[Federal Register Volume 77, Number 8 (Thursday, January 12, 2012)]
[Rules and Regulations]
[Pages 1877-1883]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-473]



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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 423

[CMS-4131-F2]
RIN 0938-AP64


Medicare Program; Medicare Advantage and Prescription Drug 
Benefit Programs: Negotiated Pricing and Remaining Revisions; 
Prescription Drug Benefit Program: Payments to Sponsors of Retiree 
Prescription Drug Plans

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

ACTION: Final rule.

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SUMMARY: This final rule implements and finalizes provisions regarding 
the reporting of gross covered retiree plan-related prescription drug 
costs (gross retiree costs) and retained rebates by Retiree Drug 
Subsidy (RDS) sponsors; and the scope of our waiver authority under the 
Social Security Act (the Act).

DATES: Effective Date: These regulations are effective on March 12, 
2012.

FOR FURTHER INFORMATION CONTACT: 

John Campbell, (410) 786-0542.
Joseph Hefter, (410) 786-5751.
James Slade, (410) 786-1073.

SUPPLEMENTARY INFORMATION:

I. Background

    The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33) established 
a new ``Part C'' in the Medicare statute (sections 1851 through 1859 of 
the Social Security Act (the Act)) that established the Medicare+Choice 
(M+C) program. Under section 1851(a)(1) of the Act, every individual 
entitled to Medicare Part A and enrolled under Medicare Part B, except 
for most individuals with end-stage renal disease (ESRD), could elect 
to receive benefits either through the original Medicare program or an 
M+C plan, if one was offered where he or she lived.
    Subsequently, the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173) was enacted on 
December 8, 2003. This legislation established the Medicare 
prescription drug benefit program (Part D) and made significant 
revisions to the provisions in Medicare Part C, governing what was 
renamed the Medicare Advantage (MA) program (formerly Medicare+Choice). 
The MMA directed that important aspects of the new Medicare 
prescription drug benefit program under Part D be similar to and 
coordinated with regulations for the MA program. The MMA also created a 
subsidy program involving payments to sponsors of Retiree Prescription 
Drug Programs, or the Retiree Drug Subsidy (RDS) Program. This program 
allows subsidy payments to sponsors of qualified retiree prescription 
drug plans for Part D drug costs for individuals who are eligible for, 
but not enrolled in, a Medicare Part D plan. The MMA also specified 
that implementation of the prescription drug benefit and revised MA 
program provisions take place by January 1, 2006. Thus, we published 
final rules for the MA and Part D prescription drug programs in the 
January 28, 2005 Federal Register (70 FR 4588 through 4741 and 70 FR 
4194 through 4585, respectively).
    We published a proposed rule on May 16, 2008 (73 FR 28556) that 
proposed to make the Part D and RDS policies the same with respect to 
the reporting of negotiated prices and retained rebates. The May 2008 
proposed rule would have required that Prescription Drug Benefit 
Program (Part D) and Retiree Drug Subsidy (RDS) sponsors report the 
pass-through negotiated prices and included a proposed definition of 
``negotiated price'' to be included at Sec.  423.882 that paralleled 
the definition at Sec.  423.100. The May 2008 proposed rule also 
proposed to include definitions of ``actually paid,'' ``administrative 
costs,'' ``allowable retiree costs,'' and ``gross covered retiree plan-
related prescription drug costs'' that reflected Part D policy on 
retained rebates and ``pass-through'' negotiated prices, and proposed 
to apply the policies to the RDS Program. Thus, our proposed rule would 
have also required RDS sponsors to report rebates retained by an 
intermediary contracting organization, such as a pharmacy benefit 
manager (PBM), that may have been received by an intermediary 
contracting organization based on the utilization by the RDS sponsor's 
enrollees, but not passed through to the plan sponsor.
    In the January 12, 2009 Federal Register (74 FR 1494), we published 
a final rule with comment period that responded to comments on the May 
16, 2008 proposed rule and finalized Part C and Part D regulations from 
that proposed rule that either were not impacted by Medicare 
Improvements for Patients and Providers Act of 2008 (MIPPA) (Pub. L. 
110-275), which was enacted on July 15, 2008, or that complemented 
MIPPA provisions. In addition, the final rule with comment period--(1) 
Deferred finalizing the RDS definition of ``negotiated prices'' and 
implemented, on an interim final basis, definitions of the other terms 
that reflected existing RDS policy, but did not reflect the new Part D 
policy on negotiated prices and retained rebates; (2) solicited public 
comment on whether we have the authority to adopt different reporting 
structures for Part D versus the RDS Program; and (3) set forth three 
theories under which we might have such authority.
    Also in the January 12, 2009 Federal Register, we published a 
proposed rule that would make regulatory revisions based on a change in 
our interpretation of section 1860D-22(b) of the Act. This provision 
would be interpreted as providing us with the authority to waive or 
modify requirements that hinder the design of, the offering of, or 
enrollment in an RDS plan.

