Opposition Brief — Shalala v. Grijalva

Supreme Court brief1999

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fit Gok Ge BEG ies. pi cnn i teats eae

Gat CE ED

No. 98-1284

om MAR 99 1999.

In The | OFFICE GE THE CLERK

Supreme Court of the United States

October Term, 1998

DONNA E. SHALALA, SECRETARY OF HEALTH

AND HUMAN SERVICES,

y. Petitioner,

GREGORIA GRIJALVA, MARY LEA, JOSEPHINE

BALESTRERI, FRED S. SCHERZ, KEVIN A. DRISCOLL,

MINA AMES, EDMUNDO B. CARDENAS, ARLINE T.

DONOHO, GOLDIE M. POWELL, and RICHARD

BAXTER, as individuals and representatives of a

class of persons similarly situated,

Respondents.

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Ninth Circuit

RESPONDENTS’ BRIEF IN OPPOSITION

TO PETITION FOR A WRIT OF CERTIORARI

Lenore E. Gerarp SALLY Hart

Legal Assistance (Counsel of Record)

to the Elderly Center for Medicare

1453 Mission St., Ste. 500 Advocacy, Inc.

San Francisco, CA 94103 1730 E. River Rd., Ste. 107

(415) 861-4444 Tucson, AZ 85718

Carot Ss. JIMENEZ (520) 577-1611

5182 Katella Ave., Ste. 106 Gnt Derorp

Los Alamitos, CA 90720 Center for Medicare

(562) 430-0239 Advocacy, Inc.

Auprey Kraus P.O. Box 350

Conter ton Health Willimantic, CT 06226

520 S. Lafayette Park Pl., Counsel for Respondents

Ste. 214

Los Angeles, CA 90057

(213) 383-4519

COCKLE LAW BRIEF PRINTING CO, (#00) 225-6964

OR CALL COLLECT (402) 342-2831

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<3 one

Pee ge!

xi i

REVISED STATEMENT OF

QUESTIONS PRESENTED

Respondents suggest that a more accurate statement

of the Questions Presented, both in content and in recog-

nition of the Secretary’s goal with this Petition, is as

follows:

Whether the judgments below should be vacated,

and the case remanded to the district court to begin the

litigation anew, because of either (1) legislation which the

Secretary explicitly declined to rely on in the court of

appeals, which has made no significant change to the

relevant portions of the Medicare statute, and which the

Secretary has misrepresented to the Court, or (2) a recent

decision of this Court which, upon objective scrutiny, has

no bearing on the outcome of the instant case.

Whether the courts below correctly concluded, like

other courts considering government health services

delivered by HMOs, that when the federally created,

mandated, and operated Medicare program contracts

with private HMOs to provide Medicare benefits, their

coverage decisions constitute state action.

Whether the courts below correctly concluded that

the Secretary violated principles of due process, which

have been recognized as a requirement in the Medicare

program by numerous courts, when she did not require

her contracting HMOs to provide adequate notice and

hearings upon the reduction or termination of Medicare

benefits.

TABLE OF CONTENTS

Page

INTRODUCTION qo occisccevekudeon ct eee 1

STATUTORY AND REGULATORY PROVISIONS

DOVORNEDD. co ccs ccntiencn tethbennie see 2

STATEMENT OF THE CASE. 20.0... ccccccccecccccks 5

REASONS FOR DENYING THE WRIT............. 13

A. The Factual And Legal Context Of Sullivan

Renders The Decision On State Action In That

Case Of No Relevance To The Instant Case... 23

B. The Secretary’s Limited Compliance With The

Remedial Order Does Not Moot The Case, And

The District Court Has Continuing Jurisdiction

To Consider Whether Its Order Should Be

MEOGEIOE 5. occccacunacecccncct cine 21

CONCLUSION «oes os csc Cannneseeciene een 27

iii

TABLE OF AUTHORITIES

Page

Cases:

Agostini v. Felton, 521 U.S. 203 BRB iirc otic tie 26

American Manufacturers Mutual Insurance Co. v.

Sullivan, 119 S.Ct. 977 Fg) ee ee a ets passim

Blum v. Yaretsky, 457 U.S. 991 PAM rks cahixgs 12, 18

Bodimetric Health Services, Inc. v. Aetna Life & Casu-

alty, 903 F.2d 480 (7th Cir. ca! EES SES act ae ig

Bowen v. Kizer, 485 U.S. 386 (1988).................. 22

Catanzano v. Dowling, 60 F.3d 113 (2d Cir. 1995) ...9, 16

City of Mesquite v. Aladdin's Castle, Inc., 455 US.

1 St EUR TS RA ala Gung Rela 24

Daniels v. Wadley, 926 F.Supp. 1305 (M.D.Tenn.

1996), vacated in part, 145 F.3d 1330 (6th Cir.

SMUPRT EWN e Stas rie cees calle eee 16

Edmonson v. Leesville Concrete Co., 500 US. 614

a AUG ine tes Oss OK tek een 14

FEA v. Algonquin SNG, Inc., 426 U.S. 548 (3976) 3.3%: 24

Fox v. Bowen, 656 F.Supp. 1236 (D.Conn. 1986) ....9, 17

Gray Panthers v. Schweiker, 652 F.2d 146 (1980),

appeal after remand, 716 F.2d 23 (D.C. Cir. 1983) ..6, 20

Grijalva v. Shalala, 152 F.3d 1115 (9th Cir. 1998)...... 12

Heckler v. Community Health Services of Crawford

County, Inc., 467 U.S. 51 SEMIS sity ck wtb s Gata ond 17

Himmler v. Califano, 611 F.2d 137 (6th Cir. 1979)...... 9

|.K. v. Dillenberg, 836 F.Supp. 694 (D.Ariz. 1993) ...9,

Jackson v. Metropolitan Edison Co., 419 U.S. 345

PPE Sad Piece enksaeWal aceon ane

TABLE OF AUTHORITIES - Continued

Page

Kraemer v. Heckler, 737 F.2d 214 (2d Cir. 1984)... 9, 17, 20

Lewis v. Continental Bank Corp., 494 U.S. 472 (1990) .... 22

Lugar v. Edmondson Oil Co., 457 U.S. 922 (1982) ..... 14

Martinez v. Richardson, 472 F.2d 1121 (10th Cir.

1973), on later motion, 655 F.Supp. 95 (D.N.M.

1986), appeal dis’d, 874 F.2d 751 (10th Cir. 1989) . .6, 20

Mathews v. Diaz, 426 U.S. 67 (1976) ........ cece eeee 5

Mathews v. Eldridge, 424 U.S. 319 (1976) ......... passim

McCuin v. Sec. of H.H.S., 817 F.2d 161 (1st Cir.

AGRI D, sak ckabcds Featdl aan canna rian ees eewene salen hs 6

National Independent Coal Operators’ Assn. v. Kleppe,

MPD UG. TO CEST O) Soo sks os a kcanvecuengeeaenann 24

Northeastern Fla. Chapter of the Associated Gen. Con-

tractors v. City of Jacksonville, 508 U.S. 656 (1993) .... 24

Perry v. Chen, 985 F.Supp. 1197 (D.Ariz. 1996)....... 16

Princeton Univ. v. Schmid, 455 U.S. 100 (1982)........ 22

Schweiker v. McClure, 456 U.S. 188 (1982).......... 5, 20

Standard Oil v. U.S., 429 U.S. 17 (1976)...........085 26

Transgo, Inc. v. Ajac Transmission Parts Corp., 768

F.2d 1001 (Sth Cir. 1985)... ... cc cccuccsvcesccceses 26

U.S. Dep't of Treasury v. Galioto, 477 U.S. 556 (1986) .... 22

Vorster v. Bowen, 709 F.Supp. 934 (C.D.Cal. 1989) ..... 9

West v. Atkins, 487 U.S. 42 (1988) ............005. 18, 19

TABLE OF AUTHORITIES — Continued

Page

CONSTITUTION, STATUTES AND REGULATIONS:

Balanced Budget Act of 1997 (BBA), Pub. L. No. 105-33,

§ 4001, 111 Stat. 251, 275

§ 4001:

toe Oe Sree RPE Pere re rar errs ct 19

BUA TONE SOU oi ecc kes te sne tae sa veawecyect ion 23

fe Se i rere rere ee ere re tree 24

Social Security Act, Tit. XVIII, codified at 42 U.S.C. 1395

et seq.

42 U.S.C.:

§ 1395d(a) (S.S.A. § 1812(a)) ..... 6... eee eee 3

§ 1395k(a)(2) (S.S-A. § 1832) ............00 00s 4

Social Security Act:

G TBS ANC). onic a vice ccc evecccc espa 19

Bt) ee Serer errr irae erty y ise seer S

§ 1852(g)(3)(B)(idi) 1... cece eee e eee eeees 23

ORE ib inic's sp daine'énvodk segs tdensecnaawes passim

§ 1862(a)(1) (42 U.S.C. § 1395y(a)) .......... 18

42 U.S.C.: :

§ 13956f (S.S.A. § 1869) ..... cece ccceceecences 6

§ 1395mm (S.S.A. § 1876)........ 6.6.0 eee 2, 6

§ 1395mm(c)(1) (S.S.A. § 1876(c)(1)) ... 4, 22, 24

TABLE OF AUTHORITIES — Continued

Page

§ 1395mm(c)(2)(A) (S.S.A. § 1876(c)(2)(A)) ...-. 4

§ 1395mm(c)(5)(A) (S.S.A. § 1876(c)(5)(A)) ... . 22

§ 1395mm(c)(5)(B) (S.S.A. § 1876(c)(5)(B)) ..... 7

Tax Equity and Fiscal Responsibility Act of 1982,

Pub. L. No. 97-248, § 114(a), 96 Stat. 324, 341...... 6

42 C.E.R.:

S GOD.7O1 OF OG. oa is cc bie Cea acue eee een ERY 6

5 G06.008 ef G88. 655 eT eg eee 6

S O09.1-409 GE. 6 os i pcdaarcdcushdatouniiewereed 5

G 410.1-410.175 6k civic eng 5

§ 417.1-417.694 .......... hed hea ORAS wre 7

MisCELLANEOUS:

62 Fed. Reg. 23368 (April 30, 1997) ...........5..00 11

Mcllrath, GAO Report, Medicare HMOs, American

Medical News 3 (November 18, 1996).............. 6

Report of testimony by Bruce C. Vladek, HCFA

Administrator, at February 10, 1995 hearing of

the Health Subcommittee of the House Ways

and Means Committee, reported at 842 New

Developments 5-7, Medicare & Medicaid Guide

(CID). sso 00d ik peach pA GE wel eek Aa ROT ae 7

Rule GOGs), FRACS, «..s:0:dy's dope Re dn cha Ce hee es 26

S. J. Stayn, Securing Access to Care in HMOs:

Toward a Uniform Model of Grievance and Appeal

Procedures, 94 Couum. L. Rev. 1674 (1994)........... 8

The Medicare Coverage Issues Manual, HCFA-

PUD. 6 onc de wine saeap obec weds coiee ene teres cistern 18

mer re ree =

—“——

INTRODUCTION

The Secretary argues that a writ of certiorari should

be issued for two reasons, neither of which is well taken.

The facts and legal context of American Manufacturers

Mutual Insurance Co. v. Sullivan, 119 S.Ct. 977 (1999),

differ so dramatically from those in the instant case that

Sullivan has no bearing on the state action issue. Here, in

contrast to the workers’ compensation program at issue

in Sullivan, Medicare’s status as a pubfecentitlement man-

dated by congressionally established substantive stan-

dards, to which due process protections have always

attached, compels the finding of state action which the

courts below correctly made.

