[Federal Register Volume 79, Number 7 (Friday, January 10, 2014)]
[Proposed Rules]
[Pages 1917-2073]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-31497]



[[Page 1917]]

Vol. 79

Friday,

No. 7

January 10, 2014

Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services





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42 CFR Parts 409, 417, 422, et al.





Medicare Program; Contract Year 2015 Policy and Technical Changes to 
the Medicare Advantage and the Medicare Prescription Drug Benefit 
Programs; Proposed Rule

Federal Register / Vol. 79 , No. 7 / Friday, January 10, 2014 / 
Proposed Rules

[[Page 1918]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 409, 417, 422, 423, and 424

[CMS-4159-P]
RIN 0938-AR37


Medicare Program; Contract Year 2015 Policy and Technical Changes 
to the Medicare Advantage and the Medicare Prescription Drug Benefit 
Programs

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

ACTION: Proposed rule.

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SUMMARY: The proposed rule would revise the Medicare Advantage (MA) 
program (Part C) regulations and prescription drug benefit program 
(Part D) regulations to implement statutory requirements; strengthen 
beneficiary protections; exclude plans that perform poorly; improve 
program efficiencies; and clarify program requirements. The proposed 
rule also includes several provisions designed to improve payment 
accuracy.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on March 7, 2014.

ADDRESSES: In commenting, please refer to file code CMS-4159-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the ``Submit a 
comment'' instructions.
    2. By regular mail. You may mail written comments to the following 
address ONLY: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-4159-P, P.O. Box 8013, 
Baltimore, MD 21244-8013.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address ONLY: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-4159-P, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. Alternatively, you may deliver (by hand or 
courier) your written comments ONLY to the following addresses prior to 
the close of the comment period: a. For delivery in Washington, DC--
Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Room 445-G, Hubert H. Humphrey Building, 200 
Independence Avenue SW., Washington, DC 20201.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without federal government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.) b. For delivery in Baltimore, MD--Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, 7500 
Security Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
call telephone number (410) 786-9994 in advance to schedule your 
arrival with one of our staff members.
    Comments erroneously mailed to the addresses indicated as 
appropriate for hand or courier delivery may be delayed and received 
after the comment period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Christopher McClintick, (410) 786-
4682, Part C issues. Marie Manteuffel, (410) 786-3447, Part D issues. 
Kristy Nishimoto, (206) 615-2367, Part C and D enrollment and appeals 
issues. Whitney Johnson, (410) 786-0490, Part C and D payment issues. 
Clarisse Owens, (410) 786-0880, Part C and D compliance issues. Frank 
Whelan, (410) 786-1302, Part D improper prescribing issues.

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: All comments 
received before the close of the comment period are available for 
viewing by the public, including any personally identifiable or 
confidential business information that is included in a comment. We 
post all comments received before the close of the comment period on 
the following Web site as soon as possible after they have been 
received: http://www.regulations.gov. Follow the search instructions on 
that Web site to view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

Table of Contents

I. Executive Summary
    A. Purpose
    B. Summary of the Major Provisions
    1. Eligibility of Enrollment for Individuals Not Lawfully 
Present in the United States
    2. Modifying the Agent/Broker Requirements, Specifically Agent/
Broker Compensation
    3. Drug Categories or Classes of Clinical Concern
    4. Improving Payment Accuracy
    5. Risk Adjustment Data Requirements (Sec.  422.310)
    C. Summary of Costs and Benefits
II. Background
III. Provisions of the Proposed Regulations
    A. Clarifying Various Program Participation Requirements
    1. Closing Cost Contract Plans to New Enrollment (Sec.  422.2 
and Sec.  422.503)
    2. Two-Year Limitation on Submitting a New Bid in an Area Where 
an MA has been Required To Terminate a Low-Enrollment MA Plan (Sec.  
422.504(a)(19))
    3. Authority To Impose Intermediate Sanctions and Civil Money 
Penalties (Sec.  422.752, Sec.  423.752, Sec.  422.760 and Sec.  
423.760)
    4. Contract Termination Notification Requirements and Contract 
Termination Basis (Sec.  422.510 and Sec.  423.509)
    5. Reducing the Burden of the Compliance Program Training 
Requirements (Sec.  422.503(b)(4)(vi)(C) and Sec.  
423.504(b)(4)(vi)(C))
    6. Changes To Audit and Inspection Authority (Sec.  
422.503(d)(2) and Sec.  423.504(d)(2))
    7. Procedures for Imposing Intermediate Sanctions and Civil 
Money Penalties Under Parts C and D (Sec.  422.756 and Sec.  
423.756)
    8. Timely Access to Mail Order Services (Sec.  423.120)
    9. Collections of Premiums and Cost Sharing (Sec.  423.294)
    10. Enrollment Eligibility for Individuals Not Lawfully Present 
in the United States (Sec. Sec.  417.2, 417.420, 417.422, 417.460, 
422.1, 422.50, 422.74, 423.1, 423.30, and 423.44)
    a. Basic Enrollment Requirements
    b. Medicare Eligibility and Lawful Presence
    c. Alignment of MA, PDP, and Cost Plan Eligibility With FFS 
Payment Exclusion Policy
    11. Part D Notice of Changes (Sec.  423.128(g))
    12. Separating the Annual Notice of Change (ANOC) From the 
Evidence of Coverage (EOC) (Sec.  422.111(a)(3) and Sec.  
423.128(a)(3))

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    13. Agent/Broker Requirements, Particularly Compensation (Sec.  
422.2274 and Sec.  423.2274).
    14. Drug Categories or Classes of Clinical Concern and 
Exceptions (Sec.  423.120(b)(2)(v) and (vi))
    a Categories or Classes of Clinical Concern
    b. Criteria Necessary To Identify Categories and Classes of 
Clinical Concern
    c. Exceptions
    d. Analysis and Identification of the Categories or Classes of 
Clinical Concern
    15. Medication Therapy Management Program (MTMP) Under Part D 
(Sec.  423.153(d))
    a. Multiple Chronic Diseases
    b. Multiple Part D Drugs
    c. Annual Cost Threshold
    16. Business Continuity for MA Organizations and PDP Sponsors 
(Sec.  422.504(o) and Sec.  423.505(p))
    17. Requirement for Applicants or Their Contracted First Tier, 
Downstream, or Related Entities To Have Experience in the Part D 
Program Providing Key Part D Functions
    18. Requirement for Applicants for Stand Alone Part D Plan 
Sponsor Contracts to Be Actively Engaged in the Business of the 
Administration of Health Insurance Benefits (Sec.  423.504(b)(9))
    19. Limit Parent Organizations to One Prescription Drug Plan 
(PDP) Sponsor Contract Per PDP Region
    20. Limit Stand-Alone Prescription Drug Plan Sponsors to 
Offering No More Than Two Plans Per PDP Region
    21. Efficient Dispensing in Long Term Care Facilities and Other 
Changes (Sec.  423.154)
    a. Prohibition on Payment Arrangements That Penalize the 
Offering and Adoption of More Efficient LTC Dispensing Techniques 
(Sec.  423.154)
    b. Misinterpretation of Language as Requiring the Proration of 
Dispensing Fees (Sec.  423.154)
    c. Additional Waiver for LTC Pharmacies Using Restock and Reuse 
Dispensing Methodologies Under Certain Conditions (Sec.  423.154)
    d. Technical Change To Eliminate Requirement That PDP Sponsors 
Report on the Nature and Quantity of Unused Brand and Generic Drugs 
(Sec.  423.154)
    22. Applicable Cost-Sharing for Transition Supplies: Transition 
Process Under Part D Sec.  423.120(b)(3)
    23. Medicare Coverage Gap Discount Program and Employer Group 
Waiver Plans (Sec.  423.2325)
    24. Interpreting Non Interference Provision (Sec.  423.10)
    25. Pharmacy Price Concessions in Negotiated Prices (Sec.  
423.100)
    26. Payments to PDP Plan Sponsors For Qualified Prescription 
Drug Coverage (Sec.  423.308) and Payments to Sponsors of Retiree 
Prescription Drug Plans (Sec.  423.882)
    27. Preferred Cost Sharing (Sec.  423.100 and Sec.  423.120)
    28. Prescription Drug Pricing Standards and Maximum Allowable 
Cost (Sec.  423.505(b)(21))
    29. Any Willing Pharmacy Standard Terms & Conditions (Sec.  
423.120(a)(8))
    a. Preferred Cost Sharing
    b. Extended Days' Supply
    c. Mail Order Cost Sharing
    30. Enrollment Requirements for the Prescribers of Part D 
Covered Drugs (Sec.  423.120(c)(5) and (6))
    31. Improper Prescribing Practices and Patterns
    a. Background and Program Integrity Concerns
    b. Drug Enforcement Administration (DEA) Certification of 
Registration
    c. Proposed Provisions
    (1) DEA Certificate and State Authority
    (2) Patterns or Practices of Prescribing
    (a) Grounds for Revocation
    (b) Criteria To Be Considered
    32. Transfer of TrOOP Between PDP Sponsors Due to Enrollment 
Changes During the Coverage Year (Sec.  423.464)
    a. Exclusion From TrOOP of Increased Cost Sharing Amounts 
Incurred Due to Secondary COB (Sec.  423.100)
    b. Transfer of TrOOP Between PDP Sponsors Due to Enrollment 
Changes During the Coverage Year (Sec.  423.464)
    33. Broadening the Release of Part D Data
    34. Establish Authority to Directly Request Information From 
First Tier, Downstream, and Related Entities (Sec.  422.504(i)(2)(i) 
and Sec.  423.505(i)(2)(i))
    35. Eligibility of Enrollment for Incarcerated Individuals 
(Sec.  417.422, Sec.  417.460, Sec.  422.74, and Sec.  423.44)
    a. Changes in Definition of Service Area for Cost Plans (Sec.  
417.422(b))
    b. Involuntary Disenrollment for Incarcerated Individuals 
Enrolled in MA, PDP and Cost Plans (Sec.  417.460, Sec.  422.74, and 
Sec.  423.44)
    36. Rewards and Incentives Program Regulations for Part C 
Enrollees (Sec.  422.134)
    37. Expand Quality Improvement Program Regulations (Sec.  
422.152)
    38. Authorization of Expansion of Automatic or Passive 
Enrollment Non-Renewing Dual Eligible SNPs (D-SNPs) to Another D-SNP 
to Support Alignment Procedures (Sec.  422.60)
    B. Improving Payment Accuracy
    1. Implementing Overpayment Provisions of Section 1128J(d) of 
the Social Security Act (Sec.  422.326 and Sec.  423.360)
    a. Terminology (Sec.  422.326(a) and Sec.  423.360(a))
    b. General Rules for Overpayments (Sec.  422.326(a) Through (c) 
and Sec.  423.360(a) Through (c))
    c. Look-Back Period for Reporting and Returning Overpayments
    2. Determination of Payments (Sec.  423.329)
    3. Reopening (Sec.  423.346)
    a. Part D Plan Payments Reopening
    b. Coverage Gap Discount Reconciliation Reopening
    4. Payment Appeals (Sec.  423.350)
    5. Payment Processes for Part D Sponsors (Sec.  423.2320)
    6. Risk Adjustment Data Requirements (Sec.  422.310)
    7. RADV Appeals
    a. Background
    b. RADV Definitions
    c. Publication of RADV Methodology
    d. Proposal To Update RADV Appeals Terminology (Sec.  422.311)
    e. Proposal To Simplify the RADV Appeals Process
    (1) Issues Eligible for RADV Appeal
    (2) Issues Not Eligible for RADV Appeals
    (3) Manner and Timing of a Request for RADV Appeal
    (4) Reconsideration Stage
    (5) Hearing Stage
    (6) CMS Administrator Review Stage
    f. Proposal To Expand Scope of RADV Audits
    g. Proposal To Clarify the RADV Medical Record Review 
Determination Appeal Burden of Proof Standard
    h. Proposal To Change RADV Audit Compliance Date
    8. Recovery Audit Contractor (RAC) Determination Appeals 
(Proposed Part 422 Subpart Z and Part 423 Subpart Z)
    a. Background
    b. Proposed RAC Appeals Process
    (1) Reconsiderations (Sec.  422.2605 and Sec.  423.2605)
    (2) Hearing Official Determinations (Sec.  422.2610 and Sec.  
423.2610)
    (3) Administrator Review (Sec.  422.2615 and Sec.  423.2615)
    C. Strengthening Beneficiary Protections
    1. Providing High Quality Health Care (Sec.  422.504(a)(3) and 
Sec.  423.505(b)(27))
    2. MA-PD Coordination Requirements for Drugs Covered Under Parts 
A, B, and D (Sec.  422.112)
    3. Good Cause Processes (Sec.  417.460, Sec.  422.74 and Sec.  
423.44)
    4. Definition of Organization Determination (Sec.  422.566)
    5. MA Organizations May Extend Adjudication Timeframes for 
Organization Determinations and Reconsiderations (Sec.  422.568, 
Sec.  422.572, Sec.  422.590, Sec.  422.618, and Sec.  422.619)
    D. Strengthening Our Ability To Distinguish Stronger Applicants 
for Part C and D Program Participation and To Remove Consistently 
Poor Performers
    1. Two-Year Prohibition When Organizations Terminate Their 
Contracts (Sec.  422.502, Sec.  422.503, Sec.  422.506, Sec.  
422.508, and Sec.  422.512)
    2. Withdrawal of Stand-Alone Prescription Drug Plan Bid Prior to 
Contract Execution (Sec.  423.503)
    3. Essential Operations Test Requirement for Part D (Sec.  
423.503(a) and (c), Sec.  423.504(b)(10), Sec.  423.505(b)(28), and 
Sec.  423.509)
    a. Failing Essential Operations Test as Cause for Immediate 
Termination
    b. Failing Essential Operations Test as Failure of a 
Qualification to Contract and Grounds for Nullification of Approval
    4. Termination of the Contracts of Medicare Advantage 
Organizations Offering Part D for Failure for Three Consecutive 
Years To Achieve Three Stars on Both Part C and Part D Summary Star 
Ratings in the Same Contract Year (Sec.  422.510)
    E. Implementing Other Technical Changes
    1. Requirements for Urgently Needed Services (Sec.  422.113)
    2. Skilled Nursing Facility Stays (Sec.  422.101 and Sec.  
422.102)
    3. Agent and Broker Training and Testing Requirements (Sec.  
422.2274 and Sec.  423.2274)

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    4. Deemed Approval of Marketing Materials (Sec.  422.2266 and 
Sec.  423.2266)
    5. Cross-Reference Change in the Part C Disclosure Requirements 
(Sec.  422.111)
    6. Managing Disclosure and Recusal in P&T Conflicts of Interest: 
[Formulary] Development and Revision by a Pharmacy and Therapeutics 
Committee Under PDP (Sec.  423.120(b)(1))
    7. Definition of a Part D Drug (Sec.  423.100)
    a. Combination Products
    b. Barbiturates and Benzodiazepines
    c. Medical Foods
    8. Thirty-Six-Month Coordination of Benefits (COB) Limit (Sec.  
423.466(b))
    9. Application and Calculation of Daily Cost-Sharing Rates 
(Sec.  423.153)
    10. Technical Change To Align Regulatory Requirements for 
Delivery of the Standardized Pharmacy Notice (Sec.  423.562)
    11. Special Part D Access Rules During Disasters or Emergencies 
(Sec.  423.126)
    12. MA Organization Responsibilities in Disasters and 
Emergencies (Sec.  422.100)
    13. Termination of a Contract Under Parts C and D (Sec.  422.510 
and Sec.  423.509)
    a. Cross-reference Change (Sec.  423.509(d))
    b. Terminology Changes (Sec.  422.510 and Sec.  423.509)
    c. Technical Change To Align Paragraph Headings (Sec.  
422.510(b)(2))
    d. Terminology Change (Sec.  423.509(b)(2)(C)(ii))
    14. Technical Changes To Align Part C and Part D Contract 
Determination Appeal Provisions (Sec.  422.641 and Sec.  422.644)
    a. Technical Changes (Sec.  422.641)
    b. Technical Changes (Sec.  422.644(a) and (b))
    15. Technical Changes To Align Parts C and D Appeal Provisions 
(Sec.  422.660 and Sec.  423.650)
    16. Technical Changes Regarding Intermediate Sanctions and Civil 
Money Penalties (Sec.  422.756 and Sec.  423.756)
    a. Technical Changes to Intermediate Sanctions Notice Receipt 
Provisions (Sec.  422.756(a)(2) and Sec.  423.756(a)(2))
    b. Cross-reference Changes (Sec.  422.756(b)(4) and Sec.  
423.756(b)(4))
    c. Technical Changes (Sec.  422.756(d) and Sec.  423.756(d))
    d. Technical Changes To Align the Civil Money Penalty Provision 
With the Authorizing Statute (Sec.  422.760(a)(3) and Sec.  
423.760(a)(3))
    e. Technical Changes To Align the Civil Money Penalty Notice 
Receipt Provisions (Sec.  422.1020(a)(2), Sec.  423.1020(a)(2), 
Sec.  422.1016(b)(1), and Sec.  423.1016(b)(1))
    17. Technical Change to the Restrictions on use of Information 
Under Part D (Sec.  423.322)
IV. Collection of Information Requirements
    A. ICRs Related to Eligibility of Enrollment for Individuals Not 
Lawfully Present in the United States (Sec.  417.2, Sec.  417.420, 
Sec.  417.422, Sec.  417.460, Sec.  422.1, Sec.  422.50, Sec.  
422.74, Sec.  423.1, Sec.  423.30, and Sec.  423.44)
    B. ICRs Related to Improper Prescribing Practices and Patterns 
(Sec.  424.535(a)(13) and (14))
    C. ICRs Related to Applicants or Their Contracted First Tier, 
Downstream, or Related Entities To Have Experience in the Part D 
Program Providing Key Part D Functions (Sec.  423.504(b)(8)(i) 
through (iii))
    D. ICRs Related to Eligibility of Enrollment for Incarcerated 
Individuals
    E. ICRs Related to Rewards and Incentives Program Regulations 
for Part C Enrollees (Sec.  422.134)
    F. ICRs Related to Expanding Quality Improvement Program 
Regulations (Sec.  422.152)
    G. ICRs Related to Good Cause Processes (Sec.  417.460, Sec.  
422.74 and Sec.  423.44)
    H. ICRs Related to the Definition of Organization Determination 
(Sec.  422.566)
    I. ICRs Related to Skilled Nursing Facility Stays (Sec.  422.101 
and Sec.  422.102)
    J. ICRs Related to MA Organization Responsibilities in Disasters 
and Emergencies (Sec.  422.100)
    K. ICR Related to Recovery Audit Contractor Determinations (Part 
422, Subpart Z and Part 423, Subpart Z)
V. Response to Comments
VI. Regulatory Impact Analysis
    A. Statement of Need
    B. Overall Impact
    C. Anticipated Effects
    1. Effects of Closing Cost Contract Plans to New Enrollment
    2. Effects of the Two-Year Limitation on Submitting a New Bid in 
an Area Where an MA Has Been Required To Terminate a Low-Enrollment 
MA Plan
    3. Effects of the Authority To Impose Intermediate Sanctions and 
Civil Money Penalties
    4. Effects of Contract Termination Notification Requirements and 
Contract Termination Basis
    5. Effects of Reducing the Burden of the Compliance Program 
Training Requirements
    6. Effects of Audit and Inspection Authority
    7. Effects of the Procedures for Imposing Intermediate Sanctions 
and Civil Money Penalties Under Parts C and D
    8. Effects of Timely Access to Mail Order Services
    9. Effects of the Collections of Premiums and Cost Sharing
    10. Effects of Enrollment Eligibility for Individuals Not 
Lawfully Present in the United States
    11. Effects of Part D Notice of Changes
    12. Effects of Separating the Annual Notice of Change (ANOC) 
From the Evidence of Coverage (EOC)
    13. Effects of the Modification of the Agent/Broker Compensation 
Requirements
    14. Effects of Drug Categories or Classes of Clinical Concern 
and Exceptions
    15. Effects of the Medication Therapy Management Program (MTMP) 
Under Part D
    16. Effects of the Business Continuity for MA Organizations and 
Part D Sponsors
    17. Effects of the Requirement for Applicants or Their 
Contracted First Tier, Downstream, or Related Entities To Have 
Experience in the Part D Program Providing Key Part D Functions
    18. Effects of Requirement for Applicants for Stand Alone Part D 
Plan Sponsor Contracts To Be Actively Engaged in the Business of the 
Administration of Health Insurance Benefits
    19. Effects of Limit Parent Organizations to One Prescription 
Drug Plan (PDP) Sponsor Contract per PDP Region
    20. Effects of Limit Stand-Alone Prescription Drug Plan Sponsors 
to Offering No More Than Two Plans per PDP Region
    21. Effects of Efficient Dispensing and in Long Term Care 
Facilities and Other Changes
    22. Effects of Applicable Cost-Sharing for Transition Supplies: 
Transition Process Under Part D
    23. Effects of Medicare Coverage Gap Discount Program and 
Employer Group Waiver Plans
    24. Effects of Interpreting the Non-Interference Provision
    25. Effects of Pharmacy Price Concessions in Negotiated Prices
    26. Effects of Payments to PDP Plan Sponsors for Qualified 
Prescription Drug Coverage and Payments to Sponsors of Retiree 
Prescription Drug Plans
    27. Effects of Preferred Cost Sharing
    28. Effects of Maximum Allowable Cost Pricing Standard
    29. Effects of Any Willing Pharmacy Standard Terms & Conditions
    30. Effects of Enrollment Requirements for the Prescribers of 
Part D Covered Drugs
    31. Effects of Improper Prescribing Practices and Patterns
    32. Effects of the Transfer of TrOOP Between Part D Sponsors Due 
to Enrollment Changes During the Coverage Year
    33. Effects of Broadening the Release of Part D Data
    35. Effects of Eligibility of Enrollment for Incarcerated 
Individuals
    36. Effects of Rewards and Incentives Program Regulations for 
Part C Enrollees
    37. Effects of Expand Quality Improvement Program Regulations
    38. Effects of Authorization of Expansion of Automatic or 
Passive Enrollment Non-Renewing Dual-Eligible SNPs (D-SNPs) to 
Another D-SNP To Support Alignment Procedures
    39. Effects of Improving Payment Accuracy: Reporting 
Overpayments, RADV Appeals, Part D Payment Reopening, LIS Cost 
Sharing, and Coverage Gap Discount Program
    40. Effects of Part C and Part D RAC Determination Appeals
    41. Effects of Requirement To Provide High Quality Health Care
    42. Effects of MA-PD Coordination Requirements for Drugs Covered 
Under Part D
    43. Effects of Revisions to Good Cause Processes
    44. Effects of the Definition of Organization Determination
    45. Effects of MA Organization Extension of Adjudication 
Timeframes for Organization Determinations and Reconsiderations
    46. Effects of the Two-Year Prohibition When Organizations 
Terminate Their Contracts

[[Page 1921]]

    47. Effects of the Withdrawal of Stand Alone Prescription Drug 
Plan Bid Prior to Contract Execution
    48. Effects of Essential Operations Test Requirement for Part D
    50. Effects of the Requirements for Urgently Needed Services
    51. Effects of Skilled Nursing Facility Stays
    52. Effects of Agent and Broker Training and Testing 
Requirements
    53. Effects of Deemed Approval of Marketing Materials
    54. Effects of Part C Disclosure Requirements
    55. Effects of Managing Disclosure and Recusal in P&T Conflicts 
of Interest: Formulary Development and Revision by a Pharmacy and 
Therapeutics Committee Under Part D
    56. Effects of the Technical Changes to the Definition of a Part 
D Drug
    57. Effects of the Thirty-Sixth Month Coordination of Benefits 
(COB) Limit
    58. Effects of Application and Calculation of Daily Cost-Sharing 
Rates
    59. Effects of the Technical Change To Align Regulatory 
Requirements for Delivery of the Standardized Pharmacy Notice
    60. Effects of the Special Part D Access Rules During Disasters
    61. Effects of the MA Organization Responsibilities in Disasters 
and Emergencies
    62. Effects of the Technical Changes Regarding the Termination 
of a Contract, Contract Determination and Other Appeals, and 
Intermediate Sanctions and Civil Money Penalties Under Parts C and D
    63. Effects of the Technical Change to the Restrictions on Use 
of Information Under Part D
    D. Expected Benefits
    1. Drug Categories or Classes of Clinical Concerns and 
Exceptions
    2. Medication Therapy Management Program Under Part D
    E. Alternatives Considered
    1. Separating the Annual Notice of Change From the Evidence of 
Coverage
    2. Modifying the Agent/Broker Compensation Requirements
    3. Medicare Coverage Gap Discount Program and Employer Group 
Waiver Plans
    4. Prescription Drug Pricing Standards and Maximum Allowable 
Cost
    5. Access to Covered Part D Drugs: Use of Standardized 
Technology
    6. Any Willing Pharmacy Standard Terms and Conditions
    7. Negotiated Prices
    8. Preferred Cost Sharing
    9. Transfer of TrOOP Between Part D Sponsors Due to Enrollment 
Changes During the Coverage Year
    10. Part D Notice of Changes
    11. Special Part D Access Rules During Disasters or Emergencies
    12. Business Continuity for MAOs and Part D Sponsors
    13. Drug Categories or Classes of Clinical Concerns and 
Exceptions
    14. Medication Therapy Management Program (MTM) Under Part D
    15. Requirement for Applicants or Their Contracted First Tier, 
Downstream, or Related Entities to Have Experience in the Part D 
Program Providing Key Part D Functions
    F. Accounting Statement and Table
    G. Conclusion
    H pages
    Regulations Text

Acronyms

ADS Automatic Dispensing System
AEP Annual Enrollment Period
AHFS American Hospital Formulary Service
AHFS-DI American Hospital Formulary Service-Drug Information
AHRQ Agency for Health Care Research and Quality
ALJ Administrative Law Judge
ANOC Annual Notice of Change
AO Accrediting Organization
AOR Appointment of Representative
BBA Balanced Budget Act of 1997 (Pub. L. 105-33)
BBRA [Medicare, Medicaid and State Child Health Insurance Program] 
Balanced Budget Refinement Act of 1999 (Pub. L. 106-113)
BIPA [Medicare, Medicaid, and SCHIP] Benefits Improvement Protection 
Act of 2000 (Pub. L. 106-554)
BLA Biologics License Application
CAHPS Consumer Assessment Health Providers Survey
CAP Corrective Action Plan
CCIP Chronic Care Improvement Program
CC/MCC Complication/Comorbidity and Major Complication/Comorbidity
CCS Certified Coding Specialist
CDC Centers for Disease Control
CHIP Children's Health Insurance Programs
CMP Civil Money Penalty
CMR Comprehensive Medical Review
CMS Centers for Medicare & Medicaid Services
CMS-HCC CMS Hierarchal Condition Category
CTM Complaints Tracking Module
COB Coordination of Benefits
CORF Comprehensive Outpatient Rehabilitation Facility
CPC Certified Professional Coder
CY Calendar year
DAB Departmental Appeals Board
DEA Drug Enforcement Administration
DIR Direct and Indirect Remuneration
DME Durable Medical Equipment
DMEPOS Durable Medical Equipment, Prosthetic, Orthotics, and 
Supplies
D-SNPs Dual Eligible SNPs
DOL U.S. Department of Labor
DUM Drug Utilization Management
EAJR Expedited Access to Judicial Review
EGWP Employer Group/Union-Sponsored Waiver Plan
EOB Explanation of Benefits
EOC Evidence of Coverage
ESRD End-Stage Renal Disease
FACA Federal Advisory Committee Act
FDA Food and Drug Administration
FEHBP Federal Employees Health Benefits Plan
FFS Fee-For-Service
FIDE Fully-integrated Dual Eligible
FIDE SNPs Fully-integrated Dual Eligible Special Needs Plans
FMV Fair Market Value
FY Fiscal year
GAO Government Accountability Office
HAC Hospital-Acquired Conditions
HCPP Health Care Prepayment Plans
HEDIS HealthCare Effectiveness Data and Information Set
HHS [U.S. Department of] Health and Human Services
HIPAA Health Insurance Portability and Accountability Act of 1996 
(Pub. L. 104-191)
HMO Health Maintenance Organization
HOS Health Outcome Survey
HPMS Health Plan Management System
ICEP Initial Coverage Enrollment Period
ICL Initial Coverage Limit
ICR Information Collection Requirement
ID Identification
IRE Independent Review Entity
IRMAA Income-Related Monthly Adjustment Amount
IVC Initial Validation Contractor
LCD Local Coverage Determination
LEP Late Enrollment Penalty
LIS Low Income Subsidy
LPPO Local Preferred Provider Organization
LTC Long Term Care
MA Medicare Advantage
MAAA Member of the American Academy of Actuaries
MA-PD Medicare Advantage-Prescription Drug Plan
MAC Medicare Appeals Council
MIPPA Medicare Improvements for Patients and Providers Act of 2008 
(Pub. L. 110-275)
MOC Medicare Options Compare
MOOP Maximum Out-of-Pocket
MPDPF Medicare Prescription Drug Plan Finder
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (Pub. L. 108-173)
MS-DRG Medicare Severity Diagnosis Related Group
MSA Metropolitan Statistical Area
MSAs Medical Savings Accounts
MSP Medicare Secondary Payer
MTM Medication Therapy Management
MTMP Medication Therapy Management Program
NAIC National Association Insurance Commissioners
NCD National Coverage Determination
NCPDP National Council for Prescription Drug Programs
NCQA National Committee for Quality Assurance
NDA New Drug Application
NDC National Drug Code
NGC National Guideline Clearinghouse
NIH National Institutes of Health
NOMNC Notice of Medicare Non-Coverage
NPI National Provider Identifier
OIG Office of Inspector General
OMB Office of Management and Budget
OPM Office of Personnel Management
OTC Over the Counter
Part C Medicare Advantage
Part D Medicare Prescription Drug Benefit Program
PBM Pharmacy Benefit Manager

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PDE Prescription Drug Event
PDP Prescription Drug Plan
PFFS Private Fee For Service Plan
POA Present on Admission (Indicator)
POS Point-of-Sale
PPO Preferred Provider Organization
PPS Prospective Payment System
P&T Pharmacy & Therapeutics
QIC Qualified Independent Contractor
QIO Quality Improvement Organization
QRS Quality Review Study
PACE Programs of All Inclusive Care for the Elderly
RADV Risk Adjustment Data Validation
RAPS Risk Adjustment Payment System
RPPO Regional Preferred Provider Organization
SEP Special Enrollment Period
SHIP State Health Insurance Assistance Programs
SNF Skilled Nursing Facility
SNP Special Needs Plan
SPAP State Pharmaceutical Assistance Programs
SSA Social Security Administration
SSI Supplemental Security Income
T&C Terms and Conditions
TPA Third Party Administrator
TrOOP True Out-Of-Pocket
U&C Usual and Customary
UPIN Uniform Provider Identification Number
USP U.S. Pharmacopoeia

I. Executive Summary

A. Purpose

    The purpose of this proposed rule is to make revisions to the 
Medicare Advantage (MA) program (Part C) and Prescription Drug Benefit 
Program (Part D) regulations based on our continued experience in the 
administration of the Part C and Part D programs and to implement 
certain provisions of the Affordable Care Act. The proposed changes are 
necessary to--(1) clarify various program participation requirements; 
(2) make changes to strengthen beneficiary protections; (3) strengthen 
our ability to identify strong applicants for Part C and Part D program 
participation and remove consistently poor performers; and (4) make 
other clarifications and technical changes.

B. Summary of the Major Provisions

1. Eligibility of Enrollment for Individuals Not Lawfully Present in 
the United States
    The Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996 makes individuals not lawfully present in the United States 
ineligible to receive federal benefits (such as Medicare), even if they 
are otherwise entitled to benefits. While we would not pay FFS claims 
for unlawfully present beneficiaries, MA, and Part D enrollment rules 
currently do not prevent the payment of capitation rates for these 
individuals. We are proposing to establish U.S. citizenship and lawful 
presence as an eligibility requirement for enrollment in MA and Part D 
plans.
2. Modifying the Agent/Broker Requirements, Specifically Agent/Broker 
Compensation
    The current compensation structure is comprised of a 6-year cycle 
and is scheduled to end December 31, 2013. MA organizations and PDP 
sponsors provide an initial compensation payment to independent agents 
for new enrollees (Year 1), and pay a renewal rate (equal to 50 percent 
of the initial year compensation) for Years 2 through 6. This structure 
has proved to be complicated to implement and monitor, and the current 
structure creates an incentive for agents to move beneficiaries as long 
as the fair market value (FMV) continues to increase each year. To 
simplify the administration of these payments and reduce incentives for 
agents and brokers to encourage beneficiaries to enroll in plans 
without regard to ensuring plan benefits would meet the beneficiaries' 
health care needs, we are proposing to revise the existing compensation 
structure. Under our proposal, MA organizations and PDP sponsors would 
continue to have the discretion to decide, on an annual basis, whether 
to pay initial and/or renewal compensation payments to their 
independent agents. Also, for new enrollments, MA organizations and 
sponsors could make an initial payment that is no greater than the FMV 
amount, which we would set annually in our guidance that interprets 
these regulations. For renewals in Year 2 and subsequent years, the MA 
organization or sponsor could pay up to 35 percent of the FMV amount 
for that year. We believe that revising the existing compensation 
structure to allow MA organizations or Part D sponsors to pay up to 35 
percent of the FMV for year 2 and subsequent years is appropriate based 
on a couple of factors. First, we believe that a 2 tiered payment 
system (that is, initial and renewal) would be significantly less 
complicated than a 3-tiered system (that is, initial, 50 percent 
renewal for years 2 through 6, and 25 percent residual for years 7 and 
subsequent years), and would reduce administrative burden and confusion 
for plan sponsors. Second, our analysis determined that 35 percent is 
the renewal compensation level at which the present value of overall 
payments under a 2-tiered system would be relatively equal to the 
present value of overall payments under a 3-tiered system (taking into 
account the estimated life expectancy for several beneficiary age 
cohorts). In addition to revising the agent and broker compensation 
structures, we propose to amend the training and testing requirements 
as well as setting limits on referral fees for agents and brokers.
3. Drug Categories or Classes of Clinical Concern
    This proposed provision would interpret the Affordable Care Act 
authority to limit protected classes to those for which access to all 
drugs in a category or class for a typical individual with a disease or 
condition treated by the drugs in the class is required within 7 days 
and more specific formulary requirements would not suffice to meet 
multitude of specific applications of the drugs within the category or 
class. Instead of mandating coverage of all drug products in a 
particular class on all Part D formularies, we can save costs by 
identifying more efficient formulary requirements or other beneficiary 
protections in most cases.
4. Improving Payment Accuracy
    The proposed regulatory provisions would implement the Affordable 
Care Act requirement that MA organizations and Part D sponsors report 
and return identified Medicare overpayments. We would adopt the 
statutory definition of overpayment for both Part C and Part D.
5. Risk Adjustment Data Requirements
    The proposed rule would strengthen existing regulations at Sec.  
422.310 on MA plan sponsors' accountability for valid risk adjustment 
data prior to submission.

C. Summary of Costs and Benefits

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                 Table 1--Summary of Costs and Benefits
------------------------------------------------------------------------
    Provision description          Total costs            Transfers
------------------------------------------------------------------------
Changes to Audit and          We estimate that
 Inspection.                   this change would
                               require an annual
                               cost of $7.95
                               million (total cost
                               of $39.75 million)
                               for the time and
                               effort for all
                               auditing
                               organizations to
                               perform the program
                               audit.
                               Additionally, we
                               estimate an annual
                               cost of $950,000
                               (total cost of 4.75
                               million) for MA
                               organizations or
                               Part D sponsors
                               with audit results
                               that reveal
                               non[dash]compliance
                               to hire an
                               independent auditor
                               to validate that
                               correction has
                               occurred.
Eligibility of enrollment     N/A.................  We estimate that
 for individuals not                                 this change could
 lawfully present in the U.S.                        save the MA program
                                                     up to $5 million in
                                                     2015, increasing to
                                                     $8 million in 2019
                                                     (total of $32
                                                     million over this
                                                     period), and could
                                                     save the Part D
                                                     program (includes
                                                     the Part D portion
                                                     of MA[dash]PD
                                                     plans) up to $5
                                                     million in 2015,
                                                     increasing to $9
                                                     million in 2019
                                                     (total of $35
                                                     million over this
                                                     period).
Modifying the agent/broker    N/A.................
 requirements, specifically
 agent/broker compensation.
Drug Categories or Classes    N/A.................  We estimate that
 of Clinical Concern.                                this change could
                                                     save the Part D
                                                     program (includes
                                                     the Part D portion
                                                     of MA-PD plans)
                                                     approximately $30
                                                     million in 2016,
                                                     increasing to $420
                                                     million in 2019
                                                     (total of $720*
                                                     million over this
                                                     period).
Improving Payment Accuracy..  N/A.................
Risk Adjustment Data          N/A.................
 Requirements.
Transfer of TrOOP Between     N/A.................
 Part D Sponsors Due to
 Enrollment Changes during
 the Coverage Year.
Eligibility of Enrollment     ....................  We estimate that
 for Incarcerated                                    this change could
 Individuals.                                        save the MA program
                                                     up to $27 million
                                                     in 2015, increasing
                                                     to $62 million in
                                                     2019 (total of $219
                                                     million over this
                                                     period), and could
                                                     save the Part D
                                                     program (includes
                                                     the Part D portion
                                                     of MA[dash]PD
                                                     plans) up to $46
                                                     million in 2015,
                                                     increasing to $90
                                                     million in 2019
                                                     (total of $333
                                                     million over this
                                                     period).
------------------------------------------------------------------------
* Projected savings are based upon full implementation of the criteria
  and do not reflect that changes for the antipsychotic class of drugs
  are deferred at this time.

II. Background

    The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33) created a 
new ``Part C'' in the Medicare statute (sections 1851 through 1859 of 
the Social Security Act (the Act)) which established what is now known 
as the Medicare Advantage (MA) program. The Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173), 
enacted on December 8, 2003, added a new ``Part D'' to the Medicare 
statute (sections 1860D-1 through 42 of the Act) entitled the Medicare 
Prescription Drug Benefit Program (PDP), and made significant changes 
to the existing Part C program, which it named the Medicare Advantage 
(MA) Program. The MMA directed that important aspects of the Part D 
program be similar to, and coordinated with, regulations for the MA 
program. Generally, the provisions enacted in the MMA took effect 
January 1, 2006. The final rules implementing the MMA for the MA and 
Part D prescription drug programs appeared in the Federal Register on 
January 28, 2005 (70 FR 4588 through 4741 and 70 FR 4194 through 4585, 
respectively).
    Since the inception of both Parts C and D, we have periodically 
revised our regulations either to implement statutory directives or to 
incorporate knowledge obtained through experience with both programs. 
For instance, on the September 18, 2008 and January 12, 2009 Federal 
Register (73 FR 54226 and 74 FR 1494, respectively), we issued Part C 
and D regulations to implement provisions in the Medicare Improvement 
for Patients and Providers Act (MIPPA) (Pub. L. 110-275). We 
promulgated a separate interim final rule in January 16, 2009 (74 FR 
2881) to address MIPPA provisions related to Part D plan formularies. 
In the final rule that appeared in the April 15, 2010 Federal Register 
(75 FR 19678), we made changes to the Part C and D regulations which 
strengthened various program participation and exit requirements; 
strengthened beneficiary protections; ensured that plan offerings to 
beneficiaries included meaningful differences; improved plan payment 
rules and processes; improved data collection for oversight and quality 
assessment; implemented new policies; and clarified existing program 
policy.
    In a final rule that appeared in the April 15, 2011 Federal 
Register (76 FR 21432), we continued our process of implementing 
improvements in policy consistent with those included in the April 2010 
final rule, and also implemented changes to the Part C and Part D 
programs made by recent legislative changes. The Patient Protection and 
Affordable Care Act (Pub. L. 111-148) was enacted on March 23, 2010, as 
passed by the Senate on December 24, 2009, and the House on March 21, 
2010. The Health Care and Education Reconciliation Act (Pub. L.

[[Page 1924]]

111-152), which was enacted on March 30, 2010, modified a number of 
Medicare provisions in Pub. L. 111-148 and added several new 
provisions. The Patient Protection and Affordable Care Act (Pub. L. 
111-148) and the Health Care and Education Reconciliation Act (Pub. L. 
111-152) are collectively referred to as the Affordable Care Act. The 
Affordable Care Act included significant reforms to both the private 
health insurance industry and the Medicare and Medicaid programs. 
Provisions in the Affordable Care Act concerning the Part C and D 
programs largely focused on beneficiary protections, MA payments, and 
simplification of MA and Part D program processes. These provisions 
affected implementation of our policies regarding beneficiary cost-
sharing, assessing bids for meaningful differences, and ensuring that 
cost-sharing structures in a plan are transparent to beneficiaries and 
not excessive. In the April 2011 final rule, we revised regulations on 
a variety of issues based on the Affordable Care Act and our experience 
in administering the MA and Part D programs. The rule covered areas 
such as marketing, including agent/broker training; payments to MA 
organizations based on quality ratings; standards for determining if 
organizations are fiscally sound; low income subsidy policy under the 
Part D program; payment rules for non-contract health care providers; 
extending current network adequacy standards to Medicare medical 
savings account (MSA) plans that employ a network of providers; 
establishing limits on out-of-pocket expenses for MA enrollees; and 
several revisions to the special needs plan requirements, including 
changes concerning SNP approvals.
    In a final rule that appeared in the April 12, 2012 Federal 
Register (77 FR 22072 through 22175), we made several changes to the 
Part C and Part D programs required by statute, including the 
Affordable Care Act, as well as made improvements to both programs 
through modifications reflecting experience we have obtained 
administering the Part C and Part D programs. Key provisions of that 
final rule implemented changes closing the Part D coverage gap, or 
``donut hole,'' for Medicare beneficiaries who do not already receive 
low-income subsidies from us by establishing the Medicare Coverage Gap 
Discount Program. We also included provisions providing new benefit 
flexibility for fully-integrated dual eligible special needs plans, 
clarifying coverage of durable medical equipment, and combatting 
possible fraudulent activity by requiring Part D sponsors to include an 
active and valid prescriber National Provider Identifier on 
prescription drug event records.

III. Provisions of the Proposed Regulations

A. Clarifying Various Program Participation Requirements

1. Closing Cost Contract Plans to New Enrollment (Sec.  422.2 and Sec.  
422.503(b)(5))
    In implementing the original Part C requirements in our June 26, 
1998 final rule, entitled, ``Medicare Program; Establishment of the 
Medicare+Choice Program'' (63 FR 34968 through 35116), we established a 
requirement in 42 CFR 422.501(b)(4) that an ``entity seeking to 
contract as [an Medicare Advantage (MA)] organization must not accept 
new enrollees under a section 1876 reasonable cost contract in any area 
in which it seeks to offer [an MA] plan.'' We stated our reasons for 
the policy, specifying in the preamble of the interim final rule that, 
``[o]ur reason for establishing this rule is to eliminate the potential 
for an organization to encourage higher-cost enrollees to enroll under 
its cost contract while healthy enrollees are enrolled in its risk-
based [MA] plan. This [final] rule is consistent with our long-standing 
policy that entities not have both a risk and cost contract under 
section 1876 [of the Act] in the same area.'' (63 FR 35014 through 
35015).
    This provision was recodified at 42 CFR 422.503(b)(5) in 
regulations implementing the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003, but the requirement, as well as the 
rationale for the requirement, remained intact.
    Since this requirement only precludes ``the entity'' contracting as 
an MA organization from having a cost contract open to new enrollment, 
the prohibition does not apply to another separate legal entity owned 
by the same parent organization, such that two legal entities owned by 
the same parent could offer a competing cost contract and MA plan. We 
do not believe that this result is consistent with the original intent 
of the prohibition because it permits legal entities that are related 
to each other under a common parent organization to offer a cost 
contract and MA plan in the same service area, creating the same 
potential for the entities to move higher risk enrollees from one plan 
to another in order to take advantage of the differing Medicare payment 
rules for the two plan types or for other reasons that are not related 
to the enrollees' best interests.
    To ensure that our original intent is realized and to eliminate the 
potential for organizations to move enrollees from one of their plans 
to another based on financial or some other interest, we propose to 
revise paragraph Sec.  422.503(b)(5) so that an, ``entity seeking to 
contract as an MA organization must [n]ot accept, or share a corporate 
parent organization with an entity that accepts, new enrollees under a 
section 1876 reasonable cost contract in any area in which it seeks to 
offer an MA plan.''
    In making the proposed revision to paragraph Sec.  422.503(b), we 
also propose to add the definition of ``parent organization'' to Sec.  
422.2 of the MA program definitions. We would specify that, ``Parent 
organization means a legal entity that owns one or more other 
subsidiary legal entities.'' We are requesting comments on whether a 
parent organization with less than a 100-percent interest in a 
subsidiary legal entity should trigger the prohibition we propose with 
the amendment at Sec.  422.503(b)(5). Although the MA program 
regulations do not currently define the term ``parent organization,'' 
our proposed definition is consistent with the way the term is 
currently used in the context of the MA program, for example, when 
assessing an organization's business structure.
2. Two Year Limitation on Submitting a New Bid in an Area Where an MA 
Has Been Required To Terminate a Low Enrollment MA Plan (Sec.  
422.504(a)(19))
    Under Sec.  422.506(b)(1)(iv), we must non-renew an MA plan that 
does not have a sufficient number of enrollees to establish that it is 
a viable independent plan option. We have currently interpreted the 
standard of whether the MA plan has a ``sufficient number of enrollees 
to establish that it is a viable independent plan option'' as meaning 
that the MA plan has fewer than 500 enrollees for non-SNPs and fewer 
than 100 enrollees for SNPs over a specified time period of 3 years. As 
we determine adjustments are appropriate, we will revisit this 
interpretation as part of annual plan guidance. In cases in which an MA 
plan has been non-renewed on this basis, it would defeat the intent and 
purpose of this rule if the MA organization could simply submit a new 
bid for the next year in the same area for the same type of plan that 
failed to attract enrollment over a number of years. Indeed, the 
problem addressed in Sec.  422.506(b)(1)(iv) would be exacerbated, as 
the new plan would start out with no MA enrollees.
    In section 3209 of the Affordable Care Act, the Congress added a 
new section

[[Page 1925]]

1854(a)(5)(C)(1) of the Act that clarified that CMS is not ``require[d] 
. . . to accept any or every bid submitted by an MA organization. . . 
.'' Section 1856(b)(1) of the Act further provides authority for CMS to 
establish MA standards by regulation, and section 1857(e)(1) of the Act 
also provides authority to impose contract requirements that CMS finds 
``necessary and appropriate.'' Under the foregoing authority, we 
propose to revise Sec.  422.504(a) to add a new contract requirement 
that stipulates that the Medicare Advantage Organization (MA 
organization) agrees not to submit a new bid of the same type of plan 
that has been non-renewed under Sec.  422.506(b)(1)(iv) in the same 
service area as the non-renewed plan for 2 years after such a non-
renewal.
    We believe this requirement will enhance our ongoing efforts to 
ensure that MA organization offerings in a service area present 
beneficiaries with viable plans that are responsive to their needs.
3. Authority To Impose Intermediate Sanctions and Civil Money Penalties 
(Sec.  422.752, Sec.  423.752, Sec.  422.760 and Sec.  423.760)
    Section 1857(a) of the Social Security Act (the Act) provides the 
Secretary with the authority to enter into contracts with MA 
organizations, and section 1860D-12(b)(1) of the Act provides the 
Secretary with the authority to enter into contracts with Part D 
sponsors. Section 1857(g)(1) of the Act provides a list of contract 
violations for which the potential enforcement response under section 
1857(g)(2) of the Act is the imposition of intermediate sanctions 
(sanctions) and/or civil money penalties (CMPs). Section 1860D-
12(b)(3)(E) of the Act applies these provisions to Part D contracts. We 
codified this authority in the June 28, 2000 final rule with comment 
period entitled, ``Medicare Program; Medicare+Choice Program (65 FR 
40170) for Part C, and the January 28, 2005 final rule entitled, 
``Medicare Program; Medicare Prescription Drug Benefit'' (70 FR 4194) 
for Part D. The authority was codified at Sec.  422.752 (Part C) and 
Sec.  423.752 (Part D). We are proposing two changes to our existing 
authority to impose sanctions and CMPs.
    First, section 6408 of the Affordable Care Act (Pub. L. 111-148) 
provided the Secretary with new authorities to impose sanctions or CMPs 
for violations of the Part C and D marketing and enrollment 
requirements. Section 6408 amended 1857(g)(1) of the Act by adding new 
sections (H) through (K). These provisions provide CMS with the 
authority to impose intermediate sanctions on an organization that 
enrolls an individual without prior consent (except in certain limited 
circumstances) or transfers an individual to a new plan without prior 
consent. They also specifically make it a contract violation to violate 
the Part C and D marketing requirements, and specify that it is a 
violation of the sponsor's Part C or D agreement with CMS for the 
sponsoring organization to employ or contract with any individual or 
entity who engages in the conduct described in paragraphs (A) through 
(J) of 1857(g)(1) of the Act.
    We are proposing to revise our regulations to codify the 
aforementioned authorities at Sec.  422.752 (Part C) and Sec.  423.752 
(Part D), following the statutory language with little modification.
    Second, we are proposing changes to the regulations intended to 
clarify CMS' authority to impose CMPs for the violations contained in 
section 1857(g)(1) of the Act and corresponding regulations at Sec.  
422.752 (Part C) and Sec.  423.752 (Part D). Existing regulations 
provide the government with authority to impose CMPs for the listed 
violations. The existing regulations, however, designate the Office of 
Inspector General (OIG) as the sole government agency with the 
authority to impose CMPs for the violations contained in Sec.  422.752 
and Sec.  423.752. We are proposing to revise the language of these 
provisions to clarify that either CMS or the OIG may impose CMPs for 
the violations listed at Sec.  422.752(a) and Sec.  423.752(a), except 
Sec.  422.752(a)(5) and Sec.  423.752(a)(5). Only the OIG will continue 
to have the authority to impose CMPs for the violations at Sec.  
422.752(a)(5) and Sec.  423.752(a)(5), regarding the misrepresentation 
and/or falsification of information furnished to CMS, an individual or 
other entity. CMS or the OIG will impose the CMPs in accordance with 
the amounts specified in section 1857(g)(2) of the Act and Sec.  
422.760 and Sec.  423.760 of the corresponding regulations.
    We are proposing to revise the existing regulations at Sec.  
422.752, Sec.  423.752, Sec.  422.760, and Sec.  423.760 to effectuate 
this change.
4. Contract Termination Notification Requirements and Contract 
Termination Basis (Sec.  422.510 and Sec.  423.509)
    Sections 1857(c) and 1860D-12(b)(3)(B) of the Act provide us with 
the authority to terminate a Part C or D sponsoring organization's 
contract at any time if we make a determination that the contracting 
organization is substantially failing to meet contract requirements and 
expectations. Sections 1857(h)(1)(B) and 1860D-12(b)(3)(F) of the Act 
provide us with the procedures necessary to facilitate the termination 
of contracts held between CMS and MA organizations and Part D sponsors, 
respectively. The Part C contract termination authorities and 
procedures were codified into regulations in the June 29, 2000 final 
rule entitled, ``Medicare Program; Medicare+Choice Program'' (65 FR 
40170) at Sec.  422.510. Likewise, the Part D authorities and 
procedures were codified into regulations in the January 28, 2005 final 
rule entitled, ``Medicare Program; Medicare Prescription Drug Benefit'' 
(70 FR 4194) at Sec.  423.509.
    We are proposing three revisions to our existing regulations that 
relate to contract termination. First, we are proposing clarification 
of the scope of our authority to terminate Part C and D contracts under 
Sec.  422.510(a) and Sec.  423.509(a). Section 1857(c)(2) of the Act 
provides us with authority to terminate a Part C or D contract if we 
make a determination that the organization--
     Has failed substantially to carry out the contract;
     Is carrying out the contract in a manner inconsistent with 
the efficient and effective administration of this part; or
     No longer substantially meets the applicable conditions of 
this part.
    Existing regulations at Sec.  422.510 and Sec.  423.509 reiterate 
the three bases for termination set forth in the statute, however, over 
time CMS has also included in regulation a number of specific 
violations within the scope of our statutory authority, that is, 
violations which meet the standard established by the statute. In the 
June 26, 1998 proposed rule (63 FR 34968, at 35018), we stated that 
``[i]n addition to repeating the above statutory language, we are 
implementing this language by identifying specific circumstances that 
we believe constitute examples of [an MA] 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.''
    However, we have come to believe over time that the inclusion of 
our broad statutory authorities in the regulations, along with the more 
specific violations, has the potential to lead to confusion regarding 
the scope of our termination authority. Terminating a contract is the 
strongest action that CMS may take in response to an MA organization or 
Part D sponsor's noncompliance. It is imperative that both CMS and 
affected organization understand the standard

[[Page 1926]]

we apply when CMS has made a determination to end the contractual 
relationship. Therefore, we are proposing to modify the language at 
Sec.  422.510(a) and Sec.  423.509(a) to clarify our contract 
termination authority by separating the statutory bases from the 
examples. To effectuate this change we will need to renumber the lists 
of bases contained in Sec.  422.510(a) and Sec.  423.509. Because there 
are cross references using the current numbering scheme, we are also 
proposing to make several corresponding reference changes to reflect 
the renumbering of this section throughout parts 422 and 423. We 
believe that by making these changes, we will improve the clarity of 
this regulation.
    Second, we are proposing revisions to our contract termination 
notification procedures contained at Sec.  422.510(b)(1) and Sec.  
423.509(b)(1). Current regulations state that if CMS decides to 
terminate a Part C or D sponsoring organization's contract, we must 
notify the MA organization/Part D sponsor in writing 90 days before the 
intended date of the termination. We believe that the 90-day timeframe 
is not in the best interest of Medicare beneficiaries, in light of the 
fact that CMS terminates contracts in circumstances where an 
organization is significantly out of compliance with Part C and D 
requirements. We also think that the 90-day timeframe is unnecessarily 
long given the existing procedural protections and appeal rights 
provided for MA organizations and Part D sponsors.
    The authorizing statute for Part C, at section 1857(h)(1)(B) of the 
Act (applicable to Part D pursuant to section 1860D-12(b)(3)(F) of the 
Act), states that the Secretary must provide reasonable notice and 
opportunity for hearing regarding the termination (including the right 
to appeal the initial determination); during this hearing process, the 
termination is effectively stayed pursuant to Sec.  422.664 and Sec.  
423.652. Therefore, we believe that a 45-day timeframe better balances 
the need to provide contracting organizations with reasonable notice of 
the impending contract termination with the interests of the Medicare 
beneficiaries who are enrolled in a plan that is deficient enough in 
its adherence to Part C and/or D requirements that contract termination 
is necessary. We also propose to make necessary cross-reference changes 
in parts 422 and 423 at Sec.  422.644(c)(1) and Sec.  423.642(c)(1).
    Additionally, in an effort to respond to changes in the media and 
information technology landscape, we are proposing a slight 
modification to the termination notification provision for the general 
public at Sec.  422.510(b)(1)(iii) and Sec.  423.509(b)(1)(iii) by 
proposing that contracting organizations now release a press statement 
to news media serving the affected community or county and posting the 
press statement prominently on the organization's Web site instead of 
publishing the notice in applicable newspapers.
    Third, we are proposing minor revisions to the wording of our 
regulations at Sec.  422.510 and Sec.  423.509 to reflect the 
authorizing language contained in sections 1857(c)(2) and 1860D-12 of 
the Act. Specifically, we are proposing to replace the word ``fails'' 
with ``failed'' in the applicable provisions of Sec.  422.510 and Sec.  
423.509. In current regulations both of the terms failed and fails are 
used when describing contract violations that may be the basis for a 
contract termination. We would like for this list to read consistently, 
therefore, we are proposing to revise the language as such. The purpose 
of this change is merely to ensure that consistent language is used 
throughout Sec.  422.510 and Sec.  423.509 and in no way changes the 
meaning or policy encompassed in these provisions.
5. Reducing the Burden of the Compliance Program Training Requirements 
(Sec.  422.503(b)(4)(vi)(C) and Sec.  423.504(b)(4)(vi)(C))
    Section 1857(a) of the Act provides the Secretary with the 
authority to enter into contracts with MA Organizations, and section 
1860D-12(b)(1) of the Act provides the Secretary with the authority to 
enter into contracts with Part D sponsors. Sections 1860D-
12(b)(3)(D)(i) and 1857(e)(1) of the Act, specify that these contracts 
shall contain other terms and conditions that the Secretary may find 
necessary and appropriate. When we implemented the Part C program, we 
determined that all Part C contracts (and subsequently Part D 
contracts) would require that the Part C or D organization has the 
necessary administrative and management arrangements to have an 
effective compliance program, as reflected in Sec.  422.503(b)(4)(vi) 
and Sec.  423.504(b)(4)(iv).
    In the December 5, 2007 Federal Register, we published the 
``Medicare Program; Revisions to the Medicare Advantage and Part D 
Prescription Drug Contract Determinations, Appeals and Intermediate 
Sanctions Process'' final rule (72 FR 68700). In that final rule, we 
established that compliance plans for sponsoring organizations must 
include training and education and effective lines of communication 
between the compliance officer and the sponsoring organization's 
employees, managers, and directors as well as their first-tier, 
downstream and related entities (FDRs). We reiterated the importance of 
this requirement in the October 22, 2009 proposed rule entitled, 
``Medicare Program; Policy and Technical Changes to the Medicare 
Advantage and the Medicare Prescription Drug Benefit Programs'' (74 FR 
53634).
    In the 2009 proposed rule, entitled, ``Medicare Program; Policy and 
Technical Changes to the Medicare Advantage and the Medicare 
Prescription Drug Benefit Programs,'' we addressed concerns about the 
burden on FDRs such as pharmacies, hospitals and physicians as a result 
of this requirement, given the likelihood that many of these entities 
and individuals contract with multiple contracting organizations. We 
were concerned that these FDRs would potentially have to participate in 
(largely duplicative) training for each organization with whom they 
contract. We requested public comments on how best to ensure that the 
training requirement continues to be met while not overly burdening the 
contracting organization or its FDRs. In response, we received numerous 
comments suggesting that CMS develop its own web-based trainings to 
lessen this burden on sponsors and FDRs (75 FR 19678 at 19688).
    In response to these requests, we have created the CMS Standardized 
General Compliance Program Training and Education Module. Until now, we 
have offered this as an optional training. In this rule, we propose to 
require that all contracting organizations accept a certificate of 
completion of the CMS training as satisfaction of this general 
compliance program training requirement. We anticipate that this 
proposal will greatly reduce the burden on various sectors of the 
industry, including, but not limited to, insurance providers, 
hospitals, suppliers, pharmacists, and physicians.
    Under this proposed change, Part D sponsors and Part C 
organizations would not be permitted to develop or implement sponsor 
specific training or provide supplemental training materials to fulfill 
the general compliance program training requirement; only CMS training 
would suffice.
    We understand that sponsors often include sponsor specific 
information (such as compliance officer's contact information, 
compliance reporting processes and expectations, hotline number or 
email address for compliance questions, Web site information for 
accessing the sponsor's compliance policies and procedures) in the 
training materials provided to the FDRs and will need an appropriate 
mechanism for

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conveying this information given that the training vehicle will no 
longer be available. To address this issue, a sponsor may choose to 
include such information in the contract held between the sponsor and 
the FDR. Alternatively, we would allow each sponsor to develop a one 
page information sheet containing this material, to be distributed by 
the sponsor to each of its FDRs. We seek comments concerning this 
portion of our proposal and suggestions on other options we could 
implement to accomplish the desired outcome.
    We are proposing to modify the regulation text by adding a new 
Sec.  422.503(b)(vi)(C)(3) and Sec.  423.504(b)(vi)(C)(4) to permit 
only this CMS training for satisfaction of the requirement to train 
FDRs.
6. Changes to Audit and Inspection Authority (Sec.  422.503(d)(2) and 
Sec.  423.504(d)(2))
    Sections 1857(d)(2)(A) and 1860D-12(b)(3)(C) of the Act specify 
that each contract under these sections must state that CMS has the 
right to audit and inspect the facilities and records of each 
organization. We are proposing three changes to our audit and 
inspection authority. First, under section 6408 of the Affordable Care 
Act new authority was provided to the Secretary that now requires that 
each contract provide the right to ``timely'': (1) Inspect or otherwise 
evaluate the quality, appropriateness, and timeliness of services 
performed under the contract; (2) inspect or otherwise evaluate the 
facilities of the organization when there is reasonable evidence of 
some need for such inspection; and (3) audit and inspect any books, 
contracts, and records of the organization that pertain to (a) the 
ability of the organization or its first tier or downstream providers 
to bear the risk of potential financial losses; or (b) services 
performed or determinations of amounts payable under the contract.
    Therefore, we are proposing to revise both Sec.  422.503(d)(2) and 
Sec.  423.504(d)(2) to reflect this change. Specifically, we are 
proposing to insert the word ``timely'' at the end of both of the 
introductory paragraphs for Sec.  422.503(d)(2) and Sec.  
423.504(d)(2).
    Second, we are proposing to add authority that will allow CMS to 
require MA organizations and Part D sponsors to hire an independent 
auditor to perform full or partial program audits to determine 
compliance with CMS requirements.
    MA organizations and Part D sponsors must adhere to CMS 
requirements to properly administer Part C and Part D benefits. These 
requirements are contained in statute, regulations and in the Part C 
and Part D sponsor agreements themselves. CMS needs assurance that MA 
organizations and Part D sponsors are substantially adhering to Part C 
and/or D requirements, and that Medicare beneficiaries are receiving 
the benefits to which they are entitled. To determine the extent of MA 
organization and Part D sponsor compliance with program requirements, 
CMS uses a variety of oversight and monitoring tools including CMS-
conducted program audits.
    CMS conducts a program audit by examining core operational areas 
and functions and determining the sponsors' level of compliance with 
these Part C and Part D program requirements. CMS may audit any program 
requirement, but in recent years we have focused on Part C and Part D 
coverage decisions, appeals, grievances, compliance program 
effectiveness, and formulary administration. CMS reviews a number of 
targeted samples to evaluate MA organizations and Part D sponsors' 
processes and systems. Targeting samples is an efficient way to 
highlight deficiencies and ensure that they are quickly and 
successfully remediated. The process is primarily designed to be 
educational for the MA organization and/or Part D sponsor as it expands 
the sponsor's understanding of CMS' expectations, and how program 
requirements are to be applied. It also identifies areas of risk or 
actual non-compliance so sponsors can quickly correct the deficiency. 
This understanding allows the MA organization and/or Part D sponsor to 
develop and implement a robust internal auditing and monitoring program 
to identify deficiencies before they reach a level of substantial non-
compliance in the future. An effective monitoring program should result 
in early detection of system and process failures and should lead to 
problems being fixed quickly and steps being implemented to prevent 
future failures.
    Organizations that are chosen for audit fall into at least one of 
the five following categories: High Star rated plans; sponsors with a 
Low Performing Icon (LPI); high risk plans (based on a data driven risk 
assessment); sponsors not audited in last 3 years, and CMS Regional or 
Central Office referrals. Annually, CMS conducts a risk assessment to 
determine which high-risk organizations to audit. Many of the program 
audits currently being conducted are with organizations whose contract 
performance or data indicators demonstrate the potential risk of 
failing to perform core program functions that, if not complied with, 
may result in potential beneficiary harm. These audits are a useful 
tool to help identify systemic deficiencies and failures in meeting CMS 
requirements and they help to promote compliance with those 
requirements. While these types of audits are necessary because these 
organizations pose the most risk, not all organizations are receiving 
the benefit of having an independent audit of their organization on a 
regular basis.
    CMS is constrained in the number of program audits we can conduct 
each year, due to limited resources. Currently, CMS has close to 300 
parent organizations that perform MA and/or Part D functions. CMS is 
only able to audit approximately 30 parent organizations per year; or 
roughly 10 percent of all MA organizations and/or Part D sponsors. CMS 
believes that MA organizations and/or Part D sponsors, their enrollees, 
and the Medicare program all benefit from a regular cycle of 
independent auditing. Therefore, we are proposing to revise our 
regulations to allow CMS to require MA organizations and/or Part D 
sponsors to hire an independent auditor to conduct regularly scheduled 
program audits in accordance with CMS specifications.
    We currently make all of our program audit protocols available to 
MA organizations and/or Part D sponsors through our Web site. Pursuant 
to the proposed new regulatory provision, CMS would notify the MA 
organization and/or Part D sponsor that it has been selected to perform 
a full or partial program audit. The MA organization and/or Part D 
sponsor would then be required to engage an independent auditor to 
perform a full or partial program audit as directed by CMS using the 
CMS published protocols, methodologies, and methods of evaluation. At 
the conclusion of the audit, at the direction of the MA organization 
and/or Part D sponsor, the independent auditor will provide a draft 
copy of its findings to CMS and the MA organization and/or Part D 
sponsor. Once the MA organization and/or Part D sponsor has had an 
opportunity to rebut any findings, the independent auditor will provide 
its final report of findings to CMS and the MA organization and/or Part 
D sponsor. CMS anticipates that additional instruction will be 
necessary to interpret and implement this audit requirement of a 
complete and full independent review. Therefore, we intend to develop 
and release sub regulatory guidance to address, among other things, 
language and specifications which should be included in the contract 
between the sponsoring

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organization and the independent auditor conducting the audit. The 
proposed authority will allow CMS to better evaluate MA organizations' 
and Part D plan sponsor's performance. With the proposed approach, each 
MA organization and/or Part D sponsor will be required to undergo an 
independent program audit at least every 3 years. Under this proposal, 
more organizations will be audited each year, which will provide CMS 
with substantially more data to evaluate program-wide performance, 
improve industry performance and protect beneficiaries enrolled in the 
Medicare Advantage and Prescription Drug Benefit programs. This will 
enhance CMS's oversight and provide us with information that enables us 
to focus our time and resources in the areas most needed to ensure 
compliance with Part C and Part D program requirements.
    CMS will continue to perform program audits in limited scenarios, 
such as when indicated by a risk analysis; and will perform limited 
``look back'' audits to ensure the integrity of the independent audit 
process proposed here. The latter audits will focus on reviewing the 
program audit findings that we receive from the independent auditors 
engaged by the Part C and Part D organizations, to ensure that the 
independent auditor conducted the audit in accordance with CMS 
specifications. We think that this additional authority will 
significantly strengthen the Medicare Parts C and D audit and oversight 
program.
    Therefore, we are proposing to add language to Sec.  422.503(d)(2) 
and Sec.  423.504(d)(2) that will allow us to require a MA organization 
or Part D sponsor to hire an independent auditor, working in accordance 
with CMS specifications, to perform program audits to determine 
compliance with CMS requirements and provide to CMS an attestation 
affirming that the audit has been completed as required.
    Third and finally, we are proposing to revise our regulations to 
specifically permit CMS to require MA organizations or Part D sponsors 
with audit results that reveal non-compliance with CMS requirements to 
hire an independent auditor to validate that correction has occurred. 
We may invoke this authority regardless of whether an independent 
auditor or CMS conducted the program audit that identified the 
programmatic deficiencies.
    When program audits are conducted, non-compliance with CMS 
requirements is often found. When CMS finds these deficiencies, it 
notifies the MA organization or Part D sponsor of its non-compliance 
and requires correction. We do not close out audits until we have 
validated that correction has occurred. While we firmly believe in the 
value of such validation, these efforts are also limited by resources. 
In order to assist us in making the determination that the deficiencies 
found during the audit have been corrected and are not likely to recur, 
we need to have greater flexibilities in performing validation 
activities. Therefore, we are proposing that we may require a MA 
organization or Part D sponsor to hire an independent auditor to 
provide us with additional information to determine if the deficiencies 
found during the course of the audit have actually been corrected and 
are not likely to recur. The independent auditor would be hired by the 
MA organization and/or Part D sponsor and work in accordance with our 
specifications in order to provide accurate and reliable information to 
CMS.
    CMS often relies on self-disclosed information from the MA 
organization or Part D sponsor, CMS and plan data; in the alternative, 
we must attempt to engage in a process to independently verify that 
deficiencies have been corrected. Given the nature and extent of some 
compliance deficiencies and the level of skill and experience required 
to conduct an exhaustive verification of correction, we have concluded 
that an independent auditor hired by the MA organization or Part D 
sponsor would be beneficial for both the organization and CMS.
    This proposal is also consistent with our regulatory authority at 
42 CFR 422.756 and 423.756 which permits us to require a sanctioned 
organization to hire an independent auditor to help us determine if a 
sanction should be lifted. Program experience has demonstrated other 
situations when the expertise of an independent auditor would be 
helpful in determining correction. For example, an independent auditor 
who specializes in complex information technology systems and who has 
specialized knowledge of how those systems interact with each other, in 
order to be compliant with our requirements, may be helpful in ensuring 
timely and successful correction of complex claims processing 
deficiencies. This is one example of a situation where we may require 
the MA organization or Part D sponsor to hire an independent auditor in 
order to assist in making the determination that the deficiencies found 
during the program audit have been corrected.
    Therefore, we are proposing to add language to Sec.  422.503(d)(2) 
and Sec.  423.504(d)(2) that will allow us to require that a sponsoring 
organization hire an independent auditor, working in accordance with 
CMS specifications, to provide us with additional information to 
determine if the deficiencies that were found during a program audit 
have been corrected.
7. Procedures for Imposing Intermediate Sanctions and Civil Money 
Penalties Under Parts C and D (Sec.  422.756 and Sec.  423.756)
    Sections 1857(g) and 1860D-12(b)(3)(E) of the Act provide the 
Secretary the ability to impose intermediate sanctions on MA 
organizations and PDP sponsors. Intermediate sanctions consist of 
suspension of enrollment, suspension of marketing and suspension of 
payment. Current regulations governing intermediate sanctions are 
contained in subparts O of part 422 and part 423. Sections 422.756 and 
423.756 provide specific procedures for imposing intermediate 
sanctions, and include provisions which address the duration of the 
sanction and the standard that we apply when determining if a sanction 
should be lifted. As specified in the Act and regulations, when 
intermediate sanctions are imposed on sponsoring organizations, the 
sanctions remain in place until we are satisfied that the basis for the 
sanction determination has been corrected and is not likely to recur.
    Because sanctions remain in place until the deficiencies have been 
corrected and we are assured that they are not likely to recur, we are 
unable to fully test the contracting organization's compliance with 
certain requirements until the sanction is lifted. Therefore, in the 
October 2009 proposed rule, entitled ``Medicare Program; Policy and 
Technical Changes to the Medicare Advantage and the Medicare 
Prescription Drug Benefit Programs'' (74 FR 54634), we proposed a rule, 
later finalized in the April 15, 2010 ``Medicare Program; Policy and 
Technical Changes to the Medicare Advantage and the Medicare 
Prescription Drug Benefit Programs'' (75 FR 19678), that allows us to 
require a plan under a marketing and/or enrollment sanction to engage 
in a test period of marketing or accepting enrollments or both for a 
limited period of time. As we explained in that proposed rule, the 
purpose of the test period is to assist us in making a determination as 
to whether the deficiencies that are the bases for the intermediate 
sanctions have been corrected and are not likely to recur. The test 
period provides us with the opportunity to observe a sanctioned plan's 
ability to enroll or market to Medicare beneficiaries prior to lifting

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the sanction. Since finalizing that rule in April 2010 (75 FR 19678), 
we have further considered its utility as a result of compliance issues 
that we have encountered over the past 2 years. We are proposing two 
modifications to this existing rule. First, we are proposing to expand 
the potential applicability of the test period requirement to all types 
of all intermediate sanctions. The existing regulation would only allow 
CMS to require this test period in instances where CMS has imposed a 
marketing and/or enrollment sanction. However, the type of intermediate 
sanction imposed is not necessarily related to the particular 
violations that form the basis for the sanction. Therefore, we are 
proposing to modify the existing rule to clarify that CMS may require a 
test period for a sponsoring organization that has had any of the three 
types of intermediate sanctions imposed: marketing, enrollment and/or 
payment.
    We also want to clarify that our ability to require this test 
period is not limited to sanctions stemming from marketing or 
enrollment violations. In the preamble language for the October 2009 
proposed rule, (74 FR 54634), we stated that ``[t]he basis for this 
proposal is that we have found that there is often not a satisfactory 
way to determine if marketing and/or enrollment problems have been 
corrected while a sanction is in place and no such activities are 
permitted.'' Upon reflection, we are concerned that this statement may 
have given the impression that the test period would only be used in 
instances where the underlying bases for the sanction are marketing 
and/or enrollment deficiencies. Therefore, we are clarifying here that 
the purpose of the test period is to assist us in making a 
determination as to whether the deficiencies that are the bases for the 
intermediate sanction have been corrected and are not likely to recur. 
The aforementioned deficiencies may be in any operational area, and are 
not limited or restricted to enrollment and/or marketing deficiencies.
    Second, we are proposing to clarify the enrollment parameters for 
Part D contracting organizations that are under the benchmark and would 
normally participate in the annual and monthly auto enrollment process 
for beneficiaries who receive a low income subsidy (LIS) during a test 
period. During a test period, sanctioned Part D plans may not be 
allowed to receive or process these types of enrollments.
    LIS beneficiaries are a vulnerable population who are particularly 
sensitive to financial instability. It is critical that Part D sponsors 
correctly identify a beneficiary's LIS status. Our goal when enrolling 
this particular population is to ensure that these vulnerable 
beneficiaries are best able to access their drugs and services in the 
manner to which they are entitled under the Part D program. We believe 
that if we allow auto-enrollments into a plan that has recently 
demonstrated substantial non-compliance with our regulations as 
evidenced by the imposition of an intermediate sanction, these 
vulnerable beneficiaries may experience difficulties in accessing 
prescription drugs. Therefore, we are proposing to make clear that we 
may determine that a sanctioned plan is not available to receive 
automatically assigned beneficiaries for the entire duration or a 
portion of the testing period.
    We are proposing to modify the regulation text at Sec.  422.756 and 
Sec.  423.756 to reflect these changes.
8. Timely Access to Mail Order Services (Sec.  423.120)
    Section 1860D 12(b)(3) of the Act authorizes the Secretary to 
include contract terms for Part D sponsors, not inconsistent with the 
Part C and D statutes, as necessary and appropriate. Section 
423.120(a)(3) specifies that a Part D sponsor's contracted network may 
include non-retail pharmacies, including mail order pharmacies, so long 
as the network access requirements are met. Part D plans are 
increasingly entering into contracts with mail order pharmacies to 
offer beneficiaries an alternative way to fill prescriptions under the 
Part D benefit, often at much lower cost sharing than is available at 
network retail pharmacies. While mail order pharmacies make up a 
relatively small percentage of total prescriptions filled under the 
Part D program, we are committed to ensuring consistent and reliable 
beneficiary access to medications, regardless of what type of pharmacy 
fills the prescriptions.
    Section 1860D-4 of the Act describes the various beneficiary 
protections in place in the Part D program. It is the industry standard 
in retail and institutional pharmacies to fill almost all prescriptions 
on the same day the prescription is presented. We have established a 24 
hour fulfillment standard for home infusion drugs covered under Part D 
(Sec.  423.120(a)(4)(iv)). For mail order pharmacies, the industry 
standard for delivery times appears to range from 7 to 10 business days 
from the date the prescription was received, and Part D sponsors' 
marketing materials often specify this time frame to beneficiaries. 
Beneficiaries generally choose to fill prescriptions through a mail 
order pharmacy, for lower cost sharing, when it is feasible to wait 7 
to 10 days to receive their medications. However, if this time frame is 
disrupted, beneficiaries may experience gaps in therapy.
    We are aware of a specific instance in which significant incentives 
(for example, zero cost sharing) caused increased demand for mail order 
prescriptions sufficient to disrupt the delivery time frame, and we are 
concerned about the adverse effect such incentives might have on 
beneficiaries. When issues with filling a prescription arise in a 
retail setting, the beneficiary often is notified of the problem in 
real time, or within hours of discovery. When issues arise in a mail 
order setting, the delays in finding, communicating, and making the 
appropriate contacts to resolve the problem may add days onto the 
ultimate delivery date, resulting in a potentially more significant 
concern for mail order beneficiaries if these delays result in gaps in 
therapy. For this reason, we believe it is necessary and appropriate to 
establish fulfillment requirements for mail order pharmacies as well as 
home delivery services offered by retail pharmacies, to set consistent 
expectations for beneficiary access to drugs in this growing segment. 
Many beneficiaries may be very well served by this type of pharmacy 
access, but only if they can rely upon efficient processing and 
turnaround times. Mail order pharmacies contracted by Part D sponsors 
can reasonably be expected to meet minimum performance standards for 
order fulfillment, including convenient order turnaround times, as a 
beneficiary protection and as a component of providing good customer 
service. Clearly stating in beneficiary materials the expected 
turnaround time for delivery allows the beneficiary to better control 
when they need to reorder to ensure no gaps in medication supply. 
Clarity in expected turnaround times also can prevent needing to 
address customer inquiries into the status of a pending order, setting 
parameters for when an order is or is not delayed and what options 
become available at that point. We believe that established companies 
that have been providing these services for years have generally been 
meeting these standards in practice already, and that the proposed 
turnaround times are in line with current practices followed by mail 
order pharmacies today. Establishing mail order fulfillment 
requirements as a contract term would require plan sponsors to require 
that all pharmacies in its network meet the same minimum

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level of service. This would underscore the importance of consistent 
and reliable access to medications, protecting beneficiaries from 
inconsistent or unreliable practices that may otherwise jeopardize 
timely access to prescriptions.
    Therefore, we are proposing to amend Sec.  423.120(a)(3) to specify 
mail order fulfillment requirements in line with what we have observed 
in other markets: 5 business days (from when the pharmacy receives the 
prescription order to when it is shipped) for those prescriptions 
requiring intervention beyond filling (such as clarifying illegible 
orders, resolving third party rejections, and coordinating with 
multiple providers as part of drug utilization management); and 3 
business days (from when the pharmacy receives the prescription order 
to when it is shipped) for those prescriptions not requiring 
intervention. We recognize that some prescription orders may require 
clarification or additional steps to be taken by the provider or 
beneficiary that will extend beyond the proposed period of 5 days. We 
believe that such cases represent a minority of mail order 
prescriptions, and as such we would anticipate that more than 99 
percent of all mail order prescriptions processed are filled in 
compliance with either the 3- or 5-day standard. We believe our 
proposed standards are in alignment with fulfillment requirements 
already in place in the market and as such do not create a new burden 
or new standard for mail order pharmacies to meet. We are soliciting 
comments not only on the proposed time frames, but also on whether 
there are instances (in addition to those discussed previously) in 
which the proposed 5-day time frame should apply.
    We additionally are soliciting comments on whether we should 
establish additional requirements for beneficiary materials relating to 
mail order services, such as: clear definitions of processing time and 
delivery time; how to access customer support; how to submit a 
complaint via 1 800 MEDICARE; and beneficiary options for accessing 
medications when a delivery is lost or delayed.
    We also welcome comments on any other requirements we should 
consider for mail order or other home delivery options. For example, 
also potentially affecting consistent access to medication is the use 
of mail order to fill initial prescriptions of new drugs or to fill 30-
day supplies of chronically used medications. The need to order a 
refill early, allowing sufficient time for processing and delivery, can 
result in refill too soon edits based upon retail 30 day standards. 
Resolving inappropriate or inapplicable edits increases burden on the 
beneficiary and the mail order pharmacy and essentially creates a 
disincentive for beneficiaries who are planning ahead and attempting to 
order early enough to ensure un-interrupted supplies of chronic 
medications. In general, we believe that filling initial prescriptions 
or routine 30-day supplies at mail order is not good practice. We 
recognize that there may be a small minority of beneficiaries who 
successfully depend solely upon mail order or other home delivery 
options for access to prescription drugs due to particular 
circumstances of geography or mobility. We have no reason to discourage 
their continued use of these services. However, due to the difficulties 
reported to CMS with consistently and effectively filling short time 
frame supplies through mail order, we do not believe that Medicare 
beneficiaries in general should be incentivized through lower cost 
sharing to utilize mail order pharmacies for initial prescriptions or 
30-day supplies.
9. Collections of Premiums and Cost Sharing (Sec.  423.294)
    Since the beginning of the Part D program, when asked whether Part 
D sponsors could waive premiums and cost sharing we have responded that 
reducing or waiving either of these amounts would be inconsistent with 
the approved bid. The bid requirements, specified in section 1860D-
11(e)(2)((C) of the Act, state the bid must reasonably and equitably 
reflect the revenue requirements of the expected population for the 
benefits provided under the plan. Waiving or reducing the cost sharing 
and/or premiums that are reflected in the approved bid would indicate 
that the plan bid was overstated and the amounts were not necessary for 
the provision of coverage. However, recently we have received reports 
of sponsors reducing or waiving cost-sharing and/or premiums. As a 
result, we propose to codify requirements for sponsor collection of 
cost sharing and premiums in regulation.
    In addition to violating the bid requirements, as we noted in the 
preamble of the October 22, 2009 proposed rule entitled, ``Medicare 
Program; Policy and Technical Changes to the Medicare Advantage and the 
Medicare Prescription Drug Benefit Programs'' (74 FR 54690), waiving 
cost sharing or premiums also violates the uniform benefit requirements 
because doing so results in the plan's not providing the same coverage 
to all eligible beneficiaries within its service area. Section 1860D-
2(a) of the Act defines qualified prescription drug coverage to mean 
access to standard or actuarially equivalent prescription drug coverage 
and access to negotiated prices (in accordance with section 1860D-2(d) 
of the Act). Thus, a Part D sponsor must offer its plan to all eligible 
beneficiaries residing in the plan's service area. We further interpret 
section 1860D-2(a) of the Act as requiring the provision of uniform 
premium and benefits and have codified these requirements in our 
regulations at Sec.  423.104(b).
    Once CMS has approved a sponsor's Part D benefit package, it cannot 
be varied for some or all of the plan's Part D enrollees. Thus, 
sponsors must commit to providing the level of benefits described in 
the sponsor's benefit package and cannot waive or reduce cost sharing, 
as that would violate the uniform benefit provisions set forth in Sec.  
423.104(b). This is true regardless of whether the Part D sponsor 
waives the copayment directly or indirectly through an affiliate, and 
regardless of whether such a waiver is prohibited by other laws. Some 
Part D sponsors are related to pharmacies through common ownership or 
control, and we note that an exception to the anti-kickback statute, 
set forth in section 1128B(b)(3)(G) of the Act, permits a pharmacy to 
waive cost sharing (that is, coinsurance and deductibles) imposed under 
Part D, if the conditions described in clauses (i) through (iii) of 
section 1128A(i)(6)(A) of the Act are met. These conditions include 
that the waiver is not advertised (through media outlets, telemarketing 
or otherwise) and is not routine, and the cost sharing is waived after 
a good faith determination that the individual is in financial need \1\ 
or reasonable efforts to collect the cost sharing have failed. This 
exception may protect from sanctions under the anti-kickback statute 
the waiver of cost sharing by pharmacies owned by Part D sponsors. 
However, as noted in the proposed rule, entitled ``Medicare Program; 
Policy and Technical Changes to the Medicare Advantage and the Medicare 
Prescription Drug Benefit Programs'' (74 FR 54690), sponsor failure to 
collect or attempt to collect cost sharing at the time the service is 
provided or to bill cost sharing to the appropriate party (either a 
beneficiary or another payer) after the fact, is a violation of the 
uniform benefit provisions set forth in the current regulation at Sec.  
423.104(b). The fact that cost sharing is waived by a pharmacy

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that is related to a Part D sponsor by common ownership, rather than 
the Part D sponsor itself, and that it may be protected from sanctions 
under the anti-kickback statute, does not relieve the Part D sponsor of 
responsibility for this violation of the uniform benefit provisions. If 
a pharmacy is unrelated to a Part D sponsor and waives cost sharing 
under the conditions previously described, the pharmacy is making an 
independent business decision to which the Part D sponsor is 
indifferent. However, if an affiliated pharmacy waives cost sharing for 
a beneficiary enrolled in the sponsor's Part D plan, the sponsor is not 
indifferent because the cost-sharing waiver is more likely to be a 
strategic decision by the sponsoring organization to move market share 
to the related-party pharmacy and increase profits to the sponsor. 
Thus, the sponsor is altering the level of cost sharing in the approved 
bid in violation of the uniform benefit provisions in Sec.  423.104(b). 
To clarify this for all parties, we propose to codify the prohibition 
of the waiver or reduction of premiums and cost sharing by adding a new 
section at Sec.  423.294. We propose to specify that Part D sponsors 
either directly, or indirectly through related party pharmacies, as 
defined in regulation at Sec.  423.501, are prohibited from reducing or 
waiving collection of premiums and cost sharing. In contrast, a 
pharmacy affiliated with one Part D sponsor may waive Part D cost 
sharing for beneficiaries enrolled Part D plans offered by other 
sponsors without violating the uniform benefit provisions.
---------------------------------------------------------------------------

    \1\ Under section 1128B(b)(3)(G) of the Act, an individual 
determination of financial need is not required for Part D 
beneficiaries eligible for the low-income subsidy under section 
1860D-14 of the Act.
---------------------------------------------------------------------------

    Additionally, we have become aware that the regulations in Part 423 
do not address Part D sponsor requirements for refunding incorrect 
collections of premiums and cost sharing or for retroactively 
collecting underpayments of cost sharing. Therefore, we also propose to 
codify requirements at Sec.  423.294 that mirror the language at Sec.  
422.270. We propose to apply the timeframe in Sec.  423.466(a) to these 
refunds and recoveries. In other words, whenever a sponsor receives 
information that necessitates a retroactive refund of incorrect 
collections of premiums and/or cost sharing or collection of 
underpayments of cost sharing, the sponsor would be required to issue 
refunds or recovery notices within 45 days. For incorrect collections, 
we propose to duplicate the language at Sec.  422.270 with one 
exception. That is, in the absence of authority to do so, we are not 
proposing to reduce Part D sponsor premiums for failure to refund 
amounts incorrectly collected from Part D enrollees. Instead, we 
propose that sponsors that fail to meet these requirements may receive 
compliance notices from CMS or, depending on the significance of the 
non-compliance, be the subject of an intermediate sanction (for 
example, suspension of marketing and enrollment activities) pursuant to 
Part 423, Subpart O.
10. Enrollment Eligibility for Individuals Not Lawfully Present in the 
United States (Sec.  417.2, Sec.  417.420, Sec.  417.422, Sec.  
417.460, Sec.  422.1, Sec.  422.50, Sec.  422.74, Sec.  423.1, Sec.  
423.30, and Sec.  423.44)
a. Basic Enrollment Requirements
    Sections 226 and 226A of the Act establish the conditions for 
Medicare Part A entitlement for individuals who have attained age 65, 
are disabled or have end-stage renal disease (ESRD), and are entitled 
to monthly Social Security benefits under section 202 of the Act. 
Individuals entitled to Part A under these sections do not have to pay 
premiums for such coverage, and they may, but are not required to, 
enroll in Medicare Part B. Section 1818 of the Act establishes the 
conditions for Medicare enrollment for individuals who are not entitled 
to monthly Social Security benefits under section 202 of the Act. 
Individuals covered under section 1818 of the Act must meet citizenship 
or alien status requirements, in addition to other requirements, in 
order to enroll in Part B. Individuals must have Part B in order to 
purchase Part A hospital insurance.
    Sections 1851(a)(3)(B), 1860D-1(a)(3)(A), and 1876(a)(1)(A) of the 
Act outline the eligibility requirements to enroll in MA (Part C), 
Medicare prescription drug coverage (Part D), and Medicare cost plans. 
Under all options, individuals must have active Medicare coverage. 
Specifically, to enroll in MA, an individual must be entitled to 
benefits under Part A and be enrolled in Part B; to enroll in Part D, 
an individual must be entitled to Part A and/or enrolled in Part B; to 
enroll in a Medicare cost plan, an individual must be enrolled in Part 
B (Part A entitlement is not required).
b. Medicare Eligibility and Lawful Presence
    Section 401 of the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996 (PRWORA), amended by section 5561 of the 
BBA, mandates that qualified aliens not lawfully present in the United 
States are not eligible to receive any federal benefit. This is 
outlined in 8 U.S.C. 1611 (Aliens who are not qualified aliens 
ineligible for federal public benefits) and 8 U.S.C. 1641 
(Definitions). The definition of qualified alien is codified in 8 CFR 
1.3 (Lawfully present aliens for purposes of applying for Social 
Security benefits).
    The aforementioned provisions affect eligibility to receive 
benefits that would otherwise be payable under provisions in the Act. 
For example, aliens meeting certain criteria are able to earn qualified 
credits towards Social Security retirement benefits as outlined in 8 
U.S.C. 1631 (Federal attribution of sponsor's income and resources to 
alien) and 8 U.S.C. 1645 (Qualifying quarters). Such individuals may 
earn the total number of qualified credits to be eligible under the Act 
to receive retirement benefits under sections 226 and 226A of the Act. 
However, should such individuals be unlawfully present in the United 
States under the previously mentioned PRWORA provisions, they are not 
eligible to receive the Social Security benefits they have earned for 
as long as they remain unlawfully present. At such time as they are 
lawfully present in the United States, or live outside the United 
States, they would again become eligible to receive Social Security 
payments.
    Similarly, when aliens become eligible for Medicare based on age or 
disability under the terms of the Act, they would also automatically be 
entitled to premium free Part A benefits and be eligible to enroll in 
Part B during a valid enrollment period. Furthermore, aliens receiving 
Social Security retirement benefits 4 months prior to turning 65, or 
are in their 21st month of receiving Social Security disability 
benefits, would, under the terms of the Act, also automatically be 
enrolled into both Part A and Part B consistent with section 1837 of 
the Act and the enrollment process outlined in Sec.  407.17. Again, 
however, under PRWORA, these individuals are not eligible to receive 
payment of Medicare benefits for so long as they are unlawfully present 
in the United States. Only upon becoming lawfully present would they 
become eligible to receive the Medicare benefits to which they would 
otherwise be entitled by paying into Social Security for the requisite 
number of quarters or paying premiums.
    We note that current regulations at Sec.  406.28 and Sec.  407.27 
outline the reasons for loss of premium Part A and Part B enrollment, 
and do not include the absence of lawful presence or citizenship as a 
reason for loss of entitlement. Individuals who are entitled to Part A 
and enrolled in Part B based on eligibility of Social Security benefits 
currently may be enrolled in

[[Page 1932]]

Medicare even if they are not lawfully present in the United States.
    When PRWORA was enacted, the Act was not amended to include the 
additional eligibility criteria for entitlement to either Social 
Security benefits or for Medicare Part A entitlement, nor were new 
provisions put into place regarding termination of entitlement or 
establishment of a special enrollment period to account for situations 
in which individuals reestablished lawful presence. As a result, 
individuals who meet the current statutory eligibility criteria have 
been reflected in CMS records as entitled to both Social Security 
benefits and Medicare coverage.
c. Alignment of MA, Part D, and Cost Plan Eligibility With Fee-For-
Service (FFS) Payment Exclusion Policy
    In order to implement 8 U.S.C. 1611 and ensure that individuals who 
are present in the United States unlawfully do not receive benefits, 
the Social Security Administration (SSA) established internal policies 
and procedures to suspend Social Security benefits during periods for 
which individuals are unlawfully present in the United States. Because 
Medicare entitlement flows from entitlement to Social Security 
retirement and disability benefits, Medicare also has implemented this 
provision through a payment exclusion process.
    Under Medicare's payment exclusion process, data on lawful presence 
is transmitted to CMS from the Department of Homeland Security via 
regular data exchanges from SSA. Once the data is received by us, the 
lawful presence status is noted on an individual's record and is 
retained in the FFS claims processing systems. As a result, we deny 
payment of both Part A and Part B claims for non-citizens where lawful 
presence is not established on their record, and do so until 
individuals regain their lawful presence status. Although payment is 
being denied for claims, individuals who are ``fully insured'' per 
section 226 of the Act, maintain Part A entitlement and remain enrolled 
in Part B on CMS records as long as premiums are paid. Similarly, 
individuals who are enrolled in premium Part A and/or Part B, maintain 
their enrollment status as long as premiums are paid.
    Although CMS implementation of the lawful presence criteria in the 
FFS program achieved the intent of PRWORA by preventing FFS payments 
for services rendered to individuals who are not lawfully present, this 
policy was not adopted in regulations for Part A and Part B eligibility 
in 42 CFR parts 406 and 407 or addressed in regulations or 
subregulatory guidance for MA, Part D, and Medicare cost plans. Thus, 
individuals who are not lawfully present, but are nevertheless shown on 
CMS records to be entitled to Medicare Part A and/or enrolled in Part 
B, have been able to enroll in MA, Part D, and Medicare cost plans and 
obtain Medicare coverage for which they should not be eligible under 8 
U.S.C. 1611. By permitting these MA, Part D and cost plan enrollments 
to remain in place, we are allowing improper payments to be made to 
plans on behalf of these individuals, which in turn impacts the 
Medicare Trust Funds. In addition, MA organizations, PDP sponsors and 
cost plans are making benefit payments under the Medicare program on 
behalf of these enrollees that are similarly prohibited under PRWORA.
    Therefore, we are proposing to align eligibility for enrollment in 
MA, Part D, and cost plans (and resulting Medicare payments to plans 
and by plans that violate PRWORA) with the FFS payment exclusion policy 
to ensure that Medicare is only paying for services rendered to 
individuals who are eligible to receive them. These steps are 
consistent with recommendations made by the Office of Inspector General 
in its January 2013 report (A-07-12-01116) regarding the need for CMS 
to maintain adequate controls to prevent and detect improper payments 
for Medicare services rendered to unlawfully present beneficiaries. 
Accordingly, we are proposing to revise the regulations to establish 
U.S. citizenship and lawful presence as eligibility requirements for 
enrollment in MA, Part D, and cost plans. Further, we propose that 
individuals who are not lawfully present in the United States would be 
involuntarily disenrolled from MA, Part D, and cost plans, based on the 
date on which they lose their lawful presence status. Disenrollments 
would be effective the first of the month following the loss of 
eligibility, and the disenrollment process would follow that currently 
set forth in the regulations when an individual is no longer eligible 
to be enrolled in a plan.
    These regulatory changes would prevent an individual from enrolling 
in a plan and/or remaining enrolled in a plan if they are not lawfully 
present in the United States. Affected individuals will retain their 
Medicare entitlement and remain enrolled in FFS, as long as premiums 
continue to be paid, but MA, Part D and cost plan payments would be 
denied for time periods during which the individuals are not lawfully 
present in the United States. We must ensure that in administering the 
Medicare program, all programs are compliant with 8 U.S.C. 161l. 
Specifically, we are proposing the following to address the eligibility 
and disenrollment of individuals not lawfully present in the United 
States:
     Sections 417.420, 417.422, 422.50, and 423.30 would be 
amended to add lawful presence or United States citizenship as 
eligibility criteria for enrollment in a cost, MA, or Part D plan, 
respectively.
     Sections 417.460, 422.74, and 423.44 would be amended to 
require the involuntarily disenrollment of individuals from cost, MA or 
Part D plans when they lose lawful presence status.
    Conforming changes would be made to Sec.  417.2, Sec.  422.1, and 
Sec.  423.1 to outline the authority for the aforementioned 
requirements, in 8 U.S.C. 1611 (Aliens who are not qualified aliens 
ineligible for Federal public benefits).
11. Part D Notice of Changes (Sec.  423.128(g))
    Section 1860D 4(a) of the Act requires Part D sponsors to disclose 
to beneficiaries information about their Part D drug plans in 
standardized form. The Act further directs Part D sponsors to include, 
as appropriate, information that MA organizations must disclose under 
section 1852(c)(1) of the Act, which includes a detailed description of 
benefits. (In guidance, we refer to the document containing this 
information and delivered to beneficiaries as the Evidence of Coverage 
(EOC).) To make informed decisions, enrollees need to understand how 
their benefits, including premiums and cost sharing, would change from 
one year to the next, should they reenroll in the same plan. (In 
guidance, we refer to the documents containing this information and 
delivered to beneficiaries as the Annual Notice of Change (ANOC).) And 
enrollees also need to be aware of changes that may take place during 
the course of the year as well. Part D regulations currently do not 
include language found in the Part C regulations at Sec.  422.111(d) 
requiring notice of changes to the plan to be provided to CMS for 
review pursuant to procedures for marketing material review and to all 
enrollees at least 15 days prior to the annual coordinated election 
period. Given that guidance applicable to both programs discusses 
notice of changes, we propose to require, for Part D, delivery of an 
ANOC.
    Specifically, we propose to adopt in Part D, with modifications, 
the language contained in Sec.  422.111(d). As is the case with the 
Medicare Advantage

[[Page 1933]]

regulation, proposed Sec.  423.128(g) would require that Part D 
sponsors submit their changes to us under the procedures contained in 
subpart V of part 423, and, for those changes taking effect on January 
1, provide a notice of changes to all enrollees 15 days before the 
beginning of the annual election period. While part 422 requires a 
minimum of 30 days' notice before the effective date for all other 
changes, proposed Sec.  423.128 would not impose that standard, but 
rather would state that Part D sponsors remain subject to all other 
notice requirements specified elsewhere in the Part D regulations. Our 
proposal reflects a programmatic difference between Parts C and D: 
Under Part D it is not unusual for access to drugs listed on a plan's 
formulary to change during the course of a year. Changes can include 
changes to formulary status, tier placement, and utilization management 
or other restrictions. It is vital that beneficiaries currently taking 
a drug receive timely notice before such changes take place in order 
that they can decide whether to, for instance, change drugs or request 
an exception to cover the drug. Accordingly, our regulations currently 
specify when sponsors must provide notice of these kinds of changes. 
Our proposal to require the delivery of an ANOC is not intended to 
disrupt or change those existing notice requirements.
    We would also like to take this opportunity to comment on the 
particular importance for Part D sponsors to provide notice in the ANOC 
of any changes they are making that will affect the amount of cost 
sharing which enrollees must pay for each drug belonging to a specific 
tier. As has been articulated in guidance, we continue to expect that 
sponsors will provide notice of such changes to all enrollees, 
including enrollees moved to a consolidated plan. Generally, sponsors 
compare numbers for the same plan from one year to the next in the 
ANOC. However, comparing numbers for the same plan would not benefit 
individuals moved from one plan to another. For instance, when a 
sponsor crosswalks members from a non-renewing plan to a consolidated 
renewal plan from one year to the next, cost sharing may change at the 
drug-tier level. For example, an enrollee who previously had zero cost 
sharing for all covered Part D drugs within the preferred generic tier 
may find that the consolidated plan now requires copays for drugs in 
that tier depending on how many months' supplies he or she orders, and 
whether he or she obtains those drugs at a retail level pharmacy or 
through mail order. We continue to expect that enrollees will receive 
ANOCs that clearly compare the non-renewed and consolidated plans' 
copayments or coinsurance for all drugs within each tier.
12. Separating the Evidence of Coverage (EOC) From the Annual Notice of 
Change (ANOC) (Sec.  422.111(a)(3) and Sec.  423.128(a)(3))
    As provided in sections 1852(c)(1) and 1860D-4(a) of the Act, MA 
organizations and Part D sponsors must disclose detailed information 
about the plans they offer to their enrollees. This detailed 
information is specified in section 1852(c)(1) of the Act and Sec.  
422.111(b) and Sec.  423.128(b) of the Part C and Part D program 
regulations, respectively.
    Under Sec.  422.111(a)(3), we require MA plans to disclose a 
detailed plan description to each enrollee ``at the time of enrollment 
and at least annually thereafter, 15 days before the annual coordinated 
election period.'' A similar rule for Part D sponsors is found at Sec.  
423.128(a)(3). The content of the annual plan description is provided 
in paragraph (b) of the respective regulations. This is commonly 
referred to as the EOC. In addition, under Sec.  422.111(d), we require 
MA organizations to notify all enrollees ``at least 15 days before the 
beginning of the Annual Coordinated Election Period'' of any changes 
that will take effect on January 1 of the next plan year. This 
notification is commonly referred to as the ANOC. Although our Part D 
guidance calls for Part D sponsors to provide an ANOC, there currently 
is not a regulatory requirement that they do so. Therefore, in the 
previous section of this proposed rule, we have proposed to codify such 
a requirement.
    Prior to the 2009 contract year, these regulations required the 
provision of the EOC at the time of enrollment and at least annually 
thereafter but did not specify a deadline for the annual provision of 
the EOC. We permitted MA organizations and Part D sponsors to provide 
the EOC as late as January 31 of the applicable contract year. 
Therefore, prior to the annual coordinated election period (AEP) for 
the 2009 contract year, MA organizations and Part D sponsors may have 
provided the EOC and ANOC at different times. In the final rule 
entitled, ``Medicare Program, Medicare Advantage and Prescription Drug 
Programs; Final Marketing Provisions'' (73 FR 54220 and 54222), we 
required MA organizations to send the EOC at the same time as the ANOC 
(that is, 15 days before the AEP), with the result that the EOC was 
sent about 4 months earlier. Our rationale for this requirement was to 
provide beneficiaries with comprehensive information prior to the AEP. 
In addition, the consolidated mailing reduced the number of mailings to 
enrollees and eliminated duplicative information. However, we have 
found through consumer testing that beneficiaries receive multiple 
documents from their plans and CMS during the AEP that address similar 
topics, which at times beneficiaries find confusing or overwhelming. 
The ANOC, which is much shorter than the EOC, is intended to convey all 
of the information essential to a beneficiary's decision to remain 
enrolled in the plan or choose another plan during the AEP. Research 
based on the consumer testing suggests that participants were more 
likely to review the ANOC if it was not included with the EOC. For 
example, when asked about the utility of each document, many 
participants stated that they would read the ANOC as soon as they 
received it, and use it more often than a combined ANOC/EOC because the 
combined document is too much to worry about, too wordy, and/or too 
difficult to find information in compared to just the ANOC.
    We have also found that sending the EOC months earlier has led to 
some unintended consequences. Specifically, the earlier deadline 
shortens the production time and affects the MA organization's or Part 
D sponsor's ability to produce an EOC that provides accurate benefit 
information in accordance with CMS required timeframes, which results 
in plans sending and beneficiaries receiving additional mailings 
containing errata sheets. We have reviewed plan ANOC/EOC documents for 
errors and found that, of the total number errors found, EOCs contain 
significantly more errors (86 percent) than the ANOCs (14 percent), 
which leads us to believe that allowing plans to have additional time 
to prepare EOCs would allow them to produce EOCs with fewer errors. 
Additionally, resources are wasted when beneficiaries are sent a 
combined ANOC and EOC, but ultimately decide to enroll in a different 
plan, and have no need for the EOC.
    In order to help current members make timely and informed decisions 
about plan choices for the next year while ensuring that they continue 
to receive all the post-enrollment information necessary in a timely 
manner, we believe it would be more effective for them to receive an 
ANOC before the AEP, and then receive the EOC from the plan he or she 
chooses for