II. Provisions of the Rules and Analysis and Response to Public 
Comments

    Based on comments on the May 2008 proposed rule, in our January 12, 
2009 final rule with comment period (74 FR 1494), we deferred 
finalizing the definition of ``negotiated prices'' and implemented, on 
an interim final basis, definitions of the other terms that reflected 
existing RDS policy, but did not reflect the new Part D policy on 
negotiated prices and retained rebates. Stakeholders that commented on 
the May 2008 proposed rule argued that the majority of RDS sponsors are 
large employers that are sophisticated purchasers with a great amount 
of leverage, and are in the best negotiating position to decide which 
pricing structure is most appropriate for them. Commenters on the May 
2008 proposed rule also argued that to extend the Part D policy of 
requiring the reporting of pass-through prices (and retained rebates) 
would cause RDS sponsors to leave the program and place retirees in the 
Medicare Part D program.
    We also at that time requested comment on whether we have the 
authority to adopt different reporting structures for Part D versus the 
RDS Program, and our final rule with comment period set forth three 
theories under which we might have such authority. These legal theories 
are described in detail in our January 12, 2009 final rule with comment 
period (74 FR 1494, 74 FR 1516, and 74 FR 1519). Although the three 
legal theories were articulated in connection with our decision to 
defer finalizing the proposed definition of ``negotiated prices'' in 
the RDS regulations (which would have tracked the Part D definition at 
Sec.  423.100), we also stated in the January 12, 2009 final rule with 
comment period that we believed these three legal theories also could 
have applicability to

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the issue of whether we could adopt a policy for retained rebates that 
differed between RDS and Part D, and we sought comment on that issue as 
well.

