Medicare Program; Revisions to the Medicare Advantage and Prescription Drug Benefit Programs

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 422 and 423

[CMS 4131-P]

RIN 0938-AP24

Medicare Program; Revisions to the Medicare Advantage and Prescription Drug Benefit Programs

AGENCY:

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

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would make revisions to the Medicare Advantage (MA) program (Part C) and prescription drug benefit program (Part D). The regulation contains new regulatory provisions regarding special needs plans, medical savings accounts (MSA) plans, and cost-sharing for dual eligible enrollees in the MA program, the prescription drug payment and novation processes in the Part D program, and the enrollment, appeals, and marketing processes for both programs. We are proposing these changes based on lessons learned since 2006, the initial year of the prescription drug program and the revised MA program.

DATES:

To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on July 15, 2008.

ADDRESSES:

In commenting, please refer to file code CMS-4131-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

You may submit comments in one of four ways (please choose only one of the ways listed):

1.

Electronically.

You may submit electronic comments on this regulation to

http://www.regulations.gov

. Follow the instructions for “Comment or Submission” and enter the filecode to find the document accepting comments.

2.

By regular mail.

You may mail written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services,

Attention:

CMS-

4131

-P, P.O. Box 8016, Baltimore, MD 21244-8016.

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

3.

By express or overnight mail.

You may send written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services,

Attention:

CMS-

4131

-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

4.

By hand or courier.

If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to either of the following addresses: a. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201.

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

b. 7500 Security Boulevard, Baltimore, MD 21244-1850.

If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members.

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

Submission of comments on paperwork requirements.

You may submit comments on this document's paperwork requirements by following the instructions at the end of the “Collection of Information Requirements” section in this document.

For information on viewing public comments, see the beginning of the

SUPPLEMENTARY INFORMATION

section.

FOR FURTHER INFORMATION CONTACT:

Special Needs Plans—LaVern Baty, 410-786-5480.

Contracts with MA Organizations—Chris McClintick, 410-786-4682.

Medicare Medical Savings Account Plans—Anne Manley, 410-786-1096.

Enrollment—Lynn Orlosky, 410-786-9064.

Payment—Frank Szeflinski, 303-844-7119.

Civil Money Penalties—Christine Reinhard, 410-786-2987.

Reconsiderations—

• John Scott, 410-786-3636.

• Kathryn McCann Smith, 410-786-7623.

Marketing—Elizabeth Jacob, 410-786-8658.

Change of Ownership—Scott Nelson, 410-786-1038.

Low-income Cost-Sharing—Christine Hinds, 410-786-4578.

Definitions related to the Part D drug benefit. Subparts F and G—Deondra Moseley, (410) 786-4577 or Meghan Elrington, (410) 786-8675. Subpart R—David Mlawsky, (410) 786-6851.

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments:

All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received:

http://www.regulations.gov

. Follow the search instructions on that Web site to view public comments.

Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

I. Background

A. Overview of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173) was enacted on December 8, 2003. The MMA established the Medicare prescription drug benefit program (Part D) and made revisions to the provisions in Medicare Part C, governing what is now called the Medicare Advantage (MA) program (formerly Medicare+Choice). The MMA directed that important aspects of the new Medicare prescription drug benefit program under Part D be similar to and coordinated with regulations for the MA program.

The MMA also directed implementation of the prescription drug benefit and revised MA program provisions by January 1, 2006. The final rules for the MA and Part D prescription drug programs appeared in the

Federal Register

on January 28, 2005 (70 FR 4588 through 4741 and 70 FR 4194 through 4585, respectively). Many of the provisions relating to applications, marketing, contracts, and the new bidding process, for the MA program, became effective on March 22, 2005, 60

days after publication of the rule, so that the requirements for both programs could be implemented by January 1, 2006. All of the provisions regarding the new Part D prescription drug program became effective on March 22, 2005.