In addition, for several reasons, it is not necessary or

appropriate for the decisions below to be vacated and the

case remanded in light of the Balanced Budget Act (BBA),

which was passed and in effect before briefing was com-

pleted in the court of appeals. First, the Secretary explic-

itly declined to raise this issue at the appropriate time

below, apparently viewing the BBA as not relevant to the

issues here raised. Second, any apparent compliance by

the BBA and its implementing regulations with the judg-

ment below responded only in small part to the deficien-

cies identified by the district court. Third, as the court of

appeals observed, the district court may modify its order

in light of later developments if the Secretary so requests

and the legal standards are met; that procedure, not the

vacating of the judgments below without full briefing and

in the face of inaccurate and misleading statements by the

Secretary, is the appropriate procedure for resolving these

issues.

Furthermore, although the Secretary suggests that

this case might be appropriate for plenary review, she is

in error: there is no conflict between the circuits on the

issues raised in this case, and the court of appeals prop-

erly applied rules of law in the state action and due

process contexts which have long been settled by this

Court. Indeed, the Secretary’s main effort is to manipu-

late the BBA and Sullivan as the mechanisms for negating

lower court decisions with which she disagrees. In her

eagerness to have the lower court opinions simply disap-

pear, the Secretary has repeatedly mischaracterized the

nature of the Medicare program and the content and

relevance of the BBA. The petition for a writ of certiorari

should be denied and the decisions below left intact.

STATUTORY AND REGULATORY

PROVISIONS INVOLVED

The Secretary asserts that the HMO portion of the

Medicare statute in effect when the district court made its

decision has been superseded by entirely new Medi-

care+Choice legislation. That is not correct. The HMO

portion of the Medicare statute and program remains in

effect, with only minor changes, renamed as one of the

Medicare+Choice coordinated care options allowed by

the Balanced Budget Act of 1997 (BBA), Pub. L. No.

105-33, § 4001, 111 Stat. 251, 275 (Social Security —Act

(S.S.A.) § 1851(a)(2)(A)). Compare BBA, §§ 4001-4002, 111

Stat. 275-330 (only partially set forth in Pet.App. 70a and

100a-101a) with the prior HMO provisions, 42 U.S.C.

§§ 1395mm et seq. Because the Secretary failed to include

significant and relevant portions of the BBA in her

—— —_

Appendix, the current HMO portion of the Medicare

statute, including the minor changes made by the BBA, is

set forth as Respondents’ Appendix (Resp.App.).

Although the BBA includes an expedited HMO

reconsideration determination in its appeal procedures

for Medicare HMO beneficiaries, S.S.A. § 1852(g),

Pet.App. 93a-101a, this change complies with only one

part of the district court’s remedial order. The Secretary

ignores the fact that four other important parts of that

order remain unmet.

Also, contrary to the Secretary’s description of Medi-

care HMOs as making coverage determinations according

to their own professional and contractual obligations

without government participation or assistance, Pet.Br.

16-17, 20, the Medicare statute specifies the health ser-

vices provided to beneficiaries of the program. Under

Part A, these services must include:

(1) inpatient hospital services . . . for up to

150 days... ;

(2)(A) post-hospital extended care services

for up to 100 days... ;

(3) ... home health services; and

(4) in lieu of certain other benefits, hospice

GARG. 3...

42 U.S.C. § 1395d(a). Under Part B, services that Medicare

must cover include:

(A)(i) home health services ... ;

(B) medical and other health services

[including physician services, outpatient

therapies and diagnostic tests, home dialysis

equipment, antigens, durable medical equip-

ment, and ambulance services]. . . ;

(D) [certain health clinic services];

(E) comprehensive outpatient rehabilita-

tion facility services; and

(F) facility services furnished in connec-

tion with surgical procedures specified by the

Secretary... .

42 U.S.C. § 1395k(a)(2). These provisions remain intact

under the BBA.

HMOs which contract with the Medicare program are

required to provide their enrollees with the full range of

services covered by Medicare for beneficiaries generally.

42 U.S.C. § 1395mm(c)(2)(A). This section also remains

intact under the BBA.

Congress included a mandatory enforcement mecha-

nism for the standards prescribed for Medicare HMOs:

“The Secretary may not enter into a contract under this

section with an eligible organization unless it meets the

requirements of this subsection and subsection (e) of this

section with respect to members enrolled under this sec-

tion.” 42 U.S.C. § 1395mm(c)(1). Again, this section

remains intact under the BBA. Resp. App. 7.

STATEMENT OF THE CASE

l.a. The Medicare program, established by Con-

gress in 1965, mandates that the federal government

cover specific medical services for Medicare beneficiaries.

The Secretary has issued extensive regulations and

administrative manuals defining with precision the pack-

age of health services covered and the process by which

coverage determinations are made pursuant to the stat-

ute. 42 C.F.R. §§ 409.1-409.68, 410.1-410.175. Incident to

this legislative determination, the courts have definitively

established that Medicare benefits are constitutionally

protected property rights. Schweiker v. McClure, 456 U.S.

188, 198 (1982); Mathews v. Diaz, 426 U.S. 67 (1976).

In the traditional fee-for-service program, which has

existed since Medicare’s inception in 1965, health care

providers are paid directly for services already rendered

to Medicare beneficiaries. The Secretary contracts with

private insurers, called “intermediaries” under Part A

and “carriers” under Part B, to process claims and other-

wise administer the benefits. These private insurers make

coverage determinations including those related to medi-

cal necessity, make payments to providers and benefici-

aries, establish guidelines and utilization screens for

coverage, and investigate fraudulent billing practices.

This Court has determined that, in exercising their con-

tractual duties, the fiscal intermediaries act as the Secre-

tary’s agents. McClure, 456 U.S. at 190; see also, e.g.,

Bodimetric Health Services, Inc. v. Aetna Life & Casualty, 903

F.2d 480, 487 (7th Cir. 1990).

From Medicare’s beginning, Congress has required

an administrative appeal process culminating in judicial

review for beneficiaries who are denied benefits. 42

U.S.C. § 1395ff. The Secretary has promulgated detailed

regulations governing this appeals process. 42 C.FR.

§§ 405.701 et seq. and 405.801 et seq. It has been clearly

established that the requirements of procedural due pro-

cess apply to the Medicare administrative appeals sys-

tem. See, e.g., McCuin v. Sec. of H.H.S., 817 F.2d 161,

171-175 (1st Cir. 1987); Gray Panthers v. Schweiker, 652 F.2d

146 (1980), appeal after remand, 716 F.2d 23 (D.C.Cir.

1983); Martinez v. Richardson, 472 F.2d 1121 (10th Cir.

1973), on later motion, 655 F.Supp. 95, 102-103 (D.N.M.

1986) (reaffirming original judgment under updated due

process analysis), appeal dismissed, 874 F.2d 751 (10th

Cir. 1989).

In 1982, Congress authorized widespread Medicare

contracting with risk-based HMOs. Tax Equity and Fiscal

Responsibility Act of 1982, Pub. L. No. 97-248, § 114(a), 96

Stat. 324, 341 (codified at 42 U.S.C. § 1395mm). Under this

system, Medicare pays contracting HMOs monthly a flat

fee or capitation payment to provide or cover the con-

gressionally mandated package of services. The Secretary

has actively encouraged Medicare beneficiaries to enroll

in HMOs, and the growth in the number of Medicare

beneficiaries enrolled in HMOs accelerated greatly in the

1990’s.!

' In 1996, 3.8 million Medicare beneficiaries were enrolled

in HMOs, more than double the 1.5 million beneficiaries

enrolled just three years earlier. McIlrath, GAO Report, Medicare

HMOs, American Medical News 3 (November 18, 1996); Report

Contrary to the Secretary’s suggestion, Medicare

HMOs are not analogous to private HMOs. Congress has

specified the package of services that Medicare HMOs

must provide, supra at 3, and the Secretary has elaborated

upon these mandates through extensive regulations and

manuals. Coverage decisions by Medicare HMOs may be

appealed to the Secretary and federal court; in fact, when

Congress included risk-based HMO coverage, it

expanded HMO beneficiary appeal rights beyond those

conferred in the Medicare fee-for-service appeal process

to include failure to receive services as well as denials of

payment. 42 U.S.C. § 1395mm(c)(5)(B). Extensive and

detailed conditions are attached to HMO participation in

the Medicare program. 42 C.F.R. §§ 417.1-417.694.

b. The Joint Statement of Facts presented to the

district court in this case identified a number of problems

with the Medicare HMO program. The six thick volumes

of exhibits, which included declarations of named plain-

tiffs, other beneficiaries and professionals, excerpts from

discovery, and studies and investigative reports, show a

pattern of denials by HMOs, particularly of certain more

costly types of health services.

Beneficiaries’ primary remedy for denial of service is

the administrative appeal process established by statute

and regulations. But he defects of this process impair the

relief which it should offer to HMO enrollees who are

of testimony by Bruce C. Vladek, HCFA Administrator, at

February 10, 1995 hearing of the Health Subcommittee of the

House Ways and Means Committee, reported at 842 New

Developments 5-7, Medicare & Medicaid Guide (CCH).

denied services.2 HMO notices of denial to beneficiaries

are infrequently given and, even when given, are inade-

quate in content. The hearing process that follows is

seriously flawed, both by its extensive delays when ser-

vices are urgently needed and by the inability of benefici-

aries to obtain and supply supporting evidence. As a

result, most beneficiaries have no effective remedy when

services are denied.

2. In an effort to correct this harmful situation,

HMO-enrolled Medicare beneficiaries brought the instant

lawsuit, stating four claims. First, the Secretary failed to

enforce the obligations of her contracting HMOs to pro-

vide congressionally mandated services. Second, the Sec-

retary did not enforce the requirement that her HMOs

provide adequate notice when they deny coverage of

such health services. Third, the Secretary’s failure to pro-

vide HMO beneficiaries with a timely appeal when

needed health services are denied deprives them of a

meaningful hearing. Fourth, in HMO appeals the Secre-

tary should place the burden of proof on the HMO rather

than on the beneficiary. After certifying a nationwide

class action, the district judge issued summary judgment

for beneficiaries on counts two and three of the complaint

and for the Secretary on count four. The district court

specifically retained jurisdiction to resolve count one.

a. Under two separate analyses, the district court

found that, contrary to the Secretary’s contention, HMO

service denials constituted state action. First, the court

2 See generally S. J. Stayn, Securing Access to Care in HMOs:

Toward a Uniform Model of Grievance and Appeal Procedures, 94

Co.um. L. Rev. 1674 (1994).

explained that Medicare HMOs fulfill two separate func-

tions, as insurers and as direct providers of medical care.

This case challenges HMOs’ performance of Medicare's

insurer function; it does not challenge HMOs’ perfor-

mance as providers of medical care. Pet.App. 33a. Courts

have consistently found that private contractors fulfilling

this insurance function for Medicare act as agents of the

Secretary. See Kraemer v. Heckler, 737 F.2d 214, 215 (2d Cir.

1984); Himmler v. Califano, 611 F.2d 137, 140 (6th Cir.

1979); Vorster v. Bowen, 709 F.Supp. 934, 936 (C.D.Cal.

1989); Fox v. Bowen, 656 F.Supp. 1236, 1238 (D.Conn.

1986). In the present case, the district court found that

“there is nothing unique about the performance of these

same duties by HMOs which warrants a contrary finding

here.” Pet.App. 34a.

Secondly, the court analyzed HMO denials of Medi-

care services under the criteria set forth in Catanzano v.

Dowling, 60 F.3d 113 (2d Cir. 1995) (decisions by private

home health agencies to deny or reduce the amount of

home health care for Medicaid recipients amount to state

action triggering due process rights), and in J.K. v. Dillen-

berg, 836 F.Supp. 694 (D.Ariz. 1993) (decisions by private

entities that contracted with the state to perform Medi-

caid mandated behavioral health care duties constituted

state action). As in Catanzano and Dillenberg, the district

court found that the criteria for state action apply here.