[[Page 1934]]

the next year after enrollment is effective. Therefore, we propose to 
require MA organizations and Part D sponsors to ensure that their 
current members receive the ANOC 15 days prior to the AEP, and receive 
the EOC no later than December 31st, for the contract year taking 
effect the following January 1st. To accomplish this, we propose to 
amend Sec.  422.111(a)(3) and Sec.  423.128(c)(3) to remove the current 
deadline and insert ``by December 31 for the following contract year.'' 
The deadline established by Sec.  422.111(d)(2) for provision of the 
ANOC would continue to be 15 days prior to the beginning of the AEP. In 
addition, as mentioned previously, we are proposing to amend Sec.  
423.128 to require Part D sponsors to provide a separate ANOC and to 
adjust the time frames for delivery accordingly.
13. Agent/Broker Compensation Requirements (Sec.  422.2274 and Sec.  
423.2274)
    Section 103(b)(1)(B) of MIPPA revised the Act to charge the 
Secretary with establishing guidelines to ''ensure that the use of 
compensation creates incentives for agents and brokers to enroll 
individuals in the MA plan that is intended to best meet their health 
care needs.'' Section 103(b)(2) of MIPPA revised the Act to apply these 
same guidelines to Part D sponsors. Our program experience indicates 
that some agents may encourage beneficiaries to enroll in plans that 
offer higher commissions without regard to whether plan benefits meet 
the beneficiaries' health needs. In recognition that agents and brokers 
play a significant role in providing guidance and advice to 
beneficiaries and are in a unique position to influence beneficiary 
choice, we had proposed, prior to the enactment of MIPPA, a rule to 
regulate agent and broker compensation. To implement the MIPAA 
provisions and relying in part on comments in response to our 
previously proposed rule, we adopted an interim final rule on September 
18, 2008, entitled ``Medicare Program; Medicare Advantage and 
Prescription Drug Benefit Programs: Final Marketing Provisions'' (73 FR 
54208, at 54226), which, among other things, established the current 
compensation structure for agents and brokers in connection with Parts 
C and D. That rule remains significantly in place at Sec.  422.2274 and 
Sec.  423.2274, and our experience since then indicates that revision 
of the compensation requirements is appropriate to ensure that we 
continue to meet our statutory mandate.
    The current compensation structure is comprised of a 6-year 
compensation cycle that began in contract year 2009. MA organizations 
and Part D sponsors were to provide an initial compensation payment to 
independent agents for new enrollees (year 1) and pay a renewal rate 
(equal to 50 percent of the initial year compensation) to independent 
agents for years 2 through 6. These rates were to be adjusted annually 
based on changes to the MA payment rates or Part D parameters as 
established by CMS. We later amended the regulations to allow MA 
organizations and Part D sponsors to compensate independent agents and 
brokers annually using an amount at or below the fair market value. 
(See the final rule with comment period entitled, ``Medicare Program; 
Changes to the Medicare Advantage and the Medicare Prescription Drug 
Benefit Programs for Contract Year 2013 and Other Changes'' (77 FR 
22072) published in the April 12, 2012 Federal Register.)
    The 6-year cycle is scheduled to end at the end of CY 2013, on 
December 31, 2013. The first year, 2009, was considered to be the first 
renewal year, effectively making 2009 the second full year of 
compensation. Because our regulations were silent regarding 
compensation amounts for Year 7 and beyond, we stated in our Final Call 
Letter for Contract Year 2014, issued on April 1, 2013, that MA 
organizations and Part D sponsors could, at their discretion, pay 
agents and brokers the renewal amount for Year 7 and beyond. However, 
this subregulatory guidance was intended to be a temporary measure, 
pending changes to our regulations.
    Under the current structure MA organizations and Part D sponsors 
pay an initial rate for the first year, and then a renewal payment of 
50 percent of the initial compensation paid to the agent for years 2 
through 6. This structure has proven to be complicated to implement and 
monitor as it requires the MA organization or Part D sponsor to track 
the compensation paid for every enrollee's initial enrollment, and 
calculate the renewal rate based on that initial payment. For example, 
assume that the same agent enrolls three beneficiaries; one in each of 
the 2012, 2013, and 2014 contract years. Beneficiary A is a new, 
initial enrollee in MA plan XYZ for CY2012. Assume that the fair market 
value (FMV) cut-off amount for agent services for CY 2012 is $400. Plan 
XYZ has decided that its initial compensation will be equal to the full 
FMV, resulting in a payment to the agent of $400. Beneficiary B is a 
new, initial enrollee in MA plan XYZ for CY2013. In CY2013, assume the 
FMV has increased to $420. Plan XYZ has again decided that its initial 
compensation will be equal to the full FMV for Beneficiary B, resulting 
in a payment to the agent of $420. Also in CY2013, Plan XYZ is required 
to pay a renewal amount of 50 percent of initial enrollment to the 
agent for Beneficiary A. Since the initial payment for Beneficiary A 
was $400, Plan XYZ will pay a renewal amount of $200. Beneficiary C is 
a new, initial enrollee in MA plan XYZ for CY2014. In CY2014, assume 
the FMV value has again increased to $430. The Plan's initial 
compensation is, again, equal to the full FMV. Plan XYZ's payments to 
the agent would be as follows: $430 for Beneficiary C (new, initial), 
$210 for Beneficiary B (renewal, 50 percent of the initial payment of 
the CY2013 FMV of $420), and $200 for Beneficiary A (50 percent of the 
initial payment of the CY2012 FMV of $400). Thus, Plan XYZ has to know, 
at any given time, the amount of the initial compensation for each plan 
year--going back as far as 2009--in which the member enrolled in order 
to pay the correct compensation amount to the agent. Moreover, MA 
organizations and Part D sponsors must first review CMS' reports to 
determine whether an initial or renewal payment should be made, and 
then combine that information with the FMV, or, if applicable, the 
plan's compensation set at less than the FMV, for each plan year to 
ensure the correct payments are made to agents. When these simple 
examples are multiplied by tens or thousands of members, the complexity 
and challenges associated with implementing the current compensation 
requirements becomes clear.
    In addition to its complexity, we are concerned that the current 
structure creates an incentive for agents and brokers to move enrollees 
from a plan of one parent organization to a plan of another parent 
organization, even for like plan type changes. Currently, in these 
cases, the new parent organization would pay the agent 50 percent of 
the current initial rate of the new parent organization; not 50 percent 
of the original initial rate paid by the other parent organization. 
Thus, in cases where the FMV has increased, or the other parent 
organization pays a higher commission, the incentive exists for the 
agent to move beneficiaries from one parent organization to another. 
(See Sec.  422.2274(a)(3) and Sec.  423.2274(a)(3)). So, in the example 
provided previously, if Beneficiary A switched to Plan ABC for CY2014, 
Plan ABC would pay the same agent $215 (50 percent of the 2014 initial 
rate of $430), instead of the $200 renewal payment the agent would have 
received if Beneficiary A remained in

[[Page 1935]]

Plan XYZ. Although the mere $15 increase in the payment to the agent 
may not appear to be much of an incentive to move one enrollee, an 
agent would receive considerably more income by moving tens of 
enrollees to another plan.
    Since 2008, we have received inquiries from MA organizations and 
Part D sponsors regarding the correct calculation of agent/broker 
compensation, and found it necessary to take compliance actions against 
MA organizations and Part D sponsors for failure to comply with the 
compensation requirements. To the extent that there is confusion about 
the exact levels or timing of compensation required, there could be an 
un-level playing field for MA organizations and Part D sponsors 
operating in the same geographic area. In addition, CMS' audit findings 
and monitoring efforts have shown that MA organizations and Part D 
sponsors are having difficulty correctly administering the compensation 
requirements. Therefore, we believe that simpler agent/broker 
compensation regulations that are easier to understand will better 
ensure that plan payments are correct and establish a level playing 
field that will further limit incentives for agents and brokers to move 
enrollees for financial gain.
    We are proposing to revise the existing compensation structure for 
agents and brokers so that, for new enrollments, MA organizations and 
Part D sponsors could make an initial payment that is no greater than 
the FMV amount for renewals in Year 2 and beyond, the MA organization 
or Part D sponsor could pay up to 35 percent of the FMV amount for the 
renewal year, resulting in the renewal year payment changing each year 
if the MA organization or Part D sponsor chooses to pay 35 percent of 
the current FMV (that is, the renewal year FMV threshold). As we do 
now, we would interpret the FMV threshold in our annual guidance to MA 
organizations and Part D sponsors. This flexibility would enable MA 
organizations and Part D sponsors to better react to changes in the 
marketplace and adjust their compensation structures accordingly.
    Under the proposed compensation structure, the calculations would 
be simpler than those required under the current rule, as shown in the 
following example:
    Assume again that Beneficiary A is a new, initial enrollee in MA 
plan XYZ for CY2015. Assume the FMV for CY 2015 is $400. Plan XYZ has 
decided to pay the full FMV, resulting in a payment to the agent of 
$400. In CY2016, assume the FMV is $420. Again, Plan XYZ has decided to 
pay the maximum FMV for initial enrollments, so it pays the agent $420 
for Beneficiary B, who is an initial enrollee. Plan XYZ has also 
decided to pay the maximum renewal payment (35 percent of the FMV), 
resulting in a payment of $147 ($420 x .35) to the agent for 
Beneficiary A. Thus, Plan XYZ's payments to its agents are based on the 
FMV for the contract year in question, regardless of when the 
beneficiary enrolled in the plan. That is, when making the renewal 
payment, Plan XYZ doesn't have to determine what the FMV was in the 
initial year, but only looks to the FMV for the current year and pays 
the chosen percentage up to the maximum 35 percent of the FMV 
established by CMS.
    In order to implement these changes in the identical Part C and 
Part D regulations at, Sec.  422.2274 and Sec.  423.2274, we first 
propose to designate the definition of ``compensation'' as paragraph 
(a)(1) and to restate the fair market value limit on compensation for 
the initial year as paragraph (b)(1)(i). Second, we propose to combine 
the current (a)(1)(i)(B), which addresses payments for renewals, and 
(a)(1)(iii), which addresses the length of time that renewals should be 
paid, and designate the revisions as a new (b)(1)(ii). Thus, the new 
paragraph (b)(1)(ii) would state that plans may pay up to 35 percent of 
the current FMV and that renewal payments may be made for the second 
year of enrollment and beyond.
    In addition, we propose to modify paragraph (a)(3) to remove the 6-
year cap on the compensation cycle. Currently, paragraph (a)(3) refers 
to policies that are replaced with a like plan during the first year or 
the subsequent 5 renewal years. Since we are proposing to eliminate the 
6-year cycle, our revised paragraph (b)(2) deletes the reference to the 
initial year and the 5 renewal years. By tying renewal compensation to 
the FMV for the renewal year, rather than the initial year of 
enrollment, our proposal reduces the financial incentives for an agent 
or broker to encourage Medicare beneficiaries to change plans, 
especially from one parent organization to another parent organization. 
As with the current regulation, we propose in paragraph (b)(2)(iii) 
that a change in enrollment to a new plan type be payable under the 
same rules that apply to an initial enrollment, regardless of whether 
the change is to an unlike plan type in the same parent organization or 
an unlike plan type in another parent organization. Note that, as with 
the current rule, our proposal only addresses compensation paid to 
independent agents and does not address compensation payable by an MA 
organization or Part D sponsor to its employees that perform services 
similar to agents and brokers.
    For our proposed regulations, we considered several different 
alternatives, including prohibiting compensation payments entirely 
beyond year 6, permitting MA organizations and Part D sponsors to pay a 
residual payment for year 7 and subsequent years, and permitting 
existing renewal payments to continue. We also evaluated different 
renewal amounts, including a 50 percent renewal payment for years 2 
through 6 with a continuing 25 percent residual payment for years 7 and 
beyond. The evaluation took into account different ages for an initial 
enrollment, as well as the life expectancy of beneficiaries. In the 
analysis, a continual renewal payment of 35 percent was similar in 
payout to the combination of a 50 percent payment for years 2 through 6 
and a residual payment of 25 percent for year 7 and beyond. We believe 
that revising the existing compensation structure to allow MA 
organizations or Part D sponsors to pay up to 35 percent of the FMV for 
year 2 and beyond is appropriate based on a couple of factors. First, 
we believe that a two-tiered payment system (that is, initial and 
renewal) would be significantly less complicated than a three-tiered 
system (that is, initial, 50 percent renewal for years 2 through 6, and 
25 percent residual for years 7 and beyond), and would reduce 
administrative burden and confusion for plan sponsors. Second, our 
analysis determined that 35 percent is the renewal compensation level 
at which the present value of overall payments under a two-tiered 
system would be relatively equal to the present value of overall 
payments under a three-tiered system (taking into account the estimated 
mortality rates for several beneficiary age cohorts). This analysis is 
based on the existing commission structure basing renewal commissions 
on the starting year initial commission amount and not the current year 
FMV amount. We welcome comments on both the amount of the renewal 
payment as well as the proposed indefinite time frame.
    Current regulations at Sec.  422.2274(a)(4) and Sec.  
423.2274(a)(4) address the timing of plan payments, as well as recovery 
of payments when a beneficiary disenrolls from a plan. Specifically, 
(a)(4) states that compensation may only be paid for the beneficiary's 
months of enrollment during the year (January through December). We 
propose to revise (a)(4) to define more clearly a plan year for

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purposes of compensation. The annual compensation amount covers January 
1 through December 31 of each year. We have learned that some plans 
have been paying compensation based on an annual cycle, rather than a 
calendar year cycle. We have taken appropriate compliance actions in 
those instances where we have evidence that an MA organization or Part 
D sponsor is paying compensation incorrectly, and issued sub-regulatory 
guidance on August 14, 2013 reminding organizations and sponsors that 
compensation is to be paid based on a calendar year cycle. Along the 
same lines, we propose to revise the language at Sec.  422.2274(a)(4) 
to clarify that the payment made to an agent must be for January 1 
through December 31 of the year and may not cross calendar years. For 
example, a renewal payment cannot be made for the period of November 1, 
2013 through October 31, 2014. Rather, the renewal payment must cover 
January 1, 2013through December 31, 2013.
    Currently, the regulation text at Sec.  422.2274(a)(4) (i) permit 
payments to be made at one time or in installments and at any time. CMS 
proposes to change the timing of payments to require that payments may 
not be made until January 1 of the compensation year, and must be paid 
in full by December 31 of the compensation year. CMS believes this 
proposal is appropriate given the ability of beneficiaries to change 
plans during the annual coordinated election period (AEP), which runs 
from October 15 through December 7. That is, beneficiaries can choose a 
new plan during the AEP, and then revise that choice as many times as 
they desire during the AEP; the last enrollment choice made is the one 
that becomes effective on January 1 of the following year. Under CMS' 
current requirements, each MA organization or Part D sponsor would have 
to recoup compensation, if already paid, for every beneficiary that 
initially enrolled in their plan but later decided to enroll in a 
different parent organization prior to January 1. Under the proposed 
rule, MA organizations and Part D sponsors would not be allowed to pay 
compensation until the beginning of the calendar year, when the final 
AEP enrollment becomes effective. Thus, the proposed rule would 
simplify MA organizations' and sponsors' compensation processes and 
enable them to make more accurate payments. We welcome comments on this 
proposal.
    Current regulations at Sec.  422.2274(4)(ii)(A) and Sec.  
423.2274(4)(ii)(A) require MA organizations and Part D sponsors to 
recover compensation paid to agents when a beneficiary disenrolls from 
a plan within the first three months of enrollment. However, in sub-
regulatory guidance, we have recognized several circumstances (for 
example, death of the beneficiary, the beneficiary moves out of the 
service area, the beneficiary becomes eligible to receive LIS, or the 
beneficiary loses Medicaid benefits) in which plans should not recover 
compensation even though the beneficiary was enrolled in the plan for 
less than 3 months. In circumstances such as these, since the 
disenrollment decision could not be based on agent or broker behavior, 
we believe it to be appropriate for the agent to receive the 
compensation associated with the months that beneficiary was a member 
of the plan. While the plan would not recover the compensation for 
those months, it would recover any compensation paid for the months 
after the disenrollment. Therefore, CMS is proposing to combine 
paragraphs (a)(4)(ii)(A) and (a)(4)(ii)(B) into a revised paragraph 
(b)(3)(iii),which would include new text to clarify that plans should 
recover compensation for only the months that the beneficiary is not 
enrolled, unless the disenrollment took place within the first 3 
months. Under our proposal, we would require disenrollments that are 
the result of agent or broker behavior to trigger recoupment of any 
compensation that has been paid for that period. In cases where 
disenrollment took place within the first 3 months and the 
disenrollment did not result from or could not have resulted from an 
agent's behavior, we would not require that compensation be recovered 
under our proposal. We would provide more specific information in sub-
regulatory guidance, and welcome comments regarding possible examples 
to include in that guidance.
    CMS also proposes here, in Sec.  422.2274(h) and Sec.  423.2274(h) 
to codify existing sub-regulatory guidance regarding referral 
(finder's) fees. CMS released a memorandum on October 19, 2011 
addressing excessive referral fees, noting that referral fees should 
not exceed $100. CMS has long been concerned that some MA organizations 
or Part D sponsors can offer the entire amount of compensation an agent 
or broker receives through only a referral, while others must combine 
any compensation for referrals with other agent marketing activities 
while meeting the same total cap on compensation, thereby creating an 
un-level playing field within the marketplace and a clear financial 
incentive for the referring agent to steer beneficiaries to MA 
organizations or Part D sponsors that offer the higher amount, without 
regard to whether plan benefits meet the beneficiaries' health care 
needs. Therefore, we are proposing to limit the amount that can be paid 
as a referral fee to independent, captive, and employed agents and 
brokers, regardless of who completes the enrollment, to a reasonable 
amount specified by CMS, which is currently, for CY 2013, and CY 2014, 
$100. Furthermore, note that, under Sec.  422.2274(a) and Sec.  
423.2274(a), CMS requires that referral fees paid to independent agents 
and brokers must be part of total compensation not to exceed the FMV 
for that calendar year.
14. Drug Categories or Classes of Clinical Concern and Exceptions 
(Sec.  423.120(b)(2)(v) and (vi))
    Section 3307 of the Affordable Care Act amended section 1860D-
4(b)(3)(G) of the Act by replacing the specific criteria established 
under MIPPA in 2008 to identify categories or classes of Part D drugs 
for which all Part D drugs therein shall be included on Part D sponsor 
formularies. The specified criteria were replaced with the requirement 
that the Secretary establish criteria through notice and comment 
rulemaking to identify drug categories or classes of clinical concern. 
In addition, section 3307 of the Affordable Care Act requires the 
Secretary to engage in rulemaking to establish any exceptions that 
permit a Part D sponsor to exclude from its formulary a particular Part 
D drug (or otherwise limit access to such drug through utilization 
management or prior authorization restrictions) within the drug 
categories or classes that meet the criteria established by the 
Secretary. The Affordable Care Act amendments to section 1860D-
4(b)(3)(G) of the Act specified that until such time as the Secretary 
establishes the criteria to identify drug categories or classes of 
clinical concern through rulemaking, the following categories or 
classes shall be identified as categories or classes of clinical 
concern: anticonvulsants, antidepressants, antineoplastics, 
antipsychotics, antiretrovirals, and immunosuppressants for the 
treatment of transplant rejection. We now propose to implement the 
Affordable Care Act requirements set forth in section 1860D-4(b)(3)(G) 
of the Act by revising Sec.  423.120(b)(2)(v) and (vi) as follows: (1) 
the criteria the Secretary will use to identify drug categories or 
classes of clinical concern; and (2) the exceptions that permit Part D 
sponsors to exclude certain Part D drugs from within an identified drug 
category or class from

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their formularies (or otherwise limit access to such drugs, including 
through utilization management or prior authorization restrictions). We 
also propose to specify drug categories or classes that would meet the 
proposed criteria and explain the process we used for making these 
determinations.
a. Categories or Classes of Clinical Concern
    In 2005, well before the passage of MIPPA, and before the start 
date of the Part D program, we directed Part D sponsors through 
guidance to include on their formularies all or substantially all drugs 
in six categories or classes (antidepressants; antipsychotics; 
anticonvulsants; immunosuppressants for transplant rejection; 
antiretrovirals; and antineoplastics). Our authority for this policy 
arises from section 1860D-11(e)(2)(D)(i) of the Act, which requires 
that in order to approve a plan, we must not find that the design of 
the plan and its benefits (including any formulary and tiered formulary 
structure) are likely to substantially discourage enrollment by certain 
Part D eligible individuals. We refer to this as our ``non-
discrimination'' policy. This statutory directive helped to ensure a 
smooth transition of the approximately 6 million Medicare-Medicaid 
beneficiaries who were converting from Medicaid drug coverage to 
Medicare drug coverage at the start of the Part D program. Under the 
existing circumstances, any formularies that did not have all or 
substantially all drugs in these categories or classes potentially 
would have been discriminatory for the Medicare-Medicaid beneficiary 
population because state Medicaid program formularies were generally 
open compared to the Part D formularies that we were anticipating prior 
to the beginning of the Part D program. Thus, it stood to reason that 
Medicare-Medicaid beneficiaries and many of their providers were 
largely unaccustomed to drug utilization management techniques. That 
is, for the most part they had little experience dealing with the 
rejection of a drug claim at the point of sale because the drug was 
either not on formulary, or another drug needed to be tried first, or 
because more information was required to determine whether the drug 
could be covered under the plan. Moreover, since the majority of the 
Medicare-Medicaid beneficiaries did not make a decision to elect their 
new plan, but were instead auto-enrolled, these individuals may not 
have understood whether their current medications would continue to be 
covered under their new Medicare plan. Since the Part D program would 
be administered by private plans with extensive experience managing 
prescription drug costs through tighter formularies and a variety of 
utilization management techniques, we anticipated the need for a 
learning curve and delays in negotiating appeals processes that might 
endanger the beneficiaries who needed access to drugs in these 
particular categories or classes. In order to mitigate the risks and 
complications associated with an interruption of therapy for vulnerable 
beneficiaries, who would be trying to navigate a new drug benefit when 
they attempted to fill or refill their first prescriptions under the 
Part D program on or after January 1, 2006, we created the special 
requirements for coverage of the six drug classes. However, the 
circumstances that existed when this policy was originally implemented 
have changed dramatically in the more than seven years the program has 
been in operation. CMS, Part D sponsors, our partners who assist 
beneficiaries with making enrollment choices, and particularly our 
Medicare-Medicaid beneficiaries and their advocates have had a great 
deal of experience working with Part D plans since 2005.
    Section 176 of MIPPA added a new section 1860D-4(b)(3)(G)(i) to the 
Act requiring, effective with plan year 2010, that the Secretary 
identify certain categories or classes of drugs that meet two statutory 
specifications: (1) Restricted access to the drugs in the category or 
class would have major or life-threatening clinical consequences for 
individuals who have a disease or condition treated by drugs in such 
category or class; and (2) There is a significant need for such 
individuals to have access to multiple drugs within a category or class 
due to unique chemical actions and pharmacological effects of the drugs 
within a category or class, such as drugs used in the treatment of 
cancer. In addition, MIPPA provided the Secretary with the discretion 
to establish exceptions permitting Part D sponsors to exclude from 
their formularies, or to otherwise limit access to (including 
utilization management or prior authorization restrictions), certain 
Part D drugs in the protected categories or classes.
    In the January 16, 2009 Federal Register (74 FR 2881), we published 
an interim final rule with comment period (IFC) entitled, ``MIPPA Drug 
Formulary and Protected Classes Policies.'' This rule revised the 
regulations governing the Medicare Part D formularies to reflect the 
MIPPA requirements. We codified at Sec.  423.120(b)(2)(v) the MIPPA 
provision requiring the inclusion of all Part D drugs in categories or 
classes that we identified as meeting the two conditions set forth in 
section 1860D-4(b)(3)(G)(i) of the Act. Given the limited timeframe 
then available for establishing and implementing a process to identify 
such drug categories or classes due to formulary submission deadlines, 
we maintained the existing six drug categories and classes of clinical 
concern for 2010 with the intention to propose and finalize a new 
process through rulemaking that would be used to identify drug 
categories or classes that met the MIPPA criteria for CY2011. After 
receiving comments in response to the January 16, 2009 IFC, entitled, 
``Medicare Advantage and Prescription Drug Programs MIPPA Drug 
Formulary Protected Classes Policies'' that persuaded us that the 
further interpretative rulemaking was necessary, we published a notice 
of proposed rulemaking (NPRM) on October 22, 2009, entitled, ``Policy 
and Technical Changes to the Medicare Advantage and the Medicare 
Prescription Drug Benefit Programs'' (74 FR 54634) to further refine 
the MIPPA criteria and establish a process that met MIPPA requirements. 
However, between the issuance of the October 22, 2009 proposed rule and 
the April 15, 2010 final rule (75 FR 19766), the Affordable Care Act 
was enacted. Section 3307 of the Affordable Care Act amended section 
1860D-4(b)(3)(G) of the Act to specify that the existing drug 
categories or classes of clinical concern would remain so until such 
time as the Secretary establishes new criteria to identify drug 
categories or classes of clinical concern under section 1860D-
4(b)(3)(G) of the Act through notice and comment rulemaking.
    We are concerned that requiring essentially open coverage of 
certain categories and classes of drugs presents both financial 
disadvantages and patient welfare concerns for the Part D program as a 
result of increased drug prices and overutilization. The principal 
disadvantage is that an open coverage policy substantially limits Part 
D sponsors' ability to negotiate price concessions in exchange for 
formulary placement of drugs in these categories or classes. Since the 
beginning of the Part D program we have heard from stakeholders that 
this policy--frequently referred to as the ``protected classes'' 
policy--significantly reduces any leverage the sponsor has in price 
negotiations and results in higher Part D costs. A report by the OIG in 
March 2011 documented similar assertions from selected Part D sponsors, 
including assertions that ``they received either no or minimal rebates 
for the drugs in these

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six classes,'' that ``there is little incentive for drug manufacturers 
to offer rebates for these six classes of drugs because they do not 
need to compete for formulary placement,'' and that ``if [a rebate] is 
provided, it's probably at a lower percentage than [the rebate for the 
drugs] that had some competition.'' (HHS Office of Inspector General, 
``Concerns with Rebates in the Medicare Part D Program'', March 2011, 
OEI-02-08-00050)
    We are aware of other analyses that support these findings. A 2008 
study conducted by the actuarial and consulting firm Milliman found 
that the six protected drug classes disproportionately accounted for 
between 16.8 percent and 33.2 percent of total drug spend among 
sponsors surveyed (Kipp RA, Ko C). (See ``Potential cost impacts 
resulting from CMS guidance on `Special Protections for Six Protected 
Drug Classifications' and Section 176 of the Medicare Improvements for 
Patients and Providers Act of 2008 (MIPPA) (PL 110-275)'' available at: 
http://amcp.org/WorkArea/DownloadAsset.aspx?id=9279). Milliman reported 
that the Part D program administrators (plan sponsors and PBMs) 
commented that the protected status of these drug classes limited plan 
sponsors' ability to effectively negotiate lower costs with 
manufacturers since it is known that these drugs must be included on 
the formulary. The Milliman report estimated that affected drug costs 
were on average 10 percent higher than they would be in the absence of 
the protected class policy and that this represented $511 million per 
year in excess costs to beneficiaries and the Part D program. We note 
that numerous brand drug patents expire between now and 2015 which 
might reduce future cost projections. Another 2008 study from the 
National Bureau of Economic Research (NBER) suggested that while 
Medicare Part D led to a substantial decline in average pharmaceutical 
prices, Medicare-intensive drugs in protected classes did not 
experience price declines as did their counterparts not in protected 
classes and may have actually experienced price increases (Duggan M, 
Morton FS. 2010. ``The Effect of Medicare Part D on Pharmaceutical 
Prices and Utilization,'' American Economic Review, American Economic 
Association, vol. 100(1), pages 590-607). Plan sponsors can still 
negotiate with manufacturers for preferred or non-preferred tier 
placement of protected class drugs, but CMS does not have any 
information on the justification for the relative magnitude of these 
rebates. However, it can reasonably be anticipated that such rebates 
would vary widely for individual manufacturers and sponsors, and 
anecdotal evidence would suggest the leverage these options provide 
sponsors may be minimal when compared to leverage available in 
connection with an initial decision regarding formulary inclusion, 
especially since tier placement has no impact on statutory LIS cost 
sharing levels. Consequently, we would predict future savings for both 
beneficiaries and the Part D program from both increased price 
competition as newly approved drugs come onto the market and more 
immediate savings if plans were able to remove some currently covered 
agents from their formularies.
    In addition to our concerns about increased Part D costs resulting 
from higher drug prices, we are also concerned that the policy 
potentially facilitates the overutilization of drugs within the 
protected classes. By limiting the ability of Part D sponsors to 
implement utilization management tools (for example, prior 
authorization or step therapy requirements) for an entire category or 
class, we also limit their ability to prevent the misuse or abuse of 
drugs that are not medically necessary. Not only can this increase Part 
D costs, but inappropriate use can also lead to adverse effects that 
can harm the beneficiary and require medical treatment that would 
otherwise not have been necessary. We believe the profitability of 
products not subject to normal price negotiations as the result of 
protected class status is a strong incentive for the promotion of 
overutilization, particularly off-label overutilization, of some of 
these drugs.
    Given the findings in these reports and our expertise with the Part 
D program, we believe it is appropriate to revisit our original policy 
for the six drug categories and classes of clinical concern--
particularly to assess whether it remains appropriate to require this 
additional level of protection for these categories or classes of drugs 
in order to ensure that Part D plans offer nondiscriminatory benefit 
designs and sufficient beneficiary access to medically necessary 
therapies. In considering the balance among beneficiary access, quality 
assurance, cost containment, and patient welfare in light of our 
existing beneficiary protections, we believe that drug categories and 
classes should be subject to normal formulary and price competition 
unless we cannot ensure clinically appropriate access (and thus non-
discriminatory benefit design) to our Medicare beneficiaries in any 
less anticompetitive way than requiring the inclusion on all Part D 
formularies of all drugs in that category or class. Moreover, we 
believe that our consideration of how to implement section 3307 of the 
Affordable Care Act must take into account both the purpose of the Part 
D benefit and the context in which it is offered. Part D does not 
typically involve access to medications on an emergency basis. In cases 
where an emergency may arise, the Part D program has some protections 
to address this--for example, our long term care emergency first fill 
requirement requires plans to cover an emergency supply of non-
formulary Part D drugs for long term care residents as part of their 
transition process. Moreover, the Part D benefit must be considered in 
light of the fact that urgently needed and emergency care is generally 
covered by Medicare Parts A and B.
    To that end, we believe that criteria for identifying drug 
categories and classes of clinical concern should identify only those 
drug categories or classes for which access cannot be adequately 
ensured by beneficiary protections that otherwise apply. Consequently, 
as we take this opportunity to propose to codify criteria for 
identifying categories or classes of drugs that are of clinical 
concern, we believe that the requirements of section 3307 of the 
Affordable Care Act should be implemented taking into consideration the 
other protections available to beneficiaries. Otherwise, section 3307 
of the Affordable Care Act would establish duplicative, and thus 
unnecessary, protections that would serve only to increase Part D 
costs--without any added benefit and with the possibility of added harm 
from misuse. Therefore, in considering whether additional protections 
continue to be needed under this section, we need to take the other 
beneficiary access protections into account. There are five such 
protections and these are formulary transparency, formulary 
requirements, reassignment formulary coverage notices, transition 
supplies and notices, and the coverage determination and appeals 
processes.
    The first protection is our requirement for full transparency to 
beneficiaries. Sponsors are required to provide comprehensive formulary 
drug listings to the public through their own Web sites and printed 
materials, as well as to CMS for access through the online automated 
drug plan comparison tool, the Medicare Plan Finder (Plan Finder). 
Beneficiaries or their representatives can complete a personalized 
search on

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Plan Finder to locate and select a Part D plan that covers their drugs. 
With our more than 7 years of experience with the Part D program, we 
are not aware of any Part D drug that is not included on at least one 
Part D formulary. Thus, beneficiaries who review plan formularies can 
select plans that cover all of their current medications.
    The second type of protection is the Part D formulary requirements. 
Our annual formulary review and approval process includes extensive 
checks to ensure adequate representation of all necessary Part D drug 
categories or classes for the Medicare population and includes the 
following:
     Discrimination Review (Sec.  423.272(b)(2)). Formularies 
are reviewed to ensure inclusion of drug categories and classes that 
are used to treat all disease states. CMS evaluates the sufficiency of 
a Part D sponsor's formulary drug categories and classes in conjunction 
with the plan's formulary drug list to ensure that the formulary 
provides access to an acceptable range of Part D drug choices.
     Two Drugs Requirement (Sec.  423.120(b)(2)(i)). Each 
submitted formulary is reviewed for the inclusion of at least two 
distinct drugs from each of the submitted categories and classes, 
except as provided in Sec.  423.120(b)(2)(ii).
     Formulary Tier Review (Medicare Prescription Drug Benefit 
Manual, Chapter 6, 30.2.7). The tiering structure of each formulary is 
reviewed to ensure that each category and class has at least one drug 
in a preferred tier.
     Common Medicare Drugs Review (Sec.  423.120(b)(2)(iii)). 
Formularies are reviewed for inclusion of the drugs or drug classes 
that are most commonly utilized by the Medicare population. We use 
prior years' data to identify the drugs or drug classes with the 
highest utilization in Medicare Part D, and use these drugs and drug 
classes as the basis for our review in this area. We also review 
formularies for the alternative dosage forms of the drugs that are most 
commonly utilized by the long-term care (LTC) population.
     Treatment Guidelines Review (Sec.  423.120(b)(2)(iii)). 
The World Health Organization (WHO) defines a standard treatment 
guideline as a systematically developed statement designed to assist 
practitioners and patients in making decisions about appropriate health 
care for specific clinical circumstances (available at http://www.who.int/medicines/technical_briefing/tbs/10-PG_Standard-Treatment-Guidelines_final-08.pdf). We analyze formularies to 
determine whether appropriate access is afforded to drugs or drug 
classes included in widely accepted treatment guidelines. In general, 
although sponsors have some flexibility in determining the 
classification system they will use to identify categories or classes 
of drugs, if a treatment guideline speaks to a specific category or 
class of drugs, we look for representation from that drug category or 
class of drugs on the formulary. Moreover, if the treatment guidelines 
address specific drugs, we would expand this requirement to review 
formularies for those specific drugs, and not just the drug category or 
class to which they belong.
     Common Home Infusion Drugs (Sec.  423.120(a)(4)). We 
review formularies for the drugs most commonly utilized in the home 
infusion setting in order to help facilitate rapid access to these 
drugs for beneficiaries.
     Vaccines Review (Sec.  423.100). Each formulary submission 
is reviewed to ensure the formulary includes Part D vaccines.
     Insulin Supplies Review (Sec.  423.100). Formularies are 
reviewed for the supplies associated with the administration of 
insulin: insulin syringes, alcohol swabs, and gauze pads.
     Specialty Tier Review (Sec.  423.578(a)(7)). For 
formularies using a specialty tier, we perform an extensive review of 
the composition of each tier. We apply a standard outlined in the 
annual Call Letter to determine whether drugs placed in specialty tiers 
meet the relevant cost criteria.
     Quantity Limits Outlier Review (Sec.  423.153(b)). All 
formulary submissions are compared to analyze the use of quantity limit 
(QL) edits. Formularies that are outliers with respect to the 
application of QL edits are asked to remove edits or provide a 
reasonable justification for the applicable QL.
     Quantity Limits Amount Review (Sec.  423.153(b)). QL 
restrictions are reviewed for appropriateness. The standard for the 
review is generally based on the Food and Drug Administration (FDA)-
approved maximum doses, when such dose limits are identified in the 
label.
     Restricted Access Review (Sec.  423.153(b)). Formularies 
are reviewed for use of Prior Authorization (PA) and Step Therapy (ST) 
edits across drug categories and classes. We decline to approve 
utilization management (UM) for entire drug classes, other than those 
considered to be best practices, for example, for erythropoietin 
stimulating agents (ESAs).
     Step Therapy Criteria Review (Sec.  423.153(b)). The ST 
requirements are reviewed to ensure that the algorithms are consistent 
with best practices.
     Prior Authorization Outlier Review (Sec.  423.153(b)). All 
formulary submissions are compared to analyze the use of PA edits. 
Formularies that are outliers with respect to the application of PA 
edits are asked to remove edits or provide a reasonable justification 
for such PA edits.
     Prior Authorization Criteria Review (Sec.  423.153(b)). We 
then review the criteria for focused drugs requiring PA on the initial 
formulary submissions. We look to existing best practices, including 
prerequisite drugs, current industry standards and appropriate 
treatment guidelines, to check that the Part D plans' use of PA is 
consistent with such practices. Submitted criteria are also compared to 
compendia and FDA-approved label indications.
     Mid-year formulary change restrictions (Sec.  
423.120(b)(5)); Chapter 6 of the Medicare Prescription Drug Benefit 
Manual, 30.3.3). Except when the Food and Drug Administration deems a 
Part D drug unsafe or a manufacturer removes a Part D drug from the 
market, a Part D sponsor may not remove a covered Part D drug from its 
formulary, or make any adverse change in preferred or tiered cost-
sharing status of a covered Part D drug, between the beginning of the 
annual coordinated election period described in section Sec.  423.38(b) 
and 60 days after the beginning of the contract year associated with 
the annual coordinated election period. However, prescription drug 
therapies are constantly evolving, and new drug availability, medical 
knowledge, and opportunities for improving safety and quality in 
prescription drug use at a lower cost will inevitably occur over the 
course of the year. As recognized in regulation, these new developments 
may require formulary changes during the year in order to provide high-
quality, affordable prescription drug coverage. To address such 
developments our negative formulary change policy requires that 
beneficiaries retain ``grandfathered'' coverage for the remainder of 
the coverage year if we permit an adverse change in the formulary 
status of any drug without a generic equivalent. Thus, in summary, our 
formulary rules both ensure that all Part D formularies contain 
sufficient drugs to treat all disease states in the Medicare population 
and protect beneficiaries from significant changes in formularies 
during the course of a coverage year.
    The third type of beneficiary protection is the annual notice to 
reassigned enrollees required under section 3305 of the Affordable Care 
Act. Effective January 1, 2011, we provide LIS individuals who are 
reassigned to

[[Page 1940]]

another Part D plan with information on the differences under the new 
plan formulary, as well as information on the beneficiary's grievance 
and appeal rights in the new plan. Thus, any individual who has his or 
her plan selection decision made through our reassignment process (in 
order to maintain access to a $0 premium) receives detailed coverage 
status information for each drug for which he or she filled a 
prescription between January and August of the previous year. With 
regard to the new plan, this notice describes for each drug whether it 
is on the formulary, whether the brand or generic version is covered, 
and whether or not utilization management tools may be applied. 
Moreover, the notice also provides a list of other plans that are 
available to the beneficiary to enroll in with no premium if they would 
prefer not to remain in the plan where they were reassigned. We send 
notices after the individual's reassignment and in time to allow for 
another voluntary plan selection effective January 1. Thus, any 
reassigned LIS individual receives advance notice of any change in 
formulary coverage of their medications in plenty of time to work with 
their prescribers if they wish to remain in the new plan, or to select 
a different Part D plan.
    The fourth type of beneficiary protection is our unique transition 
supply and notice requirements. A Part D sponsor must provide for an 
appropriate transition process for Part D drugs that are not on its 
formulary with respect to: (1) The transition of new enrollees into 
prescription drug plans following the annual coordinated election 
period; (2) the transition of newly eligible Medicare beneficiaries 
from other coverage; (3) the transition of individuals who switch from 
one plan to another after the start of the contract year; and (4) in 
some cases, current enrollees affected by formulary changes from one 
contract year to the next (see Sec.  423.120(b)(3); Chapter 6 of the 
Medicare Prescription Drug Benefit Manual, 30.4). Within the first 90 
days of a beneficiary's enrollment in a new plan, plans must provide a 
temporary fill when the beneficiary requests a refill of a non-
formulary drug (including Part D drugs that are on a plan's formulary 
but require prior authorization or step therapy under a plan's 
utilization management rules). Since certain enrollees may join a plan 
at any time during the year, this requirement applies beginning on an 
enrollee's first effective date of coverage, regardless of whether this 
is within the first 90 days of the contract year.
    A successful transition process is contingent not only upon 
providing the transitional drug supply, but also upon informing 
affected enrollees, their caregivers, and their providers about the 
beneficiary's options for ensuring that his or her medical needs are 
safely accommodated within a Part D sponsor's formulary. For this 
reason, when providing a temporary supply of non-formulary Part D drugs 
(including Part D drugs that are on a sponsor's formulary but require 
prior authorization or step therapy under a sponsor's utilization 
management rules), sponsors must provide enrollees and their providers 
with written notice within 3 business days after adjudication of the 
temporary fill that they are receiving a transition supply of a non-
formulary Part D drug and that they must take action. The temporary 
fill and notice provides beneficiaries with a reasonable amount of time 
during which they and their providers can address the issue (by 
requesting a formulary exception or transitioning to a formulary drug) 
and prevents them from having to abruptly change or go without their 
medication (see Transition notice requirements (to beneficiaries and 
providers) [Sec.  423.120(b)(3)(iv and v); Chapter 6 of the Medicare 
Prescription Drug Benefit Manual, 30.4.10]). Thus all beneficiaries and 
their prescribers have advance notice of any issue with continued 
coverage of a previously initiated therapy and sufficient time to 
resolve those issues without any lapse in appropriate therapy. The 
preceding formulary review and transition requirements are described in 
Chapter 6 of the Medicare Prescription Drug Benefit Manual (located at 
http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/Downloads/Chapter6.pdf).
    The fifth beneficiary protection we take into account is the 
requirement for a robust coverage determination and appeal process, 
including the right of an enrollee or his or her prescriber to request 
an exception to the plan's utilization management criteria, tiered 
cost-sharing structure, or formulary. Part D plan sponsors are required 
to issue a coverage decision and notify the enrollee (and the 
prescriber, as appropriate) in writing in accordance with strict 
regulatory timeframes. A plan must grant a tiering or formulary 
exception (for example, provide coverage for a non-formulary drug or an 
exception to the UM criteria) when it determines that the requested 
drug is medically necessary, consistent with the prescriber's 
supporting statement indicating that preferred alternatives(s) would 
not be as effective and/or would have adverse effects. We have 
established by regulation both an expedited adjudication timeframe if 
the plan or prescriber believes that applying the standard timeframe 
may jeopardize the enrollee's health, and a requirement that plans must 
issue all coverage decisions as expeditiously as the enrollee's health 
condition requires. Any initial coverage request that the plan expects 
to deny based on a lack of medical necessity must be reviewed by a 
physician. If the Part D sponsor makes an adverse coverage 
determination, the required written notice must explain the specific 
reason(s) for the denial and include a description of the enrollee's 
right to a standard or expedited redetermination by the plan, and the 
rest of the five-level appeals process, including the right to request 
independent review. We require plans to conduct all redeterminations 
(first level appeals) using a physician or other appropriate health 
care professional with sufficient medical and other expertise, 
including knowledge of Medicare criteria, if the initial denial was 
based on a lack of medical necessity. If a plan fails to make a 
coverage decision and notify the enrollee within the required 
timeframe, the request must be forwarded to the independent review 
entity to be adjudicated.
    Moreover, while we do not treat a claim transaction as a coverage 
determination, we do require Part D sponsors to arrange with network 
pharmacies to provide enrollees with a written copy of the Office of 
Management and Budget (OMB)-approved standardized pharmacy notice 
(``Notice of Denial of Medicare Prescription Drug Coverage,'' CMS-
10146) when the enrollee's prescription cannot be filled under the Part 
D benefit and the issue cannot be resolved at the POS. The notice 
instructs the enrollee on how to contact his or her plan and explains 
the enrollee's right to request a coverage determination. Thus, all 
beneficiaries immediately receive clear concise instructions on how to 
pursue their appeal rights whenever a prescription cannot be filled. 
For additional information on the coverage determination, appeals and 
grievance process, including information about the pharmacy notice, see 
42 CFR Part 423, subparts M and U, and Chapter 18 of the Medicare 
Prescription Drug Benefit Manual.
    As the preceding discussion demonstrates, we have implemented 
extensive beneficiary protections in the

[[Page 1941]]

form of formulary review checks, reassignment formulary coverage 
notices, drug therapy transition policies and notices for both new 
enrollees and continuously enrolled members experiencing changes in 
formulary benefits between coverage years, and robust exceptions and 
appeals processes that generally will assure appropriate access without 
having to guarantee formulary placement. Additionally, the formulary 
exceptions and appeals requirements facilitate obtaining any medically 
necessary Part D drug that is not on the formulary or that is otherwise 
subject to utilization management requirements. Taken together, we 
believe these requirements are comprehensive enough that additional 
access safeguards are needed only in those situations where a Part D 
beneficiary's clinical needs cannot be more efficiently met.
b. Criteria Necessary To Identify Categories and Classes of Clinical 
Concern
    In developing our proposed criteria to identify drug classes of 
clinical concern, we considered all of the existing beneficiary 
protections described previously in section III.A.14.a. of this 
proposed rule, particularly our coverage determination and appeals 
process, which requires plans and other adjudicators to make all 
coverage decisions as expeditiously as the enrollee's health condition 
requires. Given our existing protections, we believe clinical concern 
would arise only if access to drugs within a category or class for the 
typical individual who is initiating therapy must be obtained in less 
than 7 days because the coverage determination and appeals process 
generally does not provide for independent review and determination, 
when necessary, within such timeframe. We believe this would be the 
case only when failure to initiate the therapy within that time period 
would be likely to lead to hospitalization, incapacity, disability or 
death as a result of the exacerbation of the disease or condition to be 
treated. We do not believe it is necessary to require all Part D drugs 
within a drug category or class to be included on the formulary if 
access within 7 days is likely sufficient to allow for initiation of 
therapy without putting beneficiaries at risk of hospitalization, 
incapacity, disability, or death. In other words, we believe that 
inconvenience associated with a delay that is unlikely to pose these 
serious consequences for the typical individual initiating a new 
therapy does not warrant requiring all Part D drugs from within the 
category or class to be included on the formulary because in such an 
instance, the beneficiary would have other protections to ensure that 
he or she has appropriate access to the drug. Moreover, we do not 
believe it is necessary to require all Part D drugs within a drug 
category or class to be included on the formulary when, for a typical 
individual who already is taking the drug, interruption in existing 
drug therapy might have adverse health consequences. Specifically, we 
believe that existing protections such as the Part D formulary change 
restrictions (for example, prohibition on midyear implementation of new 
PA, ST, or QL restrictions on existing therapies) and the transition 
requirements under Sec.  423.120, which provide for temporary fills and 
require beneficiary notification of the need to request a coverage 
determination (including an exception or prior authorization approval) 
for future fills ensure sufficient protection for beneficiaries who may 
face an interruption in their ongoing therapies as a result of a change 
in their plan or formulary. Thus, our transition and negative formulary 
change requirements afford strong protections to individuals with 
ongoing therapy. However, this is in contrast to individuals who are 
initiating therapy. These individuals do not get an initial fill to try 
a medication while they petition for an exception, and thus the 
transition protections do not apply. Finally, we note that when we 
refer to a beneficiary's having ``access'' to a drug within 7 days, we 
mean that the beneficiary must need to ingest or otherwise use or 
consume the drug within that time period in order to avoid the adverse 
consequences. Thus, ``access'' means administration, which may include 
self-administration, of drugs. To illustrate this last point, 
initiation of therapy with drugs used to treat HIV/AIDS generally 
should not be delayed because initiation of therapy has rapid effects 
on viral load. Conversely, a minor delay with the initiation of therapy 
with HMG-CoA reductase inhibitors (also known as ``statins'') for 
patients with hyperlipidemia, even when transitioning among medications 
in the category or class in response to lipid profiles, liver or kidney 
function, or adverse events, is not as critical because it usually 
takes several weeks to detect measurable effects on serum lipid 
concentrations.
    Thus, for all of these reasons, we propose to specify at Sec.  
423.120(b)(2)(v)(A) a first criterion under section 1860D-
4(b)(1)(G)(ii)(II) of the Act as follows: In the case of a typical 
beneficiary who has a disease or condition treated by drugs in the 
following category or class, hospitalization, persistent or significant 
incapacity or disability, or death likely will result if initial 
administration (including self-administration) of a drug in the 
category or class does not occur within 7 days of the date the 
prescription for the drug was presented to the pharmacy to be filled. 
By typical beneficiary, we mean, for a given disease or condition, an 
individual who has the average clinical presentation of the relevant 
disease or condition.
    While this first criterion would establish the critical need to 
promptly initiate drug therapy with a drug from an identified drug 
category or class, we believe that, standing alone, it may be overly 
inclusive and, as such, would fail to appropriately balance the need 
for beneficiary protection with the need to allow plans to take 
appropriate steps to control costs and overutilization. If the drug 
category or class consists of many similar drugs that are often 
considered to be therapeutically interchangeable with one another when 
initiating drug therapy, a requirement to include on the formulary all 
drugs in that category or class would undermine the important place 
that formularies, due to their ability to control costs, hold within 
the Part D program without providing any additional beneficiary 
protection. According to the Academy of Managed Care Pharmacy (AMCP), 
therapeutic interchange is the practice of replacing, with the 
prescribing provider's approval, a prescription medication originally 
prescribed for a patient with a chemically different medication; 
medications used in therapeutic interchange programs are expected to 
produce similar levels of clinical effectiveness and sound medical 
outcomes, based on available scientific evidence. Moreover, in the 
absence of any specific treatment guidelines to the contrary, inclusion 
of all drugs in that category or class would be unnecessary. For 
example, some drugs in the nitrate class of drugs likely would meet our 
first proposed criterion, but because there are many therapeutically 
interchangeable options among nitrates, it is not necessary to require 
that all nitrate products be included on every Part D formulary. 
Indeed, under our current formulary treatment guideline reviews, while 
we require that sublingual nitroglycerin be included on all formularies 
because beneficiaries often need it on an urgent basis, we do not 
require inclusion of all other nitrates (for example, isosorbide 
dinitrate, isosorbide mononitrate, and transdermal nitroglycerin) 
because these dosage

[[Page 1942]]

forms are long-acting and typically are not needed on an urgent basis. 
(However, current treatment guidelines require the inclusion of 
isosorbide dinitrate for congestive heart failure.) Similarly, the 
typical diabetic patient who needs insulin could reasonably be 
anticipated to require two insulin products as part of his or her 
treatment regimen: Specifically, one shorter-acting, and one longer-
acting insulin. Among the insulins, there are four sub-classes: Rapid 
acting, short acting, intermediate acting, and long acting. Within each 
of the sub-classes, there are alternatives from which to choose. In 
accordance with treatment guidelines, in most cases a patient's regimen 
is comprised of one selection from either the rapid acting or short 
acting sub-classes, and one selection from either the intermediate 
acting or long acting sub-classes. While the beneficiary would require 
access to multiple drugs within the class (insulins), which at times 
could certainly be considered urgent enough to risk dire consequences 
as discussed in the first criterion, they would not need access to all 
of the options within that class because there are many alternative 
products on the market within those sub-classes that are largely 
therapeutically interchangeable, and any one of these products will 
generally meet the patient's needs. Thus, our formulary checks for 
insulin require some products in each sub-class to ensure that access 
through each plan is clinically appropriate.
    These examples illustrate the principle that it is both feasible 
and appropriate to permit plan sponsors to develop formularies that 
exclude certain products when adequate access to an appropriate 
alternative is assured by way of our existing formulary requirements 
and review process. Moreover, the transition and coverage determination 
and appeal processes are available in those situations when a non-
formulary drug is medically necessary for a specific individual.
    For these reasons, we believe it is important to include a second 
criterion that must be met in order for us to consider a drug category 
or class to be one of clinical concern for the purposes of section 3307 
of the Affordable Care Act. Specifically, we believe a drug category or 
class would be of clinical concern if CMS cannot establish that a 
formulary that includes fewer than all Part D drugs from within that 
category or class would include sufficient drugs needed to treat the 
diseases or conditions generally treated by such drugs. In other words, 
CMS cannot reasonably establish more specific CMS formulary 
requirements because there are too many potential drug-and-disease-
specific scenarios that require specific drugs from within a category 
or class, even within sub-classes. This would be the case when the 
different drugs within a category or class are uniquely associated with 
specific clinical applications because of the unique effects of such 
drugs or the variable nature of the disease or condition treated by 
such drugs. For example, a cancer patient whose clinical picture is 
rapidly changing must immediately initiate very specific changes in 
antineoplastic therapy when the new disease target is identified. While 
perhaps possible, it would not be practical to establish a multitude of 
more class-specific formulary requirements for every current or future 
combination or sequence of such drugs simply to possibly exclude a few 
drugs. Thus, we propose to add Sec.  423.120(b)(2)(v)(B) specifying a 
second criterion to identify a clinical concern as follows: More 
specific CMS formulary requirements will not suffice to meet the 
universe of clinical drug-and-disease-specific applications due to the 
diversity of disease or condition manifestations and associated 
specificity or variability of drug therapies necessary to treat such 
manifestations.
    In summary, we propose to modify Sec.  423.120(b)(2)(v) to require 
that (unless an exception applies) all Part D drugs within a drug 
category or class be included on the formulary if a the drug category 
or class of drugs for a typical individual with a disease or condition 
treated by the drugs in the category or class meets both of the 
following criteria (as determined by CMS):
     Hospitalization, persistent or significant disability or 
incapacity, or death likely will result if initial administration 
(including self-administration) of a drug in the category or class does 
not occur within 7 days of the date the prescription for the drug was 
presented to the pharmacy to be filled; and
     More specific CMS formulary requirements will not suffice 
to meet the universe of clinical drug-and-disease-specific applications 
due to the diversity of disease or condition manifestations and 
associated specificity or variability of drug therapies necessary to 
treat such manifestations.
c. Exceptions
    Section 1860D-4(b)(3)(G)(i)(II) of the Act provides us with the 
authority to establish exceptions to the requirement that a Part D 
sponsor must include all Part D drugs on its formulary in the drug 
categories or classes identified by us as drug categories or classes of 
clinical concern under section1860D-4(b)(3)(G)(ii)(I) of the Act. 
Despite the narrow scope of applicability defined by the proposed 
criteria, we believe it is necessary to identify exceptions to help 
ensure Part D coverage is limited to Part D drugs, minimize duplicative 
protections within a drug category or class of clinical concern, and 
assure beneficiary safety while curbing potential abuse and misuse as a 
result of the added protection.
    First, we propose to retain Sec.  423.120(b)(2)(vi)(A) as currently 
codified. This provision makes an exception for drug products that are 
rated as therapeutically equivalent (under the Food and Drug 
Administration's most recent publication of ``Approved Drug Products 
with Therapeutic Equivalence Evaluations,'' also known as the Orange 
Book). Thus, two drug products that are determined to be therapeutic 
equivalents by the FDA and identified in the FDA's Orange Book are 
considered to be the same Part D ``drug'' solely for purposes of this 
requirement, and sponsors would not be required to include all 
therapeutic equivalents on their formularies. Rather, the inclusion of 
one such drug product would satisfy the formulary requirement with 
respect to all therapeutically equivalent products.
    We also propose to amend and renumber (as paragraph (F)) existing 
Sec.  423.120(b)(2)(vi)(B) to make an exception for point-of-sale 
utilization management safety edits that are based on maximum daily 
doses and black-box warnings specified on the FDA-approved label, 
potential drug interactions, or duplication of therapy. In fact, we 
believe that this exception is consistent with the requirement under 
section 1860D-4(c)(1)(B) of the Act that requires Part D sponsors to 
have in place quality assurance measures and systems to reduce 
medication errors and adverse drug interactions and improve medication 
use. As noted previously, although we believe that section 3307 of the 
Affordable Care Act is intended to provide additional beneficiary 
protections, we also believe that it would be imprudent to interpret 
these protections in such a way that they interfere with existing 
protections intended to promote safety and efficacy. We believe that it 
is appropriate for Part D sponsors to establish edits for safety and 
that our policies should not interfere with basic drug utilization 
management edits that sponsors apply at point of sale to ensure that 
adverse events do not occur. For example, we

[[Page 1943]]

would expect that a claim for a 90 days supply of Atripla[supreg] for 
180 tablets, when the drug is only approved for use once a day, would 
trigger a point-of-sale safety edit. Such edits must be consistent with 
FDA labeling to ensure that they are based on scientific evidence and 
medical standards of practice. However, the use of safety edits should 
not create a significant opening for plans to establish restrictive 
policies, because safety edits need to conform to FDA labeling.
    Next, we propose to add new language at Sec.  423.120(b)(2)(vi)(B) 
to make an exception for drug products that are almost always covered 
under Medicare Parts A or B. In order to minimize confusion about the 
scope of the protections under section 3307 of the Affordable Care Act, 
we specify that the formulary requirements set forth in section 1860D-
4(b)(3)(G)(i) of the Act do not apply to drugs almost always covered by 
Medicare Part A or B. We do not currently require, and would not 
require under the authority of section 3307 of the Affordable Care Act, 
the inclusion of drugs that have been historically paid for under Part 
B (for example, ``incident to'' drugs supplied and administered by 
physicians during a patient visit and paid for under Part B). Given the 
fact that these drugs are generally covered under Medicare Part B and 
are not required under our existing policy, we believe their absence 
from plan formularies would not disrupt access. We further believe that 
requiring the inclusion of these drugs on the formulary would lead to 
beneficiary confusion. For these reasons, we are proposing to exclude 
drug products almost always covered under Medicare Part A or B.
    We also propose to add an exception at Sec.  423.120(b)(2)(vi)(G) 
to permit prior authorization for purposes of determining whether a 
drug is a Part D drug being used for a medically-accepted indication as 
defined in section 1860D-2(e)(4) of the Act or to verify a drug is not 
covered under Medicare Parts A or B as prescribed and dispensed or 
administered. Coverage under Part D is not available for drugs that are 
not used for a medically-accepted indication, and section 3307 of the 
Affordable Care Act does not change any Part D coverage rules. 
Moreover, we believe that this exception, like the exception for 
Medicare Part A or B drugs described in proposed paragraph (B), would 
not cause disruption because it merely reflects existing limits on Part 
D coverage.
    Thus, we also propose that prior authorization in the drug 
categories or classes of clinical concern is appropriate when used to 
confirm the presence of a medically-accepted indication or that 
coverage is not available under Medicare Parts A or B as prescribed and 
dispensed or administered. Prior authorization requirements to 
determine medically-accepted indications should be limited to those 
drugs for which it is reasonably foreseeable that use for non-
medically-accepted indications are likely to occur. For example, when 
only narrow indications are supported (for example, pain medications 
indicated only for cancer pain, supported by the FDA label or 
compendia), we would expect Part D sponsors to use prior authorizations 
to ensure that such agents are being used for the narrowly-supported 
indications only. Similarly, sponsors must apply prior authorizations 
for Medicare Parts A/B versus D determinations in a manner consistent 
how those determinations are made in all other categories or classes 
(that is, based upon likelihood of coverage under Medicare Part A or 
B), and thus, we would not expect to see a disproportionate amount of 
prior authorization requirements for the categories or classes of 
clinical concern compared to other formulary categories or classes. We 
expect that the plan sponsor's medical director is involved in 
establishment and oversight of plan policies related to prior 
authorization requirements. As with all PA requirements, these would 
require CMS review and approval. Consistent with current guidance, in 
Parts A or B versus D situations, CMS expects Part D sponsors will work 
aggressively to eliminate any interruptions of current therapy.
    In addition, we propose to amend Sec.  423.120(b)(2)(vi)(C) to make 
an exception for Part D compounds. As noted in previous rulemaking, 
Part D only covers those ingredients in a compound that independently 
meet the definition of a Part D drug (see Sec.  423.120(d)). Since the 
Part D compound as a whole is not FDA approved, we do not believe that 
such compounded products reasonably can be classified as being included 
in a specific category or class that meets the criteria proposed in new 
Sec.  423.120(2)(v)(A). Currently, Part D compounds that include 
ingredients that fall within a protected category or class are not 
required to be included on formularies, and we do not interpret section 
3307 of the Affordable Care Act as requiring their inclusion now. Thus, 
we believe their continued absence from plan formularies would not 
disrupt access.
    We also propose to add Sec.  423.120(b)(2)(vi)(D) to make an 
exception for drugs (other than antiretrovirals) that are FDA approved 
and that are fixed-combination dosage form prescription drug products 
as defined in 21 CFR 300.50, that contain at least one Part D drug in 
the category or class of clinical concern. Because all drugs in the 
category or class of clinical concern would be on the formulary as 
single entity products, we do not believe it is necessary, in most 
cases, to require inclusion of the fixed dose combination or co-
packaged products. However, we would propose to carve out from this 
exception fixed dose combinations and co-packaged antiretrovirals, as 
discussed in FDA guidance found here: http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/ucm079742.pdf) 
because avoiding excessive pill burden and simplifying dosage regimens 
is of utmost importance with this class of drugs. This is because the 
risk associated with non-adherence when beneficiaries have to take the 
single-entity products has far more severe consequences, such as viral 
resistance, than in most other instances, where occasional non-
adherence does not present such dire complications. Consequently, 
although we believe this exception is generally appropriate for the 
categories and classes of clinical concern that receive added 
protections under section 3307 of the Affordable Care Act, we propose 
that it not be available for antiretrovirals. This means that, under 
our proposed criteria, which, as discussed further in the following 
paragraphs, apply to antiretrovirals, all Part D formularies would need 
to include not only all single-entity antiretrovirals, but also all 
FDA-approved fixed-dose combination and co-packaged antiretrovirals.
    Additionally, consistent with current guidance, we propose an 
exception at Sec.  423.120(b)(2)(vi)(E) for certain types of Part D 
drugs, including multi-source brands of the identical molecular 
structure, extended-release products when the immediate-release product 
is included, products that have the same active ingredient or moiety, 
and dosage forms that do not provide a unique route of administration 
(for example, tablets and capsules versus tablets and transdermal 
products). Although such products may contribute to improvements in 
beneficiary adherence to their medication regimens, other interventions 
such as Medication Therapy Management Programs and special compliance 
packaging can also improve adherence. Therefore, the added costs of 
required formulary inclusion of such products may not

[[Page 1944]]

provide added value since they do not provide a clinically different 
therapeutic alternative. Such products currently are not required to be 
included on formularies, and we do not interpret section 3307 of the 
Affordable Care Act as requiring their inclusion now. Thus, we do not 
believe this exception would disrupt access.
    Finally, we considered proposing an exception at Sec.  
423.120(b)(2)(vi)(H), to allow Part D sponsors to implement prior 
authorization, including PA used to implement step therapy 
requirements, to convert beneficiaries to preferred alternatives within 
these drug categories or classes for enrollees who are initiating 
therapy (new starts). This is consistent with current guidance that 
Part D sponsors may not implement prior authorization, including PA 
used to implement step therapy requirements that are intended to steer 
beneficiaries to preferred alternatives within these drug categories or 
classes for enrollees who are currently taking a drug, unless they are 
trying to establish appropriate coverage under Parts A, B, or D. This 
prohibition applies to those beneficiaries already enrolled in the 
plan, as well as to new enrollees who were actively taking drugs in any 
of the drug categories or classes of clinical concern prior to 
enrollment in the plan. If a sponsor cannot determine at the point of 
sale that an enrollee is not currently taking a drug (for example, new 
enrollee filling a prescription for the first time), the sponsor treats 
such enrollee as currently taking the drug. Additionally, step therapy 
and prior authorization for HIV/AIDS drugs are generally not employed 
in widely-used best-practice formulary models and are not permitted 
under the current policy. Although this has been our policy since the 
start of the Part D program, and we are not aware of any problems with 
it to date, we recognize that this raises the potential for a delay in 
access to initial therapy to occur and could be in conflict with our 
first proposed criterion. However, we must balance this with incentives 
for efficient formularies and do not want to eliminate a tool that may 
be useful for Part D sponsors. Consequently, we solicit comment on the 
continued need and utility of this policy and whether it should be 
included in the exceptions at 423.120(b)(2)(vi). These exceptions would 
supersede any previous guidance relative to PAs and UM for the 
categories and classes of clinical concern.
d. Analysis and Identification of the Categories or Classes of Clinical 
Concern
    We convened a consensus panel of CMS pharmacists and the Chief 
Medical Officer for the Center for Medicare to identify which drug 
categories or classes met our proposed criteria for clinical concern. 
The panel was supported by a contractor that performed background 
research and provided specific information on Part D utilization by 
drug category or class and associated widely-accepted treatment 
guidelines for each drug category or class, when available. The panel 
reviewed all Part D drugs with utilization in 2012 using the American 
Hospital Formulary Service (AHFS)-6 classification system. We chose the 
AHFS-6 classification system as a framework because it provided us with 
a tool to logically, and in stepwise fashion, apply the criteria to all 
Part D drugs. A detailed synopsis of the panel's findings is posted at 
http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/RxContracting_FormularyGuidance.html. The 
consensus panel determined that of the current six drug categories or 
classes of clinical concern, three (anticonvulsants, antineoplastics, 
and antiretrovirals) meet both of the proposed criteria, and three do 
not (antidepressants, antipsychotics, immunosuppressants). The panel 
also determined that while other drug categories and classes met one of 
the criteria, no other drug categories or classes met both criteria.
    With respect to the first criterion, the panel concluded that 
initiation of therapy with drugs from the antiretroviral, 
antineoplastic, and anticonvulsant categories and classes for the 
typical individual prescribed these drugs in a Part D setting generally 
cannot be delayed for 7 days because of the risk of hospitalization, 
incapacity, disability, or death. For antiretrovirals, the risk 
associated with the failure to immediately initiate recommended 
concurrent therapies could significantly increase the risk of 
developing drug resistance and the potential for re-exacerbation of the 
disease. For antineoplastics, prompt initiation of therapy is also 
critical. Given that the antineoplastic drug therapy often is but one 
part of a complex cancer treatment protocol that includes non-drug 
therapies, such as radiation or surgery, initiation of the 
antineoplastic drug therapy is usually integrated with the entire 
treatment protocol. Thus, delaying initiation of antineoplastic drugs 
can delay a beneficiary's entire course of treatment. For 
anticonvulsants, the risk of seizure associated with a delay in drug 
therapy for 7 days can lead to hospitalization and significant 
incapacity.
    With respect to the second criterion, the panel concluded that the 
antiretroviral, antineoplastic and anticonvulsant categories and 
classes meet the criterion because different drugs within those 
categories and classes are used in so many patient-, drug-, or disease-
specific clinical applications that an alternative formulary 
requirement is not feasible. For antiretrovirals, the panel based this 
conclusion on the number of multiple drug combinations and adjunctive 
therapies involved, frequency with which recommended drug protocols 
change, and the role that changing drug resistance plays in determining 
the selection of among the different antiretroviral drugs. The need to 
adjust specific combination antiretroviral therapy in real time is 
complex and must consider, among other things, viral sensitivity to the 
drugs, drug interactions, pregnancy status (if applicable), and 
potentially the patient's pharmacogenomic profile of the cytochrome 
P450 system. Similarly, for antineoplastic drug therapies, the panel 
based its conclusion on the diversity of treatment protocols, the 
specificity of such treatment protocols, including the role that 
specific genetic variations can play in the selection of the 
appropriate drug therapy, and the frequency with which disease-specific 
treatment protocols recognized in the official Part D compendia change 
and get updated. A cancer patient whose clinical picture is rapidly 
changing must immediately initiate very specific changes in 
antineoplastic therapy when the new disease target is identified. 
Finally, for anticonvulsants the panel concluded that the class met the 
criterion based on the number of unique types of seizures, the multiple 
drug combinations indicated for them, and the potential for altered 
drug effects based on drug-drug interactions that occur via the 
cytochrome P450 system. For all three of the classes (anticonvulsants, 
antineoplastics, and antiretrovirals), the panel concluded that CMS 
would be unable to address them more efficiently through formulary 
requirements that would allow for some restrictions at this time based 
upon the number and specificity of the different treatment protocols.
    After a detailed analysis of existing therapies and widely-accepted 
treatment guidelines, the panel concluded that immunosuppressants for 
transplant rejection, antidepressants, and antipsychotics do not meet 
both of

[[Page 1945]]

the proposed criteria and thus would not be eligible for the additional 
protections intended by section 3307 of the Affordable Care Act.
    With respect to immunosuppressants for transplant rejection, the 
panel concluded that the first criterion was met. Due to the immune 
system's ability to mount progressively faster and stronger attacks 
against a beneficiary's new organ, and to maintain a memory relative to 
those attacks, initiation of therapy in a Part D setting generally 
cannot be delayed for up to 7 days because of the risk of 
hospitalization, incapacity, disability, or death, and thus meets the 
first criterion. Because widely-accepted treatment guidelines recommend 
sub-classes of drugs rather than specific, individual drugs, the panel 
did not believe that every drug product should be required for 
inclusion on Part D sponsors' formularies. Moreover, relative to the 
reasonably small number of transplant options available to 
beneficiaries (for example, stem cell, liver, lung, kidney, pancreas, 
heart and intestine), the consistency and specificity of treatment 
guidelines, and the amount of therapeutic drug monitoring required for 
these drugs, provide us with sufficient clinical information necessary 
to establish additional, specific formulary requirements without 
needing to continue to identify it as a drug category or class of 
clinical concern.
    For antidepressants, the panel concluded that a 7-day delay in 
initiation of therapy would generally not put the typical individual at 
risk of hospitalization, incapacity, disability or death, and thus did 
not meet the first criterion. The panel also concluded that 
antidepressants did not meet the second criterion. This determination 
was based upon the similarities of drugs within sub-classes and the 
lack of unique effects for distinguishing individual drug products when 
initiating drug therapy for the typical individual in a Part D setting. 
For example, for a patient initiating antidepressant therapy for 
depression, when the treatment guidelines indicate that a drug within 
the selective serotonin reuptake inhibitor (SSRI) sub-class of 
antidepressants should be used, there are multiple options from which 
to choose, such as fluoxetine, paroxetine, sertraline, citalopram, and 
escitalopram. While treatment guidelines may indicate the choice of an 
SSRI over the tri-cyclic antidepressant (TCA) or serotonin-
norepinephrine reuptake inhibitor (SNRI) sub-classes, assuming a 
patient is dosed correctly, they generally do not advocate a preference 
of one SSRI drug over another for initiation of therapy, nor do they 
provide a hierarchical inventory for these drugs' place in therapy 
relative to each other. In fact, the American Psychiatric Association's 
2010 treatment guideline (available at http://www.guideline.gov/content.aspx?id=24158) states that ``the effectiveness of 
antidepressant medications is generally comparable between classes and 
within classes of medications.''
    With respect to antipsychotics, many of these take weeks to reach 
their full effect (steady state). In addition, with regard to the 
Medicare population, particularly in long term care settings, current 
treatment guidelines indicate that the use of antipsychotics in the 
elderly is, in many cases, unwarranted and in others, possibly 
dangerous. However, due to the potential that, untreated, beneficiaries 
with active psychotic symptoms may be dangerous to themselves or 
others, the panel concluded that a 7-day delay in initiation of therapy 
met the threshold to put a typical individual with psychotic symptoms 
at risk of hospitalization, incapacity, disability or death, and thus 
met the first criterion.
    However, the panel concluded that antipsychotics did not have 
unique effects that distinguished one drug from another for the 
purposes of choosing the appropriate drug to initiate therapy. For 
example, for a patient initiating antipsychotic therapy for 
schizophrenia or schizoaffective, or schizophreniform disorder, when 
the treatment guidelines may indicate that a drug within the second 
generation (atypical) antipsychotic sub-class should be used, there are 
multiple options from which to choose such as aripiprazole, 
risperidone, olanzapine, quetiapine, ziprasidone, and clozapine. While 
the treatment guidelines may indicate the choice of a second generation 
antipsychotic over the neuroleptics or first generation antipsychotic 
sub-classes, assuming a patient is dosed correctly, they generally do 
not advocate a preference of one atypical antipsychotic over another 
for initiation of therapy, nor do they provide a hierarchical inventory 
for these drugs' place in therapy relative to each other. Moreover, the 
2009 update to the American Psychiatric Association's treatment 
guideline for the management of patients with schizophrenia (available 
at http://psychiatryonline.org/data/Books/prac/Schizophrenia_Guideline%20Watch.pdf) states ``the distinction between first- and 
second-generation antipsychotics appears to have limited clinical 
utility.'' Thus the panel concluded that these agents are considered to 
be generally therapeutically interchangeable when initiating therapy, 
and based on treatment guidelines, our formulary requirements could 
efficiently ensure appropriate access to antipsychotics without 
requiring inclusion on the formulary of every drug in the class.
    In addition to any cost savings that would result from the proposed 
change for the antipsychotic drug class, it is important to emphasize 
that the change also would provide Part D sponsors with an improved 
capability to address widespread inappropriate overuse of antipsychotic 
drugs through better utilization management. A recent study published 
in Psychiatric Services analyzing 2009 claims data from private 
insurance claims found that 58 percent of individuals prescribed 
psychotropic medication in 2009 had no psychiatric diagnosis during the 
year (Psychiatric Services 2013; doi: 10.1176/appi.ps.201200557). 
Moreover, on September 20, 2013, the American Psychiatric Association 
released a ``list of specific uses of antipsychotic medications that 
are common, but potentially unnecessary and sometimes harmful'', 
including a recommendation not to prescribe these drugs ``as a first-
line intervention to treat behavioral and psychological symptoms of 
dementia'' (http://www.psychiatry.org/choosingwisely). CMS has been 
particularly concerned with unnecessary use of antipsychotic drugs in 
nursing homes, which might be exacerbated by our current policy, which 
significantly limits Part D sponsors' options for ensuring appropriate 
use of these drugs. While this change in formulary requirements 
generally would not impede appropriate access to antipsychotic drug 
therapy for the mentally ill given the other formulary protections 
discussed previously, it would allow Part D sponsors to better align 
utilization management with CMS efforts to prevent inappropriate use of 
these drugs and the potential harmful effects associated with such 
inappropriate use.
    While proposing to remove the previous level of formulary coverage 
from these particular classes, it is worth noting that the requirement 
to include on plan formularies all drugs in certain categories and 
classes is unique to the Part D program. We are not aware of any other 
U.S. government programs (such as the Veteran's Administration (VA), 
Tricare, the Federal Employees Health Benefits Program (FEBHP), and, 
most recently, the Affordable Care Act Essential Health Benefits (EHB) 
Benchmark Plans), or commercial private health plans having a similar

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requirement. Similar to the Part D program, these plans also operate in 
the outpatient setting where access to medications is not typically 
needed on an emergency basis. Even though Part D formularies are more 
restrictive than Federal Employees Health Benefits Plans (FEHBP) and 
EHB plans, when CMS compared Part D formulary requirements with those 
of the VA National and Department of Defense (DoD) Basic Core 
formularies, out of 26 distinct antidepressant drugs required on all 
Part D formularies, the VA included 17, and the DoD included 10. 
Similarly, out of 19 distinct antipsychotic drugs required on all Part 
D formularies, the VA included 15, and the DoD included 2.
    Supporting this analysis that our formulary checks could 
efficiently require adequate access to the antidepressant and 
antipsychotic drug categories and classes without requiring that every 
drug be included on all Part D formularies, we compared a Part D 
formulary to other formularies. We took an approved CY 2014 formulary 
containing the average number of RxNorm Concept Unique Identifiers 
(RxCUIs). This formulary includes the following: 23 generic (ANDA) 
antidepressant drugs, 7 brand (NDA) antidepressant drugs, 18 generic 
antipsychotic drugs, and 9 brand antipsychotic drugs. We then reviewed 
the drugs comprising the aforementioned list against our formulary 
review requirements standards for treatment guidelines, common Medicare 
drugs, and the discrimination review. We found that the formulary could 
have passed these checks with 9 generic antidepressant drugs, and 6 
generic antipsychotic drugs. No brands were necessary to meet the 
formulary review requirements. Thus, this formulary includes an excess 
of 16 brand drugs and 26 generic drugs within these two classes of 
medications.
    While the immunosuppressant, antidepressant and antipsychotic 
classes all fail to meet the second criterion, we are deferring any 
change in formulary requirements for the antipsychotic class at this 
time and will continue to require all drugs from within this class to 
be on Part D formularies in 2015, subject to the exceptions that get 
finalized in Sec.  423.120(b)(2)(vi). Section 1860D-4(b)(3)(G)(I) of 
the Act requires that the Secretary identify classes and categories of 
clinical concern ``as appropriate,'' using criteria specified in notice 
and comment rulemaking. We interpret this provision as permitting us to 
postpone applying our proposed criteria to antipsychotics at this time, 
and as we are not applying the criteria to antipsychotics at this time, 
we believe it is appropriate to continue to treat antipsychotics as a 
class of clinical concern, in light of section 1860D-4(b)(3)(G)(iv) of 
the Act, because we wish to make certain we have not overlooked a need 
for any transitional considerations. This is because the risks 
associated with untreated psychotic illness, as differentiated from the 
broad category of mental illness, have the potential to be so severe. 
Therefore, although we previously explained why we do not believe the 
antipsychotic drug class would meet the new proposed criteria, at this 
time, we are proposing not to subject the antipsychotic class to the 
new criteria and therefore are proposing not to change the current 
requirement that all drugs from within this class must be included on 
all formularies, except as permitted under our proposed exceptions.
    In general, our existing beneficiary protections should suffice to 
ensure appropriate access to antipsychotic drug therapies. However, we 
are not changing the requirement for antipsychotics at this time 
because we need to determine if additional transitional consideration 
is necessary for any individuals taking these medications. While we are 
not convinced that our existing transition requirements are 
insufficient, we seek comment on whether there are additional 
considerations for transitioning some patients taking these drugs to 
alternative drug therapies and if so, why our current requirements are 
not adequate. In addition, we seek comments on what specific patient 
population(s) or individual patient characteristics would require such 
additional transition protections and how such population(s) can be 
consistently identified. Conversely, we also seek comments on whether 
it might be in the best interest of beneficiaries to have their 
existing antipsychotic therapies reevaluated through utilization 
management, given our concern with the inappropriate use of these drugs 
especially in nursing homes and the limited clinical utility of 
distinctions among agents in this class of drugs. If so, we would also 
appreciate comments on whether the benefits of such a periodic 
reevaluation that would arise from routine utilization management might 
outweigh other transitional risks. While we do not believe the risks 
associated with illnesses treated by antidepressants are as severe as 
those treated by antipsychotics, we are also seeking comment on whether 
any transitional policies specific to antidepressants would be 
appropriate.
    We are concerned about overutilization and inappropriate 
prescribing of antipsychotic medications in individuals with dementia 
for whom these medications may be prescribed as a mechanism for 
behavioral control; persons for whom antipsychotics are being used as 
sleeping aids or anxiolytics; and children who have not been diagnosed 
with a disorder for which an antipsychotic medication has been FDA-
approved. Our concerns about overutilization are not aimed at 
individuals with a current mental illness or those who are or have 
recently or previously been stabilized on antipsychotic medications. We 
do not want to limit access to effective medications, or to limit a 
return to those effective medications for adults with a psychotic 
illness who need them. Finally, we seek comment on the timing necessary 
to address any additional transitional considerations, and remove the 
temporary protections for antipsychotics, if necessary.
    Therefore, the initial drug categories and classes of clinical 
concern that meet the proposed criteria for coverage year 2015 are 
anticonvulsants, antiretrovirals, and antineoplastics. In addition, the 
antipsychotic drug class will continue to be treated as a class of 
clinical concern in 2015 and until CMS determines that it is 
appropriate to apply the criteria with respect to the antipsychotics. 
These categories and classes will be read narrowly and are not 
inclusive of every related drug product that an individual who has a 
disease treated by one of these categories or classes of drugs would 
need to take. For example, conjugated or esterified estrogens used for 
the palliative treatment of carcinoma of the prostate or metastatic 
breast cancer are not considered antineoplastics and would not be 
included in the antineoplastic class of clinical concern. We will 
provide more detailed guidance on the specific formulary checks that 
will be in place relative to antidepressant and immunosuppressant 
categories and classes of drugs at a later date. Additionally, we plan 
to work with stakeholders to provide outreach to beneficiaries around 
the proposed modification of the categories and classes of drugs of 
clinical concern that receive additional protections under section 3307 
of the Affordable Care Act so that beneficiaries can select the most 
appropriate drug plan for their needs based on drug choice as well as 
cost. Finally, CMS plans to periodically review the drug categories and 
classes

[[Page 1947]]

as the clinical landscape changes to determine whether these classes 
continue to meet both criteria and/or if other categories/classes meet 
both criteria. We would propose any changes to the categories and 
classes of clinical concern through a public notice and comment process 
such as the annual Call Letter.
15. Medication Therapy Management Program (MTM) Under Part D (Sec.  
423.153(d))
    Section 1860D-4(c)(2) of the Act, provides that Part D sponsors, in 
offering Medication Therapy Management (MTM) programs, must target 
individuals who: (1) Have multiple chronic diseases (such as diabetes, 
asthma, hypertension, hyperlipidemia, and congestive heart failure); 
(2) are taking multiple covered Part D drugs; and (3) are identified as 
likely to incur annual costs for covered Part D drugs that exceed a 
level specified by the Secretary. At the start of the Part D program, 
we believed that 25 percent of enrollees would qualify for MTM 
services. However, analysis revealed that MTM program enrollment was 
well below that level. In the 2010 Call Letter and subsequent 
regulation, we modified the criteria to reduce the variability in 
eligibility and level of service and to improve access to MTM services, 
again targeting 25 percent of enrollees. Despite these changes, MTM 
program participation remains very low. Moreover, additional evidence 
that the program improves quality and generates medical savings 
supports the idea that more than 25 percent of enrollees will benefit 
from MTM services.
    Section 1860D-4(c)(2)(C) of the Act, as implemented in Sec.  
423.153(d)(vii), specifies that sponsors shall offer a minimum level of 
MTM services to targeted beneficiaries to increase adherence to 
prescription medications or other goals deemed necessary by the 
Secretary. Additionally, section 1860D-4(c)(2)(E \2\) of the Act, as 
implemented in Sec.  423.153(d)(1)(v), provides that Part D sponsors 
must automatically enroll targeted beneficiaries in the MTM program, 
allowing beneficiaries the option to opt out. Under that authority, we 
also issued sub-regulatory guidance (found at http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/Downloads/Chapter7.pdf) and an annual memo with MTM Program Guidance 
and Submission instructions notifying Part D sponsors that we expect 
them to promote continuity of care by performing an end-of-year 
analysis that identifies current MTM program participants who will 
continue to meet the eligibility criteria for the next program year for 
the same plan. We indicated that this targeting could be done to auto-
enroll beneficiaries in the plan's MTM program early in the next 
program year in order to provide MTM interventions with less 
interruption. Although beneficiaries who are new to Part D or who may 
have changed plans may be captured during the quarterly, or more 
frequent, targeting throughout the year, there is a time lag at the 
start of the year before these beneficiaries can be enrolled in MTM. 
This concern is particularly relevant for LIS enrollees who may have 
been reassigned to a new Part D plan if their existing plan terminated 
or no longer qualified as a benchmark plan. Moreover, we believe that 
there are other special populations of beneficiaries for whom simply 
increasing the frequency of targeting will not adequately address 
barriers they face to receiving MTM services. There are also situations 
in which a beneficiary is unable to accept the offer to participate in 
a CMR, but offering to perform the CMR with the beneficiary's 
prescriber, caregiver, or other authorized individual, as provided at 
Sec.  423.153(d)(1)(vii)(B)(2), may not be effectively addressed by the 
sponsor. For example, sponsors may not effectively take steps to 
identify the beneficiary's authorized representative or coordinate with 
the beneficiary's LTC facility when appropriate. Consequently, to 
improve access to this beneficial service, we are exploring new ways to 
improve access to MTM services for Part D enrollees.
---------------------------------------------------------------------------

    \2\ Two subparts (E) have been enacted in section 1860D-4(c)(2). 
Here, we refer to the first one.
---------------------------------------------------------------------------

    Although we initially estimated that 25 percent of the Part D 
eligible population would meet the three criteria for MTM services at 
the start of the Part D program, we provided minimal detail on how 
sponsors should implement the criteria. For example, we did not 
initially provide in regulation any detail on the number of chronic 
diseases or covered Part D drugs, or an annual cost threshold that 
would be required to establish a beneficiary's eligibility for MTM 
services, although we established an annual cost threshold of $4,000 in 
subregulatory guidance. We did this to allow maximum flexibility for 
the industry to develop best practices in the provision of MTM 
services.
    After an analysis of common practices revealed wide ranges in 
eligibility and the levels of services provided, we announced in the 
2010 Call Letter (available at http://www.cms.gov/PrescriptionDrugCovContra/Downloads/2010CallLetter.pdf) that the MTM 
requirements would be revised beginning in 2010 to provide greater 
consistency among the MTM programs and to raise the level of MTM 
interventions offered to positively impact medication use by Medicare 
Part D beneficiaries. We clarified that in defining multiple chronic 
diseases, sponsors could not require more than three chronic diseases 
as the minimum number of chronic diseases and that sponsors must target 
at least four of seven core chronic diseases (hypertension, heart 
failure, diabetes, dyslipidemia, respiratory disease (such as asthma, 
chronic obstructive pulmonary disease (COPD), or chronic lung 
disorders), bone disease--arthritis (such as osteoporosis, 
osteoarthritis, or rheumatoid arthritis), and mental health (such as 
depression, schizophrenia, bipolar disorder, or chronic and disabling 
disorders)). We further clarified that in defining multiple Part D 
drugs, sponsors could not require more than eight Part D drugs as the 
minimum number of multiple covered Part D drugs. We also lowered the 
cost threshold to $3,000 and instructed sponsors to adjust their 
targeting criteria accordingly. These requirements were subsequently 
codified in the regulations at Sec.  423.153(d)(1) and (2).
    Despite the expanded criteria, we continue to see restrictive 
criteria, such as plan sponsors specifying a narrow list of chronic 
diseases or Part D drugs coupled with requiring a higher minimum number 
of covered drugs (for example, eight drugs versus two) for eligibility. 
As a result, access to MTM services remains very low with MTM program 
eligibility rates at less than 8 percent in 2011. Even more concerning, 
there may be racial disparities in meeting the eligibility criteria. In 
the 2012 Call Letter (available at http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/Announcement2012.pdf), we 
reviewed a 2010 study published in Health Services Research (HSR) by 
Wang and colleagues (Wang, et al. 2010. ``Disparity Implications of 
Medicare Eligibility Criteria for Medication Therapy Management 
Services.'' Health Services Research. 45 (4): 1061-1082.). This study 
was based on data from the Medical Expenditure Panel Survey (MEPS) 
collected prior to the implementation of the Part D program and used 
the original 2006 and the revised 2010 MTM eligibility thresholds. The 
study suggested that Hispanic and African American beneficiaries could 
be less likely to meet MTM eligibility criteria where utilization was a 
criterion for program

[[Page 1948]]

participation. The study findings had important implications for the 
Part D program because utilization based upon drug costs is a critical 
part of MTM eligibility. In 2012, Wang and colleagues repeated the 
study (Wang, et al. 2012. ``Historical trend of disparity implications 
of Medicare MTM eligibility criteria.'' Research in Social and 
Administrative Pharmacy (2012): 1-12) using 2007-2008 data along with 
both the 2006 and 2010 MTM eligibility thresholds. They found that 
disparity patterns did not change from the first study. Their findings 
that ``racial and ethnic disparities in meeting the MTM eligibility 
criteria may not decrease over time unless the eligibility criteria are 
changed'' have led us to conclude that the current MTM eligibility 
criteria are overly restrictive.
    A 2011 report from the United States Public Health Service (PHS) 
Pharmacist Professional Advisory Committee (PharmPAC report) (available 
at http://www.usphs.gov/corpslinks/pharmacy/sc_comms_sg_report.aspx) 
supports the conclusion that the current eligibility criteria are 
restricting access to MTM services. The PharmPAC report, which was 
based on the experiences of PHS clinical pharmacists who attempted to 
provide services to Part D beneficiaries, indicated that the Part D MTM 
eligibility criteria, and variability in the application of these 
criteria among Part D sponsors, constituted a policy constraint which 
limited patient participation in the program, despite the 2010 
enhancements. The authors of the PharmPAC report expressed concern 
that, at the time, the criteria permitted sponsors to define 
eligibility parameters. The PharmPAC report went on to say that as a 
result of the overly restrictive targeting criteria, patients who may 
need MTM services but did not meet the plan's criteria were not able to 
participate, unless the plan offered MTM services to a wider group than 
the targeted population.
    Further supporting this conclusion, a recent study conducted in 
conjunction with the Center for Medicare and Medicaid Innovation called 
Medication Therapy Management in Chronically Ill Population: Final 
Report (August 2013) (``CMMI MTM study'') (available at http://innovation.cms.gov/Data-and-Reports/index.html) explored the variations 
in MTM eligibility criteria. This CMMI MTM study identified patients 
with equivalent MTM eligibility characteristics who were in different 
plans with different eligibility criteria. The enrollees were 
ineligible for MTM in their own plan, but would have been eligible for 
MTM if they were enrolled in another plan which targets a particular 
chronic disease that is not targeted for MTM services by their own plan 
or which targets beneficiaries for MTM services based on a lower number 
of chronic diseases or Part D drugs for eligibility. We are concerned 
with such variability, especially in cases where a beneficiary meets 
the minimum number of chronic diseases for eligibility, but may not 
qualify for MTM because his or her chronic condition is not targeted by 
the plan, he or she does not take enough medications for the plan's 
program (even though medication management issues are present), or 
because high utilization of lower cost generics places prescription 
drug costs for the beneficiary below the cost threshold. Restrictive 
application of MTM eligibility criteria may limit MTM enrollment to 
beneficiaries with spending well above the $3,000 threshold, and the 
CMMI MTM study indicates that drug spending for MTM enrollees varied 
from $4,452 to $7,477. The CMMI MTM study's final report was published 
in August, 2013 and is available at: http://innovation.cms.gov/Files/reports/MTM-FINAL-Report.pdf.
    As discussed in the 2014 Call Letter (available at http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/Announcements2014.pdf), the CMMI MTM study found that MTM programs 
effectively targeted high risk individuals who had problems with their 
drug-therapy regimens and had high rates of hospital and emergency room 
visits before enrollment as well as those that experienced a recent 
visit to the hospital or emergency room. The study also found that 
individuals with diabetes, CHF, and COPD who were enrolled in MTM 
programs--particularly those who received annual comprehensive 
medication reviews (CMRs)--experienced significant improvements in drug 
therapy outcomes when compared to beneficiaries who did not receive any 
MTM services, thus supporting the hypothesis that the annual CMR may be 
one of the more crucial elements of MTM. Significant cost savings 
associated with all-cause hospitalizations at the overall PDP and MA-PD 
levels were found, which may be due to MTM's comprehensive, rather than 
disease specific approach. This research supports statements in a 
recent Congressional Budget Office report that programs and services 
that manage the prescription drug benefit well or improve prescription 
drug use might result in medical savings (Congressional Budget Office, 
Offsetting Effects of Prescription Drug Use on Medicare's Spending for 
Medical Services, November 2012, available at http://www.cbo.gov/publication/43741).
    Consistent with the findings of this research, we believe that the 
CMS-established eligibility criteria should be considered as the 
threshold for MTM eligibility, but not the driver of interventions by 
the plan. However, because plans target beneficiaries with specific 
diseases for MTM services, some plans, in turn, have designed 
interventions only focused on these diseases, in contrast to a more 
comprehensive approach to improving medication management and 
adherence. For example, one plan targeted beneficiaries with CHF and 
diabetes and designed interventions for these conditions. Beneficiaries 
who also had COPD qualified for MTM services, but the plan did not 
address their COPD medication issues, a practice that is inconsistent 
with the intent of comprehensive MTM. Nonetheless, the best-performing 
plans were able to improve medication adherence and quality of 
prescribing while maintaining or reducing overall health care costs 
(including drug costs), despite the costs associated with delivering a 
high number of CMRs. Moreover, the study's findings suggested that 
other conditions associated with cardiovascular disease, such as acute 
myocardial infarction (AMI), stroke, and vascular disorders, in 
addition to those already targeted under the eligibility criteria 
adopted in 2010, disproportionately appeared among the top cost savers.
    Overall, the CMMI MTM study identified practices that typified 
high-performing MTM programs, including three that concern beneficiary 
targeting. They are:
     Establishing proactive and persistent CMR recruitment 
efforts;
     Targeting and aggressively recruiting patients to complete 
a CMR based on information on medical events such as a recent hospital 
discharge in addition to scanning for the usual MTM eligibility 
criteria; and
     Coordinating care by utilizing trusted community 
relationships, including networks of community pharmacists, to recruit 
MTM eligible candidates, and utilizing existing working relationships 
between MTM providers (pharmacists) and prescribers to make 
recommendations and discuss identified problems for patients.
    Potential additional requirements, related to the first and third 
practices, are discussed elsewhere in this proposed rule. However, the 
second practice leads us to reconsider our current MTM targeting 
requirements. We believe that the results of the aforementioned studies 
indicate the

[[Page 1949]]

necessity to reduce variability in eligibility criteria among plans and 
as a result improve access to MTM services.
a. Multiple Chronic Diseases
    The statute identifies targeted beneficiaries as those Part D 
beneficiaries who have multiple chronic diseases such as diabetes, 
asthma, hypertension, hyperlipidemia, and congestive heart failure. We 
previously interpreted this language to allow sponsors to define 
``multiple chronic diseases'' with three chronic diseases being the 
maximum number a plan sponsor may require for targeted enrollment. 
Further, sponsors are allowed to target beneficiaries with select 
chronic diseases, but must include at least five of the nine core 
chronic diseases in their criteria. This list of core chronic diseases, 
as updated in the 2013 Call Letter (available at http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/downloads//Announcement2013.pdf), includes hypertension, congestive heart failure, 
diabetes, dyslipidemia, respiratory disease, bone disease--arthritis, 
mental health, Alzheimer's disease, and end stage renal disease. We 
propose to revise our interpretation of ``multiple chronic diseases'' 
to require that sponsors must target enrollees having two or more 
chronic diseases for MTM services. We believe this is a reasonable 
interpretation of the statute because ``multiple'' is commonly 
understood to mean more than one.
    In addition, we believe that the statute specifically named the 
diseases that are most prevalent within the Medicare Part D beneficiary 
population and that present a likelihood of having medication use 
issues that impact therapeutic outcomes. Therefore, we propose to 
require that at least one of the chronic diseases that a beneficiary 
has in order to satisfy the eligibility criteria must be one of the 
list of core chronic diseases. This list has been updated since 2010 to 
encompass common targeting practices among plan sponsors and diseases 
prevalent among beneficiaries. We also believe that this interpretation 
is consistent with other literature concerning the relative risk of the 
combination of multiple disease states and medications and ensures that 
Medicare Part D beneficiaries with prevalent health conditions receive 
access to MTM. In addition, to be more consistent with the findings of 
the CMMI MTM study and the current drug hierarchical condition 
categories (RxHCCs) used in the Part D risk adjuster, we propose to 
redefine the core diseases by combining hypertension and congestive 
heart failure under the umbrella of ``cardiovascular disease,'' which 
would also encompass congestive heart failure, acute myocardial 
infarction, cerebral hemorrhage and effects of stroke, vascular 
disease, specified heart arrhythmias, and hypertensive heart disease. 
The list of core chronic diseases would thus become cardiovascular 
disease, diabetes, dyslipidemia, respiratory disease, bone disease--
arthritis, mental health, Alzheimer's disease, and end stage renal 
disease. However, in future rulemaking, we may consider further 
revising the regulation to establish standards by which these core 
chronic diseases are selected, and therefore establish the list of core 
chronic diseases annually in subregulatory guidance based on those 
factors. We solicit comment on what specific patient population(s) or 
individual patient characteristics should be considered in establishing 
such standards.
b. Multiple Part D Drugs
    The statute identifies targeted beneficiaries as those Part D 
beneficiaries who are taking multiple covered Part D drugs. Although we 
initially had no requirements in this area, as early as contract year 
2006, we asked plan sponsors to report to us the number of covered Part 
D drugs that a beneficiary must have filled to meet their targeting 
criteria for MTM, and if applicable, to list the type of Part D drugs 
that would apply. While still allowing a great deal of flexibility in 
the design of MTM programs, for contract year 2007 forward, we 
requested more detailed information in this area in MTM Program 
Submission materials for a March 15, 2006 User Group Call which were 
distributed through HPMS. We asked plan sponsors to identify the number 
of covered Part D drugs that a beneficiary must have filled to meet 
their criteria for MTM programs, and to provide information on the type 
of covered Part D drugs that would apply. Specifically, we asked if any 
Part D drug would apply, only chronic/maintenance drugs, only disease-
specific drugs related to chronic diseases, or if specific Part D drug 
classes would apply (and what those drug classes were), or what other 
types of categories the plan sponsor intended to use. For coverage year 
2013, we consolidated this list of types of covered Part D drugs that 
could apply and no longer specifically collected information on 
disease-specific drugs related to chronic diseases. (MTM Program 
Submission Process Guidance for CY 2013 is available at: http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovGenIn/Downloads/Memo-Contract-Year-2013-Medication-Therapy-Management-MTM-Program-Submission-v041012.pdf)
    Because our analyses continued to reveal such wide ranges in 
eligibility under this criterion, we issued guidance in 2009, which we 
subsequently codified in our April 2010 final rule entitled, ``Policy 
and Technical Changes to the Medicare Advantage and the Medicare 
Prescription Drug Benefit Programs'' (75 FR 19678), to establish 
specific requirements regarding the minimum number of covered Part D 
drugs that plan sponsors should consider in order to satisfy the 
statutory requirement. Specifically, we instructed that Part D sponsors 
should define ``multiple'' for purposes of satisfying this requirement 
as no more than eight Part D covered drugs. (75 FR 19772) Although we 
tried to maintain maximum flexibility for plan sponsors by permitting 
this broad range, the authors of the PharmPAC report specifically cite 
the options available to plan sponsors in determining enrollee 
eligibility criteria for multiple Part D drugs as a limitation of the 
MTM programs required under Part D. We now believe that allowing plans 
this flexibility has contributed to beneficiary confusion, decreased 
access to MTM services, and even led to racial disparities in access to 
services.
    We propose to revise our interpretation of ``multiple Part D 
drugs'' to require that sponsors must target enrollees taking two or 
more Part D covered drugs for MTM services. While we are expanding this 
criterion, we are also proposing to restrict the flexibility previously 
available to sponsors by requiring that they consider any Part D 
covered drug. Literature supports the idea that patients with multiple 
diseases and taking at least two drugs are more likely to have drug 
therapy problems.
    The importance of MTM services for patients taking two or more 
medications was demonstrated in a 2007 evaluation which validated the 
Risk Based Relative Value Scale (RBRVS) for MTM Services by Isetts and 
colleagues on behalf of the state of Minnesota (available at http://www.dhs.state.mn.us/main/groups/business_partners/documents/pub/dhs16_140283.pdf). This study shows that when a patient has a single 
indication treated by at least two medications, there is likely to be 
at least one drug therapy problem. When the patient moves to two 
indications, he or she is more likely to be treated by at least three 
to five medications, and will likely have at least two drug therapy 
problems. It should be noted that this

[[Page 1950]]

evaluation considered not only prescription drugs, but also over the 
counter medications and dietary supplements.

                               Table 2--Pharmaceutical Care RBRVS *--At a Glimpse
----------------------------------------------------------------------------------------------------------------
                                       Number of medical                              Number of drug  therapy
              Level **                    indications       Number of medications         problems  (DTP)
----------------------------------------------------------------------------------------------------------------
Level 1............................  At least 1...........  At least 1...........  None observed.
Level 1............................  At least 1...........  At least 2...........  1 DTP.
Level 2............................  At least 2...........  At least 3-5.........  2 DTPs.
Level 3............................  At least 3...........  At least 6-8.........  3 DTPs.
Level 4............................  4 or more............  9 or more............  4 or more DTPs.
----------------------------------------------------------------------------------------------------------------
* Summarized from the Minnesota DHS Web site Program Guide for Delivery of Medication Therapy Management
  Services (MTMS).
** The level of care reported is the lowest of patient needs met by all criteria in each level.