As we have gained more experience with the MA program and the prescription drug benefit program, we are proposing to revise areas of both programs. Many of these revisions clarify existing policies or codify current guidance for both programs. We believe that these changes would help plans understand and comply with our policies for both programs and aid MA organizations and Part D plan sponsors in implementing their health care and prescription drug benefit plans.

B. Relevant Legislative History and Overview

The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33) established a new “Part C” in the Medicare statute (sections 1851 through 1859 of the Social Security Act (the Act)) which provided for a Medicare+Choice (M+C) program. Under section 1851(a)(1) of the Act, every individual entitled to Medicare Part A and enrolled under Medicare Part B, except for most individuals with end-stage renal disease (ESRD), could elect to receive benefits either through the original Medicare program or an M+C plan, if one was offered where he or she lived. The primary goal of the M+C program was to provide Medicare beneficiaries with a wider range of health plan choices.

The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA), Public Law 106-111, amended the M+C provisions of the BBA. Further amendments were made to the M+C program by the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554), enacted December 21, 2000.

As noted above, the MMA was enacted on December 8, 2003. Title I of the MMA added a new “Part D” to the Medicare statute (sections 1860D-1 through 1860D-42) creating the Medicare Prescription Drug Benefit Program, the most significant change to the Medicare program since its inception in 1965.

Sections 201 through 241 of Title II of the MMA made significant changes to the M+C program which was established by the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33). Title II of the MMA renamed the M+C program the MA program and included new payment and bidding provisions, new regional MA plans and special needs plans, reestablished authority for medical savings account (MSA) plans that had been provided in the BBA on a temporary basis, and other changes. Title I of the MMA created prescription drug benefits under Medicare Part D, and a new retiree drug subsidy program.

Both the MA and prescription drug benefit regulations were published separately, as proposed and final rules, though their development and publication were closely coordinated. On August 3, 2004, we published in the

Federal Register

proposed rules for the MA program (69 FR 46866 through 46977) and the prescription drug benefit program (69 FR 46632 through 46863). In response to public comments on the proposed rules, we made several revisions to the proposed policies for both programs. For further discussion of these revisions, see the respective final rules (70 FR 4588-4741) and (70 FR 4194-4585).

II. Provisions of the Proposed Regulations

In the sections that follow, we discuss the proposed changes to the regulations in parts 422 and 423 governing the MA and prescription drug benefit programs. Several of the proposed revisions and clarifications affect both programs. In our discussion, we note when a provision would affect both the MA and prescription drug benefit and include in section II C, a table comparing the proposed Part C and D program changes by specifying each issue and the sections of the Code of Federal Regulations that we propose to revise for both programs.

A. Proposed Changes to Part 422—Medicare Advantage Program

1. Special Needs Plans

The Congress first authorized special needs plans (SNP) to exclusively or disproportionately serve individuals with special needs. The three types of special needs individuals eligible for enrollment identified by the Congress include (1) institutionalized individuals (defined in 42 CFR 422.2 as an individual residing or expecting to reside for 90 days or longer in a long term care facility), (2) individuals entitled to medical assistance under a State plan under title XIX, and (3) other individuals with severe or disabling chronic conditions that would benefit from enrollment in a SNP.

The number of SNPs approved as of January 2008, is 787. This figure includes 442 dual eligible SNPs, 256 chronic care SNPs, and 89 institutional SNPs.

a. Ensuring Special Needs Plans Serve Primarily Special Needs Individuals (§ 422.4)

Section 231 of the MMA authorized MA organizations to offer a specialized MA plan that “exclusively,” or “disproportionately,” “serves” one of three categories of “special needs” individuals: Individuals dually-eligible for both Medicare and Medicaid, institutionalized individuals, and individuals with severe or disabling chronic conditions that the Secretary determines would benefit from enrollment in a SNP.