Specifically, the district court found that, with respect to

Medicare HMO service denials: (1) the government pays

for covered services; (2) the government regulates HMOs’

activities as they apply to Medicare beneficiaries, espe-

cially benefit coverage determinations; (3) the Secretary

issues regulations and directives which cannot be

ignored, and creates the legal framework which governs

the activities complained of by beneficiaries; and (4) Med-

icare beneficiaries appeal HMO service denials directly to

the Secretary, who has the power to overturn the HMO

decision. Pet.App. 32a-33a.

b. The district court held that Medicare benefici-

aries who are denied coverage by contracting HMOs are

entitled to due process as are Medicare beneficiaries who

are denied coverage in the fee-for-service system. Id. at

34a-35b. The court then applied the balancing test set

forth by this Court in Mathews v. Eldridge, 424 U.S. 319

(1976), to determine the extent of procedural protections

required for HMO beneficiaries by due process. Pet.App.

42a-45a. It concluded that the Secretary’s current notice

and hearing procedures violated due process.

Subsequently, at the court’s request, both parties

fully briefed their positions regarding the content of the

remedi«: order. Court of Appeals Supplemental Excerpts

of Record 1010-1078. The court ordered the parties to

enter into binding settlement discussions as to the details

of a meaningful notice and appeals process, with the

understanding that the Secretary's right to appeal the

state action issue would be preserved. When the Secre-

tary took the position that she would not be bound by

any settlement agreement, the district court considered

the parties’ briefing as to the specifics of the injunction

and issued its judgment on March 3, 1997. Pet.App.

59a-69a. The court did not strike down Medicare legisla-

tion or regulations, but ordered the Secretary to make

reforms in five specific areas of its HMO notice and

appeals process.

c. On April 30, 1997, two days before the deadline

for filing a notice of appeal, the Secretary published a

“Final Rule with comment period”, which implemented a

portion of the court’s order. 62 Fed. Reg. 23368 (April 30,

1997). She then requested a stay of the judgment pending

appeal, claiming that her new regulations complied with

many of the court’s procedural requirements, and, signifi-

cantly, that the other requirements would be addressed

by additional regulations in the near future. Def. Motion

for Stay Pending Appeal (5/13/97), in Court of Appeals

Excerpts of Record (C.A.E.R.) 200. The district court

granted the stay based on the Secretary’s assurances

regarding further compliance: “[T]he entire case may

become largely moot if the Secretary’s attestations

regarding rule changes are true and are implemented

without delay.” Pet.App. 68a. However, consistent with

her regrettably misleading practices throughout this liti-

gation, the Secretary has never issued regulations imple-

menting the rest of the district court’s judgment.

d. On August 5, 1997, the Balanced Budget Act of

1997 was enacted, folding Medicare HMOs into a broader

Medicare+Choice set of options. The BBA also inserted

into the statute some time frames for expedited appeals.

Although the BBA was enacted before the Secretary

filed her reply brief in the court of appeals, she declined

to discuss the new statute. Instead, she stated without

qualification that the BBA provisions “have no effect on

the arguments presented in this appeal.” Gov’t Reply Br.

at 10 n.9. Furthermore, at oral argument before the court

of appeals on January 13, 1998, the Secretary again dis-

claimed any effect on this case by the BBA, which had

become effective on January 1, 1998.

The BBA provided for expedited appeal in some but

not all of the situations addressed by the district court.

Unfortunately, neither it nor the Secretary’s implement-

ing regulations complied with other important protec-

tions included in the judgment below. First, they do not

satisfy the five-day timeliness standard for written denial

notices.* Second, they do not provide for an ‘ndependent,

non-HMO decision-maker in expedited reviews. Third,

they fail to provide for urgently needed services to con-

tinue pending expedited review. Fourth, they do not

implement the congressional mandate for the Secretary’s

enforcement of HMO contractual conditions.

3. The Ninth Circuit, in a unanimous opinion writ-

ten by Judge Wiggins, affirmed the district court’s deci-

sion. Pet.App. la-21a. First, the court of appeals held that

HMO denials of services to Medicare beneficiaries consti-

tute state action. The court considered each of the factors

that point to state action, and stated that, although each

factor alone might not be sufficient to establish state

action, together they show that the HMOs and the federal

government are joint participants in providing Medicare

services. Pet.App. 9a-10a. The court distinguished Blum v.

Yaretsky, 457 U.S. 991 (1982), where physicians made

medical treatment decisions based on professional stan-

dards, from Grijalva, where HMOs make Medicare cover-

age determinations pursuant to federal law. Pet.App. 11a.

3 The Petition incorrectly asserts that the five-day standard

is unreasonably rigid. In fact, the judgment carefully provides

for extensions of up to sixty days when needed to “make a

responsibly considered medical determination.” Pet.App. 60a.

The court of appeals then performed its own balanc-

ing test under Mathews v. Eldridge, and concluded that

due process does require the procedural protections for

Medicare beneficiaries enrolled in HMOs that were

ordered by the district court. Pet.App. 13a.

Finally, the court addressed the Secretary’s argument

that intervening regulations warranted modifying the

district court’s injunction. Judge Wiggins noted that the

district court has continuing jurisdiction over its injunc-

tion and that the Secretary could seek modification

through the district court. Pet.App. 20a. As the Secretary

had expressly advised the Ninth Circuit that the BBA did

not change the issues before it, the court did not address

the BBA.

Subsequently, the Secretary filed a Petition for

Rehearing With Suggestion For Rehearing En Banc. Her

petition was based largely on a reversal in position,

namely, that the BBA does affect the issues and relief in

this case. The panel unanimously denied the petition, and

the court as a whole declined to rehear the case en banc.

Pet.App. 22a-23a.

REASONS FOR DENYING THE WRIT

A. The Factual And Legal Context Of Sullivan Renders

The Decision On State Action In That Case Of No

Relevance To The Instant Case.

1. The Secretary’s reliance on American Manufac-

turers Mutual Insurance Co. v. Sullivan, 119 S.Ct. 977

(1999), as providing grounds to vacate and remand the

decision below is misplaced. In Sullivan, this Court held

that a private insurer’s decision to withhold payment and

seek utilization review of whether particular medical

treatments were reasonable and necessary is not fairly

attributable to the state so as to subject the insurer to the

Fourteenth Amendment's constraints. Thus, although the

Sullivan decision generally discusses this Court’s state

action jurisprudence, it has no specific relevance to this

case and offers no basis for requiring the appeals and

district courts to revisit their analyses.

a. Initially, it needs to be emphasized that Sullivan

does not modify this Court’s prior holdings on state

action. While enlightening in the application of state

action principles to a case under 42 U.S.C. § 1983 involv-

ing workers’ compensation, Sullivan does not alter the

analytical framework relied on by the courts below in this

case. This Court reaffirmed the traditional two-step

approach enunciated in Lugar v. Edmondson Oil Co., 457

U.S. 922, 937 (1982), and reached its conclusion that there

was no state action by distinguishing the situation in

Sullivan from prior state action cases and by carefully

parsing the factual contexts in which the different contro-

versies arose. 119 S.Ct. at 985-989. The court of appeals’

critique in the instant case is entirely consistent with this

Court’s long-standing approach, and Sullivan makes no

change in those parameters previously outlined.4

4 Sullivan also demonstrates that there is no significance to

the Secretary’s observation that the appellate courts’ decisions

in Sullivan and the instant case failed to include the three

principles applicable to the second Lugar factor, as set out in

Edmonson v. Leesville Concrete Co., 500 U.S. 614, 621-622 (1991).

See Pet.Br. 16. The absence of an explicit statement of these

b. It is of paramount importance to the resolution of

this Petition, however, that the legal and factual context

of Sullivan differs dramatically from the instant case.

Unlike Sullivan, where the state action inquiry focused on

private decisions to withhold payment for medical care

based on professional standards, with no state obligation

to pay or provide benefits, 119 S.Ct. at 986-988, the state

action inquiry in the present case turns on HMO coverage

determinations which are based on federal law and the

governmental obligation to provide benefits.

The Secretary contends that the state action holding

below was “predicate[d] . . . largely on the government's

regulatory role.” Pet.Br. 16. Given this Court’s repeated

recognition, including in Sullivan, 119 S.Ct. at 986, that

regulation alone does not convert private action into state

action, it is not surprising that the Secretary would seek

to frame this case as merely an instance of government

regulation. This situation, however, is vastly different

from one involving a regulated industry, as the state

action finding is here predicated on a comprehensive

federal statutory scheme establishing the Medicare pro-

gram. See supra at 2-4.

The structure and operation of the Medicare pro-

gram, which is detailed at length in the statute, the regu-

lations, and the manuals, are the responsibility of the

Secretary to carry out and enforce, and the HMOs which

contract with the Secretary play subordinate roles in this

principles does not necessarily undercut the implicit propriety

of the lower courts’ analytical approach, regardless of the

ultimate outcome of those analyses.

scheme. The Secretary not only sets the benefit entitle-

ment package, coverage and standards for quality, orga-

nization, delivery of services, and notice and appeal

rights, but exercises a virtual monopsony in its role as the

exclusive buyer of beneficiary services. Unlike Sullivan,

119 S.Ct. at 988, and Jackson v. Metropolitan Edison Co., 419

U.S. 345, 352-353 (1974), where the state had no obligation

to provide service or benefits, in this case the government

is obligated to ensure that HMOs provide all federally

mandated public benefits. That is the critical difference

from the instant case, where the obligation has always

attached to the government.

Courts have invariably found state action in the con-

text of government health benefits obligated by statute

and provided via a delegation to HMO. In a number of

recent decisions courts have explicitly rejected arguments

against state action like that made by the Secretary. In

Catanzane, 60 F.3d at 117-120, state action and consequent

due process protections were found in a managed care

arrangement for Medicaid benefits. In Perry v. Chen, 985

F.Supp. 1197 (D.Ariz. 1996), the court held that managed

care organizations contracting with the state’s Medicaid

program must meet due process requirements when they

deny health services to beneficiaries. In Daniels v. Wadley,

926 F.Supp. 1305, 1311 (M.D.Tenn. 1996), vacated on this

point sub nom. Daniels v. Menke, 145 F.3d 1330 (6th Cir.

1998) (table) (vacated for change of circumstances), the

district court held that Medicaid-contracting HMOs are

state actors and so are subject to due process standards

when they deny health services to beneficiaries. Finally,

in J.K. v. Dillenberg, 836 F.Supp. at 697-699, state action

with constitutional protections was found in private men-

tal health case management services provided under con-

tract with the state Medicaid program.

c. There is no logic in according preferential treat-

ment to HMOs which participate in the Medicare system,

when, like fee-for-service providers, they contract with

the federal government to carry out federally established

coverage decisions and as such are acting as agents. See,

e.g., Heckler v. Community Health Services of Crawford

County, Inc., 467 U.S. 51, 54, 64 (1984); Bodimetric Health

Services, Inc., 903 F.2d at 487; Kraemer, 737 F.2d at 215; Fox,

656 F.Supp. at 1238. That HMOs participate both in the

Medicare program and in the private sector is not a

relevant concern. Rather, it is their voluntary participa-

tion in the Medicare program and in the provision of

Medicare benefits which defines their role as state actors,

for, in that context, the HMOs’ actions are “fairly attribu-

table to the State.” Sullivan, 119 S.Ct. at 989.

