
would pose an imminent and serious risk to the health of enrolled
Medicare beneficiaries.
We have implemented this authority as follows. First,
Sec. 422.510(a)(5) provides for termination when an M+C organization
experiences financial difficulties so severe that its ability to make
necessary health services available is impaired to the point of posing
an imminent and serious risk to the health of its enrollees, or when
the organization otherwise fails to make services available to the
extent that such a risk to health exists. Second, Sec. 422.510(b)(2)
provides that a termination based on Sec. 422.510(a)(5) takes effect
immediately. Third Sec. 422.510(c) provides that the opportunity for
corrective action does not apply to a termination based upon
Sec. 422.510(a)(5). And fourth, subpart N of part 422 provides that in
the case of a termination based on Sec. 422.510(a)(5), a hearing is not
provided until after the termination takes effect.
Section 1857(h)(1) specifies procedures that must be followed
before a termination by HCFA can take effect (unless the exception for
an imminent and serious risk to health applies, as discussed above). We
specify these requirements at Sec. 422.50(b)(1). Section 1857(h)(1)(A)
requires that the M+C organization be provided with a ``reasonable
opportunity to develop and implement a corrective action plan to
correct the deficiencies'' that were the basis for a decision that
grounds for termination existed under section 1857(c)(2). Section
422.510(c) provides for such a corrective action opportunity,
consistent with time frames specified in Subpart N, except in cases in
which the termination is based upon Sec. 422.510(a)(5), and the
``imminent and serious'' risk to health exception in section 1857(h)(2)
applies.
Section 1857(h)(1)(B) requires that the Secretary provide the M+C
organization with ``reasonable notice and opportunity for hearing,''
including ``the right to appeal an initial decision * * * before
terminating the contract.'' (Emphasis added.) Section 422.510(d)
implements this provision by requiring that a notice of appeal rights
under Subpart N be provided when a termination notice is sent to an M+C
organization. This notice would specify that the termination would not
be effective until after the hearing and appeal, except in the case of
a termination under Sec. 422.510(a)(5).
Also, in instances where it is necessary for HCFA to immediately
terminate its contract with an M+C organization for violations
prescribed in Sec. 422.510(a)(5), we specify in Sec. 422.510(b)(2) that
if a termination notice is sent and takes effect in the middle of the
month, HCFA has the right to recover a prorated share of its payment
made to the M+C organization at the beginning of the month following
notice of said termination.
8. Termination of a Contract by the M+C Organization (Sec. 422.512)
Paragraph (a) of Sec. 422.512 provides that the M+C organization
may terminate the contract if HCFA has failed substantially to carry
out the terms of the contract. The paragraph (b) through (d)
establishes requirements for giving notice, specifies when the
termination is effective, and establishes when HCFA's liability for
payment to the M+C organization ends. Paragraph (e) states that
organizations that terminate their contract with HCFA cannot enter into
an agreement with the Secretary for five years unless there are
circumstances that warrant special consideration.
9. Minimum Enrollment Requirements (Sec. 422.514)
The newly-created section 1857(b) of the Act specifies that HCFA
may not enter into a contract with an M+C organization unless the
organization has at least 5,000 enrollees (or 1,500 if it is a PSO), or
at least 1,500 enrollees (or 500 if it is a PSO) if the organization
primarily serves individuals residing outside of urbanized areas. We
specify these requirements in Sec. 422.514(a).
Section 1857(b) refers to individuals ``who are receiving health
benefits through the organization.'' We considered interpreting
receiving health ``benefits'' to mean more than simply receiving health
services. A hospital or doctor can furnish health services on a fee-
for-service basis, or an organization can administer health benefits
offered by an employer without actually providing ``benefits'' in the
form of covered costs. We also recognize that some new organizations,
both federally waivered PSOs and new state licensed entities, will
apply to enter the M+C program. Thus, such an interpretation would
allow some new entities to achieve the minimum enrollment requirement
without having any or very little enrollment.
The minimum enrollment requirement is an indicator that the
organization applying for an M+C contract can handle risk and capitated
payments and also is able to effectively manage a health care delivery
system including the enrollment and disenrollment of beneficiaries and
the timely payment of claims, provide quality assurance, and have
systems to handle grievances and appeals. While having experience with
risk based payments indicates the organization can handle risk, it does
not provide any assurance that the organization can manage all the
contractual requirements of an M+C organization.
We realize that through the waiver process for federally waivered
PSOs and the application process for all new entities we require
reasonable assurance that the organization will be able to manage their
contract. We do not want to add an additional barrier to entry for
those organizations that have gone through the waiver process or state
licensure but are still start-up organizations.
We have decided to require that the minimum enrollment requirement
can only be met counting enrollees in the particular organization. This
will show the organization can handle risk and manage their system.
Section 1857(b)(2) contains the statement that the term ``covered
lives'' should be substituted for ``individuals'' in applying the
minimum enrollment rule to MSA plans. As such, we will count covered
lives for MSAs for purposes of meeting the minimum enrollment
requirements.
As stated earlier, section 1857(b)(3) allows M+C organizations to
request a waiver of minimum enrollment requirements during the first 3
contract years. Therefore, under Sec. 422.514(b) HCFA may waive the
minimum enrollment requirement for 1 year to those organization that
need a waiver provided such organizations satisfactorily demonstrate:
prior experience with risk-based payment arrangements; the ability to
bear financial risk under the M+C contract; and marketing and
enrollment activities necessary to meet enrollment requirements
specified at Sec. 422.514 (a)(1) and (a)(2). Both HCFA actuaries and
the National Association of Insurance Commissioners recommend against
entering into an contract with a applicant who does not project
reaching 500 members within a short timeframe. HCFA will monitor
closely the progress of organizations in meeting at least this goal
during the first contract year.
If the organization does not meet the applicable minimum enrollment
requirement by the end of its first year of operation we may waive the
requirements for an additional year if the organization meets the
requirement specified in Sec. 422.514(b)(2):

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<bullet> Requests an additional minimum enrollment waiver at least
120 days before the end of the year;
<bullet> Continues to demonstrate an ability to meet its
contractual obligations and bear financial risk; and,
<bullet> Demonstrates an acceptable marketing and enrollment
process. The organization's enrollment projections for the second year
of the waiver will become its enrollment standard.
In paragraph Sec. 422.514(b)(3) we state that we will only approve
a third and final waiver year if the organization has achieved the
transitional enrollment standard that the organization projected in
their marketing and enrollment plan required to receive a waiver for
their second year.
Finally, if an organization does not achieve the minimum enrollment
requirement and is not operating with a minimum enrollment waiver, HCFA
may elect not to renew the M+C organization's contract, we specify this
at Sec. 422.514(c).
10. Reporting Requirements (Sec. 422.516)
This M+C regulation contains a number of sections that specify
information requirements for M+C organizations. This information is to
be provided from organizations to HCFA (see Secs. 422.64, 422.502, and
422.512), from HCFA to beneficiaries (see Sec. 422.64), and from the
organizations to the beneficiaries (see Secs. 422.80 and 422.110).
The following listing summarizes all the information required to be
disclosed either to HCFA, to beneficiaries, or to both:

<bullet> Benefits
<bullet> Premiums
<bullet> Service area
<bullet> Quality and Performance: Outcomes, HEDIS, Disenrollment,
satisfaction
<bullet> Supplemental benefits
<bullet> Access: Number, mix, and distribution of providers
<bullet> Out of area coverage
<bullet> Emergency care coverage
<bullet> Supplemental premiums
<bullet> Prior authorization rules
<bullet> Grievances and appeals procedures and data
<bullet> Quality assurance program
<bullet> Utilization controls
<bullet> Compensation methods
<bullet> Financial reports
<bullet> Encounter data
<bullet> Claims
<bullet> Enrollment

These represent an extensive amount of information to be disclosed
both to HCFA and to beneficiaries. M+C organizations need to be
particularly aware of the many requirements to disclose information to
beneficiaries as seen in Secs. 422.80 and 422.110. They will have to
develop management information systems that meet these disclosure
requirements. As it is, these sections specify the basic requirements
as to information to be disclosed. HCFA will provide more detailed
policy guidance on specific contents required for each of these data
elements. These additional requirements will be developed with input
from the public, such as plans, consumer groups, etc.
M+C organizations also need to take into consideration in the
development of these management information systems, that they will
soon have to meet the requirements of the Administrative Simplification
provisions of the Health Insurance Portability and Accountability Act
of 1996. This act will result in regulations for data standards that
effect all components of the health care system. The act will specify
standards for the following types of transactions: claims, enrollment
and disenrollment, eligibility, payments and remittances, premiums,
first report of injury, claim status, referral, providers, patient
identifiers, health plan identifiers, and code sets. The organizations
will also need to be in compliance with year 2000 changes.
Furthermore, M+C organizations will need to address the
confidentiality and privacy provisions of these regulations and related
regulations, meet the validation requirements associated with several
of the data sets incorporated into this regulation, e.g, encounter data
will need to be validated, and be capable of electronically
transmitting this information to HCFA in the future, when such is so
specified.
Section 1857(d) contains several provisions involving the financial
records and financial status of M+C organizations. As discussed above,
paragraphs (1) and (2) of section 1857(d) provide for auditing and
inspection of M+C organizations' financial records. The paragraph (4)
in section 1857(d) specifically requires that organizations ``in
accordance with regulations of the Secretary, report to the Secretary
financial information,'' which ``shall include'' such information as
the Secretary may require demonstrating that the organization has a
fiscally sound operation. Under our authority at section 1856(b)(2) to
adopt section 1876 standards, we have decided to implement this
authority in part by requiring that M+C organizations comply with
financial reporting requirements currently set forth in Sec. 417.126.
These requirements are set forth in Sec. 422.516(a) and (b). We believe
that requirements specified in section 1857(d)(1), which require HCFA
to conduct annual audits of the financial records of M+C organizations,
compel M+C organizations to provide all required information described
at Sec. 422.516(a) and (b). Included in these requirements are--
<bullet> Requirement that M+C organizations develop and maintain a
system for reporting information to HCFA, its enrollees and the general
public, information described elsewhere in the regulation.
<bullet> A requirement that each M+C organization report to HCFA a
description of significant business transactions.
<bullet> A requirement that each M+C organization submit combined
financial statements to HCFA on a timely basis, as defined by HCFA.
<bullet> A requirement that for any employees' health benefits plan
that includes an M+C organization in its offering, the M+C organization
must furnish, upon request, the information the organization needs to
fulfill its reporting and disclosure obligations (with respect to the
particular M+C organization) under the Employee Retirement Income
Security Act of 1974 (ERISA).
<bullet> A requirement that the organization notify HCFA regarding
any loans or other special financial arrangements.
<bullet> A requirement that each M+C organization must make
financial information available to enrollees upon request.
11. Prompt Payment Requirements (Sec. 422.520)
Under Sec. 422.520, contracts with M+C organizations must specify
that the M+C organization agrees to provide prompt payment of claims
that have been submitted by providers for services and supplies
rendered to Medicare enrollees when these services and supplies are not
furnished by an organization-contracted provider. While this
requirement closely follows requirements already in place for section
1876 contractors, (including provisions pertaining to interest to be
paid if timely payment is not made), section 1857(f) extends similar
prompt payment requirements to claims submitted by Medicare
beneficiaries enrolled in M+C private fee-for-service plans. Section
422.520(a) contains this new section 1857(f) requirement, as well as
the requirement that applies to non-contracting providers. Further,
pursuant to our authority under section 1856(b)(1) to establish
standards under Part C, we require organizations to act upon (either
approve or deny, not

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necessarily pay) all claims within 60 calendar days from the date of
request. These claims include the remaining 5 percent of the clean
claims not paid within 30 days as well as all other claims.
In addition, pursuant to our authority in section 1856(b)(1) to
establish standards under Part C, we are requiring in Sec. 422.520(b)
that contracts or other written agreements between M+C organizations
and providers and suppliers contain a ``prompt payment'' provision, the
terms of which are developed and agreed to by the M+C organization and
the relevant provider.
Section 1857(f)(2) also contains another new provision that
specifies that if the Secretary determines that the organization fails
to make payments promptly to non-contracting providers and suppliers as
required under section 1857(f)(1) (and Sec. 422.520(a)), the Secretary
may provide for direct payments to affected providers and suppliers. We
articulate these requirements in Sec. 422.520(c).

Special Rules for RFB Societies

Enrollment restriction rules may be imposed by religious fraternal
benefit society M+C organizations, provided the restriction of
enrollment is consistent with the requirements identified in section
1859(e) of the Act. The RFB M+C organizations must still meet the
requirements for financial solvency. Moreover, the Secretary may adjust
the M+C organization's payment to account for the unique actuarial
characteristics of the individuals enrolled in the RFB M+C
organization. We specify these requirements in Sec. 422.250(a).

L. Effect of Change of Ownership or Leasing of Facilities During Term
of Contract

This interim final rule applies to M+C organizations the provisions
concerning the effect of change of ownership or leasing facilities
during the term of the contract that are currently set forth with
regard to HMOs and CMPs in subpart M of part 417 to M+C organizations.
This is accomplished by designating Secs. 417.520 through 417.523 as
Secs. 422.550 through 422.533 in a new subpart L in part 422 and making
certain nomenclature changes. (A cross-reference to subpart L of part
422 is included in subpart M of part 417 in order that these provision
may continue to apply to Medicare contracts with HMOs and CMPs under
section 1876.) We also revise redesignated Sec. 422.550 (formerly
Sec. 417.520) to add that an M+C organization that has Medicare
contract in effect and is considering or negotiating a change in
ownership must provide to HCFA updated financial information and a
discussion of the financial and solvency impact of the change of
ownership on the surviving organization. We also add this requirement
to redesignated Sec. 422.552 (formerly Sec. 417.522), which contains
requirements relating to novation agreements.

M. Subpart M--Grievances, Organization Determinations, and Appeals
(Secs. 422.560 Through 622)

1. Introduction
Subpart M of part 422 implements sections 1852(f) and (g), which
set forth the procedures M+C organizations must follow with regard to
grievances, organization determinations, and reconsiderations and other
appeals. Under section 1852(f), an M+C organization must provide
meaningful procedures for hearing and resolving grievances between the
organization (including any other entity or individual through which
the organization provides health care services) and enrollees in its
M+C plans. Section 1852(g) addresses the procedural requirements
concerning coverage (``organization'') determinations and
reconsiderations and other appeals. As discussed in detail below, only
disputes concerning ``organization determinations'' are subject to the
reconsideration and other appeal requirements under section 1852(g). In
general, organization determinations involve whether an enrollee is
entitled to receive a health service or the amount the enrollee is
expected to pay for that service. All other disputes are subject to the
grievance requirements under section 1852(f). For purposes of this
regulation, a reconsideration consists of a review of an adverse
organization determination (a decision that is unfavorable to the M+C
enrollee, in whole or in part) by either the M+C organization itself or
an independent review entity. We use the term ``appeal'' to denote any
of the procedures that deal with the review of organization
determinations, including reconsiderations, hearings before
administrative law judges (ALJs), reviews by the Departmental Appeals
Board (DAB) and judicial review.
For the grievance, organization determination, and appeal
requirements, an M+C organization must establish procedures that
satisfy these requirements with respect to each M+C plan that it
offers. These requirements generally are the same for each type of M+C
plan--including M+C non-network MSA plans and M+C PFFS plans.
The grievance, organization determination, and appeal requirements
for M+C organizations that are set forth in this interim final rule are
largely based on the existing rules for managed care organizations
under part 417, Subpart Q, Beneficiary Appeals. This is in accord with
section 1856(b)(2), which directs that the M+C standards be based on
the analogous standards established under section 1876, as long as they
are consistent with the requirements in part C. Moreover, we note that
to some extent the statutory requirements themselves reflect policies
contained in the existing part 417 requirements. For example, the
requirements under section 1852(g)(3) concerning expedited organization
determinations and reconsiderations essentially incorporate the
expedited review procedures that were issued in HCFA's April 30, 1997
final rule with comment (62 FR 23368). (That final rule established
expedited review processes for organization and reconsidered
determinations, and clarified that the definition of an organization
determination includes discontinuations of service.)
Thus, the significant differences between the grievance and appeal
requirements that apply under the M+C program and the existing
requirements in subpart Q of part 417 are: (1) changes that are
explicitly mandated under the statute, such as the requirement under
section 1852(g)(4) that HCFA contract with an independent outside
entity to review coverage denials; and (2) changes that implement
statutory intent, such as the reduced timeframe for reconsiderations,
which is consistent with both the discretion provided under section
1852(g)(2)(A) and Congress' expectations as stated in the BBA
conference report. (As discussed below, the conference report states
that the Conferees ``* * * assume that the Secretary will address the
issue of [reconsideration] timeframes in the Part C regulations'' and
intend that the Secretary adopt timeframes that are shorter than those
in existing regulations. See H.R. Rep. No. 105-217, pg. 605 (1997).)
The only other substantive changes contained in these requirements are
the incorporation into the regulations of several limited policy
clarifications that have been issued by HCFA as implementing
instructions pursuant to our April 30, 1997 final rule. These changes
are discussed in detail below.
In addition to these limited substantive changes, we have also
taken the opportunity to make numerous editorial and organizational
changes in adopting the part 417 regulation language on beneficiary
appeals for

[[Page 35022]]

purposes of the M+C program. For example, we have added material that
summarizes the rights of M+C enrollees, and we have established
distinct sections that clearly explain the timeframe and notice
requirements for standard and expedited organization determinations.
These types of changes do not affect the rights of beneficiaries or the
responsibilities of M+C organizations with regard to grievances,
organization determinations, and appeals, but we believe they can help
to ensure that these rights and responsibilities are more clearly
understood within the managed care community.
2. General Provisions (Secs. 422.560-522.562)
Subpart M begins with an introductory section (Sec. 422.560) that
simply sets out the statutory basis and scope for the requirements that
follow. Although this material is generally shorter and more concise
than the similar provisions of subpart Q in part 417, we are now
specifying under Sec. 422.560(b) that the rules concerning notice of
noncoverage on inpatient hospital care and immediate peer review
organization (PRO) review procedures for noncoverage determinations
fall within the scope of the M+C subpart M requirements.
Section 422.561 then sets forth several definitions for terms used
in the subpart. Note that some definitions previously located in
subpart Q of part 417 (such as ``ALJ'') have now been included in
Sec. 400.200, rather than in part 422, since they constitute
definitions that apply for all Medicare and Medicaid purposes. Terms
included here that are not defined in existing part 417 include
``appeal,'' ``authorized representative,'' ``enrollee,'' ``grievance,''
and ``physician.'' For the most part, these definitions are self-
explanatory; they do not impose any new requirements on M+C
organizations. For example, we clarify that an ``authorized
representative'' is an individual authorized by an enrollee to act on
his or her behalf in obtaining an organization determination, or in
dealing with any levels of the appeal process, subject to the Social
Security regulations in 20 CFR part 404, subpart R. We also specify
that, for purposes of subpart M, the term ``enrollee'' includes an
enrollee's authorized representative. Together, these definitions
should clarify that the rights of enrollees with respect to grievance
and appeal procedures can consistently be exercised for them by their
authorized representatives, except where specifically proscribed in the
regulations. We also establish that ``physician'' is defined according
to section 1861(r), which is the standard definition for both original
Medicare and the M+C program.
Section 422.562, General Provisions, provides an overview of the
rights and responsibilities of M+C organizations and M+C enrollees with
respect to grievances, organization determinations, and appeals. The
responsibilities of M+C organizations, under Sec. 422.562(a),
essentially parallel those in existing Sec. 417.604(a). We have added a
provision stating that if an M+C organization delegates any of its
responsibilities under subpart M to another entity or individual
through which the organization provides health care services, the M+C
organization is ultimately responsible for ensuring that the applicable
grievance and appeal requirements are still met. This concept is
explicitly stated in section 1852(f) concerning grievance procedures,
and we believe it is equally germane for purposes of organization
determinations and appeals. An M+C organization's responsibility for
functions that it delegates is also established under the contract
requirements set forth in Sec. 422.502(i). (Although we do not
encourage M+C organizations to delegate their grievance, organization
determination or appeal responsibilities, we recognize that
particularly for an M+C non-network MSA plan or an M+C PFFS plan, an
organization offering such a plan may choose to delegate some of these
responsibilities to local entities that can meet the applicable subpart
M requirements.)
Section 422.562(b) explains the basic rights of M+C enrollees under
subpart M and provides regulatory references to the sections that fully
explain the relevant rights. This section does not establish any rights
beyond those now available under the part 417 rules, but consolidates
general information about enrollees' rights into a central location in
the regulations.
Like the part 417 regulations, the general provisions section
concludes with brief sections addressing the applicability of
requirements in subpart M and the applicability of other regulations
under title II of the Act.
3. Grievance Procedures (Sec. 422.564)
As noted above, section 1852(f) requires that each M+C organization
provide ``meaningful procedures for hearing and resolving grievances.''
There is no explicit indication in the statute of what constitutes a
grievance; however, given the provision in section 1856(b)(2) for
basing Part C standards on standards under section 1876, we have
retained the meaning of grievance used in part 417. We have defined
this term in Sec. 422.561 as any complaint or dispute other than one
that involves an ``organization determination'' (as described under
Sec. 422.566(b)).
An enrollee might file a grievance if, for example, the enrollee
received a service but believed that the demeanor of the person
providing the service was insulting or otherwise inappropriate. Also,
as specified under Secs. 422.570(d)(2)(ii) and 422.584(d)(2)(ii),
grievance procedures would apply when an enrollee disagrees with an M+C
organization's decision not to comply with an enrollee's request to
expedite an organization determination or a reconsideration. Under
Sec. 422.564(a), we are requiring that an M+C organization must resolve
grievances in a timely manner and that procedures for doing so must
comply with any guidelines established by HCFA. This guidance would
include forthcoming instructions, rulemaking, and requirements built
into HCFA's Quality Improvement System for Managed Care (QISMC). (See
section II.D of this preamble for more information about QISMC.)
Section 422.564(b) then clarifies that grievance procedures are
separate and distinct from appeal procedures, which address
organization determinations. We also clarify under Sec. 422.564(c) that
the PRO complaint process under section 1154(a)(14) addresses quality
issues, but is separate and distinct from the M+C organization's
grievance procedures.
Although we have not in the past outlined detailed requirements for
a plan's grievance procedures, we considered doing so in this interim
final rule as a means of implementing the requirement under section
1852(f) for meaningful grievance procedures. Accordingly, we consulted
with the managed care industry as well as beneficiary advocacy groups,
reviewed comments we received from the public, and looked to recent
standards in this area, such as those developed by the National
Association of Insurance Commissioners (NAIC). (NAIC has developed and
adopted a Model Grievance Act setting forth standards for grievance
procedures that include timeframes for the resolution of quality-
related issues.) We also recognize that section 1852(c)(2)(C) requires
organizations to provide data on the number of grievances and their
disposition in the aggregate upon an enrollee's request, and we believe
timely processing of grievances is necessary to assist in consistent
data reporting. Thus, we considered requiring certain timeframes for

[[Page 35023]]

addressing grievances and contemplated further clarification of the
definition of a grievance.
However, due to limited time for rulemaking, input we received from
the public opposing mandated grievance procedures, and our
understanding that extensive research is underway concerning State
grievance requirements (the results of which should be available in the
very near future), we have decided not to prescribe specific timeframes
for grievances in this rule and instead to consider doing so through
proposed rulemaking. We plan to address such issues through a future
proposed rule. At this time, we welcome comments on the necessary
elements of a meaningful grievance procedure, including recommended
timeframes, the types of issues that should be considered grievances,
an expedited grievance process, independent review of grievances,
reconsideration of grievances, and the type of notification enrollees
should receive concerning the outcome of their grievance.
4. Organization Determinations (Secs. 422.566 Through 422.576)
Section 1852(g) requires an M+C organization to establish
procedures for hearing and resolving disputes between the organization
and its Medicare enrollees concerning organization determinations.
These rights are similar to those available to beneficiaries under
original Medicare, except that under the M+C program the initial level
of review is typically conducted by the organization itself rather than
by a PRO, intermediary, or carrier.
(For the convenience of the reader, we are presenting below a chart
offering a sequential overview of the available procedures and related
timeframes associated with service-related organization determinations
and appeals. This chart is for illustrative purposes only, and certain
details (such as when extensions are permissible and timeframes for
requests for payment) have been omitted for ease of presentation. For a
full description of the applicable requirements, please consult the
preamble material that follows and the regulations set forth in subpart
M of part 422. Although the chart reflects the maximum allowable
timeframes available to an M+C organization under the M+C regulations
(for service requests), we emphasize that the primary applicable
requirement, as discussed in detail below, is that an M+C organization
make a determination as expeditiously as the enrollee's health
condition requires. In addition, note that maximum timeframes for an
M+C organization to make a payment-related determination are somewhat
longer than for service-related determinations, as is also discussed
below.)

BILLING CODE 4120-01-P

[[Page 35024]]

[GRAPHIC] [TIFF OMITTED] TR26JN98.000

BILLING CODE 4120-01-C

[[Page 35025]]

In accordance with section 1852(g)(1), Sec. 422.566 begins by
specifying that an M+C organization must have a procedure for making
timely organization determinations regarding the benefits an enrollee
is entitled to receive and the amount, if any, that an enrollee must
pay for a health service. We note that under section 1852(g)(1), the
issues that must be addressed through an organization determination
include an enrollee's entitlement to ``receive a health service under
this section.'' (Emphasis added.) Section 1852(a) describes basic
benefits that M+C organizations must offer, as well as supplemental
benefits that organizations may offer. Supplemental benefits may either
be provided to all enrollees on a mandatory basis (with the Secretary's
approval) or provided at the enrollee's option. In both cases, the
enrollee pays for supplemental benefits. Disputes involving
supplemental benefits that are mandatory for all enrollees in a plan
will be organization determinations and subject to the appeal process,
as similar benefits were under part 417. We believe, however, that
optional supplemental benefits should also be included in the meaning
of ``health services under [section 1852]'' and disputes involving
these types of benefits should be the subject of organization
determinations and the appeal process. This policy, which is
incorporated into Sec. 422.566(a), represents a departure from existing
part 417 requirements, where disputes concerning optional supplemental
benefits are not the subject of organization determinations and must be
resolved only through grievance procedures. Section 422.566(b) then
lists actions that are organization determinations, consistent with
existing Sec. 417.606(a) (except for new language to reflect the
inclusion of optional supplemental benefits and the explicit mention of
payment for post-stabilization care, along with payment for emergency
or urgently needed services, which appear already in Sec. 422.606(a)).
Section 422.568 includes the standard timeframe and notice
requirements for organization determinations. Note that this section,
in conjunction with Secs. 422.570 and 422.572, reflect a major
reorganization of the requirements in existing Secs. 417.608 and
417.609. This reorganization was necessary both to help clarify the
different timeframe and notice requirements that apply for expedited
determinations as well as to facilitate the addition of several new BBA
requirements (which are discussed below).
The primary substantive change in Sec. 422.568 is the requirement
under Sec. 422.568(a) that an M+C organization must make a
determination with respect to an enrollee's request for service as
expeditiously as the enrollee's health status requires, and in no case
later than 14 calendar days after the organization receives the
request. As discussed in detail below in section II.M.6 of this
preamble, this new requirement emphasizes making determinations
consistent with an enrollee's health needs, while also providing for a
reduction in the maximum time allowed to make a determination from 60
days, as reflected in Sec. 417.608(a), to 14 days. In conjunction with
the reduced timeframe for making an organization determination, we are
also providing that the M+C organization may extend the timeframe by up
to 14 calendar days if the enrollee requests the extension or if the
organization justifies a need for additional information and how the
delay is in the interest of the enrollee (for example, the receipt of
additional medical evidence from noncontract providers may change an
M+C organization's decision to deny). The M+C organization must include
written justification for the extension in the case file. The length of
the extension period is consistent with the extensions currently
allowed under part 417 for expedited organization determinations.
We note that the maximum timeframes for both organization
determinations and for reconsiderations are now reckoned in ``calendar
days,'' as opposed to ``working days,'' in order to be unambiguous and
consistent with the statute. In addition, under Sec. 422.568(b), we
have specified that timeframes for requests for organization
determinations on payment issues are identical to the ``prompt
payment'' requirements set forth under Sec. 422.520. Thus, for issues
relating to payment, the requirements are as follows: (1) For ``clean
claims,'' an M+C organization must make a determination regarding the
claim within HCFA's current ``clean claim'' rules, that is, 95 percent
of clean claims must be paid within 30 calendar days after receipt of
the request for payment. (As defined in Sec. 422.500, ``clean claims''
are claims that have no defect, impropriety, lack of any required
substantiating documentation, or particular circumstances requiring
special treatment that prevents timely payment.) (2) For all other
claims, an M+C organization must make a determination regarding the
claim within 60 calendar days after receipt of the request for payment.
Consistent with section 1852(g)(1)(B), Sec. 422.568(c) and (d)
require that an M+C organization issue written notification for all
denials, including the specific reasons for the denial in
understandable language, information regarding the enrollee's right to
either an expedited or standard reconsideration, and a description of
both the expedited and standard review processes, as well as the rest
of the appeal process.
Sections 422.570 and 422.572 set forth the requirements for M+C
organizations with respect to expedited determinations. Section
1852(g)(3)(A) specifically allows either an enrollee or a physician to
request an expedited organization determination or reconsideration,
regardless of whether the physician is affiliated with the M+C
organization. We have reflected this provision in Secs. 422.570(a) (for
expedited organization determinations) and 422.584(a) (for expedited
reconsiderations). We have also addressed the issue of the
circumstances under which a physician can request expedited review for
an enrollee. HCFA currently allows any physician to request an
expedited organization determination without being appointed as an
enrollee's authorized representative. In contrast, HCFA requires that a
physician be an enrollee's authorized representative in order for the
physician to request an expedited reconsideration on the enrollee's
behalf. We have made this distinction because, in the context of an
organization determination, we regard the physician as a provider who
is requesting a service for his or her patient. In the context of a
reconsideration, on the other hand, we believe the physician is serving
as the enrollee's representative in the first level of the appeal
process.
We have decided to continue this current policy, and have reflected
in Sec. 422.570(a) that any physician can request an expedited
organization determination, while Sec. 422.584(a) provides that a
physician who requests an expedited reconsideration must be acting on
behalf of the enrollee as an authorized representative. We would also
like to make it clear that, in any case in which a physician is only
supporting an enrollee's request for expedited review, the physician
does not need to be the enrollee's authorized representative.
As mentioned above, the requirements for expedited organization
determinations and the like requirements for expedited reconsiderations
were the subject of HCFA's April 30, 1997 final rule. Section
1852(g)(3) is modeled to a large extent on our existing requirements.
For example, section 1852(g)(3)(B)(ii)

[[Page 35026]]

explicitly states that an M+C organization must expedite its
determination (or its reconsideration of a determination) if a
physician has requested the expedited review and has indicated, either
orally or in writing, that the application of a standard timeframe for
a determination (or reconsideration) could seriously jeopardize the
life or health of the enrollee or the enrollee's ability to regain
maximum function. This new statutory provision reflects the current
provisions in part 417. Sections 417.609(c)(4) and 417.617(c)(4)
require that an HMO or CMP grant a physician's request for expedited
review; however, they do not require that the physician make any
statements about the enrollee's health, as the physician must under
section 1852(g)(3)(B)(ii). In effect, the statute now requires that an
M+C organization must expedite a determination at the physician's
request, that is, providing that the physician's request indicates the
possibility of serious jeopardy to the enrollee.
Section 422.570(b)(2) specifies that a physician may provide
written or oral support for a request for expedition, and under
Sec. 422.570(c)(2)(ii), we clarify that when requests for expedited
organization determinations are made or supported by a physician, the
M+C organization must grant the request if the physician indicates that
the enrollee's health could be jeopardized. In any case in which a
physician has not initiated the request, but supports it, we regard the
physician as having joined in the request and, in effect, as being a
co-requestor. (We note that in a case when an enrollee submitted a
request for an expedited organization determination but did not know
that physician support could automatically expedite a determination, an
enrollee or a physician may submit a subsequent request, including the
physician's statement of support, for an expedited organization or
reconsidered determination.)
These sections also incorporate several details necessary to
clarify current policy, such as the provision in Sec. 422.568(d)(1)
that an M+C organization automatically transfer a denied request for an
expedited organization determination to the standard 14-day timeframe
described in Sec. 422.568(a), and the requirement under
Sec. 422.570(d)(2)(ii) that an M+C organization inform the enrollee of
the right to file a grievance if he or she disagrees with the M+C
organization's decision not to expedite. We also require under
Sec. 422.570(c)(1) that an organization establish an efficient and
convenient means for individuals to submit oral or written requests for
expedited organization determinations and document any oral requests.
Generally, in accordance with the provisions of Sec. 422.570(b)(1), we
would expect that such requests would be submitted directly to the M+C
organization. However, because we recognize that some organizations may
already have established or may wish to establish other convenient
procedures for accepting oral and written requests for expedited
review, we clarify under Sec. 422.570(b)(1) that procedures may involve
submitting a request to another entity responsible for making the
determination, as ``directed by the M+C organization.''
Under section 1852(g)(3)(B)(iii), an M+C organization must notify
the enrollee (and the physician involved, as appropriate) of an
expedited determination. The requirement to notify the physician is
similar to one in Sec. 417.609(c)(3), which requires of an HMO or CMP
``notification of the enrollee, and the physician as appropriate.''
This requirement is set forth in Sec. 422.572(a). Section
1852(g)(3)(B)(iii) also requires that the M+C organization notify the
enrollee and physician of an expedited determination under time limits
established by the Secretary, but not later than 72 hours after
receiving the request (or receiving the information necessary to make
the determination), or such longer period as the Secretary may permit
in specified cases. Under this authority, we are able to retain in
Sec. 422.572(a) the existing 72-hour timeframe for expedited review
that appears in Sec. 417.609(c)(3). Also, we have exercised our
discretion to allow in Sec. 422.572(b) an M+C organization to extend
the 72-hour deadline for expedited review by up to 14 calendar days if
the enrollee requests the extension or if the organization finds that
additional information is needed and the delay is in the interest of
the enrollee.
Thus, the authority in section 1852(g)(3)(B) has allowed us to
retain the recently promulgated regulations on expedited determinations
with only a few clarifications and minor technical changes (for
example, we have changed the 10 working day extension in
Sec. 417.609(c)(3) to 14 calendar days, to be consistent with how we
are counting days under the other section 1852 provisions). We have
added to the regulation an example of the type of reason for which an
extension may be granted, and we have specified that an M+C
organization must notify an enrollee of a determination as
expeditiously as the enrollee's health care needs require but no later
than upon expiration of the extension.
We have also added a provision in both Secs. 422.570(f) and
422.584(f) to prohibit an M+C organization from taking or threatening
to take any punitive action against a physician acting on behalf or in
support of an enrollee in requesting an expedited organization
determination or reconsideration. Since publication of our April 30,
1997 final rule, several national organizations (including the American
Medical Association and the American Association of Retired Persons)
have expressed strong support for a general prohibition that would
prevent retaliation against physicians who act on behalf of or in
support of enrollees to expedite reviews. Moreover, we believe that
this prohibition complements the anti-gag rules incorporated into
subpart E of this interim final rule.
Section 422.574 identifies the parties to an organization
determination. The statute does not specify who can ask for an
organization determination involving the rights of an M+C enrollee to
certain health services. Section 1852(g) does specify that an M+C
organization must reconsider a determination upon the request of the
enrollee, and either the enrollee or a physician can request an
expedited reconsideration. The enrollee specifically has the right to
appeal a reconsidered determination under section 1852(g)(5), a
provision that is almost identical to the appeal provision in section
1876(c)(5)(B) for HMO and CMP enrollees.
We are interpreting these provisions in the same manner as we
interpreted them in part 417 to include not just the enrollee, but also
to allow other parties to exercise those rights. Section 417.610 lists
as parties to an organization determination not just the enrollee, but
certain physicians and other providers who are assignees of the
enrollee, legal representatives of a deceased enrollee's estate, and
the broad category of any other entity determined to have an appealable
interest in the proceeding. These parties can continue to have an
interest in the proceedings throughout each level of an appeal. We have
retained this provision in Sec. 422.574, except that we have modified
Sec. 417.610(d) to include any provider or entity determined to have an
appealable interest. We have also specifically excluded the M+C
organization, since we believe that this entity constitutes the
decision maker, and as such is not a party to an organization
determination.