As noted above, the final rule implementing the MMA changes to the MA program, including these SNP provisions, was issued on January 28, 2005 (70 FR 4588). In the preamble to the proposed rule we proposed to interpret the term “serves” special needs individuals to mean markets to, and enrolls, special needs individuals. This was intended to permit an MA Plan with existing non-special needs enrollees to be designated a SNP if it prospectively, exclusively, or disproportionately enrolled special needs individuals.

We also proposed to interpret the statutory phrase, “disproportionately serve[s] special needs individuals” to refer to a SNP that enrolls special needs individuals in a proportion greater than such individuals exist in the area served by the plan (69 FR 46874). We asked for public comments regarding whether we should specify a percentage, such as 50 percent or more, as the minimum enrollment for a plan to be considered a SNP.

We did not receive any comments on this proposed provision. Therefore, in the final rule we established the disproportionate percentage methodology based on the test we proposed in the proposed rule, that is, a comparison of the proportion of the special needs individuals the plan enrolls relative to non-special needs enrollees and the proportion of special needs individuals in the plan's service area. If the proportion of special needs to non-special needs individuals being enrolled in the plan was greater than the proportion in the plan's service area, the plan could be considered a disproportionate share SNP. Our expectation was that only a limited number of non-special needs individuals would be likely to enroll in a SNP, such as spouses or children of special needs individuals who wish to enroll in the same MA plan as the spouse or parent. However, such plans may be attractive to other non-special needs individuals because they may

offer additional benefits beyond what Medicare covers. Also, individuals who are in the early stages of one of the chronic conditions covered by a disproportionate percentage, chronic care SNP may find the benefits or the network of participating specialists attractive.

Disproportionate percentage SNPs have proliferated since the implementation of the Part D program, due, in part, to the fact that both dual eligible individuals and institutionalized individuals are permitted to enroll in MA plans year round, and dual eligible and institutional SNPs are thus permitted to market year round. CMS' information shows that a significant number of the dual-eligible disproportionate percentage SNPs may have between 25 percent and 40 percent of their enrollment composed of non-special needs individuals. As a result, we are concerned that disproportionate percentage SNPs are enrolling significant numbers of non-special needs individuals, thus diluting the focus on serving those individuals with special needs.

Therefore, in order to ensure that existing and future SNPs maintain a primary focus on individuals with special needs, we are proposing to amend our regulations at § 422.4(a)(1)(iv)(B) to require that MA organizations offering SNPs limit new enrollment of non-special needs members to no more than 10 percent of new enrollees, and that 90 percent of new enrollees must be special needs individuals as defined in § 422.2. We believe this threshold would continue to allow the small number of non-SNP eligible spouses and children to continue to enroll in the same MA plan as their SNP eligible spouse or parent while ensuring that the SNP retains its focus on serving the special needs individuals for which it is specifically designed.

We understand that the majority of SNPs that currently enroll both special needs and non-special needs individuals have current enrollments of non-special needs individuals that exceed 10 percent. Because the new limitation only applies to new enrollees, these plans would be able to continue to serve their existing membership. Organizations offering disproportionate enrollment SNPs would not be permitted to enroll new non-special needs individuals, however, without first enrolling enough special needs individuals to ensure that the percentage of new non-special needs enrollees remains below 10 percent. Furthermore, as specified in § 422.4, those enrollees deemed continuously eligible per § 422.52(d) are considered special needs individuals for the purpose of determining the disproportionate percentage.

On an ongoing basis plans would need to monitor their enrollment to ensure that the 10 percent limit on new enrollments is met. This means that plans would need to monitor their enrollment to ensure that they were enrolling nine special needs individuals for every non-special needs individual to keep the ratio of new enrollees who were non-special needs individuals below 10 percent of new enrollees. MA organizations offering disproportionate SNPs would have to have a mechanism to ensure that a non-special needs individual could not enroll until a sufficient number of special needs individuals were enrolled to keep new enrollment of non-special needs individuals below 10 percent of new enrollments. For example, if a SNP receives completed enrollment elections from non-special needs individuals when such an enrollment would push the percentage of new enrollees over 10 percent, it could—(1) deny the enrollment due to the onset of the limit; or (2) place the enrollment on a waiting list to be processed after a sufficient number of special needs individuals have been enrolled. The plan would need to ensure that once enrollments are accepted for non-special needs individuals, that this is done on a non-discriminatory basis. We believe that this approach will encourage SNPs to design benefit packages that best serve the certain special needs populations for which they have been created.