A finding of no state action in the HMO Medicare

context, and the consequent reduction in beneficiary

rights, would also create a double and unequal standard

for Medicare beneficiaries, depending on whether they

were HMO-enrolled or in fee-for-service. The courts

below explicitly recognized this unfairness and the fact

that there is nothing in the legislative record to indicate a

congressional intention to create such a disparate system.

See Pet.App. 34a-35a.

Further, the Secretary significantly errs by stating

that the court below “conclud[ed] that medical treatment

decisions by private HMOs concerning their Medicare-

beneficiary members are properly attributed to the fed-

eral government.” Pet.Br. 16 (emphasis supplied). In fact,

the court of appeals’ ruling clearly was limited to coverage

decisions by Medicare HMOs rather than medical judg-

ments. Pet.App. 11a. By contrast, Sullivan did not involve

coverage determinations but, rather, withholding pay-

ment to providers pending resolution of medical treat-

ment disputes, where standards were not established by

the state. 119 S.Ct. at 986.°

The present case is also quite different from prior

cases where the challenged activity turned on judgments

made by medical professionals. In Blum v. Yaretsky, 457

U.S. at 1008-1009, this Court held that physician treat-

ment decisions do not involve state action. The lower

courts here rightly distinguished HMO coverage deter-

minations from the situations in Blum and its progeny

where no state action was found. Pet.App. 8a-10a, 30a.

The Secretary’s attempt to insulate herself and her HMOs

from accountability by cloaking them in independent pro-

fessional discretion must fail. See Pet.Br. 17-18 n. 6.

The situation in this case — unlike Sullivan — is similar

to West v. Atkins, 487 U.S. 42 (1988). There, the Court

5 The Medicare statute contains a section listing exclusions

from its package of covered services; several of the exclusions

are services “not reasonable and necessary for... [various listed

purposes].” S.S.A. § 1862(a)(1). The Secretary has further

defined in detail the situations where these exclusions are

found. See, inter alia, The Medicare Coverage Issues Manual,

HCFA-Pub. 6. These Medicare coverage exclusio~s are not

analogous to the Pennsylvania legislation analyzed in Sullivan,

where medical judgment was a prerequisite to entitlement.

found that a state-contracted physician's delivery of med-

ical treatment to state prison hospital inmates was action

fairly attributable to the state, as it had an obligation to

provide adequate medical care, it delegated that function,

and the private actor voluntarily assumed the obligation

by contract. Id. at 56. These are the same factors identified

by the district and appellate courts below in concluding

that there is state action in this situation. See Pet.App.

10a, 32a.

Indeed, the effect of the BBA is to accentuate the

Medicare parallel to the circumstances which defined

state action in West. Under the BBA, when beneficiaries

elect to enroll in managed care organizations, they will be

“locked in” and dependent on their HMOs to make cov-

erage decisions according to federal law. S.S.A.

§ 1851(e)(2)(C), added by BBA § 4001, 111 Stat. 281 (mis-

leadingly omitted from Pet.App.; see id. at 78a). Conse-

quently, beneficiaries’ circumstances will be remarkably

similar to those of the inmates in West, who also had no

alternative to the health care available from the contract-

ing physician — a state actor.

e. The Secretary wrongly discerns significance in

her observation that the relationship between Medicare

beneficiaries and HMOs is the “product of a private

choice.” Pet.Br. 17. But it is irrelevant that an HMO’s

connection to its Medicare beneficiary members resem-

bles the HMO relationship to private health beneficiaries

on the issue of choice of plans. As this Court noted in

West, 487 U.S. at 56 n. 15, whether the role of a putative

state actor “parallels one in the private sector is not, by

itself, reason to conclude that the former is not acting

under color of state law in performing his duties.”

The relevant private decision-making at issue in this

case is not that of Medicare beneficiaries choosing the

HMO route. It is, rather, the voluntary decision of private

health plans to participate as contractors in the Medicare

program. Consequently, like intermediaries in the tradi-

tional fee-for-service Medicare market, they must adhere

to the statutory and contractual entitlements to benefits.

2. The lower courts correctly held that principles of

due process require the procedural protections ordered in

this case for Medicare HMOs. In Sullivan, this Court held

that the Due Process Clause does not apply to medical

benefits under the Pennsylvania workers’ compensation

law because there is no protected property interest in

those benefits. 119 S.Ct. at 990. Here, in direct contrast,

this Court, as well as numerous other courts, has long

recognized that due process principles apply to the Medi-

care package of health benefits. McClure, 456 U.S. at 198;

see also, e.g., Kraemer, 737 F.2d at 222; Gray Panthers, 652

F.2d at 146; Martinez, 472 F.2d at 1121; Martinez, 655

F.Supp. 95, 99.

The Secretary complains that, in its due process anal-

ysis, the court of appeals did not give substantial weight

to agency views, but she misquotes the court’s opinion.

Pet.Br. 18. Judge Wiggins rejected the Secretary’s asser-

tion that Eldridge confers “great deference” upon the Sec-

retary’s views on the appropriate level of procedural

protection, for the simple reason that the language and

standard suggested by the Secretary simply do not

appear in Eldridge. See Pet.App. 13a n.3. In fact, the

district judge did give deference to her views on this

point, as he conscientiously reviewed both the Secretary’s

existing procedures and arguments, ruling in her favor on

one of the four counts. Pet.App. 24a et seq. In formulating

relief, the district court asked the Secretary to file a

response to the proposed judgment and then ordered

beneficiaries to engage in settlement talks with the Secre-

tary on the remaining issues. District Court Minute Entry

of 2/3/97, in C.A.E.R. 199. The court of appeals reviewed

the government’s interests in a separate section of its

opinion, and, even after applying the deference due

under Eldridge, the court determined that the government

had simply failed to advance any convincing argument

that the burden on it outweighed the need for additional

due process protections.

B. The Secretary’s Limited Compliance With The

Remedial Order Does Not Moot The Case, And The

District Court Has Continuing Jurisdiction To Con-

sider Whether Its Order Should Be Modified.

1. The Secretary’s assertion that this case would

warrant plenary review absent its alleged similarity with

Sullivan is unfounded. The decisions below were not

nearly so sweeping as to have “declare{d] unconstitu-

tional the Secretary’s implementation of a major federal

program.” Pet.Br. 20. Rather, they simply held that one

circumscribed aspect of the Medicare program - appeal

rights for HMO beneficiaries - needed improvement to

meet judicially recognized standards. Nor did the deci-

sions “constitutionalize” private HMOs. Id. HMOs con-

duct their activities as before, except that a)>eal

procedures for Medicare beneficiaries, which have alw.«'s

been prescribed by the Secretary, are somewhat stricter.

2. Contrary to the Secretary’s repeated assertions,

the BBA and regulations do not substantially alter the

controversy or moot this case. First, the district court's

decision did not strike down any particular provisions of

the Medicare statute or regulations. Rather, the court

focused on the Medicare appeals process as it existed in

practice, and ordered the Secretary to improve the proc-

ess in certain specific ways. Pet.App. 24a-64a. Thus, the

BBA did not replace legislation declared invalid by the

court, and for that reason many of the decisions cited by

the Secretary are not directly applicable to this case. See,

e.g., Lewis v. Continental Bank Corp., 494 U.S. 472 (1990);

Bowen v. Kizer, 485 U.S. 386 (1988); U.S. Dep’t of Treasury v.

Galioto, 477 U.S. 556 (1986); Princeton Univ. v. Schmid, 455

U.S. 100 (1982).

Second, the BBA and the new regulations do not

satisfy the requirements of the district court’s remedial

order. The BBA renamed Medicare risk-contracting HMOs

‘ grouped them together with

some new structures for providing Medicare benefits, and

“coordinated care plans,’

shifted some of the relevant statutory provisions to a new

section of the Medicare statute. But neither the statutory

framework nor the statutory provisions addressed by the

lower courts have changed. Section 1395mm(c)(1) of title

42, which forbids the Secretary from entering into a con-

tract with an HMO unless it meets the statutory require-

ments and upon which the lower courts relied (Pet.App.

20a, 54a), has not been repealed. Section 1395mm(c)(5)(A)’s

requirement of meaningful procedures for hearing and

resolving grievances between enrollees and the HMO also

remains in the statute. See Resp.App. 7.

Although the Secretary describes in glowing detail

the salubrious contents of the BBA (Pet.Br. 20-22), she

fails to note that many of its procedural provisions deal

with matters not raised in this litigation, such as decision-

making by qualified medical personnel and the time lim-

itation for non-expedited reconsiderations. Other BBA

provisions touted in the Petition simply repeat in statu-

tory form procedural characteristics of the existing sys-

tem, such as independent review of adverse HMO

reconsiderations and subsequent levels of review by ALJs

and federal courts. Only one important element of the

district court’s remedial order is satisfied by the BBA: the

requirement that an expedited HMO reconsideration by

the HMO be provided within three days (or 72 hours in

the BBA) for urgently needed health services. S.S.A.

§ 1852(g)(3)(B)(iii), added by BBA § 4001, 111 Stat. 294.

However, the other key components of the court

order are not met in the BBA and the Secretary’s regula-

tions. For example, recognizing the frequent need for

prompt medical treatment, the district court required that

HMOs make initial determinations within five days of a

request for a health care service unless more time is

required by the HMO. Pet.App. 60a. The court also

required the continuation of on-going and urgently

needed acute care services (unless harmful to the

enrollee) pending an expedited reconsideration deter-

mination. Id. at 63a. Finding that existing “notice and

informal hearing requirements set forth by statute and

regulations are all but ignored,” id. at 51a, the court

required the Secretary to enforce Congress’ statutory pro-

hibition against renewing contracts with HMOs that do

not comply with federal standards. Id. at 54a-55a, 61a,

63a. The BBA does not satisfy these obligations, and the

Secretary continues to ignore the bulk of the remedial

order.

The Petition asserts that the prohibition against con-

tracting with non-compliant HMOs was mooted by the

BBA in its enactment of S.S.A. § 1857, BBA § 4001, 111

Stat. 319. Pet.Br. 24 n.13. While it is true that the new

S.S.A. § 1857 uses permissive language in authorizing the

Secretary to terminate non-compliant Medicare+Choice

organizations generally, the Petition fails to disclose the

fact that the BBA did not repeal 42 U.S.C. § 1395mm(c)(1),

which mandates non-renewal of Medicare contracts with

deficient HMOs. Resp.App. 7. Under the rules of statu-

tory construction, the more specific provision of section

1395mm(c)(1) continues to be controlling in Medicare

contracts with HMOs under Medicare+Choice. And

where, as here, the intervening legislation and regula-

tions do not resolve many of the underlying controversies

or issues, the case is not moot. Northeastern Fla. Chapter of

the Associated Gen. Contractors v. City of Jacksonville, 508

U.S. 656, 662 (1993) (municipal ordinance conferring

minority business preferences voluntarily replaced dur-

ing appeal did not moot case when replaced by similar

statute); City of Mesquite v. Aladdin's Castle, Inc., 455 U.S.

283, 289 (1992) (voluntary compliance did not moot judg-

ment). See also, e.g., National Independent Coal Operators’

Assn. v. Kleppe, 423 U.S. 388, 393 n.4 (1976) (challenge to

validity of regulations regarding administrative hearings

not moot where regulation reissued after filing of suit

required a hearing if requested); FEA v. Algonquin SNG,

Inc., 426 U.S. 548, 558 n.8 (1976) (challenge to administra-

tive imposition of fees on oil imports not mooted by new

federal statute because it did not eliminate one type of fee

which respondents sought to enjoin).

3. The Secretary asks the Court to vacate the court

of appeals’ decision and remand this case to the district

court with instructions to vacate its judgment as well and

conduct such further proceedings as may be appropriate

in light of the BBA and new regulations. Pet.Br. 26. This

action is neither necessary nor appropriate for several

reasons.