[[Page 35027]]

5. Reconsiderations by an M+C Organization (Secs. 422.578 Through
422.590)
If a decision regarding a request for payment or service is
unfavorable (in whole or in part) to the enrollee, the enrollee or any
other party to an organization determination as listed in Sec. 422.574
who is dissatisfied with the organization determination may request
that the M+C organization reconsider the decision. Reconsiderations
represent the first step in the appeal process. The reconsideration
process encompasses both standard and expedited reconsiderations, as
described under Secs. 422.582 and 422.584. The timeframe and notice
requirements for reconsiderations are set forth under Sec. 422.590.
One important distinction between organization determinations and
reconsiderations is that an M+C organization issues a reconsidered
determination only if the reconsideration is entirely favorable to the
enrollee. As discussed in detail below, Sec. 422.590(a)(1) now requires
that with respect to standard reconsiderations concerning requests for
service, an M+C organization must issue any determination that is
entirely favorable to the enrollee as expeditiously as the enrollee's
health condition requires but no later than 30 calendar days after it
receives the request for reconsideration. (As with organization
determinations, we are also providing under Sec. 422.590(a) that the
M+C organization may extend the timeframe by up to 14 calendar days if
the enrollee requests the extension or if the organization justifies a
need for additional information and how the delay is in the interest of
the enrollee.) Under Sec. 422.590(b)(1), for standard reconsiderations
involving requests for payment, the M+C organization must issue any
fully favorable determination no later than 60 calendar days from the
date it receives the request for the reconsideration. In the case of
expedited reconsiderations (which involve only requests for services),
Sec. 422.590(d)(1) requires that an M+C organization issue any
determination that is entirely favorable to the enrollee as
expeditiously as the enrollee's health condition requires but no later
than 72 hours after it receives the request for expedited
reconsideration, again with the possibility of a 14-day extension as
described in Sec. 422.590(d)(2). If, however, the M+C organization's
reconsideration results in an affirmation, in whole or in part, of its
original adverse organization determination, this decision is
automatically subject to further review by an independent entity
contracted by HCFA. (Again, the timeframe within which an M+C
organization must reconsider a standard or expedited case has been tied
to the enrollee's health needs for service requests, subject to either
a 30-day or 72-hour maximum (with a possible 14-day extension), while
the timeframe remains at 60 days for reconsideration requests involving
payment.)
Section 1852(g)(4) of the Act requires HCFA to contract with an
independent, outside entity to review and resolve in a timely manner
reconsiderations that affirm, in whole or in part, an M+C
organization's denial of coverage. Thus, unless an organization
completely reverses its coverage denial, the M+C organization must
prepare a written explanation and refer the case to the independent
review entity for a new and impartial determination concerning the
payment or service at issue. This requirement is consistent with
existing policy. Under Sec. 417.620, an HMO or CMP that recommends
partial or complete affirmation of its adverse determination must
prepare a written explanation and send the entire case to HCFA, so that
HCFA can make the reconsidered determination. We have in the past
contracted with an independent outside entity, the Center for Health
Dispute Resolution (CHDR), to perform this function.
For standard requests for services, Sec. 422.590(a)(2) requires
that the M+C organization send the case to the independent review
entity as expeditiously as the enrollee's health requires, but no later
than 30 calendar days from the date it receives the request for a
standard reconsideration (or the date of an expiration of an
extension). For standard requests for payment, Sec. 422.590(b)(2)
allows the M+C organization 60 calendar days from the date it receives
the request to send the case to the independent review entity. In
instances involving expedited requests for reconsideration,
Sec. 422.590(d)(5) requires that the M+C organization forward its
decision to the independent entity as expeditiously as the enrollee's
health condition requires, but not later than within 24 hours of its
affirmation of the adverse organization determination.
Section 1852(g)(2)(B) requires that any reconsideration that
relates to a determination to deny coverage based on a lack of medical
necessity must be made only by ``a physician with appropriate expertise
in the field of medicine which necessitates treatment.'' We have
interpreted this requirement in Sec. 422.590(g)(2) to refer to a
physician with an expertise in the field of medicine that is
appropriate for the services at issue. The statute also requires that
the physician be one other than the physician involved in the initial
determination. We believe this requirement is implicit in the provision
in Sec. 422.590(g)(1) that the reconsideration be conducted by a person
not involved in making the organization determination.
For the most part, the procedures outlined above are consistent
with the existing part 417 requirements and are carried over into
subpart M of part 422--all significant discretionary changes (such as
the timeframe reductions) as well as statutory requirements (such as
required physician review of certain coverage denials) are discussed in
this preamble. We also are implementing several changes in the
reconsideration requirements that are analogous to those described for
organization determinations, such as the requirement under
Sec. 422.584(d)(1) that an M+C organization automatically transfer a
denied request for an expedited reconsideration to the standard 30-day
timeframe described in Sec. 422.590(a). In addition, Sec. 422.590(e)
requires that if an M+C organization refers a case to the independent
entity, it must concurrently notify the enrollee of that action.
6. Reduction of Timeframes for Standard Organization Determinations and
Reconsidered Determinations
As noted above, section 1852(g)(1)(A) requires that M+C
organizations make organization determinations ``on a timely basis.''
For standard (non-expedited) reconsiderations, section 1852(g)(2)(A)
specifies that a decision must be made no later than 60 days after the
enrollee's request, but the Act provides the Secretary with discretion
to reduce the timeframe. Again, the BBA conference report (H.R. Rep.
No. 105-217, at pg. 605 (1997)) indicates Congress' understanding that
HCFA was developing proposed regulations that would reduce existing
timeframes and that these efforts could instead be incorporated into
the regulations implementing the M+C program. Consequently, we have
decided to exercise such discretion and to reduce the timeframes within
which M+C organizations must render both standard organization and
reconsidered determinations involving requests for service.
In researching this issue, we found widespread support for reducing
timeframes for standard determinations in both medical journals and
reports

[[Page 35028]]

from other independent entities. For example, the Physician Payment
Review Commission's (PPRC) 1996 Annual Report to Congress listed ``the
timeliness of the process, especially for pre-service denials'' as one
of the areas requiring improvement in the current appeal process. PPRC
reported that ``[c]onsiderable delays are built into the [appeal]
process.'' Likewise, the Medicare Rights Center (MRC) recently
recommended that HCFA require health plans to make non-expedited
organization determinations within 10 days of receiving the request.
The MRC also recommended that HCFA require health plans to make non-
expedited reconsiderations within 20 days.
The 60-day timeframes in part 417 for organization and reconsidered
determinations were based on the original fee-for-service Medicare
appeal process. However, this process is mostly retrospective. In
coordinated care plans, preservice requests for organization
determinations exceed the number of retrospective requests. Reduced
timeframes often are of critical importance--particularly when an
individual is awaiting prior authorization for a service. Therefore, we
believe there is a compelling need to reduce the current timeframe of
60 days for determinations regarding the provision of services in M+C
organizations.

Options Considered

In developing this rule, we consulted with beneficiary advocacy
groups and the managed care industry concerning several policy options,
and reviewed comments received from the public. The groups agreed that
the current 60-day timeframe to issue organization and reconsidered
determinations was too long. A representative of HCFA's independent
contractor, the Center for Health Dispute Resolution (CHDR), also
agreed that 60 days was too long for processing determinations.
Beneficiary advocacy groups indicated that the timeframe for
rendering standard service-related organization determinations and
reconsiderations should be no more than a total of 20-30 days.
Advocates reported (and our research supports) that many States require
determinations within 30 days. Additionally, beneficiary advocates
indicated strong support for the judgment of the United States District
Court for the District of Arizona in Grijalva, et al. v. Shalala (Civ.
93-711, 1997). That case involved the appeal rights of Medicare
beneficiaries who were members of HMOs and had their requests for
services denied. The court's judgement in Grijalva prescribes various
procedures to be used for beneficiary appeals in Medicare managed care
programs, including the requirement that the HMO make a decision within
5 days, with an opportunity for a 60-day extension if there are
exceptional circumstances.
Representatives of the managed care industry recommended that we
adopt the National Committee for Quality Assurance's (NCQA) standard of
10 working days (or 14 calendar days) for organization determinations--
with an opportunity for an extension. It was also noted that decisions
on reconsiderations often take more time than organization
determinations. The industry representatives agreed that, in many
cases, plans process reconsiderations in less than 30 days, but that
often times, additional time is needed to gather information (e.g.,
medical records). The industry representatives noted that in some
instances, allowing extra time to collect information is advantageous
to the beneficiary.
Based on all of this information, we are implementing revised
requirements from those in part 417 for an M+C organization when it
issues standard organization determinations or reconsiderations. These
revised requirements include a reduction in the maximum timeframes from
60 days to 14 days for standard organization determinations involving
requests for service, and from 60 days to 30 days for standard
reconsiderations involving requests for service. (In both cases, 14-day
extensions would be permissible under certain circumstances, as
discussed above.) More important, Secs. 422.568 and 422.590 establish
for the first time the requirement that M+C organizations make both
their organization and reconsidered determinations as expeditiously as
the enrollee's health condition requires. We believe that this emphasis
on the health needs of the individual enrollee is consistent with the
statutory requirement that determinations be made on a timely basis.
Thus, the fact that an organization makes a determination on a service-
related issue within 14 days does not necessarily constitute compliance
with the regulations if there is evidence that an earlier determination
was necessary to prevent harm to the enrollee's health.
7. Reconsiderations by an Independent Entity (Secs. 422.592 and
422.594)
Section 1852(g)(4) requires the Secretary to contract with an
independent, outside entity to review and resolve in a timely manner
reconsiderations that affirm denial of coverage, in whole or in part.
HCFA has held such a contract for services from an independent review
entity for 9 years. Section 422.592 reiterates the statutory
requirement. It also articulates the principle that the independent
entity must conduct reviews as expeditiously as the enrollee's health
requires, but not to exceed the deadlines specified in its contract
with HCFA.
For standard reconsiderations, the contractor historically has been
able to process most cases within 30 days. We will require the
contractor to meet the standard articulated for M+C organizations at
section 422.590; that is, subject to considerations of medical
exigency, the contractor must process standard reconsiderations within
30 days, with the possibility of an extension. As part of our new
requirement to collect and report information regarding beneficiary
appeals, we will monitor all exceptions to deadlines and reasons for
delay. In cases in which the delay is due to the failure of the M+C
organization to supply the contractor with requested information in a
timely manner, we will generally instruct the contractor to find in the
beneficiary's favor on any issue that it cannot decide without the
information in question. (When an M+C organization has conducted a
reconsideration, it presumably will have already collected all the
relevant documents and other information needed to make the decision.
However, our experience demonstrates that the independent reviewer must
sometimes request additional material in order to have a complete
record of the dispute.)
For expedited cases, we will require the contractor to make a
decision as quickly as the enrollee's condition requires, or within 72
hours (with the possibility of an extension under certain
circumstances), in accordance with the expedited reconsideration
requirements for M+C organizations under Sec. 422.590(d). As with
standard reconsiderations, we will monitor cases that exceed this
deadline along with the reasons for the delay. If any delay is due to
the failure of the M+C organization to supply the contractor with
requested information in a timely manner, we will generally instruct
the contractor to find in the beneficiary's favor on any issue that it
cannot decide without the information in question.
In order to provide more guidance to both our contractor and the
M+C organizations with which we will contract, we will work with them
and other interested parties to develop common guidelines for
identifying those cases that require immediate attention due to the
enrollee's health condition.

[[Page 35029]]

These guidelines will build upon, but not be limited to, the criteria
that M+C organizations must use to evaluate whether a case should be
expedited, currently contained in Sec. 422.570(c)(2). We will issue
this information as part of forthcoming manual instructions.
8. Administrative Law Judge (ALJ) Hearings, Departmental Appeals Board
(DAB) Hearings, and Judicial Review (Secs. 422.600 Through 422.612)
If the independent reviewer's reconsidered determination is not
fully favorable to the enrollee, any of the parties listed in
Sec. 422.574 has a right to request a hearing before an ALJ of the
Social Security Administration if the amount remaining in controversy
is $100 or more. (Note that the M+C organization does not have a right
to request a hearing before the ALJ.) If the ALJ hearing does not
result in a fully favorable determination, any party (including the M+C
organization) may request that the Appeals Council of the DAB review
the ALJ decision. Following the administrative review process, any
party (including the M+C organization) is entitled to judicial review
of the final determination if the amount remaining in controversy is
$1,000 or more. In establishing the requirements for M+C organizations,
we have clarified and adopted the existing requirements in part 417,
with one exception. That is, consistent with section 1852(g)(5), we
require under Sec. 422.612(a) that a party who wishes to request
judicial review of an ALJ's decision must notify the other parties
involved.
9. Effectuation of a Reconsidered Determination or Decision
(Sec. 422.618)
Based on public reaction to our April 30, 1997 final rule, we
believe there may be a need for explicit regulatory requirements
concerning an M+C organization's effectuation of (that is, an
organization's compliance with) an appeal determination or decision.
Therefore, we are including at Sec. 422.618 (and referencing at
Sec. 422.590(a)(1) and (b)(1)) several requirements that constitute a
restatement of HCFA's longstanding policy in this regard (with a
corresponding timeframe reduction from 60 to 30 days in the case of
service-related reconsiderations). (See sections 2405.4 and 2405.5 of
the HMO/CMP Manual Transmittal 6, issued in March, 1991.) Specifically,
Sec. 422.618(a)(1) requires that if, on reconsideration of a request
for service, an M+C organization reverses its adverse organization
determination, the organization must authorize or provide the service
under dispute as expeditiously as the enrollee's health requires, but
no later than 30 calendar days after the date the M+C organization
receives the request for reconsideration (or no later than upon
expiration of an extension described in Sec. 422.590(a)(1)). For
reconsideration of requests for payment, Sec. 422.618(a)(2) requires
that if an M+C organization reverses its adverse organization
determination, the organization must pay for the service no later than
60 calendar days after the date the M+C organization receives the
request for reconsideration. Similarly, under Sec. 422.618(b), if an
M+C organization's adverse organization determination is reversed in
whole or in part by the independent entity's reconsideration or at a
higher level of appeal, the M+C organization must pay for, authorize,
or provide the service under dispute as expeditiously as the enrollee's
health condition requires, but no later than 60 calendar days from the
date the M+C organization receives notice reversing its organization
determination. The M+C organization must also inform the independent,
outside entity that it has effectuated the decision.
10. Noncoverage of Inpatient Hospital Care--Notice and PRO Review
(Secs. 422.620 and 422.622)
Under Sec. 422.620, we are largely incorporating the existing
requirements under Sec. 417.440(f) concerning notice of noncoverage of
inpatient hospital care. Section 417.440(f) requires that if an
enrollee in an HMO or CMP is a hospital inpatient, the enrollee remains
entitled to inpatient care until he or she receives notice that the
care is no longer covered. We have revised this provision, however, to
make it clear that inpatient services only continue to be covered until
there is a notice of noncoverage in situations in which the hospital
admission was authorized in the first instance by the M+C organization
or in which the admission constituted emergency or urgently needed
care, as described in Secs. 422.2 and 422.112(b). This clarification is
warranted in light of the fact that an M+C organization offering an M+C
non-network MSA or private fee-for-service plan has the right to deny
coverage retroactively for a hospital stay involving nonemergency or
nonurgently needed care on the grounds that it was not medically
necessary. Also, this would make it clear that an M+C organization does
not have to make payment under an MSA plan if the deductible has not
been satisfied.
Section 422.622 explains our requirements with respect to an
enrollee's right to PRO review of a determination by an M+C
organization or a hospital that inpatient care is no longer necessary.
Under existing Sec. 417.605, Medicare managed care enrollees have
two protections available to them when they believe they are being
discharged prematurely from a hospital--immediate PRO Review or an HMO
or CMP's internal expedited appeal process. Under Sec. 417.604(b),
enrollees may elect one appeal right or the other; exercising one right
eliminates the right to the other.
We believe that the PRO review process offers significant
advantages to enrollees, most significantly the protection from
financial liability for a continued hospital stay until noon of the
calendar day following the day the PRO notifies the enrollee of its
review determination. Additionally, PROs generally communicate directly
with the Medicare enrollee (or authorized representative) during the
review, conduct their reviews of an alleged premature discharge within
3 days, and use nurses and physicians to conduct the reviews. In
contrast, enrollees who file for an expedited review with the managed
care organization are not protected from financial liability during an
appeal. The HMO or CMP has 72 hours to conduct the review. If the
organization is unable to issue a fully favorable decision to the
enrollee, the case file will be forwarded to the independent
contractor.
In developing the M+C requirements with respect to this issue, we
considered whether the regulations should require enrollees of M+C
organizations to exercise their right to immediate PRO review. We
consulted with representatives of both the managed care industry and
beneficiary advocates. The groups with which we consulted indicated
that the immediate PRO review process appears to be a better option for
the enrollee. As noted previously, PRO review provides financial
protection, direct communication between the PRO and the enrollee, and
a decision that is generally rendered more quickly than a managed care
plan's determination. However, we were not certain whether we should
limit beneficiaries to one option. Particularly in the event that an
enrollee misses the deadline for filing with the PRO, we believe that
the enrollee should retain the option of filing an expedited appeal
with the M+C organization.
Based on this review, we have concluded that the appropriate course
is to draft the M+C requirements so as to make it clear that it is in
the best interest of an M+C enrollee to request PRO review if the
individual believes that he

[[Page 35030]]

or she is being discharged from a hospital prematurely. Thus,
Sec. 422.622(a)(1) specifies that: ``An enrollee who wishes to appeal a
determination by an M+C organization or hospital that inpatient care is
no longer necessary must request immediate PRO review. * * * An
enrollee who requests immediate PRO review may remain in the hospital
without further financial liability [subject to the provisions of
Sec. 422.622(c)]'' (until PRO review is completed). Section
422.622(a)(2) then provides that an enrollee who fails to make a timely
request for PRO review still has the option of requesting an expedited
reconsideration from the M+C organization, although the financial
liability protections associated with the PRO review process do not
apply. We believe that this regulatory construction makes it clear that
enrollees are expected, for their own benefit, to avail themselves of
the PRO review process, but does not eliminate the fall-back option of
the M+C organization's expedited review process for those enrollees who
fail to request PRO review on a timely basis.
We have made further revisions to the language in Sec. 417.605 to
adapt this provision to the new M+C MSA and private fee-for-service
plan options. As discussed above in connection with the notice of non-
coverage requirement in Sec. 422.620, under these plan options, an M+C
organization may not be aware that an enrollee has been hospitalized,
and has the right to deny coverage of such a hospitalization on the
grounds that the stay was not medically necessary. Also, in the case of
an enrollee in an M+C MSA plan, the individual may not have reached the
deductible under the plan, and therefore payment for medically
necessary hospital services shall be applied to the deductible. We thus
have made it clear in Sec. 422.622(c)(1) that if an M+C organization
did not authorize coverage of a hospital admission, and notifies the
enrollee that a continued stay is not covered, the organization is not
required to pay for services while the enrollee pursues an appeal with
a PRO (that is, unless and until it is determined on appeal that the
hospital stay should have been covered under the M+C plan). We have
qualified this statement to provide that the M+C organization is
obligated to pay for continued services if the enrollee was
hospitalized in order to receive emergency services or urgently needed
care as described in Secs. 422.2 and 422.112(b), since these services
do not require prior authorization.
In cases in which the hospital makes a determination that hospital
services are no longer needed, section 1154(e)(4)(B) of the Act
expressly precludes the hospital from charging a Medicare beneficiary
for services during the period that a PRO is reviewing an appeal under
section 1154(e). We have reflected this statutory provision in
Sec. 422.622(c)(2).
11. Conclusion
In developing the organization determination, appeal and grievance
requirements for M+C organizations, we have undertaken a broad review
of the existing Medicare managed care requirements. We have consulted
with representatives of beneficiary advocacy groups and the managed
care industry concerning several policy options. We believe that we
have included in this interim final rule those improvements that were
practical within the short timeframe allotted for rulemaking. In
addition to the changes made in this rule, we intend to publish a
notice of proposed rulemaking in the near future to implement a variety
of other improvements in the M+C dispute resolution process.
Therefore, we welcome comments, concerns, and ideas on all issues
discussed in this interim final rule, as well as on the overall
organizational changes incorporated into these regulations. In
particular, as noted above, we would appreciate comments on whether
HCFA should specify requirements (such as timeframes) for meaningful
grievance procedures. We also are seeking additional comments on
establishing effective and efficient parameters as to when a reduction
in services (for example, a reduction in prescription dosage, skilled
nursing facility coverage, home health care or outpatient visits)
constitutes a denial that gives rise to an obligation to provide
written notice. Comments are also welcome on whether notification
requirements should apply in all instances of service discontinuations,
as opposed to only when an enrollee indicates that he or she disagrees
with such a discontinuation, as provided under Sec. 422.566(b)(4).
Finally, we would appreciate input on categories of meaningful data
elements for reporting plan-level grievances and appeals. We believe
such comments can assist with our data collection and reporting efforts
(as required by the BBA) and in promoting consistency at the plan level
in data collection and reporting. We welcome all suggestions for other
improvements to the M+C grievance, organization determination and
appeal processes.

N. Medicare Contract Appeals

Subpart N of this interim final rule sets forth procedures for
making and reviewing the following contract determinations: (1) A
determination that an entity is not qualified to enter into a contract
with HCFA under Part C of title XVIII of the Act; (2) a determination
to terminate a contract with an M+C organization; and (3) a
determination not to authorize a renewal of a contract with an M+C
organization. Pursuant to at section 1856(b)(2), which provides for the
adoption of standards under section 1876 to implement analagous
provisions in the new Part C, the procedures set forth in subpart N of
part 422 are for the most part modeled after the contract appeal
procedures currently in place with regard to HMO and CMP contracts
under section 1876, which are set forth at 42 CFR part 417 subpart R.
We describe below the provisions of new subpart N of part 422 that are
not identical to 42 CFR part 417.
Section 422.641 sets forth the contract determinations that are
subject to the reconsideration and appeals procedures in subpart N.
Section 422.644(a) specifies that when HCFA makes a contract
determination, it provides the M+C organizations written notice
specifying reasons for the determination and M+C organization rights
pursuant to a reconsideration.
Under, Sec. 422.644(d) a HCFA notice that it has decided not to
authorize an M+C organization contract renewal is sent to the M+C
organization by May 1 of the current contract year. (Note that while
this notice informs an M+C organizations of its right to appeal a
decision not to authorize a renewal, a contract will not be renewed
unless an affirmative notice authorizing renewal is sent by HCFA. See
Sec. 422.506(b)(2).) The May 1 deadline specified above should afford
HCFA enough time to consider any M+C organization's request for
reconsideration and still afford adequate time for HCFA to ensure the
accuracy of its printed and electronic material utilized in the annual
health fair.
If HCFA decides to terminate a contract under Sec. 422.644(c) for
reasons other than those specified at 422.510(a)(5) it must provide
notice to the M+C organization by mail at least 90 days before the
intended date of the termination. Consistent with section 1857(h)(2),
which provides for immediate termination where there is an ``imminent
and serious risk'' to enrollee health and pursuant to our rulemaking
authority at section 1856(b)(1), in Sec. 422.644(c) we also provide a
separate notice timeframe for immediate terminations discussed in

[[Page 35031]]

Sec. 422.510(a)(5). See section K of this preamble. Pursuant to
violations described in Sec. 422.510(a)(5), HCFA will notify the M+C
organization in writing that its contract has been terminated effective
the date of the termination decision by HCFA. We believe that in
instances where the life and physical well being of beneficiaries is in
jeopardy, HCFA must have the ability to immediately sever its
relationship with an M+C organization in order to protect beneficiaries
and to safeguard taxpayer confidence in HCFA's administration of the
Medicare program.
Section 422.646 states that initial contract determinations are
final and binding unless the determination is reconsidered in a manner
consistent with applicable requirements described in Sec. 422.648. In
Sec. 422.650(b) we have shortened the deadline for filing a request for
reconsideration to 15 days from the sixty days allowed for HMOs and
CMPs under Sec. 417.650(b), and have eliminated the provision made in
Sec. 417.650(c) for a deadline extension for good cause. We believe the
time frames afforded under Sec. 422.650 still provide M+C organizations
sufficient time to prepare a request for reconsideration of the
contract determination at issue, should the organization decide to do
so.
As in the case of the deadline for requesting reconsideration, and
based on our rulemaking authority at section 1856(b)(1), in
Sec. 422.662(b), we have shortened the 60 day time period for
requesting a hearing under Sec. 417.662(b) to 15 days. We also have
again eliminated ``good cause'' extension authority that was found in
Sec. 417.662(c).
Like Sec. 417.664(a), Sec. 422.664(a) provides that the effective
date of a determination to terminate a contract will be postponed until
after a final decision is rendered on any M+C organization appeal.
Section 422.664(b) also follows Sec. 417.664(b) in providing that a
request for a hearing will not postpone a decision not to authorize a
contract renewal unless HCFA finds an extension of the contract past
its expiration date consistent with the purposes of Part C. There are
two significant differences between Sec. 417.664 and Sec. 422.664,
however. First, as discussed below, Sec. 417.664 provides that in the
case of a termination only, the general rule is that the termination
will be postponed until after an additional post-hearing decision level
of review required under section 1857(h)(1)(B). Second, Sec. 422.664(c)
implements the ``imminent and serious risk to health'' exception in
section 1857(h)(2), under which a termination can take effect
immediately, and will not be postponed while an appeal is pursued.
Specifically, when a contract termination decision is based upon
Sec. 422.510(a)(5), discussed in section K above, the termination is
effective immediately. While the M+C organization still has the right
to appeal the termination, this appeal will not prevent the termination
from taking effect.
In Sec. 422.670, pursuant to our rulemaking authority at section
1856(b)(1), we have added a requirement that the hearing officer
establish a time and place for the hearing within 30 days of the date
of their receipt of the request for a hearing. Again, this time
constraint has been added because we believe it is necessary to impose
time-weighted discipline on the reconsideration process that
strengthens HCFA's enforcement capabilities while simultaneously
enhancing beneficiary protections. Changing the time frame from the
open-ended language provided under Sec. 417.670 to the 30-day time
frame provided at Sec. 422.670 accomplishes these goals.
In Sec. 422.692, we provide in the case of termination decisions
only for an appeal from the hearing decision, as required under section
1857(h)(2) before a termination can take effect. We have provided for
review of a hearing officer's decision by the Administrator, under
similar procedures to those used for the Administrator's review of
decisions of the Provider Reimbursement Review Board pursuant to
Sec. 405.1875.

O. Intermediate Sanctions

The M+C organization actions subject to intermediate sanctions and
civil money penalties are substantially the same as those established
at Sec. 417.500 for section 1876 contracting plans. However, there are
some exceptions. Since the 50/50 enrollment requirement has been
dropped, so have the accompanying intermediate sanctions.
The BBA also contains additional sanction authority not found in
Sec. 417.500, which we are implementing in subpart O. First, the BBA
retains and modifies new section 1876 intermediate sanction and civil
money penalty authority originally enacted in the Health Insurance
Portability and Accountability Act of 1996 (HIPAA). This authority has
not been implemented in Sec. 417.500. Under this new authority (in
section 1876(i)(1) for HMOs and CMPs and in section 1857(g)(3) for the
M+C program), intermediate sanctions and civil money penalties can be
imposed on the same grounds upon which a contract could be terminated.
See discussion of contract termination in sections K. and N. above.
Under the section 1876 provision, the procedures now found in section
1857(h)(1), discussed in section N. above, applied to the new HIPAA
sanction authority, and had to be followed before sanctions based upon
this new HIPAA authority could be imposed. Under the BBA, however,
sanctions based on the grounds for termination in section 1857(c)(2)
can be imposed on the same terms as the sanctions in Sec. 417.500. See
section 1857(g)(3). As discussed above in section K., in
Sec. 422.510(a)(4) through (a)(11), we have identified specific M+C
organization behaviors that we believe meet one of the broad grounds
for termination in section 1857(c)(2). Under the authority in section
1857(g)(3) to impose sanctions where the grounds in section 1857(c)(2)
exist, intermediate sanctions can be imposed for any of the violations
identified in Sec. 422.510(a), and we so provide in Sec. 422.752(b).
Finally, private fee for service plans are subject to intermediate
sanctions if they fail to enforce the balance billing limit that
applies to charges to plan members by contracting providers. See
discussion of these provisions in section IV. of this preamble.
The process for imposing all of the M+C intermediate sanctions will
largely be the same as established under Sec. 417.500. Under this
process, when HCFA determines that a sanctionable violation has
occurred, it notifies the M+C organization that enrollment and
marketing must be suspended (or, alternatively, in the case of some
violations, payment for new enrollees will be suspended) in 15 days,
unless the organization provides evidence that HCFA's determination is
incorrect. There is an exception to this 15 day delay in the effective
date of the sanctions if HCFA determines that the M+C organization's
conduct poses a serious threat to an enrollee's health and safety. See
Sec. 422.756(d)(2). In addition to or in place of these intermediate
sanctions, civil money penalties may be imposed for the same underlying
violations. For any of the violations that were previously set forth in
Sec. 417.500, and are now in Sec. 422.752(a), the Office of Inspector
General imposes civil money penalties in accordance with 42 CFR part
1003. In the case of the new HIPAA sanction authority discussed above,
HCFA imposes civil money penalties, with the exception of a
determination under Sec. 422.510(a)(4), based upon fraudulent behavior
by an M+C organization. In this latter case, OIG imposes civil money
penalties.