A. Provisions of the Final Rule With Comment Period

    In the January 12, 2009 Federal Register (74 FR 1494), we published 
a final rule with comment period that finalized certain requirements 
relating to the MA and Part D Programs, and implemented certain 
requirements for the RDS Program on an interim basis. In the preamble 
discussion of these interim final regulations, we indicated that we 
agree with concerns expressed by commenters regarding the application 
to the RDS program of two Part D policies that were being finalized. We 
also indicated that the interim final regulations preserve the status 
quo for the RDS program with respect to these policies while we invited 
comment on three different legal theories under which we could 
potentially apply different cost reporting structures between the Part 
D and RDS Programs. That is, under Part D, sponsors are required to 
report pass-through pricing and retained rebates, but under the RDS 
Program, sponsors would be permitted to choose whether or not to report 
drug costs on a pass-through or lock-in basis, and could choose to 
report rebates and other price concessions that are retained by a 
pharmacy benefit management company or other intermediary contracting 
organization. In addition, the January 2009 proposed rule noted that we 
were specifically soliciting comments on the possibility of applying 
one or more of these legal theories.
    We received comments from 10 stakeholders on the final rule with 
comment period. Commenters included advocacy groups representing the 
insurance industry, and employers and other organizations that sponsor 
or administer retirement and health benefits; pharmacy benefit 
managers; a health care consortium; and a consultant.
    Commenters generally supported allowing the RDS Program reporting 
structure to be different from the Part D reporting structure, and 
commenters generally believed that we have the authority to allow 
differing reporting structures. In this final rule, based on the 
comments received both on the interim final portions of the January 12, 
2009 final rule with comment period, as well as comments received on 
the proposed rule published the same day, we are finalizing the RDS 
language as specified in the January 2009 final rule with comment 
period (73 FR 1494) (with the correction discussed in section II.C. of 
this final rule), and the proposed regulatory changes for part 423 
subpart J in the January 2009 proposed rule (74 FR 1550). Therefore we 
are finalizing the definitions of ``actually paid,'' ``administrative 
costs,'' ``allowable retiree costs,'' ``gross covered retiree plan-
related prescription drug costs, or gross retiree costs,'' as they were 
published in the January 12, 2009 final rule with comment period. We 
are also finalizing the revision of Sec.  423.888(b)(5)(i) so that it 
references the term ``gross covered plan-related retiree prescription 
drug costs,'' which is a term defined in part 423 subpart R, rather 
than ``gross prescription drug costs,'' which is not. Finally, we are 
making the one technical change to the definition of ``actually paid'' 
to make clear that direct and indirect remuneration can be from any 
source, as opposed to only from manufacturers or pharmacies. (We are 
also finalizing the regulatory waiver language set out in Sec.  
423.458(c) as proposed on the same day in the January 2009 proposed 
rule, as discussed in this section.)
    While we believe the Part D and RDS Programs are mutually exclusive 
programs, both are established under Part D-Voluntary Prescription Drug 
Benefit Program, and implemented under 42 CFR part 423. Therefore, we 
believe it is best to interpret parallel statutory language in the same 
manner, but use waiver authority to waive RDS requirements that, if 
interpreted consistently with parallel Part D requirements, would 
hinder the offering of, design of, or enrollment in, RDS plans.
1. Legal Theory 1: Interpretation of ``Actually Paid''
    In our January 12, 2009 final rule with comment period (74 FR 
1516), we articulated our first of three legal theories that would 
authorize us to adopt a different reporting policy for RDS than for 
Part D. Under this theory, when an RDS sponsor makes a payment to an 
entity (such as a PBM) that includes amounts for Part D drug ingredient 
and dispensing costs and amounts to manage the sponsor's drug benefit 
plan, the amount of that payment represents the ``costs that are 
actually paid by the sponsor'' for purposes of calculating the subsidy. 
Under this argument, we would calculate the subsidy payment based on 
the RDS sponsor's payment to the PBM, excluding discounts, chargebacks, 
and average percentage rebates. A problem with this theory is that it 
would arguably read out of the statute the phrase ``for the portion of 
the retiree's gross covered retiree plan-related prescription drug 
costs'' because the amount actually paid could include administrative 
costs.
    Comment: Several commenters indicated that they view the Part D and 
RDS programs as mutually exclusive programs and that, as a result, we 
could interpret statutory provisions governing the two programs 
differently, even if the statutory language in the two provisions were 
the same. One commenter stated that based on Congressional intent it 
did not believe policy changes in Part D need to be in lockstep with 
other programs. One commenter specifically pointed out that the term 
``administrative costs'' does not have to be interpreted in the same 
manner between the Part D and RDS Programs. Another commenter indicated 
that, in light of fact that section 1860D-22 of the Act is titled 
``Special Rules for Employer-Sponsored Programs,'' the MMA intended 
special treatment for retiree plans compared to Part D Plans.
    Response: We agree that the Part D program and the RDS program are 
different programs with different purposes, and as such, merit 
different treatment when appropriate to serve those different purposes. 
We also agree that the heading for section 1860D-22 of the Act implies 
that the RDS program merits special treatment. That said, we also 
believe that because the relevant provision uses the same statutory 
language in both programs to describe program costs, we should 
interpret the language consistently. Given these considerations, as 
described in further detail later in this section, we will use our 
waiver authority under section 1860D-22(b) of the Act to waive or 
modify the RDS statutory requirements that would otherwise require that 
RDS sponsors report costs in the same manner as Part D sponsors.
    Comment: A commenter contended that the RDS sponsor incurs 
integrated costs that are directly related to the drug benefit 
management services necessary for the plan's operation and therefore 
they should be considered costs ``actually paid.'' Another commenter 
believes that the ``actually paid'' theory is not very strong because 
it reads out of the statute the prohibition on including administrative 
costs when determining a retiree's ``allowable retiree costs.'' Another 
commenter believed that if CMS views costs a sponsor pays to a PBM 
under lock-in as ``drug costs incurred to purchase or reimburse the 
purchase of Part D drugs,'' and not as administrative costs, the 
prohibition on including administrative costs would not be read out of 
the statute. One commenter stated that the same term can be interpreted