First, it is apparent that the Secretary’s regulatory

and legislative initiatives were in reaction to the injunc-

tion in this case. Even the Secretary should not be

allowed to manipulate the judicial process by offering

half a loaf after her efforts to evade compliance have

failed.

As discussed above, the Secretary advised the court

of appeals that it need not consider the effect of the BBA

in deciding the appeal. Although that legislation became

law in August 1997, before the appeal was fully briefed

and argued, the Secretary informed the court that it

should not consider its provisions: “[T]hese changes have

no effect on the arguments presented in this appeal.”

Gov’t Reply Brief at 10 n.9 (emphasis added). Further-

more, although oral argument took place after the Janu-

ary 1, 1998 effective date of the BBA, the Secretary still

did not ask the court to consider its effect. Having

expressly waived her opportunity to raise this legislation

below, the Secretary should not be allowed to use it now

to further delay or deny relief to tens of thousands of

Medicare beneficiaries.

Second, the relief requested by the Secretary, recon-

sideration by the district court, may be obtained without

the issuance of a writ of certiorari vacating the court of

appeals’ decision. The district court retained jurisdiction

to consider the effects of the procedural changes ordered,

Pet.App. 58a, 64a, and, in any event, the Secretary may

seek modification in light of the BBA changes on remand

to the district court pursuant to Rule 60(b), F.R.Civ.P. At

the conclusion of his opinion for the unanimous panel

below, Judge Wiggins noted precisely this point:

The district court has continuing jurisdiction

over the modification of the injunction. See

Transgo, Inc. v. Ajac Transmission Parts Corp., 768

F.2d 1001, 1030 (9th Cir. 1985) (declining to

remand to district court with directions to mod-

ify injunction, noting that the party “may apply

directly” to the district court for modification in

light of post-trial events). The Secretary may

move in the district court for a modification of

its injunction.

Pet.App. 21a. See also, e.g., Agostini v. Felton, 521 U.S. 203

(1997) (discussing standards for a Rule 60(b) motion);

Standard Oil v. U.S., 429 U.S. 17 (1976) (unsuccessful

appellant may make a Rule 60(b) motion on remand).

Because the intervening legislation and regulations

complied only in small part with the lower court’s order,

this case is far from moot. The court of appeals’ opinion

directing the Secretary to seek consideration of these

subsequent events in the district court was correct. It is

not necessary, and certainly not equitable, for this Court

to vacate the decisions below merely to allow the Secre-

tary to belatedly raise additional issues. The Secretary,

like all other litigants, should apply to the district court

for that relief, rather than ask for this Court’s interven-

tion merely because of the fortuitous timing of the peti-

tion for a writ of certiorari.

CONCLUSION

For the reasons stated, the Court should deny the

petition for a writ of certiorari.

Lenore E. GERARD

Legal Assistance

to the Elderly

1453 Mission, Ste. 500

San Francisco, CA 94103

(415) 861-4444

Carot S. JIMENEZ

5182 Katella Ave., Ste. 106

Los Alamitos, CA 90720

(562) 430-0239

AuprREY Kraus

Center for Health

Care Rights

520 S. Lafayette Park PI.,

Ste. 214

Los Angeles, CA 90057

(213) 383-4519

March 29, 1999

Respectfully submitted,

SaLty Hart

(Counsel of Record)

Center for Medicare

Advocacy, Inc.

1730 E. River Rd., Ste. 107

Tucson, AZ 85718

(520) 577-1611

Gitt DeFrorp

Center for Medicare

Advocacy, Inc.

P.O. Box 350

Willimantic, CT 06226

(860) 456-7790

Counsel for Respondents

App. 1

Soc. Sec. Act § 1876 [codified 42 U.S.C. § 1395mm]

PAYMENTS TO HEALTH MAINTENANCE ORGANI-

ZATIONS AND COMPETITIVE MEDICAL PLANS

Sec. 1876. (a)(1)(A) The Secretary shall annually

determine, and shall announce (in a manner intended to

provide notice to interested parties) not later than Sep-

tember 7 before the calendar year concerned -

(i) a per capita rate of payment for each class of

individuals who are enrolled under this section with

an eligible organization which has entered into a

risk-sharing contract and who are entitled to benefits

under part A and enrolled under part B, and

(ii) a per capita rate of payment for each class

of individuals who are so enrolled with such an

organization and who are enrolled under part B only.

For purposes of this section, the term “risk-sharing con-

tract” means a contract entered into under subsection (g)

and the term “reasonable cost reimbursement contract”

means a contract entered into under subsection (h).

(B) The Secretary shall define appropriate

classes of members, based on age, disability status,

and such other factors as the Secretary determines to

be appropriate, so as to ensure actuarial equivalence.

The Secretary may add to, modify, or substitute for

such classes, if such changes will improve the deter-

mination of actuarial equivalence.

each such class shall be equal to 95 percent of the

adjusted average per capita cost (as defined in para-

graph (4)) for that class.

(D) In the case of an eligible organization with

a risk-sharing contract, the Secretary shall make

monthly payments in advance and in accordance

App. 2

with the rate determined under subparagraph (C)

and except as provided in subsection (g)(2), to the

organization for each individual enrolled with the

organization under this section.

(E)(i) The amount of payment under this para-

graph may be retroactively adjusted to take into

account any difference between the actual number of

individuals enrolled in the plan under this section

and the number of such individuals estimated to be

so enrolled in determining the amount of the advance

payment.

(ii)(1) Subject to subclause (Il), the Secretary may

make retroactive adjustments under clause (i) to take into

account individuals enrolled during the period beginning

on the date on which the individual enrolls with an

eligible organization (which has a risk-sharing contract

under this section) under a health benefit plan operated,

sponsored, or contributed to by the individual’s em-

ployer or former employer (or the employer or former

employer of the individual’s spouse) and ending on the

date on which the individual is enrolled in the plan under

this section, except that for purposes of making such

retroactive adjustments under this clause, such period

may not exceed 90 days.

(II) No adjustment may be made under subclause

(I) with respect to any individual who does not certify

that the organization provided the individual with the

explanation described in subsection (c)(3)(E) at the time

the individual enrolled with the organization.

(F)(i) At least 45 days before making the

announcement under subparagraph (A) for a year

App. 3

(beginning with the announcement for 1991), the Sec-

retary shall provide for notice to eligible organiza-

tions of proposed changes to be made in the

methodology or benefit coverage assumptions from

the methodology and assumptions used in the pre-

vious announcement and shall provide such organi-

zations an opportunity to comment on such proposed

changes.

(ii) In each announcement made under subpara-

graph (A) for a year (beginning with the announcement

for 1991), the Secretary shall include an explanation of the

assumptions (including any benefit coverage assump-

tions) and changes in methodology used in the announce-

ment in sufficient detail so that eligible organizations can

compute per capita rates of payment for classes of indi-

viduals located in each county (or equivalent area) which

is in whole or in part within the service area of such an

organization.

(2) With respect to any eligible organization which

has entered into a reasonable cost reimbursement con-

tract, payments shall be made to such plan in accordance

with subsection (h)(2) rather than paragraph (1).

(3) Subject to subsections (c)(2)(B)({ii) and (c)(7),

payments under a contract to an eligible organization

under paragraph (1) or (2) shall be instead of the amounts

which (in the absence of the contract) would be otherwise

payable, pursuant to sections 1814(b) and 1833(a), for

services furnished by or through the organization to indi-

viduals enrolled with the organization under this section.

(4) For purposes of this section, the term “adjusted

average per capita cost” means the average per capita

amount that the Secretary estimates in advance (on the

App. 4

basis of actual experience, or retrospective actuarial

equivalent based upon an adequate sample and other

information and data, in a geographic area served by an

eligible organization or in a similar area, with appropri-

ate adjustments to assure actuarial equivalence) would be

payable in any contract year for services covered under

parts A and B, or part B only, and types of expenses

otherwise reimbursable under parts A and B, or part B

only (including administrative costs incurred by organi-

zations described in sections 1816 and 1842), if the ser-

vices were to be furnished by other than an eligible

organization or, in the case of services covered only

under section 1861(s)(2)(H), if the services were to be

furnished by a physician or as an incident to a physi-

cian’s service.

(5) The payment to an eligible organization under

this section for individuals enrolled under this section

with the organization and entitled to benefits under part

A and enrolled under part B of this subchapter shall be

made from the Federal Hospital Insurance Trust Fund

and the Federal Supplementary Medical Insurance Trust

Fund. The portion of that payment to the organization for

a month to be paid by each trust fund shall be deter-

mined as follows:

(A) In regard to expenditures by eligible orga-

nizations having risk-sharing contracts, the allocation

shall be determined each year by the Secretary based

on the relative weight that benefits from each fund

contribute to the adjusted average per capita cost.

(B) In regard to expenditures by eligible organi-

zations operating under a reasonable cost reimburse-

ment contract, the initial allocation shall be based on

vise

App. 5

the plan’s most recent budget, such allocation to be

adjusted, as needed, after cost settlement to reflect

the distribution of actual expenditures.

The remainder of that payment shall be paid by the

former trust fund.

(6) Subject to subsections (c)(2)(B)(ii) and (c)(7), if

an individual is enrolled under this section with an eligi-

ble organization having a risk-sharing contract, only the

eligible organization shall be entitled to receive payments

from the Secretary under this title for services furnished

to the individual.

(b) For purposes of this section, the term “eligible

organization” means a public or private entity (which

may be a health maintenance organization or a competi-

tive medical plan), organized under the laws of any State,

which -

(1) is a qualified health maintenance organiza-

tion (as defined in section 1310(d) of the Public

Health Service Act), or

(2) meets the following requirements:

(A) The entity provides to enrolled mem-

bers at least the following heaith care ser-

vices:

(i) Physicians’ services performed

by physicians (as defined in section

1861(r)(1)).

(ii) Inpatient hospital services.

App. 6

(iii) Laboratory, X-ray, emergency,

and preventive services.

(iv) Out-of-area coverage.

(B) The entity is compensated (except for

deductibles, coinsurance, and copayments)

for the provision of health care services to

enrolled members by a payment which is

paid on a periodic basis without regard to

the date the health care services are pro-

vided and which is fixed without regard to

the frequency, extent, or kind of health care

service actually provided to a member.

primarily (i) directly through physicians

who are either employees or partners of such

organization, or (ii) through contracts with

individual physicians or one or more groups

of physicians (organized on a group practice

or individual practice basis).

(D) The entity assumes full financial risk

on a prospective basis for the provision of

the health care services listed in subpara-

graph (A), except that such entity may -

(i) obtain insurance or make other

- arrangements for the cost of providing

to any enrolled member health care ser-

vices listed in subparagraph (A) the

aggregate value of which exceeds $5,000

in any year,

(ii) obtain insurance or make other

arrangements for the cost of health care

service listed in subparagraph (A) pro-

vided to its enrolled members other than

through the entity because medical

necessity required their provision before

they could be secured through the entity,

ET re i

App. 7

(iii) obtain insurance or make

other arrangements for not more than 90

percent of the amount by which its costs

for any of its fiscal years exceed 115

percent of its income for such fiscal year,

and

(iv) make arrangements with phy-

sicians or other health professionals,

health care institutions, or any combina-

tion of such individuals or institutions to

assume all or part of the financial risk on

a prospective basis for the provision of

basic health services by the physicians

or other health professionals or through

the institutions.

(E) The entity has made adequate provision

against the risk of insolvency, which provi-

sion is satisfactory to the Secretary.

Paragraph (2)(A)(ii) shall not apply to an entity which

had contracted with a single State agency administering a

State plan approved under title XIX of this chapter for the

provision of services (other than inpatient hospital ser-

vices) to individuals eligible for such services under such

State plan on a prepaid risk basis prior to 1970.