[[Page 35032]]

P. Technical and Conforming Changes

This interim final rule makes a number of technical and conforming
changes to part 422 subpart H (which was established by an interim
final rule published on April 14, 1998 (63 FR 18124) and amended by an
interim final rule published on May 7, 1998 (63 FR 25360) For example,
we remove the definition of ``health care provider'' from subpart H. We
do this because this rule establishes a definition of ``provider'' in
subpart A of part 422 for purposes of the entire part that is exactly
the same as the definition of ``health care provider'' appearing in
subpart H. Further, as a conforming change, we then change ``health
care provider'' wherever it appears in subpart H to ``provider.''
In addition to the additions and revisions to part 422 of our
regulations discussed throughout this document, this interim final rule
also makes a number of technical and conforming changes to the
following parts of 42 CFR: 400, 410, 411, and 417. These changes, which
are generally in the form of redesignations and nomenclature changes,
are made in order to bring our regulations into conformity with the
provisions of the section 4001 through 4006 of the BBA.
We have also made a conforming change to 42 CFR part 403 ``Special
Programs and Projects,'' with regard to Medicare supplemental policies.
As Medicare does not cover the total cost of providing medical care,
approximately 75 percent of Medicare beneficiaries purchase or have
available through their own, or a spouse's employment or former
employment, some type of private supplemental health insurance
coverage. This kind of insurance helps to pay for expenses, services,
and supplies that Medicare either does not cover or does not pay in
full such as coinsurance or deductible charges, prescription drugs, and
some long term care services. This coverage is ordinarily referred to
as Medicare supplemental (Medigap) insurance. The BBA, in section 4003,
provides that an M+C plan is not considered a Medicare supplementary
policy. Therefore, we are revising Sec. 403.205 to specify that a
Medicare supplemental policy does not include a M+C plan. We are aware
of other provisions in that statute affecting the Medigap area, but
those are included or will be covered under the National Association of
Insurance Commissioners (NAIC) Model Standards in line with existing
Sec. 403.210. NAIC works with us to annually update the Model Standards
with regard to changes to the Medicare supplemental insurance area.

Q. Transition Information for Current Medicare Program

Section 4002 of the BBA included a number of provisions that were
effective upon enactment for eligible organizations with section 1876
contracts or section 1833 agreements or that would alter the
requirements for those contractors that remained in force following the
implementation of the M+C program. The provisions that were effective
upon enactment were conveyed to current contractors through operational
policy letters (OPLs) numbered 61, 63, and 65 and available to the
public on HCFA's Internet homepage. Most of the provisions convey
automatically with the publication of the Part C regulations, either
contained in the newly-established part 422 or contained in conforming
changes to part 417, while others simply created operational impacts
during the transition year of 1998.
The BBA in section 4002(a) immediately changed the required
enrollment composition of 50 percent Medicare and Medicaid, and 50
percent commercial under section 1876 to: (1) Consider only Medicare
members for 50 percent of the enrollment, and (2) permit waiver of the
requirement when it is ``in the public interest.'' All enrollment
composition requirements for Medicare contractors are eliminated
beginning with contract periods on or after January 1, 1999.
The BBA in section 4002(j) changed the definition of a health care
prepayment plan (HCPP) to mean: (1) An organization that is Union or
Employer sponsored; or (2) an organization that does not provide, or
arrange for the provision of any inpatient hospital services. Current
HCPPs must meet this definition on January 1, 1999 and new 1998
applicants must meet the definition as of the effective date of the
HCPP agreement. Also, as of January 1, 1999, HCPPs are not required to
meet Medigap requirements.
The BBA also affected section 1876 cost contracts. Upon enactment
of the BBA (August 5, 1997), the Secretary may not enter into new
section 1876 cost contracts, except for current HCPPs that converted to
section 1876 cost contracts. Also, 1876 cost contracts may not be
extended or renewed beyond December 31, 2002.

III. Medicare+Choice MSA Plans

A. Background

As noted above, among the type of M+C options available under
section 1851(a)(2) of the Act is an M+C MSA plan, that is, a
combination of a high deductible M+C insurance plan and a contribution
to an M+C MSA. Section 1859(b)(3)(A) of the Act defines an MSA plan as
an M+C plan that:
<bullet> Provides reimbursement for at least all Medicare-covered
items and services (except hospice services) after an enrollee incurs
countable expenses equal to the amount of the plan's annual deductible.
<bullet> Counts for purposes of the annual deductible at least all
amounts that would have been payable under original Medicare if the
individual receiving the services in question was a Medicare
beneficiary not enrolled in an M+C plan, including amounts that would
be paid by the beneficiary in the form of deductibles or coinsurance.
<bullet> After the annual deductible is reached, provides a level
of reimbursement equal to at least the lesser of actual expenses or the
amount that would have been paid under original Medicare if the
individual receiving the services in question was a Medicare
beneficiary not enrolled in an M+C plan, including amounts that would
be paid by the beneficiary in the form of deductibles or coinsurance.
Eligible individuals may enroll in M+C MSA plans effective January
1, 1999. Section 1859(b)(3)(B) sets the maximum annual deductible under
an M+C MSA plan for 1999 at $6,000, with changes for future years to be
based on the national per capita M+C growth percentage established
under section 1853(c)(6). (See section II.F of this preamble.) In this
interim final rule, we are seeking comment regarding establishing,
pursuant to our general authority under section 1856(b)(1), a minimum
deductible under an M+C MSA plan. As discussed below, one possibility
would be to establish a minimum deductible equal to the projected
actuarial value of the average per capita copayment under original
Medicare, rounded to the nearest $50.
Section 4006 of the BBA adds new section 138 of the Internal
Revenue Code of 1986 containing Internal Revenue Service (IRS) rules
concerning M+C MSAs. In general, an M+C MSA is a tax-exempt trust
created solely for the purpose of paying the qualified medical expenses
of the account holder. The account may be established only in
connection with an M+C MSA plan, and must consist only of contributions
from HCFA under the M+C program or of

[[Page 35033]]

transfers from another M+C MSA, if an enrollee has set up more than one
M+C MSA. Section 138 also sets forth IRS rules concerning the
distribution of MSA funds and tax penalties associated with the
distribution of funds from an M+C MSA for purposes other than paying
the qualified medical expenses of the account holder. (These provisions
are discussed below in section III.J of this preamble.)
In establishing the M+C MSA option, Congress specified under
section 1851(b)(4) of the Act that the opportunity to enroll in an M+C
MSA plan was available on a demonstration basis to up to 390,000
enrollees through December 31, 2002. The Secretary is charged with
regularly evaluating the impact of permitting enrollment in M+C MSA
plans and with submitting a report to Congress by March 1, 2002,
concerning the effects of the M+C MSA program and whether it should be
extended beyond 2002.
The introduction of M+C MSAs builds upon the private market MSA
demonstration program now available to small employers and the self-
employed under the Health Insurance Portability and Accountability Act
of 1996 (HIPAA). Like the HIPAA demonstration, the BBA conference
report (H.R. 105-217, pg. 585) indicates that the introduction of M+C
MSAs is premised on the need for beneficiaries to play a greater role
in the health care purchasing decision. M+C MSAs offer beneficiaries
incentives to ensure that the health care resources they need are
allocated in an efficient manner. This increased consumer control is
believed to have potential for discouraging the overutilization of
health services.
In implementing the BBA provisions concerning the M+C MSA
demonstration, our primary objective is to allow a true test of the
potential benefits of the MSA concept to the Medicare program and its
beneficiaries. Thus, as with other parts of the M+C regulations, an
underlying design principle has been to preserve as much flexibility as
possible for organizations and providers in terms of service delivery
arrangements, while still building in the protections intended under
the BBA for M+C MSA enrollees and the Medicare trust fund. For the
convenience of the reader, all portions of the M+C regulations that
specifically concern M+C MSA plans and accounts are discussed below in
this preamble; however, the M+C MSA regulations do not constitute a
separate subpart of new part 422. This is because, except as noted
below, the general M+C requirements throughout part 422 apply equally
to M+C organizations that offer M+C MSA plans; thus it would be
redundant to repeat all applicable requirements in a separate M+C MSA
subpart.

B. General Provisions (Subpart A)

Sections 422.2 and 422.4 set forth several definitions for terms
connected with M+C MSA plans, including ``M+C MSA,'' ``M+C MSA plan,''
and ``MSA trustee.'' As noted in section II.D of this preamble, we also
distinguish between a ``network'' and a ``non-network'' M+C MSA plan.
The definitions consist of general meanings for these terms as used in
the BBA and do not impose specific requirements. Thus, the definition
for an MSA references the applicable requirements of sections 138 and
220 of the Internal Revenue Code, and the M+C MSA plan definition
references the applicable requirements of new part 422.
The theory behind the new M+C MSA option is that a beneficiary will
pay a lower monthly premium for a ``catastrophic'' insurance policy
with a high deductible, and use the money deposited in his or her M+C
MSA account to cover expenses during the extended period prior to this
high deductible being reached. This concept is reinforced by the fact
that Congress excluded from eligibility for M+C MSA plans individuals
with ``first dollar'' health care coverage (such as, Medicaid-eligible
individuals'--see discussion below), who would not be required to incur
expenses during the significant period of time expected to transpire
before the high M+C MSA plan deductible is met. This is also the reason
that Congress amended the Medigap statute to preclude insurers from
selling policies to enrollees in M+C MSA plans that would cover costs
incurred before the high deductible is met. Indeed, the legislative
history expressly refers to ``[p]rohibit[ing] the sale of certain
[Medigap] policies to a person electing a high deductible plan,''
meaning an MSA plan. (H.R. Rep. No. 105-217, pg. 654 (1997). Emphasis
added).
Although Congress did not include a minimum deductible amount, we
believe that the statutory scheme, and the above-quoted reference to a
``high deductible plan'' in the Conference report, clearly imply that
MSA plans would have a higher deductible than other plans. As noted
above, we are seeking comment on providing for a minimum deductible
based on the actuarial value of the average per capita cost-sharing
under original Medicare rounded to the nearest $50. For 1999, this
amount is $1,000. (Clearly, any deductible lower than the actuarial
value of what original Medicare beneficiaries pay is not a ``high''
deductible.) We believe that a minimum deductible amount could ensure
that M+C MSA plans comport with the ``high deductible'' design
envisioned by Congress, without inappropriately limiting organizations'
flexibility in designing M+C MSA plans. Without such a deductible,
however, we are concerned that an organization could purport to offer
an ``M+C network MSA plan'' that had such a low deductible that it
would be impossible to distinguish from a coordinated care plan,
although the plan would not be subject to the rules that Congress
intended be applied to coordinated care plans. Therefore, in deciding
whether to institute a minimum deductible for M+C MSA plans, we intend
to examine any evidence that such abuses may be taking place, in
addition to our review of public comments on the issue.
The only other general requirement concerning M+C MSA plans is the
incorporation under Sec. 422.4(a)(2) of the statutory provision
(section 1851(a)(2)(B)) that one of the available alternatives under
the M+C program is the combination of an M+C MSA plan with a
contribution into an M+C MSA. Consistent with the statute, any State-
licensed risk-bearing entity could offer an M+C MSA plan, whether it is
an HMO offering an ``M+C network MSA plan'' under which beneficiaries
are limited to a limited network of providers for covered services
after the deductible is met, or an indemnity plan covering services on
a fee-for-service basis after the deductible is met.

C. Eligibility, Election and Enrollment Rules (Subpart B)

1. Eligibility and Enrollment (Sec. 422.56)
Any individual who is entitled to Medicare under Part A, is
enrolled under Part B, and is not otherwise prohibited (such as an ESRD
patient), is eligible to enroll in an M+C plan. However, the statute
places several limitations on eligibility to enroll in an M+C MSA plan.
These limitations are set forth at Sec. 422.56 of the regulations.
Section 422.56(a) indicates that M+C MSA plans are established on a
demonstration basis and incorporates the statutory provisions of
section 1851(b)(4), that is:
<bullet> No more than 390,000 individuals may enroll in M+C MSA
plans.
<bullet> No individual may enroll on or after January 1, 2003,
unless the enrollment is a continuation of an enrollment already in
effect as of that date.
<bullet> No individual may enroll or continue enrollment for any
year unless

[[Page 35034]]

he or she can provide assurances of residing in the United States for
at least 183 days during that year.
The 390,000 limit represents approximately 1 percent of the
Medicare population. We do not intend to apply any State or regional
limits on enrollment in M+C MSA plans, although we will monitor the
number of enrollees on an ongoing basis. We believe it is unlikely that
the number of applications for M+C MSAs will reach 390,000 in the first
enrollment period, November, 1998. If necessary, however, we will
accept applications for enrollment in M+C MSA plans on a first-come,
first-served basis, with the first 390,000 applicants being allowed to
enroll. We will notify organizations offering M+C MSA plans directly
should the enrollment cap be reached.
The only restrictions on enrollment in M+C MSA plans under
Sec. 422.56(b) and (c) are those directly contemplated under section
1851(b)(2) and (3) of the statute. Specifically, Sec. 422.56(b) states
that an individual who is enrolled in a Federal Employee Health
Benefits Program (FEHBP) plan, or is eligible for health care benefits
through the Veterans Administration (VA) or the Department of Defense
(DoD), may not enroll in an M+C MSA plan. The statute provides that the
restriction on FEHBP enrollment may be eliminated if the Director of
the Office of Management and Budget certifies to the Secretary that the
Office of Personnel Management has adopted policies to ensure that the
enrollment of FEHBP participants will not result in increased
expenditures for health benefit plans. We intend to apply this same
test for the enrollment restrictions that apply to VA and DoD-eligible
individuals. In addition, Sec. 422.56(c) incorporates the statutory
prohibition under section 1851(b)(3) on enrollment in M+C MSA plans by
individuals who are eligible for Medicare cost-sharing under Medicaid
State plans.
Section 422.56(d) sets forth several additional restrictions on
enrollment in M+C MSA plans that we believe are clearly consistent with
statutory intent. These restrictions are discussed in detail below in
section III.D.2 of this preamble, in the discussion of supplemental
benefits under an M+C MSA plan.
2. Election (Sec. 422.62)
Section 1851(e) of the Act establishes general rules concerning the
time periods when a beneficiary may elect to enroll in an M+C plan,
with special rules for M+C MSA plans set forth at section 1851(e)(5).
Based on these provisions, Sec. 422.62(d) specifies that an individual
may elect an MSA plan only during one of the following periods;
<bullet> An initial election period, that is, the 7-month period
beginning 3 months before the individual is first entitled to parts A
and B of Medicare.
<bullet> The annual coordinated election period in November of each
year.
Unlike for other M+C plans, an individual may discontinue election
of an M+C MSA plan only during the annual coordinated election period.
Thus, effective January 1, 1999, enrollees in M+C MSA plans are
``locked in'' for 1 year, or for the remainder of the calendar year for
elections during an initial election period that take effect other than
on January 1. This lock-in rule contrasts sharply with the rules for
other types of M+C plans, which provide for continuous open enrollment
and disenrollment through December 31, 2001.
There are two exceptions to this lock-in rule. First, as specified
under section 1851(e)(5)(C) and codified at Sec. 422.62(d)(2)(ii), an
individual who elects an M+C MSA plan during an annual election period
in November of a given year, and has never before elected an M+C MSA
plan, may revoke that election by submitting to the organization
offering the plan a signed request or by filing the appropriate
disenrollment form by December 15 of that year. In addition, we are
providing at Sec. 422.58(d)(2) that an individual may disenroll from an
M+C MSA plan during the special election periods prompted by
circumstances such as termination of the plan, change in the
individual's place in residence, etc., as spelled out under
Sec. 422.62(b). As discussed in detail in section II.B of this
preamble, section 1851(e)(4) provides that these special election
periods are to take effect on January 1, 2002, in concert with the
initial effective date for the lock-in rules for M+C plans other than
MSA plans. Given that the lock-in rule for M+C MSA plans takes effect
on January 1, 1999, we believe it is appropriate that the protections
afforded by the special election period should be applicable at that
time to individuals who elect M+C MSA plans.
3. Information About the M+C Program (Sec. 422.64)
Section 1851(d) and Sec. 422.64 address the requirement that M+C
organizations must provide the information that HCFA needs to help
beneficiaries make informed decisions with respect to their available
choices for Medicare coverage. The only M+C MSA-specific requirement
involved here (also applicable for M+C private fee-for-service plans)
is that the description of an M+C MSA plan's benefits should include
differences in cost-sharing, premiums, and balance billing, as compared
to other types of M+C plans (see Sec. 422.64(c)(7)(iv)). We believe
that the purpose of this requirement is to make sure that beneficiaries
are aware of the fundamental differences between M+C MSA or private
fee-for-service plans and other types of M+C plans, rather than to
present detailed information concerning the benefits, premiums, and
copayments for all other specific M+C plans in the area. For compliance
purposes, then we intend to evaluate the information submitted by
organizations for MSA plans in these terms. We note that we would apply
the same standard in determining compliance with the requirement of
Sec. 422.110(b)(2)(ii) concerning an organization's responsibility to
disclose to its enrollees a description of the benefits available under
other types of plans.

D. Benefits (Subpart C)

1. Basic Benefits Under an M+C MSA Plan (Sec. 422.102)
Section 422.102 incorporates the statutory requirements for M+C MSA
plans defined under section 1859(b)(3) of the Act, as outlined above.
Thus, Sec. 422.102(a) specifies that an MSA organization offering an
MSA plan must make available to an enrollee, or provide reimbursement
for, at least all Medicare-covered services (except for hospice
services) after the enrollee's countable expenses reach the plan's
annual deductible. We note that section 1859(b)(3)(A)(i) only uses the
phrase ``provides reimbursement for'' the covered services, but the
intent of the statute clearly includes situations where a network M+C
MSA plan would either furnish the services directly or arrange for
provision of the services. We believe that the phrase ``make available
to the enrollee'' accounts for either of these situations.
Section 422.102(b) then indicates that countable expenses must
include the lesser of actual costs or all the amounts that would have
been paid under original Medicare if the services were received by a
Medicare beneficiary not enrolled in an M+C plan, including the amount
that would have been paid by the beneficiary under his or her
deductible and coinsurance obligation. In accordance with section
1859(b)(3)(A)(ii) of the statute, under each MSA plan, an organization
would have the discretion to define what it considers countable
expenses, subject to the statutory threshold of the Medicare

[[Page 35035]]

payable amount. We would envision that M+C organizations offering MSA
plans could provide that countable expenses would include a
considerably broader range of services than does Medicare, including
expenses for services that often would constitute supplemental health
care benefits under other M+C plans, such as prescription drugs, dental
services, or preventative care services. (As discussed below, section
1852(a)(3)(B)(ii) prohibits an M+C MSA plan from providing most
supplemental health care benefits before an individual reaches the
annual deductible. However, counting the expenses for such services
towards the annual deductible is permissible.) An M+C organization
could also choose to provide that countable expenses under an M+C MSA
plan would include a provider's full charges, rather than just the
amount payable under the Medicare payment rate schedules.
Section 422.102(c) provides that after the deductible is met, an
M+C MSA plan pays the lesser of 100 percent of either the actual
expense of the services or of the amounts that would have been paid
under original Medicare if the services were received by a Medicare
beneficiary not enrolled in an M+C plan, including the amount that
would have been paid by the beneficiary under his or her deductible and
coinsurance obligation. As discussed below in section III.F., M+C
balance billing protections do not apply in this situation. Thus,
unless explicitly included in the terms of the M+C MSA plan, any
amounts billed in excess of 100 percent of this Medicare allowed amount
would be the responsibility of the enrollee. In this provision, we have
interpreted the language in section 1859(b)(3)(A)(iii)(II) referring to
the ``amounts that would be paid (without regard to any deductibles and
coinsurance) under parts A and B'' to mean the amount that would be
paid if there were no beneficiary liability provided for in the form of
deductibles and coinsurance--in other words, the full amount of the
Medicare rate. We have put this a different way in Sec. 422.102(c),
providing that the amount in question includes the amounts that the
beneficiary would pay in deductibles and coinsurance. We considered
interpreting ``without regard to any deductibles and coinsurance
amounts'' to mean without counting the amounts original Medicare
beneficiaries would pay in deductibles and coinsurance. We decided,
however, that after a deductible of up to $6000, and with balance
billing permitted, M+C MSA plans should be required to pay the full
Medicare payment rate once the deductible is met. Again, an
organization would be free to offer expanded benefits under an M+C MSA
plan beyond the minimum requirements after the deductible is met,
including supplemental benefits that it could not offer before the
deductible is met.
Section 422.103(d), concerning the annual deductible, is based on
section 1859(b)(3)(B). As the statute specifies, the maximum annual
deductible for an MSA plan for contract year 1999 is $6,000. In
subsequent contract years, the maximum deductible may not exceed the
maximum deductible for the previous contract year increased by the
national per capita M+C growth percentage for the year. In calculating
the maximum deductible for future years, HCFA will round the amount to
the nearest multiple of $50.
Another issue we examined in developing the regulations concerning
the annual deductible for M+C MSA plans was whether to establish
specific requirements on deductibles for individuals who enroll in M+C
MSA plans effective other than on January 1 of a given year, that is,
individuals who turn 65 and make midyear elections of an M+C MSA plan
within their initial enrollment periods. Our primary alternatives on
this issue were to: (1) require all M+C MSA plans to ``prorate'' the
deductible, that is, reduce the amount of the deductible for midyear
enrollees in proportion to the amount of the calendar year remaining or
(2) allow insurers the flexibility to decide for themselves how to deal
with partial year enrollees. Although the prorating alternative would
reduce the cost-sharing burden on beneficiaries during the first
partial year, and thus possibly make it more likely that an individual
whose initial election period occurs late in the year would choose an
M+C MSA plan, this option has several drawbacks. Few if any insurance
carriers now prorate their deductibles for midyear enrollees, and we
are reluctant to implement such an approach unilaterally, particularly
since we have no evidence that the costs of implementing a prorated
system would be exceeded by the benefits to beneficiaries in terms of
reduced risk. Such a requirement could limit interest in establishing
M+C MSA plans, if insurers believed that they could be placed at risk
of the enrollment of individuals with low prorated deductibles who
anticipate high cost short-term health care needs.
Instead, we decided to allow insurers to decide for their M+C MSA
plans how to deal with partial year enrollees. This should foster
flexible approaches to this situation, with organizations making
decisions based on their perceptions of the cost of implementation and
the benefits to them in terms of attracting prospective enrollees. For
example, an organization's plans could include a ``carry-over''
procedure. Under such a procedure, bills incurred during a specified
period of one calendar year could be carried over to the following year
and applied to the next year's deductible.
2. Supplemental Benefits (Secs. 422.102 and 422.103)
Section 422.102 addresses the general M+C rules on supplemental
benefits. Unlike other M+C plans, MSA plans are not permitted to
include any mandatory supplemental benefits and are limited in terms of
the optional supplementary benefits that can be offered. In accordance
with section 1852(a)(3)(B)(ii), Sec. 422.103(a) specifies that an M+C
MSA plan generally may not provide supplemental benefits that cover
expenses that count toward the annual deductible. In addition, section
4003(b) of the BBA added new section 1882 to the Act to prohibit the
sale of most supplementary health insurance policies to individuals
enrolled in M+C MSA plans. The only exceptions to this rule are spelled
out in section 1882(u)(2)(B). These exceptions apply both for purposes
of the prohibition on selling freestanding supplementary health
insurance (or ``Medigap'' insurance), and for purposes of ``optional
supplemental benefits'' offered under M+C MSA plans. These exceptions
are reflected in Sec. 422.103(a)(2). Under Sec. 422.103(a)(2), the only
types of policies that an enrollee in an M+C MSA plan may purchase that
cover expenses that may count toward the annual deductible are as
follows:
<bullet> A policy that provides coverage for accidents, disability,
dental care, vision care, or long-term care.
<bullet> A policy in which substantially all coverage relates to
liabilities incurred under workers' compensation laws, tort
liabilities, or liabilities relating to use or ownership of property.
<bullet> A policy that provides coverage for a specified disease or
illness or pays a fixed amount per day (or other period) for
hospitalization. (Note that the fact that an organization offering an
M+C MSA plan permits a particular expense to count toward the plan's
annual deductible does not necessarily mean that such expenses are
considered ``qualified medical expenses'' by the IRS.)
The above restrictions on optional supplemental benefits and
Medigap

[[Page 35036]]

coverage under section 1882, combined with Congress' explicit exclusion
of individuals with ``first dollar'' health coverage under government
programs (Medicaid, VA benefits, and FEHBP benefits--see section
1851(b)(2) and (3) and discussion above), make it clear that Congress
intended that individuals enrolled in M+C MSA plans would be required
to use the money in their M+C MSA accounts to pay for services until
the ``high deductible'' under the plan is met. While Congress addressed
government programs under which expenses during the deductible would be
covered, and prohibited the sale of new private supplemental insurance
that would cover such deductible amounts (whether an optional
supplemental benefit offered under an M+C MSA plan, or a freestanding
``Medigap'' policy), some categories of individuals with first dollar
coverage that would cover expenses that would count toward an M+C MSA
plan deductible would remain eligible to enroll in M+C MSA plans absent
a regulatory prohibition.
We believe that it would give effect to clear congressional intent
to expand the categories of individuals ineligible to enroll in M+C MSA
plans to include the additional categories that Congress neglected to
include. For example, while Congress prohibited the sale of private
insurance covering expenses that count toward an M+C MSA deductible, it
did not address individuals who may already have such coverage,
including those who have first dollar Medigap coverage through their
employer. In addition, individuals who have elected hospice coverage
are also eligible for first dollar Medicare payment, without any
qualification in the case of MSA plans. (See section 1853(h)(2)(A).)
This is also inconsistent with Congress' intended design for the M+C
MSA option. Pursuant to our authority under section 1856(b)(1) to
establish M+C standards by regulation, we accordingly are providing in
Sec. 422.56(d) that individuals with such health benefits are
ineligible to elect an MSA plan.
As mentioned above, M+C MSA plans may not provide any supplemental
benefits, except those exempted, covering expenses that count towards
the annual deductible. Once the deductible is reached, however, there
are no limitations on the supplemental benefits a plan may offer, as
long as the plan satisfies the requirements concerning making available
basic part A and B Medicare services. We believe that a market may
emerge for supplemental insurance policies in connection with M+C MSA
high deductible insurance policies. We considered the possibility of
establishing one or more sample benefit plans for use in conjunction
with M+C MSA plans, similar to the limited number of standardized
Medigap plans that are now offered. Although we are not doing so at
this time, we welcome comments on the need for such uniform plans.

E. Quality Assurance (Subpart D)

Like for other M+C plans, an organization offering an MSA plan must
have an ongoing quality assessment and performance improvement program
for the services furnished to M+C enrollees under the plan. As
discussed in detail above, the quality assurance requirements that
apply to an M+C MSA plan depend on whether the plan is a network model
plan, that is, a plan that provides benefits either through contracting
providers or under arrangements made by the plan, or a non-network
plan. Consistent with section 1852(e)(2) of the Act, a network model
M+C MSA plan must meet requirements similar to those that apply to all
other M+C coordinated care plans (with the exception of the achievement
of minimum performance levels); the statute and regulations establish
different requirements for non-network M+C MSA plans. See section II.D
of this preamble, and Sec. 422.152 of the regulations, for more
information on this subject. Also, see section II.D. of the preamble
and Sec. 422.154 for information on the external review requirements
that apply to network M+C MSA plans. Under Sec. 422.154(b)(1), the
external review requirements do not apply to non-network M+C MSA plans.

F. Relationships Between Plans and Participating Physicians (Subpart E)

For the most part, subpart E of new part 422 does not establish any
requirements that are specific to MSA plans. However, Sec. 422.214,
``Special rules for services furnished by noncontract providers,'' does
have implications for enrollees in MSA plans. The provisions of this
section are based on section 1852(k) of the Act, beginning with the
requirement under section 1852(k)(1) that for enrollees in M+C
coordinated care plans, a physician that does not have a contract with
the plan must accept as payment in full an amount no greater than the
amount the physician could collect if the individual were under the
fee-for-service Medicare program, including any applicable deductibles,
coinsurance, or balance billing permitted by the plan. (See section
1848(g) concerning the Medicare fee-for-service rules on limiting
charges.) Section 1852(k)(2) then establishes balance billing limits
for M+C private fee-for-service plans, as discussed in detail in
section IV of this preamble and Sec. 422.216; however, the statute
contains no balance billing protections for enrollees in M+C MSA plans.
It is clear from the legislative history of the provisions imposing
balance billing limits that the omission of any limits under M+C MSA
plans was not inadvertent. Page 609 of the Conference Report (H.R. Rep.
No. 105-217) refers to the House bill, which included across the board
limits on what could be collected. The Senate amendment is described as
including a ``[similar provision except that it excepts from the
requirement * * * a[ ] fee-for-service plan as well as an MSA plan.''
The ``conference agreement'' is then described as ``including] the
Senate provision with an amendment to provide for application of the
provision to Medicare+Choice fee for service plans. * * *'' Thus,
Congress clearly indicates that it provided for a balance billing limit
for M+C coordinated care plans and private fee-for-service plans
(albeit a different limit), but not for M+C MSA plans. On page 611, the
Conference Report expressly states that the House bill provided that an
``MSA plan * * * would not be subject to the * * * limitations on
balance billing.'' The conference agreement indicates that it
``includes'' this ``House bill'' position. In light of the absence of
any statutory provision for a limit on balance billing under M+C MSA
plans, and these clear statements of congressional intent that there be
no such limits, we have not provided for any limits on balance billing
under M+C MSA plans in these regulations.

G. Payments Under MSA Plans (Subpart F)

Section 1853 describes the method to be used to calculate the
annual M+C capitation rate for a given payment area (see section II.F
of this preamble and Sec. 422.254). We apply the same methodology in
determining the annual capitated rate associated with each M+C MSA plan
enrollee. Thus, for calendar year 1999, the capitated rate will
continue to be adjusted for the age, gender, Medicaid-eligibility,
disability, institutional status, and employment of the individual
beneficiary, with risk adjustment scheduled to begin on January 1,
2000, as also discussed in detail in section II.F of this preamble.
The special rules concerning the allocation of the M+C capitated
amount for individuals enrolled in M+C MSA plans are set forth at
section 1853. In

[[Page 35037]]

general, HCFA will allocate the capitated amount associated with each
M+C MSA enrollee as follows:
<bullet> On a lump-sum basis at the beginning of the calendar year,
pay into a beneficiary's M+C MSA an amount equal to the difference
between the annual M+C capitation rate for the county in which the
beneficiary resides and the M+C MSA premium filed by the organization
offering the MSA plan (this premium is uniform for all enrollees under
a single M+C MSA plan.) This results in a uniform amount being
deposited in an M+C MSA plan enrollee's M+C medical savings account(s)
in a given county, since the uniform premium amount will be subtracted
from the uniform county-wide capitation rate for every enrollee in that
county.
<bullet> On a monthly basis, pay to the M+C organization an amount
equal to one-twelfth of the difference, either positive or negative,
between the annual M+C capitation payment for the individual and the
amount deposited in the individual's M+C MSA.
Section 422.262 contains the regulations concerning the allocation
of Medicare trust funds for enrollees in M+C MSA plans. First, under
Sec. 422.262(a), an enrollee must establish an M+C MSA with a qualified
trustee or custodian. An enrollee may establish more than one account,
consistent with section 1853(e)(2)(B) of the Act, but must designate
the particular account to which payments by HCFA are to be made. As
specified under Sec. 422.262(b), a trustee can be a bank, insurance
company, or anyone approved by the IRS to be a trustee of Individual
Retirement Accounts. Section 422.262(b) also requires that M+C MSA
trustees must register with HCFA, agree to comply with IRS rules
concerning MSAs, and provide organizational information that HCFA may
require.
The specific requirements concerning the amount that HCFA pays into
an individual's M+C MSA are spelled out at Sec. 422.262(c). We
calculate the payment by first comparing the monthly premium for the
M+C MSA plan to the county-wide capitation rate under Sec. 422.252 that
is used in making payments to M+C organizations under other types of
M+C plans (final payment to M+C organizations is based on this county-
wide capitation rate, adjusted by demographic factors). If the monthly
premium is less than the monthly capitation rate for the county, HCFA
deposits into the individual's M+C MSA a lump sum equal to the annual
difference between these two amounts, that is, the monthly difference
multiplied by 12, or by the number of months remaining in the calendar
year when the individual becomes covered under the M+C MSA plan.
The lump-sum payment is made in the first month of coverage under
the M+C MSA plan, but HCFA makes no payment until the individual has
not established an M+C MSA before the beginning of the month. Should an
individual's coverage under an M+C MSA plan end before the end of a
calendar year, HCFA will recover the excess portion of the lump-sum
deposit attributable to the remaining months of that year.
In summary, Medicare's contributions to an individual's M+C MSA are
equal to the difference between the unadjusted county-wide capitation
rate for the county in which the enrollee lives and the premium filed
by the individual's high deductible M+C MSA plan. For example, if the
annual Medicare payment rate for a county is $6,000 ($500 per month),
and the annual premium for an M+C MSA insurance plan is $4800 ($400
multiplied by 12), HCFA would deposit $1,200, in January, into the M+C
MSA of each plan enrollee residing in that county. It would pay to the
insurer (generally divided into 12 equal monthly payments) the
difference between the demographically adjusted M+C payment amount for
that individual and the MSA contribution. (See the example below.) The
annual payment by HCFA represents the only permissible deposit into the
individuals's M+C MSA, with the exceptions of transfers from another
M+C MSA established by the same individual or interest or income that
accrues to the account.