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differently for different programs and that courts give deference to an 
agency's reasonable interpretation of a statutory term. Another 
commenter believes that ``actually paid'' means the lock-in price 
rather than the pass-through price.
    Response: We appreciate the comments on this issue. Based on the 
totality of the comments on our final rule with comment and proposed 
rule, however, we have determined that the best approach is to adopt 
legal theory 3, discussed in further detail below. Such an approach 
will permit us to impose reporting requirements on RDS sponsors that 
diverge from those under Part D without having to interpret parallel 
language in two different sections of the Part D statute (namely, 
sections 1860D-15 and 1860D-22 of the Act) inconsistently. Under the 
approach we are adopting, when an RDS sponsor makes a payment to an 
entity (such as a PBM) that includes amounts for Part D ingredient and 
dispensing costs and amounts to manage the sponsor's drug benefit plan, 
the total amount of the payment can be used for purposes of calculating 
the subsidy; otherwise referred to as ``lock-in'' pricing. This lock-in 
amount paid will be sufficient for us to calculate the subsidy payment, 
excluding discounts, chargebacks, and average percentage rebates. Under 
this approach, RDS sponsors can choose to report either the lock-in or 
the pass-through price for reporting drug costs for purposes of subsidy 
payments (and can choose to report retained rebates).
    Comment: One commenter supported applying the Part D negotiated 
price definition to the RDS Program, but asked that adequate time be 
allowed to implement the changes needed to report costs based on pass-
through, because the terms of its contracts with PBMs, and, in turn, 
the PBMs' contracts with pharmacies and other providers, may need to be 
changed to accommodate the new reporting requirements. Most other 
commenters supported the existing RDS negotiated price policy, which 
allows an RDS sponsor to report either the lock-in or pass-through 
price, because it will promote continued participation of employers.
    Response: For the reasons described later in this preamble, we are 
not adopting a definition of negotiated prices for the RDS program. 
Thus, the Part D policy with respect to the use of pass-through 
negotiated prices does not apply to the RDS program.
2. Legal Theory 2: Prohibition on Interference With Benefit Design of 
Retiree Drug Coverage
    The second legal theory on which we invited public comment was the 
theory that the RDS statute prohibits CMS from interfering in the 
benefit design of retiree drug coverage, and that requiring use of the 
``pass-through'' methodology to report drug costs would interfere with 
the benefit design of qualified retiree prescription drug plans.
    Section 1860D-22(a)(6)(D) of the Act provides that nothing in the 
RDS statute shall be construed as ``preventing employers to provide for 
flexibility in benefit design so long as the actuarial equivalence 
requirement is met.'' Under this legal theory, requiring reporting of 
the pass-through price (and retained rebates) would be administratively 
burdensome, create an incentive for employers to redesign their RDS 
plans and their contractual arrangements with PBMs, and perhaps 
encourage employers to opt out of the RDS Program entirely.
    This argument rests on the assumption that--(1) contractual 
arrangements between an RDS sponsor and a PBM are ``benefit 
design[s]''; and (2) requiring an RDS sponsor to report the pass-
through price for purposes of the subsidy would ``prevent'' employers 
from providing flexibility in those benefit designs. Arguably, section 
1860D-22(a)(6)(D) of the Act is most reasonably interpreted to prohibit 
us from mandating a certain benefit package in retiree drug plans, and 
not to prohibit us from imposing requirements that relate only to 
reporting costs to us. The provision's context suggests that Congress 
was concerned with the benefit design of a retiree drug plan itself, 
and not with the relationship between an RDS sponsor and its 
contractors.
    Comment: We received several comments in favor of our adopting 
legal theory 2. Several commenters noted that imposing Part D reporting 
requirements on the RDS program would reduce sponsors' flexibility in 
plan design, either directly or as a result of having to undertake 
contract modifications. One commenter stated that to require the Part D 
reporting structure for the RDS Program would alter the underpinnings 
of employer plan operations and result in RDS sponsors' modifying their 
plan benefits, because cost assumptions for prescriptions filled at a 
pharmacy would no longer be fixed. The commenter stated its belief that 
this cost variability, in turn, would likely result in changes in cost-
sharing and could constrain RDS sponsors' flexibility in benefit 
design. Other commenters believe that requiring reporting of pass-
through prices would discourage RDS sponsors from offering retiree drug 
coverage, which would push these retirees into Part D. Commenters also 
stated that requiring pass-through reporting would require considerable 
retooling of information systems.
    Response: We appreciate the comments about the effect of the Part D 
reporting requirements on RDS sponsors. Based on the comments, we agree 
that imposing the Part D reporting requirements on RDS sponsors could 
constrain plan flexibility and ultimately reduce the number of RDS 
plans available to Part D eligible individuals. In other words, these 
requirements could hinder the offering of, design of, or enrollment in 
such plans. Although we are not foreclosing the possibility that we 
could interpret section 1860D-22(a)(6) of the Act in the manner 
described in our final rule with comment, we do not believe, given our 
decision to adopt legal theory 3, that it is necessary to adopt legal 
theory 2 at this time. Thus, using our waiver authority under 1860D-
22(b) of the Act, we will allow an RDS sponsor to report either the 
lock-in or pass-through prices (and to choose whether or not to report 
retained rebates). We believe this is the most prudent approach because 
it will help keep Part D eligible individuals in health plans with 
which they are satisfied.
3. Legal Theory 3: Change in Interpretation of Waiver Authority
    The third legal theory on which we invited public comment involved 
a change in our interpretation of waiver authority in section 1860D-
22(b) of the Act, and the use of that authority to modify requirements 
for RDS sponsors. The waiver authority in section 1860D-22(b) of the 
Act appears in a section of the Act that is otherwise devoted entirely 
to provisions that apply to the RDS Program. It provides that employer 
group waiver provisions in section 1857(i) of the Act (Medicare Part C) 
apply with respect to ``prescription drug plans in relation to 
employment based retiree health coverage'' in a manner similar to how 
they apply to employment-based MA plans. Under ordinary principles of 
statutory construction, when a term is defined in statute, the 
definition applies when the same statute employs that term. Thus, the 
plainest reading of the waiver authority in section 1860D-22(b) of the 
Act is that it applies only to prescription drug plans (PDPs), and not 
to qualified retiree prescription drug plans (QRPDP). However, given 
the fact that this waiver authority appears in a section otherwise 
devoted to the RDS program, and that the term ``qualified retiree 
prescription drug plan'' includes the three words, ``prescription drug 
plan,'' we believed an argument might be made in this case