    Section 3503 of the Affordable Care Act establishes a program under 
the Public Health Service Act under which the Secretary is authorized 
to provide grants or contracts to eligible entities to implement MTM 
services and provides that MTM programs shall target individuals who 
take four or more prescribed medications, including over-the-counter 
(OTC) medications and dietary supplements, and take any high-risk 
medications. Although this provision does not directly pertain to the 
Part D program, we believe that an examination of the criteria used to 
target individuals under that provision is helpful in considering what 
changes could be made to improve the effectiveness of MTM programs 
offered under Part D. Unlike section 3503 of the Affordable Care Act, 
which expressly requires that services be targeted based on the use of 
either prescription or non-prescription drugs, the Part D statute 
expressly requires that Part D plans target beneficiaries taking 
multiple covered Part D drugs for MTM services. OTC medications or 
dietary supplements are not covered Part D drugs, and we cannot require 
Part D sponsors to consider them in targeting beneficiaries for MTM 
services. Nevertheless, as evidenced by the RBRVS approach discussed 
previously, we believe that these OTC medications and supplements may 
contribute to drug therapy problems. Therefore, we believe that it is 
reasonable to propose that ``multiple Part D drugs'' should be 
construed to mean two or more Part D drugs in order to ensure that 
beneficiaries that are at risk of drug therapy problems, including 
problems associated with taking multiple prescription medications in 
conjunction with over-the-counter medications, are appropriately 
targeted for MTM services. A literature review (Hajjar ER, Cafiero AC, 
Hanlon JT. Polypharmacy in elderly patients. Am J Geriatric 
Pharmacother. 2007; 5:345-351) cited a study that found that almost 90 
percent of elderly, rural community-dwelling patients took one or more 
OTC products and almost 50 percent took two to four. Another study of 
noninstitutionalized patients found that 47 to 59 percent of older 
patients took a vitamin or mineral and 11 to 14 percent took herbal 
supplements. The review found that polypharmacy among the elderly may 
be increasing. (Stoehr GP, Ganguli M, Seaberg EC, et al. Over the 
counter medication use in an older rural community: The MOVIES Project. 
J Am Geriatr Soc. 1997; 45:158-165). Therefore, it is reasonable to 
conclude that the Part D MTM population with multiple chronic diseases 
would also be taking OTC medications. Furthermore, we expect that 
sponsors will perform outreach to beneficiaries to acquire additional 
information regarding OTC medication use by their enrollees, consistent 
with our current guidance for CMRs, which explains that the medication 
review as part of the CMR should include prescriptions, OTC 
medications, herbal therapies, and dietary supplements (available at 
http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovGenIn/Downloads/Memo-Contract-Year-2013-Medication-Therapy-Management-MTM-Program-Submission-v041012.pdf).
    Although we are proposing this option, we also considered 
alternatives such as duplication of the section 3503 of the Affordable 
Care Act criteria for four or more prescribed medications which could 
include OTC medications and dietary supplements, provided the 
beneficiary was taking at least 2 covered Part D drugs. However, we 
recognized that Part D sponsors would not have the ability to assess an 
enrollee's use of OTC medications or dietary supplements in order to 
determine MTM eligibility despite the RBRVS approach which suggests 
that beneficiaries may still experience drug therapy problems when they 
have only one chronic disease but take at least two medications, which 
could include OTC medications or dietary supplements. As a result, we 
solicit comments on alternative definitions for ``multiple Part D 
drugs,'' including what minimum number of medications is appropriate 
for MTM targeting.
c. Annual Cost Threshold
    The Congress did not impose any specific requirements with respect 
to the cost threshold at the time the MTM criteria were passed in to 
law, nor has it addressed this threshold in any of the subsequent 
amendments to section 1860D-4(c)(2) of the Act. When we first 
established the requirements regarding MTM programs, we recognized that 
cost alone was not the best indicator of those that could benefit most 
from MTM. Indeed, in our January 2005 final rule entitled, ``Medicare 
Prescription Drug Benefit'' (70 FR 4282), we stated that cost might not 
be the best proxy for identifying patients that could benefit most from 
MTM. Nevertheless, in an attempt to identify a manageable population at 
the start of the program, we believed that individuals with the highest 
costs were more likely to be suffering from more chronic conditions and 
taking more Part D medications. Therefore, we believed that setting a 
cost threshold that would limit MTM programs to the individuals with 
the highest costs would increase the likelihood that MTM services would 
be provided to those individuals that could benefit most (because those 
individuals were likely to be at greater risk for improper medication 
use and adverse drug events). Thus, although it was set in 
subregulatory guidance, we established the initial $4000 cost threshold 
at the inception of the Part D program.
    As discussed in our April 2010 final rule entitled, ``Policy and 
Technical Changes to the Medicare Advantage and Medicare Prescription 
Drug Benefit Programs'' (75 FR 19776), following an analysis of plan 
reported data, we found

[[Page 1951]]

that only 10 percent of beneficiaries enrolled in a Part D plan with an 
approved MTM program were eligible for MTM services in 2006 and only 
13.1 percent were eligible for MTM services in 2007. In 2008, we 
conducted an analysis of beneficiary drug costs using Prescription Drug 
Event (PDE) data from contract years 2006 and 2007 obtained from the 
Integrated Data Repository (IDR) system. As part of this analysis, the 
total gross drug cost and number of beneficiaries that incurred annual 
drug costs (below) or (greater or equal to) the $4000 cost threshold 
was determined. The average number of PDEs and average costs per 
beneficiary were also calculated. Further analysis examined cost 
breakouts in $500 increments to determine the distribution of 
beneficiaries, as well as the number of fills, and gross drug cost for 
beneficiaries with annual drug costs in each of these categories. We 
determined that close to 25 percent of Part D enrolled beneficiaries 
with drug utilization (beneficiaries with at least one PDE during the 
study period) during 2006 and 2007 had annual gross drug costs of at 
least $3,000. Therefore, we lowered the cost threshold to $3,000 in the 
2010 Call Letter. Based upon our analysis of the more recent data in 
2010, we concluded that this threshold would ensure that approximately 
25 percent of the beneficiaries using the Part D benefit would receive 
MTM services, and we codified the $3,000 threshold, as updated annually 
by the annual percentage increase in the average per capita aggregate 
expenditures for Part D drugs for Part D eligible individuals under 
Sec.  423.104(d)(5)(iv) in the April 2010 final rule entitled, ``Policy 
and Technical Changes to the Medicare Advantage and Medicare 
Prescription Drug Benefit Programs'' (75 FR 19818). The threshold is 
currently $3,144 in 2013.
    However, the use of lower cost generics has been increasing since 
the Part D program began, so the application of this threshold may 
exclude many beneficiaries who are in need of MTM services. We believe 
this increase in the use of lower cost generics may contribute to low 
MTM program enrollment rates which currently hover around 8 percent, 
and may also be a driver in racial disparity in MTM program enrollment. 
Additionally, prior work, including the RBRVS approach described 
previously, assigns relative risk of needing MTM services using the 
number of indications that an individual has and the number of 
medications that he or she is taking, but does not address a cost 
threshold. Consequently, we are concerned that there are a number of 
beneficiaries who need MTM, but are not currently eligible because they 
do not meet the current cost threshold of $3,144, despite the increased 
likelihood of having drug therapy problems as a result of having 
multiple chronic diseases and taking multiple medications. Moreover, 
the current cost threshold may have the unintended consequence of 
causing beneficiaries to no longer qualify for MTM services in the next 
plan year (whether remaining in the same plan or enrolling into a new 
plan) if they fall below the cost threshold as a result of their 
enrollment in plans that employ cost avoidant strategies, such as 
aggressive use of generics, or in MTM programs that center on 
therapeutic interchange.
    Consistent with our proposal that sponsors must target enrollees 
taking two or more Part D covered drugs for MTM services and taking 
into account that one or more of these Part D drugs are likely to be 
generics, we propose setting the annual amount in Part D drug costs at 
an amount that represents the intersection of multiple conditions and 
multiple drugs. Based on an analysis of PDE data, the average cost of a 
generic prescription is $25.85. Because a very small percentage of 
prescriptions are for more than 30 days, we assume that this amount is 
the average cost for a 30-day generic prescription. Thus, the annual 
total drug cost for a beneficiary filling two generic prescriptions is 
$620.40. Accordingly, consistent with our proposal to determine a cost 
threshold that is commensurate with the drug spending of beneficiaries 
that meet the first two criteria regarding multiple conditions and use 
of multiple covered Part D drugs, we would set the cost threshold at 
$620, which is the approximate cost of filling two generic 
prescriptions. We propose to revise this number periodically to reflect 
more up-to-date information regarding the drug spending of 
beneficiaries that have two or more chronic conditions and use two 
covered Part D drugs. We remind sponsors that the drug costs used to 
determine if the total annual cost of a beneficiary's covered Part D 
drugs is likely to equal or exceed the specified annual cost threshold 
for MTM program eligibility includes the ingredient cost, dispensing 
fee, sales tax, and vaccine administration fee, if applicable. Because 
the statute requires that plans target beneficiaries who ``are 
identified as likely to incur annual costs for covered Part D drugs 
that exceed a level specified by the Secretary,'' we encourage 
sponsors, as most do now, to project annual costs for a beneficiary 
based on costs from the preceding month or quarter.
    We took a number of factors into consideration in deciding to 
propose lowering the annual threshold to a level commensurate with the 
drug spending of beneficiaries with multiple chronic diseases taking 
two covered Part D drugs. Doing so promotes consistency among Part D 
plans relative to the three eligibility criteria set forth in the 
statute by factoring multiple conditions and multiple Part D drugs into 
how the cost threshold is set. We know now that patients with multiple 
conditions and taking multiple drugs have a higher probability of 
having at least two drug therapy problems and could benefit from MTM. 
More beneficiaries are using lower cost generic alternatives and no 
longer meet the current cost threshold, which is over $3,000, and 
studies have found that the current cost threshold may promote racial 
disparities in MTM eligibility.
    Based on an analysis of 2011 PDE data and 2011 RxHCCs from the Risk 
Adjustment system, approximately 60 percent of Part D enrollees have 
two or more chronic diseases were taking two or more Part D drugs and 
incurred drug costs greater than or equal to $500. We found that 50 
percent of Part D enrollees have two or more chronic diseases, were 
taking two or more Part D drugs, and had drug costs of greater than or 
equal to $1000. Therefore, we estimate that approximately 55 percent of 
Part D beneficiaries will be eligible for MTM based on the proposed 
criteria (two or more chronic diseases, two or more Part D drugs, and 
likely to incur $620 in annual Part D drug costs).
    The CMMI MTM study found that high-performing MTM programs not only 
improved drug therapy outcomes but also maintained or lowered rates of 
hospitalizations, ER visits, and associated costs. Therefore, more of 
the Part D population can benefit from MTM services and these programs 
can potentially positively impact the Medicare program as a whole 
through improved medication use and lower healthcare costs. As a result 
of this, we no longer believe that it is appropriate to target only 25 
percent of the Part D populations, and only those beneficiaries with 
high drug costs. This is consistent with our view in our January 2005 
final rule where we stated that we believe that MTM must evolve and 
become a cornerstone of the Medicare Prescription Drug Benefit. We also 
intend that the Medicare Prescription Drug Benefit will serve as a 
model for achieving quality

[[Page 1952]]

improvement in prescription drug therapy.
    Although we are proposing to set the annual threshold at a level 
that is commensurate with the drug spending of beneficiaries with two 
or more chronic diseases that use two covered Part D drugs, we 
considered other alternatives. For example, we considered setting the 
threshold at $900 or $1200, which roughly coincide with cost thresholds 
achieved by taking three or four generic drugs. We solicit comment, 
based on industry and MTM provider experience, on where this threshold 
might be alternatively set.
    Although we are proposing to broaden MTM eligibility, we also 
believe there are special populations of beneficiaries for whom broader 
targeting criteria will not adequately address barriers they may face 
to receiving MTM services. The CMMI MTM study found that effective MTM 
programs establish proactive and persistent CMR recruitment efforts. 
These programs also utilize trusted community relationships, including 
networks of community pharmacists, to recruit MTM eligible candidates 
as well as existing working relationships between MTM providers 
(pharmacists) and prescribers to make recommendations and discuss 
identified problems for patients. Trusted community relationships are 
an important tool that can be leveraged to reduce disparities in access 
to MTM services, and other health disparities in general, faced by some 
special populations of beneficiaries.
    For example, LIS-enrollees are a diverse group and are more likely 
than other Medicare enrollees to have a high burden of disability and 
chronic disease, to have limited English proficiency, and to belong to 
a racial or ethnic minority group. Although LIS-eligibility is not a 
perfect indicator for the social determinants of health faced by those 
with limited English proficiency or belonging to racial or ethnic 
minorities, it is true that those with limited English proficiency, and 
those belonging to racial and ethnic minorities are more likely than 
other Medicare enrollees to be poor. Because this financial status is 
frequently compounded by a variety of barriers to accessing health 
insurance and care, these beneficiaries generally have a higher burden 
of disability and chronic disease. As discussed previously, the use of 
utilization-based criteria to target at-risk individuals who may not, 
as a result of cultural norms or preferences, be high utilizers of 
health care services is particularly troubling. This comes in spite of 
evidence in treatment guidelines which suggests that they may need 
targeted outreach. Such criteria may also miss other high-risk 
individuals who use multiple low-cost generic drugs that present a 
safety risk without reaching a cost threshold. More of these 
beneficiaries will be eligible for MTM services due to the revised 
criteria that we are proposing in this rule. However, there are 
currently no requirements under our regulations that Part D plans 
ensure that beneficiaries in these special populations receive focused 
outreach or engagement to increase their participation in MTM.
    Chronic disease and disability are common in the LIS population. 
More than 80 percent of Part D enrollees who had spending high enough 
to reach catastrophic coverage were LIS enrollees. Additionally, the 
reassignment process can present additional challenges for LIS 
enrollees such as new formularies, requirements for prior 
authorizations, step therapy, or quantity limits, processes for 
exceptions, appeals, and grievances, and contacting their plan. This 
makes it more challenging for LIS enrollees to maintain access to their 
drugs. Further, pharmacists at the point of sale frequently spend a 
great deal of time with and on behalf of these enrollees as they face 
formulary changes. This, in turn often generates high levels of 
frustration for the enrollee, as he or she waits for the pharmacist to 
resolve the issues, as well as for the pharmacist, as the effort 
required to assist the customer approaches the level of service 
furnished in MTM, but remains uncompensated.
    Challenges faced by LIS enrollees in the Part D program are 
exacerbated for those with limited English proficiency or who belong to 
a racial or ethnic minority. For example, translators and multi-
language inserts currently required may not be adequate to address the 
cumulative effects of race and ethnicity, lower levels of education, 
and poverty that are frequently associated with individuals with 
limited English proficiency. Moreover, messages conveyed by such 
approaches may not be consistent with an individual's underlying 
cultural beliefs and attitudes about medicine and therapy.
    Another example involves the Indian Health Service, which is 
staffed by many health care providers in the United States Public 
Health Service and bears primary responsibility for caring for American 
Indians and Alaska Natives. The Indian Health Service is comprised of 
facilities operated by the Indian Health Service, tribes or tribal 
organizations pursuant to the Indian Self-Determination and Education 
Assistance Act, and urban Indian organizations pursuant to title V of 
the Indian Health Care Improvement Act. When the majority of American 
Indians and Alaska Natives live outside reservation land, where most 
IHS/tribal facilities are located, barriers in access to care are seen 
in both rural and urban landscapes, where there is limited availability 
of providers or limited offering of services, respectively. 
Transportation to IHS/tribal facilities may be a barrier and, the 
PharmPAC report also indicates that the patient-perceived benefit of 
paying monthly premiums, in light of 100 percent coverage of health 
care expenses for eligible patients, may also reduce participation in 
MTM services. The PharmPAC report goes on to state that the Public 
Health Service Pharmacy program has apprehension about contracting with 
Part D plans offering MTM programs because limited compensation by Part 
D plans for MTM services is not cost-effective to implement on a 
national scale.
    We believe that the difficulties faced by special populations of 
beneficiaries represent important opportunities for robust MTM services 
that, when associated with early completion of CMRs, will help 
beneficiaries navigate the reassignment process, better reward 
pharmacists for the level of effort needed to serve these 
beneficiaries, and provide another option for sponsors to manage high 
cost beneficiaries. We have previously discussed the impact of one-to-
one counseling by State Health Insurance Assistance Programs, and a 
growing body of evidence indicates that the person-to-person aspect of 
MTM (including through the use of telehealth technologies) has the 
potential to yield multiple benefits that warrant more effective 
outreach by sponsors to LIS beneficiaries and those with limited 
English proficiency or who belong to a racial or ethnic minority. As we 
see with the proportion of LIS-eligible-but-unenrolled beneficiaries 
who have to apply to qualify for subsidies, generalized attempts at 
outreach are not sufficient to increase enrollment. Because of the wide 
variety in social determinants that contribute to barriers in access to 
coverage and care, individualized approaches to target populations such 
as LIS-eligible, limited English proficiency, racial and ethnic 
minorities, including American Indians and Alaska Natives, within the 
larger MTM-eligible population will likely require a multi-faceted 
approach. Thus, the opt-out method of enrolling targeted beneficiaries 
into MTM at Sec.  423.153(d)(1)(v) may only partly

[[Page 1953]]

address the increased barriers to care faced by this group.
    We are concerned that such social determinants contribute to 
persistently low MTM enrollment and participation despite attempts to 
broaden the criteria. As we have gained more experience with the MTM 
programs, we have become concerned with the number of simplistic, 
generalized strategies that have been implemented for delivering MTM 
services. We believe that Part D sponsors' strategies for outreach and 
service provision cannot be ``one size fits all'' and must be 
appropriately geared to social and demographic subpopulations within 
the overall targeted population in order to be effective. As discussed 
previously, the CMMI MTM study identified that high-performing MTM 
programs engage in multi-pronged, persistent efforts to recruit 
Medicare beneficiaries to CMRs and often use effective and diverse 
communication modalities such as person-to-person interactions, phone 
calls, or community contacts (through networks of trusted community 
pharmacists), if needed. Moreover, as illustrated in the example of the 
Indian Health Service, this may also include negotiating rates more 
acceptable to MTM providers that beneficiaries perceive as more 
accessible and trustworthy.
    Consequently, we are interpreting section 1860D-4(c)(2)(D) of the 
Act, which requires plans to have in place a process to assess 
medication use of individuals who are at-risk but not enrolled in MTM, 
to require Part D sponsors to establish effective strategies that 
ensure access to MTM services for all eligible beneficiaries. The 
statutory requirement to assess the medication use of at risk 
beneficiaries should encompass the requirement that plan sponsors 
better address barriers in access to MTM services and improve 
participation rates, particularly at the start of enrollment in the 
plan, faced by those with limited English proficiency, those who belong 
to racial and ethnic minorities, or who are LIS enrollees. Without 
being prescriptive about what strategies must be employed, we are 
proposing that sponsors develop an effective strategy to ensure access 
to services for all MTM-eligible beneficiaries, including those who 
have disabilities or who have limited English proficiency. 
Specifically, we propose to revise Sec.  423.153(d)(1)(v) to include 
the requirement that a Part D sponsor must ``have an outreach strategy 
designed to effectively engage all at-risk beneficiaries enrolled in 
the plan.''
    Sponsors have previously commented to us that they have difficulty 
reaching many individuals in these special populations because of 
inconsistent or incorrect contact information. While this certainly 
presents an added challenge, plan sponsors could, for example, analyze 
fill data, and partner with pharmacies they know that a particular 
beneficiary or populations of beneficiaries frequent. Incorporating the 
pharmacies that targeted individuals utilize into the MTM program may 
be a particularly effective strategy for successful outreach that will 
lead to enrollment in MTM programs that is more broadly representative 
of the breadth of demographic segments in the targeted population. We 
believe that current plan reporting requirements, along with other CMS 
data sources, will be sufficient for us to evaluate the impact of such 
strategies. We solicit stakeholder comment on other important 
strategies that might prove successful in improving access to MTM 
services which could be considered at a later time. This proposed rule 
may be of interest to, and affect, American Indians/Alaska Natives. 
Therefore, we plan to consult with Tribes during the comment period and 
prior to publishing a final rule. We also intend to monitor best 
practices as sponsors implement more effective strategies and may 
consider imposing additional requirements in future rulemaking.
    In summary, we are proposing revisions to the MTM eligibility 
criteria to target beneficiaries who have two or more chronic 
conditions, with at least one being a core chronic disease, who are 
taking two or more covered Part D drugs, and who have annual Part D 
drug costs commensurate with the drug spending of beneficiaries with 
two or more chronic diseases that use two covered Part D drugs. By 
decreasing the number of chronic diseases and medications and lowering 
the cost threshold for MTM eligibility, we anticipate that more 
beneficiaries will have access to MTM services which have been shown to 
improve drug therapy outcomes and decrease healthcare costs. We believe 
that these changes will simplify the MTM criteria and minimize 
beneficiary confusion when choosing or transitioning between plans. We 
believe these changes will also reduce disparities within the Part D 
beneficiary population and allow more beneficiaries with drug therapy 
problems to receive MTM. Additionally, broadened criteria, when paired 
with more effective strategies for outreach and access to MTM services, 
will more appropriately reach those individuals in need of these 
services. We remind sponsors that these proposed changes represent the 
minimum requirements, and that they may target additional 
beneficiaries. Effective MTM programs strengthen the Part D program and 
improve its overall value and, we note, our 5-star plans have 
consistently made significant investments in MTM.
16. Business Continuity for MA Organizations and Part D Sponsors (Sec.  
422.504(o) and Sec.  423.505(p))
    A variety of events ranging from power outages to disasters and 
warnings of disasters can disrupt normal business operations, and when 
these events occur it is important to ensure beneficiary access to 
health care services and drugs. Sections 1852(d) and 1860D-4(b) of the 
Act, respectively applicable to Parts C and D, establish access to 
services and covered Part D drugs as a core beneficiary protection. 
After Hurricane Sandy it became apparent that a few entities, 
particularly those with operational centers and/or information 
technology (IT) resources physically located in the affected areas, did 
not have consistent continuity plans or back-up systems and processes 
to ensure ongoing coordinated deployment of critical staff to alternate 
locations.
    Sections 1857(e)(1) and 1860D-12(b)(3)(D) of the Act authorize the 
Secretary to adopt additional contract terms for, respectively, MA 
organizations and Part D sponsors, including section 1876 cost 
contracts and Program for the All-Inclusive Care for the Elderly (PACE) 
organizations that provide qualified prescription drug coverage, that 
are not inconsistent with Parts C and D, respectively, of Title XVIII 
of the Act, when the Secretary finds it necessary and appropriate. 
Hereafter, all proposed requirements described in this section as 
applicable to Part D sponsors, also apply to section 1876 cost contract 
and PACE organizations that provide qualified prescription drug 
coverage. While a limited number of beneficiaries were affected by 
problems on the part of a small number of entities as a result of 
Hurricane Sandy, the goal of consistent disaster response remains: All 
MA organizations and Part D sponsors must limit the beneficiary impact 
of unavoidable disruptions and must ensure rapid restoration of 
operations. Accordingly, we propose to add contract provisions to 
require that MA organizations and Part D sponsors develop and maintain 
business continuity plans in order to better anticipate the types of 
disruptions that could occur and then implement policies and procedures 
to reduce interference with business operations. We believe this is 
appropriate to ensure

[[Page 1954]]

that Medicare beneficiaries have access to the care and coverage 
contemplated by the statute.
    The proposed provision would, in Sec.  422.504(o)(1) and Sec.  
423.505(p)(1), require that every MA organization and Part D sponsor 
develop, maintain, and implement a business continuity plan that meets 
certain minimum standards. In Sec.  422.504(o)(1)(i) and Sec.  
423.505(p)(1)(i), we propose that the business continuity plan must 
assess risks posed to critical business operations by disasters and 
other disruptions to business as usual, be they natural, human, or 
environmental. Proposed Sec.  422.504(o)(1)(ii) and Sec.  
423.505(p)(1)(ii) would impose a requirement that the business 
continuity plan contain a mitigation strategy to lessen hazards, 
identify essential functions, and prioritize the order in which 
functions are restored to normal operations; proposed paragraphs 
(1)(iii) through (v) contain other minimum requirements for the 
business continuity plan, discussed in more detail in the following 
paragraphs. In paragraphs (o)(2) of Sec.  422.504 and (p)(2) of Sec.  
423.505, we propose essential functions that must be restored within 24 
hours of a failure, disaster, emergency, or other disruption.
    In paragraph (1)(ii) of Sec.  422.504(o) and Sec.  423.505(p), we 
would require MA organizations and Part D sponsors to mitigate those 
risks through a variety of strategies, specifically, by: (A) 
Identifying events (triggers) that would activate the business 
continuity plan; (B) developing plans to maintain the availability and, 
as applicable, the confidentiality of hard copy and electronic 
essential records, including a disaster recovery plan for IT and 
beneficiary communication systems; (C) establishing a chain of command, 
which would ensure that employees know the rules of succession; (D) 
creating a communications plan that includes emergency capabilities and 
means to communicate with employees and third parties; (E) establishing 
procedures to address management of space and transfer of employee 
functions; and (F) establishing a restoration plan with procedures to 
transition back to normal operations. Finally, we also propose, at 
(1)(ii)(G) in Sec.  422.504(o) and Sec.  423.505(p), that the business 
continuity plan comply with all applicable federal, state, and local 
laws. In light of the nature of the records an MA organization and Part 
D sponsor would have in its possession, we propose to emphasize 
continuing compliance with the contingency plan requirements of the 
Health Insurance Portability and Accountability Act of 1996 (HIPAA) 
Security Rule (45 CFR Parts 160 and 164, Subparts A and C) by including 
a cross-reference to those requirements in paragraph (1)(ii)(B)(2). 
These areas of responsibility are essential to continuing the business 
operations that allow beneficiaries to access health care services and 
covered Part D drugs.
    To better ensure that a business continuity plan works as a 
practical matter, we next propose in Sec.  422.504(o)(1)(iii) and (iv) 
and Sec.  423.505(p)(1)(iii) and (iv) to require that on an annual 
basis, each MA organization and Part D sponsor test and revise the plan 
as necessary, and train employees on their responsibilities under the 
plan. Sections 422.504(o)(1)(v) and 423.505(p)(1)(v) would require that 
MA organizations and Part D sponsors keep records of their business 
continuity plans that would be available to CMS upon request.
    We do not believe the broad list of areas that we propose be 
covered by business continuity plans are new to MA organizations and 
Part D sponsors. Rather, these topics typically appear in standard 
business continuity plans. And we are also building on some 
requirements that already exist under federal and state laws. For 
instance, with respect to electronic protected health information, 
health plans have long had to comply with the contingency plan 
requirements found in the HIPAA Security Rule. Indeed, our goal is to 
provide a list broad enough to align with the business contingency 
plans that we believe most, if not the vast majority, of MA 
organizations and Part D sponsors already have in place.
    In contrast to the aforementioned list of broad content 
requirements, we believe the need to protect beneficiary access 
requires a prescriptive approach for some functions. In paragraphs 
(o)(2) and (p)(2), as part of the proposal that essential functions 
must be restored within 24 hours of failure (whether due to disaster, 
emergency, or other disruption), we identify what we believe are the 
minimum essential functions for each MA plan and Part D plan: Benefit 
authorization, if authorization requirements have not been waived, and 
claims adjudication and processing; an exceptions and appeals process; 
and call center operations. Given the mandate of the Act to ensure 
beneficiary access to health care and covered Part D drugs and the 
inability of many beneficiaries to pay for services or drugs without 
the Medicare benefit, we believe that the operations listed in the 
proposed regulations are the most essential operations because they 
directly support the provision of Part C and D benefits. They ensure 
immediate electronic communication on the availability and extent of 
Part C and D benefits and also provide support that makes it more 
likely that Medicare benefits will be appropriately and timely provided 
(for example, by providing telephone assistance to beneficiaries with 
questions on how to obtain benefits and maintaining a forum in which 
beneficiaries can challenge benefit denials). Without real time 
provision of Medicare benefits, beneficiaries might not pay for the 
entire cost of the services or drugs and therefore go without necessary 
treatment.
    We believe the operations listed here are the essential operations 
which must be restored in a rapid time frame. We intend our proposed 
deadline of 24 hours to be the outside limit and would expect MA 
organizations and Part D sponsors to restore operation of essential 
functions as soon as possible but not later than 24 hours after they 
fail or otherwise stop functioning as usual. The clock would begin 
running in cases of total failure (for example, a computer or 
telecommunications system crashes or stops working after disruption of 
the power supply) and also when significant problems occur (for 
example, a central database is corrupted).
    The need to ensure correct claims adjudication and benefit 
administration of health care services and drugs is no less acute 
during emergencies. A disaster or other disruption in one part of the 
country may disable computer systems that service areas across the 
country that have not otherwise been disrupted. Beneficiaries in those 
unaffected areas who were denied health care or drug benefits (that is, 
access to drugs or reimbursement for claims paid out of pocket) before 
the disruption took place should not be denied the right to immediately 
challenge those denials or to learn timely the resolution of earlier 
challenges. As proposed, Sec.  422.504(o)(2)(i) and Sec.  
423.505(p)(2)(i) identify benefit authorization (if authorization 
requirements have not been waived) and claim adjudication and 
processing as essential functions which must be operational within 24 
hours. We intend that this proposed regulation would require 
restoration of those operations for services rendered at a hospital, 
clinic or provider office or at the point of sale for Part D covered 
drugs. This function is essential for both Medicare Advantage and Part 
D plans.
    In addition, we also propose standards specific to Part D sponsors 
in Sec.  423.505(p)(2)(ii) and (iii) to ensure that a beneficiary who 
presents at a

[[Page 1955]]

pharmacy with an appropriate prescription for a covered Part D drug 
during a disruption will be more likely to walk away with the drug in 
hand. The first three prongs under proposed Sec.  423.505(p)(2) would 
classify as essential the following functions: (i) Authorization, 
adjudication and processing of pharmacy claims at the point of sale; 
(ii) administration and tracking of enrollee's drug benefits in real 
time, including automated coordination of benefits with other payers; 
and (iii) provision of pharmacy technical assistance. These essential 
tasks entail numerous sub-functions. For instance, Part D sponsors 
would need to restore within the 24 hour return to operations (RTO) all 
computer and other systems that meet all privacy and security 
requirements in order to communicate to pharmacies information about 
topics including: Coverage under Part D and the specific plan; cost-
sharing and deductibles; any restrictions such as prior authorization, 
step therapy, or quantity limit edits; and coordination of benefits 
from other insurers and any low income subsidies. Additionally, the 
sponsor would need to undertake a concurrent drug utilization review 
(DUR) to address, for instance, safety issues, as well as restore its 
pharmacy help desk to provide prompt answers to any questions 
pharmacies might have. (For more detail on some of these functions and 
sub-functions, as related to Part D, please see the preamble to section 
III. A. 17 of this proposed rule entitled, ``Requirement for Applicants 
or their Contracted First Tier, Downstream, or Related Entities to Have 
Experience in the Part D Program Providing Key Part D Functions''.)
    Proposed Sec.  422.504(o)(2)(ii) and Sec.  423.505(p)(2)(iv) would 
classify as an essential operation an enrollee exceptions and appeals 
process including coverage determinations. Under this provision, within 
24 hours of failure, MA organizations and Part D sponsors would need to 
restore all IT and workforce support necessary to maintain the ``safety 
net'' that ensures beneficiaries the right to appeal or to seek a 
formulary exception.
    Finally, for both MA organizations and Part D sponsors, we propose 
that the operation of the call center be an essential function which 
must be restored within 24 hours. By classifying operation of the call 
center as essential, proposed Sec.  422.504(o)(2)(iii) and Sec.  
423.505(p)(2)(v) would ensure that beneficiaries can receive the 
information necessary to find out where they need to go to access 
benefits and learn about any special rules that might apply (for 
example, whether pre-authorization requirements are waived or 
beneficiaries can obtain benefits at out-of-network providers or 
pharmacies) by requiring MA organizations and Part D sponsors to 
restore operation of call center services within 24 hours. Enabling a 
beneficiary who has just been denied Part D coverage at his or her 
usual pharmacy to call immediately and speak to a customer service 
representative while still standing in that pharmacy can ensure that he 
or she obtains drugs appropriately covered by his or her Part D plan 
before returning home or moving to a safer area.
    Furthermore, because it may be difficult during a disaster to get 
to a provider's office or a pharmacy, we believe it is also important 
that benefit authorization, claims adjudication, and call center 
operations be restored within 24 hours after failure. While our 
proposed provision would require MA organizations and Part D sponsors 
to coordinate their workforce, facilities, and IT and other systems 
support to meet the 24 hour RTO, we believe that the vast majority of 
MA organizations and Part D sponsors already meet, or if not, would be 
able to meet this requirement with their current resources, based upon 
our knowledge of the industry and as evidenced by the lack of 
widespread problems with MAO and Part D operations that resulted after 
recent natural disasters in different parts of the country. MA 
organizations and Part D sponsors would not be required to take any 
prescribed actions (for example, there is no requirement for redundant 
systems located at certain distances apart). Rather, the 24 hour RTO 
would allow MA organizations and Part D sponsors the flexibility to 
continue to seek their own disaster preparedness solutions (for 
instance, vendor sites or functions spread across facilities).
    Our goal in proposing a contractual requirement for business 
continuity plans is to ensure beneficiary access to health care 
services and Part D drugs during disasters and other interruptions to 
regular business operations. We view prior planning as essential to 
achieving this goal. We specifically solicit comments regarding which 
functions should be identified as essential operations and the 24-hour 
timeframe for RTO and would appreciate any information unique to the 
role of MA organizations and Part D sponsors.
17. Requirement for Applicants or Their Contracted First Tier, 
Downstream, or Related Entities To Have Experience in the Part D 
Program Providing Key Part D Functions (Sec.  423.504(b))
    Since its establishment in 2006, the Medicare Part D program has 
matured into a generally stable, well functioning program, and the Part 
D sponsors (as well as their first tier, downstream, and related 
entities (FDRs)) with which CMS contracts have developed vast expertise 
in the operational complexities of the program. While we will continue 
to fine tune the program through rulemaking, guidance, and additional 
oversight procedures, we believe the program has largely entered a 
mature stage. Despite this progress, we still find ourselves spending a 
disproportionate amount of resources and attention on the operations of 
new Part D sponsors where neither the new sponsor nor its supporting 
FDRs have experience with Part D. In an environment where there is an 
abundance of Part D industry expertise, we are committed to 
establishing an approach to contracting with new Part D sponsors that 
ensures that they take advantage of that expertise and experience in 
the development of their Part D program operations.
    To address this problem, pursuant to our authority at section 1860D 
12(b)(3)(D) of the Act to adopt additional contract terms, not 
inconsistent with the Part C and D statutes, that are necessary and 
appropriate to administer the Part D program, we are proposing to adopt 
provisions that would require any entity seeking to contract as a Part 
D plan sponsor (as a stand alone prescription drug plan sponsor or as a 
Medicare Advantage organization offering Part D benefits) to have 
arrangements in place such that either the applicant or one of its 
contracted FDRs has one full benefit year serving as a Part D plan 
sponsor, or at least one full benefit year of experience performing key 
Part D functions for another Part D plan sponsor. The applicant or a 
contracted FDR will be required to have obtained that experience within 
the two years preceding the Part D sponsor qualification application 
submission. Under this proposal, the experience requirement would be 
met by an entity seeking to contract as a Part D plan sponsor if its 
parent or another subsidiary of that parent already holds a Part D 
sponsor contract that has been in effect for at least one year at the 
time of the application submission.
    Of course, all applicants and their FDRs were new to the Part D 
program

[[Page 1956]]

in 2006, so we necessarily went forward with partners that may have had 
significant drug benefit administration experience, but no experience 
with the unique features of Part D. In 2014, there will be 
approximately 310 parent organizations that own 578 legal entities 
offering 881 contracts for Part D. In addition, more than 300 
organizations (including Part D sponsors and their FDRs) perform key 
Part D functions on behalf of the Part D sponsors. Given this large 
number of organizations with Part D experience available to serve 
beneficiaries, we believe it is in the Part D program's best interest 
to be more discriminating about the entities with which we partner to 
deliver the Part D benefit.
    New, inexperienced entities may be more likely to fail in all or 
some key Part D functions, causing harm to beneficiaries and requiring 
us to devote significant resources providing technical support to the 
new Part D sponsor in order to protect the Medicare beneficiaries 
enrolled in the sponsor's plan(s). Given the wealth of available Part D 
expertise that now exists, it is justifiable for us to require that new 
applicants to the program bring with them Part D experience so that we 
can better protect Part D enrollees and minimize unnecessary 
expenditures of resources by us in correcting avoidable problems.
    We have determined that prior experience offering drug benefits in 
the commercial insurance or Medicaid markets is no longer a sufficient 
substitute for experience operating the Part D benefit. The Medicare 
drug benefit is fundamentally different from other drug benefits, with 
unique and operationally complex provisions, including transition fill 
requirements, protected class medication formulary requirements, low 
income subsidy administration, Part A and B versus Part D coverage 
determinations, requirements related to the tracking of true out of 
pocket costs, and requirements related to the coordination of benefits 
with other payers in real time. When neither a Part D sponsor, nor its 
FDRs providing key Part D functions, has any experience delivering Part 
D benefits, the consequences can be disastrous for beneficiaries and 
highly disruptive for the program and CMS. In a recent plan year, we 
placed a new PDP sponsor, where neither it nor its FDR had PDP 
experience, under an immediate enrollment and marketing sanction just 
months after the organization began its PDP operations. The sponsor had 
experienced widespread failures across all of the most important PDP 
operational areas and was unable to fix its problems without hiring 
additional staff and contractors with PDP experience. In this case, 
among other deficiencies, this sponsor had inappropriately rejected 
drug claims at the point of sale; failed to properly process coverage 
determinations (that is, requests for drug coverage or payment and 
reimbursement); denied enrollees the chance to appeal rejected claims 
and failed to ensure that denied coverage determinations were reviewed 
by an independent third party; and failed to process enrollment and 
disenrollment requests, or failed to properly process enrollment 
transactions. In short, the PDP sponsor was not providing the PDP 
benefit to its members. This became obvious when the rate at which we 
received beneficiary complaints about the sponsor for the first 4 
months of operation was more than 225 percent higher than the average 
rate at which we received complaints about all other PDP sponsors for 
the same period. We were forced to dedicate significant resources and 
personnel to addressing the sponsor's systemic failures.
    We believe that these failures would not occur, or would be less 
catastrophic, if either the Part D sponsor or its supporting FDRs have 
had experience actually performing key Part D functions. When both the 
new sponsor and its FDRs lack experience in Part D, there is no source 
of Part D expertise associated with the operation of a Medicare 
contract that could be counted on not only to establish and maintain 
systems that would ensure the effective delivery of the drug benefit, 
but also to identify emerging operational problems and promptly develop 
and implement necessary corrective action plans. Thus, we have found 
that the marriage of Part D novices under a single contract has proven 
to be a particularly risky and disruptive combination.
    At the heart of the Part D benefit is the sponsor's ability to 
process claims for prescription drugs in real time because, unlike 
health benefits, where claims payment normally follows the delivery of 
services, pharmacies require confirmation of claims payment at point of 
sale either from an insurer or payment from the individual. While there 
are many operational functions that must run smoothly for a Part D plan 
to be successful (for example, pharmacy network development/
maintenance, enrollment processing, prescription drug discount 
negotiation, and provision of customer service), we are proposing to 
require Part D experience in only three critical areas in which 
beneficiaries are particularly vulnerable should the sponsor 
demonstrate significant non compliance. We believe limiting our new 
requirement proposal to just three targeted areas offers a balanced 
approach which protects beneficiaries while at the same time provides 
needed flexibility to new sponsors to structure their business 
arrangements to address the dozens of other Part D functions. The three 
areas for which we are proposing to require prior experience in Part D 
at the time of application to become a new Part D sponsor are
     (1) Authorization, adjudication and processing of pharmacy 
claims at the point of sale;
     (2) Administration and tracking of enrollees' drug 
benefits in real time, including automated coordination of benefits 
with other payers; and
     (3) Operation of an enrollee appeals and grievance 
process.
    It is in these three areas where--in our view, based on our 
experience with Part D enrollee health is placed at the most 
significant risk by Part D sponsor compliance failures. Further, our 
audit work has indicated that these are the operational areas where 
sponsors are most likely to have significant failures that require 
immediate corrective action. While other areas, like enrollment 
processing, also present risks of direct beneficiary harm, our 
experience has shown that organizations usually can overcome enrollment 
problems in a manner that minimizes direct beneficiary harm fairly 
quickly. Also, our audit findings have shown far fewer serious problems 
in the enrollment area compared to the three selected areas (see http://www.cms.gov/Medicare/ComplianceandAudits/PartC 
andPartDComplianceandAudits/Downloads/
2012PartCPartDProgramAuditAnnualReport.pdf).
    Authorization, adjudication and processing of pharmacy claims at 
the point of sale are the most basic features of the Part D program, 
allowing Part D plan enrollees to have their prescriptions filled at 
the pharmacy counter. When presented with a prescription by a 
beneficiary, the pharmacy communicates electronically with the Part D 
sponsor to determine eligibility, coverage, and cost sharing for the 
item according to the formulary and benefit structure of the plan in 
which the beneficiary is enrolled. Aspects of eligibility and coverage 
unique to Part D include eligibility for the Low Income Subsidy and 
transition benefits. Assuming that the sponsor informs the pharmacy 
that the prescribed drug is covered under the beneficiary's plan, the 
pharmacy charges the beneficiary the appropriate cost share or 
deductible amount, as determined by the plan

[[Page 1957]]

sponsor. The Part D sponsor also uses the online, real time system to 
conduct concurrent drug utilization review (DUR), a process through 
which pharmacists receive a message warning of potential safety issues 
given the drug requested and the patient's drug history. If any of the 
cost sharing information is incorrect, or if the claim fails to 
adjudicate electronically for any reason, the beneficiary may be forced 
to pay out of his own pocket costs that are not his responsibility or 
leave the pharmacy without his prescription drugs. If concurrent DUR is 
not performed correctly, the beneficiary's health and safety is at 
risk.
    Administration and tracking of enrollees' drug benefits in real 
time refers to a Part D sponsor correctly adjudicating the formulary it 
had submitted to CMS and that had been approved by CMS, along with 
accurately tracking an enrollee's drug spend within the Part D benefit, 
and coordinating benefits in real time with other payers. Sponsors must 
insure that the drug dispensed meets the definition of a covered Part D 
drug, including a medically accepted indication that is not otherwise 
covered under Part A or B of Medicare. Sponsors must also insure that 
any approved prior authorization, step therapy, and quantity limit 
edits are processed consistent with those approved by us, so that drugs 
are not denied inappropriately at the point of sale. Sponsors are also 
required to insure that enrollees are charged correct cost sharing, as 
amounts vary depending on the drug's tier placement, the enrollee's 
drug spend to date, contributions from other payers, and other factors 
such as whether the beneficiary receives a low income subsidy. 
Critically, compliance also includes correct application of our 
transition requirements, which is a beneficiary protection that is 
unique to Part D, and ensures beneficiaries facing a situation where 
their drugs are not on the plan's formulary have access to a temporary 
fill of the prescription, giving beneficiaries time to switch to 
another drug or seek a formulary exception. Failures in this area can 
have significant negative health consequences for enrollees because 
they are likely to be denied access to Part D drugs or face incorrect 
charges at the point of sale.
    The third key function we selected as part of the experience 
requirement is operation of an enrollee appeals process (including 
coverage determinations). A sponsor's appeals operations serve as a 
``safety net'' for improper benefits administration. Medicare enrollees 
have the right to contact their sponsor to make a complaint about the 
denial of coverage for drugs or services to which the enrollee believes 
he or she is entitled. Generally, sponsors are required to classify and 
process complaints about coverage for drugs or payment as a request for 
a coverage determination or appeal. Improper processing of a coverage 
determination denies an enrollee their due process and appeal rights 
and may delay an enrollee's access to medically necessary, even life 
sustaining services or drugs. There are different decision making 
timeframes for the review of coverage determinations and appeals. We 
have a beneficiary protection in place that requires plans to forward 
coverage determinations and redeterminations to an Independent Review 
Entity (IRE) when the plan has missed the applicable adjudication 
timeframe. If the plan sponsor reverses its initial adverse coverage 
determination or the IRE reverses the plan sponsor's adverse decision, 
the plan sponsor must correctly authorize or provide the benefit under 
dispute within the timeframes set forth in regulation. If the plan 
sponsor does not effectuate the decision timely and correctly, this can 
result in delays to an enrollee's access to medically necessary or even 
life sustaining drugs. Thus, the appeals process is a vital beneficiary 
protection that serves as the beneficiary's safety net when something 
goes wrong with claims adjudication or benefit administration, and once 
again, directly affects a beneficiary's access to prescription drugs.
    Under our proposal, multiple separate organizations could together 
combine their experience to meet the prior qualification requirements 
for the three key Part D functions. That is, no one single entity would 
need to have prior experience in all three areas. Rather, the 
requirement would be for the Part D applicant in combination with its 
FDRs, if any, to have Part D experience covering the three key 
functions.
    We believe there will be minimal impact on the prescription drug 
benefit administration market stemming from our proposal, particularly 
since large numbers of experienced organizations currently perform this 
Part D work. Fifty nine entities currently perform authorization, 
adjudication and processing of pharmacy claims at the point of sale; 66 
entities perform administration and tracking of enrollees' drug 
benefits in real time; and 203 entities operate an enrollee appeals and 
grievance process. The ready availability of entities that would meet 
the criteria we establish here is demonstrated by the fact that the 
vast majority of new Part D sponsors each year choose to contract with 
experienced Part D FDRs. For example, as of late May 2013, there are 21 
new organizations (at the parent level) with active Part D contract 
qualification applications for 2014, and each applicant has contracted 
with an FDR having at least one year of recent Part D experience. Some 
of the applicants for 2014 that attempted to apply with inexperienced 
entities performing the selected key functions withdrew their 
applications upon learning that they contained significant 
deficiencies.
    Our proposal also does not prohibit additional organizations from 
gaining Part D experience in the selected key functional areas. Should 
an organization wish to become a new Part D FDR for one or more of the 
key functions, this ``novice'' entity could provide the service for 
just one of the hundreds of existing Part D sponsors. After a period of 
one year, the novice entity would then be qualified to provide its 
services to existing Part D sponsors as well as partner with new Part D 
applicants. We are comfortable with this scenario because during the 
novice entity's first year gaining Part D experience the existing Part 
D sponsor would apply its knowledge of how to oversee its FDRs, have 
institutional knowledge of the functional area, understand the 
complexity of the program, and know the risks of failing to implement 
the program successfully.
    In the somewhat the opposite scenario, a new Part D sponsor 
contracting with experienced FDRs will have the opportunity to gain its 
experience in the key Part D functions by working closely with its 
FDRs, developing in house expertise, and providing oversight. After a 
period of one or more years, if desired, the Part D sponsor itself 
could conceivably take responsibility for carrying out one or more of 
the key Part D functions. We fully believe that our proposed approach 
allows for new organizations to develop Part D expertise, yet minimizes 
the significant risk to beneficiaries that would be caused by the types 
of widespread failures we have seen in the selected key Part D 
functions performed by inexperienced entities.
    While our proposal does not require the Part D experience to be 
current at the time of an application to become a Part D sponsor, we 
are proposing that the experience be recent (that is, within the past 2 
years) and have lasted for at least one full benefit year. As stated 
previously, the Part D program is complex, and program policies evolve 
each year, requiring organizations working in Part D to adapt and 
adjust

[[Page 1958]]

their operations. We believe that any experience older than 2 years 
would be out of date and would not represent experience with the 
current state of the Part D program. As for our proposed requirement 
that the experience be for at least a term of one full benefit year, 
this approach is appropriate because operating the benefit involves 
cyclical activities, some of which take place only one time per year, 
and thus an organization can only gain full experience by operating its 
Part D functional area for an entire benefit year.
    We intend to implement this proposal through our existing Part D 
contract qualification application process, and we have proposed to 
amend Sec.  423.504(b) accordingly. Today, at the time of application, 
an entity seeking a Part D sponsor contract must provide evidence that 
it has contractual arrangements in place for any key Part D function 
that the applicant itself will not be performing. For the three key 
functions identified under this proposal, new application procedures 
will require the applicant to submit evidence that the entity to 
perform such functions (whether itself or an FDR) has provided the same 
function for another Part D sponsor within the past 2 years, for at 
least one full benefit year. Applicants with existing Part D contracts 
or whose parents or other subsidiaries of the same parent hold Part D 
contracts will not be required to submit evidence of their Part D 
experience.
18. Requirement for Applicants for Stand-Alone Part D Plan Sponsor 
Contracts To Be Actively Engaged in the Business of the Administration 
of Health Insurance Benefits (Sec.  423.504(b)(9))
    The Medicare prescription drug benefit program has matured into a 
generally stable, well-functioning program, and the Part D sponsors 
with which CMS contracts have developed vast expertise in the 
operational complexities of the program. The market for stand-alone 
Part D Prescription Drug Plans (PDPs) has also matured significantly 
since the program's inception and what was once a novel product is now 
available to residents of every state from multiple sponsors who offer 
several plan options. Over the same period, we have noticed that the 
Part D program has in some cases attracted sponsors wishing to offer 
stand-alone PDPs who have no prior experience in the delivery of health 
or prescription drug insurance benefits, often to the detriment of the 
Part D program and the Medicare beneficiaries who elect plans offered 
by these sponsors. We are committed to establishing an approach to 
contracting with organizations new to the stand-alone PDP program that 
ensures that their first experience in the health insurance and health 
benefits market is not as the sponsor of a stand-alone PDP.
    To address this problem, we are proposing, pursuant to our 
authority at section 1860D-12(b)(3)(D) of the Act to adopt additional 
contract terms that are necessary and appropriate to administer the 
Part D program, regulatory provisions that would require any entity 
seeking to contract as a stand-alone PDP sponsor, to have either 
actively provided health insurance or health benefits coverage for 2 
continuous years immediately prior to submitting a contract 
qualification application, or provided certain prescription drug 
benefit management services to a company providing health insurance or 
health benefits coverage for 5 continuous years immediately prior to 
submitting an application. This requirement would not apply to an 
entity seeking to contract as the sponsor of a stand-alone PDP if its 
parent or another subsidiary of itself or its parent possesses the 
requisite experience.
    This proposal may appear similar to the immediately-preceding 
proposal (section III.A.17) of this proposed rule requiring, at Sec.  
423.504(b)(8), that new Part D sponsors engage first tier, downstream, 
and related entities with prior Part D experience. However, the 
proposed change we are discussing in this section, which we propose to 
codify at Sec.  423.504(b)(8), would apply only to entities seeking to 
contract as a Part D sponsor of a stand-alone PDP, whereas the proposed 
requirement at Sec.  423.504(b)(8) would apply to all new Part D 
sponsors, including those seeking to contract as Medicare Advantage 
organizations offering Part D through an MA-PD plan. We are proposing 
both requirements because the problems encountered by new PDP sponsors 
with no experience in the health insurance market are distinct from 
those encountered by new PDP sponsors and MA organizations who use PBMs 
with no experience in the Part D market. New PDPs with no prior health 
insurance or health benefits experience have demonstrated significant 
problems even when using experienced PBMs.
    The Part D program has matured to the point where beneficiaries in 
every state now have access to several options for basic and enhanced 
stand-alone Part D coverage. In 2013, there is an average of 15 
enhanced stand-alone plans and 16 basic plans per PDP Region and no 
region had fewer than 23 plans from which beneficiaries may choose. 
These numbers are consistent with the quantity of available PDPs in 
recent benefit years and are well above the minimum of two plans per 
region required by section 1860D-(a)(1) of the Act. Also, a total of 57 
parent organizations that own 72 legal entities hold 75 Part D 
contracts for stand-alone PDPs, numbers that indicate that CMS has kept 
the PDP marketplace open to a significant number of entities that 
compete to serve beneficiaries.
    Among the patterns we have identified during our implementation and 
administration of the Part D program is the extent to which the program 
has attracted organizations with no experience in the delivery of 
health or prescription drug benefits prior to their entry into the Part 
D program. These organizations often have experience in other lines of 
business, such as information technology, or are formed by investment 
groups with no other health care business for the sole or primary 
purpose of entering the Part D market. The Part D program is 
effectively used by these organizations as a means to finance their 
first (and often only) foray into the health insurance or health 
benefits industry. It appears to CMS that these sponsors view the Part 
D program as simply another line of business to which they can 
profitably apply their information management expertise, especially if 
they believe they can sell these new contracts to a larger participant 
at a substantial profit after several years. While relatively few 
sponsors fit this profile each year, they have caused disproportionate 
problems for beneficiaries and CMS, as described in the following 
paragraphs. The proper administration of the Part D benefit involves 
much more than claims adjudication. Our interaction with these novice 
sponsors leads us to believe that they underestimate the value of 
clinical expertise in administering Part D benefits, particularly in 
conducting effective coverage determination and appeals processes. 
Also, we believe they often do not recognize the critical role that 
relationships, particularly those among beneficiaries, physicians, 
pharmacists, other health care professionals, and insurers, play in the 
successful delivery of a healthcare or prescription drug benefit. Yet, 
the stakes involved in administering a Part D plan are likely higher 
than those associated with any other line of business in the novice 
sponsor's portfolio. Operational failures in Part D can cause improper 
denials at the pharmacy counter of beneficiaries' valid claims for 
prescriptions or improper denial of

[[Page 1959]]

appeals, leading to interruptions in their therapies, which can have 
life-threatening implications. In short, we have found that these types 
of applicants have been unable to administer a Part D benefit.
    The compliance record of PDP sponsors with no healthcare-related 
experience confirms our assessment of the risks they pose to the Part D 
program. Time and again, these sponsors fail our past Medicare contract 
performance and audit tests or receive low quality scores (that is, 
star ratings) because they lack the ability to administer even the most 
basic elements of a health or drug benefit program, let alone one as 
complex as Medicare Part D. For example, we recently sanctioned a new 
stand-alone PDP sponsor (a situation we describe in section III.A.17 of 
this rulemaking where we propose to establish the requirement that all 
new Part D sponsors engage subcontractors with Part D experience). The 
sponsor had no recent experience providing or administering health 
benefits. It only began offering healthcare-related benefits when it 
became a Part D plan sponsor. We believe the sponsor's inexperience 
administering health insurance and health benefits, as well as its 
apparent reliance on Medicare as its sole source of revenue, compounded 
the problems it experienced, as the sponsor was unable to independently 
and expeditiously identify and resolve problems with benefits 
administration.
    Another, more dramatic case, involved a CMS decision in 2010 to 
immediately terminate a PDP sponsor's contract under urgent 
circumstances in which beneficiaries were being significantly harmed. 
Prior to contracting with CMS, the PDP sponsor involved had no 
experience providing or administering health insurance or health 
benefits coverage. We terminated the sponsor's contract when an audit 
(prompted by urgent complaints from providers) revealed that the 
sponsor's compliance failures resulted in improperly denied access to 
Part D drugs and put the health of enrollees in the sponsor's PDP at 
imminent and serious risk. Numerous compliance failures resulted in 
beneficiaries being denied drugs that they were entitled to, including 
those needed to treat HIV, cancer, and seizures, or receiving delayed 
access to these drugs, sometimes after being required to undergo 
medically unnecessary and invasive procedures. The problems were so 
egregious and widespread that we were compelled to terminate the 
contract less than a month after we were first alerted to the problems 
and less than a week after an onsite audit of the sponsor. This 
termination created massive disruption for beneficiaries and to the 
program and required significant resources from CMS to resolve. As 
discussed previously, we believe that these failures would not have 
occurred, or would not have been as catastrophic, if the sponsors had 
prior, recent experience providing health insurance, health benefits 
coverage, or key services related to health benefits coverage.
    When the sponsor is a novice not only to Medicare Part D, but also 
to virtually every aspect of health benefits administration, there is 
no assurance that the entity will be able to administer or oversee the 
most basic elements of health benefits coverage, such as processing 
claims, administering a coverage determination and appeals process, 
enrolling beneficiaries, or administering the benefit as approved. Its 
systems and procedures for doing so are by definition new and unproven. 
We do not believe that health care is a commodity that can be reduced 
to a programmable data set, or that administering the Part D benefit 
involves little more than having the right software package. To entrust 
inexperienced applicants with responsibility for correctly operating a 
program for which even experienced health insurers have had to develop 
new expertise has proven to be unacceptably risky. Part D sponsors are 
charged with both ensuring that beneficiaries get the drugs they need 
and applying clinically appropriate utilization management protocols to 
control costs and protect beneficiary safety. In this capacity, they 
have a role in clinical decision making that is usually reserved for 
physicians and health care providers with years of academic training 
and clinical practice. Permitting an organization with prior experience 
limited to, for example, developing payroll software, to design and 
broker individuals' access to prescription drugs for potentially life-
threatening conditions is an unacceptable mismatch between a set of 
tasks and the expertise applied to it.
    We propose that new applicants have two years of experience 
providing health insurance or health benefits coverage (that is, 
operating as risk-bearing entities licensed in the states where they 
offer benefits) prior to applying as stand-alone Part D Sponsors 
because we believe that this provides sufficient time to demonstrate 
the applicant's ability to operate a health plan. A risk-bearing entity 
with significant problems administering health benefits would be 
unlikely to remain in good standing with its licensing authority for 
two years. While a longer record of successful operations would likely 
provide better evidence of the organization's competence, we are also 
sensitive to the need to promote innovation and competition that can 
come from new PDP sponsors. We believe that requiring two years of 
experience as a risk bearing entity offering health insurance or health 
benefits coverage ensures that new sponsors of stand-alone PDPs have 
minimal experience operating a health benefits program without unduly 
limiting new entrants to the marketplace.
    We recognize that a number of PBMs and Third Party Administrators 
with experience administering prescription drug benefits have entered 
the stand-alone PDP market and have adapted to providing the Part D 
benefit despite their lack of previous experience as health insurers. 
We believe this success is the result, at least in part, of their 
substantial experience operating key functions that form the core of 
PDP benefits on behalf of insurers. This experience is not sufficient 
in and of itself to administering a Part D plan, but it is certainly 
necessary. Therefore, we are proposing elsewhere in this proposed rule 
that organizations applying to contract as stand-alone PDP sponsors 
that do not have experience as a risk-bearing entity providing health 
insurance or health benefits coverage would, in the alternative, be 
eligible to hold a PDP contract if they had experience performing 
services on behalf of an insurer in the delivery of benefits in any 
health insurance market in the three key areas indicated in this 
section III.A.17 of this proposed rule. The three areas that we are 
proposing as meeting the experience requirements are: (1) Adjudication 
and processing of pharmacy claims at the point of sale; (2) 
administration and tracking of enrollees' drug benefits in real time, 
including automated coordination of benefits with other payers; and (3) 
operation of an enrollee appeals and grievance process. Our reasons for 
selecting these three areas as meeting the experience requirements are 
described in more detail in the section of this rulemaking notice 
relating to the proposed requirement at Sec.  423.504(b)(8) that new 
Part D sponsors employ experienced FDRs for these functions.
    We are proposing that entities without two years of experience as a 
risk bearing entity offering health insurance or health benefits 
coverage have five continuous years' experience providing services in 
the three key areas listed previously. We are proposing a longer 
experience requirement for these entities because entities offering 
these services face fewer barriers to entry in

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the marketplace and are not as tightly regulated as risk bearing 
entities. An entity seeking to become a risk bearing entity must 
qualify for a state license, which requires the entity to demonstrate 
on a continuous basis that it meets extensive financial, 
capitalization, and administrative requirements. By contrast, an entity 
seeking to become a PBM or Third Party administrator faces little or no 
regulatory oversight for the services it offers. The investment 
required to start a PBM or Third Party Administrator may be 
significantly lower than that required of risk bearing entities 
operating health insurance programs. While a PBM that performs poorly 
may lose contracts, it is unlikely to be subject to regulatory action 
that would become part of the publicly available record that CMS could 
use to evaluate its application to operate a stand-alone PDP. However, 
we do believe that over a longer period of time, a PBM or Third Party 
Administrator's poor reputation would become known among participants 
in the health and prescription drug insurance markets, making it 
difficult for that organization to retain current contracts or obtain 
new ones with insurers and remain in business. We therefore believe 
that entities that seek to qualify on the basis of their experience as 
PBMs or Third Party Administrators should be required to have provided 
services in these key areas for five continuous years, rather than 
merely two.
    We believe our proposal will not have significant impact on the 
availability of stand-alone PDP plans in the marketplace, but that it 
will simply function to keep out a small number of inexperienced 
organizations who are likely to perform poorly as stand-alone PDPs. 
Fortunately, the vast majority of new sponsors of stand-alone PDPs each 
year have the requisite experience. For example, eight organizations 
filed initial applications during 2013 to qualify to offer stand-alone 
PDPs in 2014 and 6 of them had at least two years' experience as a 
health insurer or 5 years' experience managing prescription drug 
benefits for health insurers. Of the six new stand-alone Part D plans 
in 2013, five had the level of experience we are proposing to require. 
Thousands of entities nationally possess the requisite experience 
providing health insurance, health benefits coverage, or PBM services.
    If this proposed change is finalized, we intend to incorporate it 
into our existing Part D application process. At the time of 
application, an entity seeking a Part D sponsor contract must provide 
evidence that it is currently licensed or is in the process of being 
licensed in a state and provide certain information about its 
organizational experience and history. New application procedures would 
require an applicant for a stand-alone PDP contract to submit evidence 
that the entity, its parent, or a subsidiary of the same parent has 
actively provided health insurance or health benefits coverage for the 
prior 2 years, or has engaged in the three key functions identified 
here continuously for the prior 5 years.
19. Limit Parent Organizations to One Prescription Drug Plan (PDP) 
Sponsor Contract per PDP Region (Sec.  423.503)
    Each year, we accept and review applications from organizations 
seeking to qualify to offer stand-alone prescription drug plans in one 
or more PDP regions. With limited exceptions (for example, poor past 
contract performance, limited Part D experience), we approve all 
applications submitted by organizations that demonstrate that they meet 
all Part D application requirements. CMS proposes, under our authority 
at section 1860D-12(b)(3)(D) of the Act to adopt additional contract 
terms, not inconsistent with the Part C and D statutes, that are 
necessary and appropriate to administer the Part D program, to add as a 
basis upon which we may deny a PDP sponsor application the fact that 
the applicant is applying for qualification in a PDP Region where 
another subsidiary of the applicant's parent organization already holds 
a PDP sponsor contract. In our description of this proposal, the term 
``parent organization'' refers to an entity that controls a subsidiary 
through ownership of more than 50 percent of the subsidiary's shares.
    During the 2013 contract year, there are 72 unique contracting 
entities (that is, entities licensed as risk bearing entities) holding 
75 PDP sponsor contracts. There are 57 parent organizations that hold 
more than one PDP sponsor contract through a subsidiary contracting 
organization over which they maintain a controlling interest.
    To promote the effective administration of a Part D program that 
involves so many parent organizations and contracting entities, we have 
consistently taken steps to ensure that the numbers of PDP sponsors, 
PDP sponsor contracts, and plan offerings are kept at a level that 
allows sponsors to fully exercise their rights as PDP sponsors but 
avoids the duplication and confusion that can result when reasonable 
limits are not placed on sponsors' requests for contracting 
arrangements that serve only their internal business operations. During 
the initial Part D contracting conducted during 2005, we approved a 
handful of contracts that were held by subsidiaries of a common parent 
organization. Since then, we have worked with the affected parent 
organizations to consolidate almost all of those ``duplicate'' 
contracts down to one PDP contract per participating parent 
organization per PDP region. The remaining duplicate contracts 
accommodate parent organizations that made binding business 
arrangements while acting in reliance on our previous allowance of 
multiple PDP sponsor contracts in the same PDP region. We expect to 
continue to work with those parent organizations to explore options for 
discontinuing their reliance on the second PDP sponsor contract in the 
immediate future.
    Section 1860D-12(b)(1) of the Act provides that PDP sponsors may 
offer multiple plan benefit packages (referred to as PBPs or plans) 
under one PDP sponsor contract. Therefore, parent organizations need 
only one PDP sponsor contract to offer the full range of the possible 
plan options in a particular PDP Region. We recognize that many parent 
organizations that offer plans in multiple PDP regions must use more 
than one subsidiary to administer their full array of plans throughout 
the United States and the territories. For example, parent 
organizations may adopt these arrangements to accommodate unique state 
licensure requirements or the terms of trademark licensing agreements. 
However, none of these justifications, which are based on a parent 
organization's need to serve more than one PDP Region, would support a 
request, like several we have received during the CY 2014 contract 
qualification application cycle, by a parent organization to be granted 
a second PDP sponsor contract in a PDP Region it already serves. As 
discussed more fully in the following paragraphs, there are significant 
inefficiencies to the program of having duplicate contracts that do not 
provide more benefit plan options than could be offered under a single 
contract. Additionally, informal communications made by past requestors 
of duplicate contracts indicated that the purpose has been to either 
(a) segregate low income beneficiaries into their own contract, or (b) 
corral the experience of a particular low-performing plan into its own 
CMS contract so as not to taint the performance rating of the better 
performing plan offering, as performance ratings are calculated at the 
contract level. CMS opposes the

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inefficiencies of duplicate contracts and the gaming duplicate 
contracts can support. That said, we welcome comments from industry, 
advocates, and others as to circumstances for our consideration under 
which duplicate contracts may be beneficial.
    One of the fundamental principles of the Part D program is that the 
selection of plans made available to beneficiaries is the product of 
true competition among PDP sponsors. Two subsidiaries of the same 
parent organizations offering plans in the same PDP region are not 
truly competitors as decisions concerning their operations are 
ultimately controlled by a single entity, or parent organization. Also, 
we only approve those PDP offerings that meet the meaningful 
differences test stated at Sec.  423.265(b)(2), and we apply that test 
at the parent organization level. A parent organization would not gain 
an opportunity to offer more plan benefit packages under two or more 
contracts it controlled through its subsidiaries than it would under 
one contract because we would, as part of our bid review, evaluate 
whether all the plans proposed by the same parent organization met the 
meaningful differences test.
    The proposed limitation on the number of PDP sponsor contracts a 
parent may control in a PDP Region is also necessary to preserve the 
integrity of CMS' star ratings. CMS assigns star ratings at the 
contract level, and they are intended to reflect all aspects of the PDP 
operations controlled by a unique contracting entity. However, that 
principle is compromised when a parent organization to one of the 
contracting entities is permitted to control, through other 
subsidiaries, more than one PDP contract. While the contracting 
entities (that is, PDP sponsors) are legally accountable for the 
delivery of benefits under a PDP sponsor contract, when those sponsors 
are subsidiaries to a parent organization, it is the parent that, in 
reality, controls the quality of the sponsor's contract performance. 
The parent does this by using its controlling interest in the 
subsidiaries to establish the budget priorities and operational 
policies of those entities. As a result, allowing a parent organization 
to effectively administer two or more PDP sponsor contracts would allow 
it potentially to artificially inflate the star ratings on one contract 
by excluding the poor performance under its other contract from the 
rating calculation. In that instance, some beneficiaries could make a 
plan election without complete information about the performance of the 
organization ultimately responsible for the quality of services they 
would receive by enrolling in that plan. A beneficiary for whom quality 
ratings are an important factor in choosing a plan is best served by 
contracting arrangements and rating systems that provide the most 
transparency about the performance of all the PDP products offered 
under the authority of the single parent organization. This goal is 
best served by limiting parent organizations to one PDP sponsor 
contract per PDP Region.
    Based on our experience in administering the Part D prescription 
drug benefit program we do not believe that there is a compelling 
justification for parent organizations to administer two PDP sponsor 
contracts in the same PDP region. Moreover, such arrangements impede 
our ability to efficiently administer the PDP and provide a means by 
which the integrity and reliability of our star ratings system can be 
compromised. Therefore, we propose to amend Sec.  423.503(a) by adding 
a paragraph (3) stating that CMS will not approve an application when 
it would result in the applicant's parent organization holding more 
than one PDP sponsor contract in the PDP region for which the applicant 
is seeking qualification as a PDP sponsor. We anticipate that we would 
most frequently use this authority to deny an application in instances 
where the applicant's parent organization already controls a PDP 
sponsor contract, either directly by acting as a PDP sponsor itself (in 
instances when the parent is licensed as a risk-bearing entity) or 
through its ownership of a subsidiary that qualifies as a PDP sponsor 
and is a party to a stand-alone PDP sponsor contract. In the less 
likely situation where two or more subsidiaries of the same parent 
organization each submit applications in the same year for PDP regions 
where the parent organization controls no PDP sponsor contracts, we 
would request that the parent withdraw all but one of the applications. 
In the absence of a withdrawal election, CMS will deny all of the 
parent organization's applications.
20. Limit Stand-Alone Prescription Drug Plan Sponsors To Offering No 
More Than Two Plans per PDP Region (Sec.  423.265)
    Under our authority at section 1860D-11(d) of the Act, we conduct 
negotiations with stand-alone prescription drug plan (PDP) sponsors 
concerning our approval of the bids they submit each year. As the Part 
D program has evolved, we have adopted regulations designed to 
authorize us to use that negotiating authority to ensure that the 
number of plans offered in a given PDP region reflects a balance 
between sponsors' interest in providing options tailored to meet the 
needs of a diverse Medicare population and the need to avoid creating 
undue confusion for beneficiaries as they consider various plan 
offerings. We continue here our process of updating our bid review 
authority to reflect the evolution of the Part D program by proposing 
to limit to two the number of plans stand-alone PDP sponsors may offer 
in each PDP region.
    PDP sponsors must offer throughout a PDP region at least one basic 
plan that consists of: Standard deductible and cost sharing amounts (or 
actuarial equivalents); an initial coverage limit based on a set dollar 
amount of claims paid on the beneficiary's behalf during the plan year; 
a coverage gap during which a beneficiary pays more of his drug costs; 
and finally, catastrophic coverage that applies once a beneficiary's 
out-of-pocket expenditures for the year have reached a certain 
threshold. Prior to our adopting regulations requiring meaningful 
differences among each PDP sponsor's plan offerings in a PDP Region, 
CMS guidance allowed sponsors that offered a basic plan to offer in the 
same region additional basic plans, as long as they were actuarially 
equivalent to the basic plan structure described in the statute. These 
sponsors could also offer enhanced alternative plans which provide 
additional value to beneficiaries in the form of reduced deductibles, 
reduced copays, coverage of some or all drugs while the beneficiary is 
in the gap portion of the benefit, or some combination of those 
features.
    As we have gained experience with the Part D program, we have made 
consistent efforts to ensure that the number and type of plan benefit 
packages PDP sponsors may market to beneficiaries are no more numerous 
than necessary to afford beneficiaries choices from among meaningfully 
different plan options. In addition to setting differential out-of-
pocket-cost (OOPC) targets each year to ensure contracting 
organizations submit bids that clearly offer differences in value to 
beneficiaries, we issued regulations in 2010 that established at Sec.  
423.265(b)(2) our authority to deny bids that are not meaningfully 
different from other bids submitted by the same organization in the 
same service area. Our application of this authority has effectively 
eliminated PDP sponsors' ability to offer more than one basic plan in a 
PDP region since all basic plan benefit packages must be actuarially 
equivalent to the standard benefit structure discussed in the statute. 
That regulation also effectively limited to two the

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number of enhanced alternative plans that we can approve for a single 
PDP sponsor in a PDP region. As part of the same 2010 rulemaking, we 
also established at Sec.  423.507(b)(1)(iii) our authority to terminate 
existing plan benefit packages that do not attract a number of 
enrollees sufficient to demonstrate their value in the Medicare 
marketplace. Both of these authorities have been effective tools in 
encouraging the development of a variety of plan offerings that provide 
meaningful choices to beneficiaries without creating undue confusion 
for beneficiaries.
    We believe that the progressive closure of the coverage gap 
provided for in the Affordable Care Act affords us another opportunity 
to promote even greater clarity in the set of stand-alone PDP plan 
options from which beneficiaries may make an election. Under the 
statute, beginning in 2011, applicable beneficiaries enjoy discounts of 
50 percent off negotiated prices on brand name drugs when purchased 
while in the coverage gap portion of the benefit. Also, since 2011, the 
required coverage in the gap has increased and will continue to do so 
gradually until 2020, when the combination of required coverage and 
manufacturer discounts covers 75 percent on average for both brand-name 
and generic drugs. This ``closing'' of the coverage gap effectively 
will leave the beneficiary with only a 25 percent cost share on average 
across the entire benefit (or its actuarial equivalent) before the 
catastrophic threshold.
    Our experience in applying the meaningful differences standard 
indicates that, as the Part D coverage gap is closed, it will become 
increasingly difficult for a PDP sponsor to qualify to offer more than 
two plans in the same service area and still meet the meaningful 
differences test. Since we began applying the meaningful differences 
standard to our bid reviews, we have generally approved two types of 
enhanced alternative plans. The first type of plan offers 
beneficiaries, in exchange for a higher premium than that charged for 
basic plan coverage, significant reductions in the cost sharing and 
deductible amounts associated with the basic Part D benefit. The second 
type offers even greater cost sharing and deductible reductions as well 
as coverage for many drugs in the gap. Since coverage of Part D drugs 
in the gap is the distinguishing feature between the two types of 
enhanced alternative plans currently available, closing the coverage 
gap also means that sponsors can no longer rely on it to establish that 
their proposed second enhanced alternative plan is meaningfully 
different than their first.
    Our enrollment data indicate that beneficiaries are already making 
plan choices based on their recognition of the shrinking significance 
of the coverage gap and with it, the value of PDP sponsors' second 
enhanced plans. Since the start of the coverage gap discount program in 
2011, enrollment levels in the second enhanced alternative plans 
offered by PDP sponsors that offer two enhanced alternative plans have 
declined from approximately 12 percent of those sponsors' total 
enhanced alternative plan enrollment in 2010 to between 7 percent and 8 
percent in the 2011, 2012, and 2013 benefit years. This finding 
suggests that the proportion of beneficiaries for whom the additional 
supplemental coverage offered by these plans is worth the supplemental 
premium continues to decline, and we expect this trend to continue as 
the coverage gap closes.
    Despite these developments, many sponsors continue to submit three 
bids per region each year, at least in part, we believe (based on 
conversations with various stakeholders), to ensure that they are not 
perceived as a weaker participant in the Part D market by offering a 
smaller set of plans than their PDP competitors. CMS believes that plan 
sponsors and beneficiaries, as well as the taxpayers, would be better 
served by a more streamlined bid submission process that limited 
sponsors to submitting two PDP bids (one basic and one enhanced) per 
PDP region each year. This limitation would provide a consistent 
bidding framework for all sponsors, allowing them to focus on quality, 
rather than quantity, in development of their bids. It would also 
reduce some of the sponsors' administrative costs associated with 
preparing, marketing, and administering a third benefit package. It may 
also help ensure that beneficiaries can choose from a less confusing 
number of plans that represent the best value each sponsor can offer.
    For CY 2013, there are seven parent organizations that offer two 
enhanced plans (that is, three plans total, one basic and two enhanced 
alternative) within a given PDP region. This amounts to 264 enhanced 
alternative plans in total (two for each affected PDP region) among the 
seven parent organizations. The application of this proposed 
regulation, if finalized, would result in the elimination of 132 
enhanced alternative plans, representing 13 percent of the total number 
of stand-alone PDP plans, and 25 percent of all enhanced alternative 
plans in 2013. If implemented today, these proposed reductions would 
affect a combined 522,742 beneficiaries, approximately 2 percent of the 
overall stand-alone PDP enrollment of 22,529,197 (based on April 2013 
enrollment data). We expect that most sponsors would attempt to 
consolidate their current beneficiaries in one of their two remaining 
plan options, so we believe adoption of this proposal would result in 
minimal disruption to beneficiaries currently enrolled in a sponsor's 
second enhanced plan.
    While the incremental closure of the coverage gap continues until 
2020, CMS believes that the observed enrollment trends in these plans 
demonstrate the reduction in beneficiaries' coverage gap costs that has 
occurred already has moved the stand alone PDP plan market in a way 
that warrants the imposition of the two plan limit as soon as possible. 
The list of plan options today is cluttered with those that the record 
shows appeal to only approximately 2 percent of the overall stand alone 
PDP-plan-enrolled beneficiaries of which 522,742 are enrolled in second 
enhanced plans). In addition, in many cases one of the two enhanced 
plans offers the minimum level of supplemental coverage required to 
meet our meaningful differences tests. We refer to these as ``low value 
enhanced plans'' to distinguish them from second enhanced plans with 
substantially more supplemental coverage. In some cases, the premiums 
for these low value enhanced plans have been less than the premiums for 
the sponsors' basic plans due to favorable risk selection. This occurs 
because many of the beneficiaries with more serious health issues and 
higher utilization of prescription drugs are in the low-income subsidy 
(LIS) eligible population which will not receive the full LIS subsidies 
in plans with supplemental coverage. For this reason we neither auto-
assign the LIS eligible population into such plans, nor will this 
population generally voluntarily enroll in such plans. Thus, continuing 
to permit multiple enhanced plans, particularly low value enhanced 
plans, facilitates risk segmentation. This can increase costs for the 
Part D program and the taxpayers overall. During the most recently 
completed CY 2014 bid review cycle, we continued to encounter bids 
submitted by sponsors for low value enhanced plans with premiums lower 
than the premiums for their basic plans. We believe it is urgent that 
we adopt this proposed policy as soon as possible so that we can bring 
an end to this bidding practice. However, because such a change would 
entail substantial changes to bidding processes for both

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Part D sponsors and CMS that could not realistically be undertaken 
until the proposal was final, we propose to adopt this policy for the 
2016 Part D contracting cycle. We believe that beneficiaries and the 
Part D program would be better served by sponsors that are focused on 
developing plans with broad beneficiary appeal rather than those 
intended to enable the sponsor to either pursue a diminishing niche in 
the Part D market or segment favorable risk into low value enhanced 
plans. We solicit comments on whether there is any real need for more 
than two standalone plan options per PDP sponsor.
    Therefore, we propose to amend the Part D regulations at Sec.  
423.265 to add a revised subsection (b)(3), which states that ``CMS 
shall not accept more than one basic bid and one enhanced bid for a 
coverage year from a single PDP sponsor in the same PDP region.'' We 
would adopt this provision under our authority at section 1860D-11(d) 
of the Act. In instances where a parent organization owns a controlling 
interest in more than one subsidiary that operates as a PDP sponsor in 
a single PDP region, we would apply subsection (b)(3) at the parent 
organization level. That is, in the same way that we currently apply 
the meaningful differences test, a parent organization with two 
subsidiary PDP sponsors could offer no more than one plan under each 
sponsors' contract. We anticipate that the need to use this 
interpretation will be infrequent as existing multi-contract 
arrangements are phased out through plan consolidation and the creation 
of new ones would be prohibited by the implementation of the provision 
described elsewhere in this proposal (if finalized) authorizing CMS to 
deny applications from organizations owned by a parent that already has 
a subsidiary operating a PDP sponsor contract in the same PDP region.
    In a proposed rule we published in October 10, 2010, announcing our 
intent to codify the Affordable Care Act provision in the Part D 
regulations, we solicited comments on whether we should use the 
Affordable Care Act authority to impose limits on the number of plans 
in a PDP region. In the preamble to the final rule that followed on 
April 15, 2011, we noted that among the comments we received were those 
stating that we should not consider imposing limits on plan offerings 
until the impact of previous statutory and regulatory changes governing 
our bid review process could be fully evaluated. At the time we 
declined to codify such limits. Now, we believe that the record in 
support of the adoption of a two-plan limit has had time to fully 
develop, including, as discussed previously, the dwindling popularity 
of the second enhanced option, the shrinking differences between the 
first and second enhanced options, and the role the second enhanced 
option plays in enabling risk segmentation, and therefore we make the 
proposal described here and seek comment from the public.
    In addition to proposing to limit PDP sponsors to submitting one 
basic and one enhanced bid per coverage year, we are also considering 
several regulatory proposals for limiting the type of coverage offered 
in those two plans to reduce or eliminate the risk segmentation 
described previously. We believe that risk segmentation is not 
consistent with the Congressional design for the Part D program, or 
with the policy goal of obtaining the best value for the government and 
the taxpayer. We believe the Congress intended sponsors to compete in 
the Part D market by offering their best bids for basic plans, in order 
to attract the greatest enrollment through the lowest premiums, and 
that this competition would maintain downward pressure on Part D bids 
and government subsidies. We do not believe that the Congress intended 
that instead sponsors would offer their best bids for a segment of the 
market that represents individuals who are low utilizers of 
prescription drugs due to better health and who can afford unsubsidized 
supplemental premiums due to better socioeconomic status. When many 
healthy individuals are not included in the basic plans, the cost of 
the basic plans is increased, and this in turn increases low-income 
premium subsidies. Therefore, permitting risk segmentation does not 
generate the best value for the Part D program as a whole. To reduce or 
eliminate risk segmentation, we are considering three options. We 
solicit comments on our conclusions with respect to risk segmentation 
and on the effectiveness of the following options.
    The first option we are considering would be to continue to allow 
separate basic and enhanced plans, but require that enhanced plans 
offer a substantial minimum level of supplemental coverage defined in 
regulation. This would differ from current practice in that we 
currently set meaningful differences requirements by observing the 
distribution of benefits submitted independently by sponsors and using 
statistical techniques to identify outlier thresholds. The problem with 
the current approach is that, when all or most sponsors reduce their 
supplemental coverage over time--the trend that we have observed--the 
outlier thresholds will decline as well. When this occurs the 
supplemental coverage will again tend to converge on the value of basic 
coverage. Instead, for instance, we could require that the enhanced 
plan offering had to cover a minimum of 50 percent (or another higher 
percentage) of the remaining actuarial value of the Part D benefit not 
included in the standard benefit for any coverage year. The additional 
coverage would be in the form of reduced deductibles and cost sharing 
and the inclusion of excluded drugs, consistent with the statutory 
definition of supplemental coverage. We solicit comment on whether such 
an approach would be sufficient to accomplish our goal of eliminating 
risk segmentation.
    In the second option we are considering, instead of setting minimum 
supplemental coverage requirements for a sponsor's enhanced plan 
offering, we would propose to use the authority provided in section 
3209 of the Affordable Care Act which amends section 1860D-11(d)(3) of 
the Act to deny any enhanced plan bid with a premium equal to or lower 
than the sponsor's basic plan premium. Alternatively we might require 
the enhanced premium to be no less than a specified multiple of the 
basic premium, such as 115 percent or another multiple. Again, the 
additional coverage in the enhanced plan would be in the form of 
reduced deductibles and cost sharing and the inclusion of excluded 
drugs. We solicit comments on this approach, and on the appropriate 
multiple of the basic premium necessary to eliminate risk segmentation. 
We also solicit comment on whether there is a possibility that this 
approach might effectively eliminate the offering of supplemental 
coverage if favorable risk selection were to continue and the actuarial 
value of such coverage could not generate sufficient premiums to pass 
these sorts of tests.
    The third option we are considering would be to reinterpret the 
provisions of section 1860D-11(b) and (c) of the Act governing the 
submission of bids that include supplemental benefits. We would propose 
that enhanced alternative coverage would be redefined to consist of 
supplemental coverage added to the sponsor's one basic benefits 
offering (for an additional premium). This could be thought of as basic 
benefits plus a supplemental benefit rider. This would mean that all 
Part D enrollees in a sponsor's Part D plans would be enrolled in the 
sponsor's one basic plan with the same formulary and pharmacy network, 
and some portion of those enrollees would

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also elect the optional supplemental coverage in the form of the second 
plan that would be the combination of the basic plan and the 
supplemental benefits. Thus, the risk of the basic benefits would be 
estimated at the PDP Regional level and the risk of the supplemental 
benefits would be estimated in accordance with that of the projected 
enrollees in the second plans. This means that the supplemental 
benefits would have to constitute actual enhancements to the basic 
benefit and that the notion of actuarial equivalence would not apply to 
the combination of the basic and supplemental benefits. This change 
would bring standalone PDP coverage more in line with both commercial 
coverage designs and with the offering of Part C optional supplemental 
benefits. We believe this option would eliminate the possibility of 
risk segmentation because every enrollee participating in a sponsor's 
Part D line of business would be enrolled in the one basic plan and 
beneficiaries that elect supplemental benefits will be charged the 
additional premium for the extra coverage. The sponsor's Part D 
offerings would consist of two plan benefit packages, one comprised 
solely of basic coverage and the other (if offered) consisting of the 
combination of the basic coverage with the supplemental coverage.
    We solicit comments on this approach and on our belief that this 
approach would be the most effective strategy for eliminating risk 
segmentation and providing the best value for the government and the 
taxpayer.
21. Efficient Dispensing in Long-Term Care Facilities and Other Changes 
(Sec.  423.154)
    We are proposing changes to the rule requiring efficient dispensing 
to Medicare Part D enrollees in Long Term Care (LTC) facilities. For 
background, section 3310 of the Affordable Care Act amended the Act to 
add a new paragraph (3) to section 1860D-4(c) of the Act. Section 
1860D-4(c)(3) of the Act provides that the Secretary shall require 
Medicare Part D sponsors of prescription drug plans to utilize 
specific, uniform dispensing techniques, such as weekly, daily, or 
automated dose dispensing, when dispensing covered Part D drugs to 
enrollees who reside in a LTC facility in order to reduce waste 
associated with 30-day fills. The section states that the techniques 
shall be determined by the Secretary in consultation with relevant 
stakeholders.
    After extensive consultation with stakeholders, in the April 15, 
2011 Federal Register entitled ``Medicare Program; Changes to the 
Medicare Advantage and the Medicare Prescription Drug Benefit Programs 
for Contract Year 2012 and Other Changes'' (``April 15, 2011 Final 
Rule''), we published a final rule at 76 FR 21432 which governs the 
appropriate dispensing of prescription drugs in LTC facilities under 
Part D plans. Pursuant to this regulation, Part D sponsors generally 
must require their network pharmacies to dispense certain solid oral 
brand covered Part D drugs in quantities of 14 days or less, unless an 
exemption applies. The regulation is found at Sec.  423.154.
    We are proposing the following specific changes to the LTC short 
cycle dispensing requirements:
     Add a prohibition on payment arrangements that penalize 
the offering and adoption of more efficient LTC dispensing techniques.
     Eliminate language that has been misinterpreted as 
requiring the proration of dispensing fees.
     Incorporate an additional waiver for LTC pharmacies using 
restock and reuse dispensing methodologies under certain conditions.
     Make a technical change to eliminate the requirement that 
Part D sponsors report on the nature and quantity of unused brand and 
generic drugs.

After providing a summary of the current LTC short cycle dispensing 
rule, we will address each proposed change in more detail.
    Section 423.154 requires that all Part D sponsors require all 
pharmacies servicing LTC facilities to dispense solid oral doses of 
covered Part D brand name drugs to enrollees in such facilities in no 
greater than 14 day increments at a time. Part D sponsors must also 
require such pharmacies to permit the use of uniform dispensing 
techniques, as defined by the LTC facility. The regulation refers to 
definitions in existence at the time of its promulgation. Brand name 
and generic drugs are defined in Sec.  423.4, and the definition 
specifically refers to a brand name drug as being one approved under an 
NDA.
    In order to quantify waste more precisely, the regulation requires 
Part D sponsors to collect and report information to CMS on the 
dispensing methodology used for each dispensing event, and on the 
nature and quantity of unused brand and generic drugs dispensed to 
enrollees in LTC facilities. Reporting on unused drugs is waived for 
Part D sponsors when both brand and generic drugs are dispensed in no 
greater than 7-day increments.
    The regulation excludes: (1) Solid oral doses of antibiotics; and 
(2) solid oral doses that are dispensed in their original container as 
indicated in the Food and Drug Administration (FDA) prescribing 
information or that are customarily dispensed in their original 
packaging to assist patients with compliance. Thus, the regulation does 
not apply to drugs that are not typically dispensed in greater than 14-
day supplies (for example: inhalers, eye drops, ear drops, steroid dose 
packs).
    LTC facilities are defined in Sec.  423.100, which definition 
excludes assisted living facilities. Intermediate care facilities for 
the mentally retarded and institutes for mental disease are 
specifically waived from the requirement in the regulation, as are I/T/
U pharmacies, due to specific problems with delivery and dispensing to 
closed (often locked) facilities.
    With respect to copayments, the regulation states that regardless 
of the number of incremental dispensing events, the total cost sharing 
must be no greater than the total cost sharing that would be imposed if 
the regulation did not apply.
    When permitted under applicable law, the regulation requires Part D 
sponsors to include provisions that address the disposal of drugs that 
have been dispensed to an enrollee in an LTC but not used, and then 
returned to the pharmacy, in the terms and conditions that they must 
offer to pharmacies, including whether return for credit and reuse is 
authorized.
a. Prohibition on Payment Arrangements That Penalize the Offering and 
Adoption of More Efficient LTC Dispensing Techniques (Sec.  423.154)
    Our first proposed change is to add a clause to Sec.  423.154 
prohibiting payment arrangements that penalize the offering and 
adoption of more efficient LTC dispensing techniques. It is our 
understanding that for 2013, some of the largest PBMs have prorated LTC 
pharmacy dispensing fees for medications subject to the LTC short cycle 
requirements. Under such dispensing fee payment arrangements, if a 
medication is discontinued before a month's supply has been dispensed, 
a pharmacy that dispenses the maximum amount of medication at a time 
permitted under Sec.  423.154 collects more in dispensing fees than a 
pharmacy that utilizes dispensing techniques that result in less than 
maximum quantities being dispensed at a time.
    We provide the following example of two pharmacies--one more 
efficient at dispensing than the other-- to illustrate our concern: A 
$4.00 dispensing fee for

[[Page 1965]]

a 30-days' supply is prorated, and a medication is discontinued after 
21 days. The first pharmacy dispenses 14-days' supply at a time and 
receives approximately $3.73 in total dispensing fees for a 28-days' 
supply, which results in 7 days' worth of medication waste. The second 
pharmacy dispenses 3-days' supply at a time and receives approximately 
$2.80 in dispensing fees for a 21-days' supply in total, which results 
no medication waste.
    We believe this example is contrary to the Congress' intent in 
enacting section 3310 of the Affordable Care Act. In this example, the 
second pharmacy's more efficient dispensing techniques save facility, 
sponsor, and Part D program costs associated with reducing the amount 
of medication waste, but the pharmacy itself receives less in 
dispensing fees than it would if it had dispensed in 14-day increments. 
This approach creates a perverse incentive for LTC pharmacies to adopt 
less efficient dispensing techniques, if available. Rational self- 
interest on the part of any LTC pharmacy with the flexibility to 
dispense greater quantities encourages wasteful dispensing and 
additional costs to the Part D program, in direct opposition to the 
intent of the law.
    During the extensive industry consultation conducted prior to the 
rulemaking required to implement section 3310 of the Affordable Care 
Act, CMS was repeatedly informed by multiple stakeholders that 
dispensing costs did not vary on the basis of the quantity of 
medication dispensed, but only by the number of dispensing events and 
the type of dispensing technique utilized. Therefore, there is no 
justifiable rationale for proration, since the cost of dispensing is 
not directly related to the quantity dispensed. In order to align 
incentives, we encouraged Part D sponsors to do quite the opposite to 
prorating dispensing fees, and offer differentially higher dispensing 
fees to promote the adoption of the most efficient dispensing 
methodologies.
    Starting in the fall of 2012, we have received numerous complaints 
about proration of dispensing fees from multiple LTC pharmacy 
organizations, LTC pharmacies, and LTC facilities that represent, 
offer, or have contracted to utilize more efficient dispensing 
methodologies. Some smaller LTC pharmacies, which rely upon their 
relative greater efficiency in reducing waste from unused drugs for 
competitive advantage, have complained that they were unable to 
negotiate appropriate terms through their intermediary group purchasing 
and contracting organizations and could not negotiate directly with 
Part D sponsors. Small LTC pharmacies have also reported that they 
risked losing their LTC facility contracts to larger LTC pharmacies if 
they did not accept the payment terms that, in effect, penalize their 
efficiency. These pharmacies have indicated that prorated dispensing 
fees are not mutually agreeable terms, and that this fee structure 
threatens the survivability of the most efficient dispensing 
techniques.
    It is unclear why Part D sponsors and their agents would choose to 
reimburse LTC pharmacies in a manner that does not promote more 
efficient dispensing methodologies. One possibility is that the smaller 
LTC pharmacies lack the leverage to negotiate differential fees due to 
the market power of the largest LTC pharmacies, which control more than 
60 percent of the market. This would be the case only if the largest 
LTC pharmacies had the market power over the largest PBMs to not only 
set their own dispensing fees, but also the dispensing fees of their 
competitors. However, we have not heard any evidence or testimony that 
would support that conclusion.
    Another possibility is that Part D sponsors are not motivated to 
promote efficiencies in long-term care prescription drug utilization. 
This could be the case because their liability for these costs is 
substantially less than that of the federal government. Since most LTC 
residents are LIS-entitled individuals or likely to incur costs subject 
to catastrophic coverage, or both, sponsor liabilities are actually 
minimized when the LTC resident beneficiary reaches the TrOOP threshold 
as quickly as possible. Thus, sponsors' interests may actually be 
aligned with those LTC pharmacies with the least efficient dispensing 
methodologies, since both parties' interests may be served by higher 
costs.
    A final possibility is that Part D sponsors believe the Sec.  
423.154 and/or the upcoming daily cost-sharing rate requirement at 
Sec.  423.153(b)(4)(i) (which becomes effective January 1, 2014) 
mandate the proration of dispensing fees when less than 30 days is 
dispensed. This is not accurate, and we discuss this misunderstanding 
both further in this section and in the section entitled, ``Application 
and Calculation of Daily Cost-Sharing Rates'' of this proposed rule.
    Given the clear intent of the Affordable Care Act to reduce 
wasteful dispensing in the LTC setting, CMS is proposing to prohibit 
payment arrangements that penalize the offering and adoption of more 
efficient LTC dispensing techniques. This would be accomplished by 
adding a new clause (f) in Sec.  423.154 that would state that a Part D 
sponsor must not, or must require its intermediary contracting 
organizations not to, penalize long-term care facilities' choice of 
more efficient uniform dispensing techniques by prorating dispensing 
fees based on days' supply or quantity dispensed. This clause would 
also state that a sponsor or its intermediary contracting organizations 
must ensure that any difference in payment methodology among LTC 
pharmacies incentivizes more efficient dispensing techniques.
b. Misinterpretation of Language as Requiring the Proration of 
Dispensing Fees (Sec.  423.154)
    Our second proposed change to Sec.  423.154 is to eliminate 
paragraph (e), which we believe has caused confusion. Section 
423.154(e) currently states: ``Regardless of the number of incremental 
dispensing events, the total cost sharing for a Part D drug to which 
the dispensing requirements, under this paragraph (a) apply must be no 
greater than the total cost sharing that would be imposed for such Part 
D drug if the requirements under paragraph (a) of this section did not 
apply.'' The purpose of this language was to ensure that sponsors did 
not assess multiple monthly copayments for each incremental dispensing 
event. We believe misinterpretation of paragraph (e) may have prompted 
some sponsors to prorate dispensing fees, even though the regulation 
does not address dispensing fees.
    Moreover, effective January 1, 2014, the daily cost-sharing rate 
requirement will apply whenever a prescription is dispensed by a 
network pharmacy for less than a 30 days' supply, unless the drug is 
excepted pursuant to Sec.  423.153(b)(4)(i), regardless of the setting 
in which the applicable drugs are dispensed. In other words, the daily 
cost-sharing rate requirement will apply to brand drugs dispensed in 
LTC facilities to the extent they must be dispensed in supplies less 
than 30 days pursuant to Sec.  423.154, and to generic drugs, to the 
extent a sponsor voluntarily dispenses generic drugs in LTC facilities 
in supplies less than 30 days. Consequently, the requirement of Sec.  
423.153(b)(4)(i) will make Sec.  423.154(e) unnecessary, and we believe 
retaining both provisions could cause further confusion. (Note that we 
propose some technical changes to the daily cost-sharing rate 
requirement in the section, entitled ``Application and Calculation of 
Daily Cost-Sharing Rates'' of this proposed rule) For these reasons, we 
propose to delete Sec.  423.154(e).

[[Page 1966]]

c. Additional Waiver for LTC Pharmacies Using Restock and Reuse 
Dispensing Methodologies Under Certain Conditions (Sec.  423.154)
    Our third proposed change to Sec.  423.154 is to waive the short-
cycle dispensing requirements for LTC pharmacies meeting certain 
conditions. Currently, Sec.  423.154(c) waives the requirements for 
pharmacies when they dispense brand name Part D drugs to enrollees 
residing in intermediate care facilities for the mentally retarded and 
institutes for mental disease, as well as for I/T/U pharmacies. We have 
learned that some institutional pharmacies maintain custody of 
medications within the LTC facilities through operating a closed 
pharmacy within the facility, and as a result can ensure sufficient 
quality control over these medications to return all unused medications 
to stock for reuse that are eligible for return and reuse under 
applicable law. This has led us to believe there is another category of 
pharmacies, such as some on site pharmacies in veterans' homes, for 
which a waiver from the LTC short cycle dispensing requirement may be 
appropriate, if they meet certain conditions that demonstrate that 
applying the 14-day dispensing requirements in these instances would 
not serve to reduce waste.
    We are proposing to waive the requirements of Sec.  423.154(a) for 
an LTC pharmacy that exclusively uses the dispensing technique of 
returning all unused medications to stock that can be restocked under 
applicable law for reuse and rebating full credit for the ingredient 
costs of the unused medication to the PDP sponsor. The proposed waiver 
would also require that for those drugs that cannot be returned for 
full credit and reuse under applicable law, such as controlled 
substances, the pharmacy uses a dispensing methodology that results in 
the delivery of no more than 14 days of a drug at a time. We would 
propose that the waiver would apply on a uniform basis to all similarly 
situated LTC pharmacies, but not to a pharmacy organization that is 
contracted to use this technique at some, but not all, of its 
pharmacies. Rather, the waiver would only apply to the qualifying 
pharmacies themselves. We would not require the pharmacy to credit back 
any amount of the dispensing fee when drugs are returned for reuse, 
since the level of effort for the pharmacies would not be expected to 
be decreased in any way. If anything, the level of effort would be 
increased to implement the appropriate internal controls for inspection 
and return to inventory of the unused medication.
    We solicit comments on whether there are any variations in 
operations that may exist among LTC pharmacies that we need to consider 
in determining whether to implement this waiver. We also solicit 
comments on how such pharmacies could be identified in industry 
standard transaction coding, as well as in network contracting and 
auditing protocols. We believe that such pharmacies would be expected 
to have documentation of relevant protocols approved by Pharmacy and 
Therapeutics (P&T) committees of the LTC facility, as well as records 
supporting the returns to inventory that could be compared with billing 
credits. We solicit comments on this understanding as well.
    We further solicit comments on our proposal that to qualify for the 
waiver, a pharmacy would have to dispense any drugs that cannot be 
restocked under applicable law, such as controlled substances, in no 
greater than 14-day supply increments. Our rationale in proposing this 
condition to the waiver is that we do not want the waiver to 
inadvertently result in large quantities of medications being dispensed 
to Part D enrollees serviced by the pharmacies that would qualify for 
the waiver because they cannot be restocked under applicable law. 
Therefore, we are proposing that such drugs should still effectively be 
subject to the short-cycle dispensing requirement. In this regard we 
wish to understand the extent of waste in pharmacies that would qualify 
for the waiver we are proposing, if we did not impose the requirement 
that drugs that cannot be restocked would be subject to a dispensing 
increment of 14-day supply or less if they cannot be restocked under 
applicable law. If persuaded that the waste would be insignificant, we 
may be persuaded to eliminate this condition to the waiver.
    We acknowledge that in the aforementioned April 15, 2011 Final 
Rule, we responded to some comments requesting that we exempt from the 
short-cycle dispensing requirement those pharmacies that already 
utilize low waste practices or ``return for credit and reuse.'' In 
response, we stated that although ``return for credit and reuse'' could 
reduce unused drugs in LTC facilities, there are limitations to this 
approach, especially because not all states allow ``return for credit 
and reuse,'' and reuse of controlled substances is limited by the Drug 
Enforcement Administration. Because of these limitations, we stated 
that we believe financial waste is more effectively reduced by 
preventing the accumulation of unused drugs in the first place, rather 
than addressing handling of unused drugs after they have accumulated in 
the LTC facilities.
    This proposal means that we have reconsidered our decision not to 
waive the short-cycle dispensing requirement for LTC pharmacies that 
use ``return for credit and reuse'' dispensing practices, because we 
did not fully consider such a waiver previously in the context of 
comments received about return and reuse being a universal alternative 
approach to short-cycle dispensing. In addition, we continue to receive 
persuasive arguments that such pharmacies should be exempt; for 
example, from some veterans' homes with on-site pharmacies. However, as 
we explained previously, we are still concerned about waste associated 
with drugs that are not permitted to be returned for reuse and credit 
under applicable law in such LTC pharmacies in considering this 
additional exemption, and for this reason have specifically solicited 
comments on the extent of waste in such pharmacies that would qualify 
for the proposed additional waiver.
d. Technical Change To Eliminate the Requirement That PDP Sponsors 
Report on the Nature and Quantity of Unused Brand and Generic Drugs 
(Sec.  423.154)
    Finally, we are proposing to make a technical change to Sec.  
423.154(a)(2), which requires Part D sponsors to collect and report 
information, in a form and manner specified by CMS, on the dispensing 
methodology used for each dispensing event described by paragraph 
(a)(1) of this section, as well as on the nature and quantity of unused 
brand and generic drugs dispensed by the pharmacy to enrollees residing 
in a LTC facility. This latter reporting requirement is waived for 
sponsors for drugs dispensed by pharmacies that dispense both brand and 
generic drugs in no greater than 7-day increments.
    In a memorandum titled, ``Modifications to the Drug Data Processing 
System (DDPS) in Relation to Appropriate Dispensing of Prescription 
Drugs in Long Term Care Facilities,'' issued by CMS on August 3, 2012, 
we explained that we planned to use the PDE data in conjunction with 
other CMS data (such as MDS) to determine the extent to which 14 day or 
less dispensing to enrollees in LTC facilities reduces the amount of 
unused drugs in LTC. We did this to lessen the burden on sponsors that 
would be created by a separate reporting requirement. Therefore, it is 
no longer necessary to waive the reporting requirement for any Part D 
sponsor, because Part D sponsors

[[Page 1967]]

comply with the requirement (in the form and manner we specified in the 
previously-referenced memorandum) via PDE submission. Thus, we are 
deleting the first sentence of Sec.  423.154(a)(2) to eliminate any 
confusion that there is a separate reporting requirement. 22. 
Applicable Cost-Sharing for Transition Supplies. Transition Process 
Under Part D Sec.  423.120(b)(3)
    We established transition requirements under Sec.  423.120(b)(3) 
for Part D sponsors to address the needs of new Part D plan enrollees 
who are transitioning from other prescription drug coverage (Part D or 
otherwise), and whose current drug therapies may not be included on 
their Part D plan's formulary (including Part D drugs that are on a 
plan's formulary but require prior authorization or step therapy under 
the plan's utilization management requirements). While Sec.  
423.120(b)(3)(iii) specifies that PDP plans must provide a temporary 
fill when an enrollee requests a fill of a non-formulary drug during 
the transition time period (including Part D drugs that are on a plan's 
formulary but require prior authorization or step therapy under a 
plan's utilization management rules), it does not currently specify the 
cost sharing that should apply to such fills. Current guidance (at 
Sec.  30.4.9 of Chapter 6 of the Medicare Drug Benefit Manual, found at 
http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovContra/Downloads/Chapter6.pdf) states that a Part D 
sponsor may charge cost sharing for a temporary supply of drugs 
provided under its transition process. Further, cost sharing for 
transition supplies for low-income subsidy (LIS) eligible beneficiaries 
cannot exceed the statutory maximum copayment amounts. However, for 
non-LIS enrollees, we stated that a sponsor must charge cost sharing 
based on one of its approved drug cost sharing tiers (if the sponsor 
has a tiered benefit design), and this cost sharing must be consistent 
with cost sharing that the sponsor would charge for non-formulary drugs 
approved under a coverage exception. This guidance created a great deal 
of confusion on the part of sponsors and beneficiaries. Charging the 
same cost sharing for non-formulary drugs, which are approved during 
transition, as for formulary drugs subject to utilization management 
edits (such as prior authorization or step therapy), that are 
overridden during transition while waiting for the utilization 
management requirement to be satisfied, is likely to be inconsistent 
with a tiered benefit design. It is possible that beneficiaries may pay 
more during transition than for his or her drug's normal designated 
formulary tier. Conversely, it is also possible that the beneficiary 
may pay more once the utilization management edit had been satisfied 
than he or she did under the transition fill. The following examples 
will illustrate these scenarios, assuming that the beneficiary is 
eligible for a transition fill, using the following hypothetical 
formulary structure:

                                    Table 3--Hypothetical Formulary Structure
----------------------------------------------------------------------------------------------------------------
              Tier                    Tier description                    Beneficiary cost sharing
----------------------------------------------------------------------------------------------------------------
1...............................  Generics...............  $5 copay/30[dash]days' supply.
2...............................  Preferred Brands.......  $10 copay/30[dash]days' supply.
3 *.............................  Non[dash]preferred       $15 copay/30[dash]days' supply.
                                   Brands.
4...............................  Specialty drugs          25% coinsurance/30[dash]days' supply.
                                   (includes both
                                   generics & brands).
----------------------------------------------------------------------------------------------------------------
* Tier 3 is the designated formulary exception tier.

    Each of the following examples shows the fill date, quantity 
filled, the associated days' supply, whether a transition fill was 
applied, and as a result, if either formulary tiering or exception 
tiering was applied to the enrollee's cost sharing. In all cases, if a 
transition fill was applied, the enrollee's cost sharing used exception 
tiering.

         Table 4--Example 1--The Beneficiary's Drug Is on Tier 2 With a Prior Authorization Requirement
----------------------------------------------------------------------------------------------------------------
                                                                                               Cost share used
                                                                          Transition fill     formulary tiering
           Date of fill                 Quantity         Days' supply         applied         (FT) or exception
                                                                                                tiering (ET)
----------------------------------------------------------------------------------------------------------------
1/1/13...........................                 30                 30                  Y  $15.00--ET.
----------------------------------------------------------------------------------------------------------------
              The beneficiary obtains the PA, and the drug is no long considered a transition fill.
----------------------------------------------------------------------------------------------------------------
2/1/13...........................                 30                 30                  N  $10.00--FT.
----------------------------------------------------------------------------------------------------------------

    In this example, if the exception tier is used on the transition 
fill, the beneficiary's cost sharing amount is reduced once he or she 
obtains the prior authorization approval. However, if the drug's 
designated formulary cost sharing amount had been used, the cost 
sharing amount would have stayed the same, and would have been the same 
cost as the cost sharing amount shown on the formulary.

               Table 5--Example 2--The Beneficiary's Drug Is on Tier 4 With a Prior Authorization
----------------------------------------------------------------------------------------------------------------
                                                                                               Cost share used
                                                                          Transition fill     formulary tiering
           Date of fill                 Quantity         Days' supply         applied         (FT) or exception
                                                                                                tiering (ET)
----------------------------------------------------------------------------------------------------------------
1/1/13...........................                 30                 30                  Y  $15.00--ET.
----------------------------------------------------------------------------------------------------------------
              The beneficiary obtains the PA, and the drug is no long considered a transition fill.
----------------------------------------------------------------------------------------------------------------
2/1/13...........................                 30                 30                  N  25%--FT.
----------------------------------------------------------------------------------------------------------------


[[Page 1968]]

    In this example, if the exception tier is used on the transition 
fill, the beneficiary's cost sharing amount will increase once he or 
she obtains the PA since the designated formulary tier has a higher 
cost sharing amount than the exception tier. If instead, the drug's 
designated formulary cost sharing had been used, the cost sharing 
amount would have remained the same for both fills. This scenario is 
particularly confusing for enrollees, since they pay more after 
receiving the required approval than they did under transition.