Example of Payments Under an M+C MSA Plan

Monthly premium for an M+C MSA plan.......................... $400
Monthly M+C county-wide capitation rate...................... 500
Monthly demographically adjusted M+C payment for an
individual beneficiary:
Individual A (65-year old beneficiary)................... 450
Individual B (85-year old beneficiary)................... 700

A. Annual contribution to enrollee's M+C MSA =
(M+C county-wide capitation rate-M+C MSA plan monthly premium) x
12. ($500-$400) x 12 = $1,200
B. Monthly payment to an M+C organization under an M+C MSA plan for
an enrollee =
Demographically adjusted M+C payment rate for an enrollee-Monthly
contribution to the enrollee's M+C MSA plan
Individual A: $450-$100 = $300
Individual B: $700-$100 = $600

In theory, payments to the plan for an individual enrollee could be
positive or negative, depending on the relationship between a plan's
premium and the capitation rate for a given county. If, in the example
above, the M+C MSA plan premium were only $25 (rather than $400), the
monthly contribution to an enrollee's M+C MSA would be $475 ($500-$25 =
$475). For the 65-year old beneficiary (Individual A), the resultant
payment to the plan would be a negative $25 ($450-$475 = (-$25)). Given
that organizations offering M+C MSA plans likely will carefully assess
payment ranges and demographic factors within their market areas before
proposing a premium, we believe that a negative payment would be rare,
but not impossible.)

H. Premiums (Subpart G)

Section 1854 establishes the requirements for determination of the
premiums charged to enrollees by M+C organizations. Like other M+C
organizations, organizations offering M+C MSA plans in general must
submit by May 1 of each year information concerning enrollment capacity
and premiums. For M+C MSA plans, the information to be submitted
includes the monthly M+C MSA plan premium for basic benefits and the
amount of any beneficiary premium for supplementary benefits. These
requirements are set forth under section 1854(a)(3) of the act and
Sec. 422.306(c) of the regulations.
Unlike for M+C coordinated care plans, section 1854(a)(5) Act
expressly exempts M+C MSA plan premiums from review and approval by the
Secretary. Section 1854(b)(1)(B) merely states that for M+C MSA plans,
the monthly amount of the premium charged to an enrollee equals the M+C
monthly supplemental beneficiary premium, if any. Although this
provision effectively

[[Page 35038]]

precludes an organization offering an M+C MSA plan from charging an
additional premium to an enrollee for basic Medicare benefits paid for
through the capitated payment made by HCFA, the plan is free to set the
basic and supplemental premium at whatever levels the market place will
bear.
The only statutory limitation placed on an M+C MSA plan's ability
to establish premiums is the ``uniform premium'' requirement of section
1854(c). The effect of this provision is that the monthly basic and
supplementary premiums may not vary among individuals enrolled in an
M+C MSA plan. (See the discussion of service area in section II.A. of
this preamble.) Thus, insurers that want to charge different amounts
for different benefits, according to geographic areas for example,
could do so only by establishing multiple M+C MSA plans. Within a plan,
however, payments into the M+C MSAs of individuals residing in the same
county will be uniform; payments to the plans will vary for each
individual.

I. Other M+C Requirements

The remaining requirements under subpart 422 have few if any
implications specific to M+C MSA plans. For example, the organizational
and financial requirements, provisions on compliance with State law,
contracting rules, and grievance and appeal requirements generally
apply in equal measure to MSA plans as to other types of plans. More
accurately, perhaps, these requirements primarily apply to the M+C
organization, rather than the plan; thus, an organization offering any
type of M+C plan must meet the applicable requirements.
One issue that may require clarification, however, involves the
provision of section 1856(b)(3)(B)(i) (and Sec. 422.402(b)) that any
State standards relating to benefit requirements are superseded. We
recognize that this provision means that State benefit rules will not
apply (such as State laws that mandate first dollar coverage for
particular benefits such as mammograms or other preventative services).
Some States may not license entities to offer catastrophic coverage,
and it is possible that M+C MSA plans could not be offered in that
State. We welcome public comment on this issue.
The only other sections of these regulations that contain
requirements that are specific to M+C MSA plans are found in Subpart
K--Contracts with M+C Organizations. First, in accordance with section
1857(c)(3), Sec. 422.504(a) specifies that the effective date for a
contract providing coverage under an M+C MSA plan may be no earlier
than January 1, 1999.
We note that Sec. 422.500(b)(2) authorizes HCFA to include in a
contract any requirements that we find ``necessary and appropriate''
that are not inconsistent with the M+C statute and regulations. Given
the demonstration basis of M+C MSA plans under section 1851(b)(4), and
the corollary requirements for an evaluation and a report to Congress,
we believe it may be necessary and appropriate to require that
organizations offering M+C MSA plans provide HCFA with data that will
enable us to evaluate M+C MSA plans in terms of selection, use of
preventive care, access, and impact on the Medicare trust fund. We are
now in the process of determining what, if any, specific data will be
required with respect to M+C MSA plans (beyond the encounter data to be
collected with respect to all M+C plans) to facilitate HCFA's
evaluation. In Sec. 422.502(f)(2)(vii), we provide authority for HCFA
to request data from M+C organizations offering MSA plans related to
selection, use of preventive care, and access to services.

J. Tax Rules

As mentioned earlier, section 4006 of the BBA added new section 138
to the Internal Revenue Code (IRC) of 1986 concerning M+C MSAs. The
regulations set forth in this interim final rule do not incorporate the
IRC provisions on M+C MSAs. However, for the convenience of the reader,
we are presenting here a brief summary of the tax rules associated with
M+C MSAs. For a full explanation of the tax consequences of
establishing a M+C MSA, we refer readers to sections 138 and 220 of the
IRC and to the relevant IRS publications. (For more information,
contact the IRS at (888) 477-2778 or through its website at
www.irs.ustreas.gov.)
When an individual joins an M+C MSA plan, HCFA makes a specified
contribution, as explained above, into the M+C MSA designated by the
individual. No other contribution may be made into the M+C MSA, and the
contribution is not included in the taxable income of the account
holder. Any income earned on amounts held in the M+C MSA are not
currently included in taxable income, similar to an individual
retirement account.
Withdrawals from an M+C MSA are not considered taxable income if
used for the ``qualified medical expenses'' of the account holder,
regardless of whether the account holder is still enrolled in an M+C
MSA plan at the time of the distribution. In general, ``qualified
medical expenses'' are defined the same as under the IRS rules relating
to itemized deductions for medical expenses. (See sections 213(d) and
220(d)(2)(A) of the IRC and IRS publication 502, Medical and Dental
Expenses.) For M+C MSA purposes, however, most health-related insurance
premiums do not constitute qualified medical expenses, nor do amounts
paid for the medical expenses of any individual other than the account
holder. Also, keep in mind that the IRS definition of qualified medical
expenses encompasses a broader range of items and services than are
covered by Medicare, including for example prescription drugs and
dental services. Thus, items that are considered qualified medical
expenses by the IRS do not necessarily constitute countable expenses
toward an M+C MSA plan's annual deductible.
An enrollee in an M+C MSA plan may make withdrawals from an M+C MSA
that are not used to pay for the qualified medical expenses of the
account holder, but these withdrawals are included in the account
holder's taxable income and may be subject to additional tax penalties
under section 138(c)(2) of the IRC. The additional tax provisions do
not apply to distributions following the disability (as defined in
section 72(m)(7) of the IRC) or death of the account holder. Finally,
under section 138(d) of the IRC a surviving spouse of an M+C MSA holder
may continue the M+C MSA upon the death of the account holder,
including making nontaxable withdrawals for the qualified medical
expenses of the spouse or the spouse's dependents, but may not make new
contributions to the M+C MSA. Again, we recommend contacting the IRS
for further details.

K. Letters of Intent

In closing, we wish to solicit letters of intent from organizations
that intend to offer high deductible M+C MSA insurance plans to
Medicare beneficiaries and/or to serve as M+C MSA trustees or
custodians. A letter of intent to offer an M+C MSA plan should include
basic information about the plan, the geographic area in which the plan
intends to operate, the name, address, and telephone number of a
contact person, so that beneficiaries can call the plan to verify
whether the plan did, in fact, submit an application and receive our
approval. This letter of intent must be received no later than July 31,
1998.
For prospective M+C MSA trustees, the letter of intent must include
the name of the organization, the address, a contact person and
telephone number,

[[Page 35039]]

funds routing number, Federal tax identification number, the geographic
area the trustee will serve, a public information number for
publication, and attestation that the organization is a chartered bank,
licensed insurance company, or other entity qualified under section
408(a)(2) or section 408(h) of the Internal Revenue Code to act as a
trustee or custodian of an individual retirement account. For trustees,
no further application to us will be required if the organization
appears to be qualified based upon submitted information. Trustees that
decide at a later date to participate will have to notify us before
offering M+C MSAs.
Statements of intent should be submitted to--Health Care Financing
Administration, CHPP, Attn: Cynthia Mason, Room C4-17-27, 7500 Security
Boulevard, Baltimore, Maryland 21244.
A letter of intent in no way commits an organization to submit an
application to offer an M+C MSA plan or serve as an M+C MSA trustee,
nor does it preclude the submission of an application if a letter of
intent is not submitted to us. As part of our information campaign, we
plan to publish and disseminate the information we receive to inform
beneficiaries of the plans that may be participating in the M+C MSA
plan demonstration project.

IV. M+C Private Fee-for-Service Plans

1. Background and Definition of M+C Private Fee for Service Plans
(Sec. 422.4(a)(3))

As noted above, among the type of M+C options available under
section 1851(a)(2) is an M+C private fee for service plan. An M+C
private fee for service plan is an M+C plan like any other except where
there are special rules and exceptions that apply to them. The effect
of these special rules and exceptions is that we believe that M+C plans
will function much like a traditional health insurance plan rather than
a coordinated care plan nor a medical savings account. The law provides
considerable flexibility in the creation of this M+C option and
therefore, it is likely that M+C private fee for service plans will
vary widely in how they function. Moreover, the law does not limit the
premiums that an M+C organization may charge for an M+C private fee for
service plan, thus making it very sensitive to market forces in its
pricing, its benefits and its function.
We propose to define an M+C private fee-for-service plan as being
an M+C plan that pays providers of services at a rate determined by the
plan on a fee-for-service basis without placing the provider at
financial risk, does not vary the rates for a provider based on the
utilization of that provider's services, and does not restrict
enrollees' choice among providers who are lawfully authorized to
provide the services and agree to accept the plan's terms and
conditions of payment. This is the statutory definition of M+C private
fee-for-service plan at 1859(b)(2)(A). The requirements these plans
must meet to contract with HCFA as an M+C private fee-for-service plan
are incorporated into the relevant sections of this regulation. An M+C
private fee-for-service plan must meet all of the requirements for any
other M+C plan, except to the extent that there are special rules for
M+C private fee-for-service plans.

2. Quality Assurance (Secs. 422.152 and 422.154)

The law exempts M+C private fee for service plans and non-network
MSAs from some of the quality assurance requirements of the law.
Moreover, the law exempts M+C private fee for service plans and non-
network MSAs from external quality review if they do not have written
utilization review protocols. Specific discussion of the statute and
the regulations that implement these provisions that apply to both M+C
private fee for service plans and non-network MSAs are found in subpart
D at sections 422.152 and 422.154. As with all other requirements for
M+C organizations and M+C plans, those provisions of regulations that
are not specific to coordinated care plans and MSAs also apply to M+C
private fee for service plans.

3. Access to Services (Sec. 422.214)

In Sec. 422.214 we implement the special requirements for access to
health services that are contained in section 1852(d)(4). The law
requires that the Secretary must assure that the M+C private fee-for-
service plan offers sufficient access to health care. Specifically, in
Sec. 422.114(a) we require that an M+C organization that offers an M+C
private fee-for-service plan must demonstrate to HCFA that it has
sufficient number and range of health care providers willing to furnish
services under the plan. Pursuant to the specific instructions of the
law, under Sec. 422.114(a) HCFA will find that an M+C organization
meets this requirement if, with respect to a particular category of
provider, the plan has--
<bullet> Payment rates that are not less than the rates that apply
under original Medicare for the provider in question;
<bullet> Contracts or agreements with a sufficient number and range
of providers to furnish the services covered under the plan; or
<bullet> A combination of the above.
Hence, an M+C private fee-for-service plan will be found to have
met the access requirements for a category of services if it has
sufficient numbers of providers under direct contract in its service
area or, if not, it has payment rates that are equal to or higher than
the original Medicare payment for the service. This access test must be
met for each category of service established by HCFA on the M+C
organization application. Clearly, if an M+C private fee-for-service
plan has payment rates that are no lower than Medicare, it need not
address if it has a sufficient number of providers of services.
However, where the plan has payment rates that are less than the
Medicare payment for that type of provider, the plan must demonstrate
that it has sufficient number of providers of that type under direct
contract. For purposes of making this judgement of sufficiency, HCFA
will use the same standards for M+C private fee-for-service plans as
for coordinated care plans. We see no basis to use different standards.
In Sec. 422.114(b) we specify that the plan must permit the
enrollees to receive services from any provider that is authorized to
provide the service under original Medicare. This implements that part
of section 1852(d)(4) that says that the access requirements cannot be
construed as restricting the persons from whom enrollees of the M+C
private fee-for-service plan may obtain covered services.

4. Physician Incentive Plans (Secs. 422.208 and 422.210)

In Sec. 422.208(e) we specify that an M+C private fee-for-service
plan may not use capitated payment, bonuses, or withholds in the
establishment of the terms and conditions of payment. This is necessary
to implement that part of the definition of an M+C private fee-for-
service plan that specifies that the plan must pay without placing the
provider at financial risk. We believe that these physician incentives
place the physician at financial risk and thus are not permitted by the
law for M+C private fee-for-service plan payments. Capitation places
physicians at risk because of the uncertainty of the extent to which
the beneficiary will require the physician's time and services to
provide an adequate level of service. Withholds from payment place the
physicians at financial risk because of the uncertainty of what the
ultimate payment for the

[[Page 35040]]

services furnished will be. Bonuses are essentially the same as
withholds. In both the case of bonuses and withholds, the physicians
knows the least amount that could be paid but in both cases, they face
uncertainty about what the total payment from the plan would be for the
services furnished.
5. Special Rules for M+C Private Fee-for-Service Plans (Sec. 422.216)
In Sec. 422.216(a) we address payment to providers. Specifically in
422.216(a)(1) we state that the M+C organization offering an M+C
private-fee-for-service plan pays contract providers (including those
that are deemed to have contract under Sec. 422.216(f)) on a fee-for-
service basis at a rate, determined under the plan, that does not place
the provider at financial risk. This reflects the statutory definition
of an M+C private fee-for-service plan.
We also specify in Sec. 422.216(a)(1) that the payment rate
includes any deductibles, coinsurance, and copayment imposed under the
plan and must be the same for all providers paid pursuant to a contract
whether or not the contract is signed or deemed to be in place as
discussed below. This reflects our understanding of the meaning and use
of these terms in common insurance use. It also reflects our belief
that the plan rate (on which balance billing discussed below is based)
is intended to be analogous to the Medicare allowed amount for a
service, of which the deductible, coinsurance or copayment is a part.
We think the deductible, and coinsurance or copayment is a part of the
plan payment rate because deductibles have to be subtracted from that
plan payment and because coinsurance is a percentage of the plan
payment rate, thus being included within the rate by definition. We
believe that the payment rate does not include balance billing because
the common definition of balance billing under both original Medicare
and common insurance is an amount above and beyond the payment rate
established for the service. Balance billing is discussed in more
detail below in (c) as a provider charge to enrollees.
As noted above, we specify in Sec. 422.216(a)(1)(i) that a uniform
payment rate must be established for a given item or service furnished
under a contract, whether the contract is signed or deemed to exist
(see discussion of deemed contracts below). In Sec. 422.216(b)(1)(i),
we also require that the plan deductible, coinsurance or copayments and
other beneficiary liability be uniform for services furnished by all
contracting providers, whether contracts are signed or deemed to be in
place. These two requirements are closely related, since permissible
enrollee liability is linked by statute to the plan's payment rate. The
balance billing limitation in section 1852(k)(2)(A) that applies to M+C
private fee-for-service plans is based on the plan payment rate, which
has deductible, copayment and coinsurance amounts built into it. In our
view, therefore, the uniform cost-sharing rule in Sec. 422.216(b)(1)(i)
follows from the uniform payment rate rule in Sec. 422.216(a)(1)(i).
We believe that the uniform rate requirement in
Sec. 422.216(a)(1)(i) is implicit in the definition of private fee-for-
service plans in section 1859(b)(2), which refers in the singular to
reimbursing, hospitals physicians and other providers at ``a rate''
determined under the plan. The balance billing limit in section
1852(k)(2)(A) even more explicitly supports a uniformity rule, in
referring in the singular to ``a'' prepayment ``rate'' that is
established under ``a contract (including [a deemed contract]). * * *''
Section 1852(k)(2)(A) thus makes clear that Congress contemplated that
a single ``rate'' would be established for a given service, or for a
service in a given area, under ``a contract,'' and that this rate would
apply under the contract, ``including'' a contract deemed ``through the
operation of subsection (j)(6)'' of section 1852 (discussed below).
Even if the statute did not refer to a single rate that applies
under a contract, and expressly include a deemed contract in this
statement, we would exercise our authority under section 1852(b)(1) to
impose a uniform rate and cost-sharing requirement. We understand from
oral presentations and written comments received in response to the
January 20, 1998 Federal Register notice (63 FR 2920), that some
entities would like to establish different payment rates and enrollee
cost-sharing for providers that sign contracts than those which would
apply to providers deemed to have a contract. These entities indicated
that they wanted to establish incentives to use the network of
providers with signed contracts. We believe that it would be
inconsistent with the scheme established by Congress to permit this.
Under such an approach, the M+C organization would in essence be
establishing a defined and limited network of preferred providers.
Congress has applied a different set of rules to plans that employ
provider networks, and exempted M+C private fee-for-service plans from
these requirements. Indeed, a ``preferred provider organization'' (PPO)
plan and ``point of service'' option are each expressly mentioned as
examples of ``coordinated care plans'' subject to the quality assurance
rules that apply to network plans, including network MSA plans. We
believe that permitting private fee-for-service plans to have different
cost-sharing amounts for providers with signed contracts would create a
``loophole'' permitting organizations from offering network type PPO
plans without complying with the quality assurance requirement that
Congress intended to apply to network plans.
In Sec. 422.216(a)(1)(ii) we specify that contracting providers
must be paid on a fee-for-service basis. This is required by the
definition of M+C private fee-for-service plans contained in
1859(b)(2)(A).
In Sec. 422.216(a)(1)(iii) we specify that the M+C organization
must make the payment rate available to providers that furnish items or
services that may be covered under the M+C private fee-for-service plan
offered by the organization. We require this to ensure that the
contracting providers will be advised or be able to acquire the amount
of payment for the services they furnish to plan enrollees. This is
particularly important given the plan's flexibility to set and change
payment rates.
In Sec. 422.216(a)(2) we specify that the M+C organization must pay
a contract provider (including one deemed to have a contract) an amount
that is equal to the payment rate described above less any applicable
deductible, coinsurance or copayment. The M+C plan's share of the
payment is the payment rate (which includes deductible, coinsurance and
copayment as discussed above) less that enrollee's cost-sharing.
In Sec. 422.216(a)(3) we also specify that the plan pays for
services of noncontract providers in accordance with
Sec. 422.100(b)(2).
Section 1852(k)(2)(B)(i) specifies that the minimum payment rate
for noncontracting providers of M+C private fee-for-service plans must
be the payment rate set in 1852(a)(2)(A), the same payment rate that
applies when coordinated care plans pay noncontracting providers for
approved services. The provisions of 1852(a)(2)(A) are set in
regulations at Sec. 422.100(b)(2) and thus that provision applies to
the payment to noncontracting providers by M+C private fee-for-service
plans. Thus, the plan must pay the provider at least the amount that
the provider would have received under original Medicare, including any
allowed balance billing amounts. The provider must accept this amount,
together with allowable cost

[[Page 35041]]

sharing paid by the enrollee, as payment in full.
In Sec. 422.216(b) we address provider charges to enrollees.
Specifically in Sec. 422.216(b)(1) we state that a contract provider
(including one that is deemed to have a contract under paragraph (f)
(discussed below) may charge the enrollee no more than the deductible,
coinsurance, copayment, and balance billing amounts permitted under the
plan, that the plan must have the same cost-sharing for deemed contract
providers as for contract providers and that the plan may permit
balance billing no greater than 15 percent of the payment rate for the
service.
The provisions regarding what enrollees may be charged are based on
our interpretation of section 1852(k)(2)(A)(i) that says that a
provider shall accept as payment in full ``* * * an amount not to
exceed (including any deductibles, coinsurance, copayments, or balance
billing otherwise permitted under the plan) an amount equal to 115
percent of such payment rate.'' We believe that the intent of this
provision is that the plan may, but is not required to, permit the
provider to collect balance billing equal to but not in excess of 15
percent of the plan payment rate. We believe that the intent of the
section was to permit a balance billing provision that mirrors that
which currently exists section 1848(g) with respect to services paid
under the Medicare fee schedule for physician services for
beneficiaries who are enrolled in original Medicare.
We recognize, however, that the inclusion of the words ``balance
billing otherwise permitted under the plan'' in the second parentheses
in section 1852(k)(2)(A)(i) could be construed, if read literally, to
permit the 115 percent limit on enrollee liability for balance billing
to be applied to a payment ``rate'' that already included balance
billing ``otherwise provided for'' in the plan.
This interpretation would in effect have created two balance
billing amounts: one balance billing amount within the payment rate
(that would be above and beyond the deductible, coinsurance and
copayment) and another balance billing amount based upon the payment
rate (effectively a balance billing amount as a percentage of another
balance billing amount). This is a convoluted result that we do not
believe was intended. In addition to producing a convoluted result, the
above reading of the reference to balance billing in the second
parenthetical in section 1852(k)(2)(A)(i) would permit M+C
organizations to avoid the limitation on enrollee liability in section
1854(e)(4), which applies only to deductibles, coinsurance, and
copayments. See section G. below. If an M+C organization offering a
private fee-for-service plan could ``provide for'' balance billing
amounts in its payment rate, such amounts would not count towards the
overall limit on enrollee liability in section 1854(e)(4). This could
result in unlimited enrollee liability if such unlimited ``plan''
balance billing amounts were coupled with balance billing of 115
percent of rates that include the plan balance billing.
The provision that requires that the plan establish the same cost-
sharing for the services of deemed contract providers as for contract
providers is discussed above in its relationship to Sec. 422.216(a)(1).
In Sec. 422.216(b)(1)(iii) we specify that the M+C organization
must specify in the contract the deductible, coinsurance, copayment,
and balance billing permitted under the plan for services furnished by
a contracting provider (including a deemed contract under paragraph
(f)). We believe it is important to ensure that the providers who
furnish services are explicitly aware of the amounts they can collect
from enrollees since there are potential penalties for violation of
these limits.
In Sec. 422.216(b)(1)(iv) we specify that an M+C organization is
subject to intermediate sanctions under Sec. 422.752(a)(7), under the
rules in subpart O of part 422, for failing to enforce limits on
beneficiary liability that apply to contract (including deemed
contract) providers. This implements section 1852(k)(2)(A)(i).
In Sec. 422.216(b)(2) we specify that a noncontract provider may
charge the enrollee no more than the cost-sharing established under the
M+C private fee-for-service plan limited as specified in
Sec. 422.308(b). This requirement implements section 1852(a)(2), which
applies to all M+C plans other than MSA plans, and which is referenced
in section 1852(k)(2)(B)(i), which applies specifically to payments to
non-contract providers under M+C private fee-for-service plans. Section
1852(a)(2) requires that M+C organizations provide for payment to non-
contracting providers of an amount, representing the sum of payment
from the organization and any cost-sharing provided for under the M+C
plan, that is at least equal to the total dollar amount of payment that
would be authorized to be paid under parts A and B, including any
balance billing permitted under such parts. We have defined ``cost-
sharing'' in section 422.2 as including only deductibles, copayments
and coinsurance, and not balance billing amounts. Because section
1852(a)(2)(A)(i) uses the term cost-sharing, we believe that it
requires that M+C organizations make payment in an amount that, when
combined with deductible amounts, coinsurance or copayments provided
for under the M+C plan, at least equals the amount the individual or
entity would be able to collect under original Medicare, as we have
provided in section Sec. 422.216(b)(3). This means that enrollees must
be held harmless against any balance billing by non-contracting
providers.
While Sec. 1852(a)(2) thus limits enrollee liability to deductible,
coinsurance, and copayment amounts (and does not permit enrollee
liability for balance billing in the case of non-contracting
individuals or entities), it does not contain any limit on the amount
of enrollee liability that can be imposed under a M+C private fee-for-
service plan for services furnished by a non-contracting provider.
While section 1854(e)(4) limits the actuarial value of cost-sharing
overall, it does not limit the amount that can be charged for a
particular service, except as specified elsewhere in this rule, for
example limits for emergency services as established in section
422.112(b). Hence, except for limits specified elswhere in this rule,
M+C organizations that offer M+C private fee-for-service plans will be
able to establish cost-sharing for services of non-contracting
providers without regard to a specific limit per service.
In Sec. 422.216(c)(1) we specify that an M+C organization that
offers an M+C private fee-for-service plan must enforce the limit
specified in paragraph (b)(1) of this section. We also specify in
Sec. 422.216(b)(1)(iv) that if the M+C organization fails to enforce
the limit as required by paragraph (c)(1) of this section, the
organization is subject to intermediate sanctions under subpart O of
this part. We intend to leave to the organization's discretion the
means by which it will enforce the limits on charges to enrollees.
However, through the ongoing monitoring of the M+C private fee-for-
service plan, HCFA will review the means by which the plan is enforcing
the limits on charges to enrollees by looking at the extent of
complaints from enrollees and the action the M+C organization takes to
resolve them, both systematically and individually.
In Sec. 422.216(c)(2) we specify that an M+C organization that
offers an M+C private fee for service plan must monitor the amount
collected by non-contract providers to ensure that those amounts do not
exceed the amounts

[[Page 35042]]

permitted to be collected under paragraph (b)(2) of this section. The
M+C organization must develop and document violations specified in
instructions and must forward documented cases to HCFA. HCFA may impose
the sanctions provided in section 1848(g)(1)(B). These are the
penalties that apply to nonparticipating physicians who fail to abide
by the limiting charge under original Medicare.
In Sec. 422.216(d) we specify that the M+C organization that offers
an M+C private fee-for-service plan must provide to plan enrollees an
appropriate explanation of benefits that includes a clear statement of
the enrollee's liability, including any liability for balance billing
consistent with this section. Section 1852(k)(2)(C)(i) requires that
the plan must notify the enrollee of balance billing that can be
collected by the provider. We believe that it would be misleading for
this notice to be limited to the balance billing that can be collected
by the provider since the provider may also be able to collect
deductible, coinsurance and or a copayment from the enrollee (depending
upon the plan's policy) and that therefore the plan should notify the
enrollee of all cost-sharing and balance billing that can be collected
by the provider so that there is no confusion.
We also specify that, in its terms and conditions of payment to
hospitals, the M+C organization must require a hospital, if it imposes
balance billing, to provide to the enrollee, before furnishing any
services for which balance billing could amount to $500 or more, notice
that balance billing is permitted for those services and a good faith
estimate of the likely amount of balance billing, based on the
enrollee's presenting condition. Section 1852(k)(2)(C)(ii) requires
that such a notice be furnished by a hospital for inpatient services
and permits the Secretary to require such a notice for other hospital
services at a tolerance to be set by the Secretary. We believe that
this requirement was included in the law because of the potential for
the balance billing provisions that apply to contracting providers to
create quite large liability for enrollees of these plans. For example,
if an M+C private fee-for-service plan permits a hospital to balance
bill up to the 115 percent of plan payment rate that the law would
permit, and the plan payment is $10,000 for the hospital stay, the
enrollee would be liable for $1500 in balance billing in addition to
the deductible, coinsurance and copayment the plan permits the hospital
to collect.
We specify that the advance notice requirements applies to all
services furnished by a hospital because of the trend towards
furnishing services on an outpatient basis that would previously have
been furnished on an inpatient basis. These services can be very
expensive and we believe that the enrollee has a need to know the cost-
sharing for these services in advance of receiving the services as for
inpatient hospital services.
We have set the tolerance at which the hospital must provide this
advance notice at $500, which is the tolerance for nonparticipating
physicians to provide advance notice of the nonparticipating
physician's actual charge under section 1842(m)(1) for purposes of Part
B of original Medicare.
In Sec. 422.216(e) we specify that the M+C organization must comply
with the coverage decisions, appeals, and grievances procedures of
subpart M. This requires that the M+C organization, offering the M+C
private fee-for-service plan, make coverage determinations on all
services and that it must make a determination before the service is
furnished if the enrollee or provider requests it. We believe that this
requirement is necessary to enforce the provisions contained in section
1852(g)(1)(A), which apply to all M+C organizations. Specifically,
section 1852(g)(1)(A) requires that ``A Medicare+Choice organization
shall have a procedure for making determinations regarding whether an
individual enrolled with the plan of the organization under this part
is entitled to receive a health service under this section and the
amount (if any) that the individual is required to pay with respect to
such services. Subject to paragraph (3), such procedures shall provide
for such determinations to be made on a timely basis.'' Paragraph (3)
is the expedited decision process.
We recognize that providing advance determinations of coverage has
not been a common feature of commercial fee-for-service plans in the
past. However, the law's use of the present tense with regard to the
requirement for coverage determinations and its reference to the
expedited appeals process (which is intended to obtain a quick appeal
of a denial of a service not yet furnished) clearly anticipates that
there will be the opportunity for an advance determination of coverage
for all M+C plans. Moreover, the opportunity to acquire an advance
determination of coverage is particularly important since there is no
protection from retroactive denial for enrollees in an M+C private fee-
for-service plan. This is a source of great risk for enrollees in M+C
private fee-for service plans, who, unlike enrollees in coordinated
care plans, may seek treatment from any licensed provider that agrees
to accept the terms and conditions of the plan.
While the opportunity for advance determinations of coverage
presents the opportunity to minimize the risk by giving the enrollee
and provider the opportunity to determine whether the plan will pay for
the service and the amount for which the enrollee will be liable, it
does not provide protection to the enrollee that is comparable to the
protection provided by original Medicare under the provisions of
section 1879 (which apply to assigned claims) and under 1842(l) (which
apply to unassigned physician claims). These provisions hold the
beneficiary without fault when a services is denied as not medically
necessary to treat illness or injury unless the beneficiary was advised
by the provider in advance of the service that Medicare would not pay
and the beneficiary accepted liability if Medicare did not cover the
service. These provisions also permit a physician to take assignment on
a claim for Medicare services to be found to be not at fault and to be
paid by Medicare for the noncovered service if he can demonstrate that
he did not know and could not reasonably have known that the service
was not covered.
We considered and rejected imposing several requirements that would
have provided Medicare beneficiaries with protection like that
available under original Medicare. Specifically, we considered
requiring that the M+C organization must require that contracting
providers (including deemed contractors) submit claims for the services
they furnish to enrollees. We also considered but rejected requiring
the M+C organization to require that contracting providers (including
deemed contractors) assume the responsibility for acquiring an advance
determination of coverage from the plan or risk being unable to charge
the enrollee if they did not notify the enrollee in advance of the
service if the plan does not cover the care. This approach would have
provided enrollees protection from the liability of full payment in the
case of retroactive denials and would have given providers an
opportunity to minimize their risk by acquiring advance approval of
coverage.
However, we decided that it would be contrary to the spirit and
intent of the M+C fee-for-service legislation to impose these
requirements on providers and plans, since they would make the plan
much more like a coordinated care plan than like a traditional fee-for-
service plan. Moreover, such a construction would place the provider at
financial risk, contrary to the