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that the term ``prescription drug plan'' was intended to encompass both 
a Part D ``prescription drug plan'' and a qualified retiree 
``prescription drug plan'' (that is, this waiver authority extends both 
to PDPs and QRPDPs), as long as the plan is offered ``in relation to 
employment-based retiree health coverage'' in either case. In the 
January 12, 2009 proposed rule, we proposed to change the regulations 
in Subpart J that interpret the waiver authority as applying only to 
Part D PDPs.
    Comment: Some commenters believe that use of the waiver authority 
is the strongest theory upon which to rely for purposes of permitting 
diverging reporting requirements in RDS and Part D. Several commenters 
agreed that the term ``qualified retiree prescription drug plan'' 
includes the words ``prescription drug plan,'' and therefore the waiver 
authority applies to RDS sponsors as long as a plan is offered ``in 
relation to employment based retiree health coverage.'' Several 
commenters stated that we have the authority to construe the waiver 
authority to include RDS plans because even though the term 
``prescription drug plan'' is defined to include only Part D plans, the 
phrase ``prescription drug plans in relation to employment based 
retiree health coverage'' is not, and commenters argue that this phrase 
could be construed to include RDS plans. Another commenter notes that 
the statutory definition of a qualified retiree prescription drug plan 
includes the term ``employment-based retiree health coverage.'' Other 
commenters believe the term ``prescription drug plan'' can be 
interpreted differently when used in different contexts, even in the 
same statute, and that courts will give deference to how the agency 
defines or interprets a term.
    Other commenters expressed concern that the use of the waiver 
authority to waive a Part D requirement that might hinder the RDS 
Program is inconsistent with the statutory construct of the waiver 
authority. One commenter notes that from a policy-perspective, Part D 
plans are very different from RDS sponsors, and these differences made 
the commenter uncertain whether waiver authority designed for MA and 
Part D would apply to the RDS program because we do not have the same 
type of authority over RDS sponsors as we do over MA organizations and 
Part D plans.
    Response: After consideration of these comments, we agree that we 
can construe the waiver authority in section 1860D-22(b) of the Act to 
apply to RDS plans if we read the phrase ``prescription drug plans in 
relation to employment-based retiree coverage'' as a whole, and 
interpret it to apply to RDS plans. Under this interpretation, we are 
authorized to waive requirements that hinder the design of, the 
offering of, or enrollment in RDS plans. We interpret the term ``gross 
covered retiree plan-related prescription drug costs,'' as defined in 
section 1860D-22(a)(3)(C)(ii) of the Act, in a manner consistent with 
the term ``gross prescription drug costs,'' as defined in section 
1860D-15(b)(3) of the Act. That is, we believe that the same 
terminology used in these statutes must be interpreted the same way. 
Using waiver authority, however, we are waiving the prohibition on 
including administrative costs in the calculation of gross retiree 
costs (at Sec.  423.882 and Sec.  423.888) when an RDS sponsor pays an 
intermediary contracting organization on a lock-in basis to allow RDS 
reporting requirements that diverge from Part D requirements (see 74 FR 
1549). In other words, we are waiving the requirement that ``gross 
covered retiree plan-related prescription drug costs'' exclude 
administrative costs because to require their exclusion from the costs 
RDS sponsors report to us--whether in the form of pass-through 
negotiated prices or reporting of retained rebates--would hinder the 
design of, the offering of, or enrollment in RDS plans. This waiver of 
the prohibition on including administrative costs in the calculation of 
gross retiree costs will apply to costs paid on a lock-in basis (and 
the reporting of retained rebates) because we do not want to interfere 
with the contracting arrangements between an RDS sponsor and its 
intermediary contracting organization. Of course, an RDS sponsor may 
exclude administrative costs from the calculation of gross retiree 
costs, if it chooses to do so. Therefore, we are not, as commenters 
suggest, using the waiver authority to waive Part D requirements; 
rather, we are using the waiver authority to waive RDS requirements 
that, if interpreted consistently with parallel language in the Part D 
statute, would require that we apply RDS reporting requirements that 
similarly parallel Part D requirements.
    Regardless of whether an RDS sponsor chooses to report drug costs 
on a lock-in or pass-through basis, or whether the RDS sponsor reports 
retained rebates or not, for audit and other oversight purposes RDS 
sponsors must document the method of reporting drug costs and rebates, 
and produce the documentation in accordance with Sec.  423.888.
    It is important to note that, with this authority, we are waiving 
only the prohibition on including administrative costs in the 
calculation of RDS payments, and only to the extent that such costs are 
included in the payment to the PBM or other intermediate contracting 
entity, whether as ``lock in'' prices or retained rebates. If RDS 
sponsors include in their contracts with intermediary contracting 
organizations specific administrative payments for specific 
administrative services, such payments could not be included in the 
calculation of RDS payments. We are not waiving any other RDS 
requirements, nor are we adopting any waivers for the RDS Program that 
exist relating to the EGHP Program. The converse is also true; we are 
not applying waivers for the RDS program to the EGHP program.
    If, in the future, we believe that we may need to waive another RDS 
requirement, we will post a proposal on the RDS public Web site with 
information on how stakeholders can comment on the proposal, and will 
allow sufficient time for stakeholders to comment.
    Comment: Commenters noted that the definition of ``gross covered 
prescription drug costs'' is not defined in the RDS statute and that 
the definition under the Part D statute is limited to Part D.
    Response: We believe the commenter is referring to the statutory 
definition of ``allowable retiree costs'' in section 1860D-
22(b)(3)(C)(i) of the Act, which uses the term ``gross covered 
prescription drug costs,'' instead of the term ``gross covered retiree 
plan-related prescription drug costs.'' We do not believe this 
distinction is meaningful in light of section 1860D-22(a)(3) of the 
Act, which includes the term ``gross covered prescription drug costs,'' 
but cross-references the definition of ``gross covered retiree plan-
related prescription drug costs'' at section 1860D-22(b)(3)(C)(ii) of 
the Act. However, even if the distinction were meaningful, both terms 
exclude administrative costs when calculating allowable costs, so this 
prohibition must be waived for purposes of the regulations we are 
finalizing in this final rule.
    Comment: A commenter argues that if rebates are retained by the PBM 
then they are not part of the cost of drugs for the RDS sponsor. If 
such rebates are part of the RDS sponsor's PBM contract they will 
change the cost paid by the plan and should be reported.
    Response: Under the approach we are adopting for the RDS Program 
with respect to retained rebates, RDS sponsors are not required to 
report rebates that are retained by the PBM--we are waiving the 
requirement that such retained rebates be considered administrative 
costs that must be excluded from gross covered retiree plan-related 
prescription drug costs. Of