            Table 6--Example 3--The Beneficiary's Drug Is Not on Formulary With a Formulary Exception
----------------------------------------------------------------------------------------------------------------
                                                                                               Cost share used
                                                                          Transition fill     formulary tiering
           Date of fill                 Quantity         Days' supply         applied         (FT) or exception
                                                                                                tiering (ET)
----------------------------------------------------------------------------------------------------------------
1/1/13...........................                 30                 30                  Y  $15.00--ET.
----------------------------------------------------------------------------------------------------------------
       The beneficiary obtains the FE, and the sponsor continues to treat the drug as non[dash]formulary.
----------------------------------------------------------------------------------------------------------------
2/1/13...........................                 30                 30                  N  $15.00--ET.
----------------------------------------------------------------------------------------------------------------

    Plan sponsors are currently required to designate to which tier a 
non-formulary drug will apply once a formulary exception is granted. 
Sponsors can continue to treat the drug as non-formulary and continue 
the exception for the remainder of the coverage year, in which case, 
cost sharing at the exception tiering continues.
    We believe that more consistent treatment of formulary and non-
formulary drugs, respectively, will simplify the benefit and reduce 
sponsor and beneficiary confusion. Consequently, we propose to add a 
paragraph at Sec.  423.120(b)(3)(vi) clarifying that when providing a 
transition supply, the cost sharing is determined as follows: A Part D 
sponsor must charge cost sharing for a temporary supply of drugs 
provided under its transition process such that the following 
conditions are met:

 For low-income subsidy (LIS) enrollees, a sponsor must not 
charge higher cost sharing for transition supplies than the statutory 
maximum copayment amounts.
 For non-LIS enrollees, a sponsor must charge--
    ++ The same cost sharing for non-formulary Part D drugs provided 
during the transition that would apply for non-formulary drugs approved 
through a formulary exception in accordance with Sec.  423.578(b); and
    ++ The same cost sharing for formulary drugs subject to utilization 
management edits provided during the transition that would apply once 
the utilization management criteria are met.
23. Medicare Coverage Gap Discount Program and Employer Group Waiver 
Plans (Sec.  423.2325)
    Section 3301 of the Affordable Care Act, codified in section 1860D-
43 and 1860D-14A of the Act, established the Medicare Coverage Gap 
Discount Program (Discount Program), beginning in 2011. Under the 
Discount Program, manufacturer discounts are made available to 
applicable Medicare beneficiaries receiving applicable covered Part D 
drugs while in the coverage gap. Section 1860D-14A(c)(1)(A)(ii) of the 
Act requires the manufacturer discount to be provided to beneficiaries 
at the point-of-sale.
    Employer Group Waiver Plans (EGWPs) are customized employer-offered 
plans available exclusively to employer/union health plan Part D 
eligible retirees and/or their Part D eligible spouse and dependents. 
Section 423.458(c)(4) requires sponsors offering EGWPs to comply with 
all Part D requirements unless those requirements have been 
specifically waived or modified by us using our authority under section 
1860D-22(b) of the Act. We do not regulate any supplemental benefits 
that EGWPs offer outside of Part D prescription coverage. Employers/
Unions offering EGWPs must ensure that any supplemental benefits comply 
with any applicable requirements for issuance under state insurance 
laws and/or ERISA rules (see January 25, 2013 Insurance Bulletin from 
the Center for Consumer Information and Insurance Oversight: http://www.cms.gov/cciio/resources/Regulations-and-Guidance/index.html#Health 
Market Reforms).
    EGWP benefits are generally structured to provide additional 
coverage so that their enrollees do not actually experience a coverage 
gap. However, the Affordable Care Act did not exclude EGWP enrollees 
from the Discount Program. Therefore, in order for an applicable drug 
to be covered by EGWPs, it must be covered under a manufacturer 
agreement, and the manufacturer must pay applicable discounts as 
invoiced. Beginning in 2014, all EGWP benefits beyond the parameters of 
the defined standard benefit will be treated as non-Medicare Other 
Health Insurance (OHI) that wraps around Part D. We specifically 
excluded supplemental coverage offered through EGWPs from the 
definition of Part D supplemental benefits in Sec.  423.100. We made 
this a requirement with respect to EGWPs so that the discount amount 
could be consistently and reliably determined. This was necessary to 
ensure that we can determine that the discount is always calculated 
accurately since we do not collect information on all EGWP retiree 
benefit arrangements to determine actual supplemental benefits. Not 
only would collecting such information be impractical, but we also 
believe instituting a requirement to collect the specific information 
on all such benefits would be so burdensome as to hinder the design of, 
the offering of, or the enrollment in employer plans. Consequently, the 
discount calculation will be based upon the Part D Defined Standard 
benefit for all EGWPs beginning in 2014. While we believed that our 
justification for excluding any supplemental benefits offered through 
EGWPs from Part D benefits clearly indicated that the basic EGWP Part D 
benefits would be limited to Defined Standard benefit because that is 
the only way we can determine that the discount is calculated 
accurately, we are taking the opportunity now to propose this specific 
requirement in Sec.  423.2325(h)(1) to remove any ambiguity.
    Treating EGWP supplemental benefits as OHI and always calculating 
the manufacturer discount based on the Defined Standard benefit means 
that discount payments likely will increase for some applicable 
beneficiaries enrolled in EGWPs over the amounts that would have been 
calculated when these benefits were considered as supplemental benefits 
for purposes of the coverage gap discount program. As noted previously, 
EGWPs' benefits are generally structured to provide additional coverage 
so that their

[[Page 1969]]

enrollees do not actually experience a coverage gap. Now that the Part 
D portion of the EGWP plan is based on the Defined Standard benefit, 
the coverage gap discount pays before the EGWP supplemental benefits 
(that is, OHI) are applied. Consequently, Part D sponsors that 
administer EGWP plans will receive discount amounts that may not offset 
the enrollees' final out-of-pocket cost-sharing, as the discounts do in 
individual market Part D plans when it is applied after Part D 
supplemental benefits. Nevertheless, we think it is important that 
these discounts that are calculated and paid prior to the application 
of OHI are apparent to the employer and union group clients of our Part 
D sponsors. This transparency ensures that the parties who are 
ultimately responsible for the both the EGWPs' plan design and the 
financial integrity of the plans are aware of the discount amounts 
received. We anticipate that the employer and union group 
administrators will take the additional funds into account when 
negotiating and designing retiree prescription drug benefits. We 
believe that his will ultimately benefit the beneficiaries enrolled in 
these plans.
    We considered several approaches for ensuring that all manufacturer 
payments accrue to the benefit of beneficiaries enrolled in EGWPs. The 
most obvious approach would have been to require EGWPs to use 
manufacturer payments to reduce beneficiary premiums or cost-sharing in 
the non-Part D portion of benefit. While this approach would have 
offered the most straightforward benefit for beneficiaries, it has 
several serious obstacles. First, we do not believe that we have the 
authority to require any specific application of the coverage gap 
discount payments to OHI benefits that are by definition non-Medicare 
private market benefits outside our regulatory purview. In addition, 
since we do not collect premium or benefit information for EGWPs, 
monitoring compliance with such requirements would not be feasible. 
Moreover, establishing an affirmative requirement would necessitate 
establishing standards for how the discount amounts should be applied 
to the retiree benefits. We frankly do not have the depth of knowledge 
of private and public sector retiree benefits necessary to establish 
such standards. We can envision that more prescriptive requirements 
about how discount amounts can be used might interfere with critical 
utilization management and cost control features of these benefits, 
conflict with employment or bargaining agreements particulars, or have 
other unintended consequences. We also considered not taking any action 
since anecdotal evidence suggests that some employer groups are already 
using the discounts to reduce premiums, and we have no reason to 
believe that this is not generally the case. However, we cannot be sure 
that all employer groups are aware of how Discount Program payments are 
calculated or the value of the payments attributable to their 
enrollees. After consideration, we believe that our best course is to 
pursue full disclosure and transparency so that employer groups have 
the information they need to take full advantage of these discounts to 
strengthen and safeguard their enrollees' retiree benefits. Through the 
proposed regulation we are seeking to ensure that employer groups are 
fully aware of Discount Program payments attributable to their 
enrollees so that the payments can be accurately anticipated and 
incorporated into EGWP benefit designs. Equipped with projected and 
actual payments received, each employer group can design a benefit 
package that best meets the needs of its retirees.
    To ensure that Discount Program payments are communicated to 
employer groups in a uniform fashion, we propose to codify notification 
requirements by amending Sec.  423.2325 to add a new paragraph (h) 
requiring Part D sponsors of EGWPs to disclose to each employer group 
the projected and actual manufacturer discount payments under the 
Discount Program attributable to the employer group's enrollees. We 
further propose that such disclosures happen at least annually or upon 
request. Part D sponsors must also be prepared to demonstrate to CMS 
that such notifications have been made upon request.
24. Interpreting the Non-Interference Provision (Sec.  423.10)
    Since the MMA created the Part D benefit in 2003, we have never 
formally interpreted section 1860D-11(i) of the Act, which is known as 
the noninterference provision. In practice we have generally invoked 
the spirit of this provision in declining to intervene in negotiations 
or disputes involving payment-related contractual terms between 
participants in the drug distribution channel. However, it is 
increasingly clear from the many questions that continue to arise when 
working with stakeholders on matters ranging from lawsuits to policy 
clearance to complaint resolution that the agency and all Part D 
stakeholders would benefit from a clear, formal interpretation of these 
limits on our authority. Some stakeholders appear to believe the 
prohibition on interference in negotiations extends far beyond the 
boundaries that we consider relevant, while others insist our authority 
extends into arbitrating matters that seem to us to clearly fall within 
the intended prohibition. Therefore, we are proposing an interpretation 
through rulemaking in order to clarify and codify the extent of these 
limits on our authority.
    The noninterference provision at section 1860D-11(i) of the Act 
provides that, ``In order to promote competition under this part and in 
carrying out this part, the Secretary: (1) May not interfere with the 
negotiations between drug manufacturers and pharmacies and PDP 
sponsors; and (2) may not require a particular formulary or institute a 
price structure for the reimbursement of covered Part D drugs.'' In 
beginning with the words ``In order to promote competition under this 
part and in carrying out this part . . .'' we believe that the Congress 
intended that the activities addressed in the rest of the provision 
should take place through private market competition. We interpret this 
to mean two separate but related goals. The first goal is that the 
Secretary through CMS should promote private market competition in the 
selection of Part D drugs for Part D sponsor formularies. The second 
goal is that CMS should not create any policies that would be expected 
to interfere with competitive market negotiations leading to the 
selection of drug products to be covered under Part D formularies. 
Therefore, in light of these two goals we believe there is both a duty 
to act--to promote competition in the private market for Part D drugs--
and a duty to refrain from acting--to avoid intervention in private 
market negotiations that take place in the context of that competitive 
market.
    Economic theory on competitive markets suggests that the duty to 
ensure a competitive market means that within the limits of our 
authority we should seek to encourage certain features of the market 
that promote more perfect competition. This would include such goals as 
decreasing the transaction cost of acquiring information on products 
offered in the market, increasing the transparency of prices, ensuring 
a large number of buyers and sellers, and minimizing barriers to entry 
to the extent possible while still ensuring quality. We have pursued 
these types of goals since the start of Part D program implementation 
through such efforts as the Medicare Prescription Drug Plan Finder, the 
development of the Medicare star ratings, our extensive efforts to 
provide technical assistance to

[[Page 1970]]

new and existing sponsors, and our meaningful differences policies that 
improve the comparability of Part D formularies and benefit packages. 
We will continue to seek opportunities to improve competition. As an 
initial matter, in light of our interpretation of the general purpose 
of section 1860D-11(i) of the Act, we propose a general rule at Sec.  
423.10(a) that CMS promotes fair private market competition in the 
market for Part D drugs.
    There is also a duty to avoid intervention in private market 
negotiations that take place in the context of that competitive market. 
We believe the intent of 1860D-11(i) is to ensure that we do not create 
any policies or become a participant in any discussions that could be 
expected to interfere with negotiations leading to the selection of 
drug products to be covered under Part D formularies. By this we mean 
selection by Part D sponsors (or other intermediary contracting 
organizations) of specific manufacturers' products for inclusion on 
formularies, formulary tier placement, and negotiations of acquisition 
costs, rebates, and any other price concessions. We believe this 
interpretation is consistent with a textual reading of 1860D-11(i) and 
with how private market transactions determine which prescription drug 
products are covered under Part D plans.
    Private market competition for prescription drugs is a complex 
process that has been described in detail elsewhere, such as in the 
2007 CBO report entitled ``Prescription Drug Pricing in the Private 
Sector'' at: http://www.cbo.gov/publication/18275. This process 
involves specific transactions between manufacturers and distribution 
channel participants (generally wholesale distributors and dispensing 
pharmacies) that are different than the transactions that take place 
between manufacturers and ultimate purchasers (primarily health plans 
or self-insured employers and/or their intermediate contracting 
organizations, such as pharmacy benefit managers (PBMs)). Pharmacies 
will stock most commonly used brand medications but will selectively 
stock generic products to leverage volume in return for the best prices 
from competing generic manufacturers. Thus, generally speaking, the 
price negotiations between manufacturers and pharmacies differentially 
determine which generic products are stocked and dispensed by 
pharmacies. These price negotiations are generally based on discounts 
off manufacturer list prices. Health plans and PBMs, in contrast, will 
base decisions on which multiple-source or therapeutically equivalent 
brand drug products will be covered under a plan in part on the 
evaluation of the relative cost effectiveness of the competing drug 
products. This will be determined by comparing both the list prices of 
the drug products and the level of rebates negotiated between the 
sponsor and the manufacturers of the brand products. Thus the price 
negotiations between manufacturers and health plans determine which 
brand products are placed on the plan's formulary and available to 
enrollees. These additional price negotiations are generally around the 
level of rebates for both formulary and tier placement. These distinct 
sets of negotiations in the private market between manufacturers and 
pharmacies on the one hand, and between manufacturers and plan sponsors 
on the other hand, support our textual reading of section 1860D-
11(i)(1) of the Act to prohibit CMS involvement in negotiations between 
manufacturers and pharmacies, and between manufacturers and plan 
sponsors. There are also separate price negotiations between plan 
sponsors (or their intermediary contracting organizations) and 
pharmacies around the negotiated prices required for network 
participation. However, as will be discussed in more detail in this 
section, since the statute establishes numerous requirements that CMS 
must regulate concerning access to network pharmacies and negotiated 
prices, we believe that a CMS role in negotiations between plan 
sponsors and pharmacies is not prohibited under section 1860D-11(i)(1) 
of the Act.
    We note that in The Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 Conference Agreement (Conference Agreement), 
in addition to the statutory language, MMA drafters included the 
following sentence: ``Conferees expect PDPs to negotiate price 
concessions directly with manufacturers.'' We believe this statement 
supports our understanding that the primary focus of section 1860D-
11(i) of the Act is on the negotiations between plan sponsors (or their 
intermediary contracting organizations) and manufacturers for rebates 
and other price concessions that ultimately determine which multiple 
source products will be placed on a sponsor's formulary. The outcome of 
these negotiations also determine tier placement, or the level of cost 
sharing that will be charged for the drug, whether the drug will be 
subject to certain utilization management controls, and may even 
influence the list prices that manufacturers submit to the commercial 
databases and that form the basis of most purchasing contracts in the 
drug distribution channel.
    Section 1860D-11(i)(1) of the Act states that we ``may not 
interfere with the negotiations between drug manufacturers and 
pharmacies and PDP sponsors''. We believe that the term 
``interference'' in this context should be interpreted as prohibiting 
our involvement in discussions between manufacturers and their 
distribution channel customers (such as wholesalers and pharmacies) or 
the ultimate purchasers of prescription drugs (such as plan sponsors 
and PBMs) leading to signed contracts. We believe that the negotiations 
addressed by the first clause should be read to apply to discussions 
manufacturers have with their customers because, as discussed 
previously, this textual reading comports with the nature of the 
transactions that occur in the private market that determine which drug 
products will be covered under Part D plans. We also believe section 
1860D-11(i)(1) of the Act should be interpreted as prohibiting our 
involvement in arbitration of agreements already executed between any 
of these parties. It would not make sense to prohibit CMS involvement 
in discussions leading up to an executed agreement only to allow 
involvement in arbitrating the terms of the agreement afterwards. Thus 
we interpret the word ``negotiations'' to mean not only the initial 
discussions leading to executed agreements, but also any subsequent 
discussions between the parties as to what those agreements require. We 
are periodically asked to become involved in both initial negotiations 
and in disputes and renegotiations by parties trying to get CMS to 
weigh in on one side or another on the premise that failure to do so 
will lead to access issues for Medicare beneficiaries. We also 
periodically are asked to address terms and conditions of executed 
agreements that one of the parties believes is unfair. We believe that 
our involvement in these sorts of issues is precisely what the statute 
prohibits in section 1860D-11(i)(1) of the Act--our weighing in on a 
contract negotiation or dispute could influence the outcome. In other 
words, government involvement could affect market forces around 
prescription drugs in ways that change the value that would otherwise 
be assigned to these products in a competitive market. We believe we 
should not pick winners and losers in formulary selection negotiations, 
and that the remedies for disputes should be determined in accordance 
with the terms of the

[[Page 1971]]

contracts or in the courts having jurisdiction over the contracts.
    Therefore we interpret the prohibition in section 1860D-11(i)(1) of 
the Act on interference in negotiations to pertain to discussions 
either between prescription drug manufacturers and pharmacies, or 
between prescription drug manufacturers and Part D sponsors (or their 
intermediary contracting organizations, hereafter included by 
association whenever we refer to Part D sponsors). Our interpretation 
is based on the sequential phrasing of the clause ``negotiations 
between drug manufacturers and pharmacies and PDP sponsors.'' Because 
in general these negotiations are not among all three parties at once, 
and because manufacturers separately contract with pharmacies for the 
purchase of inventory and with sponsors for formulary placement, we 
believe the quoted phrase can be interpreted as recognizing these 
distinct types of negotiations. Under such a reading, the prohibition 
on interference in negotiations, as described in section 1860D-11(i)(1) 
of the Act, would not pertain to negotiations between Part D sponsors 
and pharmacies.
    This does not mean, however, that we would be free to interfere in 
sponsor-pharmacy negotiations. Indeed, we believe section 1860D-
11(i)(2) of the Act sets forth specific limits on our ability to 
involve ourselves in Part D sponsors' arrangements with their network 
pharmacies, as discussed in more detail later in this section. However, 
we believe that our proposed interpretation of section 1860D-11(i)(1) 
of the Act as not applying to the sponsor-pharmacy negotiations is 
supported by the provision's context. There are numerous statutory 
provisions that require us to directly intervene in the contractual 
relationship between Part D sponsors and network pharmacies, and these 
provisions clearly signal that the Congress expected CMS involvement in 
at least some of these negotiations. The Congress has provided many 
contractual requirements for CMS to enforce between sponsors and 
pharmacies; just the drug-cost-related of these include: Interpretation 
of what ``access to negotiated prices'' means, any-willing-pharmacy 
standard terms and conditions, prohibition on any requirement to accept 
insurance risk, prompt payment, and payment standard update 
requirements. So it is clear that Part D sponsors and pharmacies do not 
have sole discretion to interpret these specific matters. We would be 
obligated to intervene in disputes over whether proposed or finalized 
contractual arrangements violated our rules in any area where our 
oversight is directed under the statute. Therefore, it is clear that 
such involvement could not be what the Congress intended to prohibit. 
Moreover, we observe a growth in related-party relationships between 
Part D sponsors and network pharmacies, where the distinction between 
the sponsor and the pharmacy is increasingly unclear, and there is no 
reason to believe that the Congress intended that we are prohibited 
from oversight of the sponsor's dealings with itself. In addition, we 
believe the goals of the non-interference provision generally support 
CMS avoidance of being an arbiter of private disputes. Thus, we would 
also decline to intervene in contractual disputes between sponsors and 
network pharmacies except in matters implicating CMS requirements, 
because to do so might distort private market outcomes in unpredictable 
ways. Therefore, we propose at Sec.  423.10(b) that CMS may not be a 
party to discussions between prescription drug manufacturers and 
pharmacies, or between drug manufacturers and Part D sponsors, and may 
not arbitrate the meaning of or compliance with the terms and 
conditions of agreements reached between these parties, except as 
necessary to enforce CMS requirements applicable to those agreements. 
Thus, we could only be involved in such discussions in order to explain 
CMS requirements and to ensure compliance with Part D rules and 
regulations. We also add that nothing in this prohibition limits our 
authority to require documentation of and access to all such 
agreements, or to require the inclusion of terms and conditions in 
agreements when necessary to implement requirements under the Act.
    The first part of the section 1860D-11(i)(2) of the Act states that 
CMS ``may not require a particular formulary''. The noninterference 
clause must be read in context of the other provisions that give CMS 
authority with respect to formularies, so we propose to interpret the 
term ``particular formulary'' to mean the selection of specific 
manufacturer licensed drug products to be on formulary, or on any 
particular tier of a formulary, assuming the product meets the 
definition of a Part D drug. We interpret the first part of section 
1860D-11(i)(2) of the Act to prohibit us from developing formulary 
guidelines that prefer one manufacturer's product over another's in 
Part D formularies, leading to more limited formularies such as 
provided by the Department of Defense and the Veteran's Administration. 
The most efficient formularies will make formulary selections and then 
exclude all or most competing multi-source and therapeutically 
equivalent brand products in order to concentrate volume and maximize 
rebates. Given the size of the Part D market, if CMS were able to 
similarly limit access to Part D formularies to certain products, this 
would bestow significant competitive advantage on the manufacturers of 
selected products and significant competitive disadvantage on 
manufacturers of competing products. Such limits would be expected to 
fundamentally alter supply and demand in the marketplace. This 
prohibited sort of selection would be distinguished from CMS formulary 
requirements that may require particular types of drug entities to be 
on all formularies, or on preferred tiers, in order to provide non-
discriminatory access to drugs necessary to treat conditions in all 
Medicare beneficiaries, or to address drug classes of clinical concern 
(see section III.A.14 of this proposed rule). Therefore, we propose a 
provision prohibiting establishment of formulary drug product selection 
at Sec.  423.10(c) that specifies that CMS does not determine the 
specific drug products to be included on Part D sponsor formularies or 
any tier placement of such products, except as required to comply with 
Sec.  423.120(b)(1)(v) or Sec.  423.272(b)(2).
    The second part of section 1860D-11(i)(2) of the Act states that 
CMS ``may not institute a price structure for the reimbursement of 
covered Part D drugs''. Again, the noninterference clause must be read 
in context of the other provisions that give CMS responsibilities in a 
number of areas that pertain to pricing, so we interpret the phrase 
``price structure'' to refer to establishing either absolute or 
relative indices of price for Part D drugs. Specifically, we believe 
the intent of this provision is to prohibit two types of intervention 
by CMS. The first prohibited activity is that CMS may not require Part 
D drug acquisition costs or sales prices to be a function of (be 
defined relative to) any particular published or unpublished pricing 
standard, either existing or future. Thus, we could not require that 
Part D prices be based on, or be any particular mathematical function 
(such as a percentage or multiple) of established pricing standards 
such as Average Wholesale Price, Wholesale Average Cost, Average 
Manufacturer Price, Average Sales Price, Federal Supply Schedule, 340b 
pricing, etc. The second prohibited activity is that CMS cannot require 
price concessions (from any

[[Page 1972]]

standard or basis) to be at any specific (absolute) dollar amount or 
equal to a level specified in other legislative requirements for other 
federal programs. Thus, we could not, for example, set minimum or 
maximum dollar prices for a drug product or require that Part D prices 
be offered at acquisition cost, or at the `best price' applicable under 
the Medicaid program. However, since the statute requires us to 
regulate many aspects of how drug costs are made available and 
displayed to beneficiaries and treated in Part D bidding and payment 
processes, it is clear that we have an important role to play in 
establishing rules for consistent treatment of drug costs in the 
program. Consequently, we may establish definitions of what constitutes 
a pricing standard, a price concession, a cost, etc. We may also 
establish rules concerning how drug costs are treated under Part D, 
including, but not limited to, how such amounts are disclosed in the 
marketplace, projected in Part D bids, made available to beneficiaries 
at point of sale, reported in Explanation of Benefits (EOBs), submitted 
to CMS, and treated in CMS payments to Part D sponsors. Therefore, we 
propose a provision prohibiting establishment of drug price 
reimbursement methodologies at Sec.  423.10(d) that specifies that CMS 
does not establish drug product pricing standards or the dollar level 
of price concessions at any stage in the drug distribution channel for 
Part D drugs. Nothing in this prohibition limits our authority to 
require full disclosure or uniform treatment and reporting of drug 
costs and prices.
25. Pharmacy Price Concessions in Negotiated Prices (Sec.  423.100)
    We have learned that some Part D sponsors have been reporting costs 
and price concessions to CMS in different ways. This reporting 
differential matters because this variation in the treatment of costs 
and price concessions affects beneficiary cost sharing, CMS payments to 
plans, federal reinsurance and low-income cost-sharing (LICS) 
subsidies, and manufacturer coverage gap discount payments. 
Differential treatment of costs would also be expected to affect plan 
bids. We do not collect sufficient detail in price concession data 
reported to CMS to quantify this impact, but this conclusion follows 
from the admitted reporting of some pharmacy price concessions in the 
annual aggregate price concession reporting (that is, the DIR 
reporting) during the coverage year payment reconciliation process, 
rather than as part of the negotiated price. (This issue, and its 
financial effect, have been discussed in the Announcement of Calendar 
Year (CY) 2014 Medicare Advantage Capitation Rates and Medicare 
Advantage and Part D Payment Policies and Final Call Letter (2014 Call 
Letter), [at http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/Announcement2014.pdf] and will be 
discussed in more detail in the discussion which follows.) If the 
projected net costs a sponsor is liable for in its bid are understated 
because the sponsor has been reporting certain types of price 
concessions as direct or indirect remuneration (DIR) rather than as 
price concessions that affect the negotiated price, it follows that the 
sponsor may be able to offer a lower bid than its competitors and may 
achieve a competitive advantage stemming not from greater efficiency, 
but rather from a technical difference in how costs are reported to 
CMS. When this happens, such differential reporting could result in 
bids that are no longer comparable, and in premiums that are no longer 
valid indicators of relative plan efficiency. We are therefore 
proposing changes to rectify this concern.
    The MMA established Part D as a voluntary, private-market-based 
program that would rely on private plans to provide coverage and to 
bear some of the financial risk for drug costs. These private plans 
would determine premiums through a bid process and would compete with 
other plans based on premiums and negotiated prices. [The Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 
Conference Agreement (Conference Agreement), page 4] Premiums are set 
through a statutory formula that ensures that premium levels are 
commensurate with bid levels. Therefore, all other things being equal, 
the lowest premium for a given level of benefits should signal the most 
efficient plan. Premiums are established through a prospective bidding 
process in which costs are projected and evaluated in accordance with 
actuarial guidelines set by the CMS Office of the Actuary.
    Negotiated prices are the payment amounts pharmacies receive from 
plans for covered Part D drugs dispensed to plan enrollees. CMS 
payments to plans are based on the reporting of negotiated prices 
(through PDE reporting) that are actually paid and are then offset by 
any other price concessions (submitted in aggregate through the 
separate annual DIR reporting process). CMS establishes rules for cost 
and price concession reporting through both PDE and DIR guidance and 
other payment reconciliation rules, and has regulated the definition of 
negotiated price and how it is to be treated in Part D benefit 
administration and in payment reconciliation. Since 2010, the 
regulatory definition has been: ``Negotiated prices means prices for 
covered Part D drugs that: (1) The Part D sponsor (or other 
intermediary contracting organization) and the network dispensing 
pharmacy or other network dispensing provider have negotiated as the 
amount such network entity will receive, in total, for a particular 
drug; (2) Are reduced by those discounts, direct or indirect subsidies, 
rebates, other price concessions, and DIR that the Part D sponsor has 
elected to pass through to Part D enrollees at the point of sale; and 
(3) Include any dispensing fees.''
    We intended clause 2 to primarily refer to price concessions from 
parties other than pharmacies, since these would be price concessions 
that were not based on the sale of the drug by the pharmacy and 
calculated when the claim adjudicated and, in fact, could not be 
calculated until a later date. In particular, we expected these other 
non-claim-based price concessions to be in the form of rebates offered 
by prescription drug manufacturers. Since prescription drugs are 
dispensed by pharmacies and purchased through transactions between Part 
D sponsors (or their intermediary contracting organizations) and 
pharmacies, manufacturers are never in a position to apply price 
concessions to negotiated prices at point of sale. We now understand 
that clause 2 is ambiguous and permits sponsors and their 
intermediaries to elect to take some price concessions from pharmacies 
in forms other than the negotiated price and report them outside the 
PDE. When this occurs, the increased negotiated prices generally shift 
costs to the beneficiary, the government and taxpayer, and when 
applicable to certain brand name drugs, to prescription drug 
manufacturers. (The mechanism of this sort of cost shift was discussed 
at length in the analogous context of lock-in pricing in our 2008 
proposed rule entitled ``Medicare Program; Revisions to the Medicare 
Advantage and Prescription Drug Benefit Programs'' which as published 
on May 16, 2008 in the Federal Register,--FR 28563 through 28566.)
    In addition, when price concessions from pharmacies are reflected 
in forms other than the negotiated price, the degree of price 
concession that the pharmacy has agreed to is no longer reflected in 
the negotiated prices available at point of sale or reflected on the 
Medicare Prescription Drug Plan

[[Page 1973]]

Finder (Plan Finder) tool. Thus, the true price of drugs at individual 
pharmacies is no longer transparent to the market. Consequently, 
consumers cannot efficiently minimize both their costs (cost sharing) 
and costs to the taxpayers by seeking and finding the lowest-cost drug/
pharmacy combination. Moreover, as the coverage gap closes, there are 
fewer and fewer beneficiaries who are exposed to the full cost of drug 
products, either at the point of sale or as reflected in Plan Finder 
estimates. When this occurs, the basis of competition shifts from 
prices to cost sharing, and the pricing signals available to the market 
can be distorted when lower cost sharing is not aligned with lower 
prices. Thus, we believe the exclusion of pharmacy price concessions 
from the negotiated price thwarts the very price competition that the 
Congress intended when it said that private plans would compete with 
other plans on both premiums and negotiated prices.
    We are aware that certain pharmacy price concessions are being 
excluded from the determination of the negotiated price because they 
are being characterized as ``network access fees'', ``administrative 
fees,'' ``technical fees'' or ``service fees'' that are frequently 
imposed through PBM-issued manuals rather than explicit contractual 
terms. Pharmacies and pharmacy organizations report that they do not 
receive anything of value for those fees other than the ability to 
participate in the Part D network. The itemized types of services for 
which their payments are offset reportedly include things such as 
transaction fees for submission of claims, help desk support, 
information technology and telecommunication systems connectivity, 
electronic funds transfers, and other expenses associated with 
credentialing, maintaining, and auditing pharmacy networks. These fees 
take the form of deductions from payments to pharmacies for drugs 
dispensed, but in our view clearly represent charges that offset 
sponsor/PBM operating costs. We believe that if the sponsor or its 
intermediary contracting organization wishes to be compensated for 
these services and have those costs treated as administrative costs, 
such costs should be accounted for in the administrative costs of the 
Part D bid. If instead these costs are deducted from payments made to 
pharmacies for purchases of Part D drugs, such costs are price 
concessions and must be treated as such in Part D cost reporting. This 
is the case regardless of whether the deductions are calculated on a 
per-claim basis or not. In our view, the decision on how such network 
management costs are funded between the PBM and the sponsor is not 
governed by our rules, but our rules do require that price concessions 
be fully disclosed and net against drug costs in reconciliation.
    We have also heard from pharmacies that some sponsors apply 
dispensing fees to claims when they are adjudicated at point of sale, 
but require that these fees later be rebated back to the sponsor and 
deducted from payment remittances. Such practices again misstate the 
negotiated price. Our proposal would require that dispensing fees could 
only be applied at point of sale if they are received and retained by 
the pharmacy in the negotiated price.
    In comments on our related discussion in the 2014 Call Letter, one 
commenter argued that these other amounts charged to pharmacies are 
actually valid administrative costs. In contrast, all other sponsors 
and PBMs that commented on that section acknowledged these amounts to 
be price concessions. More significantly, all pharmacies and pharmacy 
organizations we have heard from assert that these are price 
concessions. When reported as DIR, these price concessions have the 
effect of offsetting price concessions disproportionally against just 
the costs the plan is most liable for, as discussed in the 2014 Call 
Letter. If not reported at all, these amounts would result in another 
form of so-called PBM spread in which inflated prices contain a portion 
of costs that should be treated as administrative costs. That is, even 
if these costs did represent services rendered by the PBM or other 
intermediary organization for the sponsor, then these costs would be 
administrative service costs, not drug costs, and should be treated as 
such. Failure to report these costs as administrative costs in the bid 
would allow a sponsor to misrepresent the actual costs necessary to 
provide the benefit and thus to submit a lower bid than necessary to 
reflect its revenue requirements (as required at section 1860D-
11(e)(2)(C) of the Act and at Sec.  423.272(b)(1)) relative to another 
sponsor that accurately reported administrative costs consistent with 
CMS instructions. Therefore, we agree with the pharmacy position that 
an amount deducted from the negotiated price otherwise payable to the 
pharmacy for these sorts of administrative fees is a price concession 
that should be reflected in the negotiated price. Consequently, we 
believe that the best interpretation of statutory intent is that all 
pharmacy price concessions must be reflected in the negotiated price. 
This would preclude the differential reporting that is taking place 
today, and put all plans on a level playing field in reporting drug 
costs and price concessions from network pharmacies. Consistent and 
transparent pricing would also promote increased price competition 
among network pharmacies and will align beneficiary and taxpayer 
interests in minimizing costs. Therefore, we do not believe that other 
pricing arrangements that cannot be calculated at the point of sale, 
such as risk sharing or conditional payments based on volume, are 
compatible with the price competition envisioned under the statute. 
Such arrangements will tend to overstate negotiated prices at point of 
sale, and require the subsequent adjustments through DIR reporting that 
may increase beneficiary and government costs if specified targets are 
met. We believe that the advantages of any such incentive arrangement 
could be achieved without the cost shifting by adjusting future 
negotiated prices. For instance, if specified volume targets were met 
in one quarter, rather than retroactively adjusting that quarter's 
prices down through DIR reporting, the negotiated prices for the next 
quarter could be reduced, and so on. Therefore we propose to 
reinterpret section 1860D-2(d)(1)(B) of the Act such that negotiated 
prices are the amounts that a network pharmacy receives in total for 
covered Part D drugs, and that these prices must reflect all price 
concessions from network pharmacies. Therefore, any other negotiated 
price concessions, such as discounts, direct or indirect subsidies, 
rebates, and (DIR) referenced in the statute would be those price 
concessions offered by sources other than network pharmacies (or their 
intermediary contracting organizations). In practice, this means 
prescription drug manufacturers.
    Some stakeholders have recommended that certain incentive payments 
to pharmacies, such as generic dispensing incentive fees, should not be 
included in negotiated prices. If these payments are included, they 
explain, the negotiated prices appear higher at the more efficient 
pharmacy as the result of the additional incentive payment. This higher 
price then proportionally increases costs borne by beneficiaries, the 
government, and manufacturers. These incentives really represent 
amounts that the sponsor is willing to bear in order to encourage the 
most efficient drug choices, which will drive down total costs overall, 
and thus the sponsor is willing to bear a disproportionate share of 
such expense. We agree with this

[[Page 1974]]

argument and we believe that this sort of arrangement would not 
conflict with our proposed requirement that all price concessions be 
reflected in the negotiated price since such additional payments are 
the opposite of price concessions. Instead such incentive fees 
represent contingent price increases that cannot be predicted in 
advance, and cannot therefore be programmed to be applied at point of 
sale or reflected in the price posted on Plan Finder. We believe it 
would be appropriate to treat this particular sort of price increase 
differently than price decreases because including such amounts in the 
negotiated price (incentive fee component) at point of sale could 
disguise the relative competitiveness of the underlying pharmacy 
prices. Incentive fees also primarily benefit the plan sponsor who 
benefits from the lower costs associated with the incentivized 
behavior, rather than the beneficiary. Therefore, in this case, we 
agree that it would be more appropriate for such incentive payments to 
be excluded from the negotiated price, and reported later in 
reconciliation as negative DIR. When reported as negative DIR, these 
amounts disproportionately affect (increase) the amounts the sponsor is 
liable for in risk sharing, which is appropriate given the intent of 
the incentives to promote least-cost drug product selection at point of 
sale. Least-cost drug product selection will directly reduce the 
sponsor's allowable risk corridor costs, so any incentive paid to 
encourage this behavior would be expected to be more than offset by the 
ingredient costs savings achieved through avoidance of higher-cost drug 
selection. This is so because, as we learned from numerous commenters 
to the 2014 draft Call Letter, the incentive payments are generally in 
the range of a dollar or two and the difference between preferred and 
non-preferred drug products is generally much greater.
    Therefore, we propose to revise the definition of negotiated prices 
at Sec.  423.100 to require that all price concessions from pharmacies 
are reflected in these prices. Specifically we propose to redefine 
negotiated prices to mean prices for covered Part D drugs that: (1) The 
Part D sponsor (or other intermediary contracting organization) and the 
network dispensing pharmacy or other network dispensing provider have 
negotiated as the amount such network entity will receive, in total, 
for a particular drug; and (2) are inclusive of all price concessions 
and any other fees charged to network pharmacies; and (3) include any 
dispensing fees; but (4) exclude additional contingent amounts, such as 
incentive fees, only if these amounts increase prices and cannot be 
predicted in advance; and (5) may not be rebated back to the Part D 
sponsor (or other intermediary contracting organization) in whole or in 
part.
26. Payments to PDP Plan Sponsors for Qualified Prescription Drug 
Coverage (Sec.  423.308)) and Payments to Sponsors of Retiree 
Prescription Drug Plans (Sec.  423.882)
    We propose to revise the definition of the term actually paid at 
both Sec.  423.308 for the Part D program and Sec.  423.882 for the 
Retiree Drug Subsidy program in order to reconcile this definition with 
the changes proposed to the definition of negotiated prices in this 
regulation. Since our proposal would require that all price concessions 
from network pharmacies must be reflected in the negotiated price, it 
would no longer be correct to include pharmacies in the list of sources 
from which price concessions could be received without qualification. 
Therefore, we propose to revise the definition of actually paid at 
Sec.  423.308 to include references to incentive payments, and to 
clarify that DIR may include additional payments to pharmacies, such as 
for incentive payments, but may not include any other price concessions 
from pharmacies as these must be in the form of the negotiated price as 
proposed in Sec.  423.100. We similarly propose to change the reference 
to ``from any source'' in the definition of actually paid at Sec.  
423.882 to ``from any manufacturer or similar entity'' to align these 
definitions.
    We also propose to remove any reference to coupons in the list of 
price concession types. The definition of ``actually paid'' relates to 
costs incurred by Part D sponsors, and coupons would not affect those 
costs. Similarly, we are considering whether any or all of the 
surrounding terms ``cash discounts, free goods contingent on a purchase 
agreement, up-front payments . . . goods in kind, free or reduced-price 
services, [or] grants'' in both of those paragraphs would affect costs 
paid by Part D sponsors. We solicit comments on this question. We 
similarly propose to remove any reference to coupons in the definition 
of actually paid at Sec.  423.882 to align these definitions. We also 
solicit comments on whether the surrounding terms ``cash discounts, 
free goods contingent on a purchase agreement, up-front payments . . . 
goods in kind, free or reduced-price services, [or] grants'' in both of 
those paragraphs would affect costs paid by sponsors of qualified 
retiree prescription drug plans.
    Our reason for striking any such term is that we are not aware of 
any form of coupons (or the other forms of remuneration listed 
previously) that would affect the amount a Part D sponsor pays to the 
pharmacy on a claim. Therefore, the terms should be deleted to 
accurately reflect the types of price concessions a Part D sponsor 
might receive that would affect its financial obligation to pharmacies. 
Moreover, we do not want to signal any ambivalence with regard to the 
permissibility of copayment coupons to eliminate or reduce the cost-
sharing obligations of Part D beneficiaries. The anti-kickback statute 
prohibits the knowing and willful payment of remuneration, directly or 
indirectly, in cash or in kind, to induce the recipient to purchase any 
item for which payment may be made in whole or in part under a federal 
health care program. (42 U.S.C. 1320a-7b(b)(2)). The statute also 
prohibits the knowing and willful receipt of remuneration in return for 
such a purchase. (42 U.S.C. 1320a-7b(b)(1)). Because copayment coupons 
are provided to consumers for the purpose of inducing them to purchase 
specific prescription drugs, knowing and willful use of such coupons to 
reduce the cost-sharing obligations of federal health care program 
beneficiaries is prohibited by the anti-kickback statute. 
Pharmaceutical manufacturers are aware of this prohibition and 
typically include language on copayment coupons stating that persons 
whose prescriptions are paid for by federal programs are not eligible 
to use them.
27. Preferred Cost Sharing (Sec.  423.100 and Sec.  423.120)
    In our original rule implementing the Part D Program, we codified 
an interpretation of section 1860D-4(b)(1)(B) of the Act at Sec.  
423.120(a)(9) that permitted Part D sponsors to offer lower cost 
sharing at a subset of network pharmacies, dubbed ``preferred 
pharmacies,'' than at other in-network pharmacies. This lower cost 
sharing was subject to certain conditions that seemed straightforward 
to us at the time, but which have proven to need clarification. We have 
recently discussed this concern in the Announcement of Calendar Year 
(CY) 2014 Medicare Advantage Capitation Rates and Medicare Advantage 
and Part D Payment Policies and Final Call Letter (2014 Call Letter) on 
pages 175-176 [at http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/Announcement2014.pdf]

[[Page 1975]]

    Section 1860D-4(b)(1)(B) of the Act contemplates the possibility of 
sponsors offering lower cost sharing at some network pharmacies than is 
offered in conjunction with the any willing pharmacy terms and 
conditions mandated in the immediately preceding paragraph (A). 
However, a plan's ability to reduce cost sharing is contingent upon one 
condition: ``In no case shall such a reduction result in an increase in 
payments made by the Secretary under section 1860D-15 of the Act to a 
plan.'' In our original proposed rule entitled ``Medicare Program; 
Medicare Prescription Drug Benefit; Proposed Rule,'' published on 
August 3, 2004 in the Federal Register, 69 FR 46658 through 46659, we 
did not offer an interpretation of this language but implied that any 
assessment of whether the condition was met would be a matter of 
actuarial equivalence analysis. We proposed to codify the requirements 
in regulation with the following two conditions: ``. . . the plan must 
still meet the requirements under Sec.  423.104(e)(2) and (5); and 
[a]ny cost sharing reduction must not increase CMS payments under Sec.  
423.329.'' In the final regulation entitled ``Medicare Program; 
Medicare Prescription Drug Benefit; Final Rule'', published on January 
28, 2005 in the Federal Register, 70 FR 4247 through 4255, we 
reiterated the language from the aforementioned proposed rule (69 FR 
46658). ``However, we note that while these within-network distinctions 
are allowed, the statute also requires that such tiered cost-sharing 
arrangements in no way increase our payments to Part D sponsors. 
Therefore, tiered cost-sharing arrangements based on within-network 
distinctions could be included in Part D plans' benefits subject to the 
same actuarial tests that apply to formulary-based tiered cost-sharing 
structures. Thus, a reduction in cost sharing for preferred pharmacies 
in a Part D plan network could be offered through higher cost sharing 
for non-preferred pharmacies (or as alternative prescription drug 
coverage).'' (70 FR 4254, January 28, 2005). This statement was 
immediately followed by an expression of our intent to ensure that such 
network benefit designs were non-discriminatory: ``We recognize the 
possibility that Part D plans could effectively limit access in 
portions of their service areas by using the flexibility provided in 
Sec.  423.120(a)(9) of our final rule to create a within-network subset 
of preferred pharmacies. In other words, in designing its network, a 
Part D plan could establish a differential between cost-sharing at 
preferred versus non-preferred pharmacies--while still meeting the 
access standards in Sec.  423.120(a)(1) of our proposed rule--that is 
so significant as to discourage enrollees in certain areas (rural areas 
or inner cities, for example) from enrolling in that Part D plan. We 
emphasize that such a network design has the potential to substantially 
discourage enrollment by certain Part D enrollees, and that we have the 
authority under section 1860D-11(e)(2)(D) of the Act to disallow 
benefit designs that are discriminatory.''
    And in fact, once sponsors began to submit preferred cost sharing 
benefit designs, we imposed limits on non-preferred cost sharing in 
such plans (through plan benefit package (PBP) bid review) to ensure 
that non-preferred cost sharing in these designs did not represent a 
cost sharing outlier in comparison to Part D plans without preferred 
cost sharing. If we were to allow cost sharing in pharmacies not 
offering preferred cost sharing to rise above this outlier level, 
beneficiaries with significant utilization due to severe or chronic 
illness would clearly see that such plans were disadvantageous, and 
would avoid them. Thus, we would find any such designs to be 
discriminatory and would not approve the plan benefit package. However, 
what we failed to sufficiently explain in 2005 was that if cost sharing 
cannot rise beyond a certain level, then in return for lower cost 
sharing, preferred networks must reduce drug costs paid by the plan in 
order to prevent an increase in CMS payments to the plan. In part this 
omission may have been because we presumed that Part D sponsors would 
motivate enrollees to go to a subset of pharmacies through lower cost 
sharing only if those pharmacies offered significantly lower negotiated 
prices, and thus would provide a competitive advantage for the sponsor 
in lowering costs. As the concerns expressed in the 2014 Call Letter 
indicate, this does not seem to have been the case for some sponsors. 
However, if drug costs (negotiated prices) are not lower in return for 
lower cost sharing, and the lower cost sharing cannot be completely 
offset by higher cost sharing on other beneficiaries due to our cost-
sharing-outlier limits, then the amount that must be subsidized by the 
government and the taxpayer will increase.
    As noted in the Call Letter, we conducted an analysis of 2011 Part 
D drug costs in standalone PDPs with preferred networks, and compared 
these to costs in their non-preferred networks, as well as to costs in 
other PDPs without preferred networks. (The April 2013 analysis by CMS, 
``Negotiated Pricing between Preferred and Non-Preferred Pharmacy 
Networks'', is posted at: http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovGenIn/Downloads/PharmacyNetwork.pdf). 
We expected to find that costs were consistently lower, although we had 
no preconceived estimate of how much lower. Instead we found that 
aggregate unit costs weighted by utilization (for the top 25 brand and 
top 25 generic drugs) were slightly higher in a few preferred networks 
than in non-preferred networks in some plans. The majority of sponsors 
offering preferred networks did not have these higher costs, although 
the range of cost savings in their preferred networks ranged from a 
high of 24.2 percent to as little as 0.1 percent when measured in this 
particular way. Surprisingly, the most significant driver of excess 
costs in the outlier sponsor preferred networks appeared in mail-order 
claims. In these cases the retail pharmacies in the non-preferred 
network were actually offering savings through discounted generics at 
prices below those offered by pharmacies with preferred cost sharing. 
This is a primary reason we have proposed to interpret the any willing 
pharmacy requirements (see section III.A.29 of this proposed rule) to 
require plan sponsors to offer preferred cost sharing for any pharmacy 
that can offer sufficient discounts to qualify. Even assuming that 
preferred pharmacies were to offer lower negotiated prices than those 
available in the rest of the network, failure to allow access to any 
pharmacy willing to meet the pricing terms necessary to be included in 
the preferred network could mean that fewer beneficiaries would have 
convenient access to both lower cost sharing and lower negotiated 
prices than would otherwise obtain. We seek to not only ensure that 
preferred cost sharing is aligned with lower drug costs, but also to 
maximize the number of beneficiaries who can take advantage of such 
savings. We note that most PBMs own their mail order pharmacies, and we 
believe their business strategy is to move as much volume as possible 
to these related-party pharmacies to maximize profits from their 
ability to buy low and sell as high as the market will bear.
    Our findings--that a few sponsors have actually offered little or 
no savings in aggregate in their preferred pharmacy pricing, 
particularly in mail-order claims for generic drugs--are troubling. 
Instead of passing through lower costs available through economies of 
scale or steeper discounts, a few sponsors are actually charging the 
program higher negotiated prices. When these higher

[[Page 1976]]

prices are combined with significantly lower cost sharing offered in 
preferred pharmacy pricing, such pricing increases the proportion of 
costs borne by the plan and the government. All other things being 
equal, this increases payments to plans in violation of section 1860D-
4(b)(1)(B) of the Act. Moreover, the lower cost sharing provides a 
defective price signal that distorts market behavior. As the coverage 
gap closes, there are fewer and fewer beneficiaries who are exposed to 
the full cost of drug products, either at the point of sale or in 
Medicare Plan Finder estimates. When sponsors compete on cost sharing 
unrelated to the underlying negotiated prices of drugs, beneficiaries 
may make choices that are rational and aligned with plan interests, but 
not in the best interests of the Medicare program and the taxpayer. In 
these cases, the lower cost sharing does not motivate enrollees to 
select pharmacies with lower prices and thus make more efficient 
choices in the market, but rather, motivates enrollees to do the 
opposite. This results in higher costs to the Part D program overall.
    Therefore, we propose to clarify that preferred cost sharing should 
signal consistently lower costs. When lower cost sharing correctly 
signals the best prices on drugs, then choosing pharmacies on the basis 
of that lower cost sharing lowers not only beneficiary out-of-pocket 
costs, but also Part D plan and other government subsidy costs. Lower 
plan and government subsidies translate into lower CMS payments to 
plans, consistent with the statutory requirements at section 1860D-
4(b)(1)(B) of the Act. Therefore, we propose to revise Sec.  
423.120(a)(9) to state: ``Preferred cost-sharing in network pharmacies. 
A Part D sponsor offering a Part D plan that provides coverage other 
than defined standard coverage may reduce copayments or coinsurance for 
covered Part D drugs obtained through a subset of network pharmacies, 
as long as such preferred cost sharing is offered in accordance with 
the requirements of Sec.  423.120(a)(8) and for Part D drugs with 
consistently lower negotiated prices than the same drugs when obtained 
in the rest of the pharmacy network.'' We propose that by `consistently 
lower' we mean that sponsors must offer beneficiaries and the Part D 
program better (lower) negotiated prices on all drugs in return for the 
lower cost sharing. In practice we believe this would mean that 
whatever pricing standard is used to reimburse drugs purchased from 
network pharmacies in general, a lower pricing standard must be applied 
to drugs offered at the preferred level of cost sharing. For instance, 
if drugs offered at the standard retail level of cost sharing were 
reimbursed at 20 percent off the average wholesale price (AWP) pricing 
standard, then any drugs offered at the preferred level of cost sharing 
must be reimbursed at deeper discount than AWP minus 20 percent. If 
generic drugs offered at the standard retail level of cost sharing were 
reimbursed according to a sponsor's proprietary maximum allowable cost 
(MAC) pricing standard, then generic drugs offered at the preferred 
level of cost sharing must be reimbursed at deeper discount than the 
MAC pricing rates. We believe this is not only consistent with the 
statutory intent, but also reasonable since the mail-order operations 
and other large pharmacies where preferred cost sharing is currently 
offered have significantly more purchasing leverage with manufacturers 
and wholesalers than do smaller pharmacies. Our analysis shows that 
some sponsors are already achieving these levels of savings, and our 
proposed policy would apply a consistent standard across all sponsors 
to compete on negotiated prices, including in related-party pharmacy 
operations. We would welcome comments on alternative approaches to 
ensuring that the offering of preferred cost sharing does not increase 
our payments. We believe that any alternative methodology must be based 
solely on the level of negotiated prices and thus consistent with our 
proposal to amend that definition (section III.A.25 of this proposed 
rule). As discussed in that section, we proposed to revise the 
definition to specify that all price concessions from pharmacies must 
be reflected in the negotiated price in order to promote transparent 
price competition, as well as to eliminate differential cost reporting 
and cost shifting that interfere with a fair and transparent 
competitive bidding process. We request that any alternative 
methodology suggestions be accompanied by specific proposals for how we 
could objectively validate compliance through data we already collect.
    In addition, we solicit comments on whether we should also 
establish standards on how much lower drug costs should be in return 
for preferred cost sharing. We are aware that there is a wide range of 
savings projections associated with the use of limited networks. For 
instance, a January 2013 study prepared for the Pharmaceutical Care 
Management Association (PCMA) provides various estimates ranging from 5 
percent to 18 percent [at http://www.pcmanet.org/images/stories/uploads/2013/visante-pcma%20pharmacy%20networks%20study%201-24-13%20final.pdf]. We solicit comment on whether Medicare should require 
a minimum level of savings, such as 10 percent or 15 percent, over the 
costs available at retail cost-sharing rates. We believe that 
substantial discounts in this range would be necessary to balance the 
extremely low preferred cost sharing rates offered by many sponsors in 
2013. We also solicit comments on how broadly preferred cost sharing 
should be applied to drugs on a sponsor's formulary. For instance, is 
it reasonable to offer cost sharing as low as $0 for only the least 
expensive generics on formulary? Or should preferred cost sharing have 
to apply to a minimum percentage of formulary products to be a 
meaningful benefit instead? Or should preferred cost sharing have to 
apply to all drugs available at pharmacies offering preferred cost 
sharing? This would require that the prices of all drugs at those 
pharmacies could be no higher than the prices at the other network 
pharmacies. Such a policy would prevent sponsors from offering lower 
prices on drugs with preferred cost sharing while offering higher 
prices on other drugs not subject to preferred cost sharing. Our 
concern is that without such rules, it is possible that the beneficiary 
is motivated to change pharmacies in order to pay very low copays on 
some drugs, but the program may end up paying higher costs on other 
drugs the beneficiary purchases at the same pharmacy out of 
convenience.
    We also propose a clarification in terminology to better describe 
the application of the policy to a sponsor's approved Part D pharmacy 
network. As illustrated in the proposed revision to Sec.  
423.120(a)(9), we would like to change the point of reference in our 
guidance away from ``preferred pharmacies'' to ``preferred cost 
sharing''. This is not only a more accurate interpretation of the 
statute, but it also avoids the use of the corollary term ``non-
preferred''. We regret the unintended connotation that some network 
pharmacies are ``non-preferred pharmacies'' when, in most cases, these 
pharmacies have had no opportunity to meet the terms and conditions for 
qualifying for preferred cost sharing. The use of the term non-
preferred also has caused confusion for some stakeholders since non-
preferred is also a term of art referring to non-contracted and, 
therefore, non-network pharmacies. In addition, we believe it is 
generally misleading for our sponsors to refer to preferred pharmacies, 
when

[[Page 1977]]

only a limited number of tiers (for instance, generics) may be 
available at the lower preferred cost sharing rates at these 
pharmacies. Consequently, we are proposing to delete the definitions of 
``preferred pharmacy'' and ``non-preferred pharmacy'' from Sec.  
423.100 and to add a new definition of preferred cost sharing. 
``Preferred cost sharing'' would mean lower cost sharing for certain 
covered Part D drugs at certain network pharmacies offered in 
accordance with the requirements of Sec.  423.120(a)(9). We would then 
require that Part D sponsors would revise any marketing materials to 
reflect the revised nomenclature, and eliminate any references to 
preferred or non-preferred network pharmacies. We solicit comment on 
whether any further clarifications of terminology are needed for this 
policy proposal.
28. Prescription Drug Pricing Standards and Maximum Allowable Cost 
(Sec.  423.505(b)(21))
    We are proposing a change to the regulations governing the 
disclosure and updating of prescription drug pricing standards used by 
Part D sponsors to reimburse network pharmacies to make clear that drug 
pricing based on maximum allowable cost (MAC) is subject to these 
regulations. Section 173 of MIPPA amended sections 1860D-12(b) and 
1857(f)(3) of the Act to add a provision requiring the regular updating 
of prescription drug pricing standards. Thus, for plan years beginning 
on or after January 1, 2009, CMS's contracts with Part D sponsors must 
include a provision requiring sponsors to update any standard they use 
to reimburse network pharmacies based on the cost of the drug to 
accurately reflect the market price of acquiring the drug. These 
updates must occur not less frequently than once every 7 days, 
beginning with an initial update on January 1 of each year.
    We codified this requirement in Sec.  423.505(b)(21). We also 
amended Sec.  423.505(i)(3) with respect to contracts or written 
arrangements between Part D sponsors and pharmacies or other providers, 
first tier, downstream and related entities, to ensure that Part D 
sponsors' contracts with these entities include provisions for 
regularly updating any prescription drug pricing standard used by 
sponsors to reimburse their network pharmacies, as provided in Sec.  
423.505(b)(21). Specifically, Sec.  423.505(i)(3)(viii)(A) requires 
that sponsors' pharmacy contracts include a provision establishing 
regular updates of any prescription drug pricing standard used by the 
Part D sponsor, consistent with Sec.  423.505(b)(21), and Sec.  
423.505(i)(3)(viii)(B) requires that a Part D sponsor's pharmacy 
contract indicate the source used by the Part D sponsor for making any 
such pricing updates. We finalized these regulations in a final rule 
entitled, ``Medicare Program; Medicare Advantage Program and 
Prescription Drug Benefit Programs'' at 76 FR 54600 (September 1, 2011) 
(``September 2011 final rule'').
    When we finalized these regulations, we did not provide a specific 
definition for ``prescription drug pricing standard,'' because we 
believed that it was unnecessary at that time. Instead, we provided the 
following examples of prescription drug pricing standards: ones that 
are based on ''wholesale average cost, average manufacturer price, and 
average sales price.'' At the time, we believed these examples 
sufficiently illustrated what is meant by a prescription drug pricing 
standard, which we described as ``an accepted methodology based on 
published drug pricing.'' We also stated that defining the standard 
beyond this may be overly prescriptive and might not be flexible enough 
to evolve with industry changes.
    Since publication of the September 2011 final rule, we have 
concluded that our description of ``prescription drug pricing 
standard'' in the preamble to the final rule was unintentionally too 
restrictive. Pharmacy representatives have noted that many contracts 
between Part D sponsors/PBMs and their network pharmacies set 
reimbursement through the application of MAC prices. It is our 
understanding that MAC prices generally refer to lists of drugs that 
include the maximum amount that a plan will pay for multi-source drugs, 
whether generics or multi-source brands. Based on numerous 
conversations with pharmacy representatives, we further understand that 
there is no standardization in the pharmacy benefits industry as to the 
criteria used to determine inclusion of drugs on MAC lists or as to the 
methodology used to determine the MAC prices, but that the latter is 
based in part on the costs of the drugs and fluctuate, sometimes 
frequently. We also understand that MAC prices seem to be set in some 
relation to a lowest cost generic product alternative available on the 
market at a given time. Additionally, we understand that MAC prices are 
not typically based exclusively on published drug pricing, but are 
based at least in part on internal Part D sponsor/PBM methodologies. 
Finally, we understand that many Part D sponsors and PBMs have asserted 
that because MAC prices are not based solely on published drug pricing, 
MAC prices are not a ``prescription drug pricing standard,'' and thus, 
not subject to the updating requirements.
    Pharmacy representatives further report to us that pharmacies are 
forced to sign contracts that reimburse based on MAC prices that change 
without notice. These representatives state that pharmacies 
consequently do not know exactly what price they will be paid for which 
drugs, and thus the pharmacies cannot confirm that their reimbursements 
are correct nor engage in proper business planning.
    As noted previously, we stated in the preamble to the final 
regulation that a ``prescription drug pricing standard'' is an accepted 
methodology based on published drug pricing. This is because we were 
unaware at the time that there is at least one standard based on costs 
of the drugs that is not based strictly on published drug pricing. Now 
that we have become aware of these types of pricing standards, we wish 
to clarify our regulatory requirement. We believe that the updating 
requirement should apply to pricing standards based on the cost of a 
drug, even when the standard is not based on published drug pricing, an 
approach consistent with the intent of the statute. The text of MIPPA 
section 173 itself indicates the provision's purpose--Part D sponsors 
must update their prescription drug pricing standards regularly ``to 
accurately reflect the market price of the drug.'' We believe that this 
statement of purpose indicates that the Congress intended to provide 
pharmacies with a means of ensuring that they have current data on the 
amount of reimbursement that they can expect.
    When the source of a prescription drug pricing standard is 
published publicly, such as with AWP or WAC, pharmacies can determine 
their reimbursement for all drugs at any given time and can monitor 
these sources to ensure they are being reimbursed correctly. However, 
when a prescription drug pricing standard is not published publicly, 
network pharmacies are unable to promptly determine whether their 
reimbursement is consistent with their contractual arrangements. This, 
in turn, presents risks to the Medicare Part D program in a number of 
ways. For example, disclosure of the source used to determine drug 
prices is necessary for pharmacies to ensure accurate payment of their 
claims, which is necessary for accuracy in the costs submitted to CMS 
by Part D sponsors on PDEs without unnecessary later adjustments that 
are disruptive to the operation of the Part D program.
    In addition, when network pharmacies are unable to determine 
whether their reimbursement is

[[Page 1978]]

consistent with their contractual arrangements, the accuracy of the 
prices displayed in the Medicare Prescription Drug Plan Finder 
(``MPDPF'') is questionable. While these prices only provide an 
estimate of Part D drugs costs at particular pharmacies, beneficiaries 
do use the MPDPF to make drug purchasing choices. If a pharmacy does 
not know what it will be paid for drugs on any given day, it cannot 
test the MPDPF and validate the prices. Thus, there is no assurance 
that the posted prices are accurate, and pharmacies are deprived of the 
opportunity to compete based on more accurate prices, and beneficiaries 
may make choices based on erroneous estimated drug costs. This is 
contrary to the public policy goal of facilitating competition in the 
health care system and supporting consumers to be informed purchasers 
of health care. Also, when CMS compares posted prices to prices 
submitted on PDEs to evaluate the estimates provided in the MPDPF, 
there can be no assurance that those values correspond to the payments 
pharmacies actually receive.
    For these reasons, we now believe it is necessary to define 
``prescription drug pricing standard'' in regulation. Therefore, we 
propose to add a definition to Sec.  423.501 that would state that a 
``prescription drug pricing standard'' means ``any methodology or 
formula for varying the pricing of a drug or drugs during the term of a 
pharmacy reimbursement contract that is based on the cost of a drug, 
which includes, but is not limited to, drug pricing references and 
amounts that are based upon average wholesale price, wholesale average 
cost, average manufacturer price, average sales price, maximum 
allowable cost (MAC), or other cost, whether publicly available or 
not.'' We propose to include the phrase, ``includes, but is not limited 
to,'' to signify that the examples specified in the regulation text are 
not exhaustive.
    We expect some commenters may ask what pharmacy reimbursement 
method would not be considered a ``prescription drug pricing 
standard,'' since the regulations apply only ``if'' a Part D sponsor 
uses a standard for reimbursement that is based on the cost of the 
drug. In our view, a fixed fee drug price schedule that is not expected 
by the parties to vary during the term of the contract between the Part 
D sponsor/PBM would be not be a ``prescription drug pricing standard,'' 
as there would be no reason to update the list at least every 7 days.
    In addition, in order to make the regulations regarding 
prescription drug pricing standards easier to reference, we are 
proposing the following technical changes for consolidation purposes: 
(1) To combine the current requirements contained in Sec.  
423.505(b)(21) (i) and (ii) into (i) and eliminate the reference to the 
effective contract year 2009 as no longer necessary. These requirements 
generally state that Part D sponsors agree to update any prescription 
drug pricing standard (as would be defined in Sec.  423.501) on January 
1 of each contract year and not less frequently than once every 7 days 
thereafter. We also propose to move the current requirement to indicate 
the source used for making any such updates to (b)(21)(ii) from Sec.  
423.505(i)(3)(viii)(B). We propose this latter move of regulation text, 
so that it is clearer by its placement in the regulation that this 
requirement is on Part D sponsors.
    For new paragraph Sec.  423.505(b)(21)(iii), to be clear, we are 
proposing a new requirement and not a technical change. We are 
proposing that Part D sponsors agree in their contracts with CMS to 
disclose all individual drug prices to be updated to the applicable 
pharmacies in advance of their use for reimbursement of claims, if the 
source for any prescription drug pricing standard is not publicly 
available. This means, in conjunction with the proposed definition of a 
``prescription drug pricing standard'' discussed previously, that Part 
D sponsors would have to convey to network pharmacies in advance the 
actual MAC prices to be changed. We are requiring that the actual MAC 
prices be disclosed in advance because, if the pharmacies are not able 
to use the updates as a reference against which they can check their 
reimbursements, there would be no point to the statutory requirement.
    As a final technical change, we are proposing to eliminate language 
in Sec.  423.505(i)(3)(viii)(A) about establishing regular updates of 
any prescription drug pricing standard used by the Part D sponsor which 
is and would be duplicative to language in 423.505(b)(21). As a result 
of the changes described previously, there would be no paragraphs (A) 
and (B) to Sec.  423.505(i)(3)(viii), and this provision would simply 
require that, if applicable, each and every contract governing Part D 
sponsors and first tier, downstream, and related entities, must contain 
provisions addressing the prescription drug pricing standard 
requirements of Sec.  423.505(b)(21). We believe these proposed 
technical changes will make the regulation text easier to reference and 
understand.
29. Any Willing Pharmacy Standard Terms & Conditions (Sec.  
423.120(a)(8))
    Section 1860D-4(b)(1)(A) of the Act requires Part D plans to permit 
any pharmacy meeting the standard Terms and Conditions (T&C) to 
participate in the plan's network. We used this authority to establish 
requirements under Sec.  423.120(a)(8) and Sec.  423.505(b)(18) that 
plan sponsors have reasonable and relevant T&C for network 
participation in their standard contract, and allow any pharmacy 
meeting the T&C to participate as a network pharmacy for that plan. 
Section 1860D-4(b)(1)(B) of the Act permits sponsors to reduce cost 
sharing ``below the level otherwise required,'' notwithstanding 
paragraph (A). Thus, the statute permits a ``preferred'' cost sharing 
level (using the definition specified in section III.A.27 of this 
proposed rule) to be offered at some network pharmacies. Since the 
beginning of the program, we have required sponsors to offer standard 
T&Cs to any willing pharmacy in order to achieve broad network access, 
but have permitted sponsors to offer different T&Cs in return for 
preferred cost sharing to a smaller subset of its network. We have 
previously stated that we believed our interpretation of these two 
seemingly conflicting statutory provisions struck an appropriate 
balance between the need for broad pharmacy access and the need for 
Part D plans to have appropriate contracting tools to lower costs. In 
this section we are proposing that in place of sponsors having one 
contract with standard terms for any willing pharmacy and a second 
preferred cost sharing contract for a limited subset of pharmacies, 
that sponsors instead have standard T&C for network participation that 
list all combinations of cost sharing and negotiated prices possible 
for retail settings under the plan, allowing any willing pharmacy the 
opportunity to offer preferred cost sharing if the pharmacy can offer 
the requisite level of negotiated prices.
    When discussing cost sharing, distinctions are made in this section 
between plans offering a preferred cost sharing level and plans that do 
not. For the purposes of this section, the cost sharing levels offered 
at retail pharmacies not contracted to offer preferred cost sharing 
(previously referred to as ``non-preferred pharmacies'') are referred 
to as standard cost sharing levels. Cost sharing levels offered at 
retail pharmacies at the preferred T&C (previously referred to as 
``preferred pharmacies''), are referred to as preferred cost sharing 
levels.

[[Page 1979]]

    Because under our proposal for preferred cost sharing, pricing 
terms for pharmacies offering preferred cost sharing could not exceed 
the pricing terms for pharmacies offering standard cost sharing (see 
discussion in section III.A.27 of this proposed rule), we will use the 
terms ``ceiling price'' and ``floor price'' to refer to the upper and 
lower limits put on pricing terms. As proposed, the negotiated prices 
charged by pharmacies offering preferred cost sharing must be at or 
below the agreed upon ceiling price (determined by using the defined 
preferred cost sharing T&C pricing), which must be less than the floor 
price, or lowest negotiated price, charged at network pharmacies 
offering standard cost sharing.
    We heard from many pharmacies, many of them small independent 
community pharmacies, that plans do not offer any willing pharmacy the 
opportunity to offer preferred cost sharing. Instead, some pharmacies 
are being offered only the plan's standard T&C, at the highest level of 
beneficiary cost sharing. We received more than 200 comments in 
response to our discussion of this topic in the Announcement of 
Calendar Year (CY) 2014 Medicare Advantage Capitation Rates and 
Medicare Advantage and PDP Payment Policies and Final Call Letter (2014 
Call Letter) pp. 175-176 at http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/Downloads/Announcement2014.pdf. Most of 
these comments were from pharmacies concerned about barriers to entry 
for participation in preferred networks, and many of these argued that 
such limited networks violate the statutory intent of the network 
access provisions at section 1860D-4(b)(1) of the Act. In particular, 
these commenters disagreed that such barriers were consistent with the 
any willing pharmacy requirement as stated in 1860D-4(b)(1)(A) of the 
Act.
    Consequently, we have reviewed our original regulatory 
interpretation of these provisions, not only in light of these 
complaints, but also in light of our experience in the Part D program. 
We believe that an alternative reading of sections 1860D-4(b)(1)(A) of 
the Act and (B) of the Act to reduce barriers is not only permissible, 
it would have the following key policy benefits, which we describe as 
follows:
     Increased access for beneficiaries to preferred level cost 
sharing with any willing pharmacy able to agree to the T&C that include 
preferred cost sharing.
     Improved opportunity for competition among pharmacies 
contracting with the sponsor to charge no more than the ceiling price 
stated in the contract for preferred cost sharing, reducing costs 
charged to the program.
     Improved clarity for beneficiaries surrounding cost 
sharing levels available at retail and mail order pharmacies.
    Elsewhere in this proposed regulation we discuss clarifications to 
the requirements for offering preferred cost sharing within a sponsor's 
network (see section III.A.27 of this proposed rule). In III.A.27 we 
discuss our analysis of 2011 benefit designs incorporating preferred 
cost sharing. We found that some retail pharmacies are actually 
offering to sell Part D drugs (particularly generic versions) at prices 
below those offered by the network pharmacies eligible for preferred 
cost sharing. In such cases, the lower negotiated prices offering the 
program superior savings are offered to enrollees at the higher 
standard cost sharing levels, while the same drugs being offered to 
enrollees at lower preferred cost sharing levels may be costing the 
program as much or more. The lower cost sharing ``price'' signal is not 
aligned with either the true price of the drug or better overall value 
to the program, and therefore the defective signal incentivizes 
inefficient purchasing decisions from the perspective of the Part D 
program. If some retail pharmacies are willing to provide deeper 
discounts than those that sponsors are currently negotiating with 
pharmacies in return for offering preferred cost sharing, we can 
conclude that, all other things being equal, competition will be 
increased and aggregate negotiated prices will be reduced if these more 
competitive retail pharmacies have the opportunity to qualify for 
preferred cost sharing. Therefore, we now believe that this opportunity 
for pharmacies to gain entry into previously limited networks should be 
a component of the any willing pharmacy requirements for retail 
pharmacies, allowing more pharmacies the option to offer preferred 
level cost sharing if they are willing to charge no more than the 
ceiling price stated in the contract.
    We have heard the assertion that limited networks achieve greater 
savings than broader networks, and that moreover, allowing more 
participants into a limited network than those hand-picked by the 
sponsor will necessarily lead to increased prices. However, we have 
been running a natural experiment of sorts relative to this assertion 
in the Part D program. If limited networks per se led to significantly 
lower costs, we would see consistently significant savings in those 
network segments relative to the rest of the sponsors' networks. 
However, an April 2013 analysis by CMS, ``Negotiated Pricing Between 
Preferred and Non-Preferred Pharmacy Networks'', reviewed actual 
program experience and indicated that this is not the case across the 
board (see http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovGenIn/Downloads/PharmacyNetwork.pdf). As the 2012 
claims show, there is wide variation in discounting across sponsors. 
Consistent savings are not seen uniformly. In some cases, pharmacies 
extending high discounts are ones that have been excluded from limited 
networks offering preferred cost sharing, while some pharmacies within 
the limited networks offer effectively no discounts compared to the 
rest of the network. Therefore, we believe that opening up these 
limited networks to any pharmacy willing to charge no more than the 
contract's ceiling price to qualify for offering the lower preferred 
cost sharing is necessary to restore price competition in these 
networks. Consequently, for any sponsor that offers both standard and 
preferred cost sharing under any of its benefit packages, we propose 
that the sponsor's contracts for network retail pharmacies include not 
only the T&C for standard cost sharing, but also the T&C for offering 
preferred cost sharing, stating negotiated pricing levels that must be 
agreed upon to qualify for offering preferred cost sharing. As 
discussed previously, the ceiling price that a pharmacy can charge for 
a drug filled at a preferred cost sharing level, must be less than the 
floor price, or minimum price, charged by network pharmacies under that 
plan offering standard cost sharing levels. Retail pharmacies would 
elect to participate according to one set of terms or the other, but 
not both.
    We have also heard the argument that the pharmacies in currently 
limited networks are offering deeper discounts solely in return for 
increased market share and that they will withdraw such offers if the 
limited network is opened up to other pharmacies that can meet those 
T&C. We are skeptical that such participants in the highly competitive 
retail market will abandon their market share by returning to the 
broader network T&C. As some network pharmacies offering standard cost 
sharing have been able to extend discounts in pricing even deeper than 
what is seen in some pharmacies offering preferred cost sharing, it is 
not obvious that negotiated prices would necessarily increase in the 
aggregate in the event that a limited number of pharmacies consider 
changing from preferred to standard cost sharing. We

[[Page 1980]]

have also been informally told by one sponsor with preferred cost 
sharing in a limited network that its preferred cost sharing T&C 
already are offered to any willing pharmacy. For these reasons, we do 
not believe that our proposal would result in increased prices. We note 
that our proposed alternative statutory interpretation still would 
permit sponsors to limit preferred cost sharing to those pharmacies 
accepting T&C with stated ceiling prices. Aggressive price concessions 
to fall below the stated ceiling price (solely in the form of lower 
negotiated price, in accordance with our proposed change to that 
definition at Sec.  423.100 discussed at section III.A.25 of this 
proposed rule) would have to be met by all pharmacies offering 
preferred cost sharing, including pharmacies that are related parties 
of the Part D sponsor or its PBM. Sponsors could not offer preferred 
cost sharing for higher negotiated prices than the ceiling price listed 
in the T&C, but would be free to negotiate even deeper discounts from 
individual pharmacies in the limited network. Publicly posted pricing 
standards would effectively set a pricing floor for all pharmacies 
accepting a plan's standard T&C and set a pricing ceiling for 
pharmacies accepting the preferred cost sharing T&C. These benchmarks 
better align price with value, while maintaining sponsor flexibility to 
negotiate with all pharmacies in its network. Therefore, we are 
confident that requiring that a Part D plan sponsor offer T&C for every 
level of cost sharing approved in its benefit packages to any willing 
pharmacy would not limit competitive negotiations, nor would it in and 
of itself lead to increased negotiated prices.
    We also believe that there is a limit to the number of cost sharing 
levels offered under a benefit plan that can be well understood by 
beneficiaries. When establishing its network, a Part D sponsor does not 
offer identical T&C for network participation to every pharmacy. 
Certain terms will necessarily differ among contracts with the 
different types of pharmacies needed to provide all Part D drugs, if 
for no other reason than to address the different access and service 
standards established by CMS. These various types include at a minimum: 
Retail, mail-order, long-term care institutional, limited-distribution-
drug specialty, and home infusion therapy pharmacies. Terms will also 
differ with respect to negotiated prices and the level of cost sharing 
that a pharmacy's claims will be subject to. For instance, long-term 
care institutional, specialty, and infusion pharmacies are generally 
offered at the standard level of cost sharing (for the applicable 
formulary tier) for a month's supply of a covered drug. Retail and 
mail-order pharmacies, in contrast, currently may contract with plans 
to be offered at more than one cost sharing level.
    Cost sharing at retail and mail-order pharmacies currently vary on 
three dimensions: Whether the cost sharing is standard or preferred, on 
the quantity dispensed (or ``days' supply''), and on dispensing 
location.
a. Preferred Cost Sharing
    Under Sec.  423.120(a)(9), sponsors can offer lower preferred cost 
sharing levels to some retail and mail order pharmacies in their 
network who agree to offer superior price concessions. While 
beneficiaries may actively seek out preferred cost sharing among retail 
and mail order pharmacies, this is less common among long term care, 
specialty, and infusion pharmacy settings. Any preferred cost sharing 
structure would be required to meet certain conditions as previously 
proposed and would be required to be submitted to CMS for approval as 
part of a sponsor's plan benefit package. Plans are not currently 
required to offer a preferred cost sharing level, nor would they be 
required to if this proposal is implemented. However, for pharmacies 
that do contract to offer preferred cost sharing, our proposal means 
that preferred cost sharing must be available to all enrollees covered 
by that plan's contract and electing to use that pharmacy. This would 
include consistently charging preferred cost sharing and consistently 
billing no more than the ceiling price for all prescriptions, whether a 
one month or extended days' supply is dispensed.
b. Extended Days' Supply
    Additionally, different cost sharing levels may be offered for 
extended days' (generally greater than 34 and no more than 102) 
supplies, at both retail and mail order pharmacies. To avoid 
unnecessarily complicated benefit designs, plans should create no more 
than two cost sharing distinctions based on days' supply: One month 
supply (not to exceed 34 days) or extended days' supply (greater than 
34-days' supply). In manual guidance (see section 50.10 of Chapter 5 of 
the Medicare Prescription Drug Benefit Manual) we have further 
interpreted the ``level playing field'' provision to mean that sponsors 
electing to offer extended days' supplies of covered Part D drugs need 
to make available to retail pharmacies, upon request, an ``Extended 
Supply Addendum'' to their standard contracting terms and conditions 
for retail pharmacies. This Addendum provides one of two extended-
days'-supply contracting options: (1) To be offered at the same cost 
sharing rate as mail order if a retailer can match the mail-order T&C, 
or (2) to be offered at another higher cost-sharing level, but in no 
case higher than three times the amount enrollee would have paid at the 
same retail pharmacy had the enrollee had his or her prescription 
filled in multiple 1-month supply increments at the applicable retail 
pharmacy cost sharing (standard or preferred) cost sharing rate. The 
nature of long term care, specialty, and infusion pharmacy dispensing 
makes a price differential based on days' supplies largely unnecessary.
c. Mail Order Cost Sharing
    Section 1860D-4(b)(1)(D) of the Act (and Sec.  423.120(a)(10)) 
require sponsors to provide for extended days' supplies at retail when 
extended days' supplies are available at mail, but explicitly permits 
differential cost sharing between the two settings. For plans offering 
both preferred cost sharing and mail order options, the mail order cost 
sharing for an extended days' supply can be less than the preferred 
cost sharing for an extended days' supply filled at retail. However, 
for 1-month supplies, we propose that the cost sharing at mail order 
(for prescriptions for 34 days or less) cannot be less than the 
standard cost sharing at retail (for prescriptions for 34 days or 
less), regardless of whether a preferred cost sharing level is 
available. In general, we believe that filling initial prescriptions or 
routine 30-day supplies at mail-order is not good practice. Given the 
need to order or re-order mail order prescriptions well in advance of 
when the medication runs out (to allow time for shipping), the 
opportunity for gaps in therapy caused by delayed orders rises. When 
using mail order for one month supplies, a beneficiary would have to 
order the next month's supply shortly after receiving a new order, and 
complaints received by CMS indicate that billing errors and delayed 
shipments occur. It is our understanding that mail order is most 
efficient when processing extended days supplies, when all billing and 
processing can be addressed well in advance of needing to ship the next 
supply. However, we recognize that for some populations, monthly mail 
order supplies are an acceptable option, so we are not seeking to 
disincentivize this option. Rather, we are proposing that 1-month 
supplies filled by mail order pharmacies cannot

[[Page 1981]]

have cost sharing lower than a comparable one month supply filled at 
retail, so as not to provide an incentive to fill short supplies of 
chronic medications through mail order.
    We believe that a more simplified benefit design, incorporating 
these three variables and accommodating a more clearly defined set of 
cost sharing levels, would promote better understanding of Part D plan 
benefits, both in terms of beneficiary cost sharing and prices charged 
to the program, as well as streamlined contracting options. We also 
find it important to expressly state the total number of possible cost-
sharing levels, to clarify expectations and to preempt the introduction 
of additional or unauthorized cost-sharing levels in the future.
    For prescriptions not subject to Long Term Care, specialty 
pharmacy, or home infusion pricing, the interaction of the following 
four provisions of section 1860D-4(b)(1) of the Act point to three 
authorized levels of cost sharing: Standard, preferred, and extended 
days' supplies for retail and mail order pharmacies.
     Section 1860D-4(b)(1)(A) of the Act details the 
participation of Any Willing Pharmacy in a plan's network, provided 
that they meet T&C offered by the plan, authorizing a standard cost 
sharing level. This proposal offers retail and mail order pharmacies a 
chance to not just participate in the plan's network, but to select 
among a plan's various T&C for participation. By listing the T&C 
required for offering preferred cost sharing on the contract offered to 
any willing pharmacy, instead of only offering these T&C to select 
pharmacies, a greater percentage of network pharmacies can offer 
beneficiaries the lower cost sharing, while also offering reduced 
negotiated prices and savings to the Part D program.
     Section 1860D-4(b)(1)(B) of the Act permits discounting 
for some network pharmacies, authorizing a preferred cost sharing 
level. This proposal continues to permit both a standard and preferred 
cost sharing level within a plan's network.
     Section 1860D-4(b)(1)(C) of the Act defines the authority 
to establish rules defining convenient access, permitting a mail order 
cost sharing level. Expanding requirements for any willing pharmacy 
contracts, with any pharmacy (and presumably a greater number of 
pharmacies) now offered the opportunity to compete for preferred cost 
sharing if the pharmacy can offer the requisite level of negotiated 
prices, would expand beneficiary access to lower cost sharing options 
within the network.
     Section 1860D-4(b)(1)(D) of the Act creates a level 
playing field by ensuring that if extended days' supply benefits are 
available at mail order, beneficiaries can get the same benefit at 
retail pharmacies. Extended days' supply cost sharing at mail order 
does not have to equal extended days' supply cost sharing at retail, 
however, we propose to require that it cannot be less than the standard 
cost sharing offered at retail pharmacies for extended days' supply. As 
previously discussed, it is our understanding that mail order is most 
efficient when processing extended days supplies, when all billing and 
processing can be addressed well in advance of needing to ship the next 
supply. While we are not proposing to disincentivize mail order for 
supplies of less than 90 days, nor do we believe it is appropriate to 
incentivize through lower cost sharing the use of mail order in 
situations where gaps in therapy may be more likely to occur.
    When assessed together, we believe these four sections direct Part 
D plans to create a network offering convenient access not only to 
various types of pharmacies but also to various types of cost sharing. 
Permitting three retail cost sharing levels, as the statute implies, 
reflects the levels of cost sharing also observed in the commercial 
market. However, unique to Part D, the available cost sharing levels 
must also meet the Medicare requirements assuring pharmacy access for 
Medicare beneficiaries.
    We would like to minimize the number of variations on these three 
levels to the following options and to ensure that standard T&C for 
network participation offer every level available for each respective 
pharmacy type. First, we propose to limit long term care, specialty, 
and infusion pharmacy cost sharing to the standard monthly rate, as is 
industry practice today. Second, we propose to limit retail pharmacies 
to the three authorized levels; either the standard or preferred 
monthly rate (for supplies up to 34 days), and one extended days' 
supply cost sharing rate not exceeding three times the monthly retail 
rate (either three times the standard monthly retail rate or three 
times the preferred monthly retail rate, depending upon the T&C of the 
pharmacy's contract). Third, we propose to limit the levels of cost 
sharing at mail-order pharmacies to one monthly rate and one extended 
day mail order cost sharing rate (for any supplies greater than 34 
days) for reasons discussed previously. We additionally solicit 
comments on the frequency of mail order being used to fill 
prescriptions lasting one month or less. We note that these proposals 
would not alter our requirements around the dispensing of any days' 
supplies less than 30 days, which is still subject to the ``daily cost 
sharing'' provision at Sec.  423.153(b)(4) (which we propose to further 
clarify in section III.E.9 of this proposed rule).
    In summary, we propose to use the authority in section 1860D-
4(b)(1)(C)(i) of the Act to establish rules defining convenient access 
within a Part D pharmacy network, combined with the authority in 
section 1860D-4(b)(1)(A) of the Act to revise the any willing pharmacy 
requirements, to ensure that any pharmacy that can meet the applicable 
T&C for offering standard or preferred cost sharing can join the 
network on those terms. We believe the network access provisions in 
section 1860D-4(b)(1) of the Act support expanding Sec.  423.120(a)(8) 
to all levels of cost sharing offered under a sponsor's benefit plans. 
We believe that doing so supports the Congressional intent to have 
plans compete on negotiated prices by making this price competition 
more open and accessible to pharmacies. Specifically, we propose to 
revise Sec.  423.120(a)(8) to require that, in establishing its 
contracted pharmacy network, a Part D sponsor offering qualified 
prescription drug coverage must comply with all of the following 
requirements:
     Must offer and publicly post standard terms and conditions 
for network participation for each type of pharmacy in the network 
subject to the following:
    ++ May not require a pharmacy to accept insurance risk as a 
condition of participation in the PDP sponsor's contracted pharmacy 
network.
    ++ Must offer payment terms for every level of cost sharing offered 
under the sponsor's plans consistent with CMS limitations on the number 
and type of cost sharing levels, and for every type of similarly 
situated pharmacy.
     Must contract with any willing pharmacy able to meet one 
set of the terms and conditions offered by that plan for that type of 
pharmacy.
    We also propose to make conforming changes to the contracting 
provisions at Sec.  423.505(b)(18) to require Part D sponsors to agree 
to have standard T&C for network participation that meet the 
requirements described in Sec.  423.120(a)(8), with reasonable and 
relevant T&C of participation for each type of pharmacy in its network. 
We believe these proposed requirements would better ensure that each 
Part D plan: (1) Provides convenient access to Part D drugs in all Part 
D settings and to the extent practical, at all cost sharing

[[Page 1982]]

levels; and (2) offers cost sharing levels that encourage beneficiaries 
to make choices that minimize costs not only for themselves, but also 
to the Medicare Part D program as a whole.
    We solicit comments on these proposals to expand the any willing 
pharmacy T&C and to streamline the levels of cost sharing offered under 
those standard T&C. Based on the current level of negotiated prices in 
the Part D program, we conclude that if a greater number of pharmacies 
were given the option to compete for each cost-sharing level offered 
under the plan, that beneficiaries would have more pharmacy options 
offering the lowest cost-sharing level for reduced prices. We cannot 
compel sponsors to negotiate lower negotiated prices, nor can we compel 
pharmacies to accept plan sponsors' T&C for participation, but we can 
create benefit specifications and network access standards that promote 
streamlined benefit comparisons and that maximize opportunities for 
price competition. We believe these proposals will increase beneficiary 
understanding of and access to cost sharing that is better aligned with 
the lowest negotiated prices, improve market competition, and increase 
downward pressure on total program costs.
30. Enrollment Requirements for the Prescribers of Part D Covered Drugs 
(Sec.  423.120(c)(5) and (6))
    To improve our ability to oversee the Medicare Part D program, we 
are proposing to implement section 6405(c) of the Affordable Care Act 
effective January 1, 2015. This section provides the Secretary with 
authority to require that prescriptions for covered Part D drugs must 
be prescribed by a physician enrolled under section 1866(j) of the Act 
(42 U.S.C. 1395cc(j)) or an eligible professional as defined at section 
1848(k)(3)(B) of the Act (42 U.S.C. 1395w-4(k)(3)(B)). We are proposing 
in revised 42 CFR 423.120(c)(5) and new (6) that a prescriber of Part D 
drugs must have: (1) An approved enrollment record in the Medicare FFS 
program (that is, original Medicare); or (2) a valid opt-out affidavit 
on file with a Part A/Part B Medicare Administrative Contractor (A/B 
MAC) for a prescription to be eligible for coverage under the Part D 
program.
    Our long-standing Part D policy has been that drugs cannot be 
eligible for Part D coverage unless they are dispensed upon 
prescriptions that are valid under applicable state law. We 
incorporated this policy (Sec.  423.100 and Sec.  423.104) in the April 
12, 2012 final rule (77 FR 22072) entitled, ``Medicare Program: Changes 
to the Medicare Advantage and the Medicare Prescription Drug Benefit 
Programs for Contract Year 2013 and Other Changes.''
    Inherent in this policy is the notion that valid prescriptions of 
covered Part D drugs are written by qualified prescribers, meaning 
prescribers who have an active professional health care license that 
conveys prescribing privileges to them under applicable state law. A 
prescription is not valid under any state law if it is not written by a 
qualified prescriber. Indeed, we note that not all of the eligible 
professional types under section 1848(k)(3)(B) of the Act can 
necessarily prescribe drugs under state law.
    To help ensure that Part D drugs are prescribed only by qualified 
prescribers, we are proposing that physicians and eligible 
professionals enroll in the Medicare program in order to prescribe 
covered Part D drugs. We are proposing an enrollment deadline of 
January 1, 2015, which would provide physicians and eligible 
professionals with at least 6 months after the publication of a final 
rule to initiate and complete the Medicare enrollment process for the 
purposes of prescribing covered Part D drugs. We are soliciting 
comments regarding the effective date of this provision and the 
reason(s) why we should consider an earlier or later implementation 
date for this provision.
    Our proposal to implement section 6405(c) of the Affordable Care 
Act with respect to Part D prescribers complements our recent steps to 
help ensure that prescriptions covered by the Part D program are 
written by qualified health care practitioners. In 2012, we provided 
sponsors with guidance in an October 1, 2012 HPMS memorandum titled, 
``Revised Reporting Requirements for Prescriber Identifiers and Other 
Prescription Drug Event Fields.'' We also required every PDE record 
submitted by a Part D sponsor to CMS to contain an active and valid 
individual prescriber national provider identifier (NPI) beginning 
January 1, 2013. PDE records are summary records of every prescription 
filled under the Part D program and contain prescription drug cost and 
payment data that enables CMS to make payments to plans and otherwise 
administer the Part D benefit. Thus, the PDE NPI requirement ensures 
that we have a record of the prescriber's active and valid individual 
NPI for every prescription covered under the program.
    In the final rule implementing the NPI PDE requirement, we 
explained that the consistent use of a single validated identifier 
would enable us to provide better oversight over possible fraudulent 
activities in the Part D program. When promulgating Sec.  423.120(c)(5) 
(77 FR 22143, April 12, 2012), we stated that CMS, the National Benefit 
Integrity Medicare Drug Integrity Contractor, and oversight agencies 
would be able to more efficiently, and therefore more effectively, 
identify patterns of unusual prescribing that may be associated with 
improper and/or fraudulent activities.
    While requiring NPIs on every PDE record was an important first 
step in identifying and monitoring prescribers in the Part D program, 
the system that assigns and maintains NPI data--the National Plan and 
Provider Enumeration System (NPPES)--is not a practitioner 
credentialing system. The information stored in NPPES is self-reported 
by the applicant and is not required to be independently verified by 
HHS or CMS. This has left open some program vulnerabilities as 
described in recent OIG reports on this issue. For instance, in a June 
2013 report, the OIG found that the Part D program inappropriately paid 
for drugs ordered by individuals who clearly did not appear to have the 
authority to prescribe. (See ``Medicare Inappropriately Paid for Drugs 
Ordered by Individuals Without Prescribing Authority'' (OEI-02-09-
00608). This raises concerns about patient safety and the 
appropriateness of Part D payments. In addition, there have been 
reports that the prescriptions of physicians with suspended licenses 
have been covered by the Part D program. This should not happen, and we 
believe we can better address this type of vulnerability by verifying 
the credentials of prescribers as physicians or eligible professionals 
through either their enrollment in the Medicare FFS program with an 
approved enrollment record or their submission of a valid opt-out 
affidavit on file with a NPI at an A/B MAC.
    The Medicare FFS enrollment process requires that an A/B MAC screen 
and validate each enrollment application submitted by a physician or 
eligible professional prior to the decision to approve or deny 
enrollment in the Medicare program. Thus, when a physician, including 
an intern or resident, or eligible professional submits an enrollment 
application (for example, the CMS-855I or CMS-855O or the Internet-
based Provider Enrollment, Chain and Ownership System (PECOS) version 
of these enrollment forms) to an A/B MAC, the A/B MAC approves or 
denies the application to enroll into the Medicare FFS program based on 
whether the practitioner meets the program requirements for his/her for 
medical specialty. The Medicare FFS enrollment application collects and

[[Page 1983]]

verifies identifying information about the applicant, and his or her 
credentials, such as the license number. For example, an A/B MAC 
verifies each applicant's social security number and NPI at the time of 
enrollment, when changes or updates are submitted, and during the 5-
year revalidation process. The A/B MAC also verifies state licensing 
board information prior to enrolling an individual practitioner, and 
monthly thereafter, to determine if the state suspended or revoked a 
physician or eligible professional's medical license. In addition, A/B 
MACs verify that physician and eligible professionals are not excluded 
from receiving payments under any federal health program by checking 
the System for Award Management (SAM), a process similar to that which 
Part D sponsors currently use to ensure that physicians and eligible 
professionals are not excluded by the OIG). Thus, by leveraging the 
state licensing and OIG exclusion information maintained within PECOS, 
CMS' national fee-for-service enrollment database, we believe that we 
can help ensure that physicians and eligible professionals are State 
licensed to prescribe covered Part D drugs.
    As an alternative to submitting an enrollment application for 
Medicare billing privileges, physicians and certain eligible 
professionals may enroll in Medicare for the sole purpose of ordering 
and certifying services in the Medicare program by completing the 
Medicare enrollment application--Registration for Eligible Ordering and 
Referring Physicians and Non-Physician Practitioners (CMS-855-O). Once 
an A/B MAC determines that a physician or eligible professional meets 
all program requirements to solely order services, they are enrolled in 
the Medicare program and are placed into an approved status in PECOS. A 
physician or eligible professional may submit a CMS-855O application as 
a means of complying with our proposed requirement, if he or she is 
enrolling solely to order or certify Medicare items or services.
    Section 1861(r) of the Act, defines a physician as a doctor of 
medicine, doctor of osteopathy, doctor of dental surgery or dental 
medicine, doctor of podiatric medicine, doctor of optometry, or a 
chiropractor who is acting within the scope of his license when he/she 
prescribes a drug within Part D of Medicare. We note that physicians 
and eligible professionals may enroll in the Medicare program, but 
whether these individuals can prescribe is a matter of state law where 
the physician specialty or eligible professionals practices. For 
instance, a doctor of optometry may enroll in Medicare, but only be 
able to prescribe certain drugs within a state, and a clinical 
psychologist may enroll in Medicare, but may or may not be able to 
prescribe medications under state law. Our proposal to require 
physicians and eligible professionals to enroll in the Medicare program 
to prescribe covered Part D drugs does not solicit comment on the types 
of health care physicians and eligible professionals who can write a 
valid prescription under state law. We will continue to defer to state 
law regarding the physicians and eligible professionals that can 
prescribe covered Part D drugs. As such, a Part D sponsor would remain 
responsible for ensuring that a prescriber has the authority to 
prescribe under state law.
    Depending on state law, interns and residents may enroll in the 
Medicare FFS program to receive Medicare billing privileges or to 
solely order/certify services in Part A and Part B of the Medicare 
program. Under our proposal, interns and residents with an approved 
enrollment record in PECOS would also be allowed to prescribe covered 
Part D drugs in the Medicare program as long as the state permits this 
practice. We believe that this approach is consistent with the policy 
that we previously established in the April 27, 2012 final rule (77 FR 
25284) entitled, ``Medicare and Medicaid Programs: Changes in Provider 
and Supplier Enrollment, Ordering and Referring, and Documentation 
Requirements; and Changes in Provider Agreements.
    A small number of physicians and eligible professionals elect to 
opt out of enrolling in the Medicare program for a 2-year period by 
submitting an affidavit to the A/B MAC and only bill the Medicare 
program for covered emergency or urgent care furnished to a Medicare 
beneficiary. Under section 1802(b) of the Act and the implementing 
regulations at 42 CFR 405.400 et seq., certain physicians and eligible 
professionals can opt out of the Medicare program and enter into 
private contracts with Medicare beneficiaries. By entering into these 
types of contracts, these individuals do not bill the Medicare program 
for non-emergency services that they furnish to Medicare beneficiaries. 
In addition, Sec.  422.220 states, ``An MA organization may not pay, 
directly or indirectly, on any basis, for services (other than 
emergency or urgently needed services as defined in Sec.  422.2) 
furnished to a Medicare enrollee by a physician (as defined in section 
1861(r)(1) of the Act) or other practitioner (as defined in section 
1842(b)(18)(C) of the Act) who has filed with the Medicare carrier an 
affidavit promising to furnish Medicare-covered services to Medicare 
beneficiaries only through private contracts under section 1802(b) of 
the Act with the beneficiaries. An MA organization must pay for 
emergency or urgently needed services furnished by a physician or 
practitioner who has not signed a private contract with the 
beneficiary.''
    Generally, a physician or eligible professional makes the decision 
to opt out of the Medicare program because they have decided to furnish 
services on a private contracting basis. Therefore, we are proposing a 
similar opt-out policy as the Medicare FFS program uses for ordering 
services within Part B of the Medicare program and certifying services 
within Part A of the Medicare program. We believe that allowing opt-out 
physicians and eligible professionals to continue to prescribe covered 
Part D drugs to a Medicare enrollee would ensure consistency with the 
Part B program in this regard. In addition, an A/B MAC verifies medical 
licensure for opt-out physicians and eligible professionals on a 
monthly basis. Accordingly, we are soliciting comments on whether a 
prescription of opted-out physicians and eligible professionals should 
be considered covered under the Part D program as long as the opt-out 
physician or eligible professional furnishes their NPI to an A/B MAC.
    Under our proposal, the prescriptions of physicians or eligible 
professionals who are not enrolled in the Medicare FFS program or who 
are not enrolled in Medicare in an approved status would not be 
coverable under the Part D program. Specifically, in revised Sec.  
423.120(c)(5), we are proposing that beginning January 1, 2015, a Part 
D sponsor must deny or must require its PBM to deny a claim for a Part 
D drug from a pharmacy, including at the point of sale, if the claim 
does not contain an active and valid physician or eligible professional 
NPI. Also, the Part D sponsor must deny or must require its PBM to deny 
a pharmacy claim for a Part D drug if: (1) The physician or eligible 
professional is not enrolled in Medicare in an approved status and (2) 
the physician or eligible professional does not have a valid opt-out 
affidavit on file with an A/B MAC. We believe that the implementation 
of this policy will promote quality health care and prevent fraud by 
ensuring that prescribers of Part D drugs are physicians and eligible 
professionals who have a valid state license. We note that a prescriber 
NPI is essential on the pharmacy claim for Part D sponsors and PBMs to 
determine whether the

[[Page 1984]]

prescriber is enrolled in Medicare in an approved status or has a valid 
opt-out affidavit on file with the Medicare FFS program.
    We also note this provision, if adopted, would preclude almost all 
prescribers located outside of the United States, Puerto Rico, Guam, 
the Virgin Islands, and the Northern Mariana Islands from prescribing 
covered Part D drugs to a Medicare beneficiaries, since these 
physicians and eligible professionals may not be eligible to enroll in 
the Medicare program. In the April 12, 2012 final rule entitled, 
``Medicare Program; Changes to the Medicare Advantage and Medicare 
Prescription Drug Benefit Programs for Contract Year 2013 and Other 
Changes'' (77 FR 22144), we stated that it was our understanding that 
seven states (Arizona, Florida, Maine, North Dakota, Texas, Vermont and 
Washington) currently permit pharmacies to fill prescriptions from 
foreign prescribers, to varying degrees. Under our current requirements 
(see Publication 100-18, Chapter 5 (Medicare Prescription Drug Benefit 
Manual), section 90.2.1 (Foreign Prescribers) of the Internet-Only 
Manual), Part D sponsors must pay a claim with an active and valid NPI 
of a foreign prescriber. If there is not one at point of sale, sponsors 
do not have to cover the claim and research the NPI, as they do with 
domestic prescribers under current 423.120(c). Our proposed policy 
would change this, as no prescription would be covered if the 
prescriber is not enrolled in Medicare and does not have a valid opt-
out affidavit on file with an A/B MAC.
    We are also proposing that beginning January 1, 2015, a 
beneficiary's request for reimbursement from a Part D sponsor must be 
for a Part D drug that was dispensed in accordance with a prescription 
written by a physician or eligible professional who--
     Is identified by his or her legal name in the request; and
     Is enrolled in Medicare in an approved status; or
     Has a valid opt-out affidavit on file with an A/B MAC.
    Finally, we are also proposing to add provisions to 42 CFR 
423.120(c)(6) that a Part D sponsor would not be able to submit a PDE 
to CMS, unless it pertains to a claim for a Part D drug that was 
dispensed pursuant to a prescription written by a physician or, when 
permitted by applicable law, an eligible professional who: (1) Is 
enrolled in Medicare in an approved status; or (2) has a valid opt-out 
affidavit on file with the A/B MAC. Proposed Sec.  423.120(c)(6) would 
also provide that a Part D sponsor must submit to CMS only a PDE that 
contains an active and valid prescriber NPI.
    Under our proposal, CMS would furnish or make available to Part D 
sponsors a list of physicians and eligible professionals that have an 
approved enrollment record within the Medicare FFS program or who have 
a valid opt-out affidavit on file with the A/B MAC. Part D sponsors 
would no longer be required to check the NPPES database to determine 
whether a prescriber has an active and valid individual prescriber NPI. 
For these reasons, the language of 423.120(c)(5) would be revised, as 
Part D sponsors would have to determine from the list whether the 
prescriber is enrolled in the Medicare FFS program in an approved 
status or has a valid opt-out affidavit on file with an A/B MAC before 
allowing coverage of a prescribed Part D drug. We believe that 
verifying whether a prescriber is enrolled in Medicare with an approved 
enrollment record (or valid opt-out affidavit) would involve an effort 
similar to the one sponsors use now to determine if a prescriber has an 
active and valid individual NPI. If the prescriber were not listed as 
enrolled in Medicare in an approved status or on file with the A/B MAC 
with a valid opt-out affidavit, the drug would not be covered under the 
Part D program and a claim, including a non-standard claim from a 
Medicare enrollee, would be denied by a pharmacy or the sponsor. Our 
proposal to require a prescriber to be enrolled in the Medicare FFS 
program or have an opt-out affidavit on file with an A/B MAC, would 
allow a sponsor to confirm that a prescriber's license had been 
previously verified to ensure that the prescriber is a physician or 
eligible professional and has an active health care license under 
applicable state law.
    With more than 1 million physicians and eligible professionals 
enrolled in the Medicare FFS program and more than 9,000 valid opt-out 
affidavits on file with an A/B MAC, we do not believe that there are a 
large number of physicians or eligible professionals who prescribe 
covered drugs for Part D enrollees who are not enrolled in an approved 
status in Medicare. Our proposed revisions to Sec.  423.120 reflect the 
existing usage of the CMS-855I, Medicare Enrollment Application--
Physicians and Non-Physician Practitioners (OMB Approval Number 0938-
0685) and the CMS-855O (OMB Approval number 0938-1135), and, as such, 
we do not believe that it is necessary to change our existing paperwork 
burden estimates associated with completing the CMS-855I or the CMS-
855O.
    We are also soliciting comments on whether we should consider 
requiring all pharmacies (for example, network, non-preferred, home 
infusion, non-retail or mail order, and out-of-network) to enroll or 
maintain enrollment in the Medicare FFS program in order to dispense 
covered Part D drugs. In a May 2013 OIG report titled, ``Retail 
Pharmacies with Questionable Part D Billing, (OEI-02-09-00600),'' the 
OIG found that 2,637 or approximately 4.4 percent of pharmacies, had 
questionable billing in 2009. The report also highlighted several 
cities (Miami, Florida, Los Angeles, California, and Detroit, Michigan) 
with significantly high levels of questionable billing than the 
national average.
    We believe that requiring Medicare FFS enrollment for network 
pharmacies would leverage the credentialing, identity verification and 
other safeguards that are part of the FFS enrollment process, allowing 
Part D sponsors to leverage an important program integrity tool for 
their networks. Alternatively, we seek comment on whether requiring FFS 
enrollment for network pharmacies is a ``best practice'' in pharmacy 
contracting by plan sponsors, and should be an integral part of 
sponsors' required fraud, waste and abuse programs.
    Finally, we are soliciting public comments from doctors of dental 
surgery or dental medicine, including family dentists, regarding our 
proposal that doctors of dental surgery or dental medicine enroll in 
the Medicare program in order to prescribe covered Part D drugs. While 
many dentists have enrolled in Medicare program within the last 2 years 
to order bill the Medicare program or order services within the 
Medicare program, we will continue to conduct outreach to professional 
organizations/associations to increase the likelihood that all dentists 
have sufficient notice and therefore time to enroll in the Medicare 
program in order to prescribe covered Part D drugs.
31. Improper Prescribing Practices (Sec.  424.535)
a. Background and Program Integrity Concerns
    Notwithstanding our proposal discussed in the previous section, we 
believe that additional program safeguard enhancements are necessary to 
protect the Medicare Trust Funds from fraud, waste and abuse while 
ensuring that Part D enrollees and Part B Medicare beneficiaries 
maintain access to quality health care.