We welcome comments on the appropriateness of the 10 percent standard for new enrollees, as well as the most effective and least burdensome ways for plans to monitor the proportions of new enrollments.

b. Ensuring Eligibility To Elect an MA Plan for Special Needs Individuals (§ 422.52)

In order to elect a SNP, an individual must meet the eligibility requirements for the specific type of SNP in which the individual wishes to enroll. For example, to enroll in a dual eligible SNP, the individual must be eligible for both Medicare and Medicaid. It is the responsibility of the MA organization offering the SNP to verify eligibility during the enrollment process.

We are concerned that some dual eligible SNPs may not be appropriately verifying Medicaid eligibility of applicants for enrollment, and therefore may be enrolling beneficiaries who are not eligible for both Medicare and Medicaid. Similarly, some chronic care SNPs may encounter difficulties having providers verify that the applicants have the condition(s) established as the focus of the chronic care SNP.

We propose to clarify in our regulations that MA organizations must establish a process to verify that potential SNP enrollees meet the SNP's specific eligibility requirements. While this issue is addressed, to some degree, in our manual guidance (section 20.11 of Chapter 2 of the Medicare Managed Care Manual), we believe that it is important to ensure that plans are aware of and meet their obligations to verify an applicant's eligibility prior to enrolling individuals in a SNP through rule making.

Therefore, we are proposing in § 422.52(g) that MA organizations offering SNPs for dual eligible beneficiaries establish a process approved by CMS to obtain information from the State about the applicant's Medicaid status and that this verification must be obtained prior to enrollment. This would likely require the SNP to enter into an agreement with the State to obtain this information on a routine and timely basis. We address the issue of a relationship with the State Medicaid program in the case of a dual eligible SNP in more detail in section II, below. Those organizations offering chronic care SNPs must attempt to obtain verifying information directly from the beneficiary's provider or the organization may use the disease-specific pre-qualification assessment questions developed by, and available from CMS (model language) as an alternative methodology.

In the 2008 MA application solicitation, we required SNPs to identify their processes for verifying a beneficiary's chronic condition before enrollment. Specifically, each applicant was required to contact the enrollee's physician to verify eligibility for the specific chronic condition SNP. We subsequently received industry comments that SNP staff sometimes experience significant delays in obtaining physician verification of the beneficiary's chronic condition and, as a consequence, there was delay in enrolling an eligible beneficiary.

In response to this information, we developed an additional option to facilitate chronic condition verification. In a May 31, 2007 memorandum, we notified chronic condition SNPs that they could develop a pre-enrollment qualification assessment tool to expedite verification that beneficiaries had the chronic condition for which they were enrolled (see

https://32.90.191.19/hpms/upload_area/NewsArchive_

MassEmail/000001696/CHVHPMS%20v2.pdf

). We simultaneously posted an example of an acceptable verification tool for coronary artery disease, congestive heart failure, and/or cerebrovascular accident (stroke) on HPMS (see

https://32.90.191.19/hpms/upload_area/NewsArchive_MassEmail/000001696/Draft%20pre-Qual%for%20chronic%20SNP%20verification%205%2007%20(2).pdf

).