[[Page 35043]]

definition of an M+C private fee-for-service plan.
Our silence in regulations on the claims filing requirements of M+C
private fee-for-service plans and the absence of any explicit mechanism
for providing protection to enrollees from retroactive denials of
coverage does not foreclose the possibility that an M+C private fee-
for-service plan may choose to address these issues. For example, the
M+C private fee-for-service plan may choose to include in its terms and
conditions of payment a requirement that the provider must bill the
plan for payment. Similarly, the M+C private fee-for-service plan may
choose to provide some level of payment for services subject to
retroactive denials as an additional benefit or as a supplemental
benefit under the plan. This could be an attractive feature of the plan
and a valuable benefit to enrollees.
Although we are silent on these issues, we remain concerned about
the absence of protections for beneficiaries who enroll in private-fee-
for-service plans. We are soliciting comments on these issues, and we
are particularly interested in comments on whether to apply the
protections discussed above as a requirement or how otherwise to
protect the beneficiary from being financially at risk, while not
creating undue burdens on providers and insurers.
In Sec. 422.216(f) we specify that any provider that does not have
a contract will be treated as having a contract in effect with the M+C
organization offering the M+C private fee-for-service plan if the
provider furnishing services (1) is aware that the beneficiary
receiving the services is enrolled in the plan, and (2) before
furnishing the services, has a reasonable opportunity to be informed
about the terms and conditions of payment and coverage under the plan.
Section 1852(j)(6) requires that we deem a noncontracting provider to
be a contracting provider when these criteria are met. In
Sec. 422.216(f) we further specify three general criteria, each of
which must be met for a provider to be deemed to have a contract with
the plan and which are discussed further in Sec. 422.216(g) and (h).
In Sec. 422.216(f) we specify that for the deemed contract
provision to apply the services must be covered under the plan and must
be furnished to an enrollee of an M+C private fee-for-service plan, by
a provider that does not have in effect a signed contract with the M+C
organization. We also specify in Sec. 422.216(f)(2) that the provider
must have been informed of the individual's enrollment in the plan and
must have been informed or given a reasonable opportunity to obtain
information about the terms and conditions of payment under the plan in
a manner reasonably designed to effect informed agreement. The
information must include the information described in
Sec. 422.202(a)(1).
In Sec. 422.216(g) and (h) we further clarify that the requirements
of paragraph (f) of this section are met (and the noncontract provider
is subject to the provisions for contracting entities) if the following
conditions are met.
Enrollment information must be provided by one of the following
methods or a similar method:
<bullet> Presentation of an enrollment card or other document
attesting to enrollment.
<bullet> Notice of enrollment from HCFA, a Medicare intermediary or
carrier, or the M+C plan itself.
We considered how best to ensure that the noncontracting provider
would be advised that the enrollee is enrolled in the M+C private fee-
for-service plan. However, since there is no direct contract between
the provider and the M+C private fee-for-service plan, it becomes
incumbent upon the enrollee to advise the provider of the enrollment.
Even where the provider had previously been notified of the
beneficiary's enrollment in the M+C private fee-for-service plan (e.g.
at the time of a previous service), the provider cannot automatically
assume that the beneficiary is enrolled in the plan and may not be able
to learn the beneficiary's enrollment status prior to providing
services. This occurs because, before 2002, beneficiaries can disenroll
from M+C plans at any time, either voluntarily or involuntarily by
moving out of the service area. After that date, the beneficiary can
disenroll within the first 3 months of the year or at any time if they
move out of the service area. Hence, there are very few times that a
noncontracting provider can know with certainty that the beneficiary
remains enrolled in the M+C private fee-for-service plan based on
previous knowledge of enrollment. If the provider fails to acquire
current enrollment information from the enrollee or the plan at the
time of each service, we do not see how he or she can be held to have
met the first test of ``deemed contract status'': knowing that the
beneficiary is enrolled in the plan.
To be a deemed contractor, the provider or supplier who knows that
the patient is enrolled in the plan must either have been given
information on payment terms and conditions or must have had a
reasonable opportunity to learn such terms and conditions of plan
payment. Under that circumstance, treatment of the patient implies
consent to the terms and conditions of plan payment.
To meet the requirement of having been given information on payment
terms and conditions, we specify in paragraph (h)(1) that the
information must have been communicated to one of the following:
<bullet> The provider of the services.
<bullet> The provider's employer or billing agent.
<bullet> A partnership of which the provider is a member.
<bullet> Any party to which the provider makes assignment or
reassigns benefits.
We expanded the list of parties to whom the information must be
provided beyond those of providers themselves in recognition that
providers, and in particular, individual physicians and practitioners,
seldom receive the insurance information that is sent to them and
seldom complete and submit their own claims. By reassigning insurance
benefits to other parties and by delegating the responsibility to
complete and submit claims to other parties, they are, effectively,
also delegating the authority to make decisions governing their payment
for which they remain responsible.
We also specify in paragraph (h)(1) that the information must have
been transmitted via mail, FAX, electronic mail or telephone.
Announcements in newspapers, journals, or magazines or on radio or
television are not considered communication of the terms and conditions
of payment. We specify how the information must have been provided
because we have been asked if general distribution of information to
the public (e.g. annual newspaper notice) is an acceptable notice to
bind the provider to being considered to be a deemed contractor. We do
not believe that it is reasonable for a plan to do a general public
notice since the provider may not see it and has no way of relating
that information to itself. However, where the plan has transmitted the
information directly to the provider by mail, FAX, electronic mail or
telephone, the statute's test of having been furnished the information
to the provider has clearly been met.
However, the law also provides that a provider that has a
reasonable opportunity to acquire the terms and conditions of plan
payment must be treated as if it were a contract provider. To implement
this provision of the law, we further specify in paragraph (h)(2) that
a provider that does not have a contract with the plan is deemed to
have a contract with the plan if the plan has an acceptable procedure
under which the provider could acquire the

[[Page 35044]]

terms and conditions of plan payment before providing services to the
enrollee. Specifically, we say that this test is met where the M+C plan
has in effect a procedure under which noncontract providers are advised
how to request the payment information and the plan responds to the
request before the provider furnishes the service. This procedure could
be the inclusion of a toll free telephone number or E-mail address on
the enrollment card for the provider's use in acquiring the terms and
conditions of payment. Where the plan responds to the provider's
request before the service is furnished, the provider would be treated
as a contract provider if the provider subsequently furnishes the
service to the enrollee, regardless of whether the provider agrees to
accept the terms and conditions of the plan.
The effect of these statutory provisions is that there are very few
circumstances in which a provider would not be treated as if it had a
contract with the plan. These would include but not be limited to the
following:
<bullet> Where the beneficiary did not notify the provider of
enrollment in the plan.
<bullet> Where the provider requested but was not furnished terms
and conditions of payment in advance of the provision of services to a
known enrollee.
<bullet> Where the plan did not have a process that provided terms
and conditions of payment.
We think that in most cases, plans will ensure that there is a
procedure in place for providing this information before services are
furnished. We think that the most likely circumstances in which a
provider will be considered to be a noncontracting provider will be in
cases of emergency where the provider has not previously been mailed
the terms and conditions of payment under the plan or where the
provider does not know that the beneficiary is enrolled in the plan.
In Sec. 422.216(h)(2)(iii) we specify that the plan must include
the following in the terms and conditions of plan payment that it must
furnish to providers of services:
<bullet> Billing procedures.
<bullet> The amount the plan will pay towards the service.
<bullet> The amount the provider is permitted to collect from the
enrollee.
<bullet> The information described in Sec. 422.202(a)(1).

V. Regulatory Impact Statement

A. Introduction

We have examined the impact of this rule as required by Executive
Order 12866 and the Regulatory Flexibility Act (RFA) (Public Law 96-
354). Executive Order 12866 directs agencies to assess all costs and
benefits of available regulatory alternatives and, when regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). The RFA requires agencies
to analyze options for regulatory relief of small businesses. For
purposes of the RFA, small entities include small businesses, non-
profit organizations and governmental agencies. Most hospitals and most
other providers and suppliers are small entities, either by nonprofit
status or by having revenues of $5 million or less annually.
Section 1102(b) of the Social Security Act requires us to prepare a
regulatory impact analysis for any proposed rule that may have a
significant impact on the operations of a substantial number of small
rural hospitals. This analysis must conform to the provisions of
section 603 of the RFA. For purposes of section 1102(b) of the Act, we
define a small rural hospital as a hospital that is located outside a
Metropolitan Statistical Area and has fewer than 50 beds.
The Unfunded Mandates Reform Act (Public Law 104-4) requires that
agencies prepare an assessment of anticipated costs and benefits before
proposing any rule that may result in an annual expenditure by State,
local and tribal governments, in the aggregate, or by the private
sector, of $100,000,000 or more (adjusted annually for inflation). This
rule does not impose any mandates on State, local, or tribal
governments, or the private sector that will result in an annual
expenditure of $100,000,000 or more.
Summary of the Interim Final Rule
As discussed in detail above, this rule implements the M+C program
as directed by the BBA of 1997. The primary objective of the M+C
program is to increase the number and types of health plan choices
available to Medicare beneficiaries.
Since the implementation of section 114 of the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA 82) (Public law 97-248), the
Medicare program has offered beneficiaries a prepaid capitated option
through HMOs and CMPs paid on a full risk basis. Enrollment by Medicare
beneficiaries in Medicare managed care risk plans has grown to over 4.5
million enrollees. The number of plans increased 31 percent in CY 1995,
36 percent in CY 1996, and 31 percent in CY 1997. With the
implementation of the M+C program, we expect that the rate of growth of
beneficiaries enrolling in capitated plans will continue.
The M+C program authorizes HCFA to contract with several new types
of entities not previously available to Medicare beneficiaries such as
provider sponsored organizations, preferred provider organizations,
entities offering an ``MSA plan'' and a contribution into an M+C
medical savings account (MSA), and M+C private fee-for-service plans.
These new options will provide Medicare beneficiaries with a broad
range of health insurance alternatives like those available in the
private sector. Based on current growth rates and other information
discussed later, we estimate that anywhere from 160 to 800 new entities
may apply to contract with HCFA as M+C organizations.
By expanding choices and providing extensive educational materials
through a coordinated open enrollment period, it is expected that
beneficiaries will choose plans and health delivery systems that will
maximize the benefits to these individuals.
The BBA also revamped the payment methodology for entities
receiving capitated payments from Medicare. These payment changes were
intended primarily to insure that the amounts paid to M+C organizations
were fair and equitable to both the Medicare Trust Funds and to the
participating organizations. Although Medicare's capitation rates had
been set at 95 percent of expected costs based on actual fee-for-
service costs, there is significant evidence that Medicare has paid
more for enrollees in the managed care program than it would have paid
in the fee-for-service program. This is due primarily to the favorable
selection that these plans have experienced. The new payment rules slow
the annual increase M+C organizations would have received under the old
payment methodology. In addition, there has long been concern regarding
the regional variation in payment rates, particularly between urban and
rural counties. Because the capitated payment rates had been based upon
the fee-for-service payments, the capitated rates not only included the
variation in local prices, they also reflected different fee-for-
service practice patterns in each region. To level out the variation in
payment rates, the new methodology uses a blend of local and national
rates and input price adjustments to insure the payments more closely
reflect the different prices in the region while giving less weight to
the different utilization rates. Finally, to insure that the new
options would be

[[Page 35045]]

viable in all parts of the country a floor on capitated payments was
introduced.
Summary of Discussion of Impact
We believe that the overall impact of this regulation should be
beneficial to Medicare beneficiaries by providing them with more
options to receive health care. However, although many of the
provisions in this regulation are intended to assist beneficiaries by
providing them with comparative information, we are concerned that the
many new choices and types of plans may prove confusing even for the
most knowledgeable consumers. Reductions in capitated payment amounts
in what are now relatively higher payment areas may result in reduced
benefits for beneficiaries. Providers (especially rural providers)
should benefit from this regulation because they can contract directly
with HCFA under the PSO provisions. New contracting entities will
benefit as the Medicare statute has not previously permitted entities
that were not state licensed HMOs or CMPs to participate in the
Medicare managed care program. Providers could be negatively impacted
if they contract with M+C organizations by the degree that any
reduction in the rate of growth in payments to M+C organizations will
be passed on to them. We also recognize that existing contractors and
States may be adversely affected but cannot quantify to what degree.
This impact analysis will focus on the provisions of the BBA and this
regulation that significantly alter the risk program we have been
administering since 1985. The major differences between the section
1876 risk program and the M+C program are:
The coordinated open enrollment and public education campaign:

New payment methodology for contracting plans
Introduction of New Contracting Entities
Provider Sponsored Organizations
Medicare Savings Account Plans
Private Fee-for-Service Plans
New Quality Standards

Our analysis will assess the impact these changes will have on
Medicare beneficiaries, the Medicare Trust Funds, providers, managed
care entities, and States. Whenever possible, we will use appropriate
methods for assessing the impact quantitatively. However, because of
the large number of unknowns--such as the prospective number of
contracting organizations--this analysis relies upon many simplifying
assumptions.

B. Coordinated Open Enrollment and Public Education Campaign

Section 1851 directs HCFA to hold annual coordinated open
enrollment periods beginning in November 1999 (all plans will also be
open to enrollment in November 1998) to allow eligible beneficiaries
the opportunity to enroll in M+C organizations. It also directs HCFA to
broadly disseminate information to current and prospective Medicare
beneficiaries on the coverage options available in order to promote an
active, informed selection among such options. At least 15 days before
each annual, coordinated election period, HCFA will send to each
eligible individual a notice containing information in order to assist
the individual in making an election. This information describes M+C
options as well as original Medicare. In addition, M+C organizations
are directed to provide plan-specific information.
The public education campaign will include information on covered
benefits, cost sharing and balance billing liability under the original
Medicare program; election procedures; grievance and appeals rights
under the original Medicare fee-for-service program and the new M+C
program; information on Medigap and Medicare SELECT; and the
beneficiary's right to be protected against discrimination based on
health status.
The costs of the coordinated open enrollment and public education
campaign will be borne primarily by the participating M+C plans.
Section 4001 of the BBA added a new section 1857(e)(2) to the Social
Security Act that establishes a fee requirement under which M+C
organizations and section 1876 contractors must contribute their pro
rata share, as determined by the HCFA, of costs related to enrollment,
dissemination of information, and the counseling and assistance
programs.
The annual fee will be assessed by HCFA on all participating
organizations. The amount of the user fee will vary year to year as
determined through the appropriations process. The BBA authorized
ceiling amounts of $200 million in FY 98, $150 million in FY 99, and
$100 million annually in FY 2000 and beyond. However, in FY 1998 HCFA
was authorized to collect only $95 million through the appropriations
process.
On December 2, 1997 HCFA gave notice of our methodology of
assessing current contractors for their pro rata share of the expenses
associated with the CY 1998 information campaign. To determine each
organization's share, we divided the total amount appropriated for the
information campaign by the total projected revenues for the first 9
months of CY 98. The resulting percentage was deducted from the
payments to contracting organizations.
We explored several alternatives to this methodology. One option
was to assess each organization on a per capita basis (by number of
Medicare enrollees). Another option was to assess each organization on
the percentage of revenue they received from capitated Medicare
payments, but have a cap on the highest amount any organization would
pay.
We rejected both of these methodologies as not consistent with the
goals of the BBA. One of the primary effects of the reformed payment
methodology of the BBA was to even out variation between high and low
payment areas. By charging a per capita amount, those organizations
that are located in areas that have a high payment rate would pay a
reduced percentage of their revenue. Or put another way, we deemed that
if an organization received a higher payment per person, it should pay
a correspondingly higher user fee for its share of the education
campaign. We also decided not to put a cap on the assessment any
organization would receive based on the premise that only large
organizations would receive the benefit of a cap and smaller
organizations would have to pay more to make up the difference. This
did not seem fair or consistent with our intention of encouraging the
creation of new contracting entities and spurring competition in areas
with lower payment rates.
As stated in the interim final rule (M+C Program: Collection of
User Fees from M+C Plan and Risk-Sharing Contractors (42 CFR 417.470-
417.472)), we will establish a fee percentage rate and collect the fees
over nine consecutive months beginning with January until the
assessment limit has been reached. The following table illustrates the
method by which we will calculate the fee percentage rate, provides the
rate for FY 1998, and sets forth projections for FY 1999-2002.

[[Page 35046]]

Table 1.--Collection of Contributions From Organizations for Costs Relating to Information Dissemination
----------------------------------------------------------------------------------------------------------------
Projected
fiscal year Projected Projected Fee amount
total medicare medicare Authorized secretary percentage
medicare payment to payment to assessment is directed of
payment to organizations organizations amount (in to collect projected 9-
organizations per month (in over 9 months millions of (in month
(in millions millions of (in millions dollars) millions of payment
of dollars) dollars) \2\ of dollars) \4\ dollars)
\1\ \3\ \5\
----------------------------------------------------------------------------------------------------------------
FY 1998..................... 30,000 2,465 22,181 200 95 .428
FY 1999..................... 38,000 3,167 28,500 150 150 .526
FY 2000..................... 47,000 3,917 35,250 100 100 .284
FY 2001..................... 63,000 5,250 47,250 100 100 .212
FY 2002..................... 64,000 5,333 48,000 100 100 .208
----------------------------------------------------------------------------------------------------------------
\1\ Source: Congressional Budget Office, The Economic and Budget Outlook: Fiscal Year 1999-2008. January 1998.
\2\ Projected total fiscal year payment divided by 12 (months).
\3\ Projected monthly payment amount multiplied by 9 (months).
\4\ New Section 1857(e)(2)(D) of the Social Security Act, as added by the BBA (Public Law 105-33).
\5\ For purposes of these projections, we have assumed that Congress will include the full amount authorized
under the BBA.

As noted in the interim final rule published on December 2, 1997,
we believe that assessing the fees to reflect an organization's pro
rata share of the expenses associated with the information campaign
will require the deduction of only a very small percentage of any
organization's total annual Medicare payments. For example, in FY 1998
the percentage fee assessment is 0.428 percent--less than one-half of
one percent. In subsequent fiscal years the fees as a percentage of
Medicare payments will likely represent an even smaller percentage of
the Medicare payments as the number of eligible organizations increase
and the existing organizations experience enrollment growth.
Information Campaign
In general, we believe that this investment in new forms of
information dissemination should be beneficial to Medicare
beneficiaries, contracting organizations, and the Medicare program. By
providing extensive educational materials, it is expected that
beneficiaries will choose organizations and health delivery systems
that will maximize the benefits for them. Finally, while organizations
face an assessment fee to support information campaign activities, it
comprises a very small proportion of their revenue from the Medicare
program and could serve to enhance their marketing efforts and to save
marketing expenditures.
HCFA's information dissemination activities provided for under this
regulation encompass a variety of interventions, including mailings of
standardized, comparative information about coverage options, an
Internet web site with such information, and a toll-free telephone line
for beneficiary inquiries. In addition, the regulation provides for
information dissemination activities to be undertaken by M+C
organizations, including mailings to Medicare enrollees of plan-
specific information and the provision of additional information upon
request by Medicare eligible individuals.
In order for market competition to work effectively, consumers must
have information about their choices in order to make good decisions.
The information dissemination efforts provided for under this
regulation will give Medicare beneficiaries information about the
Medicare market, enabling them to compare fee-for-service coverage to
managed care coverage, as well as coverage under different M+C
organizations.
The Medicare program and managed care arrangements are inherently
complex subjects, and it is challenging to communicate information that
is meaningful and accurate. Many studies have shown that Medicare
beneficiaries' level of understanding of how the Medicare program works
today is very low (GAO, 1996) and this lack of understanding could be
compounded by the introduction of a new array of choices if
beneficiaries lack sufficient information or lack the skills or
understanding necessary to use available information.
For example, studies have found that many individuals who
disenrolled from Medicare risk HMOs misunderstood the nature of the
plan, such as the lock-in feature. (OIG, 1997; GAO, 1996; IOM, 1996).
As Medicare beneficiaries become better informed about the Medicare
program generally and their options under M+C specifically, they will
be able to make more informed decisions about meeting their health care
needs, leading to fewer disenrollments based on misunderstandings.
Disenrollment can be costly for plans. In 1996, a GHAA study estimated
that disenrollment costs plans close to $1,300 per Medicare
disenrollee. (GHAA, 1996)
While enhancing beneficiary choice is positive and providing
beneficiaries with information on their choices is necessary, we are
concerned that Medicare beneficiaries, especially in areas where
several M+C organizations are operating, may experience information
overload. Beneficiaries may have great difficulty in understanding the
different types of plans available to them in their area or
understanding the different benefit packages plans may offer.
Beneficiaries will be required to assess their health needs in relation
to the benefits being offered and they may well have to choose among a
wide array of different benefit packages. These will be difficult
choices and some beneficiaries may not choose the option best suited to
their individual needs.
We believe important secondary effects may ensue as well. To date,
plans have competed primarily on the basis of price and benefits. Broad
dissemination of plan-specific information, including quality measures,
should encourage competition among organizations based on quality
factors, in addition to price and benefits. As Medicare beneficiaries
become more familiar with health plans, their expectations of plan
performance and quality services will increase. Enhanced beneficiary
awareness will provide an incentive to plans to improve in areas that
beneficiaries demonstrate are important to their decision making, such
as the availability of certain providers and positive customer service
experiences.
Moreover, beneficiaries will be better health care consumers in
general if they understand their rights under managed

[[Page 35047]]

care and how to make a plan work for them. As Medicare enrollees
receive more information and become more active decision makers on plan
options, we believe they will also become more informed and active
decision makers with respect to meeting their personal medical needs.
More informed and active decision making on the part of enrollees will,
in turn, facilitate plans' efforts to manage the delivery of
appropriate, high quality health care services.
In addition, it should be noted that the information campaign is
designed to reach all Medicare beneficiaries, and it is likely that, to
the extent that this encourages growth in the M+C program,
organizations will be well positioned to take advantage of the
expanding market. Since the number of organizations and total revenues
over which the BBA fee collections will be spread is likely to continue
to rise with increased participation in the M+C program in future
years, we believe the regulatory impact of the selected option for
imposition of fees on M+C organizations will not be significant.
Moreover, M+C organizations will benefit from the increased visibility
they will receive through the focused information campaign each open
enrollment season.
Aside from the benefits of the public education campaign there are
benefits derived from the coordinated open enrollment for contracting
organizations, beneficiaries, and to a lesser degree the Medicare Trust
Funds, as discussed below.
Coordinated Open Enrollment and Beneficiary Lock-In
We anticipate that the transition into a coordinated open
enrollment period and the beneficiary lock-in will be beneficial to M+C
organizations in their efforts to attract and retain Medicare
enrollees. It also will allow them to maximize their visibility as
beneficiaries focus on information about plans during a single,
coordinated period. An annual open enrollment period may present a
challenge for start-up organizations that did not have the benefit of
adding enrollment during continuous open enrollment periods available
before 2002. However, the M+C beneficiary lock-in will provide a more
stable enrollment base for all participating organizations.
Current contractors have conveyed that continuous open enrollment,
which was prevalent prior to passage of the BBA, provided an incentive
for beneficiaries that exhaust extra benefits offered by one HMO/CMP to
switch to another HMO/CMP or back to traditional fee-for-service
Medicare. This behavior provides a disincentive for M+C organizations
to offer extra benefits, and we anticipate that M+C organizations will
be more likely to offer extra benefits if concerns about enrollees
disenrolling upon exhausting a benefit are diminished.
Moreover, as the lock-in is phased in, organizations offering M+C
plans will operate within a framework that supports their efforts to
manage the delivery of health care services. For example, if
beneficiaries are not moving in and out of a plan, the M+C organization
offering the plan will be better able to track a beneficiary's
utilization of services over time. The lock-in will encourage plans to
invest more in preventive health services or screening of new
enrollees, because it increases the likelihood that the plan will
retain its members long enough to benefit from eventual savings due to
reduced morbidity. (PPRC, 1996)
We also note that M+C organizations will have to address the
potential staffing and administrative requirements associated with a
lock-in and a compressed enrollment period, such as how to staff
appropriately to handle inquiries during the open enrollment period,
how to process new enrollees when enrollment begins, and how to conduct
initial physical histories and review medications for new enrollees.
Therefore, there will be added burdens on the M+C organizations as they
experience administrative and clinical burdens in implementing the
lock-in. M+C organizations may have to hire temporary staff and this
would be a cost to them (PPRC, 1996)
Although beneficiaries will have less flexibility with a lock-in
period, they will also benefit from a coordinated open enrollment
period because it provides a framework conducive to informed decision
making. Similar to the experience of many individuals in the private
sector, beneficiaries will receive extensive information each year,
allowing them to compare all options simultaneously. By receiving
standardized, comparative information during an annual, coordinated
period, beneficiaries will find it easier to make appropriate choices
among competing plans and between these plans and traditional Medicare
fee-for-service. An annual coordinated open enrollment period will
maximize the opportunity for all beneficiaries to make decisions that
best meet their own needs.
Some beneficiaries may be more reluctant to enroll in an M+C
organization if they must remain enrolled for extended length of time.
The Office of Inspector General surveyed a two-stage random sample of
4,065 enrollees and disenrollees from 40 Medicare risk HMOs to compare
their responses and to gain greater insight into HMO issues. The
majority of beneficiaries surveyed stated that their most important
reason for joining an HMO was their desire for more affordable health
care. Only 17 percent of beneficiaries said they would be more hesitant
to join an HMO if they did not have the option to disenroll at will.
(OIG 1998) (see Table 2).

Table 2.--Effect of Mandatory One-Year Enrollment--1996
[In percent]
------------------------------------------------------------------------
All Enrollees Disenrollees
------------------------------------------------------------------------
If beneficiary had to stay in
HMO for one year, the effect on
the enrollment decision would
be:
--more likely to join....... 34 34 22
--less likely to join....... 17 16 33
--no effect on decision..... 49 49 45
------------------------------------------------------------------------
Source: U.S. Department of Health and Human Services, Office of the
Inspector General, Beneficiary Perspectives of Risk HMOs 1996, OEI-06-
95-00430 (March 1998).

Beneficiaries retain the protection of the right to disenroll where
the M+C organization's misrepresentation or the beneficiary's
misunderstanding results in an enrollment that should not have
occurred. In addition, the year-long opportunity for newly eligible
aged individuals to disenroll and return to original Medicare is a
particularly valuable protection for many beneficiaries who may be just
beginning to understand the implications of new

[[Page 35048]]

options. ( Newly eligible disabled beneficiaries are not afforded this
option.) Beneficiary protections are enhanced by guaranteed issue of
Medigap policies for first-time M+C enrollees who gave up supplemental
coverage upon enrolling in an M+C organization and disenroll within 12
months, and for newly eligible aged beneficiaries who enroll in an M+C
organization at age 65 and disenroll within twelve months of becoming
eligible for Medicare.
Finally, we believe the lock-in will benefit the Medicare Trust
Funds. The General Accounting Office found that the flexibility for
beneficiaries to disenroll at will can cause problems for the Medicare
program. (GAO, 1997) For example, beneficiaries could decide to use an
M+C plan or other private plans while in relatively good health but
disenroll to fee-for-service when their health care needs increased.
The result could be a disproportionate number of less healthy
beneficiaries in the fee-for-service sector, excess payments to HMOs,
and unnecessary Medicare spending. We believe that the nine-month lock-
in period will help reduce risk selection and, consequently, reduce the
current problem of paying monthly premiums for beneficiaries while they
are healthy but paying traditional claims when they become ill and
disenroll from a managed care plan.

C. New Payment Methodology for M+C Plans

Section 1853 directs HCFA to modify the payment methodology for
entities receiving capitated payments from Medicare. These payment
changes are intended to: promote savings, reduce geographic variation
in the rates, and stimulate the growth of new entities to serve
Medicare beneficiaries in historically underserved areas. As described
above, beginning in 1998, monthly county rates are the greatest of: (1)
a minimum payment amount (of $367 in 1998); (2) a minimum percentage
increase of 2 percent over the preceding year's payment for the area;
and (3) a blend of the area-specific rate and an input-price adjusted
national rate, further adjusted by a budget neutrality adjustment. The
area-specific portion of the blended rates and the minimum payment
amount are updated each year by the national average per capita
Medicare growth rate (with specified reductions from 1998-2002).
Payment changes to M+C organizations figure prominently in reducing
overall Medicare spending and postponing the depletion of the Medicare
Trust Fund from 2001 to 2010. The CBO estimates that the BBA reduces
Medicare spending by $116.4 billion dollars between 1998 and 2002. An
estimated $22.5 billion, or almost 20 percent of total Medicare savings
under the BBA, is attributable to payments to M+C organizations. Much
of the savings is attributable to lower payment rates in the original
Medicare program. Additionally, removal of GME and IME from the
capitated payments to M+C organizations represents a redirection of $4
billion, which would be paid directly to providers. All told, the BBA
payment changes are estimated to reduce annual spending increases for
both the M+C program and original Medicare from 8.5 percent to about 5
percent a year between 1997 and 2002.
The new payment methodology will lessen the significant geographic
variation in payments by reducing the influence of factors that cannot
be explained by geographic differences in medical input prices. Under
the pre-BBA methodology, capitation amounts were based on actual per
capita costs for original Medicare in each enrolled's county of
residence. Under the BBA formula, adjustments for input prices is
specifically included in the computation of blended rates, but the
influence of practice pattern differences is gradually minimized
through the payment blending. Over the period 1998-2002, each county's
blended payment amount is increasingly based upon a standardized rate
that reflects practice patterns across the country. In this way, the
new methodology attempts to achieve a more equitable distribution of
payments, and will hopefully encourage plans to focus on implementation
of quality-based, cost-effective treatment methods.
One of the chief considerations in restructuring the payment
methodology was evidence that Medicare managed care organizations have
attracted healthier and therefore less expensive enrollees than fee-
for-service organizations. In its 1996 Annual Report to Congress the
PPRC reported on a study of enrollees in Medicare risk plans between
1989 and 1994. This study showed that those enrolled in managed care
plans cost the Medicare program only 63 percent as much as the average
Medicare beneficiary during the six months preceding enrollment when
both groups were enrolled in traditional Medicare. In contrast, persons
who disenrolled and returned to traditional fee-for-service Medicare
cost the program 160 percent as much as the average beneficiary in the
six months following disenrollment. In its December, 1997 study, the
Congressional Budget Office estimated that Medicare paid 6-8 percent
more for enrollees in risk-based HMOs than it would have paid for those
enrollees under fee-for-service Medicare. Although prior law did set
Medicare capitation rates 5 percent below fee-for-service payments
under original Medicare, this reduction was not enough to compensate
for favorable risk selection. The new methodology mandated by the BBA
requires risk adjustment beginning in the year 2000.
Medicare managed care enrollment has grown steadily in recent
years. However, most of the growth has been concentrated in urban
areas. Between December of 1990 and December of 1997, enrollment in
risk contracts grew from 3.3 percent of Medicare beneficiaries to 14.0
percent. Twenty-four percent of beneficiaries residing in large urban
areas with a population of 1 million or more were enrolled in a
Medicare risk plan in June of 1997. Twelve percent of beneficiaries
residing in areas adjacent to large urban areas and smaller
metropolitan areas, and less than 3 percent of Medicare beneficiaries
residing in rural areas, were enrolled in a Medicare risk plan.
Approximately thirty-three percent of Medicare beneficiaries reside in
an area that is not served by any Medicare managed care organization.
We assessed the impact of the payment methodology by first
considering the overall impact and then considering the impact of
changes in payment on specific entities. The potential overall impacts
of changes in payment are: reductions in spending; redistribution of
payments; increases in enrollment in M+C plans; changes in the
distribution of enrollment in M+C plans; and the creation of a more
competitive market offering a wider range of choices for Medicare
beneficiaries.
We have identified the types of entities and individuals that will
be directly affected by changes in payment. They include:
beneficiaries, M+C organizations offering coordinated care plans
(including current Medicare managed care contractors), and M+C
organizations offering private fee-for-service plans or MSA plans,
States, providers, and the Medicare Trust Funds.
One clear impact of the revised payment methodology is decreased
spending relative to estimates of spending under prior law. In its BBA
analysis, CBO estimated that changes in payments to managed care plans
save $22.5 billion between 1998-2002. As stated earlier, these savings
contribute significantly toward efforts to extend the long-term
solvency of the Medicare Part

[[Page 35049]]

A Trust Fund. Table 3 provides more recent alternative projections of
$30 billion in savings between 1998-2003. (HCFA Office of the Actuary,
3/98.)

Table 3.--Projected Impact Due to Changes in Payment Methodology
------------------------------------------------------------------------
Savings (in
Fiscal year billions of
dollars)
------------------------------------------------------------------------
1998....................................................... 0.3
1999....................................................... 0.7
2000....................................................... 4.4
2001....................................................... 6.6
2002....................................................... 8.1
2003....................................................... 9.2
------------------------------------------------------------------------
*Includes risk adjustment.
Source: HCFA Office of the Actuary, 3/98.