[[Page 1985]]

    As alluded to earlier, the OIG has conducted several studies 
addressing program integrity issues related to the Medicare Part D 
program. Two such reports are of particular relevance to the provisions 
we are proposing in this section.
    The first, which we have already referenced, is titled, ``Medicare 
Inappropriately Paid for Drugs Ordered by Individuals Without 
Prescribing Authority'' (OEI-02-09-00608), issued on June 21, 2013. The 
report found that Medicare paid $26.2 million for drugs prescribed by 
individuals with National Plan & Provider Enumeration System (NPPES) 
taxonomy codes indicating that they did not have the authority to 
prescribe these drugs. Such persons included counselors, chiropractors, 
social workers, physical therapists, registered nurses, occupational 
therapists, and speech-language pathologists. Some of these 
individuals--specifically, chiropractors, physical therapists, 
occupational therapists, and speech language pathologists--are eligible 
to enroll in the Medicare program to furnish Part B services.
    The second study is titled, ``Prescribers with Questionable 
Patterns in Medicare Part D'' (OEI-02-09-00603), also issued in June 
2013. This report highlighted a number of instances in which physicians 
and eligible professionals prescribed inordinate amounts of drugs to 
Part D beneficiaries in 2009. For example--
     Medicare paid a total of $9.7 million--151 times more than 
the average--for one California physician's prescriptions; most of this 
physician's prescriptions were filled by two independent pharmacies, 
both of which the OIG had identified as having questionable billing;
     One hundred and eight general-care physicians each ordered 
an average of 71 or more prescriptions per beneficiary, more than 5 
times general-care physicians' national average of 13; and
     An Ohio physician ordered more than 400 drugs each for 13 
of his 665 beneficiaries.
     A Texas physician ordered more than 400 prescriptions each 
for 16 beneficiaries and prescribed 700 or more drugs for 3 of these 
beneficiaries.
    The OIG also noted examples of physicians prescribing a high 
percentage of Schedule II and III drugs in 2009. In one case, 78 
percent of the prescriptions a Florida physician ordered were for 
Schedule II drugs even though the OIG found that 4 percent of the 
prescriptions ordered by prescribers nationwide were for Schedule II 
drugs. For one beneficiary, the physician prescribed a 605-day supply 
of morphine sulfate, a 524-day supply of oxycodone HCl, a 460-day 
supply of fentanyl, and a 347-day supply of hydromophone HCl.
    In both reports, as well as in other Part D studies, the OIG 
recommended that CMS exercise greater oversight of the Part D program, 
not only to curb the specific practices outlined previously but also to 
stem the overall risk of fraud and abuse that the program presents. The 
OIG has expressed particular concern over the potential for 
beneficiaries to become addicted to or otherwise be seriously harmed by 
certain drugs if they were inappropriately prescribed in dangerously 
excessive amounts. We share this concern.
    Although we have recently taken steps to tighten and strengthen our 
supervision of the Part D program, problems remain. We continue to 
receive reports of questionable prescribing practices. Some of these 
prescribers have been referred to our Medicare Drug Integrity 
Contractor (MEDIC) for investigation. Yet even if we find improper 
practices, such as a particular physician's unreasonably high volume or 
unsafe amounts of Schedule III controlled substance prescriptions, CMS 
does not possess the legal authority to take administrative action 
against the prescriber. This means, in many cases, that the prescriber 
can continue prescribing drugs that will be covered under Part D and, 
if he or she is enrolled in Medicare FFS, remain so enrolled to furnish 
medical services. We believe this is inconsistent with the OIG's 
recommendations in its various Part D reports, and with our goal of 
protecting and promoting the health and safety of Medicare 
beneficiaries and safeguarding the Medicare Trust Funds.
b. Drug Enforcement Administration (DEA) Certification of Registration
    The DEA implements and enforces Titles II and III of the 
Comprehensive Drug Abuse Prevention and Control Act of 1970, and the 
Controlled Substances Import and Export Act, as amended, and 
collectively referred to as the Controlled Substances Act (CSA) (21 
U.S.C. 801-971); the implementing regulations for these statutes are in 
21 CFR Parts 1300 through 1321. The CSA makes possession of authority 
under state law to dispense controlled substances a requirement for 
both obtaining and maintaining a DEA Certificate of Registration. 
Consistent with 21 U.S.C. 822(e), 21 CFR 1301.12(a) states: ``A 
separate registration is required for each principal place of business 
or professional practice at one general physical location where 
controlled substances are manufactured, distributed, imported, 
exported, or dispensed by a person.'' The term ``dispense'' under 21 
U.S C. 802(10) means ``to deliver a controlled substance to an ultimate 
user or research subject by, or pursuant to the lawful order of, a 
practitioner, including the prescribing and administering of a 
controlled substance . . .''
    We view a DEA Certificate of Registration to prescribe controlled 
substances as similar to a state's requirement that a physician or 
eligible professional be licensed or certified by the state to furnish 
health care services. We have required that physicians and eligible 
professionals meet state licensure or certification requirements in 
order to enroll in the Medicare FFS program to furnish health care 
services. In fact, certain suppliers, such as air ambulance suppliers, 
must also meet national certification standards by a federal agency 
(the Federal Aviation Administration (FAA)) to enroll or remain 
enrolled in the Medicare program. Failure to obtain or maintain 
appropriate licensure or certification can result in the denial or 
revocation of the provider or supplier's Medicare under Sec.  424.530 
and Sec.  424.535, respectively.
    We believe there is a similarity between the need to obtain and 
maintain DEA registration to dispense controlled substances, and the 
need for an air ambulance supplier to meet FAA certification 
requirements, and for a physician or eligible professional to meet 
state licensure or certification requirements in order to enroll in and 
maintain enrollment in Medicare FFS. The Medicare FFS licensure and 
certification requirements are designed to ensure that physicians, 
eligible professionals, and other suppliers are qualified to furnish 
health care services within the Medicare program. In a similar way, the 
DEA Certificate of Registration is designed to ensure that physicians 
and eligible professionals meet the statutory criteria established by 
the CSA to dispense controlled substances.
    Physicians, eligible professionals, and pharmacies with a valid DEA 
Certificate of Registration are allowed to dispense controlled 
substances. A DEA Certificate of Registration is not required to 
dispense non-controlled substances, including covered Part D drugs that 
are not considered to be controlled substances. Thus, under our current 
regulations, a physician or eligible professional may prescribe covered 
Part

[[Page 1986]]

D non-controlled drugs to a Part D enrollee even though his or her DEA 
Certificate of Registration has been suspended or revoked. As the 
agency that administers the Part D drug program, we believe it is both 
appropriate and necessary to expand our Medicare FFS provider 
enrollment requirements to ensure that only physicians and eligible 
professionals who are in good standing with state licensing boards and, 
as applicable the DEA, are writing prescriptions for covered Part D 
drugs in the Medicare program.
c. Proposed Provisions
    In light of the foregoing discussion, we are proposing several 
changes to 42 CFR Part 424, subpart P, in order to enhance our Medicare 
Part D and Part B program integrity efforts.
(1) DEA Certificate and State Authority
    We propose to add a new Sec.  424.530(a)(11) granting CMS the 
authority to deny a physician or eligible professional's Medicare 
enrollment application if: (1) His or her DEA Certificate is currently 
suspended or revoked; or (2) the applicable licensing or administrative 
body for any state in which the physician or eligible professional 
practices has suspended or revoked the physician or eligible 
professional's ability to prescribe drugs; and (3) such suspension or 
revocation is in effect on the date he or she submits his or her 
enrollment application to the Medicare contractor. We believe this 
approach is consistent with our policy under Sec.  424.530(a)(1) of 
denying enrollment to providers and suppliers that do not meet 
applicable licensure and certification requirements.
    Similarly, we propose to add a new Sec.  424.535(a)(13) granting 
CMS the authority to revoke a physician or eligible professional 's 
Medicare enrollment if (1) his or her DEA Certificate is suspended or 
revoked, or (2) the applicable licensing or administrative body for any 
state in which the physician or eligible professional practices 
suspends or revokes the physician or eligible professional's ability to 
prescribe drugs. Again, this approach is consistent with our 
requirement that providers and suppliers maintain compliance with all 
applicable licensure and certification requirements.
    We believe that the loss of the ability to prescribe drugs via a 
suspension or revocation of a DEA Certificate or by state action is a 
clear indicator that a physician or eligible professional may be 
misusing or abusing his or her authority to prescribe such substances. 
This raises concerns that the physician or eligible professional's 
improper practices may be duplicated in the Medicare program. We must 
therefore take steps to ensure that Medicare beneficiaries are 
protected and the Medicare Trust Funds.
(2) Patterns or Practices of Prescribing
(a) Grounds for Revocation
    We also propose to add a new Sec.  424.535(a)(14) that would permit 
CMS to revoke a physician or eligible professional's Medicare 
enrollment if CMS determines that he or she has a pattern or practice 
of prescribing Part D drugs that--
     Is abusive and represents a threat to the health and 
safety of Medicare beneficiaries, or
     Fails to meet Medicare requirements.
    We believe we have several bases for the legal authority for this 
proposal. First, sections 1102 and 1871 of the Act give the Secretary 
the authority to establish requirements for the efficient 
administration of the Medicare program. Second, section 1866(j) of the 
Act states that the Secretary shall establish by regulation a process 
for the enrollment of providers of services and suppliers.
    We also note that on April 29, 2013, we published in the Federal 
Register a proposed rule entitled, ``Medicare Program: Requirements for 
the Medicare Incentive Reward Program and Provider Enrollment'' (78 FR 
25013). We proposed therein to add a new Sec.  424.535(a)(8)(ii) that 
would give CMS the discretion to revoke a provider or supplier's 
Medicare enrollment if the provider or supplier has a pattern or 
practice of submitting claims for services that fail to meet Medicare 
requirements. Our purpose was to place providers and suppliers on 
notice that they were under a legal obligation to always submit correct 
and accurate claims and that failure to do so may result in the 
revocation of Medicare enrollment if such failures establish a pattern 
of incorrect or inaccurate claims. We believe that this concept should 
also extend to revoking Medicare enrollment for Part D prescribers who 
engage in abusive prescribing practices. In our view, if a physician or 
eligible professional repeatedly and consistently fails to exercise 
reasonable judgment in his or her prescribing practices, we should have 
the ability to remove such individuals from the Medicare program to 
protect beneficiaries' safety and health as well as Medicare Trust 
Funds.
(b) Criteria To Be Considered
    Many patterns and practices of prescribing, though perhaps 
questionable on their face, do not upon investigation involve abusive 
or fraudulent behavior nor involve substandard medical care. Therefore, 
we are proposing to base any revocation under proposed Sec.  
424.535(a)(14) on situations that fall outside the norm of appropriate 
prescribing, and only after carefully considering the factors outlined 
later in this section. A thorough, detailed investigation by CMS of the 
physician or eligible professional's prescribing practices would be a 
prerequisite for the use of Sec.  424.535(a)(14). Honest physicians and 
eligible professionals who engage in reasonable prescribing activities 
would not be impacted by our proposal. We note further that CMS, rather 
than the Part D plans, would make all determinations under our proposed 
provisions, though information contained in referrals from Part D Plan 
sponsors may be used as part of CMS' analysis to make revocation 
decisions.
    We choose not to define ``abusive'' and ``threat to the health and 
safety of Medicare beneficiaries'' in this proposed rule, primarily 
because the myriad of questionable situations that warrant the possible 
application of Sec.  424.535(a)(14) requires that CMS have the 
flexibility to address each case on its own merits. We believe that the 
sounder approach would be to propose a list of criteria that CMS would 
use in determining whether a prescriber is engaging in prescribing 
practices sufficient to warrant a revocation.
    In determining instances of a pattern or practice of prescribing 
that is abusive and a threat to the health and safety of Medicare 
beneficiaries, CMS proposes to consider several factors, including--
     Whether there are diagnoses to support the indications for 
which the drugs were prescribed;
     Whether there are instances where the necessary evaluation 
of the patient for whom the drug was prescribed could not have occurred 
(for example, the patient was deceased or out of state at the time of 
the alleged office visit);
     Whether the physician or eligible professional has 
prescribed controlled substances in excessive dosages that are linked 
to patient overdoses;
     The number and type(s) of disciplinary actions taken 
against the physician or eligible professional by the licensing body or 
medical board for the state or states in which he or she practices, and 
the reason(s) for the action(s);
     Whether the physician or eligible professional has any 
history of ``final adverse actions'' (as that term is defined under 
Sec.  424.502);

[[Page 1987]]

     The number and type(s) of malpractice suits that have been 
filed against the physician or eligible professional related to 
prescribing that have resulted in a final judgment against the 
physician or eligible professional or in which the physician or 
eligible professional has paid a settlement to the plaintiff(s) (to the 
extent this can be determined);
     Whether any State Medicaid program or any other public or 
private health insurance program has restricted, suspended, revoked, or 
terminated the physician or eligible professional's ability to 
prescribe medications, and the reason(s) for any such restriction, 
suspension, revocation, or termination; and
     Any other relevant information provided to CMS.
    In determining whether a physician or eligible professional has a 
pattern or practice of prescribing that fails to meet Medicare 
requirements, CMS would consider the following factors, including 
whether the physician or eligible professional--
     Has a pattern or practice of prescribing without valid 
prescribing authority;
     Has a pattern or practice of prescribing for controlled 
substances outside the scope of the prescriber's DEA Certificate of 
Registration;
     Has a pattern or practice of prescribing drugs for 
indications that were not medically accepted--that is, for indications 
neither approved by the Food and Drug Administration (FDA) nor 
medically accepted under 1860D-2(e)(4) of the Act--and whether there is 
evidence that the physician or eligible professional acted in reckless 
disregard for the health and safety of the patient.
    To be covered under Part D, Medicare requires that a drug be 
dispensed upon a prescription that is valid under state law, that the 
drug meets the definition of a Part D drug, and that it be prescribed 
by a valid prescriber for a medically accepted indication. Therefore, a 
physician or eligible professional evidencing a pattern or practice of 
prescribing without valid prescribing authority, or for controlled 
substances outside the scope of the prescriber's DEA Certificate of 
Registration, would face potential revocation of Medicare enrollment. 
In addition, a physician or eligible professional with a consistent 
pattern or practice of prescribing drugs for indications that were not 
medically accepted--that is, for indications neither approved by the 
FDA nor medically accepted under 1860D-2(e)(4) of the Act--could 
potentially face revocation. In the latter example, we would anticipate 
revoking enrollment only in cases where there is evidence of reckless 
disregard for the health and safety of the patient, not when the 
prescribing is based on peer reviewed literature or community standards 
of medical practice.
    We reiterate our earlier statement that all criteria would be 
carefully examined before determining whether a revocation under Sec.  
424.535(a)(14) is warranted. In the vast majority of cases, no single 
factor would or could be dispositive. Nonetheless, there are certain 
criteria that, if met, would weigh very heavily and perhaps decisively 
towards a finding that a revocation is justified. A primary example 
would be that the physician or eligible professional is prescribing 
drugs without legal authorization. Even if a review of the other 
criteria did not indicate a pattern of improper activity, unauthorized 
prescribing is so serious a matter that the practitioner's continued 
retention of his or her Medicare enrollment would be unacceptable.
    We stated in section III.A.30, of this proposed rule that 
prescriptions ordered by physicians and eligible professionals who are 
not enrolled in Medicare in an approved status would not be coverable 
under the Part D program.
    We welcome and indeed encourage comments on our proposed additions 
of Sec.  424.530(a)(11) and of Sec.  424.535(a)(13) and (14). We are 
especially interested in receiving comments on the following issues:
     Whether certain proposed criteria should not be used.
     Whether criteria that we did not propose should be used.
     Whether certain criteria should be given more or less 
weight than others.
     Whether our proposed additions of Sec.  424.530(a)(11) and 
of Sec.  424.535(a)(13) and (14) should be expanded to include pharmacy 
activities.
32. Transfer of TrOOP Between PDP Sponsors Due to Enrollment Changes 
During the Coverage Year (Sec.  423.464)
    Sections 1860D-23 and 1860D-24 of the Act specify that requirements 
for Part D sponsor coordination of benefits with State Pharmaceutical 
Assistance Programs and other plans providing prescription drug 
coverage, including treatment of expenses incurred by these payers 
toward a beneficiary's out-of-pocket (TrOOP) threshold. Part D 
coordination of benefit requirements are codified at Sec.  423.464 
which define ``other prescription drug coverage'' for COB purposes to 
include, among other entities, other Part D plans and specify Part D 
plan requirements for determining when an enrollee has satisfied the 
out-of-pocket threshold.
    Related regulations at Sec.  423.104(d), codifying the requirements 
in section 1860D-2(b) of the Act, require sponsors to track beneficiary 
TrOOP and gross covered drug costs and correctly apply these costs to 
the benefit limits to correctly position the beneficiary in the benefit 
and provide the catastrophic level of coverage at the appropriate time. 
When a beneficiary transfers enrollment between Part D plans during the 
coverage year, the enrollee's gross covered drug costs and TrOOP must 
be transferred between plans and applied by the subsequent plan in its 
administration of the Part D benefit. The procedures for a prior plan 
to report these TrOOP-related data and for the plan of record to 
receive, upload, and use the data position the beneficiary in the 
correct phase of the benefit was expressed in guidance outlining 
sponsor responsibilities related to the 2006 Enrollment Reconciliation 
process. CMS April 2006 guidance detailing instructions for the 
Enrollment Reconciliation-related data transfer noted the process would 
be applicable on an on-going basis when a beneficiary's enrollment in a 
plan terminated due to enrollment in another plan.
    This initial manual data transfer process was replaced in 2009 by 
an automated process for TrOOP-related data transfer developed by CMS 
and the industry in collaboration with National Council for 
Prescription Drug Programs (NCPDP). Our guidance released in 2008 
describing sponsor implementation of the automated TrOOP balance 
transfer process reiterated sponsor requirements for data reporting by 
the prior plan and use of the data for proper positioning of the 
beneficiary in the benefit by the current plan. We have continued to 
specify these requirements in subsequent updated versions of the 
guidance.
    Automated TrOOP balance transfer is supported by the NCPDP 
Financial Information Reporting (FIR) transaction standard, which is 
used to electronically transfer TrOOP-related data between plans. When 
a beneficiary transfers enrollment to another plan during the coverage 
year, transactions are sent sequentially by the CMS Part D Transaction 
Facilitator to all Part D plans in which the beneficiary was enrolled 
during the coverage year or that paid claims on the beneficiary's 
behalf. Sponsors must receive and respond to each transaction, accept 
the data reported by the enrollee's prior plan, and use these data in 
the administration of the Part D benefit.

[[Page 1988]]

    To ensure Part D benefits are correctly administered when a 
beneficiary transfers enrollment during the coverage year, we propose 
to codify these requirements in federal regulations. Specifically, we 
propose to amend Sec.  423.464(f)(2) by adding a new paragraph (C) 
requiring Part D sponsors to--
     Report benefit accumulator data in real-time in accordance 
with the procedures established by CMS;
     Accept in real-time data reported in accordance with CMS-
established procedures by any prior plans in which the beneficiary was 
enrolled, or that paid claims on the beneficiary's behalf, during the 
coverage year; and
     Apply these costs promptly.

In our guidance on automated TrOOP balance transfer, we express our 
expectation that sponsors successfully transfer accumulator data for 
beneficiaries making enrollment changes during the coverage year in a 
timely manner 100 percent of the time. Although sponsors may be 
reporting and accepting these data in accordance with our expectations, 
we have been informed that some sponsors may not be promptly loading 
the data received into their systems so it is available for claims 
processing. As a result, the beneficiary's previously incurred costs 
and gross covered drug costs are not considered in the processing of 
claims received by the new plan sponsor soon after the enrollment 
change. With this change we seek to clarify that, since the automated 
TrOOP transfer process enables the accumulators to available to the new 
plan within a day or 2 of the new enrollment effective date or, if 
later, the date CMS processes the enrollment change, we expect the new 
plan sponsor to apply the data promptly after receipt and use it in 
benefit administration.
33. Broadening the Release of Part D Data (Sec.  423.505)
    We are proposing to revise our regulations governing the release of 
Part D data to expand the release of unencrypted prescriber, pharmacy, 
and plan identifiers contained in prescription drug event (PDE) 
records, as well as to make other changes to our policies regarding 
release of Part D PDE data. In the May 28, 2008 Federal Register (76 FR 
30664) we published a final rule entitled ``Medicare Program; Medicare 
Part D Claims Data,'' (hereinafter referred to as the Part D data final 
rule) to implement regulations that govern the collection of PDE data 
under the authority of section 1860D-12(b)(3)(D) of the Act and the 
disclosure of this data in accordance with section 1106 of the Act. The 
provisions governing the collection and disclosure of PDE data are 
codified at Sec.  423.505(b)(8), (f)(3) and (l).
    PDE data are summary records of individual claim transactions at 
the pharmacy containing CMS-defined standard fields submitted by Part D 
sponsors that document the final adjudication of a Part D dispensing 
event. The Part D data final rule governed the collection and 
disclosure of the original 37 elements of PDE data, but was updated to 
apply to any additional elements that were added to the PDE record. 
This update was in a final rule issued in April 2010 (75 FR 19678) 
entitled, ``Medicare Program; Policy and Technical Changes to the 
Medicare Advantage and the Medicare Prescription Drug Benefit 
Programs'' (hereinafter referred to as the April 2010 final rule).
    In the preamble to the Part D data final rule (73 FR 30671), we 
stated, ``we [ ] believe that it is in the interest of public health to 
share the information collected under [the authority of 1860D-
12(b)(3)(D)] with entities outside of CMS.'' We explained that the 
release of PDE data assists CMS in evaluating the Medicare Part D 
program and assessing related policies. We further stated such release 
was in the interest of public health and would improve the clinical 
care of beneficiaries.
    In addition to setting forth the significant public policy reasons 
for disclosure of PDE data, we made clear in the preambles of both the 
Part D data final rule and the April 2010 rule that our primary 
concerns in releasing PDE data are protecting the confidentiality of 
beneficiary identifiable information and commercially sensitive data of 
Part D sponsors. Part D sponsors are private organizations that 
contract with the federal government to administer the Part D benefit 
by offering prescription drug plans to Medicare beneficiaries who may 
voluntarily enroll in one. Therefore, as described in the Part D data 
final rule and the April 2010 rule, the release of PDE data is subject 
to certain protections, described here generally, such as encryption of 
beneficiary information and aggregation of commercially sensitive data 
of Part D sponsors. In addition, whenever PDE data is released, we only 
release the minimum data necessary for a given purpose, as determined 
in the sole discretion of CMS after review of the requestor's detailed 
request for data. If releasing data to an external entity, in the Part 
D data final rule, CMS indicated that the requestor must be a 
legitimate researcher, meaning the requestor has the requisite 
experience and is working for, or on behalf of, a reputable 
institution. (In the preamble to the Part D data final rule (73 FR 
30674 citing 45 CFR 164.501), we used the definition of ``research'' 
contained in the HIPAA Privacy Rule, which defines the term as ``a 
systematic investigation, including research development, testing, and 
evaluation, designed to develop or contribute to generalizable 
knowledge.'' In the Part D data final rule (73 FR 30674), we also 
indicated that, consistent with our current policies for Part A and B 
data, identifiable Part D data would not be disclosed for commercial 
purposes.
    The following describes the current policy for the release of Part 
D data more specifically by PDE element: Beneficiary, prescriber, 
pharmacy, and plan identifiers are generally encrypted when released. 
We only release unencrypted beneficiary, prescriber, pharmacy, or plan 
identifiers to other government agencies or states, if these 
identifiers are necessary for the project, and we only release 
unencrypted beneficiary, prescriber, and pharmacy identifiers to 
external entities if needed to link to another dataset. We do not 
release unencrypted plan identifiers to external entities, except to 
HHS grantees, as permitted under the criteria described in the April 
2010 rule and codified in the regulations at 42 CFR 
423.505(m)(1)(iii)(C).
    Under the Part D data final rule, drug cost data in PDE records are 
generally aggregated when released. Drug cost data are available in 
disaggregated format only to other HHS entities and congressional 
oversight agencies. Drug costs data in PDE records consist of the drug 
ingredient cost, applicable dispensing fee and any required state sales 
tax. However, upon request we would exclude sales tax from the 
aggregation at the individual claim level if necessary for a project.
    As this is a time of unprecedented change for CMS and the health 
care system in general, we believe the current regulations governing 
the release of PDE data need to be re-considered. The agency has an 
important role to play in supporting opportunities to accelerate the 
transition to a data-driven and information-based health care delivery 
system in this country. CMS itself is transforming from a passive payer 
of claims towards a value-based purchaser of health care, while at the 
same time, other health care payer and provider incentives have shifted 
toward broader coverage and coordinated care. These trends are all a 
positive and expected outgrowth of the passage and implementation of 
the Affordable Care Act.

[[Page 1989]]

    Concurrent with the changes to CMS' role and the health care system 
in general is the fact that we now have several years of experience 
with release of PDE data from the Medicare Part D program. We believe 
the current limitations on the release of certain data elements hinder 
the use of PDE data in this new health care environment, and inhibit 
accompanying insights into prescription drug benefit plans that could 
result from broader release of the data. Our experience has led us to 
conclude that broader release of PDE data to external entities can 
increase the positive contributions researchers make to the evaluation 
and function of the Part D program, and improve the efficiency of the 
program and the clinical care of its beneficiaries, which is in the 
interest of public health. Expanded access to PDE data by external 
entities will allow the researchers to study additional aspects of the 
Medicare program and health care, and their findings will be released 
publicly. Such contributions are in the interest of the Medicare Part D 
program and public health now more than ever as the Affordable Care Act 
transforms CMS's role and the nation's health care system.
    For these reasons, we believe increased access to prescriber, 
pharmacy, and plan identifiers by all categories of requestors is of 
utmost importance. This new policy would facilitate research by 
entities outside CMS that involves identifiable plans, prescribers, and 
pharmacies. Furthermore, we believe we can relax the current policies 
on the release of this PDE data, while still protecting beneficiary 
confidentiality and commercially sensitive data of Part D sponsors.
    Accordingly, we are proposing to permit the release of unencrypted 
prescriber, pharmacy, and plan identifiers contained in PDE records to 
all current categories of requestors (including, other HHS entities and 
the Congressional oversight agencies, non-HHS executive branch agencies 
and states, and external entities). We note that because the minimum 
necessary policy will still apply to all such releases, this proposed 
policy change with respect to HHS entities/Congressional oversight 
agencies and non-HHS executive branch agencies/states is more a 
formality, since this data is available in unencrypted format to these 
same entities under the current Part D data regulations ``if needed.'' 
For this reason, we focus on the release of unencrypted prescriber, 
pharmacy, and plan identifiers to external entities as discussed later 
in this section.
    We emphasize that we are not proposing any changes to our release 
policies with respect to beneficiary identifiable data and the drug 
cost data of Part D sponsors. In addition, other data that is still 
viewed by some at this time to be commercially-sensitive data of Part D 
sponsors, for example, data on bids, rebates and other price 
concessions, are outside the scope of the changes to current PDE data 
release policies that we are proposing here. We note that bid data is 
not collected through PDE records, and while rebates and other price 
concessions may be reflected in PDE records, we are not proposing to 
make any changes to the policies governing release of such data.
    We understand that there may be concerns about releasing 
unencrypted prescriber, plan, and pharmacy identifiers to external 
entities, as they have been raised in the past, and we would like to 
address them upfront. In the preamble to the Part D data final rule (73 
FR 30675), we addressed specific concerns about expanding access to 
prescriber information by external entities, particularly for 
pharmaceutical companies and others who may want to influence 
physicians' prescribing patterns and interfere with a physicians' 
professional judgment. We stated that an encrypted version of the 
prescriber identifier, which allows for the linkage of all of a 
prescriber's claims without divulging the prescriber's identity, would 
meet the needs of most researchers.
    However, in our view today, the vast majority of physicians have 
prescribed and do prescribe what they believe are the appropriate 
medications for their patients, and they should have no concerns with 
transparency in their prescribing patterns. Moreover, there are other 
measures in place to prevent inappropriate influence by external 
entities on prescribers. For example, section 6002 of Affordable Care 
Act requires applicable manufacturers of drugs covered under the Part D 
program to report annually to the Secretary certain payments or other 
transfers of value to physicians. This requirement was implemented 
through a final rule that appeared in the February 8, 2013 Federal 
Register (78 FR 9458) entitled, ``Medicare, Medicaid, Children's Health 
Insurance Programs; Transparency Reports and Reporting of Physician 
Ownership of Investment Interests''. In addition, the federal Anti-
Kickback Law (section 1128B(b) of the Act) provides that anyone who 
knowingly and willfully solicits, receives, offers, or pays anything of 
value to influence the referral of federal health care program 
business, including Medicare and Medicaid, can be held accountable for 
a felony. Finally, we would point out that when data are completely 
transparent, it is easier for the attempts of some to use the data for 
purposes of inappropriate manipulation to be countered by others who 
have access to the same data. We note that it appears that prescriber 
data are already available commercially from pharmacy data aggregators. 
For these reasons, we believe that our earlier concerns about the 
release of unencrypted prescriber identifiers in PDE data to external 
entities are no longer warranted.
    Our proposal to release unencrypted prescriber identifiers means 
that legitimate external researchers will be able to conduct research 
that involves identifiable prescribers using PDE data. In the Part D 
data final rule (73 FR 30676), a commenter argued that providing access 
to linked physician identifiable claims in order to pool them with 
employer data would allow analysis to reduce cost of care delivery and 
improve the quality of care. In response, we did not disagree with the 
commenter, but referenced a variety of pay for performance and value-
based health care initiatives being undertaken by CMS in an effort to 
encourage health care providers to furnish high quality health care and 
to provide cost and quality information to consumers. We noted that we 
intended to use PDE data in those activities. We declined, however, to 
adopt a policy that would include making unencrypted prescriber 
identifiers available for release to external entities (except when 
needed to link to another data set).
    However, in light of the goals of the Affordable Care Act to 
improve the quality of health care, including through better access to 
information, we now acknowledge our agreement with the commenter 
regarding the importance of providing access to prescriber-identifiable 
claims. As we noted previously in this section, now more than ever, it 
is vital that researchers have more data to investigate ways to reduce 
the cost of care and improve its quality. Studying the prescribing 
trends of identifiable prescribers can assist all stakeholders in the 
health care system, from both public and private health care payers, to 
patients, and even to physicians themselves, by identifying prescribing 
benchmarks and determining the reasons for variations.
    With respect to the release of plan identifiers, we recognized that 
it might be asserted that in the Part D data final rule and April 2010 
rule we included this data when discussing commercially sensitive data 
of Part D sponsors that would generally be encrypted when

[[Page 1990]]

released to external entities. However, we point out that we focused on 
the separate costs paid by Part D sponsors for ingredient costs or 
dispensing fees as being the confidential data on the claim (73 FR 
30668), and we are not proposing any changes to our policies with 
respect to the release of ingredient costs or dispensing fees. However, 
we are proposing to release unencrypted plan identifiers to all 
categories of requestors.
    In comments in response to the Part D data proposed rule, 
commenters requested clarification that the plan-specific information 
we were proposing to disclose related only to Part D claims data and 
would not include competitively sensitive financial data regarding 
rebates, discounts, or other negotiated price concessions. The 
commenters expressed concerns that release of competitively sensitive 
data could undermine the competitive bid process, asserting that plans 
would be able to adjust their bids on the basis of knowledge of each 
other's data, resulting in higher drug costs for all. In response to 
these concerns, we replied in the preamble to the Part D data final 
rule that we shared the commenters' concerns about the need to protect 
sensitive data under the Part D program. We stated that because the 
Medicare drug benefit is based on a competitive business model, we 
believe releasing commercially or financially sensitive data to the 
public could negatively impact Part D sponsors' ability to negotiate 
for better prices, and ultimately could affect the ability of sponsors 
to hold down prices for beneficiaries and taxpayers. Therefore, we 
explained (73 FR 30668) that we were adopting a number of protections 
to mitigate these concerns, which include our minimum necessary, 
legitimate researcher, and aggregation policies described previously.
    These policies would also not change under our current proposal, 
except that plan identifiers (including internal plan/pharmacy 
identification numbers on the claim that represent reference numbers 
assigned by the plan at the time a drug is dispensed), would be 
available for release to all categories of requestors without 
encryption. In other words, our current policy on release of ingredient 
cost and dispensing fee data would not change under our proposal, 
meaning the minimum necessary data regarding ingredient costs and 
dispensing fees would continue to be available for release in 
disaggregated form only to other HHS entities and congressional 
oversight agencies. Non-HHS executive branch agencies and external 
entities could still only obtain the minimum necessary ingredient cost 
and dispensing fee data, only in aggregated form, and only if it is 
released to a legitimate researcher.
    We are proposing this change to our regulations governing the 
release of plan identifiers, because we no longer believe plan 
identifiers in PDE data are commercially sensitive data of Part D 
sponsors that should not be available for release (unless encrypted). 
Indeed in the April 2010 rule (75 FR 19675 through 19676), in which we 
expanded access to unencrypted plan identifiers to include HHS grantees 
under certain conditions on the basis that it would allow for the study 
of beneficiary plan choices, which would assist CMS in better 
understanding and improving the Medicare program, we responded to 
opposing comments that we believed allowing broader access by grantees 
of non-HHS entities and external researchers could also further assist 
CMS, even though we declined to adopt such broader access at the time, 
because we believed that additional time was needed to evaluate the 
issue.
    Moreover, an analysis of Part D plans, their network pharmacies, 
and average drug costs, can already be accomplished through data posted 
on CMS' Web site and/or purchased in public use files. Additionally, 
the MPDPF allows users to view and compare all available prescription 
drug plan choices, including plan and pharmacy specific estimates of 
the costs of individual drugs. These data can be manipulated by 
researchers to reveal information about specific plans and pharmacies 
that contributes to the evaluation and functioning of the Part D 
program and can be used to improve the public health. Therefore, in 
light of the public policy rationale for increasing access to PDE data 
by all categories of requestors, we believe that plan identifiers 
should be available in unencrypted format.
    We did not respond to any comments specifically addressing pharmacy 
identifiers in our Part D data final rule and April 2010 rule. However, 
for the same reasons that we are proposing to make prescriber and plan 
identifiers available for release in an unencrypted format, we no 
longer see a reason that pharmacy identifiers should not be available 
for release in unencrypted format. Accordingly, we also propose to 
release unencrypted pharmacy identifiers to all categories of 
requestors, which would also be a change in the current regulations 
governing the release of PDE data.
    We would like to address one final aspect of our policies governing 
the release of Part D data. As discussed previously, in the preamble to 
the Part D data final rule, we explained that consistent with CMS's 
existing policies with respect to Parts A and B data, CMS would not 
release PDE data for commercial purposes (but external researchers may 
be funded by commercial firms if the researchers are free to publish 
their results regardless of the findings). However, given reasons that 
we have highlighted previously which provide the impetus for the 
changes that we are proposing to make to our rules governing the 
release of PDE data, we are also soliciting comment on the current 
restriction on the release of PDE data for commercial purposes. We are 
not making a specific proposal in this regard, but rather wish to 
receive comments for consideration in light of the proposed changes to 
the requirements governing the release of Part D data that are included 
in this proposed rule.
    In addition to the proposed changes with respect to prescriber, 
pharmacy, and plan identifiers described previously, and our request 
for comment on the restriction on the release of Part D PDE data for 
commercial purposes, we are proposing a few other changes to our 
regulations governing the release of PDE data and also wish to clarify 
our existing policies with respect to several issues related to the PDE 
data. First, we are proposing to add supporting program integrity 
purposes, including coordination with states, as an additional purpose 
deemed necessary and appropriate by the Secretary for which a Part D 
sponsor must agree to submit all data elements included in all its drug 
claims under section 1860D-12(b)(3)(D) of the Act. The regulation at 
Sec.  423.505(f)(3) currently contains a non-exclusive list of purposes 
deemed necessary and appropriate. We believe that the use of these data 
for supporting program integrity purposes has always been included, 
even though not explicitly listed. However, given the importance of our 
ability to release PDE data for program integrity purposes, including 
for coordination with states on program integrity, we are proposing to 
add this purpose explicitly to the non-exclusive list in Sec.  
423.505(f)(3).
    Second, we are clarifying that non-final action data (for example, 
information on claims subject to subsequent adjustment) are available 
to entities outside of CMS. Non-final action data are captured through 
the data element, ``Original versus Adjusted PDE (Adjustment/Deletion 
code).'' This is a PDE field which distinguishes original from adjusted 
or deleted PDE records, so CMS can adjust claims and make accurate 
payment for revised PDE records, and is thus not point-of-sale

[[Page 1991]]

data. With the increasing focus on coordination of care, requests for 
access to non-final action PDE data have also increased. Such data are 
also routinely requested for evaluation and research projects. The Part 
D data final rule (73 FR 30683) included an appendix that explained in 
more specific detail the restrictions relative to the available PDE 
elements for the different categories of requestors. This appendix 
stated (73 FR 30685) that the data element ``Original versus Adjusted 
PDE (Adjustment/Deletion code)'' was available to other (that is, non-
CMS) HHS entities and the congressional oversight agencies, while for 
non-HHS executive branch agencies, states, and external entities, it 
stated that ``Final Action claims would be provided, so this element 
should not be needed.'' Thus, this appendix did not explicitly address 
the question of whether non-final action data would be available for 
release to these entities, because such data were not expected to be 
needed. However, since it is clear that these entities do need access 
to non-final data, we are clarifying that non-final action data are 
also available for release to non-HHS executive branch agencies, 
states, and external entities under the Part D data final rule.
    Finally, we believe these proposed changes to the Part D 
regulations governing PDE data release do not raise any new issues 
under the Privacy Act and that the changes are consistent with the 
System of Records that currently applies to the relevant data. Thus, we 
are not proposing any changes to the System of Records, ``Medicare Drug 
Data Processing System (DDPS),'' System No. 09-70-0553, as we are not 
proposing any changes to the data we are collecting, to how the data 
may be used, to the entities that may receive the data, or to the 
manner of transmission of the data. Rather we are proposing a change in 
the format in which the data may be provided when released to certain 
categories of requesters.
    In light of the proposed changes to our policies governing the 
release of PDE data described previously, we are proposing changes to 
the current applicable regulatory text as described later in this 
section. We are also proposing to eliminate the appendix that 
accompanied the Part D data final rule (73 FR 30683) that explained in 
more specific detail which PDE elements would be available to different 
categories of requestors, and any restrictions that applied. We believe 
this appendix is no longer necessary, as our proposals would eliminate 
most of the distinctions with respect to the PDE data available for 
release to the different categories of requesters, with the exception 
of Total Drug Costs, which will continue to be available in 
disaggregated form only to other (that is, non-CMS) HHS entities and 
the congressional oversight agencies, and we propose to revise the 
regulation at Sec.  423.505(m)(1)(iii)(B) to account for this 
distinction. We also clarify that we will exclude sales tax from the 
aggregation, if necessary for the project. We also propose changes to 
the regulatory text to incorporate notes from the current Appendix that 
are not addressed by the existing reference to CMS data sharing 
procedures in Sec.  423.505(m)(1)(ii).
    Therefore, consistent with the foregoing, we propose the following 
revisions to the applicable regulatory text:
     Section 423.505(f)(3) would be revised to add supporting 
program integrity purposes, including coordination with states, as an 
additional purpose.
     Section 423.505(m)(1)(iii) would be revised to remove 
references to encrypting certain identifiers since prescriber, plan, 
and pharmacy identifiers would no longer be subject to encryption when 
released.
     Section 423.505(m)(1)(iii)(A) would be revised to clarify 
that, subject to the restrictions contained in paragraph (m)(1), all 
elements on the claim are available not only to HHS, but also to other 
executive branch agencies and states, since there is no longer any 
distinction between the two categories.
     Section 423.505(m)(1)(iii)(B) would be revised to 
incorporate a note from the appendix, which states: ``Upon request, CMS 
excludes sales tax from the aggregation at the individual level, if 
necessary for the project'' at the end of the provision.
     Section 423.505(m)(1)(iii)(C) would be deleted as no 
longer necessary since unencrypted plan identifiers, including the 
internal plan/pharmacy identification numbers, would be available for 
release.
     Section 423.505(m)(1)(iii)(D) would be re-lettered as (C) 
and references to encryption of pharmacy and prescriber identifiers 
would be deleted, since these identifiers would be available for 
release in unencrypted format. Additional language regarding 
beneficiary identifiers would be added to the existing provision to 
reflect the current policy on release of this identifier as reflected 
in the appendix that would be eliminated.
     Section 423.505(m)(3) would be revised to incorporate a 
note from the appendix that would be eliminated about the status of the 
Congressional Research Service as an external entity when it is not 
acting on behalf of a Congressional committee in accordance with 2 
U.S.C. 166(d)(1).
34. Establish Authority To Directly Request Information From First 
Tier, Downstream, and Related Entities (Sec.  422.504(i)(2)(i), and 
Sec.  423.505(i)(2)(i))
    Pursuant to section 1857(d)(2) and 1860D-12(b)(3)(c) of the Act, 
existing regulations at 42 CFR 422.504(i) and 42 CFR 423.505(i) 
establish various conditions that entities contracting as a first tier, 
downstream, or related entity (FDR) to an MA organization or Part D 
sponsor must agree to in order to participate in the MA or Part D 
program. One such condition at Sec.  422.504(i)(2)(i) and Sec.  
423.505(i)(2)(i) is that HHS, the Comptroller General, or their 
designees have the right to audit, evaluate, and inspect any books, 
contracts, computer or other electronic systems, including medical 
records and documentation of the first tier, downstream, and related 
(FDR) entities related to CMS' contract with the Part C and D sponsor.
    CMS (or its designee(s)) conduct routine audits of Part D sponsors 
and MA organizations, as well as conduct audits to investigate 
allegations of noncompliance with Part C and/or Part D rules and 
requirements. While Sec.  422.504(d) and Sec.  423.505(d) address Part 
D and MA organizations' own maintenance of records and the rights of 
CMS to inspect those records, Sec.  422.504(i)(2)(i) and Sec.  
423.505(i)(2)(i) also require plan sponsors require that their FDRs 
agree to this CMS right to inspection. Plan sponsors regularly contract 
with FDRs to perform critical Part C and D operating functions. For 
example, many (if not most) Part D sponsors delegate critical Part D 
functions to their PBMs. As a result, many of the records that we or 
our designees would need to review and evaluate when we audit a Part D 
sponsor or MA organization reside with its FDRs.
    Our existing regulation at Sec.  423.505 (i)(3)(iv) states that the 
contracts between the Part D sponsor and its FDRs must indicate whether 
records held by the FDR pertaining to the Part D contract will be 
provided to the sponsor to provide to CMS (upon request), or will be 
provided directly to CMS or its designees by the FDR (the Part C 
regulation is silent on this matter). As such, we have not previously 
required Part C or Part D FDRs to provide information directly to CMS.
    Two separate reports by the OIG (OEI-03-08-00420, dated October 
2009 and OEI 03-11-00310, dated January 2013), have highlighted 
barriers experienced by the Medicare Drug

[[Page 1992]]

Integrity Contractor (MEDIC), the entity contracted by CMS to be 
responsible for detecting and preventing fraud, waste, and abuse in the 
Medicare Parts C and D programs nationwide, in obtaining requested 
information in an expeditious manner. The 2009 OIG report discussed 
that CMS' and its designees' (in this case, the MEDIC) lack of 
authority to directly obtain information from pharmacies, PBMs, and 
physicians has hindered the MEDIC's ability to investigate potential 
fraud and abuse and the OIG recommended that CMS change its regulations 
to establish its authority to obtain necessary information directly 
from FDRs. The OIG's 2013 report reiterated the recommendation that CMS 
have a more direct route to obtain records held by FDRs so that CMS 
would be able to obtain necessary records in a timely fashion. While 
the 2013 report pointed out that sponsors and their FDRs generally 
cooperate in providing the information requested by the MEDIC, it often 
takes months for it to reach the MEDIC because the MA organization or 
Part D sponsor acts as a gatekeeper.
    In the past, we chose not to be prescriptive regarding whether a 
first tier, downstream, or related entity must make its books and 
records available to us directly or through the Part C or D sponsor. As 
a consequence of what we have learned through the OIG investigations 
and the seriousness with which we approach our fraud, waste, and abuse 
oversight obligations, we are now proposing to specify at Sec.  
422.504(i)(2)(ii) and Sec.  423.505(i)(2)(ii) that HHS, the Comptroller 
General, or their designees have the right to audit, evaluate, collect, 
and inspect any records by obtaining them directly from any first tier, 
downstream, or related entity. This proposed regulatory change would 
not grant CMS any investigative or audit authority that we do not 
already possess. It would merely guarantee us a direct and expeditious 
route to the information we need to obtain for purposes of program 
oversight. This regulatory change would also reduce the burden on the 
plan sponsor. The plan sponsor would no longer need to act as the 
gatekeeper between CMS and its first tier, downstream, or related 
entity. Upon making contact with the first tier, downstream, or related 
entity, we would simultaneously notify the plan sponsor concerning the 
nature of the request. This will ensure that the plan sponsor will have 
notice that we are contacting one of its subcontractors.
    We are proposing to revise the regulation at Sec.  422.504(i)(2)(i) 
and Sec.  423.505(i)(2)(i) to make clear that CMS and its designees may 
``collect'' records, in addition to our existing authority to ``audit, 
evaluate, and inspect'' information. The addition of ``collect'' 
removes any doubt that, in addition to our other options for obtaining 
records, we have the authority to request information to be reviewed in 
some location other than onsite at a sponsor's or FDR's facility. 
Furthermore, the proposed provision is intended to clarify only that 
CMS may contact FDRs directly and request that they provide Part C or 
D-related information directly to CMS. The question as to whether CMS 
has the authority to enter the premises of FDRs, is to be determined by 
interpreting other applicable statutory and regulatory authority.
    We also propose to delete the existing provision at Sec.  
423.505(i)(3)(iv) which gives Part D sponsors the choice as to how 
information sought from their FDRs will be provided to CMS. Section 
423.505 would be renumbered so that paragraphs (v)-(viii) would become 
paragraphs (iv)-(vii).
35. Eligibility of Enrollment for Incarcerated Individuals (Sec.  
417.1, Sec.  417.460, Sec.  422.74, and Sec.  423.44)
    Entitlement and enrollment in the Medicare program (Part A and Part 
B) is contingent on entitlement to Social Security retirement and 
disability benefits as outlined in sections 226 and 226A of the Act, 
and enrollment in the Medicare program for individuals not receiving 
retirement or disability benefits is outlined in sections 1818 and 
1818A of the Act. These sections do not preclude entitlement to or 
enrollment in the Medicare program for individuals who are incarcerated 
in prisons or other penal facilities. However, section 1862(a)(3) of 
the Act excludes Medicare payment for services which are paid directly 
or indirectly by another government entity, including federal, state 
and local prisons, and penal facilities. Given that Medicare 
entitlement flows from entitlement to Social Security retirement and 
disability benefits, we established regulations at Sec.  411.4(b) and 
implemented section 1862(a)(3) of the Act through a payment exclusion 
process in the FFS program, outlined in section 50 of Chapter 16 of the 
Medicare Benefit Policy Manual and section 10.4 of the Medicare Claims 
Payment Manual.
    The Medicare payment exclusion process includes the receipt of 
incarceration status for individuals via regular data exchanges from 
the SSA to CMS. Once we receive the data, the incarceration status is 
noted on the individual's record and is retained in the FFS claims 
processing systems. Upon receipt of submitted FFS claims, CMS denies 
payment of both Part A and Part B claims for individuals with records 
on which incarceration is denoted. The denial of claims continues until 
the individual is no longer considered incarcerated and that 
information is reported by SSA to CMS. Individuals who are entitled to 
premium-free Part A will maintain their entitlement and will remain 
enrolled in Part B as long as premiums are paid. Similarly, individuals 
who are enrolled in premium Part A and/or Part B maintain their 
enrollment as long as premiums are paid. Sections 1851(a)(3)(B), 1860D-
1(a)(3)(A), and 1876(a)(1)(A) of the Act outline the eligibility 
requirements to enroll in MA, Part D, and Medicare Health Maintenance 
Organization/Competitive Medical Plans (cost plans). In all options, 
individuals must have active Medicare coverage. Specifically, to enroll 
in MA, an individual must be entitled to Part A and enrolled in Part B; 
to enroll in a PDP, an individual must be eligible for Part D by either 
being entitled to Part A and/or enrolled in Part B; to enroll in a 
Medicare cost plan, an individual must be enrolled in Part B but Part A 
is not required.
    In addition, sections 1851(b)(1)(A), 1860D-1(b)(1)(B)(i), and 
1876(d) of the Act provide that Medicare beneficiaries are eligible to 
enroll in an MA plan, PDP, or cost plan only if they reside in the 
geographic area served by the plan, known as the plan's ``service 
area.'' As noted earlier, an individual who is incarcerated still meets 
the eligibility requirements for Part A and Part B and is eligible 
generally to enroll in an MA plan, PDP, or cost plan. However, 
residence in a plan's service area is also a condition for eligibility 
to enroll in an MA plan, PDP or cost plan. See Sec.  422.50(a)(3)(i) 
for MA plans, Sec.  423.30(a)(1)(ii) for PDPs, and Sec.  417.422(b) for 
cost plans. If a member no longer resides in the service area, plans 
must disenroll that individual per rules at Sec.  422.74(a)(2)(i) and 
Sec.  422.74 (d)(4) for MA plans, Sec.  423.44(b)(2)(i) for PDPs, and 
Sec.  417.460(b)(2)(i) for cost plans.
a. Changes in Definition of Service Area for Cost Plans (Sec.  417.1)
    In order to implement the exclusion from Medicare coverage for 
incarcerated individuals under section 1862(a)(3) of the Act in the 
case of MA plans and PDPs, we explicitly excluded facilities in which 
individuals are incarcerated from an MA plan's service area by 
including this exclusion in the definition of ``service area'' (54 FR 
41734 and 72 FR 47410). Specifically, ``service area'' is defined in 
Sec.  422.2 for

[[Page 1993]]

MA plans and Sec.  423.4 for PDPs and both definitions indicate that 
facilities in which individuals are incarcerated are considered outside 
of the service area.
    We did not include a similar service area exclusion in the case of 
cost plans. To the extent that cost plans do not incur costs for 
incarcerated enrollees because their health care costs are covered by 
the facility, there would be no costs claimed on the cost report, and 
no Medicare payment. Nonetheless, to ensure that no cost payments are 
made, we propose to revise the definition of service area in Sec.  
417.1 to specifically note that facilities in which individuals are 
incarcerated are not a part of the service area. This adjustment will 
ensure parity among the various Medicare plan coverage options and be 
the basis for ensuring that services are not paid for by the Medicare 
Trust Funds for those who are not eligible for them.
b. Involuntary Disenrollment for Incarcerated Individuals Enrolled in 
MA, PDP and Cost Plans (Sec.  417.460, Sec.  422.74, and Sec.  423.44)
    Sections 1860D-1(b)(1)(B)(i), 1851(b)(1)(A), and 1876(a)(1)(A) of 
the Act provide that individuals whose permanent residence is outside 
the plan's service area are ineligible to enroll in or to remain 
enrolled in the MA, Part D, or cost plan. Based on the definition of 
service area established in Sec.  422.2 and Sec.  423.4, this applied 
to individuals who were incarcerated as well. As such, individuals who 
became incarcerated while enrolled were ineligible to remain enrolled 
because they did not meet the eligibility criterion of residing in the 
MA plan or PDP's service area. As noted previously, the regulations for 
cost plans currently do not exclude incarcerated individuals from 
enrolling or remaining enrolled in these plans.
    At the time of the implementation of Part D, the data regarding 
incarceration were not as robust as they are at the present time. To 
compensate, we provided instructions in sub-regulatory guidance that 
required MA plans and PDPs to investigate a notification from CMS of an 
individual's incarcerated status. If a plan could not confirm the 
status, the plan would then apply the policy for investigation of a 
possible out-of-area status which would allow an incarcerated 
individual to remain enrolled in the plan for up to 6 or 12 months for 
MA plans or PDPs, respectively. Cost plans, on the other hand, are not 
currently subject to similar instructions and therefore individuals are 
not disenrolled solely because they are determined to be incarcerated.
    Today we believe that the data that CMS receives from SSA regarding 
the incarceration status of Medicare beneficiaries are reliable enough 
for the purpose of involuntary disenrollment from MA, Part D, and cost 
plans. Thus, we propose to amend Sec.  417.460(b)(2)(i), Sec.  
417.460(f)(1)(i), Sec.  422.74(d)(4)(i), Sec.  422.74(d)(4)(v) and add 
Sec.  423.44(d)(5)(iii) and Sec.  423.44(d)(5)(iv) to establish that MA 
organizations, PDPs, and cost plan organizations must disenroll 
individuals incarcerated for 30 days or more upon notification of such 
status from CMS. As a part of this change, CMS will review the 
incarceration data provided by SSA. Where possible, CMS will 
involuntarily disenroll individuals who are incarcerated based on the 
data provided by SSA, and will notify the plan in which the individual 
is enrolled of this action. For all such disenrollments, the effective 
date of disenrollment will be the first of the month after the start of 
incarceration date as reported by SSA. We believe these proposed 
changes will prevent months of improper payments to MA, Part D, and 
cost plans and significantly lessen the burden for MA plans and PDPs by 
not requiring investigation to verify residence as outlined in section 
50.2.1 in Chapter 2 of the Medicare Managed care Manual and Chapter 3 
of the Medicare Prescription Drug Benefit Manual.
    In connection with this change, we would also propose to deny 
enrollment requests for individuals if CMS data indicates an active 
incarceration status of at least 30 days. Based on the data received 
from SSA, if incarceration is denoted, we will deny that enrollment 
based on the data provided by SSA and will notify the plan of the 
denial. This would replace the current process requiring plans to 
accept the enrollment and immediately begin the process to verify that 
the individual was out of the plan's service area. We will provide 
operational instructions in subregulatory guidance.
    In addition, we will clarify that in instances where a plan 
receives information about an individual's possible incarceration from 
a source other than CMS or learns of some other permanent residence 
change, the existing requirements to research a possible change in 
address would still apply. Finally, we note that the exceptions to 
involuntary disenrollment for not residing in the plan's service area 
(Sec.  417.460(f)(2) and Sec.  422.74(d)(4)(iii)) would not apply to 
members who are determined to be incarcerated. However, individuals 
involuntarily disenrolled will be able to enroll in a plan following 
their release from incarceration using an existing special enrollment 
period outlined in section 30.4.1 in Chapter 2 of the Medicare Managed 
Care Manual and section 30.3.1 in Chapter 3 of the Medicare 
Prescription Drug Benefit Manual (Special Enrollment Periods (SEP) for 
Changes in Residence). Individuals wanting to enroll in an open cost 
plan may do so as long as the cost plan is accepting applications for 
enrollment, following section 30.1 of Chapter 17-D of the Medicare 
Managed Care Manual.
36. Rewards and Incentives Program Regulations for Part C Enrollees 
(Sec.  422.134)
    CMS has provided subregulatory guidance regarding the types of 
rewards and incentives that may be offered to current Medicare 
Advantage (MA) plan enrollees. (See Section 70.2, Chapter 3 of the 
Medicare Managed Care Manual). Generally, such activities are limited 
to a set monetary cap, and cannot be offered in the form of cash or 
other monetary rebates or considered a health benefit. This guidance 
generally flows from our authority to regulate marketing by MA 
organizations and our recognition that certain marketing efforts may be 
targeted to current enrollees to encourage continued enrollment and 
reenrollment in a particular plan.
    Every year, CMS receives inquiries from MA organizations that wish 
to expand the scope of the rewards and incentives that currently may be 
offered to beneficiaries enrolled in their MA plans. In some cases, MA 
organizations wish to extend rewards and incentives already offered to 
their commercial members to their Medicare enrollees and there is some 
evidence to suggest that health-driven reward and incentive programs 
for currently enrolled members of health plans may lead to meaningful 
and sustained improvement to their health behaviors and health 
outcomes.
    CMS would like to enable MA organizations to offer health-driven 
rewards and incentives programs that may be applied to more health-
related services and activities than are allowed under current 
guidance. We are concerned about the possibility that such programs 
would be targeted only to healthier enrollees, and discourage sicker 
enrollees from participating in such incentives and in remaining 
enrolled in the plan. Furthermore, we would like to strengthen our 
existing subregulatory guidance and offer the opportunity for public 
review and

[[Page 1994]]

comment on our requirements for rewards and incentives programs. We 
propose to amend our regulations to establish parameters for rewards 
and incentives programs offered to enrollees of MA plans. We also 
propose to include specific requirements regarding rewards and 
incentives so as to ensure that such programs do not discriminate 
against beneficiaries, including those who are sick or disabled.
    Section 1856(b)(1) of the Act provides authority for the 
establishment of MA standards by regulation, and section 1857(e)(1) of 
the Act provides authority to impose contract requirements that CMS 
finds ``necessary and appropriate.'' Section 1852(b)(1)(a) of the Act 
states that MA organizations may not discriminate against beneficiaries 
on the basis of health status and that CMS may not approve an MA plan 
if that offering is susceptible to discrimination based on an 
individual's health status. Further, section 1857(g)(1)(D) of the Act 
provides authority for taking intermediate sanction action against an 
MA organization which ``engages in any practice that would reasonably 
be expected to have the effect of denying or discouraging enrollment by 
eligible individuals'' as a result of their health status or history. 
We propose to rely upon the aformentioned rulemaking and substantive 
authority to establish requirements for rewards and incentives programs 
offered by MA organizations to Medicare beneficiaries enrolled in their 
MA plans.
    Specifically, we propose adding a new provision at Sec.  422.134 
that would allow MA organizations to offer reward and incentive 
programs to their current Medicare enrollees to encourage their 
participation in activities that focus on promoting improved health, 
preventing injuries and illness, and promoting efficient use of health 
care resources. We would require that reward-eligible activities be 
designed so that all enrollees are able to earn rewards without 
discrimination based on race, gender, chronic disease, 
institutionalization, frailty, health status, and other impairments. 
Any rewards and incentives program implemented by an MA organization 
under our proposal must accommodate enrolled beneficiaries who are 
institutionalized or who need a modified approach to enable effective 
participation.
    To meet the proposed CMS requirements, a reward or incentive would 
have to be earned by completing the entire health-related service or 
activity and may not be offered for completion of less than all 
required components of the eligible service or activity. Under this 
proposal, rewards and incentives would be subject to a monetary cap in 
an amount CMS determines could reasonably be expected to affect 
enrollee behavior while not exceeding the value of the health-related 
service or activity itself. We intend to provide guidance on this 
qualitative standard on a regular basis.
    In addition, our proposal would require MA organizations that offer 
rewards and incentives programs to provide information about the 
effectiveness of such programs to CMS upon request. If we determine 
that the rewards and incentives programs are not compliant with our 
regulatory standard, we may require that the MA organization modify the 
basic parameters of the program.
37. Expand Quality Improvement Program Regulations (Sec.  422.152)
    Section 1852(e) of the Act requires MA organizations to have an 
ongoing quality improvement program for the purpose of improving the 
quality of care provided to enrollees. Our current regulations at Sec.  
422.152 require an MA organization to have a quality improvement 
program that measures, records, and reports on the quality of care it 
is providing to enrollees and to develop criteria for a chronic care 
improvement program. We have recently expanded our quality improvement 
program to include more specific and structured chronic care 
improvement program requirements that are outcomes based and health 
driven as well as require each MA organization to have a written 
quality improvement program plan (approved form CMS-10209). Currently, 
chronic care improvement programs must be measurable, reported on 
annually, and has a clinical focus (as determined by CMS).
    We propose revising paragraph (a) of Sec.  422.152 in order to 
codify our recent expansion of the quality improvement program policies 
and revising paragraph (c) of Sec.  422.152 to codify our recently 
expanded chronic care improvement program policies. These revised 
paragraphs will more accurately reflect current quality care 
improvement program policies and requirements.
    Additionally, paragraph (g) of Sec.  422.152 lists quality 
improvement program requirements that are specific to special needs 
plans (SNPs). We propose revising paragraph (g) to clarify that the 
requirements listed there are in addition to program requirements 
listed in paragraphs (a) and (f) of Sec.  422.152 and are not instead 
of the regular quality improvement program requirements.
    Finally, we propose to delete paragraph (h)(2) of Sec.  422.152 as 
it pertains to plan year 2010 and is no longer relevant.
38. Authorization of Expansion of Automatic or Passive Enrollment Non-
Renewing Dual Eligible SNPs (D-SNPs) to Another D-SNP To Support 
Alignment Procedures (Sec.  422.60)
    At this time, SNPs are only authorized through 2014. This proposed 
provision, which would take effect in 2015, is contingent upon, and 
would only apply, if SNPs continue to be authorized after 2014.
    Since D-SNPs were implemented in 2006, expectations for them to 
serve as a vehicle for aligning Medicare and Medicaid benefits for 
dually eligible individuals have been articulated. In 2007, the 
Congress passed the Medicare Improvements for Patients and Providers 
Act (MIPPA), which set 2013 as the deadline for all D-SNPs to have 
contracts with states to coordinate their enrollees' Medicaid coverage. 
In 2010, the Congress passed the Affordable Care Act, section 2602 of 
which established a new CMS office charged with implementing goals to 
improve the coordination between the federal government and states for 
individuals eligible for benefits under both Medicare and Medicaid 
programs in order to ensure that such individuals get full access to 
the items and services to which they are entitled. Specifically listed 
in sections 2602(c)(2) and (6) of the Affordable Care Act, we are 
tasked with simplifying the processes for Medicare-Medicaid enrollee to 
access the items and services they are entitled to under the Medicare 
and Medicaid programs, and improving care continuity and ensuring safe 
and effective care transitions for Medicare-Medicaid enrollees.
    Our current authority does not allow us to limit involvement in the 
D-SNP program to fully integrated D-SNPs; thus, the majority of 
Medicare-Medicaid enrollees enrolled in D-SNPs continue to receive 
their Medicare and Medicaid benefits and services from two different 
organizations. At the same time, some states are approaching this 
problem from a slightly different angle, and are attempting to align 
care for Medicare-Medicaid enrollees under the same organization by 
requiring that the same organization that provides Medicaid benefits 
also provide Medicare benefits. However, states' efforts stall when the 
Medicare-Medicaid enrollee is enrolled with one organization for his/
her Medicaid coverage, but in a D-SNP offered by another MA 
organization. The statute generally requires that

[[Page 1995]]

Medicare beneficiaries make an active choice of their health plan, so 
neither plans nor states can choose where the beneficiary enrolls.
    The resulting fragmentation of care can generally be addressed 
through existing mechanisms. For example, State Medicaid Agencies may 
pursue waiver authority from CMS to require Medicare-Medicaid enrollees 
to enroll in Medicaid Managed Care Organizations (MCO) that also offer 
a D-SNP. Likewise, anMA organization offering a D-SNP could novate its 
contract with CMS to the organization offering the Medicaid MCO, so 
that the entire contract, including the D-SNP, and its enrollees, is 
now held by the same organization that offers the enrollees' Medicaid 
managed care plan. However, while we can approve novations, we cannot 
mandate that the parties enter into such arrangements. Moreover, when 
an MA organization elects to non-renew its Medicare contract, rather 
than novate the contract, we do not have the authority to move 
enrollees under that contract to another MA organization offering a D-
SNP.
    Another possible solution to the problem of fragmented care lies in 
section 1851(c)(1) of the Act, which we have interpreted to provide 
flexibility in developing mechanisms by which beneficiaries may 
complete voluntary MA enrollment elections (per section 1851(a)(1) of 
the Act). These flexibilities include a process described as ``passive 
enrollment,'' whereby beneficiaries are notified of the enrollment 
opportunity and provided sufficient advance information to determine if 
they will accept this option. A beneficiary who is offered a passive 
enrollment completes the request to enroll by not declining the offer. 
However, we have limited passive enrollment to situations in which 
enrollees in MA plans that are terminating immediately have little or 
no time to choose another MA plan option or stand-alone PDP, and are at 
risk for losing their prescription drug coverage (see 42 CFR 
422.60(g)).
    Generally, we have declined to afford ourselves such discretion to 
provide passive enrollment in more situations, in part, because of 
concerns raised by beneficiary advocates about the challenges 
beneficiaries face in navigating a new provider network and 
understanding information about new benefits. In addition, we have also 
been concerned that, were we to widen the scope of our authority to 
allow passive enrollment in other situations not involving an immediate 
termination, we would be faced with the seemingly impossible task of 
sorting through requests by MA organizations to passively enroll 
members to other plans within their organization, or across 
organizations, and granting or denying such requests without appearing 
to act in an arbitrary and capricious manner, or unintentionally 
interfering with the voluntary nature of the MA program. Thus, we have 
limited our use of our passive enrollment authority by regulation to 
those situations in which beneficiaries faced an immediate plan 
termination or potential harm, and where we could, through passive 
enrollment, ensure that beneficiaries maintained access to affordable 
coverage, including prescription drug coverage.
    To date, we have not considered D-SNP non-renewals to fall under 
either category, because, by definition, non-renewals occur with 
appropriate, 90 days' notice to affected enrollees, just prior to the 
start of the annual enrollment period, when enrollees have access to 
the Medicare & You handbook and other materials, as well as ample time 
to consider their health care choices.
    However, it is worth noting that returning to Original Medicare, 
whether due to an immediate contract termination or non-renewal, poses 
potential disadvantages for the beneficiary as well, that is, the loss 
of supplemental benefits such as dental or vision benefits, and 
beneficiary confusion as he or she attempts to navigate the health care 
system (and two sets of benefits) without case management or other 
support that may have been provided by the MA plan. We have the 
authority to widen the scope of the regulation slightly to allow for 
passive enrollment when a Medicare-Medicaid enrollee is enrolled in a 
D-SNP that is non-renewing its contract with Medicare, and is enrolled 
in a Medicaid MCO (Managed Care Organization) that also offers a D-SNP, 
and the networks and benefits of the non-renewing D-SNP and the future 
D-SNP are substantially similar. By exercising passive enrollment in 
this additional limited circumstance, we could better ensure better 
continuity of care, particularly prescription drug coverage, but also 
possibly supplemental benefits, and ensure beneficiaries enjoy use of 
the same providers, with little or no change in the benefits offered. 
Our use of passive enrollment in this case would also further promote 
alignment of Medicare and Medicaid benefits offered by the same 
organization. Through sub-regulatory guidance, we would interpret the 
``substantially similar'' standard as it relates to the networks, 
benefit packages, formularies, and out of pocket costs of the non-
renewing and gaining D-SNP. As already required by Sec.  422.60(g)(2), 
we would ensure beneficiaries are notified of the costs and benefits of 
the plan, and of their ability to decline enrollment or choose another 
plan. As part of our proposal to add this additional basis for passive 
enrollment, we propose to restructure paragraph (g).

B. Improving Payment Accuracy

1. Implementing Overpayment Provisions of Section 1128J(d) of the 
Social Security Act (Sec.  422.326 and Sec.  423.360)
    This section of the proposed rule would implement section 6402 of 
the Affordable Care Act, which established new section 1128J(d) of the 
Act entitled Reporting and Returning of Overpayments. Section 
1128J(d)(4)(B) of the Act defines the term overpayment as any funds 
that a person receives or retains under title XVIII or XIX to which the 
person, after applicable reconciliation, is not entitled under such 
title. The definition of person at section 1128J(d)(4)(C) of the Act 
includes a Medicare Advantage organization (as defined in section 
1859(a)(1) of the Act) and a Part D sponsor (as defined in section 
1860D-41(a)(13) of the Act). The definition does not include a 
beneficiary.
    Section 1128J(d)(1) of the Act requires a person who has received 
an overpayment to report and return the overpayment to the Secretary, 
the state, an intermediary, a carrier, or a contractor, as appropriate, 
at the correct address, and to notify the Secretary, state, 
intermediary, carrier or contractor to whom the overpayment was 
returned in writing of the reason for the overpayment. Section 
1128J(d)(2) of the Act requires that an overpayment be reported and 
returned by the later of: (1) The date which is 60 days after the date 
on which the overpayment was identified; or (2) the date any 
corresponding cost report is due, if applicable. Section 1128J(d)(3) of 
the Act specifies that any overpayment retained by a person after the 
deadline for reporting and returning an overpayment is an obligation 
(as defined in 31 U.S.C. 3729(b)(3)) for purposes of 31 U.S.C. 3729.
    Finally, section 1128J(d)(4)(A) of the Act defines ``knowing'' and 
``knowingly'' as those terms are defined in 31 U.S.C. 3729(b). 
Specifically, the terms ``knowing'' and ``knowingly'' mean that ``a 
person with respect to information: (1) Has actual knowledge of the 
information; (2) acts in deliberate ignorance of the truth or falsity 
of the

[[Page 1996]]

information; or (3) acts in reckless disregard of the truth or falsity 
of the information.'' There need not be ``proof of specific intent to 
defraud.''
    To implement section 1128J(d) of the Act for the Part C Medicare 
Advantage program and the Part D Prescription Drug program, we are 
proposing two new sections, Sec.  422.326 and Sec.  423.360, 
respectively, both titled, ``Reporting and Returning of Overpayments.'' 
These sections propose rules for MA organizations and Part D sponsors 
to report and return an identified overpayment to the Medicare program. 
We are using the term Part D sponsor, as defined at Sec.  423.4, to 
refer to the entities that offer prescription drug plans (PDPs) under 
part 423 and thus are subject to section 1128J(d) of the Act.
    We propose conforming amendments to Sec.  422.1, Sec.  422.300, and 
Sec.  423.1 that add a reference to section 1128J(d) of the Act to the 
existing list of statutory authorities for the regulations governing 
the MA organizations and Part D sponsors. We also propose to amend 
Sec.  422.504(l) and Sec.  423.505(k) to incorporate a reference to the 
proposed Sec.  422.326 and Sec.  423.360, respectively, in order to 
extend the existing data certification requirement to data that MA 
organizations and Part D sponsors submit to CMS as part of fulfilling 
their obligation to return an overpayment under section 1128J(d) of the 
Act. Section 422.504(l) refers to certification of data ``as a 
condition for receiving a monthly payment'' and Sec.  423.505(k) refers 
to certification of data for enrollees ``for whom the organization is 
requesting payment.'' Our proposal to implement section 1128J of the 
Act contains requirements that apply after CMS has completed 
prospective monthly payments for a year, and organizations are no 
longer ``requesting payment'' because applicable reconciliation has 
occurred. Applicable reconciliation is the point when organizations 
submit their final data for the previous payment year. Accordingly, if 
an MA organization or Part D sponsor has identified an overpayment, 
there clearly is a different state of ``best knowledge, information, 
and belief'' than the state of knowledge, information, and belief that 
existed prior to applicable reconciliation. Thus, we propose to require 
that the CEO, CFO, or COO must certify (based on best knowledge, 
information, and belief) that information the MA organization or Part D 
sponsor submits to CMS for purposes of reporting and returning of 
overpayments under Sec.  422.326 and Sec.  423.360 is accurate, 
complete, and truthful.
    We remind all stakeholders that even in the absence of a final 
regulation on these statutory provisions, MA organizations and Part D 
sponsors are subject to the statutory requirements found in section 
1128J (d) of the Act and could face potential False Claims Act 
liability, Civil Monetary Penalties (CMP) Law liability, and exclusion 
from Federal health care programs for failure to report and return an 
overpayment. Additionally, MA organizations and Part D sponsors 
continue to be obliged to comply with our current procedures for 
handling inaccurate payments.
a. Terminology (Sec.  422.326(a) and Sec.  423.360(a))
    We propose to adopt the statutory definition of overpayment, where 
an overpayment exists when--after ``applicable reconciliation''--an MA 
organization or Part D sponsor is not entitled to funds it has received 
and/or retained. In order to clarify the statutory definition of 
overpayment, we propose definitions of two key terms at Sec.  
422.326(a) and Sec.  423.360(a): ``funds'' and ``applicable 
reconciliation.''
    We propose to define ``funds'' as payments an MA organization or 
Part D sponsor has received that are based on data that these 
organizations submitted to CMS for payment purposes and for which they 
have responsibility for the accuracy, completeness, and truthfulness of 
such data under existing Sec.  422.504(l) and Sec.  423.505(k). For 
Part C, the data submitted by the MA organization to CMS includes Sec.  
422.308(f) (enrollment data) and Sec.  422.310 (risk adjustment data). 
For Part D, data submitted by the Part D sponsor to CMS includes data 
submitted under Sec.  423.329(b)(3), Sec.  423.336(c)(1), Sec.  
423.343, and data provided for purposes of supporting allowable costs 
as defined in Sec.  423.308 of this part which includes data submitted 
to CMS regarding direct or indirect remuneration (DIR).
    There are additional payment-related data CMS uses to calculate 
Part C and Part D payments that are submitted directly to CMS by other 
entities, such as the Social Security Administration (SSA), which is 
the authoritative source for data they submit to CMS. We believe that 
MA organizations and Part D sponsors cannot be held accountable for the 
accuracy of data controlled and submitted to us by other entities.
    For example, the SSA is the authoritative source for date of death. 
An MA organization or Part D sponsor generally do not submit a date of 
death directly to CMS' systems; it comes from the SSA data feed. When 
the SSA submits to CMS corrected data regarding a beneficiary's date of 
death, CMS' systems recalculate the payments made to the plan for that 
beneficiary and recoup the incorrect payment in a routine retroactive 
payment adjustment process.
    When CMS recoups an incorrect payment from an MA organization or 
Part D sponsor based on data corrections submitted by authoritative 
sources such as the SSA, CMS would not consider this recoupment to be 
the return of an overpayment by an MA organization or Part D sponsor 
under proposed Sec.  422.326 and Sec.  423.360. Therefore, the proposed 
meaning of ``funds'' refers to a payment amount that an MA organization 
or Part D sponsor received from CMS that is based on data that the MA 
organization or Part D sponsor controls and submits to CMS.
    The term ``applicable reconciliation'' refers to an event or events 
after which an overpayment can exist under section 1128J(d) of the Act. 
We propose definitions of the term applicable reconciliation that are 
specific to the Part C and Part D.
    For Part C, we propose that applicable reconciliation occurs on the 
date that CMS announces as the final deadline for risk adjustment data 
submission. (See section II.B.6 of this proposed rule for a discussion 
of the final deadline for risk adjustment data submission established 
at Sec.  422.310(g).) For each payment year, we apply three sets of 
risk scores to adjust payments: Initial and midyear risk scores during 
the payment year (both sets are based on incomplete diagnosis data from 
the data collection year); and final risk scores after the payment year 
using data MA organizations submit on or before the final deadline for 
risk adjustment data (which reflects complete data for the data 
collection year). Currently, the final deadline for risk adjustment 
data submission is a month after the end of the payment year. In future 
years, we expect to announce a date that will be about 6 to 8 weeks 
after the end of the payment year to accommodate the current 
subregulatory requirement that MA organizations review the monthly 
enrollment and payment reports they receive from CMS within 45 days of 
the availability of the reports. Moving this deadline means that the 
risk adjustment data submission deadline would also function as the 
Part C applicable reconciliation date. We would announce a final risk 
adjustment data submission deadline that falls on or just after the 
conclusion of this 45-day period for the January payment.
    For Part D sponsors, we propose that applicable reconciliation is 
the later of either: The annual deadline for

[[Page 1997]]

submitting prescription drug event (PDE) data for the annual Part D 
payment reconciliations referred to in Sec.  423.343 (c) and (d) or the 
annual deadline for submitting DIR data. The annual deadline for 
submitting PDE data is the last federal business day prior to June 30th 
of the year following the benefit year being reconciled. The annual 
deadline for submitting DIR data is announced annually through 
subregulatory guidance and generally occurs around the last business 
day in June the year following the benefit year being reconciled. We 
select these events to define the Part D applicable reconciliation 
because these data are used for the purposes of determining final Part 
D payment reconciliation. Note that MA organizations would still have 
to submit all final risk adjustment diagnoses for Part D on the final 
deadline for risk adjustment data submission.
    The proposed approach to defining applicable reconciliation 
establishes dates that differ for Part C and Part D. One effect of this 
approach is that risk adjustment and enrollment data for Part D are 
subject to the Sec.  423.360 overpayment requirements at a later date 
than risk adjustment and enrollment data for Part C. The final risk 
adjustment data submission deadline for Parts C and D data would 
continue to be earlier than the deadline for final submission of PDE 
and DIR data. For this reason, we considered an alternative approach to 
defining applicable reconciliation, where there is one date for 
applicable reconciliation for both Parts C and D risk adjustment data 
and enrollment data (which would be about 6 to 8 weeks after the end of 
the payment year, going forward), and then the Part D program would be 
subject to a second applicable reconciliation date the date for final 
submission of PDE data or DIR data, whichever is later. We are 
proposing a single date for each program, and we seek comment on these 
two approaches.
    Note that payment errors identified as a result of any corrections 
to risk adjustment data submitted by MA organizations (and other 
organizations required to submit risk adjustment data to CMS) on or 
before the annual final risk adjustment data submission deadline are 
handled as part of the current annual process of risk adjustment 
payment reconciliation. Because these payment errors are prior to the 
date defined in this proposed rule as ``applicable reconciliation,'' we 
do not consider these errors to be overpayments for the purpose of 
Sec.  422.326 and Sec.  423.360. That is, any deletions of risk 
adjustment data in the file submitted on or before the final risk 
adjustment data submission deadline for a payment year, would result in 
payment errors that are addressed with processes that have been in 
place prior to our codification of section 1128J(d) of the Act in 
proposed Sec.  422.326 and Sec.  423.360.
    Likewise, for Part D, any payment errors identified as a result of 
any corrections to PDE or DIR data submitted on or before the later of 
the annual deadline for submitted PDE and DIR data are handled as part 
of the current Part D reconciliation process.
    It is our expectation that MA organizations and Part D sponsors 
must be continuously diligent regarding the accuracy and completeness 
of payment-related data they submit to CMS for a payment year, whether 
during or after that payment year, and whether before or after 
applicable reconciliation dates. This expectation is based on existing 
requirements at Sec.  422.310, Sec.  422.504(l), Sec.  
423.329(b)(3)(ii), and Sec.  423.505(k), and our proposed amendments 
that clarify and strengthen these requirements.
b. General Rules for Overpayments (Sec.  422.326(a) Through (c); Sec.  
423.360(a) Through (c))
    We propose at Sec.  422.326(b) and Sec.  423.360(b) that if an MA 
organization or Part D sponsor has identified that it has received an 
overpayment, the MA organization or Part D sponsor must report and 
return that overpayment in the form and manner set forth in the 
section. In paragraphs Sec.  422.326(c) and Sec.  423.360(c), we 
propose that the MA organization or Part D sponsor has identified an 
overpayment if it has actual knowledge of the existence of the 
overpayment or acts in reckless disregard or deliberate ignorance of 
the existence of the overpayment. The terms ``reckless disregard'' and 
``deliberate ignorance'' are part of the definitions of the ``knowing'' 
and ``knowingly'' in section 1128J of the Act, which provides that the 
terms ``knowing'' and ``knowingly'' have the meaning given those terms 
in the False Claims Act (31 U.S.C. 3729(b)(3)). Without such a proposal 
to include ``reckless disregard'' and ``deliberate ignorance'', some MA 
organizations and Part D sponsors might avoid performing activities to 
determine whether an overpayment exists. We also provide that if an MA 
organization or Part D sponsor has received information that an 
overpayment may exist, the organization must exercise reasonable 
diligence to determine the accuracy of this information, that is, to 
determine if there is an identified overpayment.
    Finally, in paragraphs Sec.  422.326(d) and Sec.  423.360(d), we 
propose the requirements for reporting and returning an identified 
overpayment. An MA organization or Part D sponsor must report and 
return any overpayment it received no later than 60 days after the date 
on which it identified it received an overpayment. The statute provides 
an alternative deadline: the date any corresponding cost report is due, 
if applicable. We propose that this alternative deadline is not 
applicable to the Parts C or D programs because, in general, MA 
organizations and Part D sponsors are paid based on their bids, and not 
based on their actual incurred costs.
    The MA organization or Part D sponsor must notify CMS, using a 
notification process determined by CMS, of the amount and reason for 
the overpayment. Also within this 60-day time period, the organization 
must return identified overpayments to CMS in a manner specified by 
CMS, including the amount and reason for the overpayment. We codify at 
paragraph (3) the statutory requirement that any overpayment retained 
by an MA organization or Part D sponsor after the 60-day deadline for 
reporting and returning is an obligation under 31 U.S.C. 3729(b)(3).
    It also is important to note that the MA organization and Part D 
sponsor are deemed to have returned the overpayment when they have 
taken the actions that we will specify, in forthcoming operational 
guidance, to submit the corrected data that is the source of the 
overpayment. We will recover the returned overpayment through routine 
processing according to the systems schedule established in the annual 
operations budget. That is, payments are recovered through the 
established payment adjustment process, not on the 60-day schedule that 
applies to each MA organization or Part D sponsor that has identified 
an overpayment. Rerunning reconciliation each time an entity identifies 
an overpayment that triggers its 60-day clock is simply not feasible 
for CMS.
    Further, there will be circumstances when we may ask the MA 
organization or Part D sponsor to provide an auditable estimate of the 
overpayment amount, reason for overpayment, and make a payment to CMS. 
This may occur, for example, when the Part D reopening occurs prior to 
the end of the look-back period or if an MA organization or Part D 
sponsor had a thoroughly-documented catastrophic loss of stored data. 
Information about the nature of such a request would be detailed in 
forthcoming operational guidance.

[[Page 1998]]

c. Look-Back Period for Reporting and Returning Overpayments
    We propose at Sec.  422.326(e) and Sec.  423.360(e) to codify a 
look-back period for MA organizations and Part D sponsors. MA 
organizations and Part D sponsors would be required to report and 
return any overpayment that they identify within the 6 most recent 
completed payment years. The statute of limitations related to the 
False Claims Act is 6 years from the date of the violation or 3 years 
from the date the relevant government official learns of the situation, 
but in no case more than 10 years from the date of the violation. CMS 
proposes 6 years as the look-back period because we believe this best 
balances government's interest in having overpayments returned with 
entities' interest in finality. Six years also is consistent with the 
CMP provisions, and maintenance of records requirements under the 
contracts. Note that overpayments resulting from fraud would not be 
subject to this limitation of a look-back period.
2. Determination of Payments (Sec.  423.329)
    Section 423.329 (d) describes the low-income cost-sharing subsidy 
payment amount. Currently, that amount is defined as the amount 
described in Sec.  423.782. However, Sec.  423.782 refers to the cost-
sharing paid by the beneficiary, not the cost-sharing subsidy paid on 
behalf of the low-income subsidy eligible individual. As such, we 
propose a technical change to Sec.  423.329(d) to correctly describe 
the low-income cost-sharing subsidy payment amount as it is intended by 
statute and has been implemented and described in interpretive guidance 
by CMS.
    The low-income cost-sharing subsidy amount is correctly described 
in Chapter 13 of our Medicare Prescription Drug Benefit Manual, Premium 
and Cost-Sharing Subsidies for Low-Income Individuals (Rev. 13, July 
29, 2011). Under the basic benefit defined at Sec.  423.100, the low-
income cost-sharing subsidy payment amount is the difference between 
the cost sharing for a non-LIS beneficiary under the Part D plan and 
the statutory cost-sharing for the LIS eligible beneficiary. Under an 
enhanced alternative plan described at Sec.  423.104(f), the cost-
sharing subsidy applies to the beneficiary liability after the plan's 
supplemental benefit is applied. We propose to amend Sec.  423.329(d) 
consistent with this guidance.
    Pursuant to Sec.  423.2305, any coverage or financial assistance 
other than basic prescription drug coverage, as defined in Sec.  
423.100, offered by an employer group health or waiver plans is 
considered ``other health or prescription drug coverage.'' This 
definition applied to all of Medicare Part D. (See 77 FR 22071 and 
22082; April 12, 2012). Therefore, the subsidy amount received by an 
employer group health or waiver plan is the subsidy amount received by 
a Part D plan offering defined standard coverage, as defined in Sec.  
423.100.
    Based on the preceding, we propose to amend Sec.  423.329(d) by 
deleting the reference to Sec.  423.782 and amending Sec.  423.329(d) 
to define the low-income cost-sharing subsidy payment amount on behalf 
of a low-income subsidy eligible individual enrolled in a Part D plan 
for a coverage year as the difference between the Part D cost-sharing 
for a non-low-income subsidy eligible beneficiary under the Part D plan 
and the statutory cost-sharing for a low-income subsidy eligible 
beneficiary.
3. Reopening (Sec.  423.346)
a. Part D Plan Payments Reopening
    As stated in our final rule entitled, ``Medicare Program; Medicare 
Prescription Drug Benefit'' published on January 28, 2005 (70 FR 4194, 
4316), the Secretary's right to inspect and audit any books and records 
of a Part D sponsor or MA organization regarding costs provided to the 
Secretary would not be meaningful, if upon finding mistakes pursuant to 
such audits, the Secretary were not able to reopen final determinations 
made on payment. Therefore, we established reopening provisions that 
would allow us to ensure that the discovery of any overpayment or 
underpayment could be rectified. In the rule, we established that a 
reopening was at our discretion and could occur for any reason within 1 
year of the final determination of payment, within 4 years for good 
cause, or at any time when there is fraud or similar fault. We now 
propose to amend the reopening provisions such that we may perform one 
reopening within 5 years after the date of the notice of the initial 
determination to the Part D sponsors. We also propose to amend the 
provision to accommodate reopening the Coverage Gap Discount 
Reconciliation described at Sec.  423.2320(b).
    At the time the proposed regulations for reopening were published 
in our proposed rule entitled, ``Medicare Program; Medicare 
Prescription Drug Benefit'' in the Federal Register on August 3, 2004 
(69 FR 46694), we had no experience in Medicare Part D to be able to 
gauge the need for a reopening of an initial payment determination. We 
patterned the provisions after the Medicare claims reopening 
regulations found in part 405. The proposed reopening provisions were 
subsequently adopted in our final rule published on January 28, 2005 
(70 FR 4316) entitled, ``Medicare Program; Medicare Prescription Drug 
Benefit.
    Under the current regulation at Sec.  423.346 (a), CMS may reopen 
for any reason within 1 year of the final determination of payment, 
within 4 years for good cause, or any time for fraud or similar fault. 
``Good cause'' is defined in the regulation at Sec.  423.346 (b) as: 
new and material evidence that was not readily available at the time 
the final determination was made; a clerical error in the computation 
of payments; or when evidence that was considered in making the 
determination clearly shows on its face that an error was made. We now 
better understand the need for reopening a payment determination and 
modify our regulation at Sec.  423.346 to align with our experience.
    We have generally performed global reopenings as a result of plan 
sponsor requests, and substantial revisions of PDE and DIR data due to 
plan corrections, CMS corrections of systems error, post reconciliation 
claims activity, and audit and other post reconciliation oversight 
activity. To date, contract years 2006, 2007, and 2008 have been 
reopened, and we have already released guidance stating that we 
intended to eventually perform a global reopening of 2011 once there is 
stability in the data for that year. This experience indicates to us 
that we will likely have to perform a reopening of the initial payment 
determination for every contract year. Therefore, we propose to remove 
the current timeframes for a reopening described in Sec.  423.346 
(a)(1) through (a)(3), remove paragraphs (b) describing good cause 
referred to in paragraph (a)(2), modify paragraph (c) to eliminate the 
reference to ``good cause,'' and amend paragraph (a) such that CMS may 
reopen one time within 5 years of notice of the initial payment 
determination.
    Based upon our experience, we believe that 5 years is adequate time 
to allow for data stability. By 5 years after the initial payment 
determination, additional PDEs or PDE adjustments associated with 
coordination of benefits will be submitted by Part D sponsors 
consistent with the timeframe described at Sec.  423.466(b). We know 
that audits and other post reconciliation oversight activity often take 
place more than 5 years from notice of the initial payment 
determination. However, in light of the overpayment provision at 
section 6402(a) of the Affordable Care Act, which established section 
1128J(d) of the Act and that we propose to codify

[[Page 1999]]

at Sec.  423.360, we do not believe that it is necessary to reopen a 
payment reconciliation after that 5-year period, nor do we believe it 
is necessary to reopen a reconsidered payment determination. Therefore, 
we propose to amend Sec.  423.346 (a) such that CMS will only reopen 
the initial payment determination and will not reopen a reconsidered 
payment determination.
    As stated in our final rule entitled, ``Medicare Program; Medicare 
Prescription Drug Benefit'' published in the Federal Register on 
January 28, 2005 (70 FR 4194), CMS can initiate a reopening on its own 
or an organization could request a reopening, but such reopenings are 
at CMS' discretion. In determining whether to reopen, we will consider 
a number of issues, including, but not limited to, whether the contract 
has terminated and received a final settlement. We will not approve a 
request to reopen for a contract that has terminated and received a 
final settlement. In addition, when we perform a reopening on its own 
initiative, contracts that have been terminated and settled will not be 
included in the reopening.
b. Coverage Gap Discount Reconciliation Reopening
    Under Sec.  423.2320(b), CMS performs a Coverage Gap Discount 
Reconciliation in which CMS reconciles interim payments with invoiced 
manufacturer discount amounts made available to each Part D plan's 
enrollee under the Discount Program. Since the interim coverage gap 
payments are estimates (76 FR 63017, 63027 (October 11, 2011)), a cost-
based reconciliation is performed to ensure that Part D sponsors are 
paid dollar for dollar for all manufacturer discount amounts as 
reported on invoiced PDE data submitted for Part D payment 
reconciliation. Manufacturer discount amounts reported on PDE records 
submitted after the PDE submission deadline for reconciliation continue 
to be invoiced to manufacturers within a maximum of 3 years of the date 
of dispensing, and manufacturers remit payments for invoiced coverage 
gap discount amounts to Part D sponsors.
    We propose to establish a reopening provision for the Coverage Gap 
Discount Reconciliation for the same reasons and under the same 
authority that we established a reopening provision for the Part D 
payment reconciliation process described in our final rule, ``Medicare 
Program; Medicare Prescription Drug Benefit'' published on January 28, 
2005 (70 FR 4194, 4316). In a Health Plan Management System (HPMS) 
memorandum dated April 30, 2010, we stated that the final reconciled 
discount program payments are subject to the reopening provision in 
Sec.  423.346. We anticipate rarely needing to reopen the Coverage Gap 
Discount Reconciliation as a result of the invoicing process that 
continues to occur after the reconciliation process. However, we want 
to leave open the option to reopen if unforeseen events result in 
underpayments or overpayments to Part D sponsors. Therefore, we propose 
to amend Sec.  423.346 to accommodate reopening a Coverage Gap Discount 
Reconciliation.
    Based on the preceding, we propose to revise Sec.  423.346 by 
removing the phrase ``or reconsidered'' from paragraph (a), amending 
paragraph (a) to account for the proposed timing of the Part D 
reopening, removing paragraphs (a)(1) through (3) and (b)(1) through 
(3); adding a new paragraph (b) to accommodate a Coverage Gap Discount 
Reconciliation reopening; and revising paragraph (c) to eliminate the 
reference to ``good cause.''
4. Payment Appeals (Sec.  423.350)
    Pursuant to Sec.  423.2320 (b), we perform a Coverage Gap Discount 
Reconciliation in which we reconcile interim payments with invoiced 
manufacturer discount amounts made available to each Part D plan's 
enrollee under the Discount Program. Current regulations do not 
describe the appeals process for a Coverage Gap Discount 
Reconciliation. We propose to establish an appeals provision for the 
Coverage Gap Discount Reconciliation for the same reasons and under the 
same authority that was used to establish the Part D payment 
reconciliation appeals process described in our final rule, ``Medicare 
Program; Medicare Prescription Drug Benefit'' published on January 28, 
2005 (70 FR 4194, 4317). In an HPMS memorandum dated April 30, 2010, 
CMS stated that the final reconciled discount program payments are 
subject the appeals provisions in Sec.  423.350, and we now propose to 
revise Sec.  423.350 to accommodate a Coverage Gap Discount 
Reconciliation appeals process.
    Consistent with the Part D payment appeals process currently 
described at Sec.  423.350, the proposed changes establish an appeals 
process whereby the final reconciliation of the interim Coverage Gap 
Discount Program payments may be subject to appeal. As stated in our 
final rule describing the Part D payment appeals process (70 FR 4317 
(January 28, 2005)), the Part D payment appeals process only applies to 
perceived errors in the application of the payment methodology and the 
payment information submitted by the Part D sponsor cannot be appealed 
through this process. In the January 28, 2005 final rule (70 FR 4317), 
Part D plans are expected to submit payment information correctly and 
within the established timelines. We codified at Sec.  423.350(a)(2) 
that payment information submitted to CMS under Sec.  423.322 and 
reconciled under Sec.  423.343 is final and may not be appealed nor may 
the appeals process be used to submit new information after the 
submission of information necessary to determine retroactive 
adjustments and reconciliations. We propose to amend Sec.  
423.350(a)(2) to include information that is submitted and reconciled 
under Sec.  423.2320(b) is final and may not be appealed nor may the 
appeals process be used to submit new information after the submission 
of information necessary to determine retroactive adjustments and 
reconciliations.
    Also consistent with the Part D payment appeals process, we propose 
that the request for a reconsideration of the Coverage Gap Discount 
Reconciliation must be filed within 15 days from the date of the final 
payment, which is the date of the final reconciled payment made under 
Sec.  423.2320 (b). Therefore, we propose to amend Sec.  423.350(b)(1) 
by adding a new paragraph (iv) to define the timeframe for filing a 
reconsideration of the Coverage Gap Discount Reconciliation.
    Based on the preceding, we propose to revise Sec.  423.350 by 
adding a new paragraph (a)(1)(v) to allow for an appeal of a reconciled 
coverage gap payment under Sec.  423.2320 (b), by revising paragraph 
(a)(2) to indicate that the payment information submitted to CMS and 
reconciled under Sec.  423.2320(b) is final and may not be appealed, 
and by adding a new paragraph (b)(1)(iv) to define the timeframe for 
appealing the final reconciled payment under Sec.  423.2320(b).
5. Payment Processes for Part D Sponsors (Sec.  423.2320)
    In our final rule entitled, ``Medicare Program; Changes to the 
Medicare Advantage and the Medicare Prescription Drug Benefit Programs 
for Contract Year 2013 and Other Changes'' (77 FR 22071, 22086; April 
12, 2012), CMS described the payment process for Part D sponsors under 
the Coverage Gap Discount Program. Under Sec.  423.2320(a), CMS 
provides monthly interim Coverage Gap Discount Program payments as 
necessary for Part D sponsors to advance coverage gap discounts to 
beneficiaries. Part D

[[Page 2000]]

sponsors report the gap discount amounts to CMS, and through a 
contractor, CMS invoices the manufacturers on a quarterly basis for the 
applicable discount amounts. The manufacturers repay each Part D 
sponsor directly for the invoiced amounts under the Medicare Coverage 
Gap Discount Program Agreement (Agreement) described at Sec.  423.2315. 
Under Sec.  423.2320(b), CMS reconciles the interim payments with 
amounts invoiced to manufacturers.
    In the event that a manufacturer fails to the provide the 
applicable discounts in accordance with the Agreement, we must impose 
civil money penalties (CMPs) equal to the sum of the applicable 
discount the manufacturer would have paid under the Agreement and 25 
percent of that amount. The CMP that is equal to the sum of the 
applicable discount the manufacturer would have paid under the 
agreement is used to pay the applicable discount that the manufacturer 
had failed to provide.
    In our final rule describing the payment process for Part D 
sponsors under the Coverage Gap Discount Program, we did not 
contemplate a payment process in the event that a manufacturer becomes 
bankrupt and does not pay the Part D sponsors for quarterly invoiced 
amounts under the Agreement. Even though we will impose a CMP on a 
bankrupt manufacturer in an effort to collect the unpaid invoiced 
amounts, the bankruptcy settlements will likely result in the CMP being 
modified or reduced. In order to ensure that the Part D sponsors have 
the funds available to advance the gap discounts at the point-of-sale, 
as required under section 1860D-14A(c)(1)(A)(ii) of the Act, we now 
propose to amend Sec.  423.2320 such that we will assume financial 
liability for the applicable discount by covering the costs of the 
quarterly invoices that go unpaid by a bankrupt manufacturer at the 
time of the Coverage Gap Discount Reconciliation described at Sec.  
423.2320(b). We would then file a proof of claim with the bankruptcy 
court to recover those costs from the bankrupt manufacturer.
    The proposed policy that CMS assume financial liability for the 
applicable discounts in the event of a manufacturer bankruptcy is 
consistent with CMS' payment processes for Part D sponsors under the 
Medicare Coverage Gap Discount Program. Under Sec.  423.2320 (a), CMS 
provides interim payments to ensure that Part D sponsors have the funds 
available to advance the coverage gap discount to beneficiaries at 
point of sale. Under Sec.  423.2320 (b), CMS reconciles the interim 
payments with the invoiced manufacturer discount amounts in order make 
the PDP sponsor whole for the gap discount amount provided to the 
beneficiaries at point of sale. (For more information on these 
provisions, see October 11, 2011 final rule (76 FR 63017, 63027).) In 
order to remain consistent with the intent of the Coverage Gap Discount 
Reconciliation to make the Part D sponsor whole for the gap discounts 
amounts advanced at point of sale, CMS must provide payments to the 
Part D sponsor to cover the cost of the applicable discount in the 
event that the manufacturer cannot pay the quarterly invoices due to a 
bankruptcy. We propose to cover the costs of unpaid quarterly invoices 
only in the event that a manufacturer becomes bankrupt. We would not 
cover the cost of unpaid quarterly invoices for any other reasons 
because, in the event that a manufacturer fails to pay the quarterly 
invoices, we will impose CMPs that will cover the cost of the unpaid 
invoices. In the event that a manufacturer becomes bankrupt, we are 
concerned that the court will either modify or reduce the amount of the 
CMP, making the CMP process ineffective for covering the cost of the 
invoices and leaving the Part D sponsor in the position of having to 
cover the costs of the gap discount.
    We propose to implement this policy by adjusting the Coverage Gap 
Discount Reconciliation to account for quarterly invoices that go 
unpaid as a result of a manufacturer becoming bankrupt. This adjustment 
will only occur for manufacturer discount amounts as they are reported 
on PDEs submitted by the submission deadline for the Part D 
reconciliation.
    Based on the preceding, we propose to add a new paragraph (c) to 
Sec.  423.2320 to describe a process for accounting for quarterly 
invoiced amounts that go unpaid by a bankrupt manufacturer.
6. Risk Adjustment Data Requirements (Sec.  422.310)
    We propose to strengthen existing regulations related to the 
accuracy of risk adjustment data by amending Sec.  422.310 on risk 
adjustment data validation. First, we propose to renumber existing 
paragraph Sec.  422.310(e) as paragraph (e)(2) and add new paragraph 
(e)(1), which would require that any medical record reviews conducted 
by an MA organization must be designed to determine the accuracy of 
diagnoses submitted under Sec.  422.308(c)(1) and Sec.  422.310(g)(2). 
(Paragraph Sec.  422.308(c)(1) addresses adjustments to payments for 
health status, and paragraph Sec.  422.310(g)(2) addresses deadlines 
for risk adjustment data submission, including the final risk 
adjustment data submission deadline prior to CMS' calculation of the 
final risk factors for a payment year.) Under our proposal, medical 
record reviews conducted by an MA organization cannot be designed only 
to identify diagnoses that would trigger additional payments by CMS to 
the MA organization; and medical record review methodologies must be 
designed to identify errors in diagnoses submitted to CMS as risk 
adjustment data, regardless of whether the data errors would result in 
positive or negative payment adjustments. This proposed amendment 
furthers our goals of improving payment accuracy and reducing payment 
errors.
    We also propose to amend Sec.  422.310(g) regarding deadlines for 
submission of risk adjustment data. Our current procedures generally 
permit submission of risk adjustment data after the final risk 
adjustment submission deadline only to correct overpayments. We propose 
to revise the regulation to explicitly permit late submissions only to 
correct overpayments but not to submit diagnoses for additional 
payment.
    Finally, we propose to align this regulation with proposed Sec.  
422.326 by making two additional changes in paragraph (g). First, we 
propose the deletion of the January 31 deadline in subparagraph (2) and 
replacing it with the statement that CMS will announce the deadline by 
which final risk adjustment data must be submitted to CMS or its 
contractor. This means that the risk adjustment data submission 
deadline would also function as the Part C applicable reconciliation 
date for purposes of proposed Sec.  422.326 on overpayment rules, as 
discussed in section II.B.1.b. of this proposed rule. Second, we 
propose to add subparagraph (3) to Sec.  422.310(g). Proposed paragraph 
(3) cites Sec.  422.326 as the source of rules for submission of 
corrected risk adjustment data after the final risk adjustment data 
submission deadline, that is, after applicable reconciliation as 
defined at Sec.  422.326(a).
7. RADV Appeals
a. Background
    We published Risk Adjustment Data Validation (RADV) appeals 
regulations in the April 15, 2010 Federal Register. These rules were 
proposed and finalized under CMS's authority to establish Medicare 
Advantage (MA) program standards by regulation at section 1856(b)(1) of 
the Act and are found at Sec.  422.311 et seq.
    As explained in the preamble of that final rule, Subpart G of the 
MA regulations at part 422 describes how

[[Page 2001]]

payment is made to MA organizations. These payment principles are based 
on sections 1853, 1854, and 1858 of the Act. Subpart G also sets forth 
the requirements for making payments to MA organizations offering local 
and regional MA plans, including calculation of MA capitation rates. 
Section 1853(a)(3) of the Act requires that we risk adjust our payments 
to MA organizations. Risk adjustment strengthens the Medicare program 
by ensuring that accurate payments are made to MA organizations based 
on the health status plus demographic characteristics of their enrolled 
beneficiaries and ensures that MA organizations are paid appropriately 
for their plan enrollees (that is, less for healthier enrollees 
expected to incur lower health care costs and more for less healthy 
enrollees expected to incur higher health care costs). Accurate 
payments to MA organizations also help ensure that providers are paid 
appropriately for the services they provide to MA beneficiaries. In 
general, the current risk adjustment methodology relies on enrollee 
diagnoses, as specified by the International Classification of Disease, 
currently the Ninth Revision Clinical Modification guidelines (ICD-9-
CM) to prospectively adjust capitation payments for a given enrollee 
based on the health status of the enrollee. Diagnosis codes determine 
the risk scores, which in turn determine the risk adjusted 
reimbursement. As a result, physicians and providers must focus 
attention on complete and accurate diagnosis reporting according to the 
official ICD-9-CM coding guidelines (that is, coding diagnoses 
accurately and to the highest level of specificity).
    MA enrollee Hierarchical Condition Categories (HCCs) are assigned 
based on risk adjustment diagnoses from FFS claims and from risk 
adjustment data submitted to us by MA organizations via the Risk 
Adjustment Payment System (RAPS). The CMS-HCCs contribute to an 
enrollee's risk score, which is used to adjust a base payment rate. 
Essentially, the higher the risk score for an enrollee, the higher the 
expected health care cost for the enrollee. The HCC data that MA 
organizations submit to CMS via the RAPS system is self-reported by the 
MA organization and does not go through a validation review before 
being incorporated into a given beneficiary's risk-profile. Since there 
is an incentive for MA organizations to potentially over-report 
diagnoses so that they can increase their payment, the Agency audits 
plan-submitted diagnosis data a few years later to ensure they are 
supported by medical record documentation.
    Verifiable medical record documentation is the key to accurate 
payment and successful data validation. We annually select contracts 
for RADV audits. RADV audits are intended to confirm the presence of 
risk adjustment conditions (that is, diagnoses that map to HCCs) as 
reported by MA organizations for their enrollees and confirmed via 
medical record documentation. RADV audits occur after the final risk 
adjustment data submission deadline for the MA contract year. We 
validate the HCC data submitted by MA organizations by reviewing 
hospital inpatient, hospital outpatient, and physician/practitioner 
provider medical records. The focus of this medical record review 
activity is on diagnoses related to the enrollee's HCC profile. Risk 
adjustment discrepancies are identified when the enrollee's HCCs used 
for payment (based upon MA organization-submitted data) differ from the 
HCCs assigned based on the medical record, under the RADV audit 
process. Risk adjustment discrepancies can be aggregated to determine 
an overall level payment error. In turn, payment error for a sample of 
contract enrollees can be extrapolated to calculate a contract-level 
payment error estimate.
    Since finalizing these rules in 2010, we have conducted additional 
RADV audits and believe that some of the appeals provisions finalized 
in the 2010 RADV Appeals final rule should now be modified to prevent 
confusion, and to strengthen the RADV appeals process. We therefore, 
propose revisions to the RADV appeals regulations finalized in the 
April 15, 2010 Federal Register. These proposed revisions clarify 
program requirements and simplify the RADV appeals process. These 
proposed RADV provisions will apply to any RADV determinations issued 
on or after the effective date of this regulation.
b. RADV Definitions
    We propose to amend the RADV definitions at Sec.  422.2 as follows:

 Removing the following definitions:
    ++ ``Initial Validation Contractor (IVC)'' means the first level of 
medical record review under the RADV audit process.
    ++ ``RADV payment error calculation appeal process'' means an 
administrative process that enables MA organizations that have 
undergone RADV audit to appeal the CMS calculation of an MA 
organization's RADV payment error.
    ++ ``The one best medical record for the purposes of Medicare 
Advantage Risk Adjustment Validation (RADV)'' means the clinical 
documentation for a single encounter for care (that is, a physician 
office visit, an inpatient hospital stay, or an outpatient hospital 
visit) that occurred for one patient during the data collection period. 
The single encounter for care must be based on a face-to-face encounter 
with a provider deemed acceptable for risk adjustment and documentation 
of this encounter must be reflected in the medical record.
 Adding the following definition:
    ++ ``RADV appeal process'' means an administrative process that 
enables MA organizations that have undergone RADV audit to appeal the 
Secretary's medical record review determinations and the Secretary's 
calculation of an MA organization's RADV payment error.
 Revising the following definitions:
    ++ Risk adjustment data validation (RADV) audit means a payment 
audit of a Medicare Advantage (MA) organization administered by CMS or 
the Secretary that ensures the integrity and accuracy of risk 
adjustment payment data.
    ++ ``Attestation process'' means a CMS-developed RADV process that 
enables MA organizations undergoing RADV audit to submit CMS-generated 
attestations for eligible medical records with missing or illegible 
signatures or credentials. The purpose of the CMS-generated 
attestations is to cure signature and credential issues for eligible 
medical records. CMS-generated attestations do not provide an 
opportunity for a provider or supplier to replace a medical record or 
for a provider or supplier to attest that a beneficiary has the medical 
condition.
c. Publication of RADV Methodology
    In the October 22, 2009 Notice of Proposed Rule Making (NPRM), and 
as reinforced in the April 15, 2010 Final Regulation, CMS indicated 
that we would, ``publish its RADV methodology in some type of public 
document--most likely, a Medicare Manual, so that the public can review 
and provide comment as it deems necessary''. We also indicated that we 
would provide an annual notice of RADV audit methodology. Our last 
RADV-related notice of methodology was published in February, 2012. We 
will continue to publish a notice of the methodology employed, but will 
do so only if there is a change in the RADV methodology that would 
require publication. We note that these notices of RADV audit

[[Page 2002]]

methodology updated information provided on RADV audit methodology 
provided in the October 22, 2009 proposed rule and April 15, 2010 final 
rule.
    In addition, we provided in the October 22, 2009 proposed rule 
preamble that we would provide an expanded explanation of methodology 
and payment error calculation factors as a part of each audit report of 
findings that we send to MA organizations that undergo RADV audit. Such 
explanation and factors have been and will continue to be part of the 
RADV audit report(s) that CMS provides health plans that have undergone 
RADV audits.
d. Proposal To Update RADV Appeals Terminology (Sec.  422.311)
    Current RADV regulations utilize the following terms for the CMS-
issued RADV audit report: Audit report post medical record review; RADV 
audit report; IVC-level RADV audit report; and RADV audit report of 
finding. This use of multiple terms to refer to what is the same audit 
report (the RADV audit report that CMS issues following conclusion of 
the medical record review portion of the audit) is potentially 
confusing. Therefore, we propose amending the RADV regulations 
throughout to adopt one common term to refer to RADV audit reports: 
``RADV Audit Report''. By standardizing terminology throughout the RADV 
regulations, the proposed amendment provides clarity which may lead to 
increased efficiency. We welcome comment on this proposal.
    As mentioned earlier in the description of RADV-related definitions 
that have changed, we have revised certain RADV-related definitions to 
accommodate changes to both the RADV audit process and the RADV appeals 
process. One definition that we have removed from the RADV regulations 
is Initial Validation Contractor, or IVC. The RADV medical record 
review process no longer utilizes ``initial'' and ``secondary'' 
validation contractors to conduct medical record review under RADV. 
Instead we now utilize medical record reviewers to code medical records 
undergoing RADV review. These reviewers may be employed by the same or 
different medical record review contractors. Therefore, the term 
``IVC'' is no longer relevant to the RADV audit process. We therefore 
propose to remove this term from the RADV regulations at the following 
citations: Sec.  422.311(c)(2)(i)(B) through (D); Sec.  
422.311(c)(2)(ii)(B), Sec.  422.311(c)(2)(iii)(A), Sec.  
422.111(c)(2)(v), (vi), Sec.  422.311(c)(3)(ii)(A), and Sec.  
422.311(c)(3)(iii)(A) and (B). We invite comment on this proposal.
e. Proposal To Simplify the RADV Appeals Process
    Currently, there are two types of RADV-related appeals processes 
described in Federal regulations at Sec.  422.311 et seq.: Medical 
record review-determination appeals and RADV payment error calculation 
appeals. RADV medical record review-determination appeal requirements 
and procedures are discussed at Sec.  422.311(b)(3) and Sec.  
422.311(c)(2). Medical record review determination appeal is a two-
stage administrative appeal process: The first step is a hearing by a 
hearing officer, followed by a CMS Administrator-level review. This 
appeal procedure provides MA organizations with an opportunity to 
appeal RADV medical record review determinations that are made by 
coders reviewing the medical record documentation submitted by MA 
organizations undergoing RADV audit. The second type of RADV appeal, 
payment error calculation appeal, is discussed at Sec.  422.311(c)(3). 
Payment error calculation appeal is a three-pronged appeal process: 
Reconsideration, followed by a hearing officer review, followed by CMS 
Administrator-level review. This appeal process was specifically 
designed to afford MA organizations the opportunity to appeal CMS's 
contract-level RADV payment error calculation.
    We propose that the administrative appeals language described at 
Sec.  422.311(b)(3) and Sec.  422.311(c)(2) for RADV medical record 
review determination appeals and Sec.  422.311(c)(3) for RADV payment 
error calculation appeals be replaced with new regulatory language 
proposed Sec.  422.311(c)(1) et seq., that combines the two existing 
RADV appeal policies and procedures into one set of requirements and 
one process. We propose to combine the two RADV appeals processes into 
one combined RADV appeals process that is comprised of three 
administrative steps: Reconsideration, hearing officer review, and CMS 
Administrator-level review. A three-step administrative appeals process 
comprising reconsideration, hearing officer review, and Administrator-
levels of review is a common administrative appeals model used 
elsewhere within the Medicare managed care program, such as in 
appealing contract award determinations and intermediate sanctions. The 
combined RADV appeal process that we are proposing at new Sec.  
422.311(c)(1) et seq., also has the benefit of simplifying what is 
today a complex two-track appeal process into one process. While both 
CMS and the MA industry will benefit from simplifying this process, MA 
organizations also obtain an additional level of review under the 
combined approach since MA organizations will be afforded a 
reconsideration appeal step for medical record review determinations 
that is today--not part of the existing RADV appeal process. Shortening 
the existing two-track appeal process should also reduce the resources 
and level of effort needed from both MA organizations and CMS in 
participating in a RADV appeal proceeding. Under this proposal, MA 
organizations can simply request to appeal their RADV audit findings 
one time and specify whether they want to appeal either their medical 
record review determination(s), payment error calculation, or both. The 
specific details regarding this proposed process follow. We propose 
these changes based upon our experience with RADV appeals and because 
we hope to reduce the burden associated with undertaking RADV appeals 
on both MA organizations and CMS. The details of this proposed policy 
and procedure follows.
(1) Issues Eligible for RADV Appeal
    Current regulations at Sec.  422.311(c)(2) et seq., and Sec.  
422.311(c)(3) et seq., specify RADV-related medical record review and 
payment error calculation documents and issues eligible for the medical 
record review determination and payment error calculation appeal 
processes. We propose to amend the policies and procedures around 
issues eligible for RADV appeals at Sec.  422.311(c)(2) and Sec.  
422.311(c)(3) by combining proposed policies and procedures for the 
existing two-pronged appeal approach into one set of policies and 
procedures for RADV appeals at the new Sec.  part 422.311(c)(2)(iv). At 
Sec.  422.311(c)(2)(i), we propose that as a general rule, MA 
organizations may appeal RADV medical record review determinations and 
RADV payment error calculation, though in order to be eligible to 
pursue these appeals, we specify at proposed Sec.  422.311(c)(2)(i)(A) 
and (B) that MA organizations must adhere to established RADV audit 
procedures and requirements and adhere to RADV appeals procedures and 
requirements. At Sec.  422.311(c)(2)(ii) we propose that failure to 
follow RADV audit procedures and requirements and RADV appeals 
procedures and requirements will render the MA organization's request 
for RADV appeal invalid. Furthermore, at proposed Sec.  
422.311(c)(2)(iii) we stipulate that the