The notification memorandum instructed SNPs to draft a verification tool, complete an attestation form asserting compliance with CMS conditions listed on the form, and to submit the tool to CMS for review and approval prior to using the tool. Concurrently, we collaborated with physician experts in chronic disease management to develop a series of questions related to several chronic conditions listed in HPMS as of January 2, 2007, representing potentially severe or disabling primary chronic conditions. Questions similar to the above example were developed for chronic obstructive pulmonary disease, diabetes mellitus, hypertension, chronic renal failure, depression, schizophrenia, bipolar disorder, dementia, and chronic alcohol or drug dependence.

Because chronic condition SNPs request CMS approval for their proposed pre-enrollment qualification assessment tools, we use the disease-specific questions to guide the SNP in the design of an appropriate tool. Having the additional option of using a pre-enrollment qualification assessment tool gives SNPs three means of meeting the verification requirement—written documentation from the beneficiary's former physician, telephonic confirmation by the beneficiary's former physician, or use of the verification tool followed by post-enrollment confirmation by any physician.

Similarly, organizations offering a SNP for institutionalized individuals must verify each enrollee's institutional status with the facility or appropriate State agency.

c. Model of Care (422.101(f))

As noted above, the MMA permitted MA organizations to offer care targeted to beneficiaries with special health care needs through SNPs. The MMA specified that a special needs individual was an individual who was “institutionalized” (as defined by the Secretary), is entitled to medical assistance under a State plan under title XIX (Medicaid), or “meets such requirements as the Secretary may determine would benefit from enrollment” in a SNP for individuals “with severe or disabling chronic conditions.” In order to ensure that SNPs are providing care targeted to such special needs beneficiaries, under our authority in section 1856(b)(1) of the Act to establish standards by regulation, we are proposing that SNPs develop a model of care specific to the special needs population they are serving. In order to more clearly establish and clarify delivery of care standards for SNPs and to codify standards which we have included in other CMS guidance and instructions (the 2008 and 2009 Call Letters, “Special Needs Plan Solicitation

1

”), we propose to add new paragraph (f) to § 422.101. Section 422.101(f) would specify that SNPs must have networks with clinical expertise specific to the special needs population of the plan; use performance measures to evaluate models of care; and be able to coordinate and deliver care targeted to the frail/disabled, and those near the end of life based on appropriate protocols. We believe that these measures are critical to providing care to the types of special needs populations served by SNPs.

1

The solicitation may be found at

http://www.cms.hhs.gov/SpecialNeedsPlans.

For example, CMS anticipates that a chronic condition SNP serving beneficiaries having severe or disabling diabetes mellitus would establish a provider network that afforded access to diabetes experts such as endocrinologists who consult on pharmacotherapy for the fragile diabetic, vitreo-retinal ophthalmologists for diabetic retinopathy management, nephrologists for diabetic nephropathy management, neurologists having diabetic neuropathy expertise, nurses having specialized training in diabetes education, and nutritionists with expertise in diabetic counseling.

The SNP might enroll diabetic beneficiaries who develop chronic renal failure related to diabetic nephropathy and require dialysis. The SNP might choose to contract or partner with these specialized diabetes experts and/or dialysis facilities, but, as a special needs plan targeting beneficiaries with specialized diabetic needs, the SNP is obligated to provide services to manage the expected disease-specific complications of a diabetic with severe or disabling disease progression. We also expect that the chronic condition SNP serving diabetic beneficiaries would develop diabetes-specific performance measures to evaluate its own systems, experts, and health outcomes related to its diabetes management.

The SNP's own internal quality assurance and performance improvement program should examine the effectiveness of its model of care for diabetes management. For example, if the SNPs provider network applied the American Diabetes Association's clinical practice guideline for reducing the risk of or slowing the progression of diabetic nephropathy by optimizing glucose control (see National Guidelines Clearinghouse, 2008;

http://www.guideline.gov/summary/summary.aspx?doc_id=10401

), an appropriate performance measure to evaluate management of diabetic beneficiaries would be a process measure to determine the percentage of diabetics having glycosylated hemoglobin (Hgb A

1C

) measured in the last 6 months or an outcome measure to determine how many diabetics had an A

1C

measuring less than 7 percent (see National Quality Measures Clearinghouse, 2008;

http://www.guideline.gov/browse/xrefnqmc.aspx

).