(c)(1) The Secretary may not enter into a contract

under this section with an eligible organization unless it

meets the requirements of this subsection and subsection

(e) with respect to members enrolled under this section.

(2)(A) The organization must provide to members

enrolled under this section, through providers and other

persons that meet the applicable requirements of this title

and part A of title XI -

(i) only those services covered under parts A and

B of this title, for those members entitled to

App. 8

benefits under part A and enrolled under part B,

(ii) only those services covered under part B, for

those members enrolled only under such part,

which are available to individuals residing in the geo-

graphic area served by the organization, except that (I)

the organization may provide such members with such

additional health care services as the members may elect,

at their option, to have covered, and (II) in the case of an

organization with a risk-sharing contract, the organiza-

tion may provide such members with such additional

health care services as the Secretary may approve. The

Secretary shall approve any such additional health care

services which the organization proposes to offer to such

members, unless the Secretary determines that including

such additional services will substantially discourage

enrollment by covered individuals with the organization.

(B) If there is a national coverage determination

made in the period beginning on the date of an

announcement under subsection (a)(1)(A) and ending on

the date of the next announcement under such subsection

that the Secretary projects will result in a significant

change in the costs to the organization of providing the

benefits that are the subject of such national coverage

determination and that was not incorporated in the deter-

mination of the per capita rate of payment included in the

announcement made at the beginning of such period -

(i) such determination shall not apply to risk-

sharing contracts under this section until the first

contract year that begins after the end of such period;

and

ad taal

App. 9

(ii) if such coverage determination provides for

coverage of additional benefits or under additional

circumstances, subsection (a)(3) shall not apply to

payment for such additional benefits or benefits pro-

vided under such additional circumstances until the

first contract year that begins after the end of such

period,

unless otherwise required by law.

(3)(A)(i) Each eligible organization must have an

open enrollment period, for the enrollment of individuals

under this section, of at least 30 days duration every year

and including the period or periods specified under

clause (ii), and must provide that at any time during

which enrollments are accepted, the organization will

accept up to the limits of its capacity (as determined by

the Secretary) and without restrictions, except as may be

authorized in regulations, individuals who are eligible to

enroll under subsection (d) in the order in which they

apply for enrollment, unless to do so would result in

failure to meet the requirements of subsection (f) or

would result in the enrollment of enrollees substantially

nonrepresentative, as determined in accordance with reg-

ulations of the Secretary, of the population in the geo-

graphic area served by the organization.

(ii)(1) If a risk-sharing contract under this section is

not renewed or is otherwise terminated, eligible organi-

zations with risk-sharing contracts under this section and

serving a part of the same service area as under the

terminated contract are required to have an open enroll-

ment period for individuals who were enrolled under the

terminated contract as of the date of notice of such termi-

nation. If a risk-sharing contract under this section is

App. 10

renewed in a manner that discontinues coverage for indi-

viduals residing in part of the service area, eligible orga-

nizations with risk-sharing contracts under this section

and enrolling individuals residing in that part of the

service area are required to have an open enrollment

period for individuals residing in the part of the service

area who were enrolled under the contract as of the date

of notice of such discontinued coverage.

(II) The open enrollment periods required under

subclause (I) shall be for 30 days and shall begin 30 days

after the date that the Secretary provides notice of such

requirement.

(III) Enrollment under this clause shall be effective

30 days after the end of the open enrollment period, or, if

the Secretary determines that such date is not feasible,

such other date as the Secretary specifies.

(B) An individual may enroll under this section

with an eligible organization in such manner as may be

prescribed in regulations and may terminate his enroll-

ment with the eligible organization as of the beginning of

the first calendar month following the date on which the

request is made for such termination (or, in the case of

financial insolvency of the organization, as may be pre-

scribed by regulations) or, in the case of such an organi-

zation with a reasonable cost reimbursement contract, as

may be prescribed by regulations.

conditions under which an eligible organization that has

entered into a contract with the Secretary under this

subsection may inform individuals eligible to enroll

Pe CLE eT EEL ee eR Ee ee

App. 11

under this section with the organization about the organi-

zation, or may enroll such individuals with the organiza-

tion. No brochures, app'tication forms, or other

promotional or informational! material may be distributed

by an organization to (or for the use of) individuals

eligible to enroll with the organization under this section

unless (i) at least 45 days before its distribution, the

organization has submitted the material to the Secretary

for review and (ii) the Secretary has not disapproved the

distribution of the material. The Secretary shall review all

such material submitted and shall disapprove such mate-

rial if the Secretary determines, in the Secretary’s discre-

tion, that the material is materially inaccurate or

misleading or otherwise makes a material misrepresenta-

tion.

(D) The organization must provide assurances to

the Secretary that it will not expel or refuse to re-enroll

any such individual because of the individual’s health

status or requirements for health care services, and that it

will notify each such individual of such fact at the time of

the individual’s enrollment.

(E) Each eligible organization shall provide each

enrollee, at the time of enrollment and not less frequently

than annually thereafter, an explanation of the enrollee’s

rights under this section, including an explanation of -

(i) the enrollee’s rights to benefits from the

organization,

(ii) the restrictions on payments under this title

for services furnished other than by or through the

organization,

App. 12

(iii) out-of-area coverage provided by the orga-

nization,

(iv) the organization’s coverage of emergency

services and urgently needed care, and

(v) appeal rights of enrollees.

(F) Each eligible organization that provides items

and services pursuant to a contract under this section

shall provide assurances to the Secretary that in the event

the organization ceases to provide such items and ser-

vices, the organization shall provide or arrange for sup-

plemental coverage of benefits under this title related to a

pre-existing condition with respect to any exclusion

period, to all individuals enrolled with the entity who

receive benefits under this title, for the lesser of six

months or the duration of such period.

(G)(i) Each eligible organization having a risk-shar-

ing contract under this section shall notify individuals

eligible to enroll with the organization under this section

and individuals enrolled with the organization under this

section that —

(I) the organization is authorized by law to ter-

minate or refuse to renew the contract, and

(II) termination or nonrenewal of the contract

may result in termination of the enrollments of indi-

viduals enrolled with the organization under this

section.

(ii) The notice required by clause (i) shall be

included in -

(I) any marketing materials described in sub-

paragraph (C) that are distributed by an eligible

EE RR eee ree

App. 13

organization to individuals eligible to enroll under

this section with the organization, and

(II) any explanation provided to enrollees by

the organization pursuant to subparagraph (E).

(4) The organization must -

(A) make the services described in paragraph

(2) (and such other health care services as such indi-

viduals have contracted for) (i) available and access-

ible to each such individual, within the area served

by the organization, with reasonable promptness and

in a manner which assures continuity, and (ii) when

medically necessary, available and accessible twenty-

four hours a day and seven days a week, and

(B) provide for reimbursement with respect to

services which are described in subparagraph (A)

and which are provided to such an individual other

than through the organization, if (i) the services were

medically necessary and immediately required

because of an unforeseen illness, injury, or condition

and (ii) it was not reasonable given the circumstances

to obtain the services through the organization.

(5)(A) The organization must provide meaningful

procedures for hearing and resolving grievances between

the organization (including any entity or individual

through which the organization provides health care ser-

vices) and members enrolled with the organization under

this section.

(B) A member enrolled with an eligible organiza-

tion under this section who is dissatisfied by reason of his

failure to receive any health service to which he believes

he is entitled and at no greater charge than he believes he

is required to pay is entitled, if the amount in controversy

is $100 or more, to a hearing before the Secretary to the

App. 14

same extent as is provided in section 205(b), and in any

such hearing the Secretary shall make the eligible organi-

zation a party. If the amount in controversy is $1,000 or

more, the individual or eligible organization shall, upon

notifying the other party, be entitled to judicial review of

the Secretary’s final decision as provided in section

205(g), and both the individual and the eligible organiza-

tion shall be entitled to be parties to that judicial review.

In applying sections 205(b) and 205(g) as provided in this

subparagraph, and in applying section 205(1) thereto, any

reference therein to the Commissioner of Social Security

or the Social Security Administration shall be considered

a reference to the Secretary or the Department of Health

and Human Services, respectively.

(6) The organization must have arrangements,

established in accordance with regulations of the Secre-

tary, for an ongoing quality assurance program for health

care services it provides to such individuals, which pro-

gram (A) stresses health outcomes and (B) provides

review by physicians and other health care professionals

of the process followed in the provision of such health

care services.

(7) A risk-sharing contract under this section shall

provide that in the case of an individual who is receiving

inpatient hospital services from a subsection (d) hospital

(as defined in section 1886(d)(1)(B)) as of the effective

date of the individual’s -

(A) enrollment with an eligible organization

under this section —

(i) payment for such services until the date

of the individual’s discharge shall be made

App. 15

under this title as if the individual were not

enrolled with the organization,

(ii) the organization shall not be financially

responsible for payment for such services until

the date after the date of the individual’s dis-

charge, and

(iii) the organization shall nonetheless be

paid the full amount otherwise payable to the

organization under this section; or

(B) termination of enrollment with an eligible

organization under this section —

(i) the organization shall be financially

responsible for payment for such services after

such date and until the date of the individual’s

: discharge,

(ii) payment for such services during the

stay shall not be made under section 1886(d), and

(iii) the organization shall not receive any

payment with respect to the individual under

this section during the period the individual is

not enrolled.

ig Fat Se Sole ale

In the case of an individual’s termination of enrollment,

the organization shall provide the individual with a copy

of the written request for termination of enrollment and a

written explanation of the period (ending on the effective

date of the termination) during which the individual

continues to be enrolled with the organization and may

not receive benefits under this title other than through

the organization.

ANS <b

(8) A contract under this section shall provide that

the eligible organization shall meet the requirement of

ae Eee i RACERS

atts

;

App. 16

section 1866(f) (relating to maintaining written policies

and procedures respecting advance directives).

(d) Subject to the provisions of subsection (c)(3),

every individual entitled to benefits under part A and

enrolled under part B or enrolled under part B only

(other than an individual medically determined to have

end-stage renal disease) shall be eligible to enroll under

this section with any eligible organization with which the

Secretary has entered into a contract under this section

and which serves the geographic area in which the indi-

vidual resides.

(e)(1) In no case may -

(A) the portion of an eligible organization’s

premium rate and the actuarial value of its deduct-

ibles, coinsurance, and copayments charged (with

respect to services covered under parts A and B) to

individuals who are enrolled under this section with

- the organization and who are entitled to benefits

under part A and enrolled under part B, or

(B) the portion of its premium rate and the

actuarial value of its deductibles, coinsurance, and

copayments charged (with respect to services cov-

ered under part B) to individuals who are enrolled

under this section with the organization and enrolled

under part B only

exceed the actuarial value of the coinsurance and deduct-

ibles that would be applicable on the average to individ-

uals enrolled under this section with the organization (or,

if the Secretary finds that adequate data are not available

to determine that actuarial value, the actuarial value of

the coinsurance and deductibles applicable on the aver-

age to individuals in the area, in the State, or in the

App. 17

United States, eligible to enroll under this section with

the organization, or other appropriate data) and entitled

to benefits under part A and enrolled under part B, or

enrolled under part B only, respectively, if they were not

members of an eligible organization.

(2) If the eligible organization provides to its mem-

bers enrolled under this section services in addition to

services covered under parts A and B of this title, election

of coverage for such additional services (unless such

services have been approved by the Secretary under sub-

section (c)(2)) shall be optional for such members and

such organization shall furnish such members with infor-

mation on the portion of its premium rate or other

charges applicable to such additional services. In no case

may the sum of -

(A) the portion of such organization’s premium

rate charged, with respect to such additional services,

to members enrolled under this section, and

(B) the actuarial value of its deductibles, coin-

surance, and copayments charged, with respect to

such services to such members

exceed the adjusted community rate for such services.