[[Page 2003]]

MA organization's written request for medical record review 
determination appeal must specify the audited HCC(s) that have been 
identified pursuant to RADV audit as being in error, and further 
specify that MA organizations must provide a justification in support 
of the audited HCC(s) that the MA organization elects to appeal. At 
Sec.  422.311(c)(2)(i) (iv) we propose that for each audited HCC, MA 
organizations may appeal one medical record that has undergone RADV 
medical record review and that if an attestation was submitted to cure 
a signature or credential issue, that attestation may likewise be 
included in the HCC appeal. For example, if an MA organization 
submitted a medical record that did not contain a signature and/or 
credential--and the MA organization submitted an attestation to cure 
the error that CMS subsequently failed to accept--the MA organization 
could choose to appeal CMS's determination to not accept the submitted 
attestation. We reiterate that the purpose of CMS-generated 
attestations is to cure signature and credential errors associated with 
an eligible submitted medical record and not to provide an opportunity 
for a provider or supplier to attest that a beneficiary has a certain 
medical condition. Evidence for the existence of the medical condition 
is found in a medical record.
    We are proposing to modify our language at Sec.  
422.311(c)(2)(i)(v) to clarify existing RADV appeals provisions which 
stipulate that MA organizations must adhere to the ``one best medical 
record'' policy. Under changes to the RADV audit methodology announced 
by CMS in February 2012, we now allow MA organizations to submit more 
than one medical record (that is, more than the ``one best medical 
record'') during the RADV audit process to validate an audited CMS-HCC. 
However, for purposes of appealing a CMS medical record review 
determination, we will not permit organizations to appeal multiple 
medical records but will instead--require that MA organizations 
identify a record from amongst those records submitted, and to submit 
that record for appeal. For each audited HCC, MA organizations may 
appeal only one medical record that has undergone RADV review. This 
policy was published in the February 2012 White Paper and is not 
included in this proposed rule.
    At Sec.  422.311(c)(2)(vi) we propose that a written request for 
RADV payment error calculation appeal must clearly specify the MA 
organization's own RADV payment error calculation and must also specify 
where the payment error calculation was erroneous.
(2) Issues Not Eligible for RADV Appeals
    At Sec.  422.311(c)(3) we propose documents and issues that are 
ineligible for RADV appeals. Consistent with the overall approach of 
combining into one RADV appeals process what was heretofore two 
separate RADV appeals processes--by way of this new proposed section, 
we propose to amend existing regulations at Sec.  422.311(c)(3). At new 
Sec.  422.311(c)(3), we propose that MA organizations' request for 
appeal may not include HCCs, medical records or other documents beyond 
the audited HCC, selected medical record and any accompanying 
attestation that the MA organization chooses to appeal. We specify at 
Sec.  422.311(c)(3)(ii) that the MA organizations may not appeal CMS's 
medical record review determination methodology or CMS's payment error 
calculation methodology. This is a clarification to existing RADV 
regulations at Sec.  422.311(c)(3)(D) which specifies that MA 
organizations may not appeal CMS's payment error calculation 
methodology. At Sec.  422.311(c)(3)(iii) we specify that MA 
organizations may not appeal RADV medical record review-related errors 
when appealing RADV error-calculation issues since medical record 
review determination issues must be resolved before we can calculate 
RADV payment errors. And at Sec.  422.311(c)(3)(iv) we specify that 
RADV errors that result from an MA organization's failure to submit a 
medical record are not eligible for appeal.
(3) Manner and Timing of a Request for RADV Appeal
    We propose to replace existing RADV regulations at Sec.  
422.311(c)(2)(iii) et seq., and Sec.  422.311(c)(3)(iii) et seq., 
regarding the manner and timing of a request for RADV appeals. Again, 
at Sec.  422.311(c)(5), we propose to combine the formerly two separate 
sets of requirements and procedures into one RADV appeals process 
addressing the request for RADV appeal. At Sec.  422.311(c)(5)(i) we 
propose that at the time the Secretary issues her RADV audit report, 
the Secretary notifies audited MA organizations that they may appeal 
RADV HCC errors that are eligible for medical record review 
determination appeal and may appeal the Secretary's RADV payment error 
calculation. At Sec.  422.311(c)(5)(ii) we specify that MA 
organizations have 30 days from the date of CMS's issuance of the RADV 
audit report to file a written request with CMS for RADV appeal. This 
request for RADV appeal must specify whether the MA organization 
requests medical record review determination appeal, whether the MA 
organization requests RADV payment error calculation appeal, or whether 
the MA organization requests both medical record review determination 
appeal and RADV payment error calculation appeal-- and in each 
instance-- the issues with which the MA organization disagrees, and the 
reasons for the disagreements. See proposed regulations at Sec.  
422.311(c)(6) et seq.
    At new Sec.  422.311(c)(5)(ii) we specify that while MA 
organizations may now elect to appeal either medical record review 
determination, payment error calculation, or both--they must notify CMS 
which issues they will appeal at the same time. This new provision 
replaces existing RADV appeals requirements regarding notification at 
Sec.  422.311(c)(2)(iii) and Sec.  422.311(c)(3)(iii)(C).
    For MA organizations that elect both medical record review 
determination appeal and RADV payment error calculation appeal, we 
specify at Sec.  422.311(c)(5)(iii)(A) and (B) that the Secretary will 
adjudicate the request for RADV payment error calculation following 
conclusion of reconsideration of the MA organization's request for 
medical record review determination appeal. This is necessary because 
RADV payment error calculations are based upon the outcomes of medical 
record review determinations. For example, for an MA organization that 
appeals both medical record review determinations and payment error 
calculations, the reconsideration official would first adjudicate and 
rule on the medical record review determinations and then proceed to 
recalculate the RADV payment error.
(4) Reconsideration Stage
    Under current RADV appeals procedures, only the RADV payment error 
calculation appeal process contains a reconsideration step. We propose 
to amend existing regulations at Sec.  422.311(c)(3)(iii)(C) and Sec.  
422.311(c)(3)(v), (vi), and (vii) by proposing a new reconsideration 
stage for RADV appeals at Sec.  422.311(c)(6) et seq. Reconsideration 
is the first stage of the new RADV appeals process and will apply to 
both medical record review determinations and error calculation issues 
being appealed. Therefore, MA organizations that elect to appeal RADV 
audit findings de facto begin the appeal process with the 
reconsideration step. At proposed Sec.  422.311(c)(6)(i) we specify 
that a MA organization's written request for medical record review

[[Page 2004]]

determination reconsideration must specify the audited HCC identified 
as being in error that the MA organization wishes to appeal; and to 
provide a justification in support of the audited HCC chosen for 
appeal. At proposed Sec.  422.311(c)(6)(ii) we specify that the MA 
organizations' written request for payment error calculation 
reconsideration must include the MA organization's own RADV payment 
error calculation that clearly indicates where the RADV payment error 
calculation was erroneous. The request for payment error calculation 
reconsideration may also include additional documentary evidence 
pertaining to the calculation of the error that the MA organization 
wishes the reconsideration official to consider.
    At proposed Sec.  422.311(c)(6)(iii) we describe the conduct of the 
reconsideration process that is being proposed. We specify that for 
medical record review determination reconsideration, a medical record 
review professional who was not involved in the initial medical record 
review determination of the disputed HCC reviews the medical record and 
accompanying dispute justification; and reconsiders the initial audited 
HCC medical record review determination. For payment error calculation 
reconsideration, CMS ensures that a third party not involved in the 
initial RADV payment error calculation reviews the RADV payment error 
calculation, reviews the MA organization's own RADV payment error 
calculation, and recalculates the payment error in accordance with 
CMS's RADV payment error calculation procedures.
    At proposed Sec.  422.311(c)(6)(iv), we specify that the 
reconsideration official issues a written reconsideration decision to 
the MA organization, and that the reconsideration official's decision 
is final unless the MA organization disagrees with the reconsideration 
official's decision. If the MA organization disagrees with the 
reconsideration official's decision, it may request a hearing.
(5) Hearing Stage
    Existing regulations at Sec.  422.311(c)(2)(iv) through (ix) and 
Sec.  422.311(C)(4) et seq., specify the procedures under which CMS 
conducts hearings under the RADV appeals process for medical record 
review and payment error calculation. We propose to replace these 
provisions with new hearing requirements and procedures at Sec.  
422.311(c)(7)(iv).
    At Sec.  422.311(c)(7)(i), we propose that at the time the RADV 
appeals reconsideration official issues his/her reconsideration 
determination to the MA organization, the reconsideration official 
notifies the MA organization of any RADV audited HCC errors and or 
payment error calculations that are eligible for RADV hearing. At Sec.  
422.311(c)(7)(ii), we specify that a MA organization that requests a 
hearing officer review must do so in writing in accordance with 
procedures established by CMS. At Sec.  422.311(c)(7)(iii), we specify 
that a written request for a hearing must be filed with the Hearing 
Officer within 30 days of the date the MA organization receives the 
reconsideration officer's written reconsideration decision. If the MA 
organization appeals the medical record review reconsideration 
determination, the written request for RADV hearing must include a copy 
of the written decision of the reconsideration official; must specify 
the audited HCCs that the reconsideration official confirmed as being 
in error; and must specify a justification as to why the MA 
organization disputes the reconsideration official's determination. If 
the MA organization appeals the RADV payment error calculation, the 
written request for RADV hearing must include a copy of the written 
decision of the reconsideration official and must include the MA 
organization's own RADV payment error calculation that clearly 
specifies where the CMS's payment error calculation was erroneous.
    At Sec.  422.311(c)(7)(iv), we propose that a CMS hearing officer 
conduct the RADV hearing. At Sec.  422.311(c)(7)(v), we specify terms 
and conditions under which a hearing officer may be disqualified. 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. A party to the hearing who objects to the 
assigned hearing officer must notify that officer in writing at the 
earliest opportunity. The hearing officer must consider the objections, 
and may, at his or her discretion, either proceed with the hearing or 
withdraw. If the hearing officer withdraws, another hearing officer 
will conduct the hearing. 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 
CMS.
    At Sec.  422.311(c)(7)(vi) we propose that the hearing officer 
reviews the medical record and any accompanying attestation that the MA 
organization selected for review, the reconsideration official's 
payment error calculation (if appealed), the reconsideration official's 
written determination, and the written justification submitted by the 
MA organization and CMS in response to the reconsideration official's 
determination.
    At Sec.  422.311(c)(7)(vii) we propose RADV appeal hearing 
procedures. We propose that the hearing officer has full power to make 
rules and establish procedures, consistent with the law, regulations, 
and rulings. These powers include the authority to dismiss the appeal 
with prejudice and take any other action which the hearing officer 
considers appropriate, including for failure to comply with RADV audit 
and appeals rules and procedures. We propose that the hearing be 
altogether on the record unless the hearing officer, at his or her full 
discretion, approves a parties request for a live or telephonic hearing 
regarding some or all of the medical records in dispute, or if the 
hearing office schedules a live or telephonic hearing on its own 
motion. The hearing officer's review will be solely limited to the 
record. The record is comprised of the RADV reviewed medical record and 
any accompanying attestation that the MA organization selected for 
review, the reconsideration official's payment error calculation (if 
appealed), the reconsideration official's written determination, the 
written justification submitted by the MA organization in response to 
the reconsideration official's determination, and written briefs from 
the MA organization explaining why they believe the reconsideration 
official's determination was incorrect. In addition, the record will be 
comprised of a brief from CMS that responds to the MA organization's 
brief.
    In terms of specifying the conduct of the hearing, we propose at 
Sec.  422.311(c)(7)(vii)(B) that the hearing officer neither receives 
testimony nor accepts any new evidence that is not part of the record. 
At Sec.  422.311(c)(7)(vii) we propose that the hearing officer be 
given the authority to decide whether to uphold or overturn the 
reconsideration official's decision, and pursuant to this decision--to 
send a written determination to CMS and the MA organization, explaining 
the basis for the decision.
    At Sec.  422.311(c)(7)(ix), we propose that in accordance with the 
hearing officer's decision, a third party not involved in the initial 
RADV payment error calculation recalculate the MA organization's RADV 
payment error and issue a new RADV audit report to the appellant MA 
organization and CMS. For MA organizations appealing the

[[Page 2005]]

RADV payment error calculation only, we propose that a third party not 
involved in the initial RADV payment error calculation recalculate the 
MA organization's RADV payment error and issue a new RADV audit report 
to the appellant MA organization and CMS. At Sec.  422.311(c)(7)(x) we 
propose that the hearing officer's decision be final unless the 
decision is reversed or modified by the CMS Administrator.
(6) CMS Administrator Review Stage
    Existing regulations at Sec.  422.311(c)(2)(x) et seq., and Sec.  
422.311(C)(4)(vi) et seq., specify the CMS Administrator-level review 
procedures that CMS adheres to under the current RADV appeals process 
for medical record review determinations and payment error calculation. 
We propose to replace these regulations with new RADV appeal-related 
CMS Administrator review requirements and procedures at Sec.  
422.311(c)(8).
    At Sec.  422.311(c)(8)(i) and (ii), we propose that a request for 
CMS Administrator review must be made in writing within 30 days of 
receipt of the hearing officer's decision; and must be filed with the 
CMS Administrator by CMS or an MA organization. At Sec.  
422.311(c)(8)(iii), we propose that after receiving a request for 
review, the CMS Administrator has the discretion to elect to review the 
hearing officer's decision or to decline to review the hearing 
officer's decision. At Sec.  422.311(c)(8)(iv) we propose that if the 
CMS Administrator elects to review the hearing decision--the 
Administrator acknowledges the decision to review the hearing decision 
in writing and notifies CMS and the MA organization of their right to 
submit comments within 15 days of the date of the notification. At 
Sec.  422.311(c)(8)(iv)(B), we propose that the CMS Administrator be 
limited to the review of the record and that the record be comprised of 
the hearing record, and written arguments from the MA organization and/
or CMS explaining why either or both parties believe the hearing 
officer's determination was correct or incorrect.
    Regarding Administrator-level review procedures at Sec.  
422.311(c)(8)(vi), we propose that the Administrator reviews the record 
and determines whether the hearing officer's determination should be 
upheld, reversed, or modified. At Sec.  422.311(c)(8)(v), we propose 
that the Administrator render his or her final decision in writing to 
the parties within 60 days of acknowledging his or her decision to 
review the hearing officer's decision. At Sec.  422.311(c)(8)(vi), we 
propose that the decision of the hearing officer become final if the 
Administrator declines to review the hearing officer's decision or does 
not make a decision within 60 days.
    Combining these existing RADV medical record review determination 
and payment error calculation appeals policies and processes improves 
the overall appeals process by strengthening the depth and integrity of 
these procedures. We also believe that doing so improves overall RADV 
appeals procedures by providing clarity that leads to greater 
efficiencies in adjudicating RADV appeals. We welcome comments on these 
proposals.
f. Proposal To Expand Scope of RADV Audits
    Federal regulations at Sec.  422.311(a) specify that RADV audits 
are conducted by CMS. We propose to amend this regulation at Sec.  
422.311(a) by specifying that the Secretary of the Department of Health 
and Human Services, along with CMS, may conduct RADV audits beginning 
with the effective date of this regulation. We also propose to amend 
RADV definitions at Sec.  422.2 to specify that The Secretary of the 
Department of Health and Human Services, along with CMS, may conduct 
RADV audits. We welcome comment on this proposal.
g. Proposal To Clarify the RADV Medical Record Review Determination 
Appeal Burden of Proof Standard
    Our regulations at Sec.  422.311(c)(3)(iv) specify that for RADV 
payment error calculation appeals, MA organizations bear the burden to 
prove that CMS failed to follow its stated RADV payment error 
calculation methodology. However, RADV regulations do not specify a 
burden of proof standard for the RADV medical record review 
determination appeal process. The absence of a clearly-defined burden 
of proof standard for RADV medical record review determination appeals 
creates an appeal environment where MA organizations, CMS and RADV 
appellate officials are free to interpret and apply different burden of 
proof standards when arguing or reviewing appeals cases. We propose to 
amend the rule with new Sec.  422.311(c)(4) which specifies that the 
burden of proof for all RADV determinations--be they payment error 
calculation or RADV medical record review determinations--is on MA 
organizations to prove, based on a preponderance of the evidence, that 
CMS's determination was erroneous.
    This approach would stand in contrast to a burden of proof standard 
in which the MA organization were to prove that a valid diagnoses 
exists on the record, and that therefore, the audited HCC has been 
validated. This proposed amendment to the rule provides the medical 
record review determination process a clear burden of proof standard 
which more aligns with the existing RADV payment error calculation 
appeals burden of proof standard. Doing so also improves the overall 
RADV appeals procedures by providing clarity that leads to greater 
efficiencies in adjudicating RADV appeals. We invite comment on this 
proposal.
h. Proposal To Change RADV Audit Compliance Date
    Currently, the compliance date for RADV audits is the due date when 
MA organizations selected for RADV audit must submit medical records to 
CMS or its contractors. We are proposing to change the compliance date 
for meeting RADV audit requirements for the validation of risk 
adjustment data to the due date when MA organizations selected for RADV 
audit must submit medical records to the Secretary--and not only CMS. 
See proposed regulation language at Sec.  422.311(b)(2).

B. Improving Payment Accuracy

8. Recovery Audit Contractor (RAC) Determination Appeals (Proposed Part 
422 Subpart Z and Part 423 Subpart Z)
a. Background
    Section 306 of the Medicare Prescription Drug, Improvement and 
Modernization Act of 2003 (MMA) required the Secretary to conduct a 
demonstration to determine whether recovery auditors could be used 
effectively to identify improper payments paid under Medicare Part A 
and Part B claims. We conducted the demonstration from March 2005 to 
March 2008 in six states. The Recovery Audit demonstration established 
recovery auditors as a successful tool in the identification and 
prevention of improper Medicare payments.
    In December 2006, the Tax Relief and Health Care Act of 2006 
(TRHCA) (Pub. L. 109-432) was enacted. Section 302(a) of the TRHCA 
created a permanent Medicare Recovery Audit Contractor (RAC) program 
and added a new paragraph (h) to section 1893 of the Social Security 
Act (the Act) that required us to establish a national recovery audit 
program for Medicare Part A and Part B. The national Medicare Fee-For-
Service (FFS) Recovery Audit program was established on January 1, 
2010.
    Section 6411(b) of the Affordable Care Act amended section 
1893(h)(1) of the Act by requiring the establishment of recovery audit 
programs for Medicare

[[Page 2006]]

Parts C and D, in addition to the RAC program already in place for 
Medicare A and B.
    On December 27, 2010, we published a notice in the Federal Register 
(75 FR 81278) requesting comments on how to best implement the RAC 
program for Parts C and D. Analysis of the comments received assisted 
us with implementation of the Part C and D RACs.
    In January 2011, we entered into a recovery audit contract for Part 
D. The Part D RAC began recouping identified overpayments in 2012. On 
December 7, 2012, we published a Request for Quotation (RFQ) via the 
General Services Administration's (GSA) eBuy seeking quotations on the 
implementation of a Medicare Part C RAC. We anticipate the award of a 
Part C RAC contract in FY 2014.
    Given that we began recouping overpayments determined by the Part D 
RAC in 2012, and we anticipate recouping overpayments in Part C after 
awarding a Part C RAC contract in FY 2014, it is appropriate to provide 
a codified administrative appeals process to allow for plans to 
challenge the overpayment findings generated by the RACs just as we 
provide for challenges to overpayment determinations elsewhere in the 
Medicare program. In crafting our proposed appeals process for Parts C 
and D RAC determinations, we reviewed existing appeals processes in 
other areas, including Parts A and B RAC determinations, Part C RADV 
Audits, Part D payments, etc.
b. Proposed RAC Appeals Process
    After reviewing the agency's existing appeal processes, we 
determined that the general mechanisms set forth in Sec.  422.311 and 
Sec.  423.350 offered the most appropriate models for the Part C and D 
RAC appeals process.
    The Part D RAC currently reviews PDE data to identify overpayments 
and underpayments that are paid back to the plans. When overpayments 
are identified, Part D plans are notified and funds are recovered. If 
plans disagree with the calculated overpayment amounts or whether the 
overpayments are proper, they may appeal the Part D RAC's determination 
directly to the CMS Center for Program Integrity.
    A multilevel independent appeals process is an important component 
of the Part C and Part D RAC program as it allows plans to appeal 
determinations they contend are made in error. The administrative 
appeals mechanisms in this proposed rule would apply to all Part C and 
Part D RAC determinations. As CMS implements the Part C RAC, we would 
determine if additional changes to the proposed appeals process are 
necessary.
    Based on the foregoing, we propose to add a new subpart Z in Parts 
422 and 423, respectively that would include the proposed provisions 
discussed in this section. In accordance with CMS direction and 
criteria, the Part C or Part D RAC would conduct an issue specific 
audit of CMS' payment(s) to plans. An independent validation of all 
Part C and Part D RAC-identified improper payments would be conducted. 
If both the Part C or Part D RAC and the independent validation 
determine that an improper payment was made, the Part C or Part D RAC 
would send a notice of improper payment to the plan. If the Part C or 
Part D RAC determines an overpayment was made to the plan, it would 
send a demand letter requesting repayment. The demand letter would: (1) 
Explain the reason for the overpayment determination; (2) explain our 
recoupment process; and (3) contain instructions on how the plan may 
appeal the Part C or Part D RAC's finding. There would be no minimum 
monetary threshold for an appeal at any level.
    The following three level process sets forth our proposed 
administrative appeals process for overpayment determinations by the 
Part C and Part D RACs. Please note that the appeals process set forth 
applies to both Sec.  422.2600 and Sec.  423.2600. Because the sections 
largely mirror one another, discussions in this preamble would apply to 
both programs, unless otherwise noted.
(1) Reconsiderations (Sec.  422.2605 and Sec.  423.2605)
    At Sec.  422.2605 and Sec.  423.2605, we propose that if the plan 
believes the part C or Part D RAC did not apply CMS' stated payment 
methodology correctly, a plan may appeal the determination to an 
independent reviewer. CMS' payment methodology itself, however, is not 
subject to appeal. That is, while miscalculations and factual or data 
errors may be appealed, the plan may not appeal the substantive basis 
for the overpayment determination. This is consistent with the approach 
to Part D reconciliation appeals at Sec.  423.350(a)(1), which states 
that the Part D plan may appeal ``if CMS did not apply its stated 
payment methodology correctly.'' The Part D reconciliation appeals 
process does not permit the underlying payment methodology to be 
appealed.
    Examples of appealable issues would include, but are not be limited 
to: (1) A Part C or Part D RAC determination that a plan provider/
pharmacy was excluded from Medicare when the service was furnished; (2) 
a Part C or Part D RAC determination that a payment was a duplicate 
payment; or (3) whether the Part C or Part D RAC miscalculated an 
overpayment.
    In paragraph (a), we propose that the plan's request for 
reconsideration must be filed with the independent reviewer within 60 
calendar days from the date of the demand letter. In paragraph (b)(1), 
we propose that the request for reconsideration must be in writing and 
must provide evidence or reasons or both to substantiate the request. 
In paragraph (b)(2), we propose that the plan must include with its 
request all supporting documentation, evidence, and substantiation it 
wants the independent reviewer to consider. This material must be 
submitted in the format requested by CMS. Documentation, evidence, or 
substantiation submitted after the filing of the reconsideration 
request would not be considered.
    In paragraph (c), we propose that CMS may file a rebuttal to the 
plan's reconsideration request. The rebuttal must be submitted to the 
independent reviewer within 30 calendar days of the independent 
reviewer's notification to CMS that it has received the plan's 
reconsideration request. CMS would notify and send its rebuttal to the 
plan at the same time it is submitted to the independent reviewer. In 
paragraph (d), we propose that the independent reviewer would conduct 
the reconsideration. Specifically, the independent reviewer would 
review the notification of improper payment, the evidence, and findings 
upon which it was based, and any evidence that the plan or CMS 
submitted in accordance with regulations. In paragraph (e), we propose 
that the independent reviewer would inform CMS and the plan of its 
decision in writing. In paragraph (f), we propose that a 
reconsideration decision would be final and binding unless the plan 
requests a hearing in accordance with Sec.  422.2605 and Sec.  
423.2605. Finally, in paragraph (g), we propose that a plan that is 
dissatisfied with the independent reviewer's reconsideration decision 
would be entitled to a review by a hearing official as provided in 
Sec.  422.2610 and Sec.  423.2610.
(2) Hearing Official Determinations (Sec.  422.2610 and Sec.  423.2610)
    In proposed Sec.  422.2610 and Sec.  423.2610, we outline the 
process for requesting review of the record by a CMS hearing official. 
In paragraph (a), we propose that a request for review must be filed 
with CMS within 15 days from the date of the independent reviewer's 
issuance of a determination.

[[Page 2007]]

The request must be in writing and must provide a basis for the 
request. In paragraph (b), we propose that the plan must submit with 
its request all supporting documentation, evidence, and substantiation 
that it wants to be considered. Documentation, evidence, or 
substantiation submitted after the filing of the request would not be 
considered.
    In paragraph (c), we propose that a CMS-designated hearing official 
would conduct the review. A hearing would not be conducted, either live 
or via telephone, unless the hearing official, in his or her sole 
discretion, chooses such a mechanism. In all cases, the hearing 
official's review would be limited to information that: (1) The Part C 
or Part D RAC used in making its determinations; (2) the independent 
reviewer used in making its determinations; (3) the plan submits with 
its hearing request; and (4) CMS submits per paragraph (d). Neither the 
plan nor CMS would be allowed to submit new evidence.
    In paragraph (d), we propose that CMS may file a rebuttal to the 
plan's hearing request. The rebuttal must be submitted within 30 
calendar days of the plan's submission of its hearing request. CMS 
would send its rebuttal to the plan at the same time it is submitted to 
the hearing official. In paragraph (e), we propose that the CMS hearing 
official would decide the case within 60 days and send a written 
decision to the plan and CMS, explaining the basis for the decision. In 
paragraph (f), we propose that the hearing official's decision would be 
final and binding, unless the decision was reversed or modified by the 
CMS Administrator in accordance with Sec.  422.2615 and Sec.  423.2615.
(3) Administrator Review (Sec.  422.2615 and Sec.  423.2615)
    In proposed Sec.  422.2615 and Sec.  423.2615, we discuss the 
Administrator review process. In paragraph (a), we propose that if a 
plan is dissatisfied with the hearing official's decision, the plan may 
request that the CMS Administrator review the decision. The request 
must be filed with the CMS Administrator within 15 calendar days of the 
date of the hearing official's decision. The request must provide 
evidence or reasons or both to substantiate the request. In paragraph 
(b), we propose that the plan must submit with its request all 
supporting documentation, evidence, and substantiation that it wants to 
be considered. Neither the plan nor CMS would be allowed to submit new 
evidence. Documentation, evidence or substantiation submitted after the 
filing of the request would not be considered.
    In paragraph (c), we propose that after receiving a request for 
review, the Administrator would have the discretion to review the 
hearing official's decision in accordance with paragraph (e) or to 
decline to review said decision.
    In paragraph (d), we propose that the Administrator would notify 
the plan of whether he or she intends to review the hearing official's 
decision. If the Administrator declines to review the hearing 
official's decision, the hearing official's decision is final and 
binding. If the Administrator agrees to review the hearing official's 
decision, CMS may file a rebuttal statement within 30 days of the 
Administrator's notice to the plan that the request for review has been 
accepted. CMS would send its rebuttal statement to the plan at the same 
time it is submitted to the Administrator. In paragraph (e), we propose 
that if the Administrator agrees to review the hearing official's 
decision, the Administrator would determine, based upon this decision, 
the hearing official record, and any arguments submitted by the plan or 
CMS in accordance with this section, whether the determination should 
be upheld, reversed, or modified. The Administrator would furnish a 
written decision to the plan and to CMS. The Administrator's decision 
would be final and binding.

C. Strengthening Beneficiary Protections

1. Providing Good Quality Health Care (Sec.  422.504(a)(3) and Sec.  
423.505(b)(27))
    Section 1857(e)(1) of the Act, together with section 1860D-12(b)(3) 
of the Act, which incorporates its terms for Part D, authorizes CMS to 
include terms and conditions in our contracts with MA organizations and 
PDP sponsors that are consistent with Part C and Part D requirements, 
respectively, and that the Secretary finds are ``necessary and 
appropriate.'' Furthermore, the requirements set forth in section 
1860D-4(b), (c), and (d) of the Act include specifications for a Part D 
sponsor to administer a benefit that not only accurately and 
efficiently process claims but also meets beneficiary healthcare needs, 
and to take affirmative action to improve outcomes and achieve patient 
satisfaction. Under this authority, we propose to add a requirement to 
CMS contracts with MA organizations and Part D sponsors that explicitly 
requires that Part C and Part D plans demonstrate that they are 
providing good quality health care by achieving good or improving 
scores on CMS performance standards for outcomes, intermediate 
outcomes, process, patient experience, and patient access to care. We 
believe that adding this requirement would help ensure our 
beneficiaries receive the right care at the right time.
    While we believe that we have conveyed this expectation in other 
ways, such as through our performance and quality measurement and 
rating methodologies, we have never explicitly articulated this 
requirement in regulation. In short, we are proposing here that it is 
not enough to simply administer a benefit plan, but that Part C and 
Part D sponsors should constantly seek out ways to actively promote and 
advance the health of its enrollees.
    In order to create a requirement that helps ensure that Medicare 
beneficiaries are receiving consistently good quality care, and to have 
the ability to enforce such a requirement, we sought existing guidance 
to shape the meaning of ``good quality health care.'' The Affordable 
Care Act required HHS to develop the National Strategy for Quality 
Improvement in Health Care (the National Quality Strategy), which, like 
our Three-Part Aim, combines the three broad objectives of better 
health for the population, better care for individuals, and affordable 
care. In addition, our Star Ratings program was developed to include 
quality and performance measures to increase the level of 
accountability for MA organizations and PDP sponsors to administer a 
good quality benefit to Medicare beneficiaries. By linking a concept as 
subjective in nature as good quality health care to objective metrics 
and measures in the Star Ratings program, we believe plans and sponsors 
can reasonably employ tangible strategies that improve the quality of 
services and benefits provided to Medicare beneficiaries.
    To give concrete and verifiable meaning to this requirement, we 
propose to specify that good quality health care refers to MA 
organizations and Part D sponsor performance in the five categories 
identified in CMS's Star Ratings program--patient outcomes, 
intermediate outcomes, patient experience, patient access to care, and 
process. Achievement of this type of performance is based on 
organizational capability and implementation by the MA organizations 
and Part D sponsor. Articulating and codifying this requirement 
underscores for the public and our plans and sponsors the critical 
importance we place on aligning the administration of Part C and Part D 
benefits with the achievement of good quality health care as 
illustrated by, but not limited to, these specific performance 
standards. Leveraging what

[[Page 2008]]

plans have already put into practice with regard to these five 
categories means that plans should not encounter any additional burden 
in complying with this proposed regulation. Instead, the proposed 
change gives plans an opportunity to demonstrate the value they offer 
their enrollees, while providing a means for us to enforce or take 
corrective action when a Part C or Part D plan fails to provide good 
quality health care.
    There are several reasons we propose including in regulation a 
contract requirement that plans administer a benefit promoting good 
quality health care. We reward MA organizations with quality bonus 
payments when they achieve high scores within the Star Ratings. At the 
same time, we believe that it is appropriate that we react 
correspondingly if an MA organization does not provide good quality 
care. In addition, our existing requirements that MA organizations have 
a quality improvement (QI) program (Sec.  422.152) and Part D sponsors 
have a Medication Therapy Management Program (Sec.  423.153(d)) further 
reinforce our belief that MA organizations and Part D sponsors are 
already striving to administer a good quality benefit. Moreover, we 
examined our authority at Sec.  422.502(b) and Sec.  423.503(b), which 
allows us to ensure that plan performance is routinely evaluated. Based 
on the methodology we use to calculate plan performance for both MA 
organizations and Part D sponsors, we are able to determine which plans 
are outliers--that is, those organizations whose performance is 
consistently poor. With regard to the particular proposed contractual 
requirement to administer a good quality benefit, we can evaluate a 
plan's scores in Performance Metrics category within the plan 
performance review. Plans are held accountable for achieving good 
scores on the review, and this evaluation allows us to appropriately 
deny an organization's application to operate if it is determined that 
they are an outlier.
    Therefore, we propose adding paragraph (b)(27) to Sec.  423.505, 
Requirements for contracts, to state, ``A PDP sponsor is required to 
administer a PDP benefit that provides good quality health care 
demonstrated by scores of 3 or higher on CMS performance standards for 
patient outcomes, intermediate outcomes, process, patient experience, 
and patient access to care.''
    Similarly, we propose adding paragraph (a)(3)(iv) to Sec.  422.504, 
Contract Provisions, to state that MA organizations agree to provide 
benefits, ``in a manner that provides good quality health care 
demonstrated by scores of 3 or higher on CMS performance standards for 
patient outcomes, intermediate outcomes, process, patient experience, 
and patient access to care.''
2. MA-PD Coordination Requirements for Drugs Covered Under Parts A, B, 
and D (Sec.  422.112)
    Under Sec.  422.112(b) of the MA program regulations, coordinated 
care plans must ensure continuity of care and integration of services 
through arrangements with contracted providers. We believe that an 
important aspect of this coordination is ensuring that all needed 
services, including drug therapies, are provided in a timely manner. We 
have become aware of situations in which enrollees' access to needed 
Medicare-covered drugs has been delayed or denied due to the MA 
organization's failure to effectively coordinate Part B and Part D 
benefits for certain drugs, both at the point-of-sale (POS) and during 
the coverage determination process.
    As defined in Sec.  423.100, ``Part D'' drugs do not include drugs 
for which payment as so prescribed and dispensed or administered to an 
enrollee is available for that enrollee under Part A or Part B. In 
other circumstances, these drugs are covered under the Part D benefit, 
but coverage generally cannot be determined based solely on the drug 
itself. These drugs include certain infusion agents, oral anti-cancer 
therapies, oral anti-emetics, immunosuppressants, and injectables.
    We do not believe MA-PD plans are adopting or administering uniform 
policies that allow them to expeditiously determine whether a drug is 
covered under Part A/Part B or Part D at the POS. The resulting POS 
rejection of coverage under the Part D benefit does not uniformly 
include messaging that a Part B prior authorization determination is 
required, nor consistently result in a corresponding authorization 
under Part B. This can result in lengthy drug treatment delays while 
the enrollee or his or her provider attempts to determine why the drug 
was not covered and then pursues a coverage determination from the MA-
PD plan. For example, an MA-PD enrollee may present a prescription for 
a covered chemotherapy drug at his or her pharmacy only to be told that 
the claim has been rejected under the Medicare Part D benefit, 
resulting in the enrollee leaving the pharmacy counter without his/her 
drug. The enrollee may not know that the drug is covered under Part B. 
In some cases, the enrollee must take steps on his or her own to find 
out why coverage for a prescription was rejected at the POS and then 
contact the plan to obtain the Part B-covered medication. Unless the 
MA-PD plan has a robust process in place to make a timely and 
appropriate payment determination at the POS, there may be unnecessary 
delays, during which the enrollee is denied access to the needed 
medication.
    We have issued guidance in section 20.2.2. Chapter 6 of the 
Medicare Prescription Drug Benefit Manual related to how Part D plan 
sponsors should make determinations whether a drugs is covered under 
Part B or Part D. We have also outlined in Appendix C of Chapter 6 
considerations for Part D plan sponsors--and by extension, MA 
organizations that offer MA-PD plans--to take into account when making 
determinations as to whether a drug is covered under Part B or Part D. 
We expect plans to work with network pharmacies and providers to 
determine coverage and payment for these drugs with the goal of 
limiting disruptions to beneficiaries and pharmacies and ensuring 
access to medically necessary prescription drugs. For example, we have 
stated in subregulatory guidance that, when adjudicating claims for 
these drugs, Part D plan sponsors are permitted to rely on information 
submitted on the prescription (for example, to determine whether the 
prescription is related to a Medicare covered organ transplant) and may 
require their network pharmacies to obtain documentation to determine 
whether payment should be made under Part B or Part D.
    During recent MA-PD plan audits, we also have seen that some plans 
are not adequately coordinating the respective Part D and Part B drug 
benefits when an enrollee or his or her provider requests a drug 
coverage determination from the plan. For example, in response to a POS 
claim rejection for an immunosuppressant drug that cannot be resolved 
at the POS, an enrollee's provider may submit a coverage determination 
request to the MA organization offering an MA-PD, which is generally 
processed under the Part D benefit. In some cases, MA-PD plans deny 
coverage and issue a denial notice under the Part D benefit on the 
basis that the drug is, or may be, covered by Part B, but the plan 
either fails to make a determination regarding Part B coverage or does 
not authorize payment under the Part B benefit.
    Occurrences like these cause inappropriate and avoidable delays, 
or, even worse, result in situations in which the enrollee fails to 
receive needed medication altogether. In the case of chemotherapy or

[[Page 2009]]

immunosuppressive drugs, such delays could have rapid and serious 
medical consequences for the beneficiary.
    Part D drug benefits and drug benefits under Parts A and B should 
be coordinated by MA organizations offering MA-PDs so that enrollees 
receive needed medications on a timely basis. We are proposing to add a 
new paragraph (b)(7) to Sec.  422.112 to require MA-PDs to establish 
adequate messaging and processing requirements with network pharmacies 
(that is, Part D contracted providers) to ensure that appropriate 
payment is assigned at the POS, and to ensure that, when coverage is 
denied under Part D due to available coverage under Part A or Part B, 
such Part A or Part B coverage is authorized or provided to the 
enrollee as expeditiously as the enrollee's health condition requires. 
Our proposed regulation would require that MA PDs have systems in place 
to accurately and timely adjudicate claims at the POS.
    In addition, we would like to ensure that MA-PD plans are 
coordinating their drug benefits appropriately during the coverage 
determination process. If an MA organization offering Part D denies 
Part D coverage due to the availability of Part A or Part B coverage, 
we expect the MA organization to ensure the decision results in 
authorization or provision of the drug under Part A or Part B pursuant 
to the requirements in parts 422 and 423, subpart M under our proposed 
regulation. We do not expect MA-PD enrollees to have to request an 
initial coverage determination more than once.
    To avoid unnecessary delays and inappropriate denials of critical 
medications, we have considered requiring MA-PD plans to authorize 
coverage of all Part A, Part B and D medications at the POS so that the 
enrollee can receive covered medication without delay. The 
determination as to whether the drug is covered under Part A, Part B or 
Part D and the amount of the appropriate cost sharing would occur later 
if necessary. However, we recognize that such a requirement may 
interfere with medically appropriate pre-authorization requirements, 
and may trigger retrospective enrollee liability depending on the 
difference in enrollee cost sharing for coverage under Part A, Part B 
and Part D and retrospective TROOP adjustments and Part D 
reconciliation.
    We solicit comments on our proposal, as well as other possible 
approaches to minimizing delays in beneficiary access to needed 
medications caused by inadequate coordination of the Part A, Part B and 
Part D drug benefits at the POS and during the coverage determination 
process. In particular, we would appreciate organizations sharing their 
expertise regarding best practices for this benefit coordination at the 
POS and plan processes that enhance those coverage determinations. We 
also are soliciting comments on challenges MA organizations offering 
Part D currently encounter in their efforts to integrate these 
benefits.
3. Good Cause Processes (Sec.  417.460, Sec.  422.74 and Sec.  423.44)
    Section 1851(g)(3)(B)(i) of the Act provides that MA organizations 
may terminate the enrollment of individuals who fail to pay basic and 
supplemental premiums after a grace period established by the plan. 
Section 1860D-1(b)(1)(B) of the Act generally directs us to use rules 
related to enrollment, disenrollment, and termination for Part D plan 
sponsors that are similar to those established for MA organizations 
under section 1851 of the Act. In addition, section 1860D-13(a)(7) of 
the Act mandates that the premiums paid by individuals with higher 
incomes be increased by the applicable Part D Income Related Monthly 
Adjustment Amount (Part D IRMAA), for the months in which they are 
enrolled in Part D coverage.
    Consistent with these sections of the Act, subpart B in both the 
Part C and Part D regulations sets forth our requirements with respect 
to involuntary disenrollment procedures at Sec.  422.74 and Sec.  
423.44, respectively. An MA or Part D plan that chooses to disenroll 
beneficiaries for failure to pay premiums must be able to demonstrate 
to us that it made a reasonable effort to collect the unpaid amounts by 
notifying the beneficiary of the delinquency, providing the beneficiary 
a period of no less than 2 months in which to resolve the delinquency, 
and advising the beneficiary of the termination of coverage if the 
amounts owed are not paid by the end of the grace period.
    In addition, current regulations at Sec.  417.460(c) specify that a 
Health Maintenance Organization (HMO) or competitive medical plan (cost 
plan) may disenroll a member who fails to pay premiums or other charges 
imposed by the plan for deductible and coinsurance amounts. While there 
is not a grace period parallel to MA and Part D, the other procedural 
requirements for cost plans to disenroll a member on this basis are 
similar to those for MA and Part D plans. The cost plan must 
demonstrate that it made reasonable efforts to collect the unpaid 
amount and send the enrollee written notice of the pending 
disenrollment at least 20 days before the disenrollment effective date.
    In the April 2011 final rule (76 FR 21432) we amended both the 
Parts C and D regulations at Sec.  422.74(d)(1)(v), Sec.  423.44(d)(1), 
and Sec.  423.44(e)(3) regarding involuntary disenrollment for non-
payment of premiums or Part D-IRMAA to allow for reinstatement of the 
beneficiary's enrollment into the plan for good cause. In the April 
2012 final rule (77 FR 22071), we extended the policy of reinstatement 
for good cause to include beneficiaries enrolled in cost plans in Sec.  
417.460(c)(3); thus aligning the cost plan reinstatement provision with 
the MA and PDP plan provisions.
    These good cause provisions authorize CMS to reinstate a 
disenrolled individual's enrollment without an interruption in coverage 
in certain circumstances where the non-payment was due to circumstances 
that the individual could not reasonably foresee and could not control, 
such as unexpected hospitalization. Since the inception of these 
provisions, we have received feedback from plans on ways to improve the 
good cause process and make it more efficient for both the plans and 
us. Over the past year, we have already used this feedback to improve 
the operational aspects of the policy by updating Chapter 2 of the 
Medicare Managed Care Manual and Chapter 3 of the Medicare Prescription 
Drug Benefit Manual to clarify notice language and the process and 
timing of receiving payments during the extended grace period, as 
outlined in Sec.  417.460(c)(3), Sec.  422.74(d)(1)(v), and Sec.  
423.44(d)(1)(vi). In addition, we updated the Complaints Tracking 
Module (CTM) Standard Operating Procedures (SOP) to permit plans to 
transfer requests for reinstatement for good cause to CMS. We are now 
proposing to make additional revisions to Sec.  417.460, Sec.  422.74, 
and Sec.  423.44 to make changes to the good cause review process.
    The ability for individuals to be reinstated during the extended 
grace period for good cause is outlined in Sec.  417.460, Sec.  422.74 
and Sec.  423.44. Since its inception, the process of accepting, 
reviewing, and processing beneficiary requests for reinstatement for 
good cause has been carried out exclusively by CMS. In multiple cases, 
individual MA organizations and Part D plans have indicated that they 
wanted to be the point of contact for their current and past members. 
In addition, several plans have raised concerns regarding complaints by 
their members who are seeking reinstatement and who have to contact CMS 
instead of the plan to make this request.
    In light of this feedback, the experience we have gained since the 
initial implementation of the good cause

[[Page 2010]]

process, and in the interest of making the process more efficient, we 
solicited public input on improving the process in the draft 2014 Call 
Letter issued on February 15, 2013. In the Call Letter, we indicated 
that we were considering making changes to the good cause process. 
Specifically, we stated that we were exploring expanding the plans' 
role in the process to include accepting the initial requests for 
reinstatement by former plan members and gathering information prior to 
submitting the requests to us. We requested comments from MA 
organizations and Part D plan sponsors on our proposal to expand the 
plans' role and any other ways we might improve the process to receive 
and review good cause requests for reinstatement.
    The vast majority of the comments we received from stakeholders in 
response to the Call Letter were in favor of expanding the plans' role, 
given the fact that plans can readily access a former enrollee's 
premium billing and payment history and, as such, are in a position to 
identify and efficiently resolve other disenrollment disputes that are 
erroneously being received as good cause requests. A number of plans 
indicated a preference to independently implement the good cause 
process through enhanced subregulatory guidance. A few commenters 
indicated that CMS should retain responsibility over all aspects of the 
good cause process to ensure objectivity.
    In response to this feedback we are proposing to amend Sec.  
417.460(c)(3), Sec.  422.74(d)(1)(v), and Sec.  423.44(d)(1)(vi) to 
permit an entity acting on behalf of CMS to effectuate reinstatements 
when good cause criteria are met. This regulatory change would allow us 
to designate another entity, including the plans or an independent 
contractor, to complete portions or all of the good cause process. It 
is our intent to expand the role of plans to include accepting incoming 
requests for reinstatement directly from former enrollees and making 
the good cause determinations using the existing regulatory standard. 
This proposed change would enable plans to be more responsive to their 
current and former members, and lessen the burden the plans have in 
coordinating with us regarding the good cause and reinstatement 
process. It further aims to lessen the number of complaints generated 
due to miscategorization of the reinstatement requests as an allegation 
of plan error, which the plans must then resolve and refer back to us 
for a good cause determination.
    Ensuring objectivity in the review of these cases and equity among 
beneficiaries regarding the determination of good cause for cases is 
critically important. Thus, we would establish operational policy and 
processes in subregulatory guidance to set parameters for the 
application of the good cause standard, including the submission to CMS 
of certain cases for review to ensure that plans remain impartial and 
equitable in their assessment and treatment of former members who have 
been disenrolled for nonpayment of premiums. These changes would be 
accompanied by the development of an oversight protocol for any 
activities currently carried out by us for which we name the plans or 
an independent contractor our designee to carry out.
    In addition to our proposal here to permit a CMS designee to 
determine reinstatements for good cause, we are taking this opportunity 
to propose a technical change to the language in Sec.  417.460 to 
clarify that good cause protections for enrollees in cost plans apply 
to instances where there was a failure to pay either plan premiums or 
cost sharing. In extending the good cause provision to cost plans in 
the April 2012 final rule, we correctly referenced failure to pay 
premiums as a basis for disenrollment from a cost plan, but in two 
instances we neglected to include a reference to ``other charges'' as a 
basis for disenrollment. We propose to make a technical change to Sec.  
417.460(c)(3) and (c)(4) to clarify that the good cause provisions are 
applicable to individuals who have been disenrolled for non-payment of 
other charges (for example, deductible or coinsurance amounts), in 
addition to non-payment of premiums.
4. Definition of Organization Determination (Sec.  422.566)
    Based on our updated guidance, program experience, and information 
collected during audits of MA organizations, we are proposing to revise 
the current regulatory definition of ``organization determination'' set 
forth at Sec.  422.566(b) to create a single, uniform definition. As 
described later in this proposed rule, the definition of organization 
determination referenced in our manual guidance (Chapter 13 of the 
Medicare Managed Care Manual, section 30), required plan marketing 
documents (such as the EOC), and Part C data requirements (Medicare 
Part C Plan Reporting Requirements, Technical Specifications Document--
Measure 6) is more inclusive than the definition currently reflected in 
this regulation.
    Section 1852(g) of the Act requires MA organizations to have a 
procedure for making determinations regarding whether an enrollee is 
entitled to receive a health service and the amount (if any) that the 
individual is required to pay for such service. Our regulations at 42 
CFR part 422, subpart M codify the procedures MA organizations must 
follow when processing organization determinations. Section 422.566(b) 
defines which actions are considered organization determinations, but 
does not currently include all types of coverage decisions made by a 
provider under contract with an MA organization.
    Our current manual guidance, required model EOC documents, and Part 
C plan reporting requirements clarify that organization determinations 
include fully favorable, partially favorable, and unfavorable decisions 
made by an MA organization concerning payment or provision of an item 
or a service. Additionally, requirements elsewhere in Part 422 provide 
certain beneficiary protections in the MA program, including a 
requirement that MA organizations provide or make payment for all 
services covered by Medicare Parts A and B (see Sec.  422.101(a)), and 
contract requirements that limit beneficiary financial liability for 
fees that the MA organization is legally obligated to pay for services 
provided by contract and non-contract providers (see Sec.  422.504(g)). 
Our proposed changes would clarify what actions are included and 
therefore ensure that enrollees receive required Medicare notices (for 
example, notice of termination in certain healthcare settings) and due 
process rights.
    We are proposing to make minor modifications to regulatory language 
at Sec.  422.566(b)(1) through (b)(3) to improve the uniformity of our 
guidance on what actions are considered organization determinations. We 
are restating these provisions for consistency within this section and 
to further underscore an ``organization determination'' includes any 
coverage decision--fully favorable, partially favorable, and 
unfavorable--made by an MA organization concerning payment or provision 
of an item or a service. At Sec.  422.566(b)(1) and (b)(2), we refer to 
an organization determination as ``any determination'' by an MA 
organization (that is, fully favorable, partially favorable, and 
unfavorable). At 422.566(b)(3), we are proposing to replace the 
reference to the MA organization's ``refusal to provide or pay'' with 
reference to ``any determination not to provide or pay for'' items or 
services made by the MA organization to improve consistency of the 
regulatory language.
    Chapter 13, section 30 of the Medicare Managed Care Manual states 
that

[[Page 2011]]

approval for an item or service by the plan or its delegated entity 
(that is, provision of an item or service by a contract provider, such 
as inpatient admission to a contract hospital) is an organization 
determination. We are also proposing to add new language to the 
regulation text at Sec.  422.566(b)(6) that clarifies that a provider 
under contract with an MA organization that furnishes an item or 
service to an enrollee has made a favorable organization determination 
on behalf of the MA organization. We believe this clarification to the 
regulatory definition is necessary to clearly distinguish when a 
contract provider is making an organization determination on behalf of 
the MA organization from instances where a contract provider is not 
making an organization determination on behalf of the MA organization. 
We have repeatedly stated that a contract provider's refusal to furnish 
an item or service is a treatment decision, not an adverse organization 
determination made on behalf of the MA organization. In a case where a 
contract provider refuses to furnish an item or service, the enrollee 
has the right to request an organization determination from the MA 
organization. In addition, the provider may request the organization 
determination on the enrollee's behalf.
    The proposed revision to the regulation text at Sec.  422.566(b)(6) 
would also clarify that a service or item provided by a noncontract 
provider due to a referral from a contract provider constitutes a 
favorable organization determination, and therefore ensures that 
enrollees would be protected by limitations on their financial 
liability. (For more information, see Sec.  422.504(g) of the 
regulations and Chapter 4, section 170 of the Medicare Managed Care 
Manual). We stated in the January 28, 2005 final rule (70 FR 4618) that 
if a network physician performs a service or directs an MA beneficiary 
to another provider to receive a plan covered service (regardless of 
whether the provider is following the plan's internal procedures, such 
as obtaining the appropriate plan pre-authorization), the enrollee 
cannot be held liable for more than applicable plan cost sharing for 
those services. When a contract provider refers an enrollee out of the 
network, the enrollee has a reasonable expectation that the items or 
services provided by the non-contract provider will be covered by the 
plan. Enrollees cannot be held to a higher standard than plan 
contracting providers to adhere to plan rules.
    Proposed new paragraph Sec.  422.566(b)(6) would also clarify that 
a favorable organization determination has been made if: (1) The MA 
organization decides to provide or pay for an item or service, 
including a decision to continue providing or paying for an item or 
service; or (2) a contract provider or facility, acting on behalf of 
the MA organization, furnishes (or continues to furnish) an item or 
service.
    Together, our proposed revisions to Sec.  422.566(b) are intended 
to codify our current guidance, creating a single, uniform definition 
of organization determination.
5. MA Organization Extension of Adjudication Timeframes for 
Organization Determinations and Reconsiderations (Sec.  422.568, Sec.  
422.572, Sec.  422.590, Sec.  422.618, and Sec.  422.619)
    Section 1852(g)(2) of the Act requires MA organizations to provide 
for reconsideration, or review, of organization determinations within a 
timeframe specified by the Secretary, but generally no later than 60 
days from the date of receipt of the request for reconsideration. 
Section 1852(g)(3)(B) of the Act requires MA organizations to maintain 
procedures for expediting organization determinations and 
reconsiderations when a physician's request indicates that applying the 
standard timeframe could seriously jeopardize the life or health of the 
enrollee or the enrollee's ability to regain maximum function or when, 
in the case of an enrollee's request, the MA organization makes such a 
determination on its own. In expedited cases, the MA organization 
generally must issue its decision no later than within 72 hours of 
receipt of the request. Section 1852(g)(3)(B)(iii) of the Act permits 
the Secretary to extend this 72-hour decision making timeframe in 
certain cases.
    Our regulations at 42 CFR part 422, subpart M codify the procedures 
MA organizations must follow in issuing standard and expedited 
organization determinations and reconsiderations. Specifically, the 
current regulations at Sec.  422.568(b), Sec.  422.572(b), and Sec.  
422.590(a)(1) and (d)(1) set forth the standard and expedited 
timeframes within which plans are required to process such decisions 
and describe the circumstances under which plans are permitted to 
extend decision making timeframes by up to 14 calendar days.
    Based on information ascertained during recent MA program audits, 
we have found that some MA organizations are routinely and 
inappropriately invoking extensions of the adjudication timeframes for 
organization determinations and reconsiderations. We have identified 
circumstances in which MA organizations are routinely invoking the 14 
day extension: (1) In cases where the plan lacks adequate internal 
controls to ensure coverage requests are reviewed and adjudicated 
within the required regulatory timeframe; and (2) in cases where the 
plan is awaiting receipt of supporting clinical documentation from one 
of its contract providers. We believe the current language that permits 
extension of the adjudication timeframes set forth in Sec.  422.568(b), 
Sec.  422.572(b), Sec.  422.590(a)(1) and Sec.  422.590(d)(2) is being 
interpreted more broadly than our intent in adopting these rules. 
Therefore, we propose to revise these regulatory provisions to more 
clearly define our intended standard for when it is appropriate for an 
MA organization to extend an adjudication timeframe.
    Routinely invoking an extension of the applicable adjudication 
timeframe is counter to the intent of the statutory and regulatory 
requirements for timely determinations that emphasize the health needs 
of the beneficiary in determining the appropriate adjudication 
timeframe. Extensions should be permitted only in limited 
circumstances, and only if the extension is in the enrollee's interest. 
MA organizations are required by regulation to render all coverage 
decisions as expeditiously as the enrollee's health condition requires. 
When plans choose to subject an item or service to a prior 
authorization requirement, we expect them to have the resources to 
process those requests in a timely manner.
    We believe MA organizations have interpreted existing regulations 
to mean that there is a broader set of circumstances in which it would 
be appropriate to invoke an extension than we intended, such as the 
need for medical evidence from a contract provider. We are proposing to 
amend the regulation text to clarify our original intent that an 
extension should not be routinely invoked for any category of coverage 
request, but in particular not for purposes of obtaining additional 
medical evidence from contract providers. Thus, we propose to revise 
the extension language in Sec.  422.568(b), Sec.  422.572(b), and Sec.  
422.590(a)(1), and to add new Sec.  422.590(e), which would incorporate 
and clarify existing text at Sec.  422.590(a)(1) and (d)(2) in order to 
more clearly identify when it is appropriate for an MA organization to 
invoke an extension of the adjudication timeframe. We also propose 
revisions to Sec.  422.590(d) and redesignation of existing 
subparagraphs Sec.  422.590(e) through (g) as part these changes.
    First, we propose to retain the current provisions in these various 
regulations

[[Page 2012]]

that permit an extension at the request of the enrollee. Additionally, 
we propose to modify the current regulatory provisions that permit an 
extension ``if the organization justifies a need for additional 
information and how the delay is in the interest of the enrollee (for 
example, the receipt of additional medical evidence from noncontract 
providers may change an MA organization's decision to deny).'' Our 
proposed revised language would result in two more specific provisions 
permitting an extension, which we believe clarifies the intent of our 
existing requirements.
    Additionally, we propose language to clarify at Sec.  
422.568(b)(1)(ii), Sec.  422.572(b)(1)(ii), and Sec.  422.590(e)(1)(ii) 
that an extension may be justified and in the enrollee's interest due 
to the need to obtain additional medical information that may result in 
changing the MA organization's denial of coverage of an item or service 
only from a non-contract provider. We believe the arrangement between 
an MA organization and its contract providers is such that clinical 
documentation should generally be readily available and that there are 
mechanisms for an MA organizations to ensure that contract providers 
produce necessary documentation in a timely manner (for example, via 
their contract). We believe that any delay in decision-making caused by 
an extension to obtain additional medical evidence from a contract 
provider would be in the plan's interest but not generally in the 
interest of the enrollee. Therefore, we are proposing to specify at 
Sec.  422.568(b)(1)(ii), Sec.  422.572(b)(1)(ii), and Sec.  
422.590(e)(1)(ii) that one circumstance in which it may be appropriate 
for an MA organization to invoke an extension is when the extension is 
in the enrollee's interest due to the need for additional medical 
evidence from a non-contract provider only.
    When the MA organization needs additional information that may 
change a decision to deny coverage, it is our expectation that the MA 
organization promptly solicit necessary clinical documentation in all 
cases and that extension of the timeframe not be routinely invoked. It 
is also our expectation that the full 14 days not be routinely taken, 
even if an extension is warranted, and that all coverage requests be 
reviewed, and decisions issued, as expeditiously as the enrollee's 
health condition requires within that period, as required by 
regulation.
    In addition, we propose to include a provision (new language to be 
codified at Sec.  422.568(b)(1)(iii), Sec.  422.572(b)(1)(iii), and 
Sec.  422.590(e)(1)(iii)) to clarify that an extension of the 
adjudication timeframe may be permitted when the extension is justified 
due to extraordinary, exigent or other non-routine circumstances, and 
it is in the enrollee's interest. We recognize that there may be 
limited, non-routine circumstances in which the adjudication timeframe 
may need to be extended even if the enrollee does not request the 
extension and no additional documentation must be obtained from a non-
contract provider. We emphasize that the extension must be both: (1) 
Due to extraordinary, exigent or other non-routine circumstances; and 
(2) in the enrollee's interest. For example, a natural or man-made 
disaster may impede a contract provider's ability to provide the MA 
organization with timely clinical information, and invoking an 
extension may be in the enrollee's interest if that information is 
necessary to approve coverage. It is our expectation that these 
exceptions would be rare. MA organizations that overuse or misuse the 
authority to invoke an extension may be subject to corrective action.
    In all cases where an extension is invoked, the MA organization is 
responsible for documenting the justification for the extension in the 
case file, complying with the requirement to notify the enrollee in 
writing of the reasons for the delay, and informing the enrollee of the 
right to file an expedited grievance if he or she disagrees with the MA 
organization's decision to grant an extension.
    In an effort to improve clarity in our guidance related to 
extensions and to remove duplicative language, we have made 
corresponding, technical edits to subpart M. Specifically, we are 
proposing in Sec.  422.590 to remove paragraph (d)(2) and add a new 
paragraph (e). To correspond with this proposed change, we propose to 
update related cross-references and language accordingly. Specifically, 
at Sec.  422.618(a)(1), we propose to replace the reference to Sec.  
422.590(a)(1) with a reference to Sec.  422.590(e). In Sec.  
422.619(a), we propose to replace the reference to Sec.  422.590(d)(2) 
with a reference to Sec.  422.590(e). Also, we propose to make 
corresponding changes within Sec.  422.568(b), Sec.  422.572(b), and 
Sec.  422.590(d) to ensure consistency in the structure and language of 
these provisions.

D. Strengthening Our Ability To Distinguish Stronger Applicants for 
Part C and D Program Participation and To Remove Consistently Poor 
Performers

1. Two-Year Prohibition When Organizations Terminate Their Contracts 
(Sec.  422.502, Sec.  422.503, Sec.  422.506, Sec.  422.508, and Sec.  
422.512)
    Section 1857(c)(4)(A) of the Act prohibits organizations from re-
entering the MA program in the event that a previous contract with the 
organization was terminated at the request of the organization within 
the preceding 2-year period, except in circumstances that warrant 
special consideration. Furthermore, section 1857(e) of the Act permits 
us to add contract provisions that are not inconsistent with Part C of 
the Act and that we find necessary and appropriate for the 
administration of Medicare Part C. We propose to amend the text and 
application of regulations implementing these provisions of the Act. In 
the April 15, 2010 final rule (75 FR 19678), we characterized our 
current policy on the 2-year ban applicable to voluntary non-renewals 
and mutual terminations as applying the ban based on plan type and 
service area. We provided the following example to illustrate 
application of the rule: an MA organization's non-renewal of a Private 
Fee-for-Service MA plan would not prohibit the MA organization from 
immediately applying for an MA HMO contract for the same service area. 
Similarly, our current policy, absent this proposal, would not apply 
the 2-year ban on an MA organization that non-renewed a contract in one 
region from applying immediately for the same type of MA product in a 
different region.
    This current policy unnecessarily narrows the scope of the 2-year 
prohibition and precludes us from preventing poor performing MA 
organizations from reentering the MA program. We have reconsidered the 
wisdom of this policy and believe that the MA program would be better 
served if we applied the 2-year ban flowing from non-renewals and 
mutual terminations to new contracts or service area expansions 
regardless of the product type or service area of the non-renewed or 
terminated contract. We note that we are retaining our ability to 
exercise discretion in applying the 2-year ban when there are special 
circumstances that warrant special consideration, as provided in the 
current regulations text at Sec.  422.503(b)(6)(ii), Sec.  
422.506(a)(4), and Sec.  422.512(e).
    First, we propose to address how a non-renewal or mutual 
termination of an MA contract would be treated.

[[Page 2013]]

Specifically, we propose to amend the regulation text at Sec.  
422.506(a)(4) and Sec.  422.512(e) to explicitly apply the 2-year 
prohibition to applications for service area expansions in addition to 
applications for new contracts. These changes to Sec.  422.506 and 
Sec.  422.512 would make the text of these regulations consistent with 
the text at Sec.  422.503(b)(7) and Sec.  422.508(c) with regard to the 
2-year prohibition imposed as a condition of a mutual termination of an 
MA contract. We read the current text at Sec.  422.503(b)(7) to permit 
us to deny a contract to a MA organization that has participated in a 
mutual contract termination, regardless of contract type, product type, 
or service area, within the past 2 years. We also note that the current 
text of Sec.  422.503(b)(6) is not explicit on this point but may be 
read to permit contract denials for new contracts and service area 
expansions, consistent with our proposal; we intend to apply this 
interpretation to the existing text at Sec.  422.503(b)(6). We also 
propose to add the following sentence to paragraphs (c) and (d) of 
Sec.  422.508 to make it clear that a mutual termination of a MA 
contract would result in a ban of all contract types and service area 
expansions: ``This prohibition may apply regardless of the product 
type, contract type or service area of the previous contract.'' These 
proposed amendments are in harmony with our policy, as articulated in 
the preamble to the April 15, 2010 final rule (75 FR 19703) to apply 
the 2-year ban consistently in the context of voluntary non-renewals 
and mutual terminations.
2. Withdrawal of Stand-Alone Prescription Drug Plan Bid Prior to 
Contract Execution (Sec.  423.503)
    Occasionally, organizations new to Part D that have qualified for a 
Medicare PDP sponsor contract withdraw their bids after we have 
announced the low-income subsidy (LIS) benchmark but prior to executing 
the contract for the coming plan year. These withdrawals interfere with 
our administration of the Part D program, in particular the auto 
assignment of LIS beneficiaries. To address this problem, we are 
proposing to adopt regulatory provisions that would impose a 2-year 
application ban on organizations not yet under contract with us as PDP 
sponsors that withdraw their applications and bids after we have issued 
our approvals. We are making this proposal under our authority at 
section 1860D-12(b)(3)(D) of the Act to adopt additional contract 
terms, including the conditions under which we would enter into 
contracts, not inconsistent with the Part D statute.
    In February of each year, we solicit applications from 
organizations seeking to qualify to enter into a contract to offer 
stand-alone PDPs in the upcoming plan year. These organizations, along 
with current PDP sponsors who wish to continue participating in the 
Part D program, submit bids in June for our review and approval. We 
review these applications and bids with the expectation that, upon 
approval, the organizations would enter into PDP sponsor contracts with 
us in September to provide the Part D benefit for the plan year 
starting the following January.
    As part of the annual bid review, we calculate the LIS benchmark 
for each PDP Region based on the bids for basic PDPs submitted annually 
by current PDP sponsors that will operate in that region in the coming 
year. Sponsors whose monthly premiums fall at or below the benchmark in 
a region receive auto-enrollments from us of LIS-eligible beneficiaries 
in those regions. We normally announce the LIS benchmark in late July 
or early August.
    In recent years, some organizations have withdrawn their 
applications and bids following the announcement of the LIS benchmark. 
Because these organizations withdrew prior to executing a contract, and 
we cannot compel them to sign the contract, they are not subject to our 
compliance or oversight authority, and nothing in our current 
regulations prevents these applicants from withdrawing their 
applications late enough in the process to cause significant 
disruption. In contrast, when an existing PDP sponsor withdraws its 
bid, we treat such an action as an election by the PDP sponsor to non-
renew its contract in that PDP Region, which renders the sponsor 
ineligible to submit another application for 2 years, under our 
regulations at Sec.  423.507(a)(3). We propose to make a regulatory 
change to ensure equal treatment between new applicants and existing 
PDP plan sponsors, which would allow us to maintain an accurate 
depiction of the contracting landscape. Specifically, we propose to 
amend Sec.  423.503 by adding paragraph (d) which would impose a 2-year 
Part D application ban on organizations approved by CMS as qualified to 
enter into stand-alone PDP sponsor contracts but which elect, after our 
announcement of the LIS benchmark, not to enter into such contract and 
withdraw their PDP bids. This proposed regulatory change, in effect, 
would subject a withdrawing applicant to the same penalty we may apply 
to an organization already under contract that elects to terminate or 
non-renew its PDP contract.
    It is critical that we have an accurate portrayal of the number and 
type of plan benefit packages that would be available to beneficiaries 
in every PDP Region, especially during the end of the summer when much 
of the bid review, both the formulary and actuarial components, has 
been completed. During this period, we need to confirm that there are 
the required minimum number of plans available in each PDP region. We 
also need accurate plan information at the end of the summer so that we 
can meet the production deadlines associated with the annual election 
period, including publication of the Medicare & You handbook as well as 
updating the Medicare Plan Finder Web site and our payment and 
enrollment systems. An applicant that withdraws its application late in 
the process alters the contracting landscape, potentially disrupting 
preparations we have already made, including those related to the auto 
assignment of LIS beneficiaries, for the upcoming plan year.
    We acknowledge that PDP plan applicants may need to withdraw their 
pending contracts for a variety of legitimate business reasons. For 
this reason, we afford applicants several months to withdraw their 
applications, without penalty, following the application due date in 
February and the bid submission deadline of the first Monday in June. 
However, in adopting the proposed regulatory authority, we would place 
a reasonable limit on prospective PDP sponsors' option to withdraw bids 
and applications without penalty. By imposing consequences on 
applicants that withdraw their bids following the announcement of the 
LIS benchmark, we also would discourage any ``gaming'' of the bid 
review and auto assignment processes (for example, by participating in 
the bid review process until it learns that it will not qualify for 
auto assignments) that can occur when applicants opt out of 
participation in the PDP at the last minute.
3. Essential Operations Test Requirement for Part D (Sec.  423.503(a) 
and (c), Sec.  423.504(b)(10), Sec.  423.505(b)(28), and Sec.  423.509)
    We propose to create, through regulation, a new step in the 
application and contracting process with newly contracted entities 
operating as stand-alone PDP sponsors or MA organizations offering Part 
D plans (MA-PDs). This step will be an ``essential operations'' test 
which we would administer to ``newly contracted entities.'' We use the 
term ``newly contracted entity'' in this preamble to describe an 
organization that has

[[Page 2014]]

entered or applied to enter into a Part D contract with us for the 
first time for the upcoming plan year, and neither it, nor another 
subsidiary of the organization's parent organization, is offering Part 
D benefits during the current benefit year. This would include 
organizations that are offering EGWPs for the first time.
    Currently, with the exception of the LIS readiness audits, we have 
no test for assessing the effectiveness of the arrangements 
organizations represent to us in their applications and bids prior to 
the actual start of delivery of benefits on January 1. An essential 
operations test would allow us to test whether an organization's 
arrangements appear likely to allow the organization to effectively 
administer its contract. We are proposing to require organizations to 
pass an essential operations test either--(1) as a qualification to 
contract, with failure to pass the test nullifying our approval of the 
application; or (2) after contract execution as a contract requirement 
but prior to the start of the benefit year, with a failure to pass the 
test triggering an immediate contract termination under Sec.  423.509.
    Pursuant to section 1860D-12(b)(3)(D) of the Act, which 
incorporates by reference section 1857(e)(1) of the Act, we have the 
authority to add contract provisions that are necessary and appropriate 
to carry out the Part D program; section 1860D-11(b) provides authority 
for the collection of additional information as part of the bid as we 
may require to carry out the Part D program. Based on this authority we 
propose adding Sec.  423.504(b)(10) and Sec.  423.505(b)(28) to include 
passing the essential operations test as a condition to enter into and 
a term of the Part D contract. Additionally, pursuant to our authority 
at section 1860D-12(b)(3)(B) and (b)(3)(F) of the Act (which 
incorporate by reference section 1857(c)(2) and (h) of the Act, 
respectively, to apply to the Part D program), the current regulations 
at Sec.  423.509(a) and (b)(2)(i), authorize immediate termination of 
contracts with Medicare Part D plan sponsors in certain circumstances. 
We believe that immediate termination would be authorized under the 
standard of section 1857(h)(2) of the Act because the inability of a 
plan sponsor to ensure future members' access their drug benefit, as 
evidenced by failure to pass the essential operations test, would 
constitute an imminent and serious risk to beneficiary health and 
safety. We propose adding Sec.  423.509(a)(4)(xii) and (b)(2)(i)(D) to 
subpart K to reflect this new cause for immediate termination. (Of 
note, we are reorganizing Sec.  423.509(a) to group the statutory basis 
for termination together followed by examples of violations that would 
meet the statutory basis. This new regulation is an example of a 
violation.) Additionally, we propose to explicitly include the 
essential operations test as a means to evaluate Part D applicants in 
Sec.  423.503(a)(1) and to add Sec.  423.503(c)(4) to subpart K to 
establish failure of an essential operations test as grounds for 
nullifying a CMS approval of application notice.
    The heart of the Part D benefit is the sponsor's ability to process 
claims for prescription drugs in real-time because, unlike health 
benefits, where claims payment normally follows the delivery of 
services, pharmacies require confirmation of claims payment at the 
point-of-sale either from an insurer or the covered individual. Success 
in Part D claims processing depends largely on the sponsor's ability to 
perform enrollment, benefit administration, and claims adjudication 
operations seamlessly at the point-of-sale. That is, the sponsor must 
be able to do all of the following essential operations in real time 
and at the point-of-sale to a satisfactory level: Identify a 
beneficiary as a member of one of its Part D plans; determine whether 
the drug requested is, in fact, appropriately covered under Part D (for 
example, that the drug is not covered: (a) Under Part B, (b) as part of 
end-stage renal disease (ESRD) treatment, or (c) as a hospice benefit); 
determine the phase of the benefit the beneficiary is currently in; and 
provide the pharmacy with instructions so that the beneficiary can be 
charged appropriate copays/coinsurance and deductibles.
    We are proposing the essential operations test and associated 
regulatory changes because of our experience with certain newly 
contracted entities in the Part D program that experienced significant 
operational difficulties at the start of the benefit year as a result 
of their inexperience administering Part D benefits. To prevent the 
recurrence of this problem and ensure that new sponsors are prepared to 
and actually can deliver Part D benefits at an acceptable level, 
starting with the 2015 contract year application cycle, we propose that 
we may require newly contracted entities to pass an essential 
operations test conducted by us beginning in the fall of 2014.
    Often these newly contracted entities have little or no prior 
experience in administering health and drug benefit plans. 
Unfortunately, by the time deficiencies in the sponsor's operations and 
ability to provide the Part D benefit become apparent (typically when 
we receive complaints about significant numbers of inappropriately 
rejected claims at the pharmacy), the sponsor has already executed an 
agreement with us, which has prevented us from moving quickly to remove 
the sponsor from the program and prevent further beneficiary harm. In 
these instances, we have found it necessary to provide inordinate 
amounts of resource-intensive technical assistance to sponsors that 
were not prepared to effectively administer Part D benefits when they 
signed their contract. The essential operations test would help to 
prevent the recurrence of problems of this nature.
    The essential operations test for newly contracted entities would 
entail testing of sponsors' command of Part D benefit administration 
rules and systems related to these areas. Initially, the testing would 
consist of scenario testing with sponsors' key staff to show us that 
they have a firm grasp of the Part D policies and essential operations. 
The test would be able to verify whether an applicant's administrative 
and management arrangements, as attested to in its application, are 
sufficient for the applicant to carry out functions listed in Sec.  
423.504(b)(4)(ii) such as furnishing prescription drug services and 
implementing utilization management programs.
    Provided we have the resources, in the future, the test would 
likely become significantly more sophisticated and involve live testing 
of sponsors' systems with test data. The more involved test would also 
likely include testing the processes related to enrollment such as MARx 
communication and processing; LIS processing and determinations; 
coverage determinations, appeals, and grievances (CDAG) processing; and 
real-time coordination of benefits data exchange and processing. For 
instance, the sponsor would need to demonstrate the ability to pay test 
claims correctly in real-time consistent with its CMS-approved benefit 
packages (including formulary) and the Part D transition fill policy.
    The timing of the essential operations test must fit within the 
timeline of the annual Part D contracting process, which is driven 
largely by the bid deadline and plan election period dictated by 
statute. In preparation for an upcoming benefit year beginning on 
January 1, we must solicit and review applications from organizations 
seeking a MA-PD or PDP sponsor contract in February of the preceding 
year. We issue application determinations (that is, approval or denial) 
in May. All existing Part D sponsors and new applicants must submit 
their plan

[[Page 2015]]

benefit package (PBP) bids (including formularies) in June. Then, we 
complete the bid review approval and negotiation processes at the end 
of August. Once we have approved the submitted bids, sponsors can then 
execute their contracts with us. Historically, we have executed all 
contracts by mid-September so we can finalize preparations for the 
marketing season, which begins on October 1, and the annual election 
period (AEP), which begins on October 15. These preparations include 
publishing the Medicare & You handbook in September, which lists 
approved plans; releasing the Medicare Plan Finder Web site using plan-
specific data; reviewing and approving sponsors' marketing materials; 
and granting sponsors access to our enrollment systems.
    In contrast to an audit, the application process currently only 
requires that sponsors demonstrate to us that they have the necessary 
legal arrangements in place (for example, a risk-bearing license, 
executed contracts with first-tier and downstream entities, pharmacy 
network descriptions, etc.). Likewise, bid and formulary approvals 
indicate that the plans to be offered by the new sponsor are acceptable 
to us, not that the sponsor will necessarily be successful in 
implementing those plans.
    Under our current schedule, the essential operations test we 
propose to require as part of the application and contracting process 
would occur after contracts are signed in September but before the 
start of the benefit year on January 1. We would most likely complete 
the tests by November 15. In the future, we aim to conduct the 
essential operations tests prior to signing contracts with applicants 
which is why we are also proposing to add passing the test as a 
qualification to contract. Ultimately, in the event of an organization 
failing the test, we would apply the appropriate proposed regulatory 
provision based on the timing of the test administration.
a. Failing Essential Operations Test as Cause for Immediate Termination
    Once a sponsor signs its contract, it is obligated to perform all 
of the required functions to support the benefits described in the 
contract even though the sponsor does not start offering benefits until 
January 1. Given the volume of preparations and tight resource 
constraints between our approving bids in late August and the start of 
the AEP in October, the first opportunity we currently have to devote 
resources to the essential operations test is most likely in late 
September to November. We are currently not likely to be in the 
position to conduct essential operations tests prior to contracting 
because it would be challenging to conduct the test prior to approving 
the benefit structure against which we would test a sponsor's ability 
to process claims accurately. If we find that a sponsor does not have 
the requisite systems and processes in place to offer Part D benefits 
in real-time, we would consider this cause for immediate termination of 
the sponsor's Part D contract in order to protect beneficiaries from 
harm at the start of the contract year.
    Pursuant to section 1857(h)(2) of the Act (incorporated by 
reference into PDP by section 1860D-12(b)(3)(F) of the Act), we have 
the authority to immediately terminate a contract with a sponsor 
(without notice and opportunity for a hearing) when a delay in 
termination would pose an imminent and serious risk to the health of 
beneficiaries enrolled in the sponsor's plans. Also, under Sec.  
423.509(b)(2)(i) and Sec.  423.652(b)(2), unlike standard CMS 
terminations, the effective date of an immediate termination is not 
stayed when the sponsor requests a hearing under Sec.  423.650(a)(2). 
Because enrollment and accurate benefit administration through real-
time claims processing are so fundamental to the delivery of the Part D 
benefit, if a sponsor fails to demonstrate to us that it can perform 
these essential operations, we would view this as a substantial failure 
to meet the Part D contract requirements on the following grounds: (1) 
Evidence that the sponsor was carrying out the contract in a manner 
that was inconsistent with the effective and efficient administration 
of the plan; and (2) evidence that the sponsor did not substantially 
meet the applicable conditions set out in the Part D regulations which 
would ultimately justify, depending upon timing of the test, our 
termination of a contract consistent with Sec.  423.509(a)(1) through 
(3) based on the sponsor's failure to meet our proposed contract terms 
at Sec.  423.504(b)(10) and Sec.  423.505(b)(28). We believe that a 
newly contracted entity's failure to demonstrate certain critical 
capabilities and failing the essential operations test represents a 
substantial failure to carry out its Part D contract and is evidence 
that the sponsor is not prepared to carry out the contract in a manner 
that is consistent with the efficient and effective administration of 
the Part D program. Such a failure poses an unacceptable risk to the 
new sponsor's future members' access to Part D drugs, which would 
constitute an imminent and serious risk to beneficiary health and 
safety, justifying our immediate termination of the sponsor's contract. 
For MA organizations that must offer Part D benefits pursuant to Sec.  
423.104(f)(3)(i), failing the test would support the termination of the 
organization's Part D addendum as well as its MA contract under Sec.  
422.510(a)(3) because the inability to offer Part D benefits means that 
the organization no longer meets the applicable conditions associated 
with offering Part C benefits.
    Given our experience with sponsors' abilities to resolve systemic 
systems problems in a timely manner, we believe that sponsors that fail 
the test would most likely not have sufficient time before the start of 
the benefit year to remedy the breadth and magnitude of the failures we 
would have identified during the test. Even if the sponsor attested 
that it had corrected problems we identified, we would not have time to 
conduct a second test to validate the sponsor's corrections prior to 
the start of the new benefit year. Simply put, we believe the risk of 
harm to enrollees' health and safety is too great to move forward with 
a sponsor that has such significant and critical problems so close to 
the start of the plan year. Thus, an immediate termination of the 
contract before the start of the year would be the only way to protect 
beneficiaries and ensure successful operation of the Part D program by 
absolving the sponsor and us of the responsibilities in the contract.
b. Failing Essential Operations Test as Failure of a Qualification to 
Contract and Grounds for Nullification of Approval
    If an organization fails an essential operations test we conducted 
prior to contract signature, no termination would be necessary as we 
would simply nullify our previous conditional approval of the 
organization's Part D contract qualification application. Section 
423.503(a) describes the mechanisms we use to evaluate an applicant and 
determine whether the applicant is qualified to contract. These 
mechanisms currently include application review and on-site visits. The 
general term ``on-site visit'' is used to describe interactions with 
applicants that include our visiting the applicant's facility and vice 
versa, either in person or virtually. We are proposing to explicitly 
include the essential operations test as a qualification to contract at 
Sec.  423.503(a)(1) to authorize our use of the test and any 
information learned in the course of the essential operations test in 
making the contract determination. Our experience over the

[[Page 2016]]

past few years with newly contracted entities that have passed the 
paper-based application, but failed to have fully-functional 
administrative and management arrangements in place to effectively 
offer benefits in January, has demonstrated to us that implementing an 
essential operations test is key to the successful administration of 
the Part D program for all beneficiaries.
    We would view failure of the essential operations test as a 
determination that the applicant would not be qualified to contract 
with us. As a result, we would nullify our approval on that basis. 
Successful applicants receive a conditional approval at the end of May 
of their Part D application pursuant to Sec.  423.503(c)(1). The letter 
informs applicants that the conditional approval is based on the 
information contained in their application, and if we subsequently 
determined that any of the information was inaccurate or that 
qualification requirements are not met, we would withdraw the approval 
of the application. Through that notice, we preserve the right to 
nullify our approval. If that occurs, we would not provide appeal 
rights described in subpart N to applicants that have their approval 
nullified based on failing the essential operations test.
    We are proposing to not afford applicants appeal rights because CMS 
would not be able to conduct the appeals process provided for in Part 
423, Subpart N, within the timeframe imposed by Sec.  423.650(c), which 
requires CMS to have all contract application appeals decided by 
September 1 for contracts to be effective on January 1 of the following 
year. We could not conduct a test in late August, find that the 
applicant failed the test, and move through a fair appeal process for 
both parties in less than 2 weeks. Therefore, we would not afford 
appeal rights to applicants that fail the test prior to contracting 
under our proposal.
4. Termination of the Contracts of Medicare Advantage Organizations 
Offering PDP for Failure for 3 Consecutive Years To Achieve 3 Stars on 
Both Part C and Part D Summary Star Ratings in the Same Contract Year 
(Sec.  422.510)
    In the final rule adopted April 12, 2012 (77 FR 22168), we set 
forth at Sec.  422.510(a)(14) and Sec.  423.509(a)(13) that a Medicare 
contracting organization's consistent failure to achieve at least a 3-
star summary star rating for 3 consecutive years provides a sufficient 
basis for us to make a decision to terminate our contract with a MA 
organization or stand-alone PDP sponsor. This termination standard was 
based on the criteria we used then to mark low-rated contracting 
organizations with a ``low performing icon (LPI)'' on the Medicare Plan 
Finder Web site. Recently, we revised our LPI assignment criteria for 
MA organizations that offer PDP benefits (MA-PDs) to more accurately 
reflect their contract performance. We propose here to revise the 
contract termination regulation related to consistent low star ratings 
to reflect the new LPI assignment methodology announced in the contract 
year 2014 Call Letter. Specifically, we are proposing to modify our 
existing authority at Sec.  422.510(a) \3\ by clarifying that MA-PD 
organizations that do not achieve at least 3 stars in both their Part C 
and D ratings in the same year for 3 consecutive years may be subject 
to termination.
---------------------------------------------------------------------------

    \3\ Elsewhere in this proposed rule, we proposed to reorganize 
and renumber Sec.  422.510(a). The discussed provision is current 
codified at Sec.  422.510(a)(14) but we are proposing to redesignate 
it as Sec.  422.510(a)(4)(xi).
---------------------------------------------------------------------------

    In the April 12, 2012 final rule (77 FR 22072), we finalized the 
contractual requirement at Sec.  422.504(a)(18) and Sec.  
423.505(b)(25) that MA organizations and PDP plan sponsors attain each 
year summary ratings of at least 3 stars (the ``average'' performance 
rating). We explained that, because the star rating calculations are 
based on an organization's performance across a wide array of 
operational measures, the summary star ratings are an accurate 
indicator of the extent to which the organization has in place 
effective administrative and management arrangements necessary to 
administer Part C and Part D benefit plans, as required under Sec.  
422.504(a)(17) and Sec.  423.505(b)(24).
    We further established, as part of the same rulemaking, our 
authority at Sec.  422.510(a)(14) and Sec.  423.509(a)(13) to terminate 
the contracts of organizations offering MA and stand-alone PDPs when 
those organizations fail to achieve at least 3 stars on either their 
Part C or Part D summary rating for at least 3 consecutive years. At 
the time, we stated that since the measures that make up the star 
ratings provide evidence of the sufficiency of a contracting 
organization's administrative and management capability, it was 
reasonable for us to conclude that an organization receiving a summary 
rating below 3 stars for 3 consecutive years had substantially failed 
to meet that requirement, providing us justification for terminating 
the contract of that organization. We also explained that 3 consecutive 
years was sufficient time for sponsors to analyze the underlying causes 
of their low ratings and take corrective action that would result in at 
least a 3-star summary rating. The rulemaking also called for an MA-PD 
organization's Part C summary rating to be tracked separately from its 
Part D summary rating. That is, we could terminate an MA-PD 
organization contract if it failed for 3 straight years to achieve at 
least a 3-star Part C summary rating, regardless of its Part D summary 
ratings. Similarly, we could terminate the same organization if it 
failed to achieve at least a 3-star Part D summary rating for 3 
straight years, regardless of its Part C performance. Since in most 
instances an MA organization must also offer Part D benefits, 
consistently low Part D summary ratings justify a termination of the 
entire MA-PD contract since the organization could no longer meet its 
obligation to offer Part D benefits. We stated that we would allow a 3-
year transition period before we would begin using the star rating-
based termination authority to issue termination notices to any 
sponsors whose performance met the criteria in late 2014 with an 
effective date of January 1, 2015.
    At the time we adopted this regulation, we identified certain 
organizations on the Medicare Plan Finder (MPF) Web site as 
consistently low performing organizations with the display of the LPI 
next to the organization's other plan information. In the contract year 
2014 Call Letter released in April 2013, we announced a change in the 
methodology for assigning the LPI mark to plan sponsors. On page 105 of 
the notice, we noted that some stakeholders had raised concerns that 
MA-PD contractors could switch back and forth from poor performance on 
Part C to poor performance on Part D from year to year without ever 
being identified as a poor performer and marked with the LPI. We noted 
that such a situation was potentially misleading to beneficiaries, and 
we decided to address the matter by revising, effective in 2014, the 
criteria for the assignment of the LPI indicator to those organizations 
that fail for 3 consecutive years to achieve both Part C and Part D 
summary ratings of at least 3 stars in the same year for 3 consecutive 
years. We concluded this announcement by observing that MA-PD 
organizations are responsible for providing adequate care and services 
across both Part C and Part D and that the LPI methodology change 
encourages consistent improvement in the quality of care by MA-PD 
organizations across all of the Part C and Part D measures.
    We believe that the justification for the change in the LPI 
methodology also requires a change in the way we would

[[Page 2017]]

apply the standard for MA-PD contract termination based on star rating 
performance. The performance of an MA-PD organization must be assessed 
across the totality of its obligations under its Medicare contract. 
Organizations should not be permitted to target their compliance 
efforts from year to year on alternating sets of contract requirements, 
just barely meeting our minimum requirements in order to stay one step 
ahead of our enforcement authorities. Beneficiaries rightly expect 
quality in the delivery of all of their Medicare benefits, covering 
both health care and prescription drugs. MA-PD organizations that 
alternate their low star ratings from year-to-year between Part C and 
Part D are in fact subjecting their members to substandard performance 
every year. This is an unacceptable outcome that does not promote the 
best interests of Medicare beneficiaries.
    If an MA-PD organization is not able to achieve at least an 
``average'' star rating across all of its Part C and Part D operations 
in at least 1 year out of 3, it would become clear that the 
organization had both substantially failed to meet the administrative 
and management requirements of a Medicare contractor and could not take 
effective corrective action over the same 3-year period.
    The artificiality of the division between Part C and Part D star 
rating performance becomes apparent when one notes the extent to which 
the measures for each part assess the MA-PD organization's performance 
of similar functions or responsibilities. According to the most recent 
methodology we used to calculate star ratings, ``The Medicare Health & 
Drug Plan Quality and Performance Ratings--2013 Part C & Part D 
Technical Notes,'' (http://www.cms.gov/Medicare/Prescription-Drug-Coverage/PrescriptionDrugCovGenIn/PerformanceData.html) the Part C 
measures are divided into 5 domains and the Part D measures into 4. 
Three of the Part C domains are virtually identical to those of Part D, 
with variations where necessary to reflect differences in terminology 
and features between health and drug plans. For example, Domain 1 for 
Part D, ``Drug Plan Customer Service,'' consists of measures that 
largely correspond to those of Part C's Domain 5, ``Health Plan 
Customer Service.'' Both contain measures that reflect call center 
performance (including foreign language availability) and processing of 
appeals. The Part D Domain 2, ``Member Complaints, Problems Getting 
Services, and Improvement in the Drug Plan's Performance,'' measures an 
organization's performance in largely the same categories as Part C's 
Domain 4, ``Member Complaints, Problems Getting Services, and 
Improvement in the Health Plan's Performance.'' Both domains consist of 
measures that reflect beneficiaries' complaints about the plan, their 
access to benefits, their decision to leave the plan, and the plan's 
quality improvement. Domain 3 of both the Part C and Part D measures 
are entitled ``Member Experience with the Health/Drug Plan'' and 
reflect plan members' experience with their plans such as assessment of 
their ability to access covered services (needed prescription drugs in 
the case of Part D, physician appointments, and coordination of care in 
the case of Part C). Domain 4 for Part D, ``Patient Safety and Accuracy 
of Drug Pricing,'' corresponds to Part C's Domain 1, ``Staying Healthy: 
Screenings, Tests and Vaccines,'' and Domain 2, ``Managing Chronic 
(Long Term) Conditions,'' in that they all capture an MA-PD 
organization's attention to the clinical impact of the Medicare 
services they provide to their members. The Part D measures in Domain 4 
reflect the extent to which plan members maintain adherence to their 
medication regimens and receive prescriptions for high risk 
medications. The Part C Domains 1 and 2 address clinical performance as 
it is carried out by a health plan, including the extent to which it 
has conducted screenings of its members for breast cancer, colorectal 
cancer, and high cholesterol and manages long term conditions such as 
diabetes, high blood pressure, and rheumatoid arthritis.
    The similarity in the Part C and Part D measures means that the 
operations associated with these 2 programs are not so different as to 
justify separate Part C and Part D analyses of MA-PD organization's 
delivery of Medicare benefits to the same set of beneficiaries in the 
same service area. MA-PD organizations do not contract with us to 
provide separate Part C and Part D benefits. Rather, it is more correct 
to say that their contract obligates them to provide effective customer 
service, access to care, and promote clinical outcomes across the 
entire range of Medicare benefits. Therefore, the better way to assess 
an MA-PD organization's administrative and management compliance is not 
to see whether it can meet Part C or Part D requirements, but whether 
it can meet the customer service, access to care, and clinical 
performance requirements in the delivery of all types of Medicare 
benefits. The only way to accurately measure the performance of such 
functions is to examine the organization's ratings in the Part C and 
Part D measures in the related domains. For example, an MA-PD 
organization cannot be said to be providing satisfactory customer 
service to its members if it achieves a 3-star rating in only its Part 
C operations.
    Therefore, we propose to revise Sec.  422.510(a) \4\ to clarify 
that MA-only contracts are subject to CMS termination when they fail 
for 3 consecutive years to achieve a Part C star rating of at least 3 
stars. Additionally, we propose to add a subparagraph to Sec.  
422.510(a) to establish as a basis for termination of MA-PD contracts 
the failure for 3 consecutive years of the contract to achieve at least 
3 stars in both its Part C and D ratings in the same year. When we 
first adopted the star rating-based contract termination authority in 
April 2012, we stated that we would afford organizations a 3-year 
transition period before we would use that authority to make contract 
termination decisions. This period was necessary to allow organizations 
to make adjustments to their operations to reflect the dramatic 
increase in the consequences associated with low star rating 
performance created by our new termination authority. Accordingly, the 
regulation states that we may use only those star ratings issued after 
September 1, 2012, to make a decision to terminate a contract based on 
consistently low star ratings. Thus, organizations that fail to achieve 
at least a 3-star rating upon the release in September 2014 of the 2015 
ratings would be the first group of Medicare contractors eligible for 
termination under our new authority. We are not proposing to extend 
this grace period as part of this proposed adjustment to the current 
policy, because there is no reason why failures under the current 
regulations (which contain the ``loophole'' we are closing here) should 
not count towards the 3-year mark along with failures under the revised 
standard once in place.
---------------------------------------------------------------------------

    \4\ Elsewhere in this proposed rule, we would reorganize and 
renumber Sec.  422.510(a) and Sec.  423.509(a) to better reflect the 
bases for contract termination in connection with our statutory 
authority to terminate. Using the current numbering, this proposal 
would be codified as Sec.  422.510(a)(14) but under our proposal 
here, it would be codified as Sec.  422.510(a)(4)(xi).