We recognize there is a broad range of chronic disease management systems and evidence-based clinical practice guidelines available to SNPs; consequently, we have deliberately guided SNPs toward the conceptual framework of a model of care without being prescriptive about the specific staff structure, provider network, clinical protocols, performance improvement, and communication systems. We also expect that within the target population of beneficiaries having severe or disabling diabetes mellitus, SNPs would have a subpopulation of diabetics who are frail, near the end of life, or disabled by other morbidities (for example, neurological disorders, mental disorders, etc.) that would need additional specialized benefits and services that should be addressed in the model of care. For example, the diabetic beneficiary with diabetic complications who is near the end of life might require assisted living or institutional services for which the SNP would develop different goals, expanded specialty services and facilities in their provider network, different performance measures, and additional protocols.

d. Dual Eligible SNPs and Arrangements With States (§ 422.107)

CMS' review of SNPs targeting beneficiaries eligible for both Medicare and Medicaid (dual eligible SNPs) over the past few years suggests to us that for such SNPs to serve this population of beneficiaries, a plan should have a documented relationship with the State Medicaid agency in the State in which its members reside. Dual eligible SNPs that have not established a working relationship with the State may

encounter difficulties verifying eligibility for Medicaid prior to enrollment in a SNP and, thus, may inappropriately enroll members who are not eligible for Medicaid. Also, without an arrangement with the State, SNPs may not have the information necessary to guide beneficiaries to providers that can deliver both Medicare and Medicaid services. Further, Medicaid often provides additional health services not covered by Medicare through the SNP. Medicare Advantage organizations (MA organization) with no State relationship may be advising dual eligible members that services are not covered at all because they are not covered under the SNP, even though the services are covered through Medicaid. Consequently, if the MA organization is not aware of the benefits available to its members through other sources, such as Medicaid, it cannot ensure that the model of care it delivers offers adequate coordination of the essential services.

In order to ensure that beneficiaries are able to access essential services that are available through Medicaid in addition to those benefits available through the SNP, we propose to add a new § 422.107 which would require that an MA organization seeking to offer a SNP to serve the dual eligible population must have, at a minimum, a documented relationship, such as a contract, memorandum of understanding (MOU), data exchange agreement, or some other agreed upon arrangement with the State Medicaid agency for the State in which the dual eligible SNP is operating, in an effort to improve Medicare and Medicaid integration.

We propose in § 422.107(a) that all SNPs, whether entering the market or already established at the time these regulations become effective, must have in place a dual eligibility verification arrangement and information sharing on Medicaid providers and benefits.

We also propose in § 422.107(b) that within 3 years of the effective date of these regulations, all dual eligible SNPs already offering contracts are required to develop additional formal arrangements with States, and that new SNPs offering contracts after these regulations are effective, are required to have formal arrangements by their third contract year. CMS is allowing 3 years because we understand that it may take this long for contractual arrangements between the State and an MA plan to be implemented, particularly if Medicaid capitation and a request for proposal (RFP) are involved. We believe that by providing States and MA organizations with the maximum amount of flexibility for having a documented relationship, it will encourage States to actively participate in the development of integrated Medicare and Medicaid products with MA organizations. We believe 3 years is a reasonable and sufficient amount of time for MA organizations to develop documented arrangements with their respective States. We understand that some States are not yet ready to engage and participate in providing health care through MA organizations for their Medicaid-eligible populations and, are, therefore, providing a 3-year window for development and implementation.