(3) For purposes of this section, the term “adjusted

community rate” for a service or services means, at the

election of an eligible organization, either —

(A) the rate of payment for that service or ser-

vices which the Secretary annually determines would

apply to a member enrolled under this section with

an eligible organization if the rate of payment were

determined under a “community rating system” (as

defined in section 1302(8) of the Public Health Ser-

vice Act, other than subparagraph (C)), or

App. 18

(B) such portion of the weighted aggregate pre-

mium, which the Secretary annually estimates would

apply to a member enrolled under this section with

the eligible organization, as the Secretary annually

estimates is attributable to that service or services,

but adjusted for differences between the utilization char-

acteristics of the members enrolled with the eligible orga-

nization under this section and the utilization

characteristics of the other members of the organization

(or, if the Secretary finds that adequate data are not

available to adjust for those differences, the differences

between the utilization characteristics of members in

other eligible organizations, or individuals in the area, in

the State, or in the United States, eligible to enroll under

this section with an eligible organization and the utiliza-

tion characteristics of the rest of the population in the

area, in the State, or in the United States, respéctively).

(4) Notwithstanding any other provision of law, the

eligible organization may (in the case of the provision of

services to a member enrolled under this section for an

illness or injury for which the member is entitled to

benefits under a workmen’s compensation law or plan of

the United States or a State, under an automobile or

liability insurance policy or plan, including a self-insured

pian, or under no fault insurance) charge or authorize the

provider of such services to charge, in accordance with

the charges allowed under such law or policy -

(A) the insurance carrier, employer, or other

entity which under such law, plan, or policy is to pay

for the provision of such services, or

App. 19

(B) such member to the extent that the member

has been paid under such law, plan, or policy for

such services.

(f)(1) For contract periods beginning before January

1, 1999, each eligible organization with which the Secre-

tary enters into a contract under this section shall have,

for the duration of such contract, an enrolled membership

at least one-half of which consists of individuals who are

not entitled to benefits under this title.

(2) Subject to paragraph (4), The Secretary may

modify or waive the requirement imposed by paragraph

(1) -

(A) to the extent that more than 50 percent of

the population of the area served by the organization

consists of individuals who are entitled to benefits

under this title or under a State plan approved under

title XIX, or

(B) in the case of an eligible organization that is

owned and operated by a governmental entity, only

with respect to a period of three years beginning on

the date the organization first enters into a contract

under this section, and only if the organization has

taken and is making reasonable efforts to enroll indi-

viduals who are not entitled to benefits under this

title or under a State plan approved under title XIX.

(3) If the Secretary determines that an eligible orga-

nization has failed to comply with the requirements of

this subsection, the Secretary may provide for the suspen-

sion of enrollment of individuals under this section or of

payment to the organization under this section for indi-

viduals newly enrolled with the organization, after the

App. 20

date the Secretary notifies the organization of such non-

compliance.

(4) Effective for contract periods beginning after

December 31, 1996, the Secretary may waive or modify

the requirement imposed by paragraph (1) to the extent

the Secretary finds that it is in the public interest.

(g)(1) The Secretary may enter a risk-sharing con-

tract with any eligible organization, as defined in subsec-

tion (b), which has at least 5,000 members, except that the

Secretary may enter into such a contract with an eligible

organization that has fewer members if the organization

primarily serves members residing outside of urbanized

areas.

(2) Each risk-sharing contract shall provide that -

(A) if the adjusted community rate, as defined

in subsection (e)(3), for services under parts A and B

(as reduced for the actuarial value of the coinsurance

and deductibles under those parts) for members

enrolled under this section with the organization and

entitled to benefits under part A and enrolled in part

B, or

(B) if the adjusted community rate for services

under part B (as reduced for the actuarial value of the

coinsurance and deductibles under that part) for

members enrolled under this section with the organi-

zation and entitled to benefits under part B only is

less than the average of the per capita rates to bene-

fits under part B only

is less than the average of the per capita rates of payment

to be made under subsection (a)(1) at the beginning of an

annual contract period for members enrolled under this

section with the organization and entitled to benefits

App. 21

under part A and enrolled in part B, or enrolled in part B

only, respectively, the eligible organization shall provide

to members enrolled under a risk-sharing contract under

this section with the organization and entitled to benefits

under part A and enrolled in part B, or enrolled in part B

only, respectively, the additional benefits described in

paragraph (3) which are selected by the eligible organiza-

tion and which the Secretary finds are at least equal in

value to the difference between that average per capita

~payment and the adjusted community rate (as so

reduced); except that this paragraph shall not apply with

respect to any organization which elects to receive a

lesser payment to the extent that there is no longer a

difference between the average pe: capita payment and

adjusted community rate (as so reduced) and except that

an organization (with the approval of the Secretary) may

provide that a part of the value of such additional bene-

fits be withheld and reserved by the Secretary as pro-

vided in paragraph (5). If the Secretary finds that there is

insufficient enrollment experience to determine an aver-

age of the per capita rates of payment to be made under

subsection (a)(1) at the beginning of a contract period, the

Secretary may determine such an average based on the

enrollment experience of other contracts entered into

under this section.

(3) The additional benefits referred to in paragraph

(2) are -

(A) the reduction of the premium rate or other

charges made with respect to services furnished by

the organization to members enrolled under this sec-

tion, or

(B) the provision of additional health benefits,

App. 22

or both.

(4) [Repealed.]

(5) An organization having a risk-sharing contract

under this section may (with the approval of the Secre-

tary) provide that a part of the value of additional bene-

fits otherwise required to be provided by reason of

paragraph (2) be withheld and reserved in the Federal

Hospital Insurance Trust Fund and in the Federal Supple-

mentary Medical Insurance Trust Fund (in such propor-

tions as the Secretary determines to be appropriate) by

the Secretary for subsequent annual contract periods, to

the extent required to stabilize and prevent undue fluctu-

ations in the additional benefits offered in those subse-

quent periods by the organization in accordance with

paragraph (3). Any of such value of additional benefits

which is not provided to members of the organization in

accordance with paragraph (3) prior to the end of such

period, shall revert for the use of such trust funds.

(6)(A) A risk-sharing contract under this section

shall require the eligible organization to provide prompt

payment (consistent with the provisions of sections

1816(c)(2) and 1842(c)(2)) of claims submitted for services

and supplies furnished to individuals pursuant to such

contract, if the services or supplies are not furnished

under a contract between the organization and the pro-

vider or supplier.

App. 23

(B) In the case of an eligible organization which the

Secretary determines, after notice and opportunity for a

hearing, has failed to make payments of amounts in

compliance with subparagraph (A), the Secretary may

provide for direct payment of the amounts owed to pro-

viders and suppliers for such covered services furnished

to individuals enrolled under this section under the con-

tract. If the Secretary provides for such direct payments,

the Secretary shall provide for an appropriate reduction

in the amount of payments otherwise made to the organi-

zation under this section to reflect the amount of the

Secretary’s payments (and costs incurred by the Secretary

in making such payments).

(h)(1) If -

(A) the Secretary is not satisfied that an eligible

organization has the capacity to bear the risk of

potential losses under a risk-sharing contract under

this section, or

(B) the eligible organization so elects or has an

insufficient number of members to be eligible to

enter into a risk-sharing contract under subsection

(g)(1),

the Secretary may, if he is otherwise satisfied that the

eligible organization is able to perform its contractual

obligations effectively and efficiently, enter into a con-

tract with such organization pursuant to which such

organization is reimbursed on the basis of its reasonable

cost (as defined in section 1861(v)) in the manner pre-

scribed in paragraph (3).

App. 24

(2) A reasonable cost reimbursement contract under

this subsection may, at the option of such organization,

provide that the Secretary -

(A) will reimburse hospitals and skilled nurs-

ing facilities either for the reasonable cost (as deter-

mined under section 1861(v)) or for payment

amounts determined in accordance with section 1886,

as applicable, of services furnished to individuals

enrolled with such organization pursuant to subsec-

tion (d), and

(B) will deduct the amount of such reimburse-

ment from payment which would otherwise be made

to such organization.

If such an eligible organization pays a hospital or skilled

nursing facility directly, the amount paid shall not exceed

the reasonable cost of the services (as determined under

section 1861(v)) or the amount determined under section

1886, as applicable, unless such organization demon-

strates to the satisfaction of the Secretary that such excess

payments are justified on the basis of advantages gained

by the organization.

(3) Payments made to an organization with a rea-

sonable cost reimbursement contract shall be subject to

appropriate retroactive corrective adjustment at the end

of each contract year so as to assure that such organiza-

tion is paid for the reasonable cost actually incurred

(excluding any part of incurred cost found to be unneces-

sary in the efficient delivery of health services) or the

amounts otherwise determined under section 1886 for the

types of expenses otherwise reimbursable under this title

for providing services covered under this title to individ-

uals described in subsection (a)(1).

App. 25

(4) Any reasonable cost reimbursement contract

with an eligible organization under this subsection shall

provide that the Secretary shall require, at such time

following the expiration of each accounting period of the

eligible organization (and in such form and in such

detail) as he may prescribe -

independently certified financial statement its per

capita incurred cost based on the types of compo-

nents of expenses otherwise reimbursable under this

title for providing services described in subsection

(a)(1), including therein, in accordance with account-

ing procedures prescribed by the Secretary, its

methods of allocating costs between individuals

enrolled under this section and other individuals

enrolled with such organization;

(B) that failure to report such information as

may be required may be deemed to constitute evi-

dence of likely overpayment on the basis of which

appropriate collection action may be taken;

zation is related to another organization by common

ownership or control, a consolidated financial state-

ment she \, be filed and that the allowable costs for

such organization may not include costs for the types

of expense otherwise reimbursable under this title, in

excess of those which would be determined to be

reasonable in accordance with regulations (providing

for limiting reimbursement to costs rather than

charges to the eligible organization by related organi-

zations and owners) issued by the Secretary; and

(D) that in any case in which compensation is

paid by an eligible organization substantially in

excess of what is normally paid for similar services

by similar practitioners (regardless of method of

App. 26

compensation), such compensation may as appropri-

ate be considered to constitute a distribution of

profits.

(5)(A) After the date of the enactment of this paragraph,

the Secretary may not enter into a reasonable cost reim-

bursement contract under this subsection (if the contract

is not in effect as of such date), except for a contract with

an eligible organization which, immediately previous to

entering into such contract, had an agreement in effect

under section 1833(a)(1)(A).

(B) The Secretary may not extend or renew a

reasonable cost reimbursement contract under this

subsection for any period beyond December 31, 2002.

(i)(1) Each contract under this section shall be for a

term of at least one year, as determined by the Secretary,

and may be made automatically renewable from term to

term in the absence of notice by either party of intention

to terminate at the end of the current term; except that in

accordance with procedures established under paragraph

(9), the Secretary may at any time terminate any such

contract or may impose the intermediate sanctions

described in paragraph (6)(B) or (6)(C) (whichever is

applicable) on the eligible organization if the Secretary

determines that the organization -

(A) has failed substantially to carry out the con-

tract;

(B) is carrying out the contract in a manner

substantially inconsistent with the efficient and effec-

tive administration of this section; or

conditions of subsections (b), (c), (e), and (f).

App. 27

(2) The effective date of any contract executed pur-

suant to this section shall be specified in the contract.