[[Page 1881]]

course, if an RDS sponsor chooses to report the retained rebates, the 
subsidy payment will be adjusted accordingly.

B. Provisions of the Proposed Rule

    In the January 12, 2009 Federal Register (74 FR 1550), we published 
a proposed rule that would amend the regulations pertaining to our 
waiver authority under section 1860D-22(b) of the Act to broaden our 
interpretation of the waiver authority. The proposed rule would permit 
the waiver of requirements that hinder the design of, the offering of, 
or the enrollment in an employer-sponsored group prescription drug 
plan. In addition, the January 2009 proposed rule (74 FR 1551) noted 
that we were specifically soliciting comments on the possibility of 
applying one or more of those legal theories.
    One of the legal theories discussed in the interim final rule with 
comment involves interpreting the waiver authority under section 1860D-
22(b) of the Act (which incorporates waiver authority under section 
1857(i) of the Act) to authorize us to waive requirements of the RDS 
statute to permit differences between the RDS and Part D programs with 
respect to the two policies in question. In our current regulations, 
however, we have interpreted section 1860D-22(b) of the Act to apply 
only to Medicare Part D plans, and not RDS plan sponsors. In order for 
us to change our interpretation of the scope of our waiver authority, 
therefore, we proposed to revise the regulations to specify that the 
waiver authority applies to the RDS program.
    Thus, to enable us potentially to adopt this legal theory, we 
published the January 2009 proposed rule to invite public comment on 
this proposed change. We also noted that after we have reviewed the 
comments received on the proposed rule and the RDS interim final 
regulations, we would determine whether to adopt any of the legal 
theories discussed in the preamble discussion of the RDS interim final 
rule, and whether to finalize the regulatory revisions based on our 
change in interpretation of section 1860D-22(b) of the Act set forth in 
the proposed rule.
    We received seven timely comments from stakeholders on the January 
12, 2009 proposed rule. Because the provisions of the January 2009 
proposed rule are closely related to the legal theory provisions of the 
final rule with comment period, we responded to the comments regarding 
these provisions in section II.A. of this final rule.
    After review of the comments, we are finalizing our proposed 
changes to part 423, Subpart J to reflect the proposed interpretation 
of our authority under section 1860D-22(b) of the Act. In addition, we 
are finalizing the regulations for the RDS program as set forth in the 
final rule with comment period. Specifically, we are declining to adopt 
the Part D definition of ``negotiated price,'' we are not revising the 
definition of ``actually paid'' to require RDS sponsors to report 
retained rebates, and we are finalizing the other definitions set forth 
in Sec.  423.882 and the provisions of Sec.  423.888, as set forth in 
the final rule with comment period, subject to the modification 
described in section II.C. of this final rule.