Examples of additional formal arrangements range from documentation of a cooperative arrangement with the State to coordinate benefits to a contractual arrangement between the State Medicaid agency and the MA organization offering the SNP, under an RFP process, or under a Medicaid capitation arrangement.

e. Special Needs Plans and Other MA Plans With Dual Eligibles: Responsibility for Cost-Sharing (§ 422.504(g)(1))

CMS' review of MA plans serving dual eligible beneficiaries over the past few years has identified that a number of providers are charging the beneficiaries Medicare Parts A and B cost sharing that is the responsibility of the State. Additionally, many dual eligible enrollees are unclear about the Medicare and Medicaid rules and benefits. Some new enrollees have experienced interruptions in treatment, resulting in a negative impact on their health. These experiences suggest that additional requirements are needed to ensure that both providers and beneficiaries understand Medicare and Medicaid rules and that beneficiaries do not pay cost-sharing for which they are not responsible.

In order to protect beneficiaries and ensure that providers do not bill for cost-sharing that is not the beneficiary's responsibility, we have amended § 422.504(g)(1)(i) and (g)(1)(ii) to require that all MA organizations, including SNPs, with enrollees who are eligible for both Medicare and Medicaid specify in their contracts with providers that enrollees will not be held liable for Medicare Parts A and B cost sharing when the State is liable for the cost-sharing. We are proposing, therefore, that contracts with providers state that the provider will do this by either accepting the MA plan payment in full (§ 422.504(g)(1)(iii)(A)) or by billing the appropriate State source (for example, Medicaid) (§ 422.504(g)(1)(iii)(B)). Additionally, we are proposing that all MA organizations with enrollees eligible for both Medicare and Medicaid must inform providers of the Medicare and Medicaid benefits and rules for enrollees eligible for Medicare and Medicaid (§ 422.504(g)(1)(iii)).

Medicare Advantage organizations have flexibility in establishing arrangements with States. The arrangements could include discussing and identifying both the Medicare and Medicaid benefits and rules. A list of the services, as well as the rules applicable to enrollees eligible for Medicare and Medicaid could be disseminated to providers and updated as necessary. A contact person or liaison could be identified for each MA plan who could assist with questions and with the maintenance of current information.

2. MA MSA Transparency (§ 422.103(e))

As noted above, the MMA restored authority for “Medical Savings Account” (MSA) plans that had been provided for in the BBA on a temporary basis, but which expired without any such plan ever being offered. MSA plans are MA plans under which a portion of the total MA capitation rate is paid to the MA organization for a high-deductible policy that covers Medicare covered services after the high deductible is met. The remainder of the amount is placed into a savings account to be used to cover health care costs until the deductible is met. Any amounts not used in a given year accumulate for use in a future year.

As noted, under the original BBA authority, no MA organization chose to offer an MSA plan. We believe that this might be attributable in part to differences between the rules for MSA plans and the more popular health savings account (HSA) arrangements available for non-Medicare beneficiaries. In order to encourage the offering of MSA plans, and to test whether changing some rules would be beneficial, we initiated an “MSA demonstration” under which some MSA rules were waived. As part of this demonstration, we required that participating MA organizations provide MSA plan enrollees with cost and quality information that they could use to make informed choices as to where they would get health care.

Consistent with the best practices of HSAs and other high-deductible health plans, we propose in new § 422.103(e) to require that all MSA plans provide enrollees with information on the cost and quality of services as specified by CMS and provide information to CMS

on how they would provide this information to enrollees.

2

2

HSAs are health insurance plans with a high deductible and a savings account for the under 65 population and are administered by the U.S. Department of the Treasury. Medicare MSAs are a type of medical savings account, also with a high deductible and a savings account, designed for the Medicare population and are administered by the U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services. HSAs and MSAs are governed by different statutes, and while these health insurance products are similar in many ways, there are also important differences between them. For further information on HSAs, go to

http://www.ustreas.gov/offices/public-affairs/hsa/

.

The purpose of reporting cost/quality information to consumers, a practice known as “transparency,” is to permit plan enrollees to compare costs for specific services and to compare providers on cost and quality, with the high deductible acting as an added incentive to shop around. This proposal would implement a basic tenet of high-deductible health plans, the availability of useful cost and quality information to support consumer shopping.