(3) Each contract under this section -

(A) shall provide that the Secretary, or any per-

son or organization designated by him -

(i) shall have the right to inspect or other-

wise evaluate (I) the quality, appropriateness,

and timeliness of services performed under the

contract and (II) the facilities of the organization

when there is reasonable evidence of some need

for such inspection, and

(ii) shall have the right to audit and inspect

any books and records of the eligible organiza-

tion that pertain (I) to the ability of the organiza-

tion to bear the risk of potential financial losses,

or (II) to services performed or determinations of

amounts payable under the contract;

(B) shall require the organization with a risk-

sharing contract to provide (and pay for) written

notice in advance of the contract’s termination, as

well as a description of alternatives for obtaining

benefits under this title, to each individual enrolled

under this section with the organization; and

(C)(i) shall require the organization to comply

with subsections (a) and (c) of section 1318 of the

Public Health Service Act (relating to disclosure of

certain financial information) and with the require-

ment of section 1301(c)(8) of such Act (relating to

liability arrangements to protect members);

(ii) shall require the organization to pro-

vide and supply information (described in sec-

tion 1866(b)(2)(C)(ii))) in the manner such

information is required to be provided or sup-

plied under that section;

App. 28

(iii) shall require the organization to notify

the Secretary of loans a id other special financial

arrangements which are made between the orga-

nization and subcontractors, affiliates, and

related parties; and

(D) shall contain such other terms and condi-

tions not inconsistent with this section (including

requiring the organization to provide the Secretary

with such information) as the Secretary may find

necessary and appropriate.

(4) The Secretary may not enter into a risk-sharing

contract with an eligible organization if a previous risk-

sharing contract with that organization under this section

was terminated at the request of the organization within

the preceding five-year period, except in circumstances

which warrant special consideration, as determined by

the Secretary.

(5) The authority vested in the Secretary by this

section may be performed without regard to such provi-

sions of law or regulations relating to the making, perfor-

mance, amendment, or modification of contracts of the

United States as the Secretary may determine to be incon-

sistent with the furtherance of the purpose of this title.

(6)(A) If the Secretary determines that an eligible

organization with a contract under this section —

(i) fails substantially to provide medically

necessary items and services that are required

(under law or under the contract) to be provided

to an individual covered under the contract, if

the failure has adversely affected (or has sub-

stantial likelihood of adversely affecting) the

individual;

App. 29

(ii) imposes premiums. on individuals

enrolled under this section in excess of the pre-

miums permitted;

(iii) acts to expel or to refuse to re-enroll an

individual in violation of the provisions of this

section;

(iv) engages in any practice that would rea-

sonably be expected to have the effect of denying

or discouraging enrollment (except as permitted

by this section) by eligible individuals with the

organization whose medical condition or history

indicates a need for substantial future medical

services;

(v) misrepresents or falsifies information

that is furnished -

(I) to the Secretary under this section, or

(II) to an individual or to any other entity

under this section;

(vi) fails to comply with the requirements

of subsection (g)(6)(A) or paragraph (8); or

(vii) in the case of a risk-sharing contract,

employs or contracts with any individual or

entity that is excluded from participation under

this title under section 1128 or 1128A for the

provision of health care, utilization review, medi-

cal social work, or administrative services or

employs or contracts with any entity for the pro-

vision (directly or indirectly) through such an

excluded individual or entity of such services;

the Secretary may provide, in addition to any other

remedies authorized by law, for any of the remedies

described in subparagraph (B).

App. 30

(B) The remedies described in this subpara-

graph are —

(i) civil money penalties of not more than

$25,000 for each determination under subpara-

graph (A) or, with respect to a determination

under clause (iv) or (v)(I), of not more than

$100,000 for each such determination, plus, with

respect to a determination under subparagraph

(A)(ii), double the excess amount charged in vio-

lation of such subparagraph (and the excess

amount charged shall be deducted from the pen-

alty and returned to the individual concerned),

and plus, with respect to a determination under

subparagraph (A)(iv), $15,000 for each individual

not enrolled as a result of the practice involved,

(ii) suspension of enrollment of individuals

under this section after the date the Secretary

notifies the organization of a determination

under subparagraph (A) and until the Secretary

is satisfied that the basis for such determination

has been corrected and is not likely to recur, or

(iii) suspension of payment to the organiza-

tion under this section for individuals enrolled

after the date the Secretary notifies the organiza-

tion of a determination under subparagraph (A)

and until the Secretary is satisfied that the basis

for such determination has been corrected and is

not likely to recur.

which the Secretary makes a determination under

paragraph (1), the basis of which is not described in

subparagraph (A), the Secretary may apply the fol-

lowing intermediate sanctions:

(i) Civil money penalties of not more than

$25,000 for each determination under paragraph

App. 31

(1) if the deficiency that is the basis of the deter-

mination has directly adversely affected (or has

the substantial likelihood of adversely affecting)

an individual covered under the organization’s

contract.

(ii) Civil money penalties of not more than

$10,000 for each week beginning after the initia-

tion of procedures by the Secretary under para-

graph (9) during which the deficiency that is the

basis of a determination under paragraph (1)

exists.

(iii) Suspension of enrollment of individ-

uals under this section after the date the Secre-

tary notifies the organization of a determination

under paragraph (1) and until the Secretary is

satisfied that the deficiency that is the basis for

the determination has been corrected and is not

likely to recur.

(D) The provisions of section 1128A (other than

subsections (a) and (b)) shall apply to a civil money

penalty under subparagraph (B)(i) or (C)(i) in the

same manner as such provisions apply to a civil

money penalty or proceeding under section 1128A(a).

(7)(A) Each risk-sharing contract with an eligible

organization under this section shall provide that the

organization will maintain a written agreement with a

utilization and quality control peer review organization

(which has a contract with the Secretary under part B of

title XI of this chapter for the area in which the eligible

organization is located) or with an entity selected by the

Secretary under section 1154(a)(4)(C) under which the

review organization will perform functions under section

1154(a)(4)(B) and section 1154(a)(14) (other than those

performed under contracts described in section

App. 32

1866(a)(I)(F)) with respect to services, furnished by the

eligible organization, for which payment may be made

under this title.

(B) For purposes of payment under this title,

the cost of such agreement to the eligible organiza-

tion shall be considered a cost incurred by a provider

of services in providing covered services under this

title and shall be paid directly by the Secretary to the

review organization on behalf of such eligible organi-

zation in accordance with a schedule established by

the Secretary.

(i) shall be transferred in appropriate pro-

portions from the Federal Hospital Insurance

Trust Fund and from the Supplementary Medical

Insurance Trust Fund, without regard to amounts

appropriated in advance in appropriation Acts,

in the same manner as transfers are made for

payment for services provided directly to bene-

ficiaries, and

(ii) shall not be less in the aggregate for

such organizations for a fiscal year than the

amounts the Secretary determines to be sufficient

to cover the costs of such organizations conduct-

ing activities described in subparagraph (A) with

respect to such eligible organizations under part

B of title XI. ;

(8)(A) Each contract with an eligible organization

under this section shall provide that the organization may

not operate any physician incentive plan (as defined in

subparagraph (B)) unless the following requirements are

met:

App. 33

(i) No specific payment is made directly or

indirectly under the plan to a physician or physi-

cian group as an inducement to reduce or limit

medically necessary services provided with

respect to a specific individual enrolled with the

organization.

(ii) If the plan places a physician or physi-

cian group at substantial financial risk (as deter-

mined by the Secretary) for services not provided

by the physician or physician group, the organi-

zation —

(I) provides stop-loss protection for the

physician or group that is adequate and appro-

priate, based on standards developed by the Sec-

retary that take into account the number of

physicians placed at such substantial financial

risk in the group or under the plan and the

number of individuals enrolled with the organi-

zation who receive services from the physician or

the physician group, and

(II) conducts periodic surveys of both indi-

viduals enrolled and individuals previously

enrolled with the organization to determine the

degree of access of such individuals to services

provided by the organization and satisfaction

with the quality of such services.

j (iii) The organization provides the Secre-

tary with descriptive information regarding the

plan, sufficient to permit the Secretary to deter-

mine whether the plan is in compliance with the

requirements of this subparagraph.

(B) In this paragraph, the term “physician

incentive plan” means any compensation arrange-

ment between an eligible organization and a physi-

cian or physician group that may directly or

Betas. ee Te Se ee ee a

App. 34

indirectly have the effect of reducing or limiting ser-

vices provided with respect to individuals enrolled

with the organization.

(9) The Secretary may terminate a contract with an

eligible organization under this section or may impose

the intermediate sanctions described in paragraph (6) on

the organization in accordance with formal investigation

and compliance procedures established by the Secretary

under which -

(A) the Secretary first provides the organization

with the reasonable opportunity to develop and

implement a corrective action plan to correct the

deficiencies that were the basis of the Secretary’s

determination under paragraph (1) and the organiza-

tion fails to develop or implement such a plan;

(B) in deciding whether to impose sanctions,

the Secretary considers aggravating factors such as

whether an organization has a history of deficiencies

or has not taken action to correct deficiencies the

Secretary has brought to the organization’s attention;

delays between the finding of a deficiency and the

imposition of sanctions; and

(D) the Secretary provides the organization

with reasonable notice and opportunity for hearing

(including the right to appeal an initial decision)

before imposing any sanction or terminating the con-

tract.

(j)(1)(A)_ In the case of physicians’ services or renal

dialysis services described in paragraph (2) which are

furnished by a participating physician or provider of

services or renal dialysis facility to an individual enrolled

with an eligible organization under this section and

App. 35

enrolled under part B, the applicable participation agree-

ment is deemed to provide that the physician or provider

of services or renal dialysis facility will accept as pay-

ment in full from the eligible organization the amount

that would be payable to the physician or provider of

services or renal dialysis facility under part B and from

the individual under such part, if the individual were not

enrolled with an eligible organization under this section.

(B) In the case of physicians’ services described

in paragraph (2) which are furnished by a nonpar-

ticipating physician, the limitations on actual charges

for such services otherwise applicable under part B

(to services furnished by individuals not enrolled

with an eligible organization under this section) shall

apply in the same manner as such limitations apply

to services furnished to individuals not enrolled with

such an organization.

(2) The physicians’ services or renal dialysis ser-

vices described in this paragraph are physicians’ services

or renal dialysis services which are furnished to an

enrollee of an eligible organization under this section by

a physician, provider of services, or renal dialysis facility

who is not under a contract with the organization.

(k)(1) Except as provided in paragraph (2) -

(A) on or after the date standards for Medi-

care +Choice organizations and plans are first

established under section 1856(b)(1), the Secretary

shall not enter into any risksharing contract under

this section with an eligible organization; and

(B) for any contract year beginning on or

after January 1, 1999, the Secretary shall not

renew any such contract.

(2) An individual who is enrolled in part B only

and is enrolled in an eligible organization with a risk-

App. 36

sharing contract under this section on December 31,

1998, may continue enrollment in such organization

in accordance with regulations described in section

1856(b)(1).

(3) Notwithstanding subsection (a), the Secre-

tary shall provide that payment amounts under risk-

sharing contracts under this section for months in a

year (beginning with January 1998) shall be com-

puted -

(A) with respect to individuals entitled to

benefits under both parts A and B, by substitut-

ing payment rates under section 1853(a) for the

payment rates otherwise established under sec-

tion 1876(a), and

(B) with respect to individuals only entitled

to benefits under part B, by substituting an

appropriate proportion of such rates (reflecting

the relative proportion of payments under this

title attributable to such part) for the payment

rates otherwise established under subsection (a).

(4) The following requirements shall apply to

eligible organizations with risk-sharing contracts

under this section in the same manner as they apply

to Medicare +Choice organizations under part C;

(A) Data collection requirements under sec-

tion 1853(a)(3)(B).

(B) Restrictions on imposition of premium

taxes under section 1854(g) in relating to pay-

ments to such organizations under this section.

of new enrollees during November 1998 under

section 1851(e)(6).

(D) Payments under section 1857(e)(2).

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.