---------------------------------------------------------------------------

[[Page 2018]]

III. Provisions of the Proposed Regulation

E. Implementing Other Technical Changes

1. Requirements for Urgently Needed Services (Sec.  422.113)
    Our regulations at Sec.  422.113(b) require MA organizations to 
cover urgently needed services furnished outside a plan's service area 
or contracted network of providers when the enrollee is in need of such 
services but is outside of the service area or is in the service area 
but the plan network is temporarily unavailable due to extraordinary 
and unusual circumstances. Further requirements built in to the 
definition of ``urgently needed services'' specify additional criteria 
for out-of-network coverage of these services: (1) The need for 
services was a result of unforeseen illness, injury or condition; and 
(2) it is not reasonable, given the circumstances, for the enrollees to 
obtain the services through the organization offering the MA plan.
    In the preamble to our June 29, 2000 final rule implementing the 
current requirements (65 FR 40199), we clarified the intended meaning 
of ``extraordinary and unusual circumstances'' as ``an earthquake or 
strike.'' However, it is our experience in administering the MA program 
that there are other much less severe circumstances in which the plan 
network may be unavailable or inaccessible to an enrollee who is in the 
authorized service area and needs immediate care due to an unforeseen 
illness, injury or condition. Examples of such circumstances include 
the need for urgent care outside of the network's business hours, (for 
example, during the weekend or at night).
    Many MA plans have responded to the need for urgently needed 
services by contracting with clinics that have hours of operation well 
beyond those of traditional physicians' offices to furnish services to 
their enrollees when the plan network is not available.
    To better align the regulations with current practices regarding 
access to urgently needed care services, we are proposing to revise the 
regulation by removing the phrase ``under extraordinary and unusual 
circumstances'' at Sec.  422.113(b)(1)(iii). The proposed regulatory 
language would read as follows:
    (iii) Urgently needed services means covered services that are not 
emergency services as defined in this section, provided when an 
enrollee is temporarily absent from the MA plan's service (or, if 
applicable, continuation) area (or provided when the enrollee is in the 
service or continuation area but the organization's provider network is 
temporarily unavailable or inaccessible) when the services are 
medically necessary and immediately required--
2. Skilled Nursing Facility Stays (Sec.  422.101 and Sec.  422.102)
    Under section 1814(a)(2)(B) of the Act, Medicare Part A generally 
only covers skilled nursing facility services (SNF) following a 
qualifying 3-day hospital stay. However, under section 1812(f) of the 
Act, we may authorize Part A coverage of SNF care without a prior 
hospital stay if two conditions are met. First, the coverage of these 
services must not result in any increase in Medicare program payments, 
and second, the coverage must not alter the acute care nature of the 
benefit. For reasons discussed later in this proposed rule, in an 
August 22, 2003 final rule (68 FR 50847), we exercised this authority 
under section 1812(f) of the Act with respect to SNF services covered 
under MA plans.
    The reason that we took this step is that, in the absence of this 
exercise of this authority, MA organizations could only cover SNF 
services without a 3-day prior hospital stay as a supplemental benefit. 
In such a case, if an MA enrollee is in a SNF pursuant to such coverage 
in the middle of a 100-day covered stay, and disenrolls from the MA 
plan, or the MA plan is terminated or non-renewed during such a stay, 
the beneficiary would lose SNF coverage, as it would not be covered 
under Medicare Part A because it would not have met the condition for 
coverage of a 3-day prior hospital stay. By exercising the authority 
under section 1812(f) of the Act to make the stay a Part A covered 
benefit, the stay would remain covered even if the individual is no 
longer enrolled in the MA plan.
    Our determination that SNF services provided by MA organizations 
without a 3-day prior hospital stay met the two tests in section 
1812(f) of the Act was based on the fact that MA organizations are paid 
a monthly per-Medicare enrollee payment to provide all contracted 
services. Thus, Medicare costs would not be affected by permitting SNF 
services to be covered by Medicare without the prior 3-day hospital 
stay for so long as the beneficiary was enrolled in the MA plan because 
the plan is paid a fixed amount without regard to services received. We 
determined that this would provide incentives for the MA organizations 
to provide care more cost effectively. Some evidence at the time 
indicated that MA organizations, particularly coordinated care plans, 
could shorten hospital stays and shift patients to post-acute or 
subacute settings, such as SNFs, more quickly than under the original 
Medicare program. If SNF care is the appropriate level of care, MA 
organizations are then able to use SNF care rather than more expensive 
hospital care for similar patients requiring posthospital care. For 
some patients and diagnoses, the MA organization is able to bypass the 
hospital stay and admit the beneficiary directly to a SNF.
    Because the previously discussed rulemaking exercised authority 
under section 1812(f) of the Act to authorize Part A coverage in the 
absence of an otherwise-required 3-day prior hospital stay, the 
regulations addressing ``basic benefits'' (which include benefits under 
Part A) at Sec.  422.101 were revised to include provision for this 
Part A coverage at Sec.  422.101(c).
    Notwithstanding the fact that, when the option under Sec.  
422.101(c) is elected by an MA organization, the services are covered 
under Part A, at least some MA organizations did not include the costs 
of such stays in the Part A portion of their adjusted community rate 
(ACR) submissions, and in later years, in their bids. Rather, they 
continued to treat these Part A-covered services as ``supplemental 
benefits.'' We understand why MA organizations did this, as the 
services (other than in the case described previously when an MA 
enrollee receiving such services is no longer enrolled in an MA plan 
covering them) would not be covered under Part A if the enrollee were 
not enrolled in the MA plan. However, because of the section 1812(f) of 
the Act waiver, these services technically were services ``covered 
under Part A,'' included under Sec.  422.101(a), not supplemental 
benefits under Sec.  422.102.
    We had determined in promulgating the August 2003 final rule that 
the services in this situation had to be treated as covered under Part 
A in order to protect coverage for a beneficiary who changes from MA 
coverage to original Medicare coverage mid-stay. However, in light of 
the fact that MA organizations have, over a period of years, been 
treating these benefits as supplemental benefits, we have determined 
that we can protect a beneficiary in the situation described without 
requiring an MA organization to include a SNF stay without a 3-day 
prior hospitalization as a Part A benefit under its MA plan by 
modifying our exercise of section 1812(f) of the Act authority to waive 
the 3-day prior hospitalization requirement only in cases in which an 
MA enrollee receiving SNF services without a 3-day

[[Page 2019]]

prior hospital stay changes from coverage under the MA plan to Medicare 
coverage under Original Medicare (or another MA plan that does not 
cover such stays as a supplemental benefit). This addresses the concern 
we were addressing in our August 2003 final rule without requiring MA 
organizations to change their treatment of this MA plan benefit.
    In order to effectuate this proposed change in the scope of our 
section 1812(f) waiver, we are proposing to move the provision 
describing an MA organizations' authority to furnish covered SNF stays 
without the qualifying inpatient hospital stay required under original 
Medicare to a new Sec.  422.102(f) in the section of the regulations 
governing supplemental benefits.
    We also propose to make a conforming revision in the cross-
reference to this provision that currently appears at Sec.  
409.30(b)(2)(ii), to--(1) reflect this provision's relocation from 
Sec.  422.101 to Sec.  422.102; and (2) reflect the fact that the Part 
A coverage provided for thereunder is not for the entire ``duration of 
the SNF stay'', but only for the period after the individual is no 
longer enrolled in the MA plan offering the coverage of the SNF stay as 
a supplemental benefit.
3. Agent and Broker Training and Testing Requirements (Sec.  422.2274 
and Sec.  423.2274)
    Pursuant to our authority under sections 1851(h)(2), 1860D-
1(b)(1)(B)(vi), 1851(j)(2)(E), and 1860D-4(l)(2) of the Act, we 
previously codified agent and broker training and testing requirements 
at Sec.  422.2274(b) and (c) and Sec.  423.2274(b) and (c) to require 
all agents and brokers selling Medicare products be trained and tested 
annually through a CMS endorsed or approved training program, or as 
specified by us, on Medicare rules and regulations specific to the plan 
products they intend to sell.
    Since the training and testing requirements were implemented, we 
have embarked on various activities to improve and ensure the efficacy 
of training and testing. Specifically, we launched an online training 
and testing pilot in 2009 to increase understanding of the standardized 
Medicare program requirements. Although the pilot was successful, our 
ability to accommodate all agents and brokers nationally is limited and 
maintaining the training and testing module requirements creates a 
significant financial burden. Additionally, endorsing other entities 
limits our oversight of training and testing information, and assurance 
of consistency among program requirements. Moreover, through our 
monitoring efforts, we have found that MA organizations and Part D 
sponsors are complying with the annual guidance released by us. 
Specifically, we found that plans provided adequate detail on the level 
of information that must be covered in agent and broker training and 
testing materials. As a result, we propose to revise Sec.  422.2274(b) 
and (c) and Sec.  423.2274(b) and (c) to accomplish several things (i) 
remove CMS endorsed or approved training and testing as an option; (ii) 
require that agents and brokers be trained annually on Medicare rules 
and regulations; and details specific to the plan products they intend 
to sell: And (iii) require agents and brokers to be tested annually to 
ensure appropriate knowledge and understanding of the training topics. 
We believe this proposed change continues to ensure that all agents and 
brokers selling Medicare products have a comprehensive understanding of 
Medicare program rules. We previously proposed (see the provisions for 
``Reducing the Burden of the Compliance Program Training Requirements 
(Sec.  422.503(b)(4)(vi)(C) and Sec.  423.504(b)(4)(vi)(C)'') to 
require a standardized compliance training program. Under those 
provisions, MA organizations and Part D sponsors will not be permitted 
to develop and implement plan specific training materials or 
supplemental materials. The proposed change in this section is 
exclusive to the requirements for conducting marketing activities under 
the MA and Part D program.
4. Deemed Approval of Marketing Materials (Sec.  422.2266 and Sec.  
423.2266)
    Sections 1851(h) and 1860D-1(b)(1)(B)(vi) of the Act establish the 
requirements regarding the review and approval of marketing materials 
created by MA organizations and Part D sponsors. Sections Sec.  
422.2266 and Sec.  423.2266 provide the regulatory requirements for 
materials that are deemed approved. If we have not disapproved the 
distribution of marketing materials and forms submitted by an MA 
organization or Part D sponsor with respect to the plan in the area, we 
are deemed not to have disapproved in all other areas covered by the MA 
organization or Part D sponsor except with regard to any portion of the 
material or form that is specific to the particular area. Sections 
Sec.  422.2262 and Sec.  423.2262 also provide the requirements for the 
review and distribution of marketing materials. The provisions stated 
in Sec.  422.2266 and Sec.  423.2266 are also part of the review and 
distribution process of marketing materials, and therefore should be 
moved to align with the requirements in Sec.  422.2262 and Sec.  
423.2262. Therefore, we propose moving the substance of the current 
requirements in Sec.  422.2266 and Sec.  423.2266 to Sec.  422.2262 
(a)(2) and Sec.  423.2262(a)(2), respectively. We propose reserving 
Sec.  422.2266 and Sec.  423.2266.
    In addition, we also believe that the current regulatory 
requirements in Sec.  422.2266 and Sec.  423.2266 do not clearly state 
when and to what extent marketing materials are considered deemed 
approved. Therefore, we propose to simplify the language presently 
contained in Sec.  422.2266 and Sec.  423.2266 by stating, ``if CMS 
does not approve or disapprove marketing materials within the specified 
review timeframe, the materials will be deemed approved. Deemed 
approved means that an MA organization or Part D sponsor may use the 
material.'' We believe this change clarifies the present regulatory 
requirement for deemed marketing materials.
5. Cross-Reference Change in the Part C Disclosure Requirements (Sec.  
422.111)
    Prior to the publication of subpart V, Medicare Marketing 
Requirements, marketing-related rules were found in subpart B, 
Eligibility, Election, and Enrollment. These rules (codified in Sec.  
422.80) included review of marketing materials and election forms. With 
the publication of our September 18, 2008 final rule (73 FR 54208), the 
marketing-related requirements were moved into the new subpart V and 
Sec.  422.80 was removed. Since that time, we have discovered an 
incorrect cross-reference to Sec.  422.80 at Sec.  422.111(d)(1) for 
procedures MA organizations must follow when submitting its rules 
changes to us for review. The correct reference should be subpart V, 
Medicare Advantage Marketing Requirements. We are proposing in these 
regulations to correct the reference contained in Sec.  422.111(d)(1).
6. Managing Disclosure and Recusal in P&T Conflicts of Interest: 
Formulary Development and Revision by a Pharmacy and Therapeutics 
Committee Under Part D (423.120(b)(1))
    Section 1860D-4(b)(3)(A)(ii) of the Act requires Part D sponsors 
who use formularies to include on their P&T committees at least one 
practicing physician and at least one practicing pharmacist, each of 
whom is independent and free of conflict with respect to the sponsor 
and the plan and who has expertise in the care of elderly or disabled 
persons. In our August 3,

[[Page 2020]]

2004 proposed rule (69 FR 46659), we proposed to interpret 
``independent and free of conflict'' to mean that such P&T committee 
members could have no stake, financial or otherwise, in formulary 
determinations. In our January 28, 2005 final rule (70 FR 4256), we 
adopted this interpretation, and clarified that we would consider a P&T 
committee member not to be free of conflict of interest if he or she 
had any direct or indirect financial interest in any entity--including 
Part D plans and pharmaceutical manufacturers--that would benefit from 
decisions regarding plan formularies.
    In a recent report (``Gaps in Oversight of Conflicts of Interest in 
Medicare Prescription Drug Decisions,'' OEI-05-10-00450), the HHS OIG 
recommended improvements in our requirements for Part D plan P&T 
committees. Specifically, the OIG report recommended that we establish 
minimum standards to ensure that these committees have clearly 
articulated and objective processes to determine whether disclosed 
financial interests are conflicts and to manage recusals due to 
conflicts of interests. The OIG report also suggested that we tell 
sponsors that they need to designate an objective party, such as a 
compliance officer, to flag and enforce the necessary recusals. In 
other words, the identification and evaluation of whether a disclosed 
financial interest represents a conflict of interest should be made by 
a knowledgeable and accountable representative of the sponsor's 
organization, such as the compliance officer, and not solely by the P&T 
committee members themselves. We concurred that P&T committees should 
have clearly articulated and objective processes to determine whether 
disclosed financial interests are conflicts, and to manage recusals 
arising from any such conflicts. Therefore, to address these 
recommendations, we propose to revise our formulary requirements 
pertaining to development and revision by a P&T committee at Sec.  
423.120(b)(1) to make it clear that the sponsor must establish such 
processes. Moreover, we propose that these processes must be clearly 
articulated and documented, and enforced by an objective party.
    In our response to the OIG report, we noted that statutory and 
regulatory provisions (section 1860D-4(b)(3) of the Act and 42 CFR 
Sec.  423.120(b)) indicate that it is the plan sponsor's responsibility 
to meet the formulary requirements, which include development of these 
processes. We also noted that we believe the agency's current Part D 
formulary review provides appropriate protections to beneficiaries from 
any adverse effects resulting from potential conflicts of interest. The 
agency thoroughly reviews Part D formularies to prevent discrimination 
against Medicare beneficiaries based on age, disease, or setting in 
which they receive care. The review process ensures inclusion of a 
broad distribution of therapeutic categories and classes by using 
reasonable benchmarks to ensure drug lists are robust. Further, we 
ensure that cost-sharing levels and utilization management strategies 
are appropriate and non-discriminatory. We identify potential outliers 
at each review step for further investigation and require reasonable 
clinical justification when outliers appear to create beneficiary 
access problems. We devote extensive resources to plan formulary 
oversight--and reserve the right to reject any formulary--to ensure 
compliance with industry best practices for formulary development and 
to ensure beneficiaries' access to clinically appropriate therapies.
    Therefore, if a P&T committee, while operating under a potential 
conflict of interest were to create a formulary representative of such 
conflicts, the formulary would likely be discriminatory. Because a 
discriminatory formulary would not be approved, the only potential 
impact we can envision would be that the bid could be more expensive 
and, therefore, less competitive. However, in this case, beneficiaries 
could easily evaluate these higher premiums in the marketplace and 
choose a more efficient plan to meet their needs. As a result, we would 
expect that, given our level of formulary review, a conflict of 
interest in the P&T committee would disadvantage the sponsor rather 
than the beneficiary or the Medicare program.
    We have also been asked to consider whether the practicing 
physician and the practicing pharmacist on the P&T committee who must 
be free of conflict of interest from Part D plans and pharmaceutical 
manufacturers should also be free of conflict of interest from Pharmacy 
Benefit Managers (PBMs). As discussed previously, we believe that our 
current formulary review process confers appropriate protections to 
beneficiaries from any potential adverse effects of conflicts of 
interest. Additionally, we have devoted extensive resources to the 
oversight of plan formularies and audit of P&T committee proceedings to 
ensure that they comply with industry best practices for development 
and management, and ensure beneficiaries' access to clinically 
appropriate therapies.
    P&T committees must first base their clinical decisions on the 
strength of scientific evidence and standards of practice, including 
assessing peer-reviewed medical literature, pharmacoeconomic studies, 
outcomes research data, and other such information as it determines 
appropriate, consistent with the program goal of maintaining a 
competitive market. Therefore, given that sponsors must balance both 
quality and costs in developing formularies, and that PBMs are the 
entities that negotiate for price concessions on behalf of sponsors, we 
believe that it is appropriate that PBMs have an interest in formulary 
decisions. However, we solicit comment on the pros and cons of defining 
PBMs as entities that could benefit from formulary decisions from which 
one practicing and one practicing pharmacy on the P&T committee must be 
free of conflict of interest.
    As discussed previously, we believe the potential effects of 
conflicts of interest would theoretically result in either 
discriminatory or inefficiently priced plans. However, our formulary 
review process prevents discrimination, and higher priced plans will be 
subject to competition on premiums in the marketplace. Nonetheless 
there may be risks to formularies that we have not anticipated. In 
addition, we believe that sponsors should be accountable for 
objectively managing potential conflicts of interest as directed by the 
statute. Therefore, we propose revising our regulations at Sec.  
423.120(b)(1) to renumber the existing provisions and add a new 
paragraph (b)(1)(iv) to require that the sponsor's P&T committee 
clearly articulates and documents processes to determine that the 
requirements under paragraphs (b)(1)(i), through (iii) have been met, 
including the determination by an objective party of whether disclosed 
financial interests are conflicts of interest and the management of any 
recusals due to such conflicts.
7. Definition of a Part D Drug (Sec.  423.100)
    Section 1860D-2(e) of the Act defines a covered Part D drug as a 
drug that may be dispensed only upon a prescription and that is 
described in subparagraph (A)(i), (A)(ii), or (A)(iii) of section 
1927(k)(2) of the Act; or a biological product described in clauses (i) 
through (iii) of subparagraph (B) of such section, or insulin described 
in subparagraph (C) of such section and medical supplies associated 
with the injection of insulin (as defined in regulations of the 
Secretary), and such term includes a

[[Page 2021]]

vaccine licensed under section 351 of the Public Health Service Act 
(and, for vaccinations administered on or after January 1, 2008), its 
administration, and any use of a covered Part D drug for a medically 
accepted indication (as defined in paragraph (4)). We codified this 
definition in Sec.  423.100.
a. Combination Products
    The FDA approves and regulates many products that include drug-drug 
and drug-device combinations. However, for the purposes of the Part D 
program, only combination products approved and regulated by the FDA as 
drugs, vaccines, or biologics (or any approved combinations of these) 
are potentially eligible for Part D coverage, in line with the Part D 
drug definition. We have previously addressed the status of combination 
products through guidance, including initially a published Q&A response 
and later in Section 10.3 of Chapter 6 of the Medicare Prescription 
Drug Benefit Manual (Part D Manual). This guidance has specified that 
combination products that contain at least one Part D drug component 
are Part D drugs when used for a medically accepted indication, unless 
such product, as a whole, belongs in one of the categories of drugs 
excluded from coverage under the Part D program. We now propose to 
address this issue in regulation to codify and clarify our policy.
    We propose to add paragraph (vii) under the definition of a Part D 
drug to further clarify that only those combination products approved 
and regulated in its combination form by the FDA as a drug, vaccine, 
insulin, or biologic, as described in paragraph (i), (ii), (iii), or 
(v) of the Part D drug definition, may be eligible for Part D coverage. 
Our proposal would make it clear that the definition of a Part D drug 
excludes products where a combination of items are bundled or packaged 
together for convenience (such as one box packaging together multiple 
products, each in separate bottles), where the bundle has not been 
evaluated and approved by the FDA. This proposal would not affect 
products where multiple active ingredients (including at least one Part 
D eligible prescription-only ingredient) are incorporated into a single 
pill or single injection, as such products would have had to go through 
FDA approval in this combined form, meeting the Part D requirement. 
Combination products that are FDA approved would then be treated like 
other Part D drugs, eligible for coverage only when being used for a 
medically accepted indication and not otherwise excluded from Part D 
coverage (for example, because it is covered as prescribed and 
dispensed or administered under Medicare Part B).
    This proposed policy is intended to clarify that a combination 
product containing at least one constituent ingredient that would, if 
dispensed separately, meet the definition of a Part D drug is eligible 
for Part D coverage only if it has received FDA approval in its 
combined form. Combination products not FDA approved as drugs under the 
Federal Food, Drug, and Cosmetics Act would not satisfy section 
1927(k)(2)(A)(i) of the Act, defining covered outpatient drugs as those 
approved for safety and effectiveness as a prescription drug. 
Combination vaccines not licensed as a vaccine under section 351 of the 
Public Health Service Act similarly would not satisfy the definition of 
a Part D drug as defined in section 1927(k)(6).
    Our proposal would not require that all constituent ingredients of 
a combination product be FDA-approved prescription drugs. An example 
would be an FDA-approved prescription drug that combines a Part D drug 
with a non-Part D covered vitamin. Conversely, a product combining a 
Part D drug with a medical food, dietary supplement, or another Part D 
drug, where the combined product has not received FDA approval as a 
prescription drug, vaccine, or biologic would not be eligible for Part 
D coverage.
b. Barbiturates and Benzodiazepines
    We also propose to amend the definition of a Part D drug to address 
certain exclusions by revising paragraph (2)(ii). When the Part D 
benefit started in 2006, all uses of barbiturates and benzodiazepines 
were excluded from coverage by statute. In 2008, section 175 of the 
MIPPA amended section 1860D-2(e)(2)(A) of the Act to include coverage 
for barbiturates when used in the treatment of epilepsy, cancer, or a 
chronic mental health disorder and for benzodiazepines when used for 
any medically accepted indication, effective January 1, 2013. In 2010, 
section 2502 of the Affordable Care Act amended section 1927(d) of the 
Act, to remove barbiturates and benzodiazepines from the list of drugs 
subject to exclusion from coverage, effective for services provided on 
or after January 1, 2014. Thus, this subsequent statutory change 
effectively includes barbiturates as a Part D drug for all medically 
accepted indications. The proposed revision to Sec.  423.100 would 
conform our definition of Part D drug to the new statutory requirement.
c. Medical Foods
    We propose to add paragraph (2)(iii) to the list of exclusions from 
the definition of Part D drug to specify that medical foods, as defined 
in 21 U.S.C. 360ee, are not Part D drugs. Medical foods are not 
described in subparagraphs A(i), A(ii) or A(iii) of section 1927(k)(2) 
of the Act, and therefore do not meet the statutory definition of a 
covered Part D drug, nor do they fall under other categories eligible 
for Part D coverage listed in the Part D drug definition, such as 
biologics, vaccines, and insulin.
    Moreover, as described previously in the section on combination 
products, a product with relevant components including some or all 
ingredients meeting the definition of a Part D drug would not be 
eligible for Part D coverage unless the combined product has also been 
approved by the FDA as a drug, vaccine, or biologic.
    The proposed clarifications involving coverage for approved 
combination products and non-coverage of medical foods would not affect 
current policies surrounding Part D coverage of parenteral nutrition. 
(See the Part D manual guidance, Chapter 30.7 regarding the payment for 
parenteral and enteral nutrition items and services.) Extemporaneously 
compounded prescription drug products (addressed separately in Chapter 
6 of the Part D manual and in Sec.  423.120) also would not be affected 
by the proposed changes. Part D coverage for extemporaneously 
compounded prescriptions is available for the ingredients that 
independently meet the definition of a Part D drug when the product 
needed is one requested by the provider to meet a specific medical 
need, where there is no commercially available alternative. The 
convenience packaging of unapproved combination products for broad 
distribution does not meet the criteria set out specifically for 
extemporaneously compounded prescriptions.
8. Thirty-Six Month Coordination of Benefits (COB) Limit (Sec.  
423.466(b))
    In our April 15, 2010 final rule (75 FR 19819), we exercised our 
authority under sections 1860D-23 and 1860D-24 of the Act to impose a 
timeframe on the coordination of benefits between PDP sponsors and 
other payers including State Pharmaceutical Assistance Programs 
(SPAPs), other providers of prescription drug coverage, or other 
payers. In the preamble of the final rule, we explained our approach to 
determining the 3-year timeframe,

[[Page 2022]]

including the benefits derived from its establishment.
    We stated, ``PDP sponsors must coordinate benefits with SPAPs, 
other entities providing prescription drug coverage, beneficiaries, and 
others paying on the beneficiaries' behalf for a period not to exceed 3 
years from the date on which the prescription for a covered PDP drug 
was filled.'' The phrase ``a period not to exceed 3 years'' has caused 
confusion among some sponsors, who interpreted this to mean that the 
coordination of benefits period could be shorter than 3 years, and have 
consequently imposed tighter timeframes for coordination of benefits.
    To clarify the requirement and avoid further confusion, we are 
proposing to remove from the regulation the phrase ``not to exceed,'' 
and adding the word ``of.'' This would clarify that sponsors must 
employ a coordination of benefits period of 3 years, and would remove 
any uncertainty about whether they may impose a shorter coordination of 
benefits period.
    We also propose to revise the heading of Sec.  423.466 to reference 
claims adjustments, which are addressed in Sec.  423.466(a).
9. Application and Calculation of Daily Cost-Sharing Rates (Sec.  
423.153)
    We are proposing technical changes to the daily cost-sharing rate 
rule to clarify the application and calculation of daily cost-sharing 
rates and cost-sharing under the rule. We reminded Part D sponsors in 
the contract year 2014 Final Call Letter that, beginning January 1, 
2014, in accordance with Sec.  423.153(b)(4)(i), they must establish 
and apply a daily cost-sharing rate whenever a prescription is 
dispensed by a network pharmacy for less than a 30 days' supply, unless 
the drug is excepted in the regulation. These provisions were finalized 
in a rule entitled ``Medicare Program; Changes to the Medicare 
Advantage and the Medicare Prescription Drug Benefit Programs for 
Contract Year 2013 and Other Changes'' (77 FR 22072) (``April 12, 2012 
final rule''). We provided information in the contract year 2014 Final 
Call Letter about changes to the PBP to accommodate a mandatory Daily 
Copayment field for any tier where the plan enters a Copayment Field to 
assist sponsors that have been confused about how to calculate daily 
cost-sharing rates. We also noted in the contract year 2014 Final Call 
Letter that the daily cost-sharing rate rule does not address how 
pharmacy dispensing fees are to be negotiated, calculated, or paid. We 
did so because we had heard that some sponsors are prorating dispensing 
fees as part of implementing the LTC short-cycle dispensing requirement 
of Sec.  423.154 effective beginning January 1, 2013 and may be 
incorrectly referencing the upcoming daily cost-sharing rate rule as 
the reason. We made clear that there is no necessary connection between 
daily cost-sharing rates charged to beneficiaries and how dispensing 
fees are paid to pharmacies. Nothing in the daily cost-sharing rate 
rule at Sec.  423.153(b)(4) requires the proration of dispensing fees, 
and we proposed a prohibition on the proration of dispensing fees in 
the LTC setting in another section of this proposed rule, because we 
believe it encourages inefficient dispensing in LTC facilities. In 
light of continuing confusion among some Part D sponsors about the 
daily cost-sharing rate rule, we believe technical changes to the rule 
are warranted.
    Currently, under Sec.  423.100, in cases when a copayment is 
applicable, ``daily cost-sharing rate'' is defined as the ``monthly 
copayment under the enrollee's Part D plan, divided by 30 or 31 and 
rounded to the nearest lower dollar amount, if any, or to another 
amount, but in no event to an amount that would require the enrollee to 
pay more for a month's supply of the prescription than would otherwise 
be the case.'' When we drafted this definition, we used the numbers 
``30'' and ``31,'' as these are the numbers of days that are typically 
in a month's supply in Medicare Part D prescription drug benefit plans. 
However, we clarified in the Call Letter that the maximum amount that 
can be entered for the Daily Copayment field in the PBP will be based 
on the 1-month copayment amount divided by the actual number of days 
entered for the 1-month supply for that specific tier. Therefore, we 
are proposing to replace these numbers with the phrase ``the number of 
days in the approved month's supply for the drug dispensed'' to address 
how Part D sponsors that have other days' supplies as their month's 
supplies are to calculate daily cost-sharing rates.
    Also, under our existing definition of ``daily cost sharing rate'' 
in Sec.  423.100, as noted above, and with respect to copayments, the 
daily copayment cannot be an amount that would require the enrollee to 
pay more for a month's supply of the prescription than would otherwise 
be the case. For example: If a plan uses a 31-day supply as its 1-month 
supply and establishes a one-month copayment of $70 for Tier 3, then 
the Daily Copayment field entry for that tier could not be higher than 
$2.25 ($70/31 = $2.258). Thus, if a plan must round the daily cost-
sharing rate to a dollar and cents figure, the highest amount the plan 
could round to would be the nearest lower dollar and cents amount, as 
shown in the example. If a plan rounded the daily cost-sharing rate up, 
then if an enrollee eventually received a month's supply of a 
medication, the enrollee would pay more than ``would otherwise be the 
case,'' meaning more than the 1-month cost sharing specified in the 
approved benefit package. In the example, if a plan were to round the 
daily cost-sharing rate up to $2.26, an enrollee who eventually 
receives a month's supply of the medication would pay $70.06, which is 
higher than the approved $70 copay for that tier. In other words, 
rounding up is not permitted under the current definition of ``daily 
cost-sharing rate'' and this has been another cause of confusion for 
some Part D sponsors.
    While our original intention was to prohibit significant increases 
in cost sharing, such as charging the full 30-day copay for both the 
trial supply and any subsequent refill of a medication, the current 
limitation on any increase in cost sharing over the 30-day supply 
amount has reportedly led to unnecessarily complicated programming, as 
well as proration of other amounts on the claim, such as the dispensing 
fees, as discussed previously. Therefore, we are proposing to replace 
the language ``lower dollar amount, if any, or to another amount,'' 
with ``the nearest cent.'' We believe this language would be the 
simplest way to convey the concept of rounding, while realizing this 
language would allow Part D sponsors to round daily cost-sharing rates 
up or down to the nearest 2 decimal places. For instance, in the 
example provided previously, the daily cost-sharing rate would actually 
be rounded to $2.26, as this amount would be the nearest cent. For the 
reasons we describe in the following paragraph, we believe this slight 
change in policy is not significant and that the proposed revised 
regulation text would address current confusion about the daily cost-
sharing rate rule. The revised definition of ``daily cost-sharing 
rate'', if adopted, would read with respect to copayments: ``as 
applicable, the established monthly copayment under the enrollee's Part 
D plan, divided by the number of days in the approved month's supply 
for the drug dispensed and rounded to the nearest cent.''
    As noted previously, the daily cost-sharing rate rule applies 
whenever a prescription is dispensed by a network pharmacy for less 
than a 30 days' supply, unless the drug is excepted in the regulation. 
However, as detailed in

[[Page 2023]]

the preamble to the April 12, 2012 final rule (77 FR 22072), it is 
primarily expected to incentivize Part D enrollees to talk with their 
prescribers about trial supplies, when they are prescribed an expensive 
chronic medication for the first time. By obtaining a less-than-30-
days' supply, beneficiaries reduce their cost sharing when the 
medication is discontinued in the first month due to poor tolerance or 
side effects, which also benefits the Part D program by reducing costs 
of unused medications. In addition, as noted in the April 12, 2012 
final rule (77 FR 22072), we believe some enrollees will be encouraged 
to request that their pharmacists assist them with synchronizing the 
refill dates of multiple medications, because they could do so without 
having to pay a full month's cost sharing for the shortened days' 
supplies necessary to synchronize refill dates. Although permitted 
under the rule, we do not foresee enrollees choosing to continue to 
receive chronic medications incrementally on a sequential basis. We 
anticipate that enrollees who tolerate a chronic medication would 
obtain months' supplies after the first incremental fill, and enrollees 
who are synchronizing medications are expected to do so through one 
incremental fill of all medications except one. Therefore, even though 
the proposed revised definition of ``daily cost-sharing rate'' could 
result in an enrollee who receives the remainder of month's supply 
after receiving an incremental fill paying slightly more than he or she 
otherwise would have for a month's supply, we believe such cases would 
be rare, if any, and the amounts involved are nominal anyway. We are 
more concerned that the regulation text with respect to rounding is 
clearer, and in this regard, we solicit comments on whether sponsors 
need any additional rounding guidance.
    We are also proposing other technical changes to the daily cost-
sharing rate rule at Sec.  423.153(b)(4)(i) to improve the regulation's 
clarity. First, we are proposing to consolidate the language of Sec.  
423.153(b)(4)(i)(A) into Sec.  423.153(b)(4)(i) and to consolidate 
Sec.  423.153(b)(4)(i)(B)(1) and (2) into a new paragraph Sec.  
423.153(b)(4)(ii). Second, we are proposing that the language in Sec.  
423.153(b)(4)(i) that addresses the application of the daily cost-
sharing rate in the case of a monthly copayment be revised for clarity, 
and moved to a new paragraph (b)(4)(iii)(A). This paragraph would state 
that in the case of a drug that would incur a copayment, the Part D 
sponsor must apply cost-sharing as calculated by multiplying the 
applicable daily cost-sharing rate by the days' supply actually 
dispensed when the beneficiary receives less than a 30 days' supply. 
Again, this is not a change in policy but is merely a technical change 
to the regulation text for better clarity. Third, we are proposing that 
Sec.  423.153(b)(4)(iii)(B) would state that, in the case of a drug 
that would incur a coinsurance percentage, the Part D sponsor shall 
apply the coinsurance percentage for the drug to the days' supply 
actually dispensed. We note that this means, with respect to dispensing 
fees, that the enrollee's portion of additional dispensing fees for the 
incremental supply would be calculated by application of this 
percentage. We believe all the foregoing technical clarifications will 
assist sponsors in correctly setting, calculating, and applying daily 
cost-sharing rates in the retail and LTC settings beginning January 1, 
2014 whenever a prescription is dispensed by a network pharmacy for 
less than a 30 days' supply, unless the drug is excepted in the 
regulation.
10. Technical Change To Align Regulatory Requirements for Delivery of 
the Standardized Pharmacy Notice (Sec.  423.562)
    The current regulations at Sec.  423.562(a)(3) require Part D plan 
sponsors to make arrangements with their network pharmacies to 
distribute notices instructing enrollees how to contact their plans to 
obtain a coverage determination or request an exception. This is 
accomplished through delivery of a standardized notice, CMS-10147--
``Medicare Prescription Drug Coverage and Your Rights'' (``pharmacy 
notice''). Section 423.562(a)(3) cross-references Sec.  
423.128(b)(7)(iii), added in our April 2011 final rule (76 FR 21432), 
which requires plans to have a system in place that transmits codes to 
network pharmacies so the pharmacy is notified to deliver the pharmacy 
notice at the point of sale (POS) in designated circumstances where the 
prescription cannot be filled as written.
    Pursuant to the 2011 regulatory change, we issued subsequent 
guidance (HPMS memoranda dated October 14, 2011 (``Revised Standardized 
Pharmacy Notice'') and December 27, 2012 (``Revised Guidance for 
Distribution of Standardized Pharmacy Notice'') which clarifies that 
distribution of the pharmacy notice is required upon receipt of certain 
transaction responses indicating that the claim is not covered by Part 
D, as well as revised manual guidance in Chapter 18, section 40.3.1 of 
the Medicare Prescription Drug Benefit Manual related to 
operationalization of this requirement specific to a variety of 
specialty pharmacy settings.
    In practice, we have never based distribution of or referral to the 
pharmacy notice on whether or not the enrollee disagrees with 
information provided by the pharmacist, but rather on whether the drug 
in question can be provided under Part D and whether the enrollee is 
able to obtain the covered drug at the pharmacy counter. Because the 
existing regulation text at Sec.  423.562(a)(3) ties delivery of the 
pharmacy notice to the enrollee's disagreement with information 
provided by the pharmacist, we are proposing to remove this reference.
    This proposed technical change would not alter the circumstances 
under which the pharmacy notice must be delivered to an enrollee and 
will align the regulation and the operational requirements for 
distribution of the pharmacy notice. In addition, this proposed change 
would be consistent with both the current OMB-approved instructions 
regarding the pharmacy notice and current CMS manual guidance.
    We do not prohibit distribution of the pharmacy notice in any 
circumstance, so pharmacies may choose to also provide a copy of the 
notice in circumstances where the enrollee disagrees with the 
information provided (for example, if the enrollee believes they are 
being charged an incorrect cost-sharing amount), but the notice is not 
required under the standards established in Sec.  423.128(b)(7)(iii). 
Provision of the pharmacy notice is not a prerequisite for an enrollee 
to request a coverage determination or access the appeals process. 
Similarly, a plan sponsor's failure to comply with the requirements of 
Sec.  423.128(b)(7)(iii) or Sec.  423.562(a)(3) does not in any way 
limit an enrollee's right to request a coverage determination or 
appeal.
11. Special Part D Access Rules During Disasters or Emergencies (Sec.  
423.126)
    Section 1860D-4(b) of the Act requires us to ensure beneficiaries 
have access to covered Part D drugs. When a disaster strikes or is 
imminent, beneficiaries may find they have trouble accessing drugs 
through normal channels or must move to safer locations far away from 
their regular pharmacies. In order to ensure that beneficiaries do not 
run out of their medications during or as a result of a disaster or 
emergency, we issued guidance on December 18, 2009 identifying when, in 
the course of a disaster, Part D sponsors would be

[[Page 2024]]

expected to relax ``refill-too-soon'' (RTS) edits. We now propose to 
codify a revised version of that policy. Proposed Sec.  
423.126(a)(1)(i) would require Part D sponsors to relax RTS edits in 
the event of any imminent or occurring disaster or emergency that would 
hinder an enrollee's access to covered Part D drugs. By this we mean 
that there is an anticipated or actual disaster or emergency, as 
evidenced by a declaration of a disaster or emergency issued by an 
appropriate federal, state, or local official, and it is reasonable to 
conclude that such disaster or emergency or preparation therefore would 
make it difficult for beneficiaries to obtain refills of their 
medications because the disaster or emergency or anticipation thereof 
has affected, or will affect, their ability to have timely access to 
their usual pharmacies. For example, if federal, state or local 
authorities issue mandatory evacuation orders to populations or 
segments of the population in a geographic area, it would be reasonable 
to conclude that the evacuation would hinder an LTC resident's ability 
to get a refill after he or she is evacuated from the facility. In such 
an instance, then, Part D sponsors with enrollees in the affected area 
would be required to relax RTS edits so that the LTC pharmacies could 
provide beneficiaries with refills to take with them to the location to 
which they are being evacuated. Our proposed requirement would apply to 
one refill for each drug the beneficiary is taking for refills sought 
within 30 days of the date the plan sponsor began relaxing RTS edits. 
We believe this timeframe would be sufficient to ensure that 
beneficiaries who are unable to obtain refills during the emergency or 
disaster will be able to do so as soon as they can safely access a 
network pharmacy. We solicit comment as to whether 30 days after the 
date of the triggering declaration provides an appropriate amount of 
time to ensure that beneficiaries do not run out of their medications. 
In particular, we would be interested in learning about any situations 
in which a beneficiary affected by an actual or impending disaster or 
emergency would be likely to go to a pharmacy more than 30 days after 
the triggering declaration such that the resumption of RTS edits after 
30 days would be problematic. We also solicit comment as to how it 
would be feasible for Part D sponsors to identify pharmacies or 
beneficiaries located in affected areas for which they would be 
required to relax edits and, how long it might then take to program the 
necessary changes.
    Although we believe our proposal provides a general framework for 
when RTS edits must be relaxed, we solicit comment on whether we should 
impose more particular requirements in cases where a disaster or 
emergency could result in a voluntary or mandatory evacuation of an LTC 
facility. We are also concerned that if a disaster strikes the area in 
which an LTC facility is located but not the area in which its 
servicing LTC pharmacy is located, the appropriate edits may not be 
relaxed. Accordingly, we solicit comment as to whether it would be more 
feasible to establish beneficiary specific edits limited to residents 
of LTC facilities in affected areas given that evacuation decision-
making is rarely a straightforward, linear process (for example, not 
just based on the declaration of a disaster or emergency), but rather, 
often involves a myriad of facility-specific factors. In particular, we 
solicit comment on the practicality of requiring Part D sponsors to 
relax RTS edits for residents of a particular LTC facility after that 
facility decides on its own initiative to evacuate through use of 
National Council on Prescription Drug Programs (NCPDP) Submission 
Clarification Code (SCC) code 13, which conveys that there is an 
emergency. We solicit comment as to whether use of this code number, 
13, is specific enough to signal that sponsors need to loosen RTS edits 
and whether it would be practical for LTC facilities to request that 
their LTC pharmacies enter the SCC code 13. Lastly, we would be 
interested in any other ideas on how to structure workable edits or 
institute manual procedures to best target only enrollees who live in 
LTC facilities located in areas affected by a disaster.
    We would also be interested in hearing from any commenters who 
would recommend any other triggering events that would require Part D 
sponsors to relax RTS edits. In particular, we solicit comment as to 
whether it would be feasible to require sponsors to relax edits after 
the issuance by the National Weather Service (NWS) of a Hurricane or 
Tropical Storm watch or warning. The NWS typically issues watches 36 
hours in advance of adverse weather conditions possibly hitting an 
area, while the NWS issues watches 48 hours (2 days) in advance of 
those conditions possibly hitting an area. All watches/warnings are 
posted on the NWS Web site immediately after their issuance. We solicit 
comment as to whether watch/warnings would require RTS overrides in the 
whole state, or just areas under the watch or warning. We are also 
interested in comments regarding the time generally needed to move 
residents of LTC facilities with their medication supplies to safety.
    Lastly, we believe that sponsors are in the best position to 
determine how to relax the specific RTS edits when required under our 
proposal. However, we also wish to ensure that all sponsors relax RTS 
edits in a consistent manner in order that enrollees have the same 
critical access to drugs when disasters and emergencies are imminent or 
have occurred--regardless of the specific plan in which they are 
enrolled. Accordingly, we solicit comments on the types of situations 
that might arise and the extent to which sponsors should be allowed to 
exercise some discretion in complying with this proposed requirement.
    And, as has been the case under our current guidance, Part D 
sponsors may consider extending the implementation of the RTS edits but 
are not required to do so. However, if sponsors choose to reinstate the 
RTS edits, they need to work closely with enrollees who indicate that 
they are still displaced or otherwise impacted by the disaster or 
emergency.
12. MA Organization Responsibilities in Disasters and Emergencies 
(Sec.  422.100)
    Section 1852(d) of the Act requires MA organizations to provide 
proper and continued access to services, including making medically 
necessary benefits available and accessible 24 hours a day and 7 days a 
week. When a disaster occurs or is imminent, beneficiaries may find 
they have trouble accessing services through normal channels or must 
move to safer locations that are outside of their service areas. To 
date, we have relied on issuing subregulatory guidance for MA 
organizations through the HPMS system and have included that guidance 
in Chapter 4 of the Medicare Managed Care Manual. During a disaster, we 
expect MA organizations to continue to follow applicable standing 
regulations, including ensuring continuing access to care in addition 
to complying with our subregulatory guidance.
    We are proposing to add paragraph (m) to Sec.  422.100 to codify 
and further clarify an MA organization's responsibilities when health 
plan services are affected by public health emergencies or disasters. 
This provision is intended to ensure that beneficiaries continue to 
have access to care in situations where normal business operations are 
disrupted due to public health emergencies, disasters and warnings of 
imminent disasters. The proposed new paragraph (m) requires MA 
organizations to ensure access to

[[Page 2025]]

covered services that are furnished at non-contracted facilities and to 
charge no more cost sharing for services obtained by enrolled 
beneficiaries out-of-network than they would pay in-network. These 
requirements provide protections for enrolled beneficiaries, including 
those who move to safer locations that are outside of their service 
areas, who have trouble accessing services through normal channels due 
to the unusual circumstances created by the disaster or emergency. 
Additionally, the proposed new paragraph (m) provides MA organizations 
with guidance on the bases for determining the beginning and end of a 
disaster or emergency and requires that the organization post on its 
Web site and convey to enrollees and contracted providers at least 
annually, the disaster and emergency policies in order to facilitate 
enrollee access to needed services while normal care delivery is 
unavailable. In addition, this enables out-of-network providers to be 
informed of the terms of payment for furnishing services to affected 
enrollees.
13. Termination of a Contract Under Parts C and D (Sec.  422.510 and 
Sec.  423.509)
a. Cross-Reference Change (Sec.  423.509(d))
    Section 1857(h)(1)(B) and 1860D-12(b)(3)(F) of the Act describes 
the procedures for termination for both Part C and Part D plan sponsors 
respectively. These statutory provisions give an organization an 
opportunity for a hearing before its contract is terminated.
    We codified organizations' appeal rights under subpart N of parts 
422 and 423. Under the Part C Sec.  422.510(d), a reference to the 
appeal rights ``in accordance with subpart N'' is made. However, in the 
corresponding section for Part D Plan sponsors at Sec.  423.509(d), the 
reference to the appeal rights reads ``in accordance with Sec.  
423.642.'' The Part C and Part D references should be the same. We are 
proposing to align the Part C and Part D appeal rights language under 
Sec.  422.510(d) and Sec.  423.509(d) by replacing the inconsistent 
language at Sec.  423.509(d) to now read ``in accordance with subpart N 
of this part.'' This change is proposed only to ensure consistent 
wording is used in both regulatory sections and in no way changes the 
meaning or policy encompassed in this provision.
b. Terminology Changes (Sec.  422.510 and Sec.  423.509)
    Sections 1857(c) and 1860D-12(b)(3)(B) of the Act authorize 
contract terminations for Part C MA organizations and Part D plan 
sponsors respectively. In the current termination regulations at Sec.  
422.510 and Sec.  423.509, there is inconsistent use of the terms 
``days'' and ``calendar days''. Calendar days are the appropriate term 
that should be used consistently throughout these sections. Therefore, 
we are proposing to replace the word ``days'' with ``calendar days'' in 
both Sec.  422.510 and Sec.  423.509. This change is proposed only to 
ensure consistent wording is used in Sec.  422.510 and Sec.  423.509 
and in no way changes the meaning or policy encompassed in these 
provisions.
c. Technical Change To Align Paragraph Headings (Sec.  422.510(b)(2))
    Sections 1857(c)(2) and 1860D-12(b)(3)(B) of the Act provide us 
with the authority to terminate contracts, for Part C and Part D 
sponsors respectively. The Part C paragraph heading at Sec.  
422.510(b)(2) incorrectly reads ``Expedited termination of contract by 
CMS.'' The Part D corresponding paragraph heading at Sec.  
423.509(b)(2) correctly reads ``Immediate termination of contract by 
CMS''. The Part C and Part D paragraph headings should be the same. 
Therefore, we are proposing to revise the paragraph of Sec.  
422.510(b)(2) to read ``Immediate termination of contract by CMS''. 
This change is proposed only to ensure consistent wording is used in 
both regulatory sections and in no way changes the meaning or policy 
encompassed in this provision.
d. Terminology Change (Sec.  423.509(b)(2)(C)(ii))
    Sections 1857(c)(2) and 1860D-12(d)(3)(B) of the Act provide us 
with the authority to terminate contracts, for Part C and Part D 
sponsors respectively. In Sec.  423.509(b)(2)(C)(ii) the regulation 
incorrectly references ``MA organization.'' This section concerns Part 
D, so the correct reference is ``Part D Plan Sponsor''. Therefore, we 
are proposing to change Sec.  423.509(b)(2)(C)(ii) to appropriately 
reference Part D plan sponsor; not MA organization (Part C), as it 
currently states. This change is proposed only to ensure accurate 
wording is used in both regulatory sections and in no way changes the 
meaning or policy encompassed in this provision.
14. Technical Changes To Align Part C and Part D Contract Determination 
Appeal Provisions (Sec.  422.641 and Sec.  422.644)
    Sections 1857(h) and 1860D-12(b)(3)(F) of the Act describe the 
procedures for termination for both Part C MA organizations and Part D 
Plan sponsors, respectively. These statutory provisions provide an 
organization with an opportunity for a hearing before its contract is 
terminated. Appeal procedures were established under sections 
1856(b)(2) and 1860D-12(b)(3) of the Act for both Part C and Part D 
sponsors, respectively. Sections 422.641 and 423.641, list the types of 
Part C and Part D contract determinations that may be appealed.
(a) Technical Change (Sec.  422.641)
    Currently in Sec.  422.641, the contract termination is discussed 
in paragraph (b) and contract non-renewal is discussed in (c). 
Conversely, in Sec.  423.641 the contract terminations are discussed in 
(c) and contract non-renewal is discussed in (b). Therefore, we are 
proposing to align the Part C list order for (b) and (c) in the 
contract determinations section at Sec.  422.641 with its Part D 
corresponding section at Sec.  423.641. This change is proposed only to 
ensure consistency between the two parts and in no way changes the 
meaning or policy encompassed in this provision.
(b) Technical Changes (Sec.  422.644(a) and (b))
    Sections 1857(h)(1)(B) and 1860D-12(b)(3)(F) of the Act describe 
the procedures for termination for both Part C and Part D sponsors, 
respectively. These statutory provisions provide an organization with 
an opportunity for a hearing before its contract is terminated. Appeal 
procedures were established under Sec.  1856(b)(2) of the Act for both 
Part C and Part D sponsors. In Sec.  423.642 we specify that the notice 
is based upon a contract determination made ``under Sec.  423.641.'' 
Therefore, since Part C and Part D language should be consistent the 
same reference should be made in the Part C corresponding Sec.  
422.644. To remedy this error, we are proposing to insert ``under Sec.  
422.641'' into Sec.  422.644(a) for Part C contract determinations. 
This change is proposed only to ensure consistent wording is used in 
both regulatory sections and in no way changes the meaning or policy 
encompassed in this provision.
    In addition, the Part D Plan sponsor language in Sec.  423.642(b) 
states that ``(b) The notice specifies the--(1) Reasons for the 
determination; and''. The Part C language in Sec.  422.644(b) states 
that ``(b) The notice specifies--(1) The reasons for the determination; 
and''. Part C and Part D language should be consistent, therefore, the 
same reference should be made in the Part C corresponding section Sec.  
422.644. To remedy this error, we are proposing to align the Part C 
language at Sec.  422.644(b) with that of the Part D language at Sec.  
423.642(b) for consistency between both the Part C and

[[Page 2026]]

Part D termination regulations. Specifically, we propose to change 
Sec.  422.644(b) by deleting the word ``the'' and revising it to read 
``(b) The notice specifies the--(1) Reasons for the determination; 
and''. This change is proposed only to ensure consistent wording is 
used in both regulatory sections and in no way changes the meaning or 
policy encompassed in this provision.
15. Technical Changes To Align Parts C and D Appeal Provisions (Sec.  
422.660 and Sec.  423.650)
    Sections 1857(h)(1)(B) and 1860D-12(b)(3)(F) of the Act describe 
the procedures for termination for both Part C and Part D, 
respectively. These statutory provisions provide organizations with an 
opportunity for a hearing before its contract is terminated. Appeal 
procedures were established under Sec.  1856(b)(2) of the Act for both 
Part C and Part D sponsors. We propose to make technical changes in our 
regulations at Sec.  422.660(a)(2), Sec.  422.660(a)(3), and Sec.  
423.650(a)(2) to ensure consistency. Specifically, we are proposing to 
replace the term ``under'' with the phrase ``in accordance with'' in 
Sec.  422.660(a)(2), Sec.  422.660(a)(3), and Sec.  423.650(a)(2). This 
change is proposed only to ensure consistent wording is used in Sec.  
422.660 and Sec.  423.650 and in no way changes the meaning or policy 
encompassed in these provisions.
    In addition, we are proposing to make a technical change in our 
regulations at Sec.  423.650(a)(4) to ensure consistency with the 
authorizing language contained in sections 1856(b)(2), 1857(h), and 
1860D-12(d)(3)(F) of the Act which gives us the authority to terminate 
contracts for both Part C and Part D sponsors. Under the Part C Sec.  
422.660(a)(4), a reference to imposing intermediate sanctions and civil 
money penalties ``in accordance with Sec.  422.752(a) through (b) of 
this part'' is made. The corresponding section for Part D is at Sec.  
423.650(a)(4). However, the reference to imposing intermediate 
sanctions and civil money penalties reads ``in accordance with Sec.  
423.752(a) and (b)''. The Part C and Part D references should be the 
same and both state ``(a) through (b)''. Specifically, we are proposing 
to replace the word ``and'' with ``through'' in Sec.  423.650(a)(4). 
This change is proposed only to ensure consistent wording is used in 
both regulatory sections and in no way changes the meaning or policy 
encompassed in this provision.
    Sections 422.660(b)(4) and 423.650(b)(4) give a general reference 
to Sec.  422.752 and Sec.  423.752, but do not refer the reader to the 
applicable paragraphs contained in those sections. Therefore, we are 
proposing to modify Sec.  422.660(b)(4) and Sec.  423.650(b)(4) to add 
the language ``Sec.  422.752(a) through (b)'' and ``Sec.  423.752(a) 
through (b)'', respectively, to refer the reader to the applicable 
regulations for intermediate sanctions. This change is proposed only to 
accurately reflect applicable regulatory requirements and in no way 
changes the meaning or policy encompassed in this provision.
16. Technical Changes Regarding Intermediate Sanctions and Civil Money 
Penalties
    Sections 1857(g) and 1860D-12(b)(3)(E) of the Act provides us with 
the authority to impose intermediate sanctions (sanctions) and CMPs on 
Part C and Part D sponsors, respectively.
a. Technical Changes to Intermediate Sanctions Notice Receipt 
Provisions (Sec.  422.756(a)(2) and Sec.  423.756(a)(2))
    Under Sec.  422.756(a)(2) and Sec.  423.756(a)(2) the current 
language states that written requests for rebuttal by the MA 
organization or Part D plan sponsor must be received within ``10 
calendar days from the receipt of notice''. This language is 
inconsistent with other the language that appears in other sections 
within subpart O, the appeals section in subpart N and the termination 
sections in subpart K. In those sections we state that written requests 
must be received within ``10 calendar days after receipt of the 
notice''. The language in all sections should be consistent. Therefore, 
we are proposing to modify the language at Sec.  422.756(a)(2) and 
Sec.  423.756(a)(2) to state ``10 calendar days after receipt of the 
notice''. This change is proposed only to ensure consistent wording is 
used in all sections and in no way changes the meaning or policy 
encompassed in this provision.
    In addition, we are proposing to correct the grammatical error that 
exists in current Sec.  422.756(a)(2) and Sec.  423.756(a)(2). The Part 
C and Part D language currently reads, ``CMS considers receipt of 
notice as the day after notice is sent by fax, email, or submitted for 
overnight mail''. To fix the grammatical errors we are proposing to 
revise the language in both Sec.  422.756(a)(2) and Sec.  423.756(a)(2) 
to read ``CMS considers receipt of the notice as the day after the 
notice is sent by fax, email, or submitted for overnight mail.'' This 
change is proposed only to make a grammatical correction and in no way 
changes the meaning or policy encompassed in this provision.
b. Cross-Reference Changes (Sec.  422.756(b)(4) and Sec.  
423.756(b)(4))
    Under Sec.  422.756(b)(4) and Sec.  423.756(b)(4), we furnish our 
procedures for imposing intermediate sanctions and civil money 
penalties on MA organizations and Part D sponsors, respectively. The 
current language at Sec.  422.756(b)(4) states that MA organizations, 
if sanctioned, must follow the right to a hearing procedure as 
specified at Sec.  422.660 and Sec.  422.684. The current language at 
Sec.  423.756(b)(4) states that Part D sponsors, if sanctioned, must 
follow the right to a hearing procedure as specified at Sec.  423.650 
and Sec.  423.662. However, MA organizations and Part D sponsors must 
adhere to procedures promulgated within subpart N of the regulations, 
not just Sec.  422.660 and Sec.  422.684; and Sec.  423.650 and Sec.  
423.662, respectively. Therefore, we are proposing to modify the 
language at Sec.  422.756(b)(4) and Sec.  423.756(b)(4) to state that 
MA organizations and Part D sponsors ``must follow the right to a 
hearing procedures as specified in subpart N''. This change is proposed 
only to accurately reflect applicable regulatory requirements and in no 
way changes the meaning or policy encompassed in this provision.
c. Technical Changes (Sec.  422.756(d) and Sec.  423.756(d))
    In Sec.  422.756(d) and Sec.  423.756(d) we provide alternatives to 
sanctions, including non-renewal or termination of the organizations 
contract. However, the paragraph heading of both Sec.  422.756(d) and 
Sec.  423.756(d) only refers to terminations by CMS. Therefore, we are 
proposing to revise the paragraph heading to ``Non-renewal or 
termination by CMS'' in both sections to reflect the content specified 
within the provision. This change is proposed only to accurately 
reflect applicable regulatory requirements and in no way changes the 
meaning or policy encompassed in this provision.
    Within Sec.  422.756(d) and Sec.  423.756(d) we state that we may 
decline to authorize the renewal of an organization's contract in 
accordance with Sec.  422.506(b)(2) and (b)(3) for MA organizations and 
in accordance with Sec.  423.507(b)(2) and (b)(3) for Part D sponsors. 
However, in both Sec.  422.756(d) and Sec.  423.756(d), all of 
paragraph (b) applies to the provisions. Therefore, we are proposing to 
change both provisions Sec.  422.756(d) and Sec.  423.756(d) to read 
``Sec.  422.506(b)'' and ``Sec.  423.507(b)'', respectively. This 
change would accurately reflect that all of paragraph (b) applies in 
both provisions. This

[[Page 2027]]

change is proposed only to accurately reflect applicable regulatory 
requirements and in no way changes the meaning or policy encompassed in 
this provision.
    Within Sec.  422.756(d) and Sec.  423.756(d), we refer to the 
sanctions described in paragraph (c) of each section but in each 
section, paragraph (c) refers to the effective date and duration of 
sanctions, rather than sanctions which are described in Sec.  422.750 
and Sec.  423.750, respectively. Therefore, we are proposing to change 
the current language at Sec.  422.756(d) to read ``In addition to or as 
an alternative to the sanctions described in Sec.  422.750 . . .'' and 
change the language at Sec.  423.756(d) to read ``In addition to or as 
an alternative to the sanctions described in Sec.  423.750.'' This 
change would accurately reflect the applicable provision referenced in 
both Sec.  422.756(d) and Sec.  423.756(d). This change is proposed 
only to accurately reflect applicable regulatory requirements and in no 
way changes the meaning or policy encompassed in this provision.
d. Technical Changes To Align the Civil Money Penalty Provision With 
the Authorizing Statute (Sec.  422.760(a)(3) and Sec.  423.760(a)(3))
    The provisions at Sec.  422.760(a)(3) and Sec.  423.760(a)(3) 
state, ``the harm which resulted or could have resulted from conduct of 
an MA organization'' and ``the harm which resulted or could have 
resulted from conduct of a Part D plan sponsor'', respectively. 
However, this language is not consistent with the authorizing statutory 
provisions, nor is it consistent with other provisions in the 
corresponding sections. Therefore, we are proposing to align the 
language with paragraph (b) in both Sec.  422.760(a)(3) and Sec.  
423.760(a)(3). The language would be revised to state ``The adverse 
effect to enrollees which resulted or could have resulted . . .'' in 
both Sec.  422.760(a)(3) and Sec.  423.760(a)(3). This change is 
proposed only to accurately reflect applicable statutory requirements 
and in no way changes the meaning or policy encompassed in this 
provision.
e. Technical Changes To Align the Civil Money Penalty Hearing Notice 
Receipt Provisions (Sec.  422.1020(a)(2), Sec.  423.1020(a)(2), Sec.  
422.1016(b)(1), and Sec.  423.1016(b)(1))
    Sections 1857(g)(4) and 1860D-12(b)(3)(E) of the Act provides us 
with the authority to impose civil money penalties on Part C and Part D 
sponsors, respectively. Under Sec.  422.1020(a)(2) and Sec.  
423.1020(a)(2), we discuss our procedures for appealing CMPs. The 
current language in both sections state written requests for appeal by 
the MA organization or legal representative or authorized official must 
be filed within 60 calendar days from the receipt of notice of initial 
determination, to request a hearing before the Administrative Law Judge 
to appeal any CMS decision. However, this language does not align with 
the appeal language in subpart N. Therefore, we are proposing to change 
the language at Sec.  422.1020(a)(2) and Sec.  423.1020(a)(2) to align 
it with the language within subpart N for appeals. Specifically, we are 
changing both Sec.  422.1020(a)(2) and Sec.  423.1020(a)(2) to state 
``within 60 calendar days after receipt of the notice of initial 
determination''. This change is only to ensure consistent wording is 
used in all sections and in no way changes the meaning or policy 
encompassed in this provision.
    In addition, under Sec.  422.1016 and Sec.  423.1016, we furnish 
our procedures for filing briefs with the Administrative Law Judge or 
Departmental Appeals Board, and opportunity for rebuttal. The 
provisions at Sec.  422.1016(b)(1) and Sec.  423.1016(b)(1) state, 
``the other party will have 20 days from the date of mailing or 
personal service to submit any rebuttal statement or additional 
evidence''. However, this language is not consistent with provisions in 
other corresponding sections. Therefore, we are proposing to revise the 
language at Sec.  422.1016(b)(1) and Sec.  423.1016(b)(1) to state 
``The other party will have 20 days from the date of mailing or in 
person filing''. This change is proposed only to ensure consistent 
wording is used in all sections and in no way changes the meaning or 
policy encompassed in this provision.
17. Technical Change to the Restrictions on Use of Information Under 
Part D (Sec.  423.322)
    We are proposing a technical change to Sec.  423.322 due to section 
6402(b)(1) of the Affordable Care Act which amended section 1860D-
15(f)(2) of the Act. For background, most of the payment provisions for 
the Part D program are found in section 1860D-15 of the Act. 
Subsections (d) and (f) of section 1860D-15 of the Act authorize the 
Secretary to collect any information needed to carry out this section. 
However those subsections, as originally enacted, also stated that 
``information disclosed or obtained under [section 1860D-15 of the Act] 
may be used by officers, employees, and contractors of [HHS] only for 
the purpose of, and to the extent necessary, in carrying out [section 
1860D-15 of the Act].'' Thus, section 1860D-15 of the Act contains 
provisions that limit the use of information disclosed or obtained 
under its authority.
    Section 6402(b)(1) of the Affordable Care Act amended section 
1860D-15(f)(2) of the Act to relax the limitation on the use of 
information that is disclosed or obtained under section 1860D-15 of the 
Act. Specifically, the Affordable Care Act removed the word ``only'' 
from subsection (f)(2)(A) and added a new subsection (ii) which states 
that information disclosed or obtained under section 1860D-15 of the 
Act may be used by officers, employees, and contractors of HHS for the 
purposes of, and to the extent necessary, in ``conducting oversight, 
evaluation, and enforcement under this title.'' Section 6402(b)(1) also 
added a new subsection (B) which states that information disclosed or 
obtained pursuant to section 1860D-15 of the Act may be used ``by the 
Attorney General and the Comptroller General of the United States for 
the purposes of, and to the extent necessary in, carrying out health 
oversight activities.'' Thus, the Affordable Care Act considerably 
broadened the purposes for which HHS, its contractors, and the Attorney 
General and Comptroller General may use the information disclosed or 
obtained pursuant to section 1860D-15 of the Act by removing the word 
``only'' in subsection (A) and adding a new clause (ii) and a new 
subsection (B). However, we note, that the Affordable Care Act did not 
change the existing restriction on the use of information under 
subsection (d).
    In light of the Affordable Care Act amendment to section 1860D-
15(f) of the Act, we are proposing to make conforming changes to Sec.  
423.322.

IV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.

[[Page 2028]]

     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs).

A. ICRs Related to Eligibility of Enrollment for Individuals Not 
Lawfully Present in the United States (Sec.  417.2, Sec.  417.420, 
Sec.  417.422, Sec.  417.460, Sec.  422.1, Sec.  422.50, Sec.  422.74, 
Sec.  423.1, Sec.  423.30, and Sec.  423.44)

    We are proposing to amend Sec.  417.2, Sec.  417.420, Sec.  
417.422, Sec.  417.460, Sec.  422.1, Sec.  422.50, Sec.  422.74, Sec.  
423.1, Sec.  423.30, and Sec.  423.44 to include the eligibility 
requirement of citizenship or lawful presence to enroll in MA, Part D, 
or cost plans. To implement these regulations, we would relay data 
regarding an individual's lawful presence status to plans through the 
MARx system so that the plans will be aware of an individual's 
eligibility when requesting enrollment and notify plans when current 
members lose lawful presence status. This data is already available to 
us; thus no new data will be collected, and there is no new information 
collection or burden on organizations.

B. ICRs Related to Improper Prescribing Practices and Patterns (Sec.  
424.535(a)(13) and (14))

    Our proposed additions of Sec.  424.535(a)(13) and (14) would 
result in an increase in revocations and associated appeals. However, 
we are unable to estimate the number of revocations and appeals. We do 
not have data available that can be used to make such a projection, as 
each situation would have to be carefully reviewed and addressed on a 
case by case basis. Since we would invoke Sec.  424.535(a)(8)(iii) only 
in the most egregious of circumstances, we believe that the number of 
revocations under this provision would be small. The concomitant 
increase in the ICR burden would therefore be minimal.

C. ICRs Related to Applicants or Their Contracted First Tier, 
Downstream, or Related Entities To Have Experience in the Part D 
Program Providing Key Part D Functions (Sec.  423.504(b)(8)(i) Through 
(iii))

    Proposed Sec.  423.504(b)(8)(i) through (iii) would require that 
Part D organizations seeking a new Medicare contract must have 
arrangements in place such that either the applicant or a contracted 
entity that will be performing certain key Part D functions has at 
least 1 full benefit year of experience providing the function or 
providing the function for another Part D plan sponsor. The burden 
associated with this requirement is the time and effort put forth by 
Part D applicants to answer questions about such experience as part of 
the Part D application process. For entities that hold an existing Part 
D contract, or whose parent or another subsidiary of that parent has 
already held a Part D sponsor contract for at least a year, it is 
estimated that it will take each Part D applicant for a new contract 2 
minutes to provide 1 or 2 new sentences in the organizational history 
section of the application, and 1 minute to respond to yes-no questions 
about experience with the 3 functions for which experience is required, 
for a total of 3 minutes per applicant. For entities new to Part D, it 
is estimated that it will take each Part D applicant for a new contract 
2 minutes to provide 1 or 2 new sentences in the organizational history 
section of the application, 1 minute to respond to yes-no questions 
about experience with the 3 functions for which experience is required, 
and 1 additional minute to provide at least 1 contract number of an 
existing or recent Part D sponsor under which the entity to provide the 
key function obtained its experience, for a total of 4 minutes. Based 
on the number of Part D applications we receive each year, we would 
anticipate no more than 60 Part D applications for a new contract, of 
which no more than 15 would be entities new to Part D. Thus, the burden 
for the 45 existing entities at 3 minutes each, plus the burden for the 
15 new entities at 4 minutes each, brings the total burden hours to 
approximately 3.25 hours. If approved, the new application questions 
would be addressed under currently approved OMB control number (OCN) 
0938-0936.

D. ICRs Related to Eligibility of Enrollment for Incarcerated 
Individuals (Sec.  417.460, Sec.  422.734, and Sec.  423.44)

    We are proposing to amend Sec.  417.460(b)(2)(i), Sec.  
417.460(f)(1)(i), Sec.  422.74(d)(4)(i)(A), Sec.  422.74(d)(4)(v), and 
Sec.  423.44(d)(5) to clarify the eligibility requirement for residing 
in the plan's service area related to incarceration for the purposes of 
enrolling into and remaining enrolled in MA, Part D, and Medicare cost 
plans. To implement these regulations, we would relay data to plans 
regarding an individual's incarceration through the MARx system so that 
the plans would be aware of the individual's eligibility when 
requesting enrollment and notify the plans of loss of eligibility for 
current members. This data is already available to us. Thus no new data 
would be collected, and there is no new information collection or 
burden on organizations.

E. ICRs Related to Rewards and Incentives Program Regulations for Part 
C Enrollees (Sec.  422.134)

    This requirement does not impose any new information collection 
requirements. This is an existing recordkeeping requirement in which MA 
organizations must retain information pertaining to any rewards and 
incentives programs in accordance with our regulations at 42 CFR 
422.118. We believe the burden associated with this requirement is 
exempt from the PRA under 5 CFR 1320.3(b)(2) as we believe this is a 
usual and customary business practice. Furthermore, any requests to 
furnish the information in a form and manner we designate are unique, 
that is, non-standardized and specific to each individual MA 
organization.

F. ICRs Related to Expanding Quality Improvement Program Regulations 
(Sec.  422.152)

    This requirement does not impose any new information collection 
requirements. PRA approval is current under OCN 0938-1023.

G. ICRs Related to Revisions to Good Cause Processes (Sec.  417.460, 
Sec.  422.74, and Sec.  423.44)

    We are proposing to amend Sec.  417.460, Sec.  422.74, and Sec.  
423.44 to establish the ability for us to designate an entity other 
than CMS to implement the good cause process. To implement these 
regulations, the plan will already have the enrollment data necessary 
to make the good cause determinations within the process. Thus no new 
data would be collected. However, there would be additional burden to 
the plan in terms of completing the operational process, such as 
responding to requests for reinstatement from former members, gathering 
the attestation from the individual regarding his or her reason for not 
paying the plan premiums within the grace period, making the 
determination as to whether the individual meets the good cause 
criteria and maintaining the case notes and documentation to support 
its determination should it need to be reviewed. As plans already 
provide customer service to their current and past members, we estimate 
that this burden would be approximately 30 minutes for each 
reinstatement request. According to the most recent wage data provided 
by the Bureau of Labor Statistics (BLS) for May 2012, the mean

[[Page 2029]]

hourly wage for the category of ``Customer Service Representatives''--
which we believe, considering the common point of entry for all issues 
at the plan, is the most appropriate category--is $15.92. With fringe 
benefits and overhead, the per hour rate is $24.03. It is calculated 
that the cost for 30 minutes would be $12.01. Not all plans disenroll 
for non-payment of premiums. However, for those who do implement this 
voluntary policy, it results in an average of 20,000 disenrollments 
each month. In response, we receive an average of 698 requests for 
reinstatement per month. The plan representative cost of $12.01 for 
each case is multiplied by 698 cases. Therefore, based on the proposed 
change, handling of these requests would result in a total monthly cost 
of $8,383 for all plans in the MA, Part D, and cost plan programs.

H. ICRs Related to the Definition of Organization Determination (Sec.  
422.566)

    The burden associated with this proposal is the time necessary for 
MA organizations to process organization determination requests, issue 
a decision and, where appropriate, effectuate any approved coverage 
decision. When an MA organization issues an adverse organization 
determination, it must give the enrollee written notice pursuant to the 
requirements in Sec.  422.568(d) and (e) and Sec.  422.572(e). This 
requirement is subject to the PRA, and the burden associated with it is 
currently approved under OCN 0938-0829. The information collection 
requirements are not expected to change because the proposed revisions 
to the definition of organization determination would not alter the 
frequency with which the current OMB-approved notice is required, nor 
the time required to issue the notice. The proposed change to Sec.  
422.566(b)(3) would codify certain adverse decisions which MA 
organizations already treat operationally as adverse organization 
determinations subject to the standardized denial notice. The proposed 
addition of Sec.  422.566(b)(6) applies only to favorable organization 
determinations which do not require written notice.

I. ICRs Related to Skilled Nursing Facility Stays (Sec.  422.101 and 
Sec.  422.102)

    We propose to relocate the MA regulation language currently located 
at Sec.  422.101(c), ``Requirements Related to Basic Benefits'' to 
Sec.  422.102(a)(5), ``Supplemental Benefits.'' We are proposing to 
move the provision because it describes MA organizations' authority to 
furnish covered SNF stays without the qualifying inpatient hospital 
stay required under original Medicare. For the past 10 years, MA 
organizations have offered the waiver of the 3-day inpatient hospital 
stay as a supplemental benefit. Thus, placing the provision in the 
section related to supplemental benefits is appropriate.
    We also propose to make a conforming revision in the cross-
reference to this provision that currently appears at Sec.  
409.30(b)(2)(ii), in order to reflect this provision's relocation from 
Sec.  422.101 to Sec.  422.102. This is a simple relocation of current 
regulation. There are no new PRA requirements.

J. ICRs Related to Changes to Audit and Inspection Authority (Sec.  
422.503(d)(2) and Sec.  423.504(d)(2))

    We are proposing a change to Sec.  422.503(d)(2) and Sec.  
423.504(d)(2) to include authority that will permit CMS to require MA 
organizations and Part D sponsors to hire an independent auditor to 
conduct full or partial program audits and/or perform validation 
exercises to confirm correction of deficiencies found during an audit. 
We currently conduct these audits and validation exercises, and collect 
data associated with these activities under OCN 0938-1000. We do not 
believe that requiring MA organizations and Part D sponsors to hire an 
independent auditor to conduct these audits or validation exercises 
will impose any additional burden on MA organizations and Part D 
sponsors.

K. ICR Related to Recovery Audit Contractor Determinations (Part 422, 
Subpart Z and Part 423, Subpart Z)

    The information collection burden associated with our proposed 
requirements consists of the submission of requests for: (1) 
Reconsiderations; (2) CMS hearing official determinations; and (3) CMS 
Administrator reviews. Based on existing Part D appeals data, we 
estimate that plans will file the following numbers of requests on an 
annual basis:

      Table 7-- Estimated Number of Part C & D RAC Appeal Requests
------------------------------------------------------------------------
                                                             Number of
                     Type of request                       requests per
                                                               year
------------------------------------------------------------------------
Reconsideration.........................................             104
CMS Hearing Official....................................              10
Administrator Review....................................               2
                                                         ---------------
  Total.................................................             116
------------------------------------------------------------------------

    The reasons for the decrease in requests at higher appeal levels 
are that: (1) The plan may succeed in its appeal and thus have no need 
to appeal to the next level; and (2) the plan may simply wish to forgo 
further appeals. We stress that the figures in Table 7 are mere 
projections, though, again, they are based on the number of Part D 
appeals that have been submitted to date.
    We estimate that it would take a plan 5 hours to prepare and file 
an appeal request. In terms of cost, it has been our experience that 
most appeals have been prepared by high-level officials of the plan. 
According to the most recent wage data provided by the Bureau of Labor 
Statistics (BLS) for May 2012, the mean hourly wage for the category of 
``General and Operations Managers''--which we believe, considering the 
variety of officials who have submitted appeals, is the most 
appropriate category--is $55.22. With fringe benefits and overhead, the 
per hour rate is $83.35. Multiplying this figure by 580 hours (or 116 
submissions x 5 hours) results in a projected annual cost burden of 
$48,343, as outlined in Table 8.

                                                Table 8--Estimated Annual Reporting/Recordkeeping Burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                        Total
                                              OMB                              Burden per     Total    Hourly labor  labor cost      Total
          Regulation  section(s)            Control   Respondents   Responses    response    annual      cost  of        of        capital/      Total
                                              No.                                (hours)     burden      reporting    reporting   maintenance  cost  ($)
                                                                                             (hours)        ($)          ($)      costs  ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   422.2605..........................       N/A            52          52           5         260         83.35       83.35             0  21,671.00
Sec.   422.2610..........................       N/A             5           5           5          25         83.35       83.35             0    2083.75
Sec.   422.2615..........................       N/A             1           1           5           5         83.35       83.35             0     416.75
Sec.   423.2605..........................       N/A            52          52           5         260         83.35       83.35             0  21,671.00
Sec.   423.2610..........................       N/A             5           5           5          25         83.35       83.35             0    2083.75

[[Page 2030]]

 
Sec.   423.2615..........................       N/A             1           1           5           5         83.35       83.35             0     416.75
                                          --------------------------------------------------------------------------------------------------------------
    Total................................       N/A           116         116         N/A         580  ............  ..........             0     48,343
--------------------------------------------------------------------------------------------------------------------------------------------------------

    If you comment on these information collection and recordkeeping 
requirements, please do either of the following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this proposed rule; or
    2. Submit your comments to the Office of Information and Regulatory 
Affairs, Office of Management and Budget,

Attention: CMS Desk Officer, CMS-4159-P
Fax: (202) 395-6974; or
Email: OIRA_submission@omb.eop.gov

V. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We will consider all comments we receive 
by the date and time specified in the DATES section of this preamble, 
and, when we proceed with a subsequent document, we will respond to the 
comments in the preamble to that document.

VI. Regulatory Impact Analysis

A. Statement of Need

    The purpose of this proposed rule is to make revisions to the MA 
program (Part C) and Prescription Drug Benefit Program (Part D), 
implement provisions specified in the Affordable Care Act, and make 
other changes to the regulations based on our continued experience in 
the administration of the Part C and Part D programs. These latter 
revisions are necessary to: (1) Clarify various program participation 
requirements; (2) make changes to strengthen beneficiary protections; 
(3) strengthen our ability to identify strong applicants for Part C and 
Part D program participation and remove consistently poor performers; 
and (4) make other clarifications and technical changes.

B. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 18, 2011), 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 (March 22, 
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 Orders 12866 and 13563 direct 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). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. A regulatory impact analysis (RIA) must be prepared for 
major rules with economically significant effects ($100 million or more 
in any 1 year). This proposed rule has been designated an 
''economically significant'' rule under section 3(f)(1) of Executive 
Order 12866. Accordingly, we have prepared a regulatory impact analysis 
that details the anticipated effects (costs, savings, and expected 
benefits), and alternatives considered by proposed requirement. 
Finally, in accordance with the provision of the Executive Order 12866, 
this proposed rule was reviewed by the Office of Management and Budget.
    Two provisions result in a total of 4,768 annual burden hours and a 
total annualized monetized impact of $148,939. See sections IV.G. and 
IV.K. of this proposed rule for details regarding the burden associated 
with the requirements of this proposed rule. 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, small entities include small businesses, nonprofit 
organizations, and small governmental jurisdictions. The great majority 
of hospitals and most other health care providers and suppliers are 
small entities, either by being nonprofit organizations or by meeting 
the SBA definition of a small business (having revenues of less than 
$7.0 million to $34.5 million in any 1 year). Individuals and states 
are not included in the definition of a small entity. This proposed 
rule primarily affects the Federal government, Medicare Advantage 
plans, and Part D Sponsors.
    Part D sponsors and MA plans, entities that will be affected by the 
provisions of this rule, are not generally considered small business 
entities. MA plans and Part D sponsors must meet minimum enrollment 
requirements (5,000 in urban areas and 1,500 in nonurban areas) and 
because of the revenue from such enrollments, these entities are 
generally above the revenue threshold required for analysis under the 
RFA. We determined that there were very few MA plans and Part D 
sponsors that fell below the size thresholds for ''small'' businesses 
established by the Small Business Administration (SBA). Currently, the 
SBA size threshold is $7 million in total annual receipts for health 
insurers (North American Industry Classification System, or NAICS, Code 
524114) and we have confirmed that most Part D sponsors have Part D 
receipts above the $7 million threshold.
    While a very small rural plan could fall below the threshold, we do 
not believe that there are more than a handful of such plans. A 
fraction of MA organizations and sponsors are considered small 
businesses because of their non-profit status. HHS uses as its measure 
of significant economic impact on a substantial number of small 
entities, a change in revenue of more than 3 to 5 percent. 
Consequently, we do not believe that this threshold would be reached by 
the proposed requirements in this proposed rule because this proposed 
rule would have minimal impact on small entities. Therefore, an 
analysis for the RFA will not be prepared because the Secretary has 
determined that this proposed rule

[[Page 2031]]

would not have a significant impact on a substantial number of small 
entities.
    In addition, section 1102(b) of the Act requires us to prepare an 
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 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 of a metropolitan statistical area and has fewer 
than 100 beds. We are not preparing an analysis for section 1102(b) of 
the Act because the Secretary has determined that this proposed rule 
would 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 by 
state, local, or tribal governments, in the aggregate, or by the 
private sector of $100 million in 1995 dollars, updated annually for 
inflation. In 2013, that threshold is approximately $141 million. This 
proposed rule is not expected to reach this spending threshold.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on state 
and local governments, preempts state law, or otherwise has Federalism 
implications. Based on CMS Office of the Actuary estimates, we do not 
believe that this proposed rule imposes substantial direct requirement 
costs on state and local governments, preempts state law, or otherwise 
has Federalism implications.
    Table 14 details the proposed rule's impacts by entity, including 
the federal government and MA organizations and Part D sponsors. We 
note that the estimated savings do not represent net social benefits 
because they consist of transfers of value from drug manufacturers, 
pharmacies, incarcerated individuals and individuals not lawfully 
present in the United States to the federal government, MA 
organizations, Part D sponsors and beneficiaries who continue in the 
programs.

C. Anticipated Effects

1. Effects of Closing Cost Contract Plans to New Enrollment
    In our proposal to ensure that organizations do not move enrollees 
from one of their cost or MA plan types to another based on financial 
or some other interest, we propose to revise Sec.  422.503(b)(5) so 
that an entity seeking to contract as an MA organization must ``not 
accept new enrollees under a section 1876 reasonable cost contract in 
any area in which it seeks to offer an MA plan if the MA organization 
and reasonable cost contract are offered by the same parent 
organization.'' We believe this provision will have minimal or no 
financial impact as only a handful of parent organizations currently 
offer MA and cost plans in the same service area. In addition, as the 
regulation requires that affected cost plans close to new enrollment, 
not that they terminate operations, we believe that there will be 
little or no impact to beneficiaries.
2. Effects of Two-year Limitation on Submitting a New Bid in an Area 
Where an MA Has Been Required To Terminate a Low-Enrollment MA Plan
    Under Sec.  422.506(b)(1)(iv), we must non-renew a MA plan that 
does not have a sufficient number of enrollees to establish that it is 
a viable independent plan option. We have established the threshold for 
termination due to insufficient number of enrollees at fewer than 500 
enrollees for non SNPs and fewer than 100 enrollees for SNPs over a 
specified time period of 3 years. If we did not implement this, an MA 
organization required to terminate or consolidate one of its MA plans 
due to sustained low enrollment could avoid the consequences of such a 
requirement by submitting a bid for a new plan in the same service 
area.
    We are proposing to amend the MA regulations at Sec.  422. 
504(a)(19) to impose a contractual requirements that when CMS non 
renews, or asks the MA organization to terminate an MA plan due to 
sustained low enrollment pursuant to Sec.  422.506(b)(1)(iv), the MA 
organization may not introduce any new MA plan in that service area for 
2 contract years. We believe this requirement will enhance our ongoing 
efforts to ensure that MA organization offerings in a service area 
present beneficiaries with viable plans that are responsive to their 
needs. We see no financial impact on MA organizations as this 
requirement has very limited application and imposes no independent 
financial burden.
3. Effects of Authority To Impose Intermediate Sanctions and Civil 
Money Penalties
    We are proposing to make two changes to existing authority for the 
imposition of intermediate sanctions and civil money penalties (CMPs). 
First, under the Affordable Care Act, new authority was provided to the 
Secretary, which now permits CMS to impose intermediate sanctions for 
additional contract violations in the areas of marketing and 
enrollment. This new authority further permits CMS to impose 
intermediate sanctions on contracting organizations' that employ or 
contract with organizations, agents, and suppliers who commit any of 
the contract violations contained in Sec.  422.752 and Sec.  423.752.
    Second, we are clarifying our authority to impose CMPs for the 
aforementioned contract violations. Current regulations designate the 
OIG as the sole government agency with the authority to impose CMPs for 
the contract violations contained in Sec.  422.752 and/or Sec.  
423.752. We are modifying the language of these provisions to clarify 
that CMS or the OIG may impose CMPs for these contract violations 
except the provision that relates to the misrepresentation of 
falsification of information furnished to CMS, an individual or entity.
    We believe these provisions would not result in additional burden 
to sponsors nor would they have a financial impact on sponsors.
4. Effects of Contract Termination Notification Requirements and 
Contract Termination Basis
    In current regulations, we are required to provide 90-day notice to 
organizations whose contracts are being terminated by CMS. The 
authorizing statute at section 1857(h)(1)(B) and 1860D-12(b)(3)(F) of 
the Act states that the Secretary must provide reasonable notice and 
opportunity for hearing (including the right to appeal the initial 
determination) before terminating a contract (except under certain 
circumstances). We are proposing to modify the notice timeframe from 90 
days to 45 days. We believe these provisions would not result in 
additional burden to sponsors nor would it have a financial impact on 
sponsors.
5. Effects of Reducing the Burden of the Compliance Program Training 
Requirements
    We are proposing to lessen the burden placed on contracting 
organizations and their first tier, downstream and related entities 
(FDRs). Current regulations specify that contracting organizations are 
required to provide general compliance program training for their FDRs 
upon initial contracting and annually thereafter. To lessen this 
burden, we would require all contracting organizations to accept a

[[Page 2032]]

certificate of completion of the CMS Standardized General Compliance 
Program Training and Education Module as evidence of satisfaction of 
this program requirement. Under this program change, contracting 
organizations would not be permitted (or required) to develop or 
implement organization specific training for FDRs. We anticipate that 
this would greatly reduce the burden on various sectors of the industry 
including, but not limited to, insurance providers, hospitals, 
suppliers, pharmacists and physicians. We anticipate that this change 
would actually provide savings for sponsors and the FDRs since FDRs 
would only have to take one training as opposed to the possible 
numerous trainings they may take under current requirements. 
Additionally, sponsors would save because they would not be required to 
provide training materials to each FDR with which they contract.
    We believe these provisions would not result in additional burden 
to sponsors nor would they have a financial impact on sponsors.
6. Effects of Audit and Inspection Authority
    We are proposing two changes to Sec.  422.503(d)(2) and Sec.  
423.504(d)(2) that would allow CMS to require sponsors (MA 
organizations and Part D sponsors) to hire an independent auditor to 
conduct full or partial program audits of the sponsors' operational 
areas and/or correction validation exercises. We currently conduct 
program audits of approximately 30 sponsors per year. Under this 
proposal, each MA organization and/or Part D sponsor would be required 
to hire an independent auditor to perform a full or partial program 
audit at least every 3 years. There are currently 298 sponsors in the 
Parts C & D programs. Under this new authority, approximately 99, or 
one-third of these organizations would be required to hire an 
independent auditor to perform a program audit, beginning in contract 
year 2015. Once the sponsor's audit is concluded in the year in which 
it was chosen, the sponsor would not be subject to another audit until 
its third year occurs (that is, plans selected for audit in contract 
year 2015, would not be selected for audit again until contract year 
2018); unless the sponsor demonstrates behavior that we believe poses a 
risk to Medicare beneficiaries, the Trust Fund or both. Sponsors 
demonstrating this type of noncompliance may be subjected to a CMS 
program audit at any time in order to identify and mitigate any risk of 
potential harm to our beneficiaries. This proposal ensures that all 
sponsors will be audited on at least a 3-year cycle while continuing to 
maintain the integrity of the program by allowing CMS to continue to 
conduct audits when it believes beneficiaries are at risk.
    Each independent auditor would work within CMS' specifications and 
guidelines. We would make available to the sponsors all of the methods 
of evaluations, methodologies and protocols to be used by the 
independent auditor when conducting the audit. We would also provide 
technical assistance to auditors as necessary.
    We currently conduct program audits that examine the following 
operational areas:
 Formulary and Benefits Administration (Part D)
 Coverage Determinations, Appeals & Grievances (Part D)
 Organization Determinations, Appeals & Grievances (Parts C)
 Compliance Program effectiveness (Parts C & D)
 Outbound Enrollment Verification (OEV) (Parts C & D)
 Special Needs Plan Model of Care (SNP MOC) implementation 
(Parts C & D)

We estimate that the independent auditor hired will need to have a team 
consisting of the following professionals:
     Formulary and Benefits Administration--pharmacist, a 
senior claims analyst, and a senior auditor.
     Coverage Determinations, Part D Appeals, Part D 
Grievances--pharmacist, senior auditor.
     Organization Determinations, Part C Appeals, Part C 
Grievances--nurse practitioner, senior auditor, auditor.
     Compliance Program effectiveness--two auditors (at least 
one senior).
     Outbound Enrollment Verification (OEV)--two auditors (at 
least one senior).
     Special Needs Plan Model of Care (SNP MOC) 
implementation--two auditors (at least one senior).
    We used the most recent (2010) wage statistics supplied by the 
Department of Labor, Bureau of Labor Statistics to develop estimates of 
direct wages. We also added fringe benefits, overhead costs, and 
general and administrative expenses using percentages that are 
consistent with CMS contracts. Based on our experience and in 
consultation with program experts, we developed an estimate of the 
hourly burden. The estimated mean cost per hour for each sponsor is 
$35.80 (wages, fringe benefits, and overhead). The team of 14 
professionals (listed previously) is necessary for the performance of 
each program audit. The estimated mean number of hours the team will 
need to perform the audit per sponsor is 160. The mean cost per sponsor 
to procure and support the auditor is therefore: 14 x 160 x $35.80 = 
$80,192. The auditing costs will be allowable costs in the plan's bid. 
Since, sponsors will only be subjected to these audits every 3 years; 
it is our expectation that sponsors will include one-third of this cost 
in its bid each year. Therefore, each plan year, the total cost 
included in a sponsors bid is: $80,192 / 3 = $26,731.
    The total annual estimated burden hours related to the time and 
effort for all sponsors being audited is estimated to be 298 sponsors x 
$26, 731 per sponsor, per year = $7,965,838. Therefore, the estimated 
annual cost for this requirement is $7,965,838.
    We are also proposing to revise our regulations to permit CMS to 
require MA organizations or Part D sponsors with audit results that 
reveal non-compliance with CMS requirements to hire an independent 
auditor to validate that correction has occurred. As mentioned 
previously, under our existing authority we currently conduct 
approximately 30 audits per year. Based on our experience, the number 
of deficiencies identified and requiring corrective action can vary 
widely from sponsor to sponsor, which therefore affects the time and 
effort required for subsequent correction validation. Therefore, we 
have decided to provide an estimate that assumes that each sponsor 
audited has failed 50 percent of all elements audited; thereby 
requiring correction validation. We recognize that some sponsors may 
have far fewer elements that require validation and some sponsors may 
have more elements that require validation, but we believe that this is 
the most accurate estimate we can provide of the number of sponsors 
that will undergo validation and the associated effort required with 
that validation.
    Under these circumstances we estimate that the independent auditor 
hired will need to have a team consisting of the following 
professionals:
     Formulary and Benefits Administration--pharmacist, a 
senior claims analyst, and a senior auditor.
     Coverage Determinations, Part D Appeals, Part D 
Grievances--pharmacist, senior auditor.
     Organization Determinations, Part C Appeals, Part C 
Grievances--nurse practitioner, senior auditor.
     Compliance Program effectiveness--one senior auditor.
     Outbound Enrollment Verification (OEV)--one senior 
auditor.

[[Page 2033]]

     Special Needs Plan Model of Care (SNP MOC) 
implementation--one senior auditor.
    We used the same wage statistics provided previously to develop an 
estimate of the hourly burden (which includes fringe benefits, overhead 
costs, and general and administrative expenses that use percentages 
that are consistent with CMS contracts). The estimated mean cost per 
hour for these sponsors is $35.80. A team of 10 professionals (listed 
previously) is necessary for the performance of each correction 
validation. The average hourly cost for a validation with a team of 10 
professionals is the same as the average hourly cost of an initial 
audit with a team of 14 professionals because in both scenarios, the 
mix of auditors to specialists (or non-auditors) is roughly 70 percent 
auditors and 30 percent specialists. Since the need for specialists can 
vary widely (that is, in some validations they may not be needed at 
all, and in other cases, all of the specialists from the original audit 
may be needed), we determined that the average breakdown of the team is 
the same for initial audit and validation. Therefore, the average 
hourly cost has not changed, despite the change in the number of team 
members. The estimated mean number of hours the team will need to 
perform the correction validation per sponsor is 80. The mean cost per 
sponsor to procure and support the independent auditor is therefore: 10 
x 80 x $35.80 = $28,640. The validation costs will be allowable costs 
in the plan's bid. Under existing regulations the total annual 
estimated burden hours related to the time and effort for sponsors to 
perform the correction validation is estimated to be 30 sponsors x 
$28,640 per sponsor, per year = $859,200. Therefore, the estimated 
annual cost for this requirement under existing regulations is 
$859,200.
    If the provision proposing that we acquire the authority to require 
sponsors to hire an independent auditor to conduct program audits is 
finalized, the number of sponsors being audited per year will increase 
from 30 (current) to 99 (proposed). Using the same weighted data 
assuming that each sponsor audited has failed at least 50 percent of 
audited elements, the estimated mean cost per sponsor to procure and 
support the independent auditor is: 10 x 80 x $35.80 = $28,640. The 
correction validation costs will be allowable costs in the plan's bid. 
Since, sponsors will only be subjected to these audits/validations 
every 3 years; it is our expectation that sponsors will include one-
third of this cost in its bid each year. Therefore, each plan year, the 
total cost included in a sponsors bid is: $28,640 / 3 = $9,547. The 
total annual estimated burden hours related to the time and effort for 
all sponsors being audited to perform the correction validation is 
estimated to be 99 sponsors x $9,547 per sponsor, per year = $945,120. 
Therefore, the potential estimated annual cost for this requirement is 
$945,120.
7. Effects of Procedures for Imposing Intermediate Sanctions and Civil 
Money Penalties Under Parts C and D
    We are proposing to make changes to our authority for imposing 
intermediate sanctions and for determining when such sanctions will be 
lifted. Sections 1857(g) and 1860D-12(b)(3)(E) of the Act provide the 
Secretary the ability to impose intermediate sanctions on MA 
organizations and PDP sponsors. Intermediate sanctions consist of 
suspension of enrollment, suspension of marketing and suspension of 
payment. Current regulations governing intermediate sanctions are 
contained in subparts O of part 422 and part 423. Sections 422.756 and 
Sec.  423.756 provide specific procedures for imposing intermediate 
sanctions, and include provisions which address the duration of the 
sanction and the standard that we apply when determining if a sanction 
should be lifted. As specified in the Act and regulations, when 
intermediate sanctions are imposed on contracting organizations, the 
sanctions remain in place until the Secretary/CMS is satisfied that the 
basis for the sanction determination has been corrected and is not 
likely to recur.
    In the October 2009 proposed rule (74 FR 54634), we proposed a 
change that included a rule that allows us to require a plan under a 
marketing and/or enrollment sanction to market or accept enrollments or 
both for a limited period of time. As we explained in that proposed 
rule, the purpose of the test period is to assist us in making a 
determination as to whether the deficiencies that are the bases for the 
intermediate sanctions have been corrected and are not likely to recur. 
The test period provides us with the opportunity to observe a 
sanctioned plans ability to enroll or market to Medicare beneficiaries 
prior to lifting the sanction.
    We are proposing to extend the applicability of such a test period 
to include all intermediate sanctions and to clarify that while we may 
require a sponsor to receive enrollments during this test period, the 
sponsor would not receive any LIS annual or auto facilitated 
reassignments.
    We believe these provisions would not result in additional burden 
to sponsors nor would they have a financial impact on sponsors.
8. Effects on Timely Access to Mail Order Services
    We believe it is necessary and appropriate to establish mail order 
fulfillment requirements defining maximum turnaround times from when 
the pharmacy receives the prescription order to when it is shipped. 
This would underscore the importance of consistent and reliable access 
to medications, protecting beneficiaries from inconsistent or 
unreliable practices that may otherwise jeopardize timely access to 
prescriptions. The proposed standards are in alignment with 
requirements already in place in the market, and as such we do not 
expect significant financial impacts to implement.
9. Effects of Collections of Premiums and Cost Sharing
    In the proposed provision, ``Waivers and Incorrect Collections of 
Premiums and Cost Sharing,'' we propose to codify our existing guidance 
pertaining to the waiver of premiums and cost sharing by Part D 
sponsors and to specifically require sponsors to refund incorrect 
collections of premiums and cost sharing or retroactively collect 
underpayments of cost sharing. Since our policy on waivers of premiums 
and cost sharing has been specified in informal guidance since the 
beginning of the Part D program and the timeframe for sponsor refunds 
and recoveries is codified in regulations at Sec.  423.466(a) 
indicating that such refunds and collections are required, we do not 
believe the proposed changes would result in any additional costs.
10. Effects of Enrollment Eligibility for Individuals Not Lawfully 
Present in the United States
    In section III.A.10. of this proposed rule, we discuss our 
proposals to add 'citizenship or lawful presence' as an eligibility 
requirement to enroll and remain enrolled in MA, Part D, and section 
1876 cost contracts to align with section 401 of the PRWORA mandating 
that aliens not lawfully present in the United States are not eligible 
to receive any federal benefit. In CY 2012, there were close to 50 
million Medicare beneficiaries. Approximately 34.4 million 
beneficiaries were enrolled in MA plans, PDPs or cost plans, which 
accounted for 68.8 percent of the total Medicare population. In the 
same year, an average of 4,285 Medicare beneficiaries enrolled in MA or 
Part D plans were identified by SSA as being unlawfully present. By 
directing MA

[[Page 2034]]

plans, PDPs, and cost plans to disenroll individuals who, at the time 
of notification from CMS, are not lawfully present, we intend to 
prevent improper payment for these individuals to MA plans, PDPs, and 
cost plans for periods when these individuals were ineligible to 
receive such services. Based on data for capitation payments for MA and 
PDPs, as well as the prepayments provided to cost plans, we estimate 
that the disenrollment of individuals who are unlawfully present would 
result in a decrease in payments made by CMS and would result in a cost 
savings of $10 million in 2015. We estimate, based on the numbers 
previously mentioned, that this change could save the MA program 
approximately $5 million in 2015, increasing to $8 million in 2019, and 
could save the Part D program (includes the Part D portion of MA-PD 
plans) approximately $5 million in 2015, increasing to $9 million in 
2019. As cost plans are paid based on the reasonable costs delivering 
Medicare-covered services to their enrollees, instead of the fixed 
capitation amounts paid to MA plans and PDPs, we believe the impact to 
cost plans associated with this provision to be negligible.

Table 9--Projected Number of Individuals Disenrolled Due to Loss of Lawful Presence and Estimated Savings to the Medicare Advantage Program by Provision
                                                          for Calendar Years 2015 Through 2019
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                           Totals  (CYs
                                                               2015            2016            2017            2018            2019         2105-2019)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Projected number of unlawfully present beneficiaries               1,118           1,247           1,375           1,503           1,632           6,875
 enrolled in MA plans...................................
Projected federal impact due to unlawfully-present               \1\ -$5         \1\ -$6         \1\ -$6         \1\ -$7         \1\ -$8            -$32
 individuals disenrolled 6 months sooner................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Estimates reflect scoring by the CMS, Office of the Actuary, and 2012 lawful presence data provided by the SSA.
\1\ Million.


 Table 10--Projected Number of Individuals Disenrolled Due to Loss of Lawful Presence and Estimated Savings to the Medicare Part D Program by Provision
                                                          for Calendar Years 2015 Through 2019
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                           Totals  (CYs
                                                               2015            2016            2017            2018            2019         2015-2019)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Projected number of unlawfully present beneficiaries               5,780           6,276           6,771           7,267           7,762          33,856
 enrolled in Part D plans (including MA-PDs)............
Projected federal impact due to unlawfully-present               \1\ -$5         \1\ -$6         \1\ -$7         \1\ -$8         \1\ -$9        \1\ -$35
 individuals disenrolled 6 months sooner................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Estimates reflect scoring by the CMS, Office of the Actuary, and 2012 lawful presence data provided by the SSA.
\1\ Million.

11. Effects of Part D Notice of Changes
    This section would codify current guidance for Part D sponsors to 
inform beneficiaries about changes to plan benefits from year to year 
and also correct an oversight whereby such a regulation currently 
exists for Part C but not for Part D. We anticipate that this proposal 
would result in no additional costs because Part D sponsors already 
typically provide this information.
12. Effects of Separating the Annual Notice of Change (ANOC) From the 
Evidence of Coverage (EOC)
    Currently, members must receive the plan's combined ANOC/EOC prior 
to the Annual Election Period (AEP). We propose to separate the 
distribution and dissemination requirements, such that, the ANOC is 
received by beneficiaries before the AEP and the EOC is received closer 
to the enrollment effective date. This way, beneficiaries who choose to 
leave their current plans and enroll in other plans will only receive 
an EOC from the plan in which they have enrolled. We believe that this 
will reduce confusion among beneficiaries about which EOC is for the 
plan in which they have enrolled. It eliminates the unnecessary waste 
from the production of EOCs that end up being discarded. It also allows 
MA organizations and Part D sponsors additional time to develop better 
quality documents.
    We propose to revise the language in Sec.  422.111(a)(3) and Sec.  
423.128(a)(3) to allow the EOC to be sent to members a few months after 
the ANOC. We believe this provision will have minimal or no financial 
impact as the proposal would merely change the timing of notices that 
MA organizations and Part D sponsors already provide. Further, the 
delay in providing the EOC could result in savings as MA organizations 
and Part D sponsors have additional time to ensure that these documents 
are accurate, thus eliminating the need for updates and correction 
notices.
13. Effects of the Modification of the Agent/Broker Compensation 
Requirements
    The current independent agent compensation structure (as originally 
published as CMS-4138-IFC2 in November 2008) is comprised of a 6-year 
cycle and is scheduled to end December 31, 2013. MA organizations and 
Part D sponsors provide an initial compensation payment to independent 
agents for new enrollees or unlike plan changes (Year 1), and pay a 
renewal rate (equal to 50 percent of the initial year compensation) for 
Years 2 through 6. CMS is proposing to revise this existing 
compensation structure. MA Organizations and PDP sponsors would have 
the discretion to decide, on an annual basis, whether to pay initial 
and/or renewal compensation payments to their independent agents. For 
new or unlike plan change enrollments, MA Organizations and PDP 
sponsors could make an initial payment that is no greater than the fair 
market value (FMV)

[[Page 2035]]

amount for such services, set annually by CMS in guidance interpreting 
these regulations. For renewals in Year 2 and subsequent years, the MA 
organization or PDP sponsor could pay up to 35 percent of the FMV 
amount for that year. We are proposing that recovery of compensation 
payments not happen when the disenrollment does not result from the 
agent's behavior. In addition to the agent and broker compensation 
structures, we are amending the training and testing requirements and 
setting limits on referral fees for agents and brokers.
    We do not believe that any of these revisions will add additional 
burden or have financial impact. We are simply revising the existing 
compensation structure under which MA organizations may pay independent 
agents and believe that the total compensation amounts will generally 
remain unaffected. Furthermore, we believe these proposed changes would 
actually lessen the burden and impact on MA organizations by 
simplifying the compensation structure for independent agent brokers.
14. Effects of Drug Categories or Classes of Clinical Concern and 
Exceptions
    We believe that this proposed provision to establish new criteria 
for identifying Part D drug categories or classes of clinical concern 
would generate significant Part D savings. This provision would require 
that Part D sponsors include all Part D drugs on their formularies in 
categories or classes of clinical concern that CMS specifies for a 
typical individual with a disease or condition treated by the drugs in 
the category or class meet the following proposed criteria: (1) 
hospitalization, persistent or significant disability or incapacity, or 
death likely will result if initial administration (including self-
administration) of a drug in the category or class does not occur 
within 7 days of the date the prescription for the drug was presented 
to the pharmacy to be filled; and (2) more specific CMS formulary 
requirements will not suffice to meet the universe of clinical drug-
and-disease-specific applications due to the diversity of disease or 
condition manifestations and associated specificity or variability of 
drug therapies necessary to treat such manifestations.
    The expected savings to the Part D program would result from 
reducing the number of categories or classes of drugs for which Part D 
sponsors currently must include all Part D drugs on their formularies, 
as compared to existing requirements. Specifically, in applying the 
proposed criteria to all categories and classes of Part D drugs, CMS 
has determined that three existing categories and classes of Part D 
drugs would meet the new criteria and that no additional categories or 
classes of drugs would meet the criteria. Specifically, we determined 
that only the antineoplastic, antiretroviral and anticonvulsant 
categories and classes would meet the new criteria. This means that 
Part D sponsors would no longer be required to include all Part D drugs 
from within the antidepressant and immunosuppressant (used for 
transplants rejection) classes on their formularies. Relative to the 
antipsychotic class, however, we are deferring any change in formulary 
requirements for the antipsychotic class at this time and will continue 
to require that all drugs within the antipsychotic class be included on 
all Part D formularies, subject to the exceptions that get finalized in 
Sec.  423.120(b)(2)(vi).
    Based upon this determination, we estimated that full 
implementation (including the antipsychotic class) of this provision 
would result in federal savings to the Medicare Part D program of $720 
million for the period CY 2015 through CY 2019, with most of these 
savings generated from the antipsychotic class (see table 14). We note 
this estimate is based upon the information that is available. 
Projected savings are based upon full implementation of the criteria 
and do not reflect that changes for the antipsychotic class of drugs 
are deferred at this time. However, there could be additional savings 
when new drugs enter the market and compete with each other by 
providing higher rebates.
    A consensus panel applied our proposed criteria to determine the 
categories or classes of clinical concern. Our consensus panel 
determined that of the current six categories or classes of clinical 
concern, three met both of the proposed criteria, three did not, and no 
new drug categories or classes met both criteria. Finally, we estimated 
the impact on drug expenditures for those drugs that ultimately met the 
criteria, as well as those drug categories or classes that no longer 
qualify as categories or classes of clinical concern.
    To arrive at the cost estimate for the implementation of the 
categories or classes of clinical concern, we began by putting drug 
spending into three groupings: (1) Drugs that were already included in 
the six categories or classes of clinical concern; (2) drugs with a 
greater likelihood of being affected by this change because formularies 
without them would be acceptable under our formulary review process; 
(3) drugs with a lesser likelihood of being affected by this statutory 
change because formularies without them would not be acceptable under 
our formulary review process; and (4) drugs in the research and 
development pipeline in the six categories or classes of clinical 
concern that would be affected by this statutory change. Because we 
reduced the number of categories or classes of clinical concern 
relative to the six for which we currently require formulary inclusion 
of all Part D drugs, we expect Part D sponsors' negotiating power to 
increase. As a result, Part D sponsors could incur lower drug costs and 
could lower their bids, which could result in lower premiums and co-
pays. We also believe that direct savings would be generated by the 
increasing generic utilization by removing brand products from 
formularies. Although, based on other categories and classes of drugs 
that exhibit generic saturation, we have reason to believe that some 
plans would still cover the brand products. Moreover, we believe that 
the program would avoid future costs because some drugs in the research 
and development pipeline would not be required on formularies as a 
result of this change.
    To support the panel's conclusion that our formulary checks could 
efficiently require adequate access to these categories and classes 
without requiring that every drug in them be included on Part D 
formularies, we compared a Part D formulary to other formularies. To 
accomplish this, we took an approved CY 2014 formulary containing the 
average number of RxNorm Concept Unique Identifiers (RxCUIs). This 
formulary includes the following: 23 Generic (ANDA) antidepressant drug 
entities, 7 brand (NDA) antidepressant drug entities, 18 generic 
antipsychotic drug entities, and 9 brand antipsychotic drug entities. 
We then reviewed the drugs comprising the previously mentioned list 
against our formulary review requirements standards for treatment 
guidelines, common Medicare drugs, and the discrimination review. We 
found that the formulary could have passed these checks with 9 generic 
antidepressant drug entities, and 6 generic antipsychotic drug 
entities. No brands were necessary to meet the formulary review 
requirements. Thus, this formulary includes an excess of 16 brand drug 
entities and 26 generic drug entities within these two classes of 
medications. Because all these products are currently required on all 
Part D formularies, there is significantly less need for manufacturers 
to restrain list prices or offer rebates to sponsors for formulary 
placement. In contrast, under our proposal, 100 percent of the brands

[[Page 2036]]

(16/16) and 63 percent of the generics (26/41) would be expected to 
meet or exceed the price concessions applicable to the least expensive 
products in those classes to remain competitive. If manufacturers 
increased price concessions in response, sponsors might elect to keep 
the products on the formulary. Otherwise, we would expect sponsors to 
take those products off formulary. Thus, individuals on brand versions 
of these drugs or on the 63 percent of generic versions would in most 
cases either stay on the drug at that more competitive price, or switch 
to an even cheaper alternative that remains on formulary. Either way, 
the beneficiary's drug costs and costs to the program would decrease. 
Moreover, to evaluate whether plans would continue to offer brand drugs 
(because new generic drugs would be available), and therefore whether 
any rebates would be available, we evaluated CY 2014 formularies for 
three classes of drugs that face saturation by generics. We found that 
even though the majority of drugs in those classes were generic, some 
plans continued to offer brand drugs. We also propose to establish 
exceptions that we believe permit Part D sponsors to apply meaningful 
utilization management to these drugs without compromising access. 
Although these exceptions are generally similar to existing policy, we 
propose to permit prior authorizations for drugs in the categories and 
classes of clinical concern to verify medically accepted indications or 
in Part A/B versus D situations. These lower costs could be reflected 
in bids submitted to CMS by Part D sponsors and could result in 
decreased premiums for Medicare beneficiaries.
    Although Part D sponsors would be required to include all Part D 
drugs on their formularies in fewer categories or classes than are 
currently required, we believe that our formulary review processes are 
sufficient to ensure that the implementation of this provision would 
not negatively impact beneficiary access to drugs or enrollment in Part 
D plans. Moreover, robust transition, exceptions and coverage 
determination, appeals and grievances processes ensure beneficiary 
access in the event that they have enrolled, either self-enrolled or 
auto-enrolled, in a plan where their drugs are not on formulary. We 
also do not believe that the proposed provisions would lead to greater 
beneficiary confusion or any increased difficulty in making enrollment 
decisions. We continue to believe that overall enrollment would 
increase given demographic trends and the increasing cash prices for 
drugs paid by beneficiaries who must pay cash because they do not 
enroll. Accordingly, we believe Medicare beneficiaries would continue 
to find Part D to be a cost efficient method of obtaining robust drug 
coverage at a range of acceptable costs.
    We plan on working closely with Part D sponsors as our guidance in 
this area develops to ensure that they continue to provide high quality 
prescription drug coverage at the most economical price. It is not 
clear to us whether PBMs would experience a decrease in administrative 
costs. On one hand, the provisions in this rule may decrease formulary 
maintenance expenses, such as managing a small formulary. This may 
result in PBMs decreasing their fees to Part D sponsors. On the other 
hand, these provisions may increase exception requests, appeals, prior 
authorizations, and outreach to Part D sponsors, thereby increasing 
PBMs' administrative costs. However, because these types of 
administrative costs exist for PBMs today, it is unclear how much of an 
increase we would see specifically as a result of these provisions. 
Similar to our ongoing communications with our Part D sponsors, we 
intend to work closely with the industry to minimize the likelihood of 
any unanticipated increases in beneficiary costs.
15. Effects of Medication Therapy Management Program (MTMP) Under Part 
D
    Current regulations require that Part D sponsors must have 
established a Medication Therapy Management Program that targets 
beneficiaries who: (1) Have multiple chronic diseases with three 
chronic diseases being the maximum number a Part D plan sponsor may 
require for targeted enrollment; (2) are taking multiple Part D drugs, 
with eight Part D drugs being the maximum number of drugs a Part D plan 
sponsor may require for targeted enrollment; and (3) are likely to 
incur costs for covered Part D drugs in an amount greater than or equal 
to $3000, as increased by an annual percentage. We specified in 
guidance that while Part D sponsors are permitted to target 
beneficiaries with select chronic diseases, they must include at least 
five of nine core chronic diseases in their criteria. These provisions 
have generated wide variability in MTM programs. Moreover, despite opt-
out enrollment, completion rates for comprehensive medication reviews 
(CMR) remain very low.
    We propose to broaden the MTM criteria to require that Part D 
sponsors now target beneficiaries who have two or more chronic diseases 
and are taking two or more covered Part D drugs. We propose to set the 
annual cost threshold at an amount commensurate with the annual amount 
of Part D costs incurred by individuals that meet the first two 
criteria regarding multiple chronic conditions and use of multiple 
covered Part D drugs. Applying this methodology, we would set the cost 
threshold at $620, which is the approximate cost of filling two generic 
prescriptions. We propose to revise this number periodically to reflect 
more up-to-date information regarding the drug spending of 
beneficiaries that have two or more chronic conditions and use two 
covered Part D drugs. We estimate that 2.5 million beneficiaries are 
currently eligible for MTM services, 13 percent opt-out of the MTM 
program, and 10 percent of participating beneficiaries will receive an 
annual CMR. We also estimate that an average CMR requires 35 minutes to 
complete and the average hourly compensation (including fringe 
benefits, overhead, general, and administrative expenses and fee) of 
the MTM provider is $120 (labor cost per CMR is $70), and that it costs 
$0.91 to print and mail a CMR summary in CMS' standardized format. 
Therefore, the estimated total annual cost of providing CMRs in all 
settings is $15,422,925 ($70.91/CMR x 217,500 CMRs). Previously, prior 
to the availability of more precise opt-out and CMR rates, we estimated 
that the total burden associated with conducting CMRs and delivering 
the CMR written summary in CMS' standardized format was 1,192,429 hours 
with a cost of $143,363,555, including delivery of 1,896,500 CMRs in 
all settings under the current eligibility criteria, and implementation 
and mailing costs for the CMR summary in standardized format (see OMB 
Control No. 0938-1154). We do not currently have data or estimates to 
determine the costs associated with quarterly targeted medication 
reviews and follow-up interventions, if necessary.
    We estimate that 18 million beneficiaries would be eligible for MTM 
services based on the proposed criteria. Using the same opt-out, CMR, 
and expense rates as before, the estimated total annual cost of 
providing CMRs in all settings is $111,045,060 ($70.91/CMR x 1,566,000 
CMRs). This is below previous estimates.
    Additionally, there is currently no requirement to ensure that 
beneficiaries in special populations receive focused targeting, 
outreach, or engagement for enrollment or participation in MTM. 
Moreover, the opt-out method of enrolling targeted beneficiaries into 
MTM at 42 CFR 423.153(d)(1)(v) may only partly address the increased