As noted above, projected savings due to the change in the M+C
payment methodology are also tied in part to the overall savings in
Medicare created by BBA changes in payments to Medicare fee-for-service
providers. Specifically, since the National Per Capita M+C growth
factor (NGP) is defined as the ``projected per capita rate of growth in
Medicare expenditures'' reduced by the BBA's specified percentage
reduction, the NGP will include the impact of reductions and/or slower
increases to provider payments in the original Medicare program.
Another factor that affects the amount of savings is the minimum
payment amount and the minimum percentage increase. Because the payment
methodology does not allow for reduction of the floor and minimum
payment increases, budget neutrality, which is achieved by reducing or
increasing the blended rates, may not be achieved in all years where
the computation requires a reduction in the blended rates. This
situation occurred in the calculation of the 1998 and 1999 rates, when
no county received the blended rate because the budget neutrality
adjustment brought all rates to an amount below the amount of the
minimum 2 percent increase. See discussion in Section II.F. above.
It is clear that one aspect of the new payment methodology, the
floor, actually increases spending compared to prior law. CBO estimates
that increasing payments to the floor counties will cost $2.2 billion
more than expected under previous law over the 5-year period of 1998-
2002. However, increasing payment to floor counties meets important
policy objectives in that by reducing payment disparities it is hoped
that more choices will become available in under-penetrated areas.
The payment methodology has removed some of the variation in
payment rates by increasing payment rates in lower payment counties
through use of a minimum payment amount. In the future, blending will
further reduce variation by reducing the influence of local fee-for-
service costs in the blended rates. Table 4 shows the impact of the
payment methodology by location. The floor rate increased payments
significantly in rural areas and in some urban counties as well.

Table 4.--Average and Range of Medicare County Payment Rates, by Location, 1997-1998
----------------------------------------------------------------------------------------------------------------
1997 Range 1998 Range
1997 Average 1998 Average (Low:High) (Low:High)
----------------------------------------------------------------------------------------------------------------
All Counties................................ 470 484 221:767 367:783
Central Urban............................... 546 557 349:767 367:783
Other Urban................................. 440 452 256:728 367:742
Urban Fringe................................ 394 413 231:693 367:707
Other Rural................................. 371 397 221:647 367:660
----------------------------------------------------------------------------------------------------------------
Source: MEDPAC, March 1998 Report to Congress: Medicare Payment Policy.

A further change in the methodology is the graduate medical
education (GME) carve-out. While the removal of GME does not generate
savings for the Medicare trust fund or Medicare GME, it does reduce
capitation rates in counties that historically received GME payments
(except in counties where the minimum payment amounts apply). In
general, GME carve-outs disproportionately affect urban managed care
organizations because urban counties house more teaching hospitals.
Table 5 shows the 1995 GME percentages in urban and rural counties.

Table 5.--Estimated Graduate Medical Education Payment Reductions as a
Proportion of Medicare Risk Payment Rates by Urban and Rural Location
(percentage), 1995
------------------------------------------------------------------------
Location GME percentage
----------------------------------------------------------
All
Countie
s...... 3.4
Urban
Countie
s...... 3.8
Centra
l
Urban 5.3
Other
Urban 3.1
Rural
Countie
s...... 2.1
Urban
Fring
e.... 2.2
Other
Rural 1.9
------------------------------------------------------------------------
Source: PPRC, 1997 Annual Report to Congress, Chapter 3, p. 62.

We anticipate that these changes to the variations payment will
affect the enrollment distribution of M+C enrollees.
The methodology has already increased capitation levels in rural
areas now receiving the payment floor, in some counties significantly.
HCFA's Office of the Actuary currently predicts that the blended rates
will begin in CY 2000, which should increase rates in some rural areas
that received the 2 percent increase in 1998 and 1999. In fact, to the
extent that blended rates are eventually applied under the budget
neutrality rules, the blended rate will gradually elevate payments to
counties that have an area-specific payment that is below the national
average as adjusted for input prices.
The improved incentives in rural counties should prompt M+C
organizations to contract in these areas. Greater participation of
managed care plans in rural counties should spur increases in M+C
enrollment in the long run. CBO expects an incremental gain of 3
percent market share for coordinated care plans by 2002. This growth
occurs, for the most part, in non-urban areas. It

[[Page 35050]]

is expected that higher payments in rural areas will encourage M+C
organizations to offer plans in these areas. In particular, PSOs were
included as an M+C option in part because of the belief that rural
providers might organize M+C organizations in their areas which,
because of their smaller population bases, generally have not been as
attractive to managed care plans for commercial or Medicare business.
Table 6 provides a profile of the distribution of risk contractors
and enrollment prior to passage of the BBA.

Table 6.--Distribution of Medicare Risk Enrollment, and Risk Contractors
----------------------------------------------------------------------------------------------------------------
Percent of Percent of
Percent of Percent of Percent of counties counties
beneficiaries counties counties offering 2- offering
Location in risk plans offering 0 offering 1 4 risk more than 5
(6/97) risk plans risk plan plans (6/ risk plans
(6/97) (6/97) 97) (6/97)
----------------------------------------------------------------------------------------------------------------
Urban (MSA of 1 million or more)............. 24 0 2 19 79
Other Urban (surrounding counties or smaller
MSA)........................................ 11.8 27 12 34 27
Fringe Urban (rural areas bordering MSA)..... 2.6 71 18 11 1
Other rural areas............................ 1.1 91 6 3 0
----------------------------------------------------------------------------------------------------------------
Source: MEDPAC 1997 Chartbook.

It is expected that as more M+C organizations enter the Medicare
market, competitive pressures will increase. As the payment changes are
implemented and geographic variation in payment levels is reduced, the
profitability of M+C organizations will be driven less by where they
deliver services, and more by how well they deliver services. An
organization's success will depend on the quality of services offered,
the extent and clarity of an organization's communications with
beneficiaries, the ability of a plan to effectively manage the
provision of care to Medicare beneficiaries, and the satisfaction
levels of Medicare enrollees in a plan, as well as the benefits offered
and the premiums charged. These competitive forces should provide
increased access to high quality services under capitated plans for
Medicare beneficiaries.
For beneficiaries in rural areas we believe the overall impact of
these changes should make participation in the M+C program a more
viable option. Conversely, as payment rates become less robust in urban
areas and margins decrease, some coordinated care plans may choose to
reduce benefits, or increase premiums. Reductions in benefits or
increases in premiums would have a negative impact on beneficiaries.
We should also note here that oftentimes we look at payment as a
driving force in the Medicare program as a whole. While the increased
payment to rural counties should on its face provide an incentive for
organizations to offer their services and products in rural areas, that
may not always be the case. That is, some may assume that when Medicare
pays coordinated care plans considerably more than the average per
capita fee-for-service cost in a geographic area, as it does in many of
the payment floor counties, this would cause organizations to rush to
enter into contracts in these areas. However, plans may decide that the
smaller pool of potential enrollees (and hence the smaller pool over
which to spread risk) do not justify either their added financial risk
or the proportionally larger start up and marketing costs associated
with launching a plan in a rural area.
We believe and Congress intended that these increases for rural
counties would stimulate the growth of capitated plans in these areas.
However, there still is a large degree of uncertainty over the actual
effects of the BBA changes for rural areas. In the end only M+C
organizations can really determine if the payment levels justify their
costs.

D. Introduction of New Contracting Entities

In general, we believe that new entities will be formed to serve
the Medicare market. As discussed above, the new payment methodology
and the availability of PSO and MSA plans should stimulate the private
sector's development of entities to compete for Medicare beneficiaries.
While estimates of the development of new entities are somewhat
speculative, the following are our best estimates based on currently
available information, enrollment projections, informal surveys and
discussions with industry representatives.
Provider Sponsored Organizations: The Congressional Budget Office
projects that PSO enrollment will reach a 3 percent share of Medicare
beneficiaries, or about 1 million beneficiaries, by 2002 and that a
significant portion of the PSO enrollment will be in rural areas (CBO,
1997).
Currently, there are approximately 5.5 million beneficiaries
enrolled in 307 Medicare risk products, which is an average of
approximately 8,000 enrollees per Medicare risk plan. We believe that
CBO's projections, presented in the following table, represent a good
estimate of the approximate number of new PSO plans that will be
established. Some industry analysts have projected a higher level of
certified PSOs than projected by CBO. While we believe it is highly
unlikely that as many as 25 PSOs will be certified by the end of 1998,
we believe that CBO's projections for 1999 and thereafter are
reasonable.

------------------------------------------------------------------------
Enrollment estimate Year New PSOs
------------------------------------------------------------------------
100,000....................................... 1998 25
400,000....................................... 1999 50
600,000....................................... 2000 75
800,000....................................... 2001 100
1,000,000..................................... 2002 125
------------------------------------------------------------------------
Source of enrollment estimate: CBO, 1997.

As a secondary impact, the M+C program could result in expanded
availability of PSOs, particularly in rural areas. That is, PSOs that
are successful in their Medicare contracts may decide to expand into
the commercial market. In turn, if commercial payers learn of their
success in serving the Medicare population, they may have more
confidence in the ability of PSOs to assume and manage risk and may,
therefore, be more interested in contracting with them.
Private Fee-For-Service Plans: The Congressional Budget Office
projected that no Medicare beneficiaries will enroll in private fee-
for-service plans, and no reliable estimates for the number of likely
private fee-for-service market entrants are available. However, we have
received some expressions of

[[Page 35051]]

interest from insurance carriers and others regarding how these plans
will work and whether there is an opportunity to serve Medicare
beneficiaries. If offered, we would expect them to be most attractive
to wealthier beneficiaries because of their anticipated higher premiums
and other out-of-pocket costs. While private fee-for-service plan
providers are allowed to engage in limited balance billing, there is no
statutory limit on premiums that a plan may charge beneficiaries.
Medical Savings Account Plans: The Congressional Budget Office
estimated that 390,000 Medicare beneficiaries will enroll in M+C MSA
plans by 2000. This is the statutory limit for the total number of
beneficiaries that can enroll in the MSA demonstration. While there are
no reliable estimates on the number of organizations that will offer
M+C MSAs, we expect that many organizations offering MSA plans in the
commercial marketplace will offer MSA plans in the Medicare market as
well.
According to a recent General Accounting Office study, 57 carriers,
including three HMOs, offered MSA plans in the commercial market as of
the summer of 1997. Blue Cross & Blue Shield plans represented almost
one-third of the plans offered in the market. At that time, an
additional fifteen carriers and eight HMOs indicated an interest in
offering MSA plans. However, commercial enrollment in MSA plans has
been considerably lower than had been anticipated. While the
demonstration project under the Health Insurance Portability and
Accountability Act allowed for 750,000 MSAs to be sold, as of June 30,
1997, only 17,145 individuals had enrolled in these new products,
according to the Internal Revenue Service.
The GAO found that the complexities surrounding the tax
implications of an MSA product, increased time necessary to explain the
product to customers, and lower commissions to brokers/agents for
selling a high deductible product have contributed to the low number of
plans sold. However, some of these complexities may be mitigated under
the BBA, as beneficiaries are barred from contributing their own money
to the medical savings account, and they will receive extensive
information about MSA plans as part of the annual information campaign
on their M+C options.
Impact of New Contracting Entities
Beneficiaries may benefit from competitive pressures on M+C
organizations to compete on such factors as reduced premiums, extra
benefits, and quality. However, the difference between out-of-pocket
costs under managed care plans and the traditional fee-for-service
program may decrease as M+C payments moderate. Under the Medicare risk
program, beneficiaries enrolled in risk HMOs generally have had lower
out-of-pocket costs than beneficiaries in the traditional Medicare fee-
for-service sector. For example, a recent study by the American
Association of Retired Persons projected that beneficiaries enrolled in
a Medicare managed care plan will spend an average of 16 percent of
their annual income, or $1,775, on out-of-pocket health care costs, in
1997. This is compared to the estimated out-of-pocket expenses for
Medicare fee-for-service beneficiaries, which were projected on average
to be 21 percent of their annual income, or $2,454, on out-of-pocket
costs. (AARP, 1997).
We also anticipate that many providers will have new opportunities
to serve Medicare beneficiaries, such as through provider sponsored
organizations or through strategic partnerships with other coordinated
care plans seeking to enter new markets. As M+C enrollment grows,
providers will find it increasingly important to their business to
participate in an M+C network as many of their patients will be locked
into these networks. In turn, we believe M+C organizations will seek to
contract with providers that are capable of serving both their
commercial and Medicare populations.
Finally, the M+C program will most affect those states in which the
greatest market opportunities for newly created M+C organizations
exist. Oversight and licensing responsibilities will likely increase
for such states as newly created M+C organizations, such as PSOs, seek
to serve the Medicare market. The BBA increases the workload for States
only to the extent that new organizations will begin operating in the
State. It is likely that States will also have to monitor the
compliance of PSOs that have a waiver of State licensure in the case of
quality and consumer protection standards. This constitutes an
additional workload of partial monitoring of plans that are not subject
to State solvency requirements.
Many states will be confronted with issues on licensing of PSOs,
whether by bringing such entities under existing HMO laws and
regulations or establishing separate PSO licensing provisions. In a
recent report, the National Association of Insurance Commissioners
reported that ten states have already enacted state-level PSO
regulation (NAIC, 1997), and the National Council for State
Legislatures reports that thirteen states currently are considering PSO
legislation.
States will also have to integrate PSOs into their state guaranty
fund or other mechanism for protecting beneficiaries against insolvent
plans. While this will not be a new function, it is expected to
increase the amount of regulatory oversight necessary due to new market
entrants and could place burdens on a state's ability to protect
consumers if PSOs become insolvent.
Finally, the preemption of state mandated benefit and provider
participation laws will lead to mandated benefits being applied to a
smaller number of State residents. However, states may still enforce
any laws relating to cost-sharing for a benefit included in an M+C
contract as well as any laws restricting balance billing practices by
providers. Moreover, we believe that few states will be impacted by the
BBA's prohibition on state imposition of premium taxes on payments to
Medicare risk contracts/M+C organizations. While almost all states
impose premium taxes on insurers generally (and nineteen states have
specific premium tax schedules for HMOs), it is our understanding that
most states have not subjected Medicare revenue to a premium tax and
that many states specifically exempt Medicare payments to HMOs from any
premium tax.

E. New Quality Standards

Each M+C organization must have arrangements for an ongoing quality
assessment and performance improvement program for health care services
it provides to Medicare beneficiaries enrolled in the M+C plans. The
quality assurance program for an M+C organization must, among other
things: (1) stress health outcomes and provide for the collection,
analysis, and reporting of data to permit measurement of outcomes and
other indices of the quality of M+C organizations and organizations;
(2) include measures of consumer satisfaction; (3) provide the
Secretary with such access to information collected as appropriate to
monitor and ensure the quality of care; (3) provide review by
physicians and other health care professionals of the process followed
in the provision of health care services; (4) provide for the
establishment of written protocols for utilization review, based on
current standards of medical practice; (5) have mechanisms to detect
both underutilization and overutilization of services; (6) take action
to improve quality and assess the effectiveness of that action through
systematic follow-up; and (7) make available information

[[Page 35052]]

on quality and outcomes measures to facilitate beneficiary comparison
and choice of health coverage options.
An M+C organization is deemed to have met the quality assessment
and performance improvement requirements if the organization is
accredited (and periodically reaccredited) at a level acceptable to the
Secretary by a national, private accrediting organization approved by
the Secretary. Deemed M+C organizations must meet certain requirements,
including submitting to surveys to validate its accreditation
organization's process and authorizing its accreditation organization
to release to HCFA a copy of its most current accreditation survey and
any information related to the survey as required by HCFA.
Accrediting organizations will have to meet certain requirements in
order to receive approval as well as ongoing requirements to maintain
its approved status.
The quality assurance and performance improvement requirements
under this regulation provide that each M+C organization achieve
minimum performance levels on standardized quality measures. They also
require that organizations conduct performance improvement projects
that achieve, through ongoing measurement and intervention,
demonstrable and sustained improvement in significant aspects of
clinical care and non-clinical services that can be expected to affect
health outcomes and member satisfaction. This approach to ensuring
quality reflects the expansion in recent years of the problem-focused
approach that was prevalent in the past to include a focus on
systematic quality improvement as well.
We believe that the quality assessment and performance improvement
requirements under this regulation will not impose significantly new
burdens on most M+C organizations.
First, as discussed in detail in section III D of this preamble,
requirements under this regulation build on a variety of HCFA and State
Medicaid agency efforts to promote the assessment and improvement of
quality in plans contracting with Medicare and Medicaid, including:
<bullet> The Quality Improvement System for Managed Care (QISMC),
an initiative with state and federal officials, beneficiary advocates,
and the managed care industry to develop a coordinated quality
oversight system to reduce duplicative or conflicting efforts and that
has an emphasis on demonstrable and measurable improvement.
<bullet> Initiatives to improve accountability by requiring uniform
collection and reporting of data to allow assessment of plan
performance and to facilitate comparisons among plans, such as the
Health Plan Employer Data and Information Set (HEDIS 3.0).
<bullet> Projects to enhance the role of Medicare Peer Review
Organizations (PROs) in evaluating and improving managed care plan
quality, including the development and testing of a minimum set of
performance evaluation measures and quality improvement projects
developed through collaboration between PROs and the managed care
industry.
Second, we anticipate that many new M+C organizations will be
offered by organizations currently participating as Medicare risk
contractors. While we acknowledge that many organizations have not
developed the capacity to fully meet the pre-BBA requirements, we
believe that this regulation does not create substantially new demands
for building new administrative and information systems necessary to
meet the quality assessment and performance improvement requirements
for M+C products, as such organizations already are subject to similar
requirements as section 1857 contractors. Moreover, we will build into
the contract process a gradual phase-in of the number of focus areas
for which a plan must demonstrate improvement to allow sufficient time
for a plan to implement and conduct well-designed improvement projects.
Third, we anticipate that many organizations seeking to offer M+C
products will have had to invest in administrative and information
systems to meet the requirements of other purchasers and State
regulators, diminishing burdens this regulation might otherwise have
imposed. This is true even for provider-sponsored organizations that
seek a federal waiver from state solvency requirements, as such
entities are still subject to other state requirements, including a
state's quality assessment and improvement requirements.
We have built on efforts in other sectors in developing these
quality assessment and performance improvement requirements in order to
minimize the burden that these activities place on plans. (GAO,
September 1996; NCQA, 1997), such as:
<bullet> Many employers and cooperative group purchasing groups and
some States already require that organizations be accredited by the
National Committee on Quality Assurance, the Joint Commission on
Accreditation of Healthcare Organizations, the American Healthcare
Accreditational Commission, or other independent bodies.
<bullet> Many also require that organizations report their
performance on HEDIS, FACCT, or other measures and conduct enrolled
surveys using the CAHPS or other instruments. For example, NCQA
estimates that more than 90 percent of plans are collecting some or all
of HEDIS data for their commercial population. (NCQA, 1997)
<bullet> States have heightened their regulatory efforts through
insurance or licensing requirements, and the National Association of
Insurance Commissioners has developed model acts on network adequacy,
quality assessment and improvement, and utilization review.
Another important mechanism in avoiding duplication of effort and
unnecessary administrative burdens with respect to internal quality
assurance requirements is the ``deemed'' status afforded organizations
for each standard that is accredited by a national, private accrediting
organization.
Fourth, we have worked closely with private-sector leaders in
health plan performance and quality measurement to avoid duplication of
effort and promote standardization in measurement approaches. (GAO,
September 1996) For example, we convened advisory groups of managed
care organizations, State and Federal purchasers and regulators,
beneficiary advocates, and experts in mental health and substance abuse
services and relied heavily on the insight and expertise of these
groups in refining standards and guidelines.
Fifth, measuring and reporting plan-and provider-specific
information will allow plans and networks to compare themselves to
competitors, track their own performance over time, and so drive their
own internal quality improvement programs. (Palmer, 1997). Moreover,
plans will have added incentives to initiate performance improvement
projects that will lead to more cost-effective delivery of health care
services, such as influenza immunization outreach efforts which lead to
lower complications and treatment of influenza-related conditions or
improving access to primary care to reduce inappropriately frequent use
of the emergency room by enrollees. This regulation allows plans the
freedom to select its own particular topics for measurement and
improvement so that each plan can conduct projects relating to aspects
of care and services that are significant for its own population.
Although the quality standards under this regulation are not
substantially

[[Page 35053]]

different from requirements already in place, we recognize that some
M+C organizations may need to invest in administrative and/or
information systems necessary to comply with the existing as well as
the M+C standards. Additionally, while some plans may be tempted to
invest their resources into the areas in which they must measure and
demonstrate improved performance at the expense of other parallel
quality initiatives, we have designed the quality assessment and
performance improvement requirements under this regulation to be as
flexible as possible and encourage plans to work with HCFA in
developing long-range goals for projects.
Our role in overseeing compliance with the quality standards
interrelates with our efforts to sponsor an annual information campaign
that coincides with the open enrollment period for M+C organizations
and is an important augmentation to those efforts. These efforts are
designed to ensure that all organizations in the M+C program have the
organizational structure and operational capacity to provide quality
health care to Medicare beneficiaries and to ensure that beneficiaries
have accurate information on quality to guide their health plan
selections.

F. Conclusion

We expect that this rule overall will have a positive impact on the
Medicare program, Medicare beneficiaries, providers, rural providers
and suppliers, and entities that have not previously contracted with
us. However, some current managed care contractors will experience a
decrease in the capitated payments they otherwise would have received
without passage of the BBA, possibly resulting in reduced benefits for
Medicare enrollees. States will also have to develop mechanisms to
license new risk bearing entities known as provider sponsored
organizations after 3-year waivers.

VI. Collection of Information Requirements

Emergency Clearance: Public Information Collection Requirements
Submitted to the Office of Management and Budget (OMB)

In compliance with the requirement of section 3506(c)(2)(A) of the
Paperwork Reduction Act of 1995, the Health Care Financing
Administration (HCFA), Department of Health and Human Services (DHHS),
has submitted to the Office of Management and Budget (OMB) the
following request for emergency review. We are requesting an emergency
review because the collection of this information is needed prior to
the expiration of the normal time limits under OMB's regulations at 5
CFR, Part 1320. The Agency cannot reasonably comply with the normal
clearance procedures because of the statutory requirement, as set forth
in section 1856 of Balanced Budget Act of 1997, to implement these
requirements on June 1, 1998.
HCFA is requesting OMB review and approval of this collection
within 11 working days, with a 180-day approval period. Written
comments and recommendations will be accepted from the public if
received by the individual designated below, within 10 working days of
publication of this document in the Federal Register.
During this 180-day period HCFA will pursue OMB clearance of this
collection as stipulated by 5 CFR 1320.5.
In order to fairly evaluate whether an information collection
should be approved by OMB, section 3506(c)(2)(A) of the PRA requires
that we solicit comment on the following issues:
<bullet> The need for the information collection and its usefulness
in carrying out the proper functions of our agency.
<bullet> The accuracy of our estimate of the information collection
burden.
<bullet> The quality, utility, and clarity of the information to be
collected.
<bullet> Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
Therefore, we are soliciting public comment on each of these issues
for the information collection requirements summarized and discussed
below.

Application Requirements (Sec. 422.6)

In order to obtain a determination on whether it meets the
requirements to become an M+C organization and is qualified to provide
a particular type of M+C plan, an entity, or an individual authorized
to act for the entity (the applicant) must complete an application, in
the form and manner required by HCFA, including all of the requirements
set forth in Sec. 422.6.
In order to contract with us under the M+C program, organizations
are required to complete an application to demonstrate their capability
of carrying out the requirements of the Medicare program. Completing an
application requires the capability of organizations to adhere to
Medicare program guidelines and demonstrate to HCFA by in-house
documentation that such capability exists. In prior years, applicants
were required to complete applications forms (HCFA 901-903) to obtain a
Medicare contract under section 1876 of the program. The application
having OMB clearance #0938-0470 estimated that approximately 100 hours
would be required to complete an application. We believe the new
applications are quite similar and therefore estimate that 100 hours
will be required to complete an application under the Medicare + Choice
program. We project approximately 100 applications a year requiring
10,000 hours of time by all applicants on an annual basis.

Eligibility To Elect an M+C Plan (Sec. 422.50)

A beneficiary must complete and sign an election form and gives
information required for enrollment.
The burden associated with this requirement is the time it takes
for a beneficiary to complete an enrollment form. The enrollment form
varies for each organization, but similar identifying information is
collected. It is estimated that it will take 2,000,000 beneficiaries
(based on 2,012,025 enrollments in calendar year 1997) 10 minutes for
an annual burden of 20,000,000 minutes = 333,000 hours.

Continuation of Enrollment (Sec. 422.54)

An M+C organization that wishes to offer a continuation of
enrollment option must submit their marketing materials to HCFA for
approval, which meet the requirements set forth in this section, that
describe the option and the M+C organization's assurances of access to
services as set forth in this section and, an M+C organization that
offers a continuation of enrollment option must convey all enrollee
rights conferred under this rule.
The burden associated with this requirement is captured below in
Sec. 422.64.

Election Process (Sec. 422.60)

The election form must be completed and signed by the M+C eligible
individual beneficiary (or the individual who will soon become entitled
to Medicare benefits) and include authorization for disclosure and
exchange of necessary information between HCFA and the M+C
organization.
The burden associated with this requirement is captured above in
the Sec. 422.50 discussion.
The M+C organization must file and retain M+C plan election forms
for the period specified in HCFA instructions, and submit beneficiary
M+C plan and optional supplemental benefit elections to HCFA.
The burden associated with this requirement is the time required
for each organization to perform record

[[Page 35054]]

keeping on each application filed. It is estimated that it will take
each organization 5 minutes for each of 2,000,000 beneficiaries (based
on 2,012,025 enrollments in calendar year 1997). The total annual
burden is estimated at 10,000,000 minutes = 167,000 hours. On average,
M+C organizational level burden is 167,000/450 (100 new/350 current) =
371 annual hours. In addition, it is estimated to take each M+C
organization 4 hours per month to electronically submit a subset of
beneficiary M+C plan and optional supplemental benefit election
information to HCFA, for a total annual burden of 21,600 hours.
The M+C organization must give the beneficiary prompt written
notice of acceptance or denial in a format specified by HCFA that meets
the requirements set forth in this section.
The burden associated with each organization providing the
beneficiary prompt written notice, performed by an automated system, is
estimated at 1 minute per application processed. The annual total
burden is estimated at 2,000,000 minutes = 33,000 hours. On average,
M+C organizational level burden is 33,000/450 (100 new/350 current) =
73 annual hours.
Within 30 days from receipt of the election form (or from the date
a vacancy occurs for an individual who was accepted for future
enrollment), the M+C organization must transmit the information
necessary for HCFA to add the beneficiary to its records as an enrollee
of the M+C organization.
The burden associated with electronic submission of information to
HCFA is estimated at 1 second per application processed, for an annual
burden of 2,000,000 minutes = 33,000 hours. On average, M+C
organizational level burden is 33,000/450 (100 new/350 current) = 73
annual hours.

Election of Coverage Under an M+C Plan (Sec. 422.62)

Except as provided in paragraph (d)(2)(ii) of Sec. 422.62, an
individual may disenroll from an M+C MSA plan only during an annual
election period or the special election period described in paragraph
(b) of this section. However, an individual who elects an M+C MSA plan
during an annual election period and had never before elected an M+C
MSA plan may revoke that election, no later than December 15 of that
same year, by submitting to the organization that offers the M+C plan a
signed and dated request in the form and manner prescribed by HCFA or
by filing the appropriate disenrollment form through other mechanisms
as determined by HCFA.
The burden associated with this requirement is the time required
for each beneficiary to complete a disenrollment form. It is estimated
that about 5 percent of the maximum number of beneficiaries permitted
to choose an MSA (390,000) would disenroll (19,500) and each
disenrollment form would take 4 minutes to complete, for an annual
burden of 78,000 minutes = 1,300 hours.

Information About the M+C Program (Sec. 422.64)

Each M+C organization must provide, on an annual basis and in a
format and using standard terminology that may be specified by HCFA,
the information necessary that meets the general and content
requirements set forth in Sec. 422.6, to enable HCFA to provide to
current and potential beneficiaries the information they need to make
informed decisions with respect to the available choices for Medicare
coverage.
The burden associated with this requirement is the time required
for the organization to provide the information to HCFA. It is
estimated that it will take 450 (100 new/350 current) organizations 12
hours for an annual burden of 5,400 hours. In addition, it is estimated
that on an annual basis it will take 4 hours for an estimated 50
organizations to modify and submit their revised materials to HCFA for
review for a annual burden of 200 hours.

Coordination of Enrollment and Disenrollment Through M+C Organizations
(Sec. 422.66)

An individual who wishes to elect an M+C plan offered by an M+C
organization may make or change his or her election during the election
periods specified in Sec. 422.62 by filing the appropriate election
form with the organization or through other mechanisms as determined by
HCFA.
An individual who wishes to disenroll from an M+C plan may do so by
(1) electing a different M+C plan by filing the appropriate election
form with the M+C organization or through other mechanisms as
determined by HCFA, (2) submitting a signed and dated request for
disenrollment to the M+C organization in the form and manner prescribed
by HCFA or, (3) filing the appropriate disenrollment form through other
mechanisms as determined by HCFA.
The burden associated with electing a different plan is included in
422.50. The burden associated with disenrolling is the time to complete
a disenrollment form. It is estimated that 720,000 disenrollments
(based on the number of disenrollments in calendar 1997) will take 2
minutes each for an annual burden of 1,440,000 minutes = 2,400 hours.
On average, M+C organizational level burden is 2,400/450 (100 new/350
current) = 5 annual hours.
The M+C organization must submit each disenrollment notice to HCFA
promptly.
The burden associated with electronic submission of information to
HCFA is estimated at 1 second per disenrollment processed, for an
annual burden of 1,200 minutes = 20 hours.
On average, M+C organizational level burden is 1,200/450 (100 new/
350 current) = 3 annual hours.
In the case of a plan where lock-in applies, the M+C organization
must provide the enrollee with a statement explaining that he or she
remains enrolled until the effective date of disenrollments, and until
that date, neither the M+C organization nor HCFA pays for services not
provided or arranged for by the M+C plan in which the enrollee is
enrolled.
The burden associated with each organization providing the
beneficiary prompt written notice of disenrollment and lock-in,
produced by an automated system, is estimated at 1 minute per
disenrollment processed, for an annual burden of 720,000 minutes =
1,200 hours. On average, M+C organizational level burden is 1,200/450
(100 new/350 current) = 3 annual hours.
The M+C organization must file and retain disenrollment requests
for the period specified in HCFA instructions.
The burden associated for each disenrollment request is the time
required for each organization to perform recordkeeping on each
disenrollment request filed. It is estimated that it will take 5
minutes for 720,000 disenrollments processed for an annual burden of
3,600,0000 minutes = 60,000 hours. On average, M+C organizational level
burden is 6,000/450 (100 new/350 current) = 13 annual hours.

Disenrollment by the M+C Organization (Sec. 422.74)

If the disenrollment is for any of the reasons specified in
paragraphs (b)(1) through (b)(2)(i) and (b)(3) of Sec. 422.74, that is,
other than death or loss of entitlement to Part A or Part B, the M+C
organization must give the individual a written notice of the
disenrollment with an explanation of why the M+C organization is
planning to disenroll the individual. The notice must be mailed to the
individual before submission of the disenrollment notice to HCFA and
include an explanation of the individual's right to a hearing under the

[[Page 35055]]

M+C organization's grievance procedures.
There is a burden associated with the requirement for the
organization to notify the beneficiary about an involuntary
disenrollment, and to separately notify the beneficiary of the
effective date of the disenrollment. It is estimated that less than 100
such notices will be issued and that each notice will take 1 minute for
an annual burden of less than 100 minutes = or less than 1.5 hours.
A M+C organization may disenroll an individual from the M+C plan
for failure to pay any basic and supplementary premiums if the M+C
organization sends a written notice of nonpayment to the enrollee
within 20 days of the date that the delinquent charges were due stating
that nonpayment of premiums will not automatically result in
disenrollment and information about the lock-in requirements of the M+C
plan.
There is a burden associated with the requirement for the
organization to notify the beneficiary and it is estimated that less
than 500 of these requests occur annually at 1 minute per notification,
resulting in an estimated burden of 500 minutes, or approximately 80
hours.
A M+C organization may disenroll an individual from the M+C plan if
the individual's behavior is disruptive, unruly, abusive, or
uncooperative to the extent that his or her continued enrollment in the
plan seriously impairs the M+C plan's ability to furnish services to
either the particular individual or other individuals enrolled in the
plan. The M+C organization must document the enrollee's behavior, its
own efforts to resolve any problems, and any extenuating circumstances,
as described in paragraphs (d)(2)(i) through (d)(2)(iii) of this
section. And, a M+C organization must submit documentation related to
the proposed disenrollment and any information submitted by the
beneficiary, to HCFA for review to determine whether the M+C
organization has met the disenrollment requirements.
The burden associated with this requirement is the time for the
organization to document the behavior of the beneficiary and document
the efforts of the organization to resolve any problems and provide
information to HCFA concerning the involuntary disenrollment request.
The burden reflects documentation and transmission of documentation to
HCFA by the managed care plans. It is estimated that less than 100 such
requests occur annually (based on estimate of regional office
collection of such information), and it is estimated that each request
will take 1 hour to manually collect the data and 15 minutes to
transmit the data to HCFA, for a burden of 125 hours.
A M+C organization must report to the Office of the Inspector
General of the DHHS any disenrollment based on fraud or abuse by the
individual.
There is a burden associated with the requirement for the
organization to report to the Office of the Inspector General any
disenrollment based on fraud or abuse by the individual. It is
estimated that only 1% of all involuntary disenrollments, or 10 involve
fraud or abuse, and the reporting burden would be 1 minute each, for a
total burden of less than 1 hour.
If a M+C organization terminates or is terminated or the service
area or continuation area are reduced with respect to all M+C enrollees
in the area in which they reside, the M+C organization must give each
Medicare enrollee a written notice of the effective date of the plan
termination or area reduction and a description of alternatives for
obtaining benefits under the M+C program. The notice must be sent
before the effective date of the plan termination or area reduction.
The burden associated with this requirement is captured below in
Sec. 422.506.