C. Technical Correction

    During our review of the comments on these rules, we noticed an 
inconsistency between the preamble discussions and the regulatory text 
in the May 2008 proposed rule; and the regulations text of the January 
2009 final rule with comment period regarding the definition of the RDS 
term ``actually paid''.
    Specifically, the preamble discussions of the RDS term ``actually 
paid'' in the May 2008 and January 2009 proposed rule and final rule 
with comment period, and the regulations text of the May 2008 proposed 
rule (73 FR 28571, 73 FR 28602, and 74 FR 1515, respectively), all note 
that direct and indirect remuneration can be from any source, and such 
remuneration will cause the amounts that are actually paid to be 
reduced. The regulatory text in the January 2009 final rule with 
comment period incorrectly specified that the direct and indirect 
remuneration may only be from any manufacturer or pharmacy.
    The statutory definition of ``allowable retiree costs'', when 
stating that such costs are costs that are actually paid (net of 
discounts, chargebacks, and average percentage rebates), does not limit 
the source from which these discounts, chargebacks, and average 
percentage rebates come (see section 1860D-22(a)(3)(C)) of the Act (42 
U.S.C. 1395w-132(a)(3)(C)). Limiting the source from which direct and 
indirect remuneration may be derived is not consistent with the 
proposed rule, or the preamble discussion in the interim final rule 
(nor is it consistent with the Part D regulations).
    Therefore, in this final rule, we are making a technical correction 
to the definition of the RDS definition of ``actually paid'' (see Sec.  
423.882) by revising the phrase ``from any manufacturer or pharmacy'' 
to read ``from any source'' because it does not matter from what source 
direct or indirect remuneration comes, as long as the remuneration 
serves to decrease the costs incurred under the qualified retiree 
prescription drug plan. So the definition in Sec.  423.882 will read as 
follows:

    Actually paid means, that the costs must be actually incurred by 
the qualified retiree prescription drug plan and must be net of any 
direct or indirect remuneration (including discounts, charge backs 
or rebates, cash discounts, free goods contingent on a purchase 
agreement, up-front payments, coupons, goods in kind, free or 
reduced-price services, grants, or other price concessions or 
similar benefits offered to some or all purchasers) from any source 
that would serve to decrease the costs incurred under the qualified 
retiree prescription drug plan.

III. Provisions of the Final Rule

    In this final rule, we are adopting the provisions of the January 
2009 proposed rule and the provisions of the final rule with comment 
period (see section II.B.3. of this final rule) with the technical 
correction to Sec.  423.882 described in section II.C. of this final 
rule.

IV. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995.

V. Regulatory Impact Statement

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, section 202 of the Unfunded 
Mandates Reform Act of 1995 (Pub. L. 104-4), Executive Order 13132 on 
Federalism (August 4, 1999), and the Congressional Review Act (5 U.S.C. 
804(2)).
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more in any 1 year). This rule is 
not a significant and/or an economically significant rule. This rule 
will not impose added benefits or costs on stakeholders because it 
allows

[[Page 1882]]

stakeholders the same reporting flexibilities that they exercise 
currently.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities, if a rule has a significant impact on a substantial 
number of small entities. For purposes of the RFA, we estimate that 
this rule will not have a significant impact on a substantial number of 
small entities. In fact, the policy approach taken in this final rule 
is intended to minimize impacts on any size business, including small 
businesses, or other small entities. This final rule allows RDS 
sponsors the flexibility to report drug costs on either a pass-through 
or lock-in basis, so that they may negotiate arrangements most 
beneficial to the RDS sponsor, and allows RDS sponsors to choose 
whether they will report retained rebates. This rule does not affect 
hospitals or other health care providers because the rule relates to 
how an RDS sponsor reports drug costs in order to receive an RDS 
payment. The amounts reported do not relate to the amounts actually 
paid to hospitals and other providers because the subsidy is an after-
the-fact subsidy; meaning that the drug costs are incurred and paid and 
then an RDS sponsor may receive an RDS payment. Therefore, the 
Secretary has determined that this final rule will not have a 
significant economic impact on a substantial number of small entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a metropolitan 
statistical area and has fewer than 100 beds. This rule will not have a 
significant impact on small rural hospitals, because it does not relate 
to small rural hospitals either directly or indirectly. Therefore, the 
Secretary has determined that this final rule will not have a 
significant impact on the operations of a substantial number of small 
rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2011, that 
threshold is approximately $136 million. This rule does not contain 
mandates that will impose spending costs on State, local, or tribal 
governments in the aggregate, or by the private sector, of $136 million 
or more.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a final rule that imposes 
substantial direct requirement costs on State and local governments, 
preempts State law, or otherwise has Federalism implications. This rule 
will not have a substantial direct effect on State or local 
governments, nor will it preempt States, or otherwise have a Federalism 
implication.