[[Page 2037]]

barriers to care faced by some beneficiaries. Without being 
prescriptive about what strategies must be employed, we are proposing 
that sponsors develop an effective strategy to ensure access to 
services for all MTM-eligible beneficiaries. We would expect to see 
details concerning sponsors' specialized strategies regarding outreach 
and service provisions in their bids. We believe that current plan 
reporting requirements, along with other CMS data sources, will be 
sufficient for us to evaluate the impact of such strategies.
    We cannot definitively score this proposal because the portion of 
the administrative costs attributable to MTM is not a specific line 
item that can be easily extracted from the bid. Although the increase 
in the number of CMRs is estimated to cost $111 million, mounting 
evidence shows that MTM services may generate overall medical savings.
    Supporting this conclusion, a recent study conducted in conjunction 
with the Center for Medicare and Medicaid Innovation (``CMMI MTM 
study'') (available at http://innovation.cms.gov/Files/reports/MTM-Interim-Report-01-2013.pdf) found that MTM programs effectively 
targeted high risk individuals who had problems with their drug-therapy 
regimens and had high rates of hospital and emergency room visits 
before enrollment as well as those that experienced a recent visit to 
the hospital or emergency room. The study also found that individuals 
enrolled in MTM programs--particularly those who received annual CMRs--
experienced significant improvements in drug therapy outcomes when 
compared to beneficiaries who did not receive any MTM services, thus 
supporting the hypothesis that the annual CMR may be one of the more 
crucial elements of MTM. Significant cost savings associated with all-
cause hospitalizations at the overall PDP and MA-PD levels were found, 
which may be due to MTM's comprehensive rather than disease-specific 
approach. This research supports statements in a recent Congressional 
Budget Office report that programs and services that manage the benefit 
well or improve prescription drug use might result in medical savings 
(Congressional Budget Office, ``Offsetting Effects of Prescription Drug 
Use on Medicare's Spending for Medical Services'', November 2012, 
available at http://www.cbo.gov/sites/default/files/cbofiles/attachments/43741-MedicalOffsets-11-29-12.pdf).
    We anticipate that many more beneficiaries will have access to MTM 
services under the proposed revisions to the eligibility criteria, and 
believe that these changes will simplify the MTM criteria and minimize 
beneficiary confusion when choosing or transitioning between plans. 
Moreover, we believe these changes will reduce disparity and allow more 
beneficiaries with drug therapy problems to receive MTM services. 
Similarly, we expect the proposed requirement that sponsors develop an 
effective strategy to ensure access to services for all MTM-eligible 
beneficiaries will help to ensure that beneficiaries in special 
populations receive focused targeting, outreach, or engagement for 
enrollment or participation in MTM.
16. Effects of Business Continuity for MA Organizations and Part D 
Sponsors
    Proposed Sec.  422.504(o) and Sec.  423.505(p) would, respectively, 
require MA organizations and Part D sponsors to develop and maintain 
business continuity plans which assess risks posed by disasters and 
contain strategies to mitigate those risks. We also would require that 
essential functions--including at a minimum benefit authorization, 
claim adjudication, call center and supporting operations--be restored 
within 24 hours after such functions fail or are disrupted.
    Business continuity plans are well established in the business 
community, and we believe that most MA organizations and Part D 
sponsors already have business continuity plans in place which cover 
the basic proposed subject areas. We estimate that 5 percent of the 
contracting entities (532 MA organizations and Part D sponsors in 
2013), or about 27 entities, will be affected by this requirement, 
resulting in an initial burden of 2,080 hours.
    We estimate the first year burden of an emergency management 
director to help design the plan would be a burden of 56,160 hours (27 
x 2,080). The estimated cost associated with such expert is the 
estimated number of hours multiplied by the estimated hourly rate of 
$36.50 (hourly rate for an emergency management director, General 
Medical and Surgical Hospitals, according to May 2012 wage data from 
Bureau of Labor Statistics Occupational Employment Statistics) plus 48 
percent for fringe benefits and overhead, which equals a first year 
cost of $3,033,763.
    In subsequent years, the burden associated with this proposed 
requirement would be the costs of an emergency management director 
working on a part time basis for an ongoing burden of 28,080 (27 x 
1,040). The estimated cost associated with such expert is the estimated 
number of hours multiplied by the estimated hourly rate of $36.50 plus 
48 percent for fringe benefits and overhead, which equals an annual 
cost of $1,516,882 for subsequent years.
    We do expect that the burden would, should a disaster or other 
disruption of business occur, ultimately result in savings from 
planning that would avoid even more losses, but such offsets cannot be 
calculated here.
    Requiring business continuity plans would benefit Medicare 
beneficiaries in these Part C and Part D plans because planning helps 
to negate problems: The more prepared that MA organizations and Part D 
sponsors are for disasters and other disruptions to business, the more 
likely it would be that these organizations would address timely any 
problems encountered and ultimately return to regular operations and 
the less likely it would be that individuals would lose access to 
benefits as a result of disruptions. Requiring the restoration of 
essential functions within 24 hours after failure would help by 
providing a clear deadline by which priority operations must be 
available to beneficiaries. Our proposal to deem as essential benefit 
authorization certain minimum functions, including claim adjudications, 
and all supporting operations would benefit individuals by providing 
the means to ensure beneficiaries access to their Medicare benefits--
and therefore health care and drugs. Designating operation of the call 
center as essential would provide beneficiaries real time customer 
support which could be critical to ensuring access to benefits in times 
of disaster or other disruption. For instance, if beneficiaries could 
not get to their regular places of business or found their claims were 
rejected at point of sale, customer service representatives could then 
send them to providers and pharmacies that could provide them with 
benefits or resolve questions in real time such that they would be more 
likely to leave pharmacies with any appropriate drugs in hand.
17. Effects of Requirement for Applicants or Their Contracted First 
Tier, Downstream, or Related Entities to Have Experience in the Part D 
Program Providing Key Part D Functions
    Based on CMS' authority at section 1860D-12(b)(3)(D) of the Act to 
adopt additional contract terms, not inconsistent with the Part C and D 
statutes, that are necessary and appropriate to administer the Part D 
program, we are proposing at Sec.  423.504(b)(8)(i) through (iii) that 
Part D organizations seeking a new Medicare contract must have 
arrangements in place such that either the applicant, or

[[Page 2038]]

a contracted entity that will be performing certain key Part D 
functions, has at least one full benefit year of experience providing 
key Part D functions. This proposal ensures that applicants take 
advantage of the abundant Part D industry expertise and experience that 
exists today in the development of their Part D program operations, 
rather than relying on technical assistance from CMS and having their 
inexperience place beneficiaries' access to prescription drugs at risk. 
We believe this provision will have a very minor savings impact on the 
federal budget, based on savings of time and effort (staff time and 
contracted auditor time and resources) that the government would spend 
on overseeing the disproportionate level of problems experienced by 
organizations operating Part D plans without prior Part D experience. 
For each inexperienced organization allowed into the program in the 
absence of this proposal, we would anticipate a savings of 1,000 staff 
hours at an average rate of $50 per hour, for a total of $50,000 in 
employee time, plus an additional savings of $200,000 in contractor 
dollars to conduct an emergency audit, for a total of $250,000. In the 
absence of this proposal, we would anticipate no more than two such 
inexperienced entities beginning Part D operations per year, for a 
total annual savings of $500,000.
    The burden associated with this proposal on industry would be 
minimal, with a total estimated number of labor hours of 3.25 to submit 
information during the Part D application process. Using the same 
average hourly salary as previously mentioned, the total cost to Part D 
applicants would be $162.50. We do not believe there are any non-
administrative costs to industry associated with this proposal, as Part 
D applicants are already required to have arrangements in place to 
perform the key Part D functions discussed in our proposal.
    The main anticipated effect from this proposal is ensuring that 
only entities with some experience with Part D in critically important 
functional areas are permitted to offer new Part D contracts, thus 
strengthening the Part D program by enhancing the qualification 
criteria. We considered the alternate proposal of requiring the prior 
Part D experience to be tied to specific quality outcomes. We rejected 
the alternative because we believed it added unnecessary complexity and 
burden to the process, and we believe a simple experience requirement 
is currently sufficient.
18. Effects of Requirement for Applicants for Stand Alone Part D Plan 
Sponsor Contracts To Be Actively Engaged in the Business of the 
Administration of Health Insurance Benefits
    Based on CMS' authority at section 1860D-12(b)(3)(D) of the Act to 
adopt additional contract terms, not inconsistent with the Part C and D 
statutes, that are necessary and appropriate to administer the Part D 
program, we proposed at Sec.  423.504(b)(9)(i) through (ii) that 
organizations seeking to offer a stand-alone prescription drug plans 
(PDP) for the first time must have either: (i) Actively offered health 
insurance or health benefits coverage for 2 continuous years 
immediately prior to submitting an application, or (ii) actively 
managed prescription drug benefits for a company offering health 
insurance or health benefits coverage for 5 continuous years 
immediately prior to submitting an application. This proposal would 
ensure that applicants have substantial experience in administering 
health insurance benefits prior to becoming a Part D sponsor. We 
believe this provision will have a very minor savings impact on the 
federal budget, based on savings of time and effort (staff time and 
contracted auditor time and resources) that the government would spend 
on overseeing the disproportionate level of problems experienced by 
organizations operating stand-alone PDPs without prior health insurance 
administration experience. For each inexperienced organization not 
allowed into the program in the absence of this proposal, we would 
anticipate a savings of 1,000 staff hours at an average rate of $50 per 
hour, for a total of $50,000 in employee time, plus an additional 
savings of $200,000 in contractor dollars to conduct an emergency 
audit, for a total of $250,000. In the absence of this proposal, we 
would anticipate no more than two such inexperienced entities beginning 
Part D operations per year, for a total annual savings of $500,000.
    The burden associated with this proposal on industry would be 
minimal, with a total estimated number of labor hours of 3.25 to submit 
information during the Part D application process. Using the same 
average hourly salary as previously mentioned, the total cost to Part D 
applicants would be $162.50. We do not believe there are any non-
administrative costs to industry associated with this proposal, as Part 
D applicants are already required to be licensed in at least one state 
prior to offering Part D benefits.
    The main anticipated effect from this proposal is ensuring that 
only entities with some experience administering health insurance 
benefits will be permitted to offer new stand-alone PDPs, thus 
strengthening the Part D program by enhancing the qualification 
criteria. CMS considered the alternate proposal of requiring the prior 
health insurance benefit administration experience to be tied to 
specific quality outcomes. We rejected this alternative because we 
believed it added unnecessary complexity and burden to the process, and 
we believe a simple experience requirement is currently sufficient.
19. Effects of Limit Parent Organizations to One Prescription Drug Plan 
(PDP) Sponsor Contract per PDP Region
    This provision has no quantifiable impact because the savings that 
might be achieved likely will be offset by the burden necessary with 
the consolidation activities and legal work necessary to implement 
these changes.
20. Effects of Limit Stand-Alone Prescription Drug Plan Sponsors To 
Offering No More Than Two Plans per PDP Region
    This provision has no quantifiable impact because the savings that 
might be achieved likely will be offset by the burden necessary with 
the consolidation activities and legal work necessary to implement 
these changes.
21. Effects of Efficient Dispensing and in Long Term Care Facilities 
and Other Changes
    We are proposing the following specific changes to the LTC short-
cycle dispensing requirements at Sec.  423.154: (1) Add a prohibition 
on payment arrangements that penalize the offering and adoption of more 
efficient LTC dispensing techniques; (2) eliminate language that has 
been misinterpreted as requiring the proration of dispensing fees; (3) 
incorporate an additional waiver for LTC pharmacies using restock and 
reuse dispensing methodologies under certain conditions; and (4) make a 
technical correction to eliminate the requirement that Part D sponsors 
report on the nature and quantity of unused brand and generic drugs. 
Medicare Part D plan sponsors are already required to comply with the 
LTC short-cycle dispensing requirements.
    The prohibition on payment arrangements that penalize the offering 
and adoption of more efficient LTC dispensing techniques is a 
clarification of the Congress' intent in enacting section 1860D-4(c)(3) 
of the Act, and we

[[Page 2039]]

do not believe it will impose any new costs on stakeholders. Indeed, 
this proposal should reduce Part D sponsors' costs by preventing Part D 
sponsors from penalizing the most efficient LTC dispensing techniques. 
The resulting reduction in brand drug costs should offset or surpass 
increases in dispensing fees.
22. Effects of Applicable Cost-Sharing for Transition Supplies: 
Transition Process Under Part D
    We propose to add at Sec.  423.120(b)(3)(vi) a paragraph clarifying 
that a Part D sponsor must charge cost sharing as follows: (a) For low-
income subsidy (LIS) enrollees, a sponsor must not charge higher cost 
sharing for transition supplies than the statutory maximum copayment 
amounts; (b) for non-LIS enrollees, a sponsor must charge: (1) The same 
cost sharing for non-formulary Part D drugs provided during the 
transition that would apply for non-formulary drugs approved under a 
coverage exception; and (2) the same cost sharing for formulary drugs 
subject to utilization management edits provided (for example, prior 
authorization and step therapy) during the transition that would apply 
once the utilization management criteria are met.
    Because increases or decreases in cost sharing during transition 
supplies under the various circumstances are likely to offset one 
another, we anticipate that there would be no cost impact on plans.
23. Effects of Medicare Coverage Gap Discount Program and Employer 
Group Waiver Plans
    The regulation amends Sec.  423.2325 by adding a new paragraph (h), 
``Medicare Coverage Gap Discount Program and Employer Group Waiver 
Plans''. This new provision requires Part D sponsors to fully disclose 
to each employer group the projected and actual manufacturer discount 
payments under the Discount Program attributable to the employer 
group's enrollees.
    We believe that the provision will have negligible regulatory 
impact because, in the interest of Full Disclosure requirements, the 
great majority of sponsors with employer group clients have likely 
already integrated Discount Program data into their existing client 
reporting. This additional reporting has enabled employer groups to 
begin to incorporate the manufacturer payments into their benefit 
packages. Also, for those few Part D sponsors that have not already 
incorporated the discounts into client reports, the provision creates a 
minimal financial burden. The requirement does not entail development 
or gathering of any new data as currently, Part D sponsors report 
beneficiary-level discounts to CMS on Prescription Drug Event (PDE) 
data, and report aggregated enrollee utilization to employer group 
clients. The new provision requires only that sponsors who have not yet 
modified their existing reports provide the aggregated discount amounts 
to each employer group, and use the existing processes for report 
dissemination.
    In estimating the associated regulatory costs we assumed that 80 
percent of the sponsors were already supplying employer group clients 
with Discount Program information and that 20 percent of the plans 
would need to modify the reports as a result of this provision. We used 
2013 data to determine the number of sponsors that would be affected by 
this new requirement. In 2013, 131 Part D sponsors operated one or more 
EGWP plans. If 20 percent of these Part D sponsors were required to 
change their client reporting, approximately 26 sponsors would be 
affected. Our research indicates that it would take each sponsor 
employing a mid-level analyst about 2-business days to aggregate the 
manufacturer discounts for each client and modify the existing reports 
to include the discount payments. Assuming an average hourly wage and 
benefits of $50,\5\ the cost of these 16 hours would be $50 x 16 = $800 
for each Part D sponsor or a total of $800 x 26 = $20,800 for all 26 
sponsors combined. In subsequent years we do not believe that there 
will be any incremental costs associated with the regulation as 
sponsors will update the discount data per their existing processes.
---------------------------------------------------------------------------

    \5\ Depart of Labor quarterly census of Employment and Wages 
indicates that the average 2011 wage for private health insurance 
plans was $74,431. To project a 2015 wage this figure was increased 
3 percent per year to $83,772 in 2015. This lead to an hourly wage 
projection of $40.27 or with 20 percent benefits an hourly rate of 
$48.33, which was in turn rounded upward to derive an hourly rate of 
$50.
---------------------------------------------------------------------------

    There is no quantifiable monetary value to CMS. Rather, requiring 
Part D sponsors to report amounts they receive on behalf of employer 
group enrollees will enable the employer group to use the payments in a 
way that best serves retirees.
24. Effects of Interpreting the Non-Interference Provision
    We are proposing to formally interpret section 1860D-11(i) of the 
Act, referred to as the non-interference provision. This provision 
prohibits CMS from interfering with the negotiations between drug 
manufacturers and pharmacies and Part D sponsors, and requiring a 
particular formulary or instituting a price structure for the 
reimbursement of covered part D drugs. We have not previously 
interpreted the statutory provision, which has resulted in different 
stakeholders having different views about its scope. Consequently, we 
believe that a clear interpretation of the statutory provision will 
remove ambiguity. We do not believe there is any regulatory impact 
because we are codifying an existing requirement that currently 
prohibits CMS from interfering in certain activities between Part D 
sponsors, pharmacies and manufacturers without adding any new 
requirements.
25. Effects of Pharmacy Price Concessions in Negotiated Prices
    We propose to revise the definition of negotiated prices at Sec.  
423.100 to specify that all pharmacy price concessions must be included 
in the negotiated price. This would preclude the differential reporting 
that is taking place today in the realm of reporting drug costs and 
price concessions from network pharmacies. This proposal would change 
current policy that permits sponsors to elect to take some price 
concessions from pharmacies in forms other than the negotiated price 
and report them outside the PDE. This practice currently allows price 
concessions to be applied disproportionately to costs that plans are 
liable for, and thus may shift more low-income cost-sharing subsidy and 
reinsurance costs to the government, as well as to manufacturers in the 
calculation of coverage gap discount payments. A sponsor that engages 
in this practice can reduce its bid and achieve a competitive advantage 
relative to a sponsor that applies all price concessions to the 
negotiated price--a competitive advantage stemming not from greater 
efficiency, but from a technical difference in how costs are reported 
to CMS. Meanwhile, the higher the negotiated price, the higher 
beneficiary coinsurance will be, the faster the beneficiary is moved 
through the benefit, and the higher government subsidies for low-income 
cost sharing (LICS) and reinsurance subsidies will be. Our proposal 
would impose consistent treatment of drug price reporting.
    Our proposal to require all price concessions to be reflected in 
the negotiated price received by the pharmacy would not necessarily 
change the level of price concessions received from network pharmacies, 
but would impose a single consistent price concession reporting process 
on all Part

[[Page 2040]]

D sponsors. Therefore, it is not clear that any contractual 
arrangements between a subset of sponsors and network pharmacies would 
require renegotiation, since only the form of the price concession, 
rather than its level, would be affected by this proposal.
    In addition, when price concessions from pharmacies are in forms 
other than the negotiated price, the degree of price concession that 
the pharmacy has agreed is no longer reflected in the negotiated prices 
available at point of sale or reflected on the Medicare Prescription 
Drug Plan Finder (Plan Finder) tool. Thus, the true price of drugs at 
individual pharmacies is no longer transparent to the market. 
Consequently, consumers cannot efficiently minimize both their costs 
(cost sharing) and costs to the taxpayers by seeking and finding the 
lowest-cost drug/pharmacy combination. This proposal would ensure that 
the actual level of price competition is transparent to the Part D 
market.
    Under current policy, a sponsor may be able to offer a lower bid 
than its competitors and may achieve a competitive advantage stemming 
not from greater efficiency, but from a technical difference in how 
costs are reported to CMS. When this happens, such differential 
reporting may result in bids that are no longer comparable, and in 
premiums that are no longer valid indicators of relative plan 
efficiency. The changes we are proposing would lead to Part D bids 
being more accurately comparable and premiums more accurately 
reflecting relative plan efficiencies. The lowest premiums would more 
accurately direct beneficiaries to the plans that have the lowest costs 
to the program overall.
    We do not collect sufficient detail in price concession data 
reported to CMS to quantify the impact of this proposed change to 
standardize price concession reporting. We believe that only certain 
sponsors are engaging in the differential reporting practices today, 
and these sponsors face close competition from larger competitors that 
do not appear to be employing the same strategies. Consequently, if the 
sponsors employing these tactics increase their bids to maintain 
margin, they could likely risk losing market share. Therefore, we would 
expect these sponsors to carefully consider the risk of losing market 
share before raising their bids in response to our regulatory 
proposals, particularly those that are committed to the LIS market.
    We expect that the effect of our proposal to require consistent and 
transparent pricing would not only provide higher-quality information 
to the Part D market, but also promote increased price competition 
among network pharmacies. This expectation is consistent with economic 
theory that holds that increased price transparency will increase price 
competition. We believe pharmacies will support including the full 
price concession in the point-of-sale price, and fully transparent 
price competition will align beneficiary and taxpayer interests in 
minimizing costs. Our proposal would not change the level of price 
concessions and therefore costs under the program as a whole, but would 
apply consistency to how these are reported to CMS and treated in 
bidding and payment processes. Therefore, we anticipate that there 
would be no cost impact on plans.
26. Effects of Payments to PDP Plan Sponsors for Qualified Prescription 
Drug Coverage and Payments to Sponsors of Retiree Prescription Drug 
Plans
    This section is not anticipated to have any significant impact 
since it is only a conforming change, necessary to align with the 
proposed definition change in another section of the regulation.
27. Effects of Preferred Cost Sharing
    We propose to require that sponsors may offer reduced copayments or 
coinsurance for covered Part D drugs obtained through a subset of 
network pharmacies, as long as such preferred cost sharing is in return 
for consistently lower negotiated prices relative to the same drugs 
when obtained in the rest of the pharmacy network. Therefore, we intend 
to clarify that preferred cost sharing should consistently be aligned 
with and accurately signal lower costs. We propose that by 
``consistently lower'' we mean that sponsors must offer better prices 
on all drugs in return for the lower cost sharing. In practice we 
believe this would mean that whatever pricing standard is used to 
reimburse drugs purchased from network pharmacies in general, a lower 
pricing standard must be applied to drugs offered at the preferred 
level of cost sharing. Our analysis shows that most sponsors offering 
preferred cost sharing are currently achieving these levels of savings, 
and therefore our proposed policy would only require a change in price 
concession levels or reporting for a limited number of sponsors. Our 
proposal would apply a consistent expectation across all sponsors to 
compete on the same basis on negotiated prices, including in related-
party pharmacy operations.
    Instead of consistently passing through lower costs available 
through economies of scale or steeper discounts, some (but not the 
majority of) sponsors are actually charging the program higher 
negotiated prices in some cases. In other cases, the negotiated prices 
offered for preferred cost sharing are only slightly lower than the 
prices in the rest of the network. When either higher prices or very 
nearly the same prices are combined with significantly lower cost 
sharing, such pricing increases the proportion of costs borne by the 
plan and the government. Moreover, the lower cost sharing provides a 
defective price signal that distorts market behavior. In these cases, 
the lower cost sharing does not incent enrollees to select pharmacies 
with lower prices and thus make more efficient choices in the market, 
but the exact opposite. This would be expected to result in higher 
costs to the Part D program overall. Therefore, we believe our proposed 
policy change to require consistently lower negotiated prices in return 
for preferred cost sharing may not only decrease overall price levels 
in certain sponsor's networks, but would also encourage beneficiaries 
to make drug purchase decisions that are better aligned with lower 
costs to the program overall. However, we do not have enough 
information on how negotiated prices might change--particularly in 
combination with the requirements for all price concessions from 
pharmacies to be reflected in negotiated prices, and for any-willing-
pharmacy terms and conditions to include minimum price concession terms 
for preferred cost sharing--to predict the overall change in Part D 
costs.
28. Effects of Maximum Allowable Cost Pricing Standard
    We are proposing a change to the regulations at Sec.  
423.505(b)(21) and Sec.  423.505(i)(3) governing the disclosure and 
updating of prescription drug pricing standards used by Part D sponsors 
to reimburse network pharmacies to make clear that drug pricing based 
on maximum allowable cost (MAC) is subject to these regulations. In the 
final rule at 76 FR 54600 (September 1, 2011), we did not estimate a 
regulatory impact for Part D sponsors to comply with the prescription 
drug pricing standard requirements, and we do not believe these 
proposed changes would result in any regulatory impact. Read together, 
the new provisions in Sec.  423.501, Sec.  423.505(b)(21), and Sec.  
423.505(i)(3)(viii) require sponsors, when applicable, to include 
provisions in network pharmacy contracts, to address the disclosure of 
MAC prices themselves to be updated to the applicable pharmacies

[[Page 2041]]

in advance of their use for reimbursement of claims, because the source 
of the MAC prices is not publicly available. Addressing prices that 
will be paid to a subcontractor is an activity undertaken in the normal 
course of business. Also, whether to use MAC prices is voluntary for 
Part D sponsors. Finally, sponsors must have procedures, systems, and 
technology currently in place to use these prices for reimbursement of 
pharmacy claims in the normal course of business. These systems would 
have to be adapted to also disclose the prices to pharmacies in advance 
of their use, which we believe would involve negligible effort for Part 
D sponsors' existing employees and/or subcontractors. Therefore, we 
estimate the impact of these provisions to be negligible.
29. Effects of Any Willing Pharmacy Standard Terms & Conditions
    Proposed changes to Sec.  423.120(a)(8) would require Part D 
sponsors to offer the contract terms and conditions (T&C) for every 
level of cost sharing offered under a Part D plan (preferred, standard 
retail, mail order, etc.) to any willing pharmacy. We expect the burden 
for Part D sponsors to amend contracts, where necessary, to offer every 
level of cost sharing would be negligible. Sponsors already must meet 
any willing pharmacy requirements for retail and mail order cost 
sharing. In 2013, nearly half of non-employer group Part D sponsors 
were designing and marketing plans with T&C for preferred cost sharing 
levels. For these sponsors, the only change associated with this 
proposal will be to ensure that now T&C for all levels of cost sharing, 
including preferred, are being offered (if they are not already) to all 
interested pharmacies. For the other half of Part D sponsors not 
currently offering preferred cost sharing options, this proposal does 
not require them to start.
    Part D sponsors already negotiate contracts regularly with 
pharmacies in order to meet network access requirements. We estimate 
that for sponsors who currently offer benefit packages with a preferred 
cost sharing level (approximately 500 plans), an estimated new burden 
of 5,000 legal hours (500 plans x 10 hours) for revising contract 
language and 2,000 hours (500 plans x 4 hours) for additional contract 
support staff time negotiating with and assisting pharmacies 
contracting at the preferred cost sharing level for the first time. The 
estimated cost associated with this change is the estimated number of 
hours multiplied by available average hourly rates ($62.93 per hour for 
a lawyer, $32.22 per hour for a financial specialist [May 2012 wage 
data from Bureau of Labor Statistics Occupational Employment 
Statistics]), plus 48 percent for fringe benefits and overhead, which 
equals a first year cost of $561,053.20. Once a sponsor has revised 
contracts to meet the proposed requirement, no extraordinary additional 
expenses are anticipated for subsequent years. For a plan not currently 
offering preferred cost sharing levels, it is expected that preferred 
cost sharing terms and conditions would be offered to any willing 
pharmacy if they ever decide to offer them.
    Any new burden on pharmacies is similarly expected to be 
negligible, as they are already reviewing and implementing terms from 
contracts, often annually. Pharmacies are not being directed to choose 
one set of T&C over another, but rather are gaining the option to 
review and implement terms for preferred cost sharing, if they so 
choose to accept the applicable negotiated pricing terms.
    Beneficiaries are expected to benefit from an increased number of 
pharmacies offering preferred cost sharing levels.
30. Effects of Enrollment Requirements for the Prescribers of Part D 
Covered
    Our proposal is that prescribers must be enrolled in Medicare in 
order for their prescriptions to be coverable under the Part D program. 
This will entail Part D sponsors or their designated PBMs checking the 
prescriber's individual NPI to determine whether the prescriber's is 
validly enrolled in Medicare before paying a claim from a network 
pharmacy or request for reimbursement from a beneficiary.
    When we promulgated the NPI PDE requirement in a final regulation 
published on April 12, 2012 (77 FR 22072), we estimated the impact for 
PBMs and plan organizations to contract for or build prescriber ID 
validation services. Thus, while this proposal entails a new 
requirement for Part D sponsors, we do not believe it would have any 
new or additional impact because Part D sponsors must already have 
prescriber validation capabilities to meet the NPI PDE requirement.
    Additionally, under our proposal, we do not estimate any savings. 
We presume that if a beneficiary's prescriber is not enrolled or does 
not enroll in Medicare, the beneficiary will find a new prescriber who 
is enrolled, rather than go without needed medications. Therefore, we 
do not estimate any savings from this proposal.
31. Effects of Improper Prescribing Practices and Patterns
    Our proposed revisions in Sec.  424.530(a)(11) and Sec.  
424.535(a)(13) would likely result in additional application denials 
and revocations. The DEA Web site found at http://www.deadiversion.usdoj.gov/crim_admin_actions/index.html contains a 
list of physicians, eligible professionals, and pharmacies that have 
had their DEA Certificate of Registration suspended or revoked since 
2000. Based on our review of this data, we believe that approximately 
200 Medicare-enrolled physicians and eligible professionals would be 
affected by proposed Sec.  424.535(a)(13). However, we do not have data 
available to assist us in calculating the potential costs to physicians 
and eligible professionals in lost potential billings or the potential 
costs or savings to the government arising from this provision; nor are 
we able to estimate the number of denials per year that would result 
from proposed Sec.  424.530(a)(11).
    Our proposed Sec.  424.535(a)(14) would result in an increase in 
the total number of revocations under Sec.  424.535(a). We are unable, 
though, to project the number of providers and suppliers that would be 
revoked under Sec.  424.535(a)(14) because we do not have data 
available that can be used to make such an estimate. Thus, we cannot 
project: (1) The potential costs to providers and suppliers in lost 
billings, or (2) the potential costs or savings to the government 
arising from our proposed provision.
32. Effects of the Transfer of TrOOP Between Part D Sponsors Due to 
Enrollment Changes During the Coverage Year
    We do not expect that codifying the requirement for Part D sponsors 
to report TrOOP-related data to a subsequent plan in which a 
beneficiary enrolls during the coverage year, and for the new plan to 
accept that data and use it to position the beneficiary in their 
benefit would generate savings or increase costs.
    We expect the requirement to report TrOOP-related data and to 
accept and use the data to position a beneficiary in a new plan benefit 
when the member changes plans during the coverage year would ensure the 
Part D benefit is correctly administered by the new plan and prevent a 
beneficiary who has already moved through the initial phase(s) of the 
Part D benefit from starting the benefit anew as a result of the 
enrollment change.

[[Page 2042]]

33. Effects of Broadening the Release of Part D Data
    We are proposing to revise our regulations governing the release of 
Part D data to expand the release of unencrypted prescriber, plan and 
pharmacy identifiers contained in prescription drug event (PDE) records 
to external researchers, as well as to make other changes to our 
policies regarding release of PDE data, as currently codified at Sec.  
423.505(f)(3) and (m). This proposal does not impose any new costs on 
any stakeholders. Medicare Part D plan sponsors are already required 
to, and do, submit the information that may be released in accordance 
with this proposal. Therefore, we are not including any assessment of 
this proposal for the regulatory impact statement.
34. Effects of Establish Authority to Directly Request Information From 
First Tier, Downstream, and Related Entities
    Pursuant to sections 1857(d)(2) and 1860D 12(b)(3)(c) of the Act, 
we are now proposing to specify at Sec.  422.504(i)(2)(ii) and Sec.  
423.505(i)(2)(ii) that HHS, the Comptroller General, or their designees 
have the right to audit, evaluate, collect, and inspect any records 
directly from any first tier, downstream, or related entity. This 
proposed regulatory change would not grant CMS (or the MEDIC, the 
contractor that conducts fraud investigations on our behalf) any 
oversight authority beyond what we already possess.
    In enabling CMS or its designee(s) to directly request information 
from a first tier, downstream, or related entity, we would provide a 
more efficient avenue to obtain necessary information. This proposal 
would change the current policy, which requires going through the plan 
sponsor in order to collect information. Our proposal would save money 
and time for CMS as well as the plan sponsor.
    We anticipate that adoption of this proposal would result in cost 
savings for plan sponsors. Under the current regulatory structure, 
assuming that the MEDIC (the CMS contractor that typically would put 
forth such requests) puts forth 1000 requests per year to Part C and D 
sponsors, each request requires the plan sponsor to spend 5 hours 
developing and making the request for information from its first tier, 
downstream, or related entity, and communicating the results of that 
request back to CMS. At a rate of $55 per hour, plan sponsors may save 
a total of $275,000 in employee costs in the aggregate. Additionally, 
we believe this provision will have a very minor savings impact on the 
federal budget. This calculation is based on the savings in time and 
effort the MEDIC will experience (2 hours per information request) 
resulting from the ability to request information directly from first 
tier, downstream, and related entities. The 2 hours reflects the time 
the MEDIC currently spends resolving ambiguities in the request or in 
the information provided in response that are created by the presence 
of an intermediary (that is, the plan sponsor) between the requestor 
(MEDIC) and the custodian of the information (that is; first tier, 
downstream, or related entity).
    In addition to cost savings, this proposed regulatory change will 
reduce the administrative burden on plan sponsors. The plan sponsor 
will no longer have to act as the gatekeeper between the MEDIC and its 
first tier, downstream, or related entity.
    We do not anticipate any additional burden relating to the proposed 
requirement that we alert the plan sponsor that we are contacting its 
first tier, downstream or related entity since CMS will be merely 
copying the plan sponsor on the request.
35. Effects of Eligibility of Enrollment for Incarcerated Individuals
    We are proposing to amend Sec.  417.460(b)(2)(i), Sec.  
417.460(f)(1)(i), Sec.  422.2, Sec.  422.74(d)(4)(i)(A), Sec.  
422.74(d)(4)(v), Sec.  423.4, and Sec.  423.44(d)(5) to clarify the 
eligibility requirement for residing in the plan's service area related 
to incarceration for the purposes of enrolling into and remaining 
enrolled in MA, Part D, and Medicare cost plans. We expect the impact 
of this change to be primarily that of savings to the MA and Part D 
programs. In CY 2012, there were close to 50 million Medicare 
beneficiaries. Approximately 34.4 million of those beneficiaries were 
enrolled in MA plans, PDPs, or cost plans which accounts for 68.8 
percent of the total Medicare population. In the same year, an average 
of 21,329 Medicare beneficiaries enrolled in MA or Part D plans were 
identified by SSA as being incarcerated.
    We issued guidance to MA plans and PDPs to investigate each 
individual's incarcerated status and disenroll the individual for no 
longer residing in the plan's service area if the plan confirmed 
incarcerated status. If the MA plan or PDP could not confirm the 
incarcerated status, those plans were to continue to investigate each 
instance of incarceration for up to 6/12 months and disenroll the 
individuals at the end of that time following Sec.  422.74(b)(4)(ii)/
Sec.  423.44(b)(5)(ii) if they couldn't verify the incarcerated status 
sooner. As a result, the plan received capitated payments when the 
individual was ineligible to receive payment of Medicare benefits. 
Section 1876 Cost contracts had no such instructions to disenroll 
individuals who are incarcerated. By directing MA plans, PDPs, and cost 
plans to disenroll incarcerated individuals at the time of notification 
from CMS, we intend to prevent improper payment for these individuals 
to MA plans, PDPs, and cost plans for periods when they were ineligible 
to receive such services. Based on the data for capitation payments for 
MA and PDPs, as well as the prepayments provided to cost plans, we 
estimate that the disenrollment of incarcerated individuals would 
result in a decrease in payments made by CMS and would result in a cost 
savings of $70 million in 2015.
    We estimate, based on the numbers mentioned previously, that this 
change could save the MA program approximately $27 million in 2015, 
increasing to $62 million in 2019, and could save the Part D program 
(includes the Part D portion of MA-PD plans) approximately $46 million 
in 2015, increasing to $90 million in 2019. As cost plans are paid 
based on the reasonable costs delivering Medicare-covered services to 
their enrollees, instead of the fixed capitation amounts paid to MA and 
PDPs, we believe the impact to cost plans associated with this 
provision to be negligible.

   Table 11--Projected Number of Individuals Disenrolled Due to Incarceration and Estimated Savings to the Medicare Advantage Program by Provision for
                                                            Calendar Years 2015 Through 2019
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                            Totals (CYs
                                                               2015            2016            2017            2018            2019         2105-2019)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Projected number of incarcerated beneficiaries enrolled            6,280           7,750           9,221          10,691          12,162          46,104
 in MA plans............................................

[[Page 2043]]

 
Projected federal impact due to incarcerated individuals         \1\-$27         \1\-$35         \1\-$43         \1\-$52         \1\-$62        \1\-$219
 disenrolled 6 months sooner............................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Estimates reflect scoring by the CMS, Office of the Actuary, and 2012 incarceration data provided by the SSA.
\1\ Million.


    Table 12--Projected Number of Individuals Disenrolled Due to Incarceration and Estimated Savings to the Medicare Part D Program by Provision for
                                                            Calendar Years 2015 through 2019
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                            Totals (CYs
                                                               2015            2016            2017            2018            2019         2015-2019)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Projected number of incarcerated beneficiaries enrolled           49,275          55,970          62,666          69,362          76,058     \1\ 313,331
 in Part D plans (including MA-PDs).....................
Projected federal impact due to incarcerated individuals         \2\-$46         \2\-$55         \2\-$65         \2\-$77         \2\-$90        \2\-$333
 disenrolled 12 months sooner...........................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Estimates reflect scoring by the CMS, Office of the Actuary, and 2012 incarceration data provided by the SSA.
\1\ Accumulated; not unique individuals.
\2\ Million.

36. Effects of Rewards and Incentives Program Regulations for Part C 
Enrollees
    This proposal would permit plans to provide limited rewards and 
incentives to enrollees who participate in activities that focus on 
promoting improved health, preventing injuries and illness, and 
promoting efficient use of health care resources. While there would be 
a cost associated with providing rewards and incentives, we anticipate 
that there may be savings as a result of healthier beneficiary 
behavior. Because plans are not required to provide rewards and 
incentives and CMS does not have a means of calculating the costs and 
benefits of rewards/incentives at this time, we are not providing an 
impact analysis for this provision.
37. Effects of Expand Quality Improvement Program Regulations
    The proposed regulation changes are only technical changes for the 
established quality improvement program requirements. These changes 
would clarify how MA organizations report quality improvement program 
information to CMS. As MA organizations are already reporting this 
information to CMS and the changes are only to codify the process, the 
changes will not increase costs for MA organizations.
38. Effects of Authorization of Expansion of Automatic or Passive 
Enrollment Non-Renewing Dual Eligible SNPs (D-SNPs) to Another D-SNP To 
Support Alignment Procedures
    We propose to modify the situations in which CMS may passively 
enroll beneficiaries to include the situation when a Medicare Advantage 
Dual Eligible SNP (D-SNP) is non-renewing. More specifically, passive 
enrollment would be permitted for full-benefit dual eligible 
beneficiaries in the non-renewing D-SNP when there is another D-SNP in 
the service area that offers substantially similar benefits, network, 
and cost-sharing as the non-renewing D-SNP, and that also offers the 
Medicaid managed care organization in which the beneficiary is 
enrolled.
    SNPs are due to sunset in 2014. Consequently, we are not scoring 
this provision for contract years 2015 through 2019.
39. Effects of Improving Payment Accuracy: Reporting Overpayments, RADV 
Appeals, Part D Payment Reopening, LIS Cost Sharing, and Coverage Gap 
Discount Program
    This proposed section proposes only technical changes for 
overpayment reporting, RADV appeals, Part D payment reopening, LIS cost 
sharing, and the Coverage Gap Discount Program. These technical changes 
will not result in costs to MA organizations and Part D sponsors, nor 
do we expect the impact of these technical changes to result in 
savings.
40. Effects of Part C and Part D RAC Determination Appeals
    In section III.B.x of this proposed rule, to establish an 
administrative appeals process for overpayment determinations by the 
Part C and Part D RACs. The cost associated with these provisions 
involves the preparation and submission of appeal requests by plans. We 
estimate this cost to be $48,343 as summarized in the following Table 
13.

                        Table 13--Summary of RAC Determination Appeals Costs and Benefits
----------------------------------------------------------------------------------------------------------------
                                                   Costs  (in
             Provision description                 $millions)                        Benefits
----------------------------------------------------------------------------------------------------------------
Submission of MA plans' first level Request              0.02167  Administrative appeal rights and accuracy in
 for Reconsideration.                                              recovery demands.
Submission of Part D plans' first level                  0.02167  Administrative appeal rights and accuracy in
 Request for Reconsideration.                                      recovery demands.
Submission of MA plans' second level Request             0.00208  Administrative appeal rights and accuracy in
 for Review.                                                       recovery demands.

[[Page 2044]]

 
Submission of Part D plans' second level                 0.00208  Administrative appeal rights and accuracy in
 Request for Review.                                               recovery demands.
Submission of MA plans' third level Request               0.0004  Administrative appeal rights and accuracy in
 for Review by the CMS Administrator.                              recovery demands.
Submission of Part D plans' third level                   0.0004  Administrative appeal rights and accuracy in
 Request for Review by the CMS Administrator.                      recovery demands.
----------------------------------------------------------------------------------------------------------------

41. Effects of Requirement To Provide High Quality Health Care
    The proposal to add contractual requirements for MA plans and Part 
D plans to provide high quality health care proposes to include in the 
terms and conditions in our contracts with Part D sponsors and explicit 
requirement that Part D plans administer a benefit that promotes and 
supports high quality care. We believe that we have conveyed this 
expectation in other ways, such as through our performance and quality 
measurements and methodologies. This proposal provides a basis for 
enforcement or corrective action for low-performing plans. Therefore, 
we do not believe there is an impact associated with this proposal.
42. Effects of MA-PD Coordination Requirements for Drugs Covered Under 
Part D
    To ensure that Part A, Part B and Part D drug benefits are 
coordinated by MA-PDs so that enrollees receive needed medications on a 
timely basis, we are proposing to add a new section (b)(7) to Sec.  
422.112 to require MA-PDs to establish adequate messaging and 
processing requirements with network pharmacies to ensure that 
appropriate payment is assigned at the point of sale (POS) and to 
ensure that when coverage is denied under Part D due to available 
coverage under Part A or Part B, that such coverage is authorized 
expeditiously so that the drug may be provided to the enrollee as his 
or her health condition requires. Our proposed regulation requires that 
MA-PDs have systems in place to accurately and timely adjudicate claims 
at the POS.
    In addition, we would like to ensure that MA-PD plans are 
coordinating their benefits appropriately during the coverage 
determination process. If an MA-PD denies PDP coverage due to the 
availability of Part A or Part B coverage, we expect the MA 
organization to ensure that the decision results in authorization or 
provision of the drug under Part B pursuant to the requirements in 
parts 422 and 423, subpart M. We do not expect MA-PD enrollees to have 
to request an initial Part A or B versus Part D coverage determination 
more than once. We are soliciting comments about our proposal, as well 
as other possible approaches to minimizing delays in beneficiary access 
to needed medications caused by inadequate coordination of Part A, Part 
B and Part D benefits at the POS and during the coverage determination 
process. In particular, we would appreciate organizations sharing their 
expertise regarding best practices for benefit coordination at the POS 
and plan processes that enhance those coverage determinations. We also 
are soliciting comments on challenges MA-PDs currently encounter in 
their efforts to integrate these benefits. Under Medicare regulations 
MA-PD plans are already required to coordinate member coverage for both 
Part A and B and Part D covered drugs. It is our understanding that the 
majority of MA-PDs are effectively performing this activity. However, 
we are aware that some MA-PDs have been less successful. With this 
regulation we propose to identify drug coverage standards that all MA-
PDs can follow that have proven to be both cost effective and 
efficient. This proposed regulation does impose any new requirements or 
costs but rather will assist low performing MA-PDs in clarifying the 
necessary actions to meet existing regulatory requirements for the 
effective coordination of Part A, Part B and Part D covered drugs.
43. Effects of Revisions to Good Cause Processes
    We are proposing to revise Sec.  417.460, Sec.  422.74, and Sec.  
423.44 to allow an entity acting on behalf of CMS to conduct good cause 
reviews. Shifting responsibility for this activity from CMS to entities 
such as MA, Part D and cost plans would not change the number of 
individuals requesting reinstatement for good cause nor the number of 
those individuals who meet the criteria for reinstatement. While some 
plans may increase their bids to cover the costs to complete this work, 
the administrative burden to plans is negligible. Therefore, we do not 
expect this change to have a monetary impact to the Medicare Trust 
Funds or affect enrollment, as the policies permitting involuntary 
disenrollment for non payment of premiums and allowing beneficiaries to 
request reinstatement for good cause have been in existence for some 
time.
44. Effects of the Definition of Organization Determination
    The proposed revisions at Sec.  422.566 are intended to clarify the 
meaning of organization determination and to maintain consistency 
between the regulatory definition of organization determination and the 
definition used elsewhere in CMS documents and subregulatory guidance. 
Specifically, we are seeking to include additional types of coverage 
decisions that are subject to Medicare appeals processing requirements 
set forth in subpart M. In other words, cases where a provider under 
contract with an MA organization provides a service directly to an 
enrollee and when a contract provider refers an enrollee to a non-
contract provider for an item or service. Because this proposed change 
codifies the existing definition of organization determination, this 
proposal does not represent any new burden on MA organizations or 
burden for small businesses, rural hospitals, states or the private 
sector.
45. Effects of MA Organization Extension of Adjudication Timeframes for 
Organization Determinations and Reconsiderations
    The proposed changes to Sec.  422.568(b), Sec.  422.572(b), and 
Sec.  422.590 would clarify the limited circumstances in which MA 
organizations are permitted to extend the adjudication timeframe for 
organization determinations and reconsiderations. We believe these 
proposed changes would have a minimal impact on MA organizations, 
because they are not likely to alter the number of coverage requests 
plans would receive or the required clinical resources to process each 
request. During audits of MA organizations, we identified cases where 
plans are improperly extending the applicable adjudication timeframe 
(for example,

[[Page 2045]]

where clinical documentation is needed from a contract provider or 
where the plan has failed to develop and review the case during the 
required timeframe) but we do not have data on the overall frequency 
with which extensions are being invoked and what percentage of those 
cases involve the scenarios described.
46. Effects of Two-Year Prohibition When Organizations Terminate Their 
Contracts
    As part of a group of proposals intended to strengthen our ability 
to distinguish stronger applicants for Part C participation we propose 
to revise the regulation text at Sec.  422.506 and Sec.  422.512 to 
explicitly apply the 2-year prohibition on re-application after an 
organization has terminated its contract to applications for service 
area expansions in addition to applications for new contracts. These 
changes to Sec.  422.506 and Sec.  422.512would make the text of these 
regulations consistent with the language of a similar provision at 
Sec.  422.503 and Sec.  422.508 (which bans re-application for 2 years 
after we have terminated an organization's contract). We believe this 
provision will have minimal financial impact as it only affects those 
organizations that choose to non-renew or mutually terminate a contract 
with CMS. This provision will not affect current beneficiaries as it 
only applies when an organization is applying for a new contract or to 
expand the service area of its existing contract; beneficiaries who are 
currently enrolled in an organization's existing contracts are 
therefore not affected.
47. Effects of Withdrawal of Stand Alone Prescription Drug Plan Bid 
Prior to Contract Execution
    This provision is not anticipated to have any significant impacts, 
as the withdrawn bids that this provision would not relate to any 
existing enrollees.
48. Effects of Essential Operations Test Requirement for Part D
    This provision has no quantifiable impact because the requirement 
affects unknown individuals/entities in the future. Nevertheless, we 
believe this proposal to require new Part D sponsors to pass an 
essential operations test prior to being permitted to accept 
enrollments will enhance our ability to ensure that beneficiaries are 
permitted to choose only from among those Part D plans offered by 
sponsors truly qualified to administer the full range of benefits to 
which beneficiaries are entitled. This approach will reduce both the 
likelihood of disruptions in beneficiaries' access to outpatient 
prescription drugs and the resources CMS has to dedicate to addressing 
such disruptions.
49. Effects of Termination of the Contracts of Medicare Advantage 
Organizations Offering Part D for Failure for Three Consecutive Years 
To Achieve Three Stars on Both Part C and Part D Summary Star Ratings 
in the Same Contract Year
    This provision has no quantifiable impact because this affects 
unknown individuals/entities in the future. We believe the proposal to 
authorize the termination of contracts that fail to achieve three-star 
ratings for both Part C and D within three years is consistent with our 
overall emphasis on ensuring that beneficiaries receive quality 
services from their plan sponsors. Eliminating poor performing 
contracts will promote beneficiary satisfaction with the Part C and D 
programs and reduce the amount of effort we must apply to overseeing 
and correcting the performance of organizations that consistently fail 
to demonstrate a commitment to quality.
50. Effects of Requirements for Urgently Needed Services
    The proposed revisions of Sec.  422.113(b)(1)(iii) removes the 
requirement of ``extraordinary and unusual'' for in-service-area, out-
of-network coverage for urgent needed services. Typically, this will 
mean that enrollees with non-emergent weekend medical problems will now 
be covered for services furnished out of network thus eliminating the 
need for beneficiaries to seek out-of-network care. Many plans already 
contract with 24/7 walk-in clinics providing in-network coverage. 
Historically, the alternative to plan coverage has been emergency-room 
care. We therefore expect minimal cost and possible savings as a result 
of this change.
51. Effects of Skilled Nursing Facility Stays
    Our proposal that would relocate the MA regulation language 
currently located at Sec.  422.101(c), ``Requirements Related to Basic 
Benefits'' to Sec.  422.102(a)(5), ``Supplemental Benefits'' is a 
technical change only and would have no financial impact.
52. Effects of Agent and Broker Training and Testing Requirements
    At Sec.  422.2274 and Sec.  423.2274, we are proposing to revise 
Sec.  422.2274(b) and (c) and Sec.  423.2274(b) and (c) to remove the 
concept of a CMS endorsed or approved training and testing, and require 
instead that agents be trained and tested annually, as specified by 
CMS. We believe this proposed change continues to ensure that all 
agents/brokers selling Medicare products have a comprehensive 
understanding of Medicare program rules. The changes made to this 
regulation will not result in any additional costs for MA plans or Part 
D plans, or a new collection of information. We are simply revising the 
existing language to remove an obligation for CMS to endorse or approve 
a training program in favor of CMS providing such training directly.
53. Effects of Deemed Approval of Marketing Materials
    At Sec.  422.2266 and Sec.  423.2266, CMS provides the regulatory 
requirements for materials that are deemed approved. It also provides 
the requirements for the review and distribution of marketing 
materials. We are proposing to move the current requirements in 
Sec. Sec.  422.2266 and 423.2266 to Sec. Sec.  422.2262(a)(2) and 
423.2262(a)(2), respectively. We also propose to simplify the language 
in Sec. Sec.  422.2266 and 423.2266 by stating if CMS does not approve 
or disapprove marketing materials within the specified review 
timeframe, the materials will be deemed approved. Deemed approved means 
that a MA organization or Part D sponsor may use the material. Changes 
to this regulation will not result in additional. We are simply 
revising the existing language to clarify the existing requirements for 
deemed approved materials.
54. Effects of Part C Disclosure Requirements
    This provision would simply replace the current, incorrect, 
reference in Sec.  422.111 to the marketing materials and elections 
form requirements at Sec.  422.80, with the correct reference to 
subpart V, Medicare Advantage Marketing Requirements. This is a 
technical change and represents no costs or impact.
55. Effects of Managing Disclosure and Recusal in P&T Conflicts of 
Interest: Formulary Development and Revision by a Pharmacy and 
Therapeutics Committee Under Part D
    We propose to revise our regulations at Sec.  423.120(b)(1) to 
reorder the existing provisions and add a new paragraph (b)(1)(iv) to 
require that a Part D sponsor's P&T committee clearly articulates and 
documents processes to determine that the requirements under paragraphs 
(b)(1)(i), (ii), and (iii) have been met, including the determination 
by an objective party of whether disclosed financial interests are

[[Page 2046]]

conflicts of interest and that management of any recusals due to such 
conflicts of interest.
    Because plans were previously required to have these processes in 
place, and we are only asking that they document them, we anticipate 
that there would be no cost impact on plans.
56. Effects of the Technical Changes to the Definition of Part D Drug
    There is no impact associated with this provision as it is a 
technical change to regulation language.
57. Effects of Thirty Sixth Month Coordination of Benefits (COB) Limit
    There is no impact associated with this provision as it is a 
technical change to regulation language.
58. Effects of Application and Calculation of Daily Cost-Sharing Rates
    There is no impact associated with this provision, as it is a 
technical change to regulation language.
59. Effects of Technical Change To Align Regulatory Requirements for 
Delivery of the Standardized Pharmacy Notice
    Our proposed revision to Sec.  423.562(a)(3) is a technical change 
and does not represent a burden for small businesses, rural hospitals, 
states, or the private sector.
60. Effects of Special Part D Access Rules During Disasters
    In proposed Sec.  423.126(a), we would codify requirements similar 
to existing guidance that pertains to relaxing ``refill-too-soon'' 
(RTS) edits to permit one refill in the event of any imminent or 
occurring disaster or emergency that would hinder an enrollee's access 
to covered Part D drugs.
    The proposed changes would not result in any additional costs. For 
one, we currently expect through guidance that sponsors will relax 
edits after the issuance of certain federal declarations. We also do 
not anticipate that providing a general framework for when sponsors 
must relax RTS edits would necessitate an increase in resources because 
it is currently not uncommon for Part D sponsors to relax edits for 
particular individuals under certain circumstances.
    The proposed provisions would require Part D sponsors to relax 
``refill-too-soon'' (RTS) edits when, as evidenced by a declaration of 
a disaster or emergency or its imminence by an appropriate federal, 
state, or local official, it is reasonable to conclude that an 
occurring or imminent disaster or emergency would make it difficult for 
beneficiaries to obtain refills of their medications. Relaxing RTS 
edits in these circumstances would benefit beneficiaries by better 
ensuring that they do not run out of their medications when a disaster 
is imminent or after it strikes.
61. Effects of MA Organization Responsibilities in Disasters and 
Emergencies
    The proposed addition of section Sec.  422.100(m) requires plan 
activities during disasters that are currently recommended in our 
guidance. Since plans are already cooperating with our recommendations 
we expect no impact as a result of this requirement. Additionally, we 
are requiring a dedicated Web page for disasters on plan Web sites. 
Since plans already have Web sites and technical staff supporting them, 
we expect minimal cost, if any, for the additional page. We are also 
requiring plans to annually notify enrollees about disaster 
preparation. Since plans, as required at Sec.  422.111, already 
annually notify beneficiaries using the Evidence of Coverage template, 
we expect minimal cost, if any, for the additional notification about 
disasters.
62. Effects of the Technical Changes Regarding the Termination of a 
Contract, Contract Determination and Other Appeals, and Intermediate 
Sanctions and Civil Money Penalties Under Parts C and D
    Sections III.E.13. and 14 this proposed rule include provisions 
making minor technical and clarifying changes. These changes include 
making language consistent, aligning titles and correcting references. 
These technical and clarifying changes will not result in additional 
burden to sponsors nor will they have a financial impact on sponsors.
63. Effects of Technical Change to the Restrictions on use of 
Information Under Part D
    There is no impact associated with this provision as it is a 
technical change to regulation language to reflect the expansion, 
pursuant to section 6402(b)(1) of the Affordable Care Act, in the 
purposes for which HHS, its contractors, and the Attorney General, and 
Comptroller General may use information disclosed or obtained pursuant 
to section 1860D-15 of the Act.

             Table 14--Estimated \1\ Aggregate Costs and Savings to the Health Care Sector by Provision for Calendar Years 2015 Through 2019
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Calendar year ($ in millions)            Total  ($ in
                   Provision                             Regulation section(s)         -------------------------------------------------- millions)  CYs
                                                                                          2015      2016      2017      2018      2019       2015-2019
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Impacts to MA Organizations and Part D Sponsors
--------------------------------------------------------------------------------------------------------------------------------------------------------
A.6. Changes to Audit and Inspection..........  Sec.   422.503(d)(2), Sec.                   8.9       8.9       8.9       8.9       8.9            44.5
                                                 423.504(d)(2).
                                                                                       -----------------------------------------------------------------
    Total ($ in millions).....................  ......................................       8.9       8.9       8.9       8.9       8.9            44.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Federal Government (Medicare) Impacts
--------------------------------------------------------------------------------------------------------------------------------------------------------
A.10. Enrollment Eligibility for Individuals    Sec.   422.1, Sec.   422.50, AND Sec.        -10       -12       -13       -15       -17             -67
 Not Lawfully Present in the United States \2\.   422.74; Sec.   423.1, Sec.   423.30,
                                                 and Sec.   423.44.
--------------------------------------------------------------------------------------------------------------------------------------------------------
A.14. Drug Categories or Classes of Clinical    Sec.   423.102(b)(2)(v)-(vi)..........         0       -30       -50      -220      -420            -720
 Concern and Exceptions \3\.
A.35. Eligibility of Enrollment for             Sec.   422.74.........................       -73       -90      -108      -129      -152            -552
 Incarcerated Individuals \4\.
                                                                                       -----------------------------------------------------------------

[[Page 2047]]

 
    Total ($ in millions).....................  ......................................       -83      -132      -171      -364      -589          -1,339
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Estimates of costs and savings reflect scoring by the CMS, Office of the Actuary. Also, only provisions with savings or cost exceeding $1,000,000
  are listed. Other provisions either have no expected savings or cost, or, have a savings or cost under $1,000,000. Details on these savings and cost
  may be found in the RIA narrative.
\2\ Supporting 2012 lawful presence data provided by SSA.
\3\ Projected savings are based upon full implementation of the criteria and do not reflect that changes for the antipsychotic class of drugs are
  deferred at this time.
\4\ Supporting 2012 incarceration data provided by the SSA.

D. Expected Benefits

1. Drug Categories or Classes of Clinical Concerns and Exceptions 
(Sec.  423.102(b)(2)(v)-(vi)
    Proposed codification of the categories or classes of clinical 
concern provisions would assist PBMs in applying the Part D plans and 
managing the Part D sponsor's benefit packages more efficiently.
2. Medication Therapy Management Program under Part D
    We anticipate that many more beneficiaries will have access to MTM 
services and believe that the proposed changes will simplify the MTM 
criteria and minimize beneficiary confusion when choosing or 
transitioning between plans. Moreover, we believe the proposed changes 
would reduce disparity and allow more beneficiaries with drug therapy 
problems to receive MTM services. Similarly, we expect the proposed 
requirement that sponsors develop an effective strategy to ensure 
access to services for all MTM-eligible beneficiaries will help to 
ensure that beneficiaries in special populations receive focused 
targeting, outreach, or engagement for enrollment or participation in 
MTM.

E. Alternatives Considered

1. Separating the Annual Notice of Change from the Evidence of Coverage
    We considered reverting back to requirements in place prior to the 
2009 contract year, which allowed issuing EOCs as late as January 31 of 
the applicable contract year. We determined the EOC should be received 
by members before the effective date of their coverage for that 
contract year, beginning on January 1, in order for members to have 
full disclosure of plan rules prior to the beginning of the contract 
year.
2. Modifying the Agent/Broker Compensation Requirements
    In the preamble we outlined a few alternative compensation 
schedules. Ultimately we determined that the best approach was a two 
tier payment schedule, incorporating an initial payment and a 
continuous renewal payment.
3. Medicare Coverage Gap Discount Program and Employer Group Waiver 
Plans
    In the preamble we outlined the alternative approaches we 
considered in our efforts to make sure that the discounts were used to 
benefit enrollees. Ultimately we determined that the best approach 
would be to make sure that employer groups have the information needed 
to incorporate the payments into their benefit packages.
4. Prescription Drug Pricing Standards and Maximum Allowable Cost
    No alternatives were considered.
5. Access to Covered Part D drugs (c) Use of Standardized Technology
    No alternatives were considered.
6. Any Willing Pharmacy Standard Terms & Conditions
    We considered the alternative of maintaining the current process 
where Part D plans can limit pharmacy access to preferred cost-sharing 
contracts. We have observed this in practice to be limiting market 
competition, creating a barrier to entry, and further, not producing 
the savings to the program that were initially anticipated.
7. Negotiated Prices
    We did not identify any alternatives that both maintained 
consistent reporting among sponsors leading to comparable bids, and 
maximized price competition.
8. Preferred Cost Sharing
    We considered whether a methodology that was based on lower average 
costs (or any other function of costs in the rest of the network) in 
return for preferred cost sharing would suffice to meet the statutory 
requirement. While such a methodology might technically meet the 
requirement not to increase CMS payments to plans, whether it did so or 
not would be dependent on the actual negotiated prices paid and could 
be determined only long after a coverage year had ended and complete 
the PDE data was available. We believe that to promote price 
competition, the relative levels of negotiated prices offered for 
preferred cost sharing and in the rest of the network should be 
transparent and verifiable at the point of sale, as well as to CMS 
oversight at any point prior to and during a coverage year. We were 
unable to identify any methodology other than our proposal to 
accomplish these goals. We solicit comments on alternative approaches 
to ensuring that the offering of preferred cost sharing does not 
increase CMS payments. We believe that any alternative methodology must 
be based solely on the level of negotiated prices and thus consistent 
with our proposal to amend that definition. We also solicit comments on 
whether we should also establish standards on how much lower drug costs 
should be in return for preferred cost sharing.
9. Transfer of TrOOP Between Part D Sponsors Due to Enrollment Changes 
During the Coverage Year
    No alternative proposals were considered.
10. Part D Notice of Changes
    We did not consider any alternatives for the proposed provision 
because it proposes to codify a longstanding policy.

[[Page 2048]]

11. Special Part D Access Rules During Disasters or Emergencies
    We did not consider alternatives to requiring Part D sponsors to 
lift ``refill too soon'' (RTS) edits in the event of any imminent or 
occurring disaster or emergency that would hinder an enrollee's access 
to covered Part D drugs. It is important for the well-being and health 
of beneficiaries that they be able to obtain their medications after 
disasters strike. Furthermore, given the complexities of moving large 
numbers of people with different health conditions to safer locations, 
we also believed we had no alternative but to require Part D sponsors 
to relax RTS edits when a disaster is imminent and access to services 
might be jeopardized rather than waiting for it to strike.
12. Business Continuity for MA Organizations and Part D Sponsors
    We did not consider any alternatives for the initial part of the 
provision found in Sec. Sec.  422.504(o)(1) and 423.505(p)(1) that 
would, respectively, require MA organizations and Part D sponsors to 
develop and maintain business continuity plans. Creating such a plan is 
an accepted business practice and we would require MA organizations and 
Part D sponsors to address a standard list of areas; in short, we know 
of no other options.
    In contrast, we considered other options when drafting proposed 
Sec. Sec.  422.504(o)(2) and 423.505(p)(2), which would require the 
restoration of essential functions within 24 hours after failure. We 
considered requiring MA organizations and Part D sponsors to restore 
even more functions, but decided disruptions to business would 
presumably limit resources and that it was important to focus on only 
the most vital functions. We also considered paring down the list of 
essential functions, but found that we could not do so without 
jeopardizing the mandate of the Act--to ensure access to health care 
and covered Part D drugs through the provision of appropriate Medicare 
benefits. Benefit authorization, claim adjudications, and call center 
operations are all essential to providing appropriate Medicare coverage 
for beneficiaries both living inside and outside of areas hit by 
disasters and other disruptions.
    Lastly, we considered the option of requiring restoration of 
essential functions to occur for a shorter or longer time period than 
24 hours after failure proposed. We decided that 12 hours might present 
operational challenges for MA organizations and Part D sponsors; 
conversely, requiring beneficiaries to wait more than 24 hours to 
access their coverage and therefore health care and drug benefits, 
seemed to pose an undue risk to both their present and possibly future 
health and well-being.
13. Drug Categories or Classes of Clinical Concerns and Exceptions
    The critical policy decision was how broadly or narrowly to 
establish criteria and exceptions to those criteria pursuant to 
Affordable Care Act provisions. Broad criteria might easily encompass 
many classes of drugs and significantly increase costs to the Part D 
program by eliminating the need for manufacturers to aggressively 
rebate their products for formulary placement. Only narrow criteria 
would limit the number of categories or classes of clinical concern 
receiving additional protections under the Affordable Care Act. 
Similarly, broad exceptions further limit the products within those 
categories or classes of clinical concern that would receive additional 
protection under the Affordable Care Act.
14. Medication Therapy Management Program (MTM) Under Part D
    We considered leaving the maximum number of multiple chronic 
diseases a plan may require for targeted enrollment at three, but 
believed this threshold significantly limited the number of 
beneficiaries who qualified for MTM services and was inconsistent with 
literature concerning the relative risk of the combination of multiple 
disease states and the need for access to MTM interventions. Similarly, 
we considered other numbers of Part D drugs less than eight, but again 
believed these thresholds decreased access to MTM services, contributed 
to beneficiary confusion, and led to racial disparities in access to 
MTM services. We also considered other cost thresholds less than 
$3,000, for example, $900 or $1,200, which roughly coincide with cost 
thresholds achieved by taking 3 or 4 generic drugs, and we solicit 
stakeholder comment on where the threshold might alternatively be set.
    Relative to the requirement for sponsors to establish effective 
strategies for reaching all MTM-eligible beneficiaries, we do not 
believe it is appropriate at this time to prescribe outreach activities 
for Part D sponsors to effectively reach diverse, special populations 
of their enrolled beneficiaries. Rather, we propose that sponsors 
develop an effective strategy to ensure access to MTM services for all 
MTM-eligible beneficiaries. We will continue to monitor the efficacy of 
such programs and the impact of any change to the requirements and will 
consider other options as may be necessary.
15. Requirement for Applicants or Their Contracted First Tier, 
Downstream, or Related Entities To Have Experience in the Part D 
Program Providing Key Part D Functions
    Based on CMS' authority at section 1860D-12(b)(3)(D) of the SSA to 
adopt additional contract terms that are necessary and appropriate to 
administer the Part D program, we proposed at Sec.  423.504(b)(8)(i) 
through (iii) that Part D organizations seeking a new Medicare contract 
must have arrangements in place such that either the applicant or a 
contracted entity that will be performing certain key Part D functions 
has at least one full benefit year of experience providing the function 
for another Part D plan sponsor. This proposal ensures that applicants 
take advantage of the abundant Part D industry expertise and experience 
that exists today in the development of their Part D program 
operations, rather than relying on technical assistance from CMS and 
having their inexperience place beneficiaries' access to prescription 
drugs at risk. We believe this provision will have a very minor savings 
impact on the federal budget, based on savings of time and effort 
(staff time and contracted auditor time and resources) that the 
government would spend on overseeing the disproportionate level of 
problems experienced by organizations operating Part D plans without 
prior Part D experience. For each inexperienced organization allowed 
into the program in the absence of this proposal, we would anticipate a 
savings of 1,000 staff hours at an average rate of $50 per hour, for a 
total of $50,000 in employee time, plus an additional savings of 
$200,000 in contractor dollars to conduct an emergency audit, for a 
total of $250,000. In the absence of this proposal, we would anticipate 
no more than two such inexperienced entities beginning Part D 
operations per year, for a total annual savings of $500,000.
    The burden associated with this proposal on industry would be 
minimal, with a total estimated number of labor hours of 3.25 to submit 
information during the Part D application process. Using the same 
average hourly salary as previously mentioned, the total cost to Part D 
applicants would be $162.50. We do not believe there are any non-
administrative costs to industry associated with this proposal, as Part 
D applicants are already required to have arrangements in place to 
perform the key Part D functions discussed in our proposal.
    The main anticipated effect from this proposal is ensuring that 
only entities

[[Page 2049]]

with some experience with Part D in critically important functional 
areas are permitted to offer new Part D contracts, thus strengthening 
the Part D program by enhancing the qualification criteria. CMS 
considered the alternate proposal of requiring the prior Part D 
experience to be tied to specific quality outcomes. CMS rejected the 
alternative because we believed it added unnecessary complexity and 
burden to the process, and we believe a simple experience requirement 
is currently sufficient.

F. Accounting Statement and Table

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a0004/a-4/pdf), in Table 15, we have 
prepared an accounting statement showing the classification of the 
expenditures, costs, and savings associated with the provisions of this 
proposed rule for CYs 2015 through 2019.

  Table 15--Accounting Statement: Classifications of Estimated Costs and Transfers From Calendar Years 2015 to
                                                      2019
                                                 [$ in millions]
----------------------------------------------------------------------------------------------------------------
                                                                            Transfers
                                               -----------------------------------------------------------------
                   Category                           Discount rate
                                               --------------------------             Period covered
                                                     7%           3%
----------------------------------------------------------------------------------------------------------------
Annualized Monetized Transfers (Federal)......     -$251.23     -$260.49  CYs 2015-2019.
                                               -----------------------------------------------------------------
Whom to Whom?                                       Federal Government, MA Organizations and Part D Sponsors
----------------------------------------------------------------------------------------------------------------


 
                                                                  Costs  (all other provisions)
                                               -----------------------------------------------------------------
                                                      Discount rate
                                               --------------------------             Period covered
                                                     7%           3%
----------------------------------------------------------------------------------------------------------------
Annualized Costs to MA Organizations and Part          $8.9         $8.9  CYs 2015-2019.
 D Sponsors.
----------------------------------------------------------------------------------------------------------------
Note: Monetized Figures in 2014 Dollars.

G. Conclusion

    We estimate the savings to the federal government from implementing 
these provisions will be $83 million in CY 2015. The savings will 
increase annually. In CY 2019, the federal government savings from 
implementing these provisions will be $589 million. For the entire 
estimated period, CYs 2015 through 2019, we estimate the total federal 
government (Medicare) impact to result in savings of approximately 
$1.34 billion in 2014 dollars. The cost impact to MA organizations and 
Part D sponsors is estimated at $8.9 million annually during CYs 2015 
through 2019. We note that these savings do not represent net social 
benefits because they consist of transfers of value from drug 
manufacturers, pharmacies, incarcerated individuals and individuals not 
lawfully present in the United States to the federal government, MA 
organizations, Part D sponsors and beneficiaries who continue in the 
programs.

List of Subjects

42 CFR Part 409

    Health facilities and Medicare.

42 CFR Part 417

    Administrative practice and procedure, Grant programs-health, 
Health care, Health insurance, Health maintenance organizations (HMO), 
Loan programs-health, Medicare, and Reporting and recordkeeping 
requirements.

42 CFR Part 422

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

42 CFR Part 423

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

42 CFR Part 424

    Administrative practice and procedure, Emergency medical services, 
Health facilities, Health maintenance organizations (HMO), Health 
professionals, Medicare, Penalties, Privacy, Reporting and record 
keeping requirements.
    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR Chapter IV as follows:

PART 409--HOSPITAL INSURANCE BENEFITS

0
1. The authority citation for part 409 continues to read as follows:

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

0
2. Section 409.30 is amended by revising paragraph (b)(2)(ii) to read 
as follows:


Sec.  409.30  Basic requirements.

    (b) * * *
    (2) * * *
    (ii) If, upon admission to the SNF, the beneficiary was enrolled in 
an M+C plan, as defined in Sec.  422.4 of this chapter, offering the 
benefits described in Sec.  422.102(a)(5) of this chapter, the 
beneficiary will be considered to have met the requirements described 
in paragraphs (a) and (b) of this section, and also in Sec.  
409.31(b)(2), for the duration of the SNF stay.

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

0
3. 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

[[Page 2050]]

Public Health Service Act (42 U.S.C. 300e, 300e-5, and 300e-9), and 
31 U.S.C. 9701.

0
4. Section 417.1 is amended by revising the definition of ``service 
area'' to read as follows:


Sec.  417.1  Definitions.

* * * * *
    Service area means a geographic area, defined through zip codes, 
census tracts, or other geographic measurements, that is the area, as 
determined by CMS, within which the HMO furnishes basic and 
supplemental health services and makes them available and accessible to 
all its enrollees in accordance with Sec.  417.106(b). Facilities in 
which individuals are incarcerated are not included in the geographic 
service area of an HMO or CMP plan.
* * * * *
0
5. Section 417.2 is amended by revising paragraph (b) to read as 
follows:


Sec.  417.2  Basis and scope.

* * * * *
    (b) Subparts G through R of this part set forth the rules for 
Medicare contracts with, and payment to, HMOs and competitive medical 
plans (CMPs) under section 1876 of the Act and 8 U.S.C. 1611.
* * * * *


Sec.  417.420  [Amended].

0
6. In Sec.  417.420, paragraph (a) is amended by removing the phrase 
``Individuals who are entitled to'' and adding in its place the phrase 
``Eligible individuals who are entitled to''.
0
7. Section 417.422 is amended--
0
A. In the introductory text, by removing the phrase ``any individual 
who--'' and adding in its place the phrase ``any individual who meets 
all of the following:''
0
B. In paragraphs (a) through (e), by removing the ``;'' and adding in 
its place ``.''.
0
C. In paragraph (f), by removing the ``; and'' and adding in its place 
``.''.
0
D. Adding paragraph (h).
    The addition reads as follows:


Sec.  417.422  Eligibility to enroll in an HMO or CMP.

* * * * *
    (h) Is a United States citizen or qualified alien who is lawfully 
present in the United States as determined in 8 CFR 1.3.
0
8. Section 417.460 is amended--
0
A. Revising paragraph (b)(2)(i).
0
B. In paragraph (b)(2)(iii), by removing ``; or'' and adding in its 
place ``;''.
0
C. By removing the period at the end of (b)(2)(iv) and adding ``; or'' 
in its place.
0
D. By adding paragraph (b)(2)(v).
0
E. In paragraph (b)(3), by removing the cross-reference ``paragraphs 
(c) through (i)'' and adding in its place the cross-reference 
``paragraphs (c) through (j)''.
0
F. By revising paragraph (c)(3).
0
G. In paragraph (c)(4), by removing the phrase ``non-payment of 
premiums.'' and adding in its place the phrase ``non-payment of 
premiums or other charges.''.
0
H. By adding new paragraphs (f)(1)(i)(A) through (C).
0
I. By adding paragraph (j).
    The revisions and the additions read as follows:


Sec.  417.460  Disenrollment of beneficiaries by an HMO or CMP.

* * * * *
    (b) * * *
    (2) * * *
    (i) Moves out of the HMO's or CMP's geographic area or is 
incarcerated.
* * * * *
    (v) Loses qualified alien status or lawful presence in the United 
States.
* * * * *
    (c) * * *
    (3) Good cause and reinstatement. When an individual is disenrolled 
for failure to pay premiums or other charges imposed by the HMO or CMP 
for deductible and coinsurance amounts for which the enrollee is 
liable, CMS (or its designee) may reinstate enrollment in the plan, 
without interruption of coverage, if the individual shows good cause 
for failure to pay and pays all overdue premiums or other charges 
within 3 calendar months after the disenrollment date. The individual 
must establish by a credible statement that failure to pay premiums or 
other charges was due to circumstances for which the individual had no 
control, or which the individual could not reasonably have been 
expected to foresee.
* * * * *
    (f) * * *
    (1) * * *
    (i) * * *
    (A) Incarceration. The HMO or CMP must disenroll an individual if 
the HMO or CMP establishes, on the basis of evidence acceptable to CMS, 
that the individual is incarcerated per Sec.  417.1.
    (B) Notification by CMS of incarceration. When CMS notifies an HMO 
or CMP of disenrollment due to an incarceration as per Sec.  417.1, 
disenrollment is effective the first of the month following the start 
of incarceration, unless otherwise specified by CMS.
    (C) Exception. The exception in paragraph (f)(2) of this section 
does not apply to individuals who are incarcerated.
* * * * *
    (j) Loss of qualified alien status. Disenrollment is effective the 
first day of the month following the last month of lawful presence or 
qualified alien status in the United States.

PART 422--MEDICARE ADVANTAGE PROGRAM

0
9. The authority citation for part 422 continues to read as follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).
0
10. Section 422.1 is amended by revising paragraph (a) to read as 
follows:


Sec.  422.1  Basis and scope.

    (a) Basis. This part is based on the indicated provisions of the 
following:
    (1) The following provisions of the Act:

1128J(d)--Reporting and Returning of Overpayments.
1851--Eligibility, election, and enrollment.
1852--Benefits and beneficiary protections.
1853--Payments to Medicare Advantage (MA) organizations.
1854--Premiums.
1855--Organization, licensure, and solvency of MA organizations.
1856--Standards.
1857--Contract requirements.
1858--Special rules for MA Regional Plans.
1859--Definitions; enrollment restriction for certain MA plans.

    (2) 8 U.S.C. 1611--Aliens who are not qualified aliens ineligible 
for Federal public benefits
* * * * *
0
11. Section 422.2 is amended by--
0
A. Revising the definition of ``Attestation process''.
0
B. Removing the definition of ``Initial Validation Contractor (IVC)''.
0
C. Adding the definitions of ``Parent organization'' and ``RADV appeal 
process''.
0
D. Removing the definition of ``RADV payment error calculation appeal 
process''.
0
E. Revising the definition of ``Risk adjustment data validation (RADV) 
audit''.
0
F. Revising introductory text of the definition of ``Service area''.
0
G. Removing the definition of ``The one best medical record for the 
purposes of Medicare Advantage Risk Adjustment Validation (RADV)''.
    The revisions and additions read as follows:

[[Page 2051]]

Sec.  422.2  Definitions.

* * * * *
    Attestation process means a CMS-developed RADV audit-related 
process that is part of the medical record review process that enables 
MA organizations undergoing RADV audit to submit CMS-generated 
attestations for eligible medical records with missing or illegible 
signatures or credentials. The purpose of the CMS-generated 
attestations is to cure signature and credential issues. CMS-generated 
attestations do not provide an opportunity for a provider or supplier 
to replace a medical record or for a provider or supplier to attest 
that a beneficiary has the medical condition.
* * * * *
    Parent organization means a legal entity that owns one or more 
other subsidiary legal entities.
* * * * *
    RADV appeal process means an administrative process that enables MA 
organizations that have undergone RADV audit to appeal the Secretary's 
medical record review determinations and the Secretary's calculation of 
an MA organization's RADV payment error.
* * * * *
    Risk adjustment data validation (RADV) audit means a payment audit 
of a MA organization administered by the Secretary that ensures the 
integrity and accuracy of risk adjustment payment data.
* * * * *
    Service area means a geographic area that for local MA plans is a 
county or multiple counties, and for MA regional plans is a region 
approved by CMS within which an MA-eligible individual may enroll in a 
particular MA plan offered by an MA organization. Facilities in which 
individuals are incarcerated, with the exclusion of Institutions for 
Mental Disease, are not included in the service area of an MA plan. 
Each MA plan must be available to all MA-eligible individuals within 
the plan's service area. In deciding whether to approve an MA plan's 
proposed service area, CMS considers the following criteria:
* * * * *
0
12. Section 422.50 is amended--
0
A. In paragraph (a) introductory text, by removing the phrase ``if he 
or she--'' and adding in its place the phrase ``if he or she meets all 
of the following:''
0
B. In paragraphs (a)(1) and (4), by removing ``;'' and adding in its 
place ``.''.
0
C. In paragraph (a)(5), by removing ``; and'' and adding in its place 
``.''.
0
D. By adding paragraph (a)(7).
    The addition reads as follows:


Sec.  422.50  Eligibility to elect an MA plan.

* * * * *
    (a) * * *
    (7) Is a United States citizen or qualified alien who is lawfully 
present in the United States as determined in 8 CFR 1.3.
* * * * *
0
13. Section 422.60 is amended by redesignating paragraphs (g) 
introductory text through (g)(3) as paragraphs (g)(1) through (4), and 
by revising newly redesignated paragraph (g)(1) to read as follows:


Sec.  422.60  Election process.

* * * * *
    (g) * * *
    (1) Passive enrollment by CMS. CMS may implement passive enrollment 
procedures (as described in paragraph (g)(2) of this section) in any of 
the following situations:
    (i) Immediate terminations as provided in Sec.  422.510(a)(5).
    (ii) Other situations in which CMS determines that remaining 
enrolled in a plan poses potential harm to the members.
    (iii) Situations which meet all of the following criteria:
    (A) A specialized MA plan for special needs individuals in which 
the individual is enrolled will no longer be offered following the end 
of the current calendar year,
    (B) The individual is a--
    (1) Special needs individual entitled to medical assistance under a 
Medicaid State plan, as defined in section 1859(b)(6)(B)(ii) of the Act 
and Sec.  422.2; and
    (2) Full-benefit dual eligible beneficiary, as defined in section 
1935(c) of the Act.
    (C) The passive enrollment is into a specialized MA plan for 
special needs individuals with a network and benefits that are 
substantially similar, as determined by CMS, to the non-renewing plan, 
and where the sponsoring organization also offers the Medicaid managed 
care organization in which the individual is also enrolled.
* * * * *
0
14. Section 422.74 is amended by--
0
A. Adding paragraph (b)(2)(v).
0
B. Revising paragraphs (d)(1)(v) and (d)(4)(i)(A).
0
C. Adding paragraphs (d)(4)(v)and (d)(8).
    The additions and revisions read as follows:


Sec.  422.74  Disenrollment by the MA organization.

* * * * *
    (b) * * *
    (2) * * *
    (v) The individual loses qualified alien status or is no longer 
lawfully present in the United States.
* * * * *
    (d) * * *
    (1) * * *
    (v) Extension of grace period for good cause and reinstatement. 
When an individual is disenrolled for failure to pay the plan premium, 
CMS (or its designee) may reinstate enrollment in the MA plan, without 
interruption of coverage, if the individual shows good cause for 
failure to pay within the initial grace period, and pays all overdue 
premiums within 3 calendar months after the disenrollment date. The 
individual must establish by a credible statement that failure to pay 
premiums within the initial grace period was due to circumstances for 
which the individual had no control, or which the individual could not 
reasonably have been expected to foresee.
* * * * *
    (4) * * *
    (i) * * *
    (A) Out of the MA plan's service area or is incarcerated as 
specified in paragraph (d)(4)(v) of this section.
* * * * *
    (v) Incarceration. (A) The MA organization must disenroll an 
individual if the MA organization establishes, on the basis of evidence 
acceptable to CMS, that the individual is incarcerated as specified 
Sec.  422.2 or when notified of the incarceration by CMS as specified 
paragraph (d)(4)(v)(B) of this section.
    (B) Notification by CMS of incarceration. When CMS notifies the MA 
organization of the disenrollment due to an incarceration as specified 
in Sec.  422.2, disenrollment is effective the first of the month 
following the start of incarceration, unless otherwise specified by 
CMS.
* * * * *
    (8) Loss of qualified alien status. Disenrollment is effective with 
the month following the last month of lawful presence or qualified 
alien status in the United States.
* * * * *
0
15. Section 422.100 is amended by adding paragraph (m) to read as 
follows:


Sec.  422.100  General requirements.

* * * * *
    (m) Special requirements during a disaster or emergency. (1) When a 
state of disaster is declared as described in paragraph (m)(2) of this 
section, an MA organization offering an MA plan must, until one of the 
conditions described in

[[Page 2052]]

paragraph (m)(3) of this section occurs, ensure access to benefits in 
the following manner:
    (i) Cover Medicare Parts A and B services and supplemental Part C 
plan benefits furnished at non-contracted facilities subject to Sec.  
422.204(b)(3).
    (ii) Waive, in full, requirements for gatekeeper referrals where 
applicable.
    (iii) Provide the same cost-sharing for the enrollee had the 
service or benefit been furnished at a plan-contracted facility.
    (iv) Make changes that benefit the enrollee effective immediately 
without the 30-day notification requirement at Sec.  422.111(d)(3).
    (2) Declarations of disasters. A declaration of disaster will 
identify the geographic area affected by the event and may be made as 
one of the following:
    (i) Presidential declaration of a disaster or emergency under the 
either of the following:
    (A) Stafford Act.
    (B) National Emergencies Act.
    (ii)(A) Secretarial declaration of a public health emergency under 
section 319 of the Public Health Service Act.
    (B) If the President has declared a disaster as described in 
paragraph (m)(2)(i) or (2)(ii) of this section, then the Secretary may 
also authorize waivers or modifications under section 1135 of the Act.
    (iii) Declaration by the Governor of a State or Protectorate.
    (3) End of the disaster. The public health emergency or state of 
disaster ends when any of the following occur:
    (i) The source that declared the public health emergency or state 
of disaster declares an end.
    (ii) The CMS declares an end of the public health emergency or 
state of disaster.
    (iii) Thirty days have elapsed since the declaration of the public 
health emergency or state of disaster and no end date was identified in 
paragraph (m)(3)(i) or (3)(ii) of this section.
    (4) MA plans unable to operate. An MA plan that cannot resume 
normal operations by the end of the public health emergency or state of 
disaster must notify CMS.
    (5) Disclosure. In addition to other requirements of annual 
disclosure under Sec.  422.111, an organization must do all of the 
following:
    (i) Indicate the terms and conditions of payment during the public 
health emergency or disaster for non-contracted providers furnishing 
benefits to plan enrollees residing in the state-of-disaster area.
    (ii) Annually notify enrollees of the information listed in 
paragraphs (m)(1) through (3) and (m)(5) of this section.
    (iii) Provide the information described in paragraphs (m)(1) 
through (3) and (m)(4)(i) of this section on its Web site.


Sec.  422.101  [Amended]

0
16. Section 422.101 is amended by removing and reserving paragraph (c).
0
17. Section 422.102 is amended by adding paragraph (a)(5) to read as 
follows:


Sec.  422.102  Supplemental benefits.

    (a) * * *
    (5) MA organizations may elect to furnish, as part of their 
Medicare covered benefits, coverage of post hospital SNF care as 
described in subparts C and D of this part, in the absence of the prior 
qualifying hospital stay that would otherwise be required for coverage 
of this care.
* * * * *
0
18. Section 422.111 is amended by revising paragraphs (a)(3) and (d)(1) 
to read as follows:


Sec.  422.111  Disclosure requirements.

    (a) * * *
    (3) At the time of enrollment and at least annually thereafter by 
December 31 for the following contract year.
* * * * *
    (d) * * *
    (1) Submit the changes for CMS review under procedures of Subpart V 
of this part.
* * * * *
0
19. Section 422.112 is amended by adding paragraph (b)(7) to read as 
follows:


Sec.  422.112  Access to services.

* * * * *
    (b) * * *
    (7) With respect to drugs for which payment as so prescribed and 
dispensed or administered to an individual may be available under Part 
A or Part B, or under Part D, MA-PD plans must coordinate all benefits 
administered by the plan and--
    (i) Establish and maintain a process to ensure timely and accurate 
claims adjudication at the point-of-sale; and
    (ii) Issue the determination and authorize or provide the benefit 
under Part A or Part B or as a benefit under Part D as expeditiously as 
the enrollee's health condition requires, in accordance with the 
requirements of part 422, subpart M and Part 423, subpart M, as 
appropriate, when a party requests a coverage determination.
* * * * *
0
20. Section 422.113 is amended by revising paragraph (b)(1)(iii) 
introductory text to read as follows:


Sec.  422.113  Special rules for ambulance services, emergency and 
urgently needed services, and maintenance and post-stabilization care 
services.

* * * * *
    (b) * * *
    (1) * * *
    (iii) Urgently needed services means covered services that are not 
emergency services as defined in this section, provided when an 
enrollee is temporarily absent from the MA plan's service (or, if 
applicable, continuation) area (or provided when the enrollee is in the 
service or continuation area but the organization's provider network is 
temporarily unavailable or inaccessible) when the services are 
medically necessary and immediately required--
* * * * *
0
21. Section 422.134 is added to subpart C to read as follows:


Sec.  422.134  Reward and incentive programs.

    (a) General rule. The MA organization may create one or more 
programs consistent with the standards of this section that provide 
rewards and incentives to enrollees in connection with participation in 
activities that focus on promoting improved health, preventing injuries 
and illness, and promoting efficient use of health care resources.
    (b) Non-discrimination. Reward and incentive programs--
    (1) Must not discriminate against enrollees based on race, gender, 
chronic disease, institutionalization, frailty, health status or other 
impairments;
    (2) Must be designed so that all enrollees are able to earn 
rewards; and
    (3) Are subject to sanctions at Sec.  422.752(a)(4).
    (c) Requirements. (1) A rewards and incentives program must meet 
all of the following:
    (i) Be offered in connection with completion of the entire service 
or activity.
    (ii) Be offered to all eligible members without discrimination.
    (iii) Have a monetary cap, as determined by CMS, of a value that 
may be expected to impact enrollee behavior but not exceed the value of 
the health related service or activity itself.
    (iv) Otherwise comply with all relevant fraud and abuse laws, 
including, when applicable, the anti-kickback statute and civil money 
penalty prohibiting inducements to beneficiaries.
    (2) Reward and incentive items may not--
    (i) Be offered in the form of cash or other monetary rebates; or
    (ii) Be used to target potential enrollees.

[[Page 2053]]

    (3) The MA organization must make information available to CMS upon 
request about the form and manner of any rewards and incentives 
programs it offers and any evaluations of the effectiveness of such 
programs.
0
22. Section 422.152 is amended as follows:
0
A. Paragraph (a) introductory text is amended by:
0
i. Removing the phrase ``for each of those plans'' and adding in its 
place the phrase ``for each plan''.
0
.ii. Removing the phrase ``a plan must--'' and adding in its place the 
phrase ``a plan must do all of the following:''
0
B. By redesignating paragraphs (a)(1) through (3) as (a)(2) through 
(4), respectively.
0
C. By adding a new paragraph (a)(1).
0
D. In newly redesignated paragraph (a)(2), by removing the ``;'' and 
adding in its place ``.''.
0
E. In newly redesignated paragraph (a)(3), by removing the ``; and'' 
and adding in its place ``.''.
0
F. By revising paragraphs (c), (g) introductory text, and (h).
    The addition and revisions read as follows:


Sec.  422.152  Quality improvement program.

    (a) * * *
    (1) Create a quality improvement program plan that sufficiently 
outlines the elements of the plan's quality improvement program.
* * * * *
    (c) Chronic care improvement program requirements. (1) Develop 
criteria for a chronic care improvement program. These criteria must 
include all of the following:
    (i) Methods for identifying MA enrollees with multiple or 
sufficiently severe chronic conditions that would benefit from 
participating in a chronic care improvement program.
    (ii) Mechanisms for monitoring MA enrollees that are participating 
in the chronic improvement program and evaluating participant outcomes 
such as changes in health status.
    (iii) Performance assessments that use quality indicators that are 
objective, clearly and unambiguously defined, and based on current 
clinical knowledge or research.
    (iv) Systematic and ongoing follow-up on the effect of the program.
    (2) The organization must report the status and results of each 
program to CMS as requested.
* * * * *
    (g) Special requirements for specialized MA plans for special needs 
individuals. All special needs plans (SNPs) must be approved by the 
National Committee for Quality Assurance (NCQA) effective January 1, 
2012 and subsequent years. SNPs must submit their model of care (MOC), 
as defined under Sec.  422.101(f), to CMS for NCQA evaluation and 
approval, in accordance with CMS guidance. In addition to the 
requirements under paragraphs (a) and (f) of this section, a SNP must 
conduct a quality improvement program that meets all of the following:
* * * * *
    (h) Requirements for MA private-fee-for-service plans and Medicare 
medical savings account plans. MA PFFS and MSA plans are subject to the 
requirement that may not exceed the requirement specified in Sec.  
422.152(e).


Sec.  422.300  [Amended]

0
23. Section 422.300 is amended by removing the phrase ``and 1858 of the 
Act.'' and adding in its place the phrase ``1858, and 1128J(d) of the 
Act.''
0
24. Section 422.310 is amended by:
0
A. Redesignating the text of paragraph (e) as paragraph (e)(2) and 
adding new paragraph (e)(1) following current paragraph (e) subject 
heading.
0
B. Adding new paragraph (e)(1).
0
C. Revising paragraph (g)(2).
0
D. Adding paragraph (g)(3).
    The additions and revision read as follows:


Sec.  422.310  Risk adjustment data.

* * * * *
    (e) * * *
    (1) Any medical record reviews conducted by an MA organization must 
be designed to determine the accuracy of diagnoses submitted under 
Sec.  422.308(c) and Sec.  422.310(g).
* * * * *
    (g) * * *.
    (2) After the payment year is completed, CMS recalculates the risk 
factors for affected individuals to determine if adjustments to 
payments are necessary.
    (i) Prior to calculation of final risk factors for a payment year, 
CMS allows a reconciliation process to account for risk adjustment data 
submitted after the March deadline until the final risk adjustment data 
submission deadline in the year following the payment year.
    (ii) After the final risk adjustment data submission deadline, 
which is announced by CMS, an MA organization can submit data to 
correct overpayments but cannot submit diagnoses for additional 
payment.
    (3) Submission of corrected risk adjustment data in accordance with 
overpayments after the final risk adjustment data submission deadline, 
as described in paragraph (g)(2) of this section, must be made as 
provided in Sec.  422.326.
0
25. Section 422.311 is amended as follows:
0
A. In paragraph (a), by removing the phrase ``CMS annually'' and adding 
in its place the phrase ``the Secretary annually''.
0
B. In paragraph (b)(2), by removing the phrase ``to CMS or its 
contractors'' and adding in its place the phrase ``to the Secretary''.
0
C. By removing paragraph (b)(3).
0
D. By revising paragraph (c).
    The revision read as follows:


Sec.  422.311  RADV audit dispute and appeal processes.

* * * * *
    (c) RADV audit appeals. (1) Appeal rights. MA organizations that do 
not agree with their RADV audit results may appeal.
    (2) Issues eligible for RADV appeals. (i) General rules. MA 
organizations may appeal RADV medical record review determinations and 
the Secretary's RADV payment error calculation. In order to be eligible 
for RADV appeal, MA organizations must adhere to the following:
    (A) Established RADV audit procedures and requirements.
    (B) RADV appeals procedures and requirements.
    (ii) Failure to follow RADV rules. Failure to follow the 
Secretary's RADV audit procedures and requirements and the Secretary's 
RADV appeals procedures and requirements will render the MA 
organization's request for appeal invalid.
    (iii) RADV appeal rules. The MA organization's written request for 
medical record review determination appeal must specify the following:
    (A) The audited HCC(s) that the Secretary identified as being in 
error.
    (B) A justification in support of the audited HCC selected for 
appeal.
    (iv) Number of medical records eligible for appeal. For each 
audited HCC, MA organizations may appeal one medical record that has 
undergone RADV review. If an attestation was submitted to cure a 
signature or credential-related error, the attestation may be included 
in the HCC appeal.
    (v) Selection of medical record for appeal. The MA organization 
must select the medical record that undergoes appeal.
    (vi) Written request for RADV payment error calculation appeal. The 
written request for RADV payment error calculation appeal must clearly 
specify the following:
    (A) The MA organization's own RADV payment error calculation.

[[Page 2054]]

    (B) Where the Secretary's RADV payment error calculation was 
erroneous.
    (3) Issues ineligible for RADV appeals. (i) MA organizations' 
request for appeal may not include HCCs, medical records or other 
documents beyond the audited HCC, RADV-reviewed medical record, and any 
accompanying attestation that the MA organization chooses for appeal.
    (ii) MA organizations may not appeal the Secretary's medical record 
review determination methodology or RADV payment error calculation 
methodology.
    (iii) As part of the RADV payment error calculation appeal--MA 
organizations may not appeal RADV medical record review-related errors.
    (iv) MA organizations may not appeal RADV errors that result from 
an MA organization's failure to submit a medical record.
    (4) Burden of proof. The MA organization bears the burden of proof 
by a preponderance of the evidence in demonstrating that the 
Secretary's medical record review determination(s) or payment error 
calculation was incorrect.
    (5) Manner and timing of a request for RADV appeal. (i) At the time 
the Secretary issues its RADV audit report, the Secretary notifies 
audited MA organizations of the following:
    (A) That they may appeal RADV HCC errors that are eligible for 
medical record review determination appeal.
    (B) That they may appeal the Secretary's RADV payment error 
calculation.
    (ii) MA organizations have 30 days from date of issuance of the 
RADV audit report to file a written request with CMS for RADV appeal. 
This request for RADV appeal must specify one of the following:
    (A) Whether the MA organization requests medical record review 
determination appeal, the issues with which the MA organization 
disagrees, and the reasons for the disagreements.
    (B) Whether the MA organization requests RADV payment error 
calculation appeal, the issues with which the MA organization 
disagrees, and the reasons for the disagreements.
    (C) Whether the MA organization requests both medical record review 
determination appeal and RADV payment error calculation appeal, the 
issues with which the MA organization disagrees, and the reasons for 
the disagreements.
    (iii) For MA organizations that appeal both medical record review 
determination appeal and RADV payment error calculation appeal:
    (A) The Secretary adjudicates the request for RADV payment error 
calculation following conclusion of reconsideration of the MA 
organization's request for medical record review determination appeal.
    (B) MA organizations may not appeal their RADV payment error 
calculation until appeals of RADV medical record review determinations 
filed by the MA organization have been completed and the decisions are 
final.
    (6) Reconsideration stage. (i) Written request for medical record 
review reconsideration. A MA organization's written request for medical 
record review determination reconsideration must specify the following:
    (A) The audited HCC that the Secretary identified as being in error 
that the MA organization wishes to appeal.
    (B) A justification in support of the audited HCC chosen for 
appeal.
    (ii) Written request for payment error calculation. The MA 
organization's written request for payment error calculation 
reconsideration--
    (A) Must include the MA organization's own RADV payment error 
calculation that clearly specifies where the Secretary's RADV payment 
error calculation was erroneous; and
    (B) May include additional documentary evidence pertaining to the 
calculation of the payment error that the MA organization wishes the 
reconsideration official to consider.
    (iii) Conduct of the reconsideration. (A) For medical record review 
determination reconsideration, a medical record review professional who 
was not involved in the initial medical record review determination of 
the disputed audited HCCs does the following:
    (1) Reviews the medical record and accompanying dispute 
justification.
    (2) Reconsiders the initial audited medical record review 
determination.
    (B) For payment error calculation reconsideration, CMS ensures that 
a third party not involved in the initial RADV payment error 
calculation does the following:
    (1) Reviews the Secretary's RADV payment error calculation.
    (2) Reviews the MA organization's RADV payment error calculation;
    (3) Recalculates the payment error in accordance with CMS's RADV 
payment error calculation procedures.
    (iv) Effect of the reconsideration official's decision. (A) The 
reconsideration official issues a written reconsideration decision to 
the MA organization.
    (B) The reconsideration official's decision is final unless the MA 
organization disagrees with the reconsideration official's decision.
    (C) If the MA organization disagrees with the reconsideration 
official's decision, they may request a hearing in accordance with 
paragraph (c)(8) of this section.
    (7) Hearing stage. (i) Errors eligible for hearing. At the time the 
reconsideration official issues his or her reconsideration 
determination to the MA organization, the reconsideration official 
notifies the MA organization of any RADV HCC errors or payment error-
calculations that are eligible for RADV hearing.
    (ii) General hearing rules. A MA organization that requests a RADV 
hearing must do so in writing in accordance with procedures established 
by CMS.
    (iii) Written request for hearing. The written request for a 
hearing must be filed with the Hearing Officer within 30 days of the 
date the MA organization receives the reconsideration officer's written 
reconsideration decision.
    (A) If the MA organization appeals medical record review 
reconsideration determination, the written request for RADV hearing 
must--
    (1) Include a copy of the written decision of the reconsideration 
official;
    (2) Specify the audited HCCs that the reconsideration official 
confirmed as being in error; and
    (3) Specify a justification why the MA organization disputes the 
reconsideration official's determination.
    (B) If the MA organization appeals the RADV payment error 
calculation, the written request for RADV hearing must include the 
following:
    (1) A copy of the written decision of the reconsideration official.
    (2) The MA organization's own RADV payment error calculation that 
clearly specifies where the Secretary's payment error calculation was 
erroneous.
    (iv) Designation of hearing officer. A hearing officer will conduct 
the RADV hearing.
    (v) Disqualification of the hearing officer. (A) 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.
    (B) A party to the hearing who objects to the designated hearing 
officer must notify that officer in writing at the earliest 
opportunity.
    (C) The hearing officer must consider the objections, and may, at 
his or her discretion, either proceed with the hearing or withdraw.
    (D) If the hearing officer withdraws, another hearing officer 
conducts the hearing.
    (E) If the hearing officer does not withdraw, the objecting party 
may, after the hearing, present objections and

[[Page 2055]]

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 the Secretary.
    (vi) Hearing Officer review. The hearing officer reviews the 
following:
    (A) For medical record review determination appeal all of the 
following:
    (1) The RADV-reviewed medical record and any accompanying 
attestation that the MA organization selected for review.
    (2) The reconsideration official's written determination.
    (3) The written brief submitted by the MA organization or the 
Secretary in response to the reconsideration official's determination.
    (B) For payment error calculation appeal all of the following:
    (1) A copy of the written decision of the reconsideration official 
that clearly specifies whether the Secretary's payment error 
calculation was erroneous.
    (2) Briefs addressing the reconsideration decision.
    (vii) Hearing procedures. (A) Authority of the Hearing Officer. The 
hearing officer has full power to make rules and establish procedures, 
consistent with the law, regulations, and the Secretary rulings. These 
powers include the authority to dismiss the appeal with prejudice and 
take any other action which the hearing officer considers appropriate, 
including for failure to comply with such rules and procedures.
    (B) The hearing is on the record. (1) Except as specified in 
paragraph (c)(viii)(B)(2), the hearing officer is limited to the review 
of the record.
    (2)(i) Subject to the hearing officer's full discretion, the 
parties may request a live or telephonic hearing regarding some or all 
of the disputed medical records.
    (ii) The hearing officer may, on his or her own-motion, schedule a 
live or telephonic hearing.
    (3) The record is comprised of the following:
    (i) Documents described at paragraphs (c)(6)(iv) and (7)(vi) of 
this section.
    (ii) Written briefs from the MA organization explaining why they 
believe the reconsideration official's determination was incorrect.
    (iii) The Secretary's optional brief that responds to the MA 
organization's brief--
    (4) The hearing officer neither receives testimony nor accepts any 
new evidence that is not part of the record.
    (5) Either the MA organization or the Secretary may ask the hearing 
officer to rule on a motion for summary judgment.
    (viii) Hearing Officer decision. The hearing officer decides 
whether to uphold or overturn the reconsideration official's decision, 
and sends a written determination to CMS and the MA organization, 
explaining the basis for the decision.
    (ix) Computations based on hearing decision. (A) Once the hearing 
officer's decision is considered final pursuant to subsection (x), a 
third party not involved in the initial RADV payment error calculation 
recalculates the MA organization's RADV payment error and issues a new 
RADV audit report to the appellant MA organization and CMS.
    (B) For MA organizations appealing the RADV error calculation only, 
a third party not involved in the initial RADV payment error 
calculation recalculates the MA organization's RADV payment error and 
issues a new RADV audit report to the appellant MA organization and 
CMS.
    (x) Effect of the Hearing Officer's decision. The hearing officer's 
decision is final unless the decision is reversed or modified by the 
CMS Administrator.
    (8) CMS Administrator review stage. (i) A request for CMS 
Administrator review must be made in writing and filed with the CMS 
Administrator.
    (ii) CMS or a MA organization that has received a hearing officer's 
decision and requests review by the CMS Administrator must do so within 
30 days of receipt of the hearing officer's decision.
    (iii) After receiving a request for review, the CMS Administrator 
has the discretion to elect to review the hearing officer's decision or 
to decline to review the hearing officer's decision.
    (iv) If the CMS Administrator elects to review the hearing 
decision--
    (A) The CMS Administrator acknowledges the decision to review the 
hearing decision in writing and notifies CMS and the MA organization of 
their right to submit comments within 15 days of the date of the 
notification; and
    (B) The CMS Administrator is limited to the review of the record. 
The record is comprised of the following:
    (1) The record is comprised of documents described at paragraphs 
(c)(6)(iv), (7)(vii), and (7)(ix) of this section.
    (2) The hearing record.
    (3) Written arguments from the MA organization or CMS explaining 
why either or both parties believe the hearing officer's determination 
was correct or incorrect.
    (C) The CMS Administrator reviews the record and determines whether 
the hearing officer's determination should be upheld, reversed, or 
modified.
    (v) The CMS Administrator renders his or her final decision in 
writing to the parties within 60 days of acknowledging his or her 
decision to review the hearing officer's decision.
    (vi) The decision of the hearing officer is final if the CMS 
Administrator--
    (A) Declines to review the hearing officer's decision; or
    (B) Does not make a decision within 60 days.
0
26. Section 422.326 is added to subpart G to read as follows:


Sec.  422.326  Reporting and returning of overpayments.

    (a) Terminology. For purposes of this section--
    Applicable reconciliation occurs on the date of the annual final 
deadline for risk adjustment data submission described at Sec.  
422.310(g), which is announced by CMS each year.
    Funds means any payment that an MA organization has received that 
is based on data submitted by the MA organization to CMS for payment 
purposes, including Sec.  422.308(f) and Sec.  422.310.
    Overpayment means any funds that an MA organization has received or 
retained under title XVIII of the Act to which the MA organization, 
after applicable reconciliation, is not entitled under such title.
    (b) General rule. If an MA organization has identified that it has 
received an overpayment, the MA organization must report and return 
that overpayment in the form and manner set forth in this section.
    (c) Identified overpayment. The MA organization has identified an 
overpayment if it has actual knowledge of the existence of the 
overpayment or acts in reckless disregard or deliberate ignorance of 
the existence of the overpayment. An MA organization must exercise 
reasonable diligence to determine the accuracy of information it 
receives that an overpayment may exist.
    (d) Reporting and returning of an overpayment. An MA organization 
must report and return any overpayment it received no later than 60 
days after the date on which it identified it received an overpayment.
    (1) Reporting. An MA organization must notify CMS, of the amount 
and reason for the overpayment, using a notification process determined 
by CMS.
    (2) Returning. An MA organization must return identified 
overpayments in a manner specified by CMS.
    (3) Enforcement. Any overpayment retained by an MA organization 
after the 60-day deadline for reporting and returning is an obligation 
under 31 U.S.C. 3729(b)(3).

[[Page 2056]]

    (e) Look-back period. An MA organization must report and return any 
overpayment identified for the 6 most recent completed payment years. 
Overpayments resulting from fraud are not subject to this limitation of 
the look-back period.


Sec.  422.502  [Amended]

0
27. Section 422.502(b)(3) is amended by removing the phrase ``CMS may 
deny an application based on the applicant's'' and adding in its place 
the phrase ``CMS may deny an application for a new contract or service 
are expansion based on the applicant's''.
0
28. Section 422.503 is amended by--
0
A. Adding paragraph (b)(4)(vi)(C)(3).
0
B. Adding and reserving paragraph (b)(4)(vi)(G)(4).
0
C. Revising paragraph (b)(4)(vi)(G)(5).
0
D. In paragraph (d)(2) introductory text, removing the phrase ``has the 
right to:'' and adding in its place the phrase ``has the right to 
timely do all of the following:''.
0
E. In paragraph (d)(2)(i), removing the ``;'' and adding in its place a 
``.''.
0
F. In paragraph (d)(2)(ii), removing the ``; and'' and adding in its 
place a ``.''.
0
G. Adding paragraph (d)(2)(iv).
    The revisions and additions are as follows:


Sec.  422.503  General provisions.

* * * * *
    (b) * * *
    (4) * * *
    (vi) * * *
    (C) * * *
    (3) An MA organization must require all of its first tier, 
downstream and related entities to take the CMS training and accept the 
certificate of completion of the CMS training as satisfaction of this 
requirement. MA organizations are prohibited from developing and 
implementing their own training or providing supplemental training 
materials to fulfill this requirement.
* * * * *
    (G) * * *
    (5) Not accept, or share a corporate parent organization with an 
entity that accepts, new enrollees under a section 1876 reasonable cost 
contract in any area in which it seeks to offer an MA plan.
    (d) * * *
    (2) * * *
    (iv) CMS may require that the MA organization hire an independent 
auditor to conduct full or partial program audits or to provide CMS 
with information to determine if deficiencies found during an audit or 
inspection have been corrected and are not likely to recur. The 
independent auditor must work in accordance with CMS specifications and 
must be willing to attest that a complete and full independent review 
has been performed.
* * * * *
0
29. Amend Sec.  422.504 by:
0
A. Adding paragraphs (a)(3)(iv) and (a)(19).
0