Approval of Marketing Materials and Election Forms (Sec. 422.80)

At least 45 days before the date of distribution the M+C
organization must submit any marketing material or election form to
HCFA for review. The materials must be in a format and using standard
terminology specified by HCFA, that meet the requirements specified in
this section.
The burden associated with this requirement is captured above in
Sec. 422.64.
A M+C organization must notify the general public of its enrollment
period (whether time-limited or continuous) in an appropriate manner,
through appropriate media, throughout its enrollment area.
We anticipate notification to the general public would be through a
general circulation newspaper and would require 8 hours of burden per
organization to modify their enrollment period bulletin and seek
publication in a local newspaper, for an annual burden of 3,600 hours.

Special Rules for Point of Service Option (Sec. 422.105)

M+C organizations must maintain written rules on how to obtain
health benefits through the POS benefit. While the maintenance of
written rules is a recordkeeping requirement subject to the PRA, the
burden associated with this requirement is exempt from the PRA, as
defined in 5 CFR 1320.3(b)(2) and (b)(3).
The M+C organization must provide to beneficiaries enrolling in a
plan with a POS benefit an ``evidence of coverage'' document, or
otherwise provide written documentation, that specifies all costs and
possible financial risks to the enrollee, including the requirements
set forth in (d)(2)(i) through (d)(2)(iv) of this section.
The burden associated with this requirement is captured above in
Sec. 422.64.
An M+C organization that offers a POS benefit must report data on
the POS benefit in the form and manner prescribed by HCFA.
The special rules for M+C organizations offering a POS benefit as
stipulated in Sec. 422.105 requires that M+C organizations provide to
HCFA POS data relating to the utilization of the POS benefit by plan
members. This is not a new data requirement since M+C organizations
that offer a POS benefit would need to have this data in the normal
course of business in order to pay POS claims. We estimate that
providing this data to HCFA would require 1 hour per quarterly
submission. Thus, the annual burden would be 1 hour x 4 = 4 hours per
MCO in providing the required POS data.

Disclosure Requirements (Sec. 422.111)

An M+C organization must disclose the information specified in
Sec. 422.64 and in paragraph (b) of Sec. 422.111 to each enrollee
eligible for or electing an M+C plan it offers. The information must be
in clear, accurate, and standardized form, and provided at the time of
enrollment and at least annually thereafter. The burden associated with
this requirement is captured above in Sec. 422.64.
If an M+C organization intends to change its rules for an M+C plan,
it must submit the changes for HCFA review under the procedures of
Sec. 422.80. The burden associated with this requirement is reflected
in Sec. 422.80 above.
The plan must also give notice to all enrollees 30 days before the
intended effective date of the changes. The burden associated with this
requirement is reflected above in Sec. 422.80.
The M+C organization must make a good faith effort to provide
written notice of a termination of a contracted provider within 15
working days of receipt or issuance of a notice of termination, as
described in

[[Page 35056]]

Sec. 422.204(c)(4), to all enrollees who are patients seen on a regular
basis by the provider whose contract is terminating, irrespective of
whether the termination was for cause or without cause. When a contract
termination involves a primary care professional, all enrollees who are
patients of that primary care professional must also be notified.
HCFA has no basis to calculate the burden impact imposed by these
requirements. Therefore, we explicitly seek comment on the impact of
this notification requirement.

Access to Services (Sec. 422.112)

In the case of involuntary termination of an M+C plan or
specialist(s) for a reason other than for cause, the M+C organization
must inform beneficiaries of their right to maintain access to
specialists and provide the names of other M+C plans in the area that
contract with specialists of the beneficiary's choice, as well as an
explanation of the process the beneficiary would need to follow should
he or she decide to return to original Medicare.
The requirements imposed by this section would be pursuant to an
administrative action and therefore are exempt from the PRA as defined
in 5 CFR 1320.4.
An M+C plan seeking a service area expansion must demonstrate that
the number and type of providers available to plan enrollees are
sufficient to meet projected needs of the population to be served. The
burden associated with meeting this requirement is captured above in
422.6.
An M+C plan must demonstrate to HCFA that its providers are
credentialed through the process set forth at Sec. 422.204(a). The
burden associated with meeting this requirement is captured above in
422.6.
Plans must have procedures approved by HCFA for (1) identification
of individuals with complex or serious medical conditions; (2)
assessment of those conditions, including medical procedures to
diagnose and/or monitor them on an ongoing basis; and (3) establishment
of a treatment plan appropriate to those conditions, with an adequate
number of direct access visits to specialists to accommodate the
treatment plan. Treatment plans must be time-specific and updated
periodically by the PCP.
Plans must also; (1) establish written standards for the timeliness
of access to care and member services that meet or exceed standards
established by HCFA, (2) continuously monitor and document the timely
access to care and member services within a plan's provider network to
ensure compliance with these standards, and take corrective action as
necessary, (3) establish written policies and procedures (coverage
rules, practice guidelines, payment policies, and utilization
management) that allow for individual medical necessity determinations,
and (4) ensure that providers consider and document beneficiary input
into the provider's proposed treatment plan.
Plans must maintain written procedures to ensure that; (1) the M+C
organization and its provider network have the information required for
effective and continuous patient care and quality review, including
procedures to ensure that, each provider, supplier, and practitioner
furnishing services to enrollees maintains an enrollee health record in
accordance with standards established by the M+C organization, taking
into account professional standards; appropriate and confidential
exchange of information among provider network components, (2) written
procedures to ensure that enrollees are informed of specific health
care needs that require follow-up and receive, as appropriate, training
in self-care and other measures they may take to promote their own
health; and (4) documentation demonstrating that systems to address
barriers to enrollee compliance with prescribed treatments or regimens.
HCFA's believes these requirements are reasonable and customary
business practices and the burden associated with these requirements is
exempt from the PRA as defined in 5 CFR 1320.3(b)(2). Therefore, we are
assigning one token hour of burden for these requirements. HCFA invites
comment on the burden estimate associated with these requirements.

Confidentiality and Accuracy of Enrollee Records (Sec. 422.118)

For any medical records or other health and enrollment information
it maintains with respect to enrollees, an M+C organization must
establish and maintain procedures set forth in (a) through (c) of this
section.
While the maintenance of health records is a recordkeeping
requirement subject to the PRA, we believe the burden associated with
this requirement is exempt from the PRA, as defined in 5 CFR
1320.3(b)(2) and (b)(3), and assigning 1 token hour of burden for this
requirement. We solicit comment on the burden associated with this
requirement.

Information on Advance Directives (Sec. 422.128)

Each M+C organization must maintain written policies and procedures
that meet the requirements for advance directives, as set forth in 43
CFR part 489 subpart I.
An M+C organization must maintain written policies and procedures
concerning advance directives with respect to all adult individuals
receiving medical care by or through the M+C organization.
An M+C organization must provide written information to those
individuals with respect to the requirement set forth in this section.
These requirements are identical to the requirements currently
approved under OMB# 0938-0610, with an expiration date of July, 31,
1999. Since the currently approved requirements encompass a larger
universe of provider types then just managed care organizations it is
difficult to estimate the burden on the M+C organizational level.
However, the per beneficiary encounter burden is estimated to be 3
minutes. In the near future, HCFA will revise this collection to
capture this new provider type and resubmit the collection to OMB for
approval.

Protection Against Liability and Loss of Benefits (Sec. 422.132)

Each M+C organization must adopt and maintain arrangements
satisfactory to HCFA to protect its enrollees from incurring liability
for payment of any fees that are the legal obligation of the M+C
organization. The burden associated with demonstrating this requirement
is captured below under Sec. 422.306.
Each M+C organization must have an insolvency protection plan that
provides for continuation of benefits. Each plan must submit a
insolvency plan to HCFA for approval. The reporting requirements are
similar to the insolvency plan reporting requirements submitted by 1876
plans. The burden associated with completing and submitting an
insolvency plan is estimated to be 40 hours per plan on an annual
basis. Therefore, the total annual burden associated with this
requirement is 18,000 hours (40 hours x 450 plans (100 new/350
current)). In the near future, HCFA will revise this collection to
capture this new provider type and resubmit the collection to OMB for
approval.

Quality Assessment and Performance Improvement Program (Sec. 422.152)

The organization offering the plan must measure performance under
the

[[Page 35057]]

plan, using standard measures required by HCFA, and report its
performance to HCFA.
All Medicare+Choice organizations and an organization offering an
M+C non-network MSA plan or an M+C private fee-for-service plan will be
required to measure performance under their plans, using standard
measures required by HCFA, and report their performance to HCFA.
Reporting will be required annually. The standard measures that will be
required will most likely be those already captured in HEDIS and CAHPS,
approved under OMB # 0938-0701. The currently approved annual per plan
burden is estimated to be 400.53 hours. Therefore, the total burden
associated with this requirement is 180,239 hours (400.53 hours x 450
plans (100 new/350 current)). In the near future HCFA will resubmit
this collection to OMB for approval for use by M+C organizations.
The organization must report the status and results of each
performance improvement project to HCFA as requested.
All Medicare+Choice organizations offering coordinated care plans
will be required to undertake performance improvement projects relative
to those plans. Each organization must report the status and results of
each project to HCFA as requested. We expect that, in any given year,
each organization will complete two projects, and will have two others
underway, relative to each plan. We expect that we will request the
status and results of each organization's projects annually. We
estimate that it will take an organization 5 hours to prepare its
report for each project. Therefore, we estimate that the total annual
hours involved per plan to be 20 and an overall annual burden for all
plans of 9,000 hours.
For all types of plans that it offers, an organization must: (1)
Maintain a health information system that collects, analyzes, and
integrates the data necessary to implement its quality assessment and
performance improvement program, (2) Ensure that the information it
receives from providers of services is reliable and complete, and (3)
Make all collected information available to HCFA.
All M+C organizations must maintain a health information system,
and must make all collected information available to HCFA. The
requirement guarantees our access to organization information: it does
not impose an obligation for routine organization submission of
information. At this time, we do not anticipate requesting information
other than that relating to the standard measures and performance
improvement projects discussed above.

External Review (Sec. 422.154)

Except as provided in paragraph (c) of Sec. 422.154, each M+C
organization must, for each M+C plan it operates, have an agreement
that meets the provisions of this section, with an independent quality
review and improvement organization (review organization) approved by
HCFA to perform functions of the type described in 42 CFR part 466 of
this chapter.
Most M+C organizations must have an agreement with a review
organization approved by HCFA to perform functions of the type
described in 42 CFR part 466. A similar requirement already exists for
Medicare contracting HMOs, at Sec. 466.72. The burden estimate prepared
for OMB submission #0938-0445 would also apply to the new requirement.
The currently approved burden associated with this requirement on the
organizational level is 10 hours every three years.
In the near future HCFA will resubmit this collection to OMB for
approval for use by M+C organizations.

Compliance Deemed on the Basis of Accreditation (Sec. 422.156)

An M+C organization deemed to meet Medicare requirements must: (1)
Submit to surveys by HCFA to validate its accreditation organization's
accreditation process, and (2) authorize its accreditation organization
to release to HCFA a copy of its most recent accreditation survey,
together with any survey-related information that HCFA may require
(including corrective action plans and summaries of unmet HCFA
requirements).
The burden associated with this requirement is captured below in
Sec. 422.158.

Accreditation Organizations (Sec. 422.157)

An accreditation organization approved by HCFA must undertake the
following activities on an ongoing basis: (1) Provide to HCFA in
written form and on a monthly basis all of the information required in
paragraphs (c)(1)(i) through (c)(1)(v) of Sec. 422.157, (2) Within 30
days of a change in HCFA requirements, submit to HCFA all of the
information required in paragraphs (c)(2)(i) through (c)(2)(iii) of
Sec. 422.157, (4) Within 3 days of identifying, in an accredited M+C
organization, a deficiency that poses immediate jeopardy to the
organization's enrollees or to the general public, give HCFA written
notice of the deficiency, and (5) Within 10 days of HCFA's notice of
withdrawal of approval, give written notice of the withdrawal to all
accredited M+C organizations. The burden associated with this
requirement is captured below in Sec. 422.158.

Procedures for Approval of Accreditation as a Basis for Deeming
Compliance (Sec. 422.158)

A private, national accreditation organization applying for
approval must furnish to HCFA all of the information and materials
referenced in this section. However, when reapplying for approval, the
organization need furnish only the particular information and materials
requested by HCFA.
The BBA allows HCFA to deem that a M+C organization meets certain
Medicare requirements if that organization is accredited by an
accreditation organization approved by HCFA. We expect that four
national accreditation organizations will eventually be approved. The
application and oversight procedures that we have developed for deeming
in the managed care arena mirror those already in place in the fee-for-
service arena as currently approved under OMB # 0938-0690. Therefore,
much of the burden estimate prepared for the fee-for-service deeming
regulations in 42 CFR part 488, Subpart A, would also apply here. The
initial application burden associated with obtaining deeming authority
is 96 hours every six years. Since we anticipate that four
organizations will apply, the total burden is 386 hours over a six year
period. The ongoing burden of supplying HCFA with data on the status of
its deemed facilities is estimated to be 48 annual hours per deeming
organization for a total annual burden of 192 hours. In the near future
HCFA will resubmit this collection to OMB for approval of deeming in
the managed care arena use.

Participation Procedures (Sec. 422.202)

An M+C organization that operates a coordinated care plan or
network MSA must provide for the participation of individual health
care professionals and of the management and members of groups through
reasonable written procedures that include the following; (1) written
notice of rules of participation such as terms for payment, utilization
review, quality improvement programs, credentialing, data reporting,
confidentiality, guidelines or criteria for the furnishing of
particular services, and other rules related to administrative policy,
(2) written notice of material changes in participation rules before
the changes are put into effect, (3) written notice of participation
decisions that are adverse to health care professionals, (4) a process
for appealing adverse

[[Page 35058]]

decisions, including the right of physicians and other health care
professionals to present information and their views on the decision.
The M+C organization must maintain documentation demonstrating
that: (1) practice guidelines and utilization management guidelines
meet the requirements of (1)(i) through (iv) of this section, (2) the
guidelines have been communicated to providers and, as appropriate, to
enrollees, (3) decisions with respect to utilization management,
enrollee education, coverage of services, and other areas in which the
guidelines apply are consistent with the guidelines, and (4) an M+C
organization that operates an M+C plan through subcontracted physician
groups or other subcontracted networks of health care professionals
provided that the participation procedures in this section apply
equally to physicians and other health care professionals within those
subcontracted groups.
The burden associated with these requirements is the time required
to maintain documentation demonstrating that the requirements have been
met and, as necessary, the time necessary to communicate the guidelines
to providers and enrollees. HCFA believes that these requirements are
reasonable and customary business practices and the burden of meeting
these requirements is exempt from the PRA as stipulated under 5 CFR
1320.3(b)(2). Therefore, we are assigning one token hour of burden to
these requirements. We explicitly solicit comments on the burden
associated with meeting these requirements.

Participation Contracts: Requirements and Prohibitions (Sec. 422.204)

An M+C organization that operates a coordinated care plan or
network MSA plan that provides benefits through contracting health care
professionals must provide notice to contracting professionals when the
organization denies, suspends, or terminates their agreement with the
professional and include (1) the reason for the action, (2) the
standards and the profiling data the organization used to evaluate the
professionals, (3) the numbers and mix of health care professionals
needed for the organization to provide adequate access to services, and
(4) the professional's right to appeal the action and the timing for
requesting a hearing. This is a new requirement.
The burden associated with this requirement is the time required
for organization to prepare a written notification of the denial,
suspension, or termination of their agreement with the organization. In
discussions with HCFA plan managers, it was predicted that .5 percent
of all organizations (approximately 2 organizations) would find it
necessary to take such action for about 1 percent of their contracted
professionals within a single year and if the organization was already
established and doing business. The range of number of contracted
professionals extends from 3 contracted professionals to 67,000.
Excluding outliers on both ends of the range, we estimate that an
organization contracts with an average of 3,000 health care
professionals. Using an estimate of 10 minutes per instance to generate
and furnish a notice of such action, the total burden on known
contractors (350) would be 2 organizations * 30 * 10 minutes = 600
minutes or 10 hours annually.
In addition, HCFA expects to receive approximately 100 additional
applications for contracts with new entities to be processed in 1998
for 1999. For organizations creating new networks, they would probably
all have at least one instance of denial the first year affecting
approximately 1 percent of the number of contracting professionals.
Using an estimate of 10 minutes per instance to generate and furnish a
notice of such action, the total burden on new contractors would be 100
organizations * 30 * 10 minutes = 30,000 minutes or 500 hours. The
total burden with current applications and expected applications for
contracts would be 510 hours annually.
The number of new organizations is expected to increase by 100, on
an annual basis creating an expected burden for current contracts
[350(*.005(organization-rounded to the nearest whole number) *30*10)/60
= ]10 hours + new contracts [100*30*10 /60 =]500 hours = 510 hours.
An M+C organization is required to notify any licensing or
disciplinary bodies or other appropriate authorities when it suspends
or terminates a contract with a health care professional because of
deficiencies in the quality of care provided by the professional.
The burden associated with this requirement is the time required
for the organization to prepare a written notification to the
appropriate authorities. No exact data is available to estimate how
often this situation might occur. HCFA estimates that this situation
might occur in 3 percent of the M+C organizations once during an annual
period. The amount of time estimated to prepare the written
notification is 10 minutes. The annual burden associated with this
requirement is estimated to be [450 * .03 * 1 *10/60] = 2.25 hours.

Interference With Health Care Professionals' Advice to Enrollees
Prohibited (Sec. 422.206)

Section 422.206 prohibits the M+C organization from restricting the
provision of treatment advice by health care professionals to
enrollees. However, the prohibition against interference is not
construed as requiring counseling by a professional or a referral to a
service by that professional, if there is an objection based on moral
and religious grounds. Section 422.206 implements a new disclosure
requirement and requires M+C organizations to notify HCFA during the
application process, and later to all current and prospective
enrollees, through appropriate written means, if the organization has
such a conscience protection policy regarding counseling in effect or
if the policy is changed subsequent to the application. The expected
number of M+C organizations exercising this option is not expected to
exceed 10 in any given year. The amount of burden imposed in the
application process, which is captured in the application burden and in
the preparation of the contents of the subscriber agreement or member
handbook or a subsequent written notice to enrollees is reflected above
in Sec. 422.6 and Sec. 422.64.

Physician Incentive Plans: Requirements and Limitations (Sec. 422.208)

An M+C organization must conduct periodic surveys of current and
former enrollees where substantial financial risk exists.
The burden associated with this requirement is captured below in
Sec. 422.210.

Disclosure of Physician Incentive Plans (Sec. 422.210)

Each M+C organization must provide to HCFA descriptive information
about its physician incentive plan in sufficient detail to enable HCFA
to determine whether that plan complies with the requirements of
Sec. 422.208. Reporting should be on the HCFA PIP Disclosure Form (OMB
No. 0938-0700). An M+C organization must disclose annually to HCFA the
physician incentive arrangements that are effective at the start of
each year.
Sections 422.208 and 422.210 require disclosure of physician
incentive plan information to HCFA or to States and to Medicare
beneficiaries and the enrollee surveys required when plans put
providers at substantial risk. This collection of information,
Incentive Arrangement Form HCFA-R-201 and supporting regulations, used
to monitor

[[Page 35059]]

physician incentive plans on an annual basis, is approved under OMB #
0938-0700. In the near future HCFA will resubmit this collection to OMB
for approval for use by M+C organizations.

Special Rules for M+C Private Fee-for-Service Plans (Sec. 422.216)

The M+C organization must make information on its payment rates
available to providers that furnish services that may be covered under
the M+C private fee-for-service plan.
We expect the M+CPFFS plan to provide written information to
contracting providers and to make the information available via a
website or toll free number to noncontracting providers who inquire. 50
M+CPFFS plans (estimate of M+CPFFS plans in out years; in first year we
may have none) will be required to provide 20,000 annual responses
(about 1 million providers nationwide divided by 50 M+CPFFS plans) at
an estimated 5 minutes per disclosure (average of phone calls, website
time, mailing time for hard copies to contracting providers) for a
total annual burden of 1,667 hours per provider and an overall annual
burden of 83,350 hours.
An M+C organization that offers an M+C fee-for-service plan must
enforce the limit specified in paragraph (b)(1) of this section.
Specifically, an M+C organization that offers an M+C private fee-for-
service plan must monitor the amount collected by non-contract
providers to ensure that those amounts do not exceed the amounts
permitted to be collected under paragraph (b)(2) of this section. The
M+C organization must develop and document violations specified in
instructions and must forward documented cases to HCFA.
M+C private fee-for-service plans must investigate and send to HCFA
documentation of excessive charges by providers. It is estimated that
50 M+C private fee-for-service plans will have 10 cases per year, at 20
hours per case (to contact the enrollee who complained, acquire and
review documents, contact the provider, prepare report to HCFA).
Therefore, the total burden associated with this requirement is 10
cases x 20 hours = 200 annual hours per plan, for a total annual
burden of 10,000 hours.
An M+C organization that offers an M+C private fee-for-service plan
must provide to plan enrollees, for each claim filed by the enrollee or
the provider that furnished the service, an appropriate explanation of
benefits. The explanation must include a clear statement of the
enrollee's liability for deductibles, coinsurance, copayment, and
balance billing.
This requirement is akin to the Medicare EOMB or summary statement
and must be furnished on a regular basis for every claim paid or denied
by the M+C private fee-for-service plan. It is estimated that 3 million
notices will be disseminated by M+C private fee-for-service plans. This
estimate is determined by; multiply 5000 enrollees per plan by 12 (one
notice per month) or 60,000, multiplied by an estimated 50 plans for a
total of 3 million notices. At an estimated 3 minutes of burden per
notice, the total burden is 9 million minutes or 150,000 burden hours.
On a plan level the average annual burden is estimated to be 3,000
hours.
In its terms and conditions of payment to hospitals, organization
the hospital is required, if it imposes balance billing, to provide to
the enrollee, before furnishing any services for which balance billing
could amount to not less than $500: (1) Notice that balance billing is
permitted for those services; (2) a good faith estimate of the likely
amount of balance billing, based on the enrollees presenting condition;
and (3) the amount of any deductible, coinsurance, and copayment that
may be due in addition to the balance billing amount.
It is estimated that 20,000 of 25,000 estimated hospitalizations
will require these notices. The $500 tolerance will be exceeded each
time the plan payment rate for the inpatient stay would exceed
$3333.33--which is probably almost all of them--if the plan lets the
hospital balance bill. At 5 minutes of burden per notice times 20,000
annual notices, the total burden is 100,000 minutes or 1,667 hours of
burden.

Encounter Data (Sec. 422.257)

Each M+C organization must submit to HCFA (in accordance with HCFA
instructions) all data necessary and as stipulated under this section
to characterize the context and purpose of each encounter between a
Medicare enrollee and a provider, supplier, physician, or other
practitioner.
The Act requires that the collection of inpatient hospital data for
discharges beginning on or after July 1, 1997 and allows the collection
of other data no earlier than July 1, 1998. The statutory language is
clearly tied to the creation of risk-adjusted payment rates, as defined
at Sec. 422.256 (c) and (d) of this rule. Requirements concerning
collection of encounter data apply to M+C organizations with respect to
all their M+C plans, including medical savings accounts (MSAs) and
private fee-for-service plans.
M+C organizations must submit data as follows: (1) Beginning on a
date determined by HCFA, inpatient hospital care data for all
discharges that occur on or after July 1, 1997.
These requirements are approved under OMB # 0938-0711, with an
expiration date of July 31, 1998. The burden associated with submitting
data for inpatient hospital care data for all discharges that occur on
or after July 1, 1997, is currently .5 minutes per EMC bill and 1
minute per hard copy bill. Although there are currently three options
for submitting bills, on average the total annual burden per plan is
46.5 hours, with an overall burden of annual 32,833 hours.
HCFA will provide advance notice to M+C organizations to collect
and submit: (1) Physician, outpatient hospital, SNF, and HHA data
beginning no earlier than October 1, 1999; and (2) all other data HCFA
deems necessary beginning no earlier than October 1, 2000. We estimate
the following burden for each category based on a projection of 15
seconds per claim: Physician: 72 million claims = 300,000 hours
Outpatient hospital: 12 million claims = 50,000 hours HHA, Hospice,
SNF: 2.4 million claims = 10,000 hours All other: 24 million claims =
100,000 hours
We will implement this provision by providing for direct
transmission from the provider to HCFA with common PC-based technology.
It should be noted that prior to implementing the requirement for M+C
organizations to collect and submit physician, outpatient hospital,
SNF, and HHA data HCFA will amend OMB # 0938-0711 and seek OMB PRA
approval. As part of the PRA process the public will be given several
opportunities to comment, via Federal Register notification, on the
proposed collection prior to OMB approval and implementation.
M+C organizations and their providers and practitioners will be
required to submit medical records for the validation of encounter
data, as prescribed by HCFA.
Currently HCFA plans on implementing this requirement pursuant to
an administrative action or audit, based on data submitted to HCFA or
one of its agents. Therefore, these requirements are currently not
subject to the PRA as defined in 5 CFR 1320.4.
However, if HCFA were to implement these requirements on a
prospective basis, as part of a program oversight activity, we will
amend OMB # 0938-0711 and seek OMB PRA approval. As part of the PRA
process the public will be given several opportunities to comment, via
Federal Register notification, on the proposed collection prior to OMB
approval and implementation.

[[Page 35060]]

Special Rules for Beneficiaries Enrolled in M+C MSA Plans
(Sec. 422.262)

An entity that acts as a trustee for an M+C MSA must: (1) Register
with HCFA, (2) certify that it is a licensed bank, insurance company,
or securities broker, or other entity qualified, under sections
408(a)(2) or 408(h) of the IRS Code, to act as a trustee, (3) agree to
comply with the M+C MSA provisions of section 138 of the IRS Code of
1986; and (4) Provide any other information that HCFA may require.
An M+C organization offering an M+C MSA plan will have to register
with HCFA for each beneficiary enrolled. This will require a short form
that would take no more than five minutes to fill out. The Act limits
the number of MSA enrollees to 390,000; therefore, with maximum
participation, registration with HCFA would take 32,500 hours. (i.e.,
390,000 registration forms at 5 minutes each.)
Items 2 and 3, above, are IRS requirements and entail no reporting
requirements for HCFA. Under item 4, above, we anticipate no further
M+C MSA reporting requirements at this time.

Special Rules for Hospice Care (Sec. 422.266)

An M+C organization that has a contract under Subpart K of part 422
must inform each Medicare enrollee eligible to elect hospice care under
section 1812(d)(1) of the Act about the availability of hospice care
(in a manner that objectively presents all available hospice providers,
including a statement of any ownership interest in a hospice held by
the M+C organization or a related entity) if: (1) A Medicare hospice
program is located within the organization's service area, or (2) It is
common practice to refer patients to hospice programs outside that
area.
At present, one-twentieth of one percent (three thousand) of
Medicare managed care enrollees have elected the hospice option. We
estimate that informing beneficiaries about their hospice choices would
take about ten minutes. For three thousand beneficiaries, this
represents a total burden of 500 hours. On a organizational level the
annual burden would be 500 hours / 450 M+C organizations (100 new/350
current) = 1.2 annual burden hours per entity.

Submission of Proposed Premiums and Related Information (Sec. 422.306)

Not later than May 1 of each year, each M+C organization and any
organization intending to contract as an M+C organization in the
subsequent year must submit to HCFA, in the manner and form prescribed
by HCFA, for each M+C plan it intends to offer in the following year:
(1) The information specified in paragraph (b), (c), or paragraph (d)
of this section for the type of M+C plan involved, and (2) The
enrollment capacity (if any) in relation to the M+C plan and area.
This collection effort will require the submission of benefit and
pricing forms that will be used to price the benefit package sold and
describe the benefit package being priced to Medicare beneficiaries.
Both collection efforts will be completed at the same time, in order to
approve both the benefit and pricing structure of a particular benefit
package.
Organizations submitting benefit and pricing forms would include
all M+C organizations plus any organization intending to contract with
HCFA as a M+C organization.
The estimate of the hour burden of this collection of information
is as follows:
Pricing portion of the Adjusted Community Rate Proposal; 1 response
per year per respondent x 450 (350 current/100 new) annual
respondents x 100 hours of estimated burden per response = 45,000
total annual burden hours.
The Plan Benefit Package portion of the Adjusted Community Rate
Proposal; 1 response per year per respondent x 450 (350 current/100
new) annual respondents x 20 hours of estimated burden per response =
9,000 total annual burden hours.

Requirement for Additional Benefits (Sec. 422.312)

An M+C organization's request to make a withdrawal from the
stabilization fund established for an M+C plan to be used during a
contract period must be made in writing when the M+C organization
notifies HCFA under Sec. 422.306 of its proposed premiums, other cost-
sharing amounts, and related information in preparation for its next
contract period.
The burden associated with this requirement is captured above in
Sec. 422.306.

State Licensure Requirement (Sec. 422.400)

Except in the case of a PSO granted a waiver under Subpart H of
part 422, each M+C organization must: (1) Be licensed under State law,
or otherwise authorized to operate under State law, as a risk-bearing
entity (as defined in Sec. 422.2) eligible to offer health insurance or
health benefits coverage in each State in which it offers one or more
M+C plans; (2) If not commercially licensed, obtain certification from
the State that the organization meets a level of financial solvency and
such other standards as the State may require for it to operate as an
M+C organization; and (3) Demonstrate to HCFA that--(i) The scope of
its license or authority allows the organization to offer the type of
M+C plan or plans that it intends to offer in the State; and (ii) If
applicable, it has obtained the State certification required under
Sec. 422.400(b).
The regulations at Sec. 422.400 require health plans to demonstrate
to HCFA that they meet the State licensure requirement of section
1855(a)(1) of the Social Security Act. As explained in the preamble,
organizations must meet both the basic requirement of State licensure
as a risk-bearing entity, as well as the requirement that the scope of
licensure be consistent with the type (or types) of M+C plan(s) the
organization will be offering. We are asking new organizations (i.e.,
other than current contractors) to submit, as part of the process of
applying for an M+C contract, a written certification showing the
organization's licensure status. As of the date of publication of this
interim final regulation, we are working with the National Association
of Insurance Commissioners to develop a form that may be used to
satisfy this requirement. A written statement containing the same type
of information that is requested in the form we are developing would
also suffice to show compliance with the statutory requirement.
The written certification is a combination of information provided
by the organization proposing to enter into an M+C contract, and
information to be provided by the appropriate State regulatory body
(e.g. the State department of insurance). This is necessary because the
written certification serves two purposes. First, it provides us with
written evidence of compliance with the State licensure requirement for
all M+C plans an organization may wish to offer. Second, it serves to
inform State regulators of the intention of organizations doing
business within the State with regard to M+C offerings. The
certification process enables the State to ensure that the organization
is complying with the State's standards for licensure (for example, as
noted in the preamble, an HMO that proposes to offer a Medicare point-
of-service (POS) product may be informed by the State that HMO
licensure does not allow an organization to offer POS products, and
that licensure as an indemnity insurer is required in that State in
order to offer a POS product).
The certification will have to be completed (or other written

[[Page 35061]]

documentation provided) only once by each M+C organization, unless the
nature of the M+C plan(s) offered by the organization differ from the
original certification (e.g., an HMO may decide at some later date,
after its initial application to offer a POS product--though even in
such a case, a new certification may not be necessary to the extent
that we are aware that applicable State law does not require a
different licensure status). We estimate that the time burden for the
M+C organization is 10 minutes or less for completion of the
certification form, or preparation of alternative written
documentation. Similarly, we would estimate, that the time burden for
the State regulatory body should be 15 minutes or less (including time
necessary to verify information from electronic or paper files).
Because we are estimating that there will be an average of 100 new
applicants per year for M+C contracts over the next 5 years, and
because this requirement will be imposed for nearly all organizations
on a one-time basis, we estimate the annual total burden to be 25
minutes per respondent x 100 annual responses for a total of 42
annual hours.