B. Anticipated Effects

    We do not anticipate effects on RDS sponsors, other providers or 
the Medicare program.

C. Alternatives Considered

    We considered requiring RDS sponsors to report pass-through pricing 
and to require the reporting of retained rebates but decided against 
this approach because commenters believe that requiring these reporting 
structures could cause RDS sponsors not to participate in the RDS 
Program.

D. Conclusion

    We do not believe that this rule will have an impact on RDS 
sponsors or any other stakeholders. We do not believe that a regulatory 
flexibility analysis, or an analysis required by section 1102(b) of the 
Act, are required, beyond the analysis performed in this section and 
the discussions provided in the section II. of this final rule.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 423

    Administrative practice and procedure, Emergency medical services, 
Health facilities, Health maintenance organizations (HMO), Health 
professionals, Medicare, Penalties, Privacy, Reporting and 
recordkeeping requirements.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services amends 42 CFR part 423 as set forth below:

PART 423--VOLUNTARY MEDICARE PRESCRIPTION DRUG BENEFIT

0
1. The authority citation for part 423 continues to read as follows:

    Authority: Secs. 1102, 1860D-1 through 1860D-42, and 1871 of the 
Social Security Act (42 U.S.C. 1302, 1395w-101 through 1395w-152, 
and 1395hh).

Subpart J--Coordination of Part D Plans With Other Prescription 
Drug Coverage

0
2. Section 423.454 is amended by revising the definition ``Employer-
sponsored group prescription drug plan'' to read as follows:


Sec.  423.454  Definitions.

* * * * *
    Employer-sponsored group prescription drug plan means, prescription 
drug coverage offered to retirees who are Part D eligible individuals 
under employment-based retiree health coverage. For purposes of this 
subpart, employment-based retiree health coverage is such coverage (as 
defined in Sec.  423.882) provided through a Medicare Part D plan, or 
for which a plan sponsor could qualify for payments under Subpart R of 
this part.
* * * * *

0
3. Section 423.458 is amended as follows:
0
A. Republishing the heading of paragraph (c).
0
B. Revising paragraph (c)(1).
0
B. Redesignating paragraph (c)(2) as paragraph (c)(3).
0
D. Adding a new paragraph (c)(2).
    The revision and addition read as follows:


Sec.  423.458  Application of Part D rules to certain Part D plans on 
and after January 1, 2006.

* * * * *
    (c) Employer group waiver--(1) General rule for employer-sponsored 
group prescription drug plans that are Medicare Part D plans. CMS may 
waive or modify any requirement under this part that hinders the design 
of, the offering of, or the enrollment in an employer-sponsored group 
prescription drug plan, including authorizing the establishment of 
separate premium amounts for enrollees of the employer-sponsored group 
prescription drug plan and limitations on enrollment in such plan to 
Part D eligible individuals participating in the sponsor's employment-
based retiree health coverage. Any entity seeking to offer, sponsor, or 
administer an employer-sponsored group prescription drug plan may 
request, in writing, a waiver or modification of additional 
requirements under this Part that hinder its design of, the offering 
of, or the enrollment in, such employer-sponsored group prescription 
drug plan.
    (2) General rule for employer-sponsored group prescription drug 
plans for which a sponsor could qualify for payments under Subpart R of 
this part. CMS may waive or modify any

[[Page 1883]]

requirement under this part that hinders the design of, the offering 
of, or the enrollment in an employer-sponsored group prescription drug 
plan.
* * * * *

Subpart R--Payments to Sponsors of Retiree Prescription Drug Plans


Sec.  423.882  [Amended]

0
4. In Sec.  423.882, the definition of ``Actually paid'' is amended by 
removing the phrase ``manufacturer or pharmacy'' and adding the term 
``source'' in its place.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: November 3, 2011.
Donald M. Berwick,
Administrator, Centers for Medicare and Medicaid Services.

    Approved: January 6, 2012
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2012-473 Filed 1-11-12; 8:45 am]
BILLING CODE 4120-01-P