General Provisions (Sec. 422.501)/Contract Provisions (Sec. 422.502)

In order to qualify as an M+C organization, enroll beneficiaries in
any M+C plans it offers, and be paid on behalf of Medicare
beneficiaries enrolled in those plans, an M+C organization must enter
into a contract with HCFA.
Since the contract requirements associated with these sections are
reflective the requirements and associated burden set forth in other
sections of Part 422, the remaining burden associated with the
requirements of these sections is the time required for a M+C
organizations to read and sign the contract. It is estimated that it
will take 100 M+C organizations on an annual basis, 2 hours each for a
total annual burden of 200 hours. However, we solicit comment on the
burden associated with these sections as it relates to the burden of
meeting the requirements of the contract as reflected elsewhere in this
regulation.

Nonrenewal of Contract (Sec. 422.506)

An M+C organization that does not intend to renew its contract,
must notify HCFA, each Medicare enrollee, and the general public,
before the end of the contract. Based on current experience HCFA
receives 10 notifications of non-renewal on an annual basis. We
estimate that the burden of notifying HCFA is 2 hours per notification
for an annual burden of 20 hours.
We estimate the burden associated with notifying enrollees would
take 16 hours per plan to draft and disseminate through mass mailings
information of changes to affected beneficiaries for an annual burden
of 160 hours.
We anticipate notification to the general public would be through
the same notice published in a general circulation newspaper and would
be an additional burden of 4 hours per organization for an annual
burden of 40 hours.

Modification or Termination of Contract by Mutual Consent
(Sec. 422.508)

An M+C organization that modifies or terminates it contract by
written mutual consent must notify HCFA, each Medicare enrollee, and
the general public, within timeframes specified by HCFA. Based on
current experience HCFA receives less then 10 notifications of
Modification or termination on an annual basis that would require
notification of Medicare enrollees or the general public. However, we
estimate that the burden of notifying HCFA is 2 hours per notification
for an annual burden of 20 hours.

Termination of Contract by HCFA (Sec. 411.510)

If HCFA decides to terminate a contract for reasons other than the
grounds specified in Sec. 422.510(a)(5), the M+C organization notifies
its Medicare enrollees and the general public by publishing a notice in
one or more newspapers of general circulation in each community or
county located in the M+C organization's geographic area of the
termination by mail and at least 30 days before the effective date of
the termination. Based upon current experience this requirement is
imposed pursuant to an administrative action against fewer than 10
organizations on an annual basis. Therefore, these requirements are not
subject to the PRA as defined in 5 CFR 1320.4 and 5 CFR 1320.3(c).

Termination of Contract by the M+C Organization (Sec. 422.512)

The M+C organization may terminate the M+C contract if HCFA fails
to substantially carry out the terms of the contract. The M+C
organization must give advance notice as follows as required in
paragraphs (a)(1) through (a)(3) of Sec. 422.512. In summary, an M+C
organization that does not intend to renew its contract, it must notify
HCFA, each Medicare enrollee, and the general public, before the end of
the contract.
Based upon current experience this requirement is imposed on fewer
than 10 organizations on an annual basis. Therefore, these requirements
are not subject to the PRA as defined in 5 CFR 1320.3(c).

Reporting Requirements (Sec. 422.516)

Each M+C organization must report to HCFA annually, within 120 days
of the end of its fiscal year (unless for good cause shown, HCFA
authorizes an extension of time), the requirements in Sec. 422.516
(b)(1) through (b)(3). The burden associate with these requirements is
currently captured under form HCFA-906, OMB #0938-0469. Although the
burden associated with the completion of the HCFA-906 differs by
provider type, on average, the annual burden per provider is 17 annual
hours, for a total burden of 3,130 hours. In the near future HCFA will
resubmit this collection to OMB for approval for use by M+C
organizations.
For any employees' health benefits plan that includes an M+C
organization in its offerings, the M+C organization must furnish, upon
request, the information the plan needs to fulfill its reporting and
disclosure obligations under the Employee Retirement Income Security
Act of 1974 (ERISA). The M+C organization must furnish the information
to the employer or the employer's designee, or to the plan
administrator, as the term ``administrator'' is defined in ERISA.
These reporting requirements are currently imposed by the
Department of Treasury and therefore impose no addition burden.
Each M+C organization must make the information reported to HCFA
under Sec. 422.502(f)(1) available to its enrollees upon reasonable
request. This burden associated with this requirement is imposed
pursuant to the dissemination of enrollment/disenrollment information
referenced in Subpart B of this regulation.
Each organization must notify HCFA of any loans or other special
financial arrangements it makes with contractors, subcontractors and
related entities.
The burden associate with these requirements is currently captured
under form HCFA-906, OMB #0938-0469. In the near future HCFA will
resubmit this collection to OMB for approval for use by M+C
organizations.

Change of Ownership (Sec. 422.550)

Sec. 422.550 is amended to require in paragraph (b) that an M+C
organization must provide updated financial information and a
discussion of the financial and solvency impact of the change of
ownership on the surviving

[[Page 35062]]

organization. The burden associated with these requirements, which is
estimated to take 10 hours per respondent x 10 annual respondents, is
currently captured under National Data Reporting Requirements, form
HCFA-906, OMB #0938-0469. In the near future HCFA will resubmit this
collection to OMB for approval for use by M+C organizations.

Sec. 422.562 General provisions.

An M+C organization, with respect to each M+C plan that it offers,
must establish and maintain written procedures related to; (1) the
grievance procedures as described in Sec. 422.564, (2) making timely
organization determinations, (3) an appeal process that meets the
requirements of this Subpart for issues that involve organization
determinations.
In addition, an M+C organization must ensure that all enrollees
receive written information about the grievance and appeal procedures
that are available to them through the M+C organization and complaint
process available to the enrollee under the PRO process as set forth
under section 1154(a)(14) of the Act.
While we believe the initial burden associated with meeting these
requirements is captured elsewhere in this regulation, we solicit
comment on the ongoing burden associated with maintaining and
disseminating the information requirements set forth in this section.

Standard Timeframes and Notice Requirements for Organization
Determinations (Sec. 422.568)

When a party has made a request for a service, the M+C organization
must notify the enrollee of its determination as expeditiously as the
enrollee's health condition requires, but no later than 30 calendar
days after the date the organization receives the request for a
standard organization determination.
If an M+C organization decides to deny service or payment in whole
or in part, it must give the enrollee written notice of the
determination.
The burden associated with this requirement is discussed below in
Sec. 422.572.

Expediting Certain Organization Determinations (Sec. 422.570)

To ask for an expedited determination, an enrollee or a health care
professional must submit an oral or written request directly to the M+C
organization or, if applicable, to the entity responsible for making
the determination, as directed by the M+C organization. A physician may
provide oral or written support for a request for an expedited
determination.
If an M+C organization denies a request for expedited
determination, it must give the enrollee prompt oral notice of the
denial and follow up, within 2 working days, with a written letter
that: (1) Explains that the M+C organization will process the request
using the 30-calendar-day timeframe for standard determinations, (2)
informs the enrollee of the right to file a grievance if he or she
disagrees with the M+C organization's decision not to expedite; and (3)
provides instructions about the grievance process and its timeframes.
If an M+C organization grants a request for expedited
determination, it must make the determination and give notice in
accordance with Sec. 422.572.
The burden associated with this requirement is discussed below in
Sec. 422.572.

Timeframes and Notice Requirements for Expedited Organization
Determinations (Sec. 422.572)

Except as provided in paragraph (b) of Sec. 422.572, an M+C
organization that approves a request for expedited determination must
make its determination and notify the enrollee (and the physician as
warranted by the patient's medical condition or situation) of its
decision, whether adverse or favorable, as expeditiously as the
enrollee's health condition requires, but not later than 72 hours after
receiving the request.
The M+C organization may extend the 72-hour deadline by up to 14
calendar days if the enrollee requests the extension or if the
organization finds that it needs additional information and the delay
is in the interest of the enrollee (for example, the receipt of
additional medical evidence may change an M+C organization's decision
to deny). The M+C organization must notify the enrollee of its
determination before or immediately upon expiration of the extension.
If the M+C organization first notifies an enrollee of its expedited
determination orally, it must mail written confirmation to the enrollee
within 2 working days of the oral notification.
Organizations that contract with HCFA under the M+C program are
required to implement procedures for making timely organization
determinations and for resolving reconsiderations and other levels of
appeals with respect to these determinations. In general, organization
determinations involve whether an enrollee is entitled to receive a
health service or the amount the enrollee is expected to pay for that
service. A reconsideration consists of a review of an adverse
organization determination (a decision by an M+C organization that is
unfavorable to the M+C enrollee, in whole or in part) by either the M+C
organization itself or an independent review entity. We use the term
``appeal'' to denote any of the procedures that deal with the review of
organization determinations, including reconsiderations, hearings
before administrative law judges (ALJs), reviews by the Departmental
Appeals Board (DAB) and judicial review. As discussed in detail in
section II.M of this preamble, the organization determination and
appeal requirements for M+C organizations that are set forth in this
interim final rule are largely based on the existing rules for managed
care organizations under Part 417, Subpart Q, Beneficiary Appeals.
Sections 422.568, 422.570, and 422.572 contain the applicable
requirements for initial organization determinations, which include
submission of an oral or written request from an enrollee, and
notification procedures that the M+C organization must follow when it
makes a determination. We estimate that approximately 20 percent of the
approximately 1 million M+C enrollees may make a request for an
organization determination in a year, with an estimated burden of 2
minutes per request. Estimated notification burden associated with
these requests is 5 minutes per request. The total overall annual
burden for enrollee requests and organizational notification burden is
33,333 hours and 83,333 hours respectively.

Request for a Standard Reconsideration (Sec. 422.582)

A party to an organization determination must ask for a
reconsideration of the determination by filing a written request with:
(1) The M+C organization that made the organization determination; (2)
an SSA office; or (3) in the case of a qualified railroad retirement
beneficiary, an RRB office.
If the 60-day period in which to file a request for a
reconsideration has expired, a party to the organization determination
may file a request for reconsideration with the M+C organization, SSA,
or an RRB office. If SSA or RRB receives a request, it forwards the
request to the M+C organization for its reconsideration. The request
for reconsideration and to extend the timeframe must: (1) Be in
writing; and( 2) state why the request for reconsideration was not
filed on time.

[[Page 35063]]

The party who files a request for reconsideration may withdraw it
by filing a written request for withdrawal at one of the places listed
in paragraph (a) of this section.
The burden associated with this requirement is discussed below in
Sec. 422.602.

Expediting Certain Reconsiderations (Sec. 422.584)

To ask for an expedited reconsideration, an enrollee or a health
care professional (on behalf of an enrollee) must submit an oral or
written request directly to the M+C organization or, if applicable, to
the entity responsible for making the reconsideration, as directed by
the M+C organization. A physician may provide oral or written support
for a request for an expedited reconsideration.
If an M+C organization denies a request for expedited
reconsideration, it must take the following actions: (1) Automatically
transfer a request to the standard timeframe and make the determination
within the 45-day timeframe established in Sec. 422.590(a); (2) give
the enrollee prompt oral notice, and follow up, within 2 working days,
with a written letter that--(i) Explains that the M+C organization will
process the enrollee's request using the 45-day timeframe for standard
reconsiderations, (ii) informs the enrollee of the right to file a
grievance if he or she disagrees with the organization's decision not
to expedite, and (iii) provides instructions about the grievance
process and its timeframes.
If an M+C organization grants a request for expedited
reconsideration, it must conduct the reconsideration and give notice in
accordance with Sec. 422.590(d).
The burden associated with this requirement is discussed below in
Sec. 422.602.

Timeframes and Responsibility for Reconsiderations (422.590)

If the M+C organization makes a reconsidered determination that
affirms, in whole or in part, its adverse organization determination,
it must prepare a written explanation and send the case file to the
independent entity contracted by HCFA as expeditiously as the
enrollee's health condition requires, but no later than 45 calendar
days from the date it receives the request for a standard
reconsideration. The organization must make reasonable and diligent
efforts to assist in gathering and forwarding information to the
independent entity.
If the M+C organization affirms, in whole or in part, its adverse
organization determination, it must prepare a written explanation and
send the case file to the independent entity contracted by HCFA no
later than 60 calendar days from the date it receives the request for a
standard reconsideration. The organization must make reasonable and
diligent efforts to assist in gathering and forwarding information to
the independent entity.
If the M+C organization fails to provide the enrollee with a
reconsidered determination within the timeframes specified in paragraph
(a) or paragraph (b) of this section, or to obtain a good cause
extension described in paragraph (e) of this section, this failure
constitutes an affirmation of its adverse organization determination,
and the M+C organization must submit the file to the independent entity
in the same manner as described under paragraphs (a)(2) and (b)(2) of
this section.
The M+C organization may extend the 72-hour deadline by up to 14
calendar days if the enrollee requests the extension or if the
organization finds that it needs additional information and the delay
is in the interest of the enrollee (for example, the receipt of
additional medical evidence may change an M+C organization's decision
to deny). The M+C organization must notify the enrollee of its
determination before or immediately upon expiration of the extension.
If the M+C organization first notifies an enrollee orally of a
completely favorable expedited reconsideration, it must mail written
confirmation to the enrollee within 2 working days.
If, as a result of its reconsideration, the M+C organization
affirms, in whole or in part, its adverse expedited organization
determination, the M+C organization must submit a written explanation
and the case file to the independent entity contracted by HCFA within
24 hours. The organization must make reasonable and diligent efforts to
assist in gathering and forwarding information to the independent
entity.
If the M+C organization refers the matter to the independent entity
as described under this section, it must concurrently notify the
enrollee of that action.
If the M+C organization fails to provide the enrollee with the
results of its reconsideration within the timeframe described in
paragraph (d) of this section, this failure constitutes an adverse
reconsidered determination, and the M+C organization must submit the
file to the independent entity within 24 hours of expiration of the
timeframe set forth in paragraph (d) of this section.
The burden associated with this requirement is discussed below in
Sec. 422.602.

Notice of Reconsidered Determination by the Independent Entity
(Sec. 422.594)

When the independent entity makes the reconsidered determination,
it is responsible for mailing a notice of its reconsidered
determination to the parties and for sending a copy to HCFA.
See discussion below.

Request for an ALJ Hearing (Sec. 422.602)

A party must file a written request for a hearing at one of the
places listed in Sec. 422.582(a) or with the independent, outside
entity. The organizations listed in Sec. 422.582(a) forward the request
to the independent, outside entity, which is responsible for
transferring the case to the appropriate ALJ hearing office.
Sections 422.582, 422.584, and 422.590 contain the applicable
requirements for reconsiderations by an M+C organization of adverse
organization determinations. The required procedures generally involve
a written request from an enrollee, preparation of a brief written
explanation and case file by the M+C organization, and notification of
the decision by the M+C organization. Only about 0.5 percent of
organization determinations, [that is, about 20,000 cases per year],
ever reach the reconsideration stage. For these cases, we estimate a
burden on the requesting enrollee of approximately 20 minutes per case
and a burden on the M+C organization of approximately 4 hours,
including both information collection and notification. Note that
Sec. 422.590 specifies that if an M+C organization affirms, in whole or
in part, its adverse organization determination, it must forward the
case to an independent entity contracted by HCFA for further review. We
estimate that approximately 50 percent (10,000) of reconsidered cases
result in a decision that is adverse to the enrollee, and thus review
by the independent entity. For these cases, we estimate an additional
burden on the M+C organization of approximately 2 hours per case. Thus,
the estimated total annual burden on M+C organizations associated with
reconsiderations is 100,000 hours (4 hours times 20,000 cases plus 2
hours times 10,000 cases).
About 30 percent of reconsideration requests that reach the
independent entity level are resolved fully in favor of the enrollee.
For the other 7,000 cases, an enrollee may pursue additional appeals,
beginning with an appeal to an ALJ. Only about 10 percent of these
cases are appealed to the ALJ, and for these 700 cases, we estimate an

[[Page 35064]]

incremental burden of 20 minutes on the enrollee to make the request
for an appeal under Sec. 422.602, and 2 hours on the M+C organization
for additional information collection associated with the appeal.
Finally, under Secs. 422.608 and 422.612, enrollees or M+C
organizations may appeal ALJ decisions to the Departmental Appeal
Board, and subsequently request judicial review. We would estimate an
incremental burden of an additional 2 to 4 hours per case, with only
about 20 DAB cases and 10 judicial review cases per year.

How M+C Organizations Must Notify Enrollees of Noncoverage of Inpatient
Hospital Care (Sec. 422.620)

The M+C organization must give the enrollee written notice that
includes the following: (1) The reason why inpatient hospital care is
no longer needed, (2) the effective date of the enrollee's liability
for continued inpatient care, and (3) the enrollee's appeal rights. If
the M+C organization allows the hospital to determine whether inpatient
care is necessary, the hospital obtains the concurrence of the
contracting physician responsible for the enrollee's hospital care or
of another physician as authorized by the M+C organization, and
notifies the enrollee, following the procedures set forth in
Sec. 412.42(c)(3) of this chapter.
The burden associated with this requirement is discussed below in
Sec. 422.622.

Requesting Immediate PRO Review of Noncoverage of Inpatient Hospital
Care (Sec. 422.622)

For the immediate PRO review process, the enrollee must submit the
request for immediate review in writing or by telephone to the PRO that
has an agreement with the hospital under Sec. 466.78 of this chapter by
noon of the first working day after he or she receives written notice
that the M+C organization or hospital has determined that the hospital
stay is no longer necessary.
Under Sec. 422.620, an M+C organization is required to provide an
M+C enrollee, before a hospital discharge, with a written notice of
noncoverage if it decides that inpatient care is no longer necessary.
Section 422.622 provides the procedures that are to be followed if an
enrollee by the enrollee and the M+C organization if the enrollee
wishes to request PRO review of the M+C organization's decision. We
estimate that there will be no more than 1,000 of these type of cases
per year under the M+C program. We estimate that the reporting burden
for an M+C organization to provide written notice of noncoverage to be
approximately 10 minutes per notice; for an M+C enrollee to complete a
request for immediate PRO review to be approximately 10 minutes per
request; and for the M+C organization to submit requested medical
information to the PRO, to be approximately 2 hours per response.
In response to a request from the M+C organization, the hospital
must submit medical records and other pertinent information to the PRO
by close of business of the first full working day immediately
following the day the organization makes its request.
Given that this requirement is imposed pursuant to an
administrative action against an organization, this requirement is not
subject to the PRA as defined in 5 CFR 1320.4.

Request for Reconsideration (Sec. 422.650)

A request for reconsideration must be made in writing and filed
with any HCFA office within 15 days from the date of the notice of the
initial determination. Based upon current experience this requirement
is imposed pursuant to an administrative action against fewer than 10
organizations on an annual basis. Therefore, these requirements are not
subject to the PRA as defined in 5 CFR 1320.3(c) and 5 CFR 1320.4.
The M+C organization or M+C contract applicant who filed the
request for a reconsideration may withdraw it at any time before the
notice of the reconsidered determination is mailed. The request for
withdrawal must be in writing and filed with HCFA. Based upon current
experience this requirement is imposed pursuant to an administrative
action against fewer than 10 organizations on an annual basis.
Therefore, these requirements are not subject to the PRA as defined in
5 CFR 1320.3(c) and 5 CFR 1320.4.

Request for Hearing (Sec. 422.662)

A request for a hearing must be made in writing and filed by an
authorized official of the applicant entity or M+C organization that
was the party to the determination under appeal. The request for a
hearing must be filed with any HCFA office within 15 days after the
date of receipt of the notice of initial or reconsidered determination.
Based upon current experience this requirement is imposed pursuant
to an administrative action against fewer than 10 organizations on an
annual basis. Therefore, these requirements are not subject to the PRA
as defined in 5 CFR 1320.3(c) and 5 CFR 1320.4.

Disqualification of Hearing Officer (Sec. 422.668)

A hearing officer may not conduct a hearing in a case in which he
or she is prejudiced or partial to any party or has any interest in the
matter pending for decision.
If the hearing officer does not withdraw, the objecting party may,
after the hearing, present objections and request that the officer's
decision be revised or a new hearing be held before another hearing
officer. The objections must be submitted in writing to HCFA.
Based upon current experience these requirements are imposed
pursuant to an administrative action against fewer than 10
organizations on an annual basis. Therefore, these requirements are not
subject to the PRA as defined in 5 CFR 1320.3(c) and 5 CFR 1320.4.

Time and Place of Hearing (Sec. 422.670)

The hearing officer fixes a time and place for the hearing, which
is not to exceed 30 days from the receipt of the request for the
hearing, and sends written notice to the parties. The notice also
informs the parties of the general and specific issues to be resolved
and information about the hearing procedure.
Based upon current experience these requirements are imposed
pursuant to an administrative action against fewer than 10
organizations on an annual basis. Therefore, these requirements are not
subject to the PRA as defined in 5 CFR 1320.3(c) and 5 CFR 1320.4.

Record of Hearing (Sec. 422.686)

A complete record of the proceedings at the hearing is made and
transcribed and made available to all parties upon request. Based upon
current experience these requirements are imposed pursuant to an
administrative action against fewer than 10 organizations on an annual
basis. Therefore, these requirements are not subject to the PRA as
defined in 5 CFR 1320.3(c) and 5 CFR 1320.4.

Notice and Effect of Hearing Decision (Sec. 422.690)

As soon as practical after the close of the hearing, the hearing
officer issues a written decision that: (1) Is based upon the evidence
of record, and (2) contains separately numbered findings of fact and
conclusions of law. And, the hearing officer provides a copy of the
hearing decision to each party. Based upon current experience these
requirements are imposed pursuant to an administrative action against
fewer than 10 organizations on an annual basis. Therefore, these
requirements are

[[Page 35065]]

not subject to the PRA as defined in 5 CFR 1320.3(c) and 5 CFR 1320.4.

Effect of Revised Determination (Sec. 422.698)

The revision of an initial or reconsidered determination is binding
unless a party files a written request for hearing of the revised
determination in accordance with Sec. 422.662. Based upon current
experience these requirements are imposed pursuant to an administrative
action against fewer than 10 organizations on an annual basis.
Therefore, these requirements are not subject to the PRA as defined in
5 CFR 1320.3(c) and 5 CFR 1320.4.
As a note, the public will be afforded several subsequent comment
periods in future publications of Federal Register notices announcing
our intention to seek OMB approval of standardized information
collection requirements such as the ACR and contractor application
forms that will be submitted to OMB in the near future.
We have submitted a copy of this rule to OMB for its review of the
information collection requirements above. To obtain copies of the
supporting statement for these collection requirements and any
currently approved forms that are related to the proposed paperwork
collections referenced above, E-mail your request, including your
address, phone number and HCFA regulation identifier HCFA-1011, to
Paperwork@hcfa.gov, or call the Reports Clearance Office on (410) 786-
1326.
As noted above, comments on these information collection and record
keeping requirements must be mailed and/or faxed to the designee
referenced below, within ten working days of publication of this
collection in the Federal Register:

Health Care Financing Administration, Office of Information Services,
Information Technology Investment Management Group, Division of HCFA
Enterprise Standards, Room C2-26-17, 7500 Security Boulevard,
Baltimore, MD 21244-1850, Attn: John Burke HCFA-1030, Fax Number: (410)
786-1415
And
Office of Information and Regulatory Affairs, Office of Management and
Budget, Room 10235, New Executive Office Building, Washington, DC
20503, Attn: Allison Herron Eydt, HCFA Desk Officer, Fax Number: (202)
395-6974 or (202) 395-5167

VII. Responses to Comments

Because of the large number of items of correspondence we normally
receive on a rule, we are not able to acknowledge or respond to them
individually. We will, however, consider all comments that we receive
by the date specified in the DATES section of this preamble, and, if we
proceed with a subsequent document, we will respond to the comments in
that document.

VIII. Waiver of Proposed Rulemaking and Waiver of Delayed Effective
Date

Because the Secretary is exercising discretion in implementing
sections 1851 through 1857 and section 1859 of the Act, ordinarily we
would publish a notice of proposed rulemaking and afford a period for
public comments. Further, we generally provide for final rules to be
effective no sooner than 30 days after the date of publication unless
we find good cause to waive the delay. However, section 1856(b)(1) of
the Act requires that these regulations be published by June 1, 1998,
and provides that in order to carry out this requirement we may
promulgate regulations that take effect on an interim basis, after
notice and pending opportunity for public comment.
On January 20, 1998, we published a notice in the Federal Register
in which we requested public comments on the implementation of the M+C
program. We received approximately 90 items of correspondence in
response to that notice. Further, on February 4, 1998, we held a public
meeting to discuss issues and concerns from plans, providers,
beneficiaries, and other interested parties on the requirements and
implementation of the Medicare+Choice program. Approximately 600
individuals representing managed care organizations, local governmental
agencies, and advocacy groups attended that meeting.
Because of the need to publish regulations timely and in light of
the fact that we previously provided opportunity for public comment, we
find good cause to waive the notice of proposed rulemaking and to issue
this final rule on an interim basis. We are providing a 90-day comment
period for public comment. We also find good cause to waive the delay
in the effective date of this rule.

IX. Effect of the Contract With America Advancement Act of 1996
(Public Law 104-121)

This rule has been determined to be a major rule as defined in
Title 5, United States Code, section 804(2). Ordinarily under 5 U.S.C.
801, as added by section 251 of Public Law 104-121, a major rule shall
take effect 60 days after the later of (1) the date a report on the
rule is submitted to the Congress, or (2) the date the rule is
published in the Federal Register. However, section 808(2) of Title 5,
United States Code, provides that, notwithstanding 5 U.S.C. 801, a
major rule shall take effect at such time as the Federal agency
determines if for good cause the agency finds that notice and comment
procedures are impracticable, unnecessary, or contrary to the public
interest. As explained above, for good cause we find that it was
impracticable, unnecessary, or contrary to the public interest to
complete notice and comment procedures before publication of this rule.
Accordingly, pursuant to 5 U.S.C. 808(2), these regulations are
effective on July 27, 1998.

BILLING CODE 4120-01-P
42 CFR Chapter IV is amended as set forth below.

A. Part 400

PART 400--INTRODUCTION; DEFINITIONS

1. The authority citation for part 400 continues to read as
follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh) and 44 U.S.C. chapter 35.

2. In Sec. 400.200, the definition for ``PRO'' is revised and the
following definitions are added in alphabetical order to read as
follows.

Sec. 400.200 General definitions.

* * * * *
ALJ stands for administrative law judge.
* * * * *
NCD stands for national coverage determination.
* * * * *
Peer review organization means an organization that has a contract
with HCFA, under part B of title XI of the Act, to perform utilization
and quality control review of the health care furnished, or to be
furnished, to Medicare beneficiaries.
PRO stands for peer review organization.
* * * * *
RRB stands for Railroad Retirement Board.
* * * * *
3. In Sec. 400.202 a definition of ``national coverage
determination'' is added in alphabetical order to read as follows.

Sec. 400.202 Definitions specific to Medicare.

* * * * *
National coverage determination (NCD) means a national policy
determination regarding the coverage status of a particular service,
that HCFA

[[Page 35066]]

makes under section 1862(a)(1) of the Act, and publishes as a Federal
Register notice or HCFA Ruling. (The term does not include coverage
changes mandated by statute.)
* * * * *

B. Part 403

PART 403--SPECIAL PROGRAMS AND PROJECTS

1. The authority citation for part 403 continues to read as
follows:

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

2. In Sec. 403.205, paragraph (d) introductory text is revised to
read as follows:

Sec. 403.205 Medicare supplemental policy.

* * * * *
(d) Medicare supplemental policy does not include a Medicare+Choice
plan or any of the following health insurance policies or health
benefit plans:
* * * * *
C. Part 410

PART 410--SUPPLEMENTARY MEDICAL INSURANCE (SMI) BENEFITS

1. The authority citation for part 410 continues to read as
follows:

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

2. Part 410 is amended as set forth below.
a. Section 410.57 is revised to read as follows:

Sec. 410.57 Pneumococcal vaccine and flu vaccine.

(a) Medicare Part B pays for pneumococcal vaccine and its
administration when reasonable and necessary for the prevention of
disease, if the vaccine is ordered by a doctor of medicine or
osteopathy.
(b) Medicare Part B pays for the influenza virus vaccine and its
administration.
b. Section 410.152 is amended to add a paragraph (1) to read as
follows:

Sec. 410.152 Amounts of Payment.

* * * * *
(1) Amount of payment: Flu vaccine. Medicare Part B pays 100
percent of the Medicare allowed charge.

D. Part 411

PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE
PAYMENT

1. The authority citation for part 411 continues to read as
follows:

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

Sec. 411.15 [Amended]

2. In Sec. 411.15, in paragraph (e), the following changes are
made:
a. The ``and'' at the end of paragraph (e)(2) is removed.
b. A semicolon and the word ``and'' are added at the end of
paragraph (e)(3).
c. A new paragraph (e)(4) is added, to read as follows:

Sec. 411.15 Particular services excluded from coverage.

* * * * *
(e) * * *
(4) Influenza vaccinations that are reasonable and necessary for
the prevention of illness.
* * * * *
3. In Sec. 411.355, a new paragraph (c)(5) is added, to read as
follows:

Sec. 411.355 General exceptions to referral prohibitions related to
both ownership/investment and compensation.

* * * * *
(c) * * *
(5) A coordinated care plan (within the meaning of section
1851(a)(2)(A) of the Act) offered by an organization in accordance with
a contract with HCFA under section 1857 of the Act and part 422 of this
chapter.
* * * * *
E. Part 417

PART 417--HEALTH MAINTENANCE ORGANIZATIONS, COMPETITIVE MEDICAL
PLANS, AND HEALTH CARE PREPAYMENT PLANS

1. The authority citation for part 417 continues to read as
follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh), secs. 1301, 1306, and 1310 of the Public
Health Service Act (42 U.S.C. 300e, 300e-5, and 300e-9); and 31
U.S.C. 9701.

2. Section 417.402 is revised to read as follows:

Sec. 417.402 Effective date of initial regulations.

(a) The changes made to section 1876 of the Act by section 114 of
the Tax Equity and Fiscal Responsibility Act of 1982 became effective
on February 1, 1985, the effective date of the initial implementing
regulations.
(b) The changes made to section 1876 of the Act by section 4002 of
the Balanced Budget Act (BBA) of 1997 are incorporated in section 422
except for 1876 cost contracts. Upon enactment of the BBA (August 5,
1997) no new cost contracts or service area expansions are accepted by
HCFA except for current Health Care Prepayment Plans that may convert
to 1876 cost contracts. Also, 1876 cost contracts may not be extended
or renewed beyond December 31, 2002.
3. In Sec. 417.413, paragraphs (d)(1) and (d)(2) introductory text
are revised and new paragraphs (d)(2) (iii) and (d)(8) are added to
read as follows:

Sec. 417.413 Qualifying condition: Operating experience and
enrollment.

* * * * *
(d) Standard: Composition of enrollment. (1) Requirement. Except as
specified in paragraphs (d)(2) and (e) of this section, not more than
50 percent of an HMO's or CMP's enrollment may be Medicare
beneficiaries.
(2) Waiver of composition of enrollment standard. HCFA may waive
compliance with the requirements of paragraph (d)(1) of this section if
the HMO or CMP has made and is making reasonable efforts to enroll
individuals who are not Medicare beneficiaries and it meets one of the
following requirements:
* * * * *
(iii) The HMO or CMP requests waiver of the composition rule
because it is in the public interest. The organization provides
documentation that supports one of the following:
(A) The organization serves a medically underserved rural or urban
area.
(B) The organization demonstrates a long-term business and
community service commitment to the area.
(C) The organization believes that a waiver is necessary to promote
managed care choices in an area with limited or no managed care
choices.
* * * * *
(8) Termination of composition standard. The 50 percent composition
of Medicare beneficiaries terminates for all managed care plans on
December 31, 1998.
* * * * *
4. In Sec. 417.426, a new paragraph (a)(4) is added to read as
follows:

Sec. 417.426 Open enrollment requirements.

(a) Basic requirements. * * *
(4) An HMO or CMP with a risk contract must accept applications
from eligible Medicare beneficiaries during the month of November 1998.
* * * * *
5. Section 417.428 is revised to read as follows:

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