We recognize that the Congress exempted MSA plans from the quality improvement program requirements in section 1852(e)(1) of the Act, and thus from the data collection and reporting requirements in section 1852(e)(3) of the Act. We would not, under this requirement, be mandating the same level of data collection required under those provisions, or the reporting of quality data to CMS. Rather, we are presuming that MA organizations in the business of offering an MSA product are committed to facilitating the intended benefits of this model—that consumers make informed choices as to their health care purchases during the deductible period and beyond. We would expect that such organizations already have mechanisms in place, in connection with their commercial lines of business, for providing their beneficiaries with cost or quality information. Indeed, in the case of Medicare participating providers, such information is available from CMS through our own transparency initiatives.

Our view that quality and cost information would be available, or reasonably accessible, to organizations in the business of offering an MSA plan is supported by the fact that the MA organizations participating in the MSA demonstration have agreed to provide the information to their enrollees. We invite public comments on this issue. We are proposing to revise the regulations to require that MA organizations offering MSA plans provide their enrollees with quality and cost information, to the extent available, concerning services in the plan's service area, and to report to CMS on its approach to providing this information. Below are examples of what a plan could be expected to address:

• How the organization will provide cost and quality information to enrollees, including screenshots for any Web-based tools used to meet this requirement.

• If they will use a Web-based product to meet this requirement, how they will provide this information to enrollees that do not have access to the Internet.

• How their organization will obtain information regarding cost and quality in the requested service area and whether this information will be personalized to the member.

B. Proposed Changes to Part 423—Medicare Prescription Drug Benefit Program

1. Passive Election for Full Benefit Dual Eligible Individuals Who Are Qualifying Covered Retirees (§ 423.34)

Section 1860D-1(b)(1)(C) of the Act, and implementing regulations at 42 CFR 423.34(d), require that CMS automatically enroll a full-benefit dual eligible (FBDE) individual who has (1) failed to enroll in a prescription drug plan (PDP) or MA-PD into a PDP at or below the premium subsidy amount, and, per the last sentence in section 1860D-1(b)(1)(C) of the Act, (2) has not declined Part D enrollment, into a PDP with a premium at or below the full premium subsidy amount. Further, the statute requires that if there is more than one such plan the “Secretary shall enroll such an individual on a random basis among all such plans in the PDP region.” Our general policy in implementing these provisions is to notify individuals in advance about their pending auto-enrollment, and to include in that notice information about other plans available to the individual and about how to decline Part D coverage, and thus opt out of the default enrollment process.

For the overwhelming majority of FBDE individuals, default enrollment into a PDP is a favorable outcome that ensures that they receive prescription drug coverage without costs for premiums and deductibles, and with only nominal costs for cost sharing. In many cases, the Part D enrollment is also beneficial for FBDE individuals with retiree coverage, since the Part D drug coverage may well be available at a lower cost than the coverage offered through the employer plan. However, for a significant number of FBDE individuals with drug coverage through an employer group plan—especially those with full health care coverage—automatic enrollment into a PDP can have serious and sometimes irreversible negative consequences, either for the beneficiary and/or for family members. For example, under the terms of a particular employer group plan, an individual may lose employer group retiree medical coverage upon enrollment in a Part D plan, or worse, an individual's automatic enrollment in a PDP can result not only in the individual's disenrollment from the employer plan, but the disenrollment of a spouse or other family member. Although we were aware of this possibility at the outset of the program, we had no information about the extent to which FBDE individuals might already have retiree group coverage, and we believed that to the extent there were individuals in this situation, the number would be extremely small. Thus, we did not make any special rules for this population.

Since January 2006, however, we have received a relatively small, but steady, series of complaints about this issue. We have attempted to work with employers to resolve individual situations as they arose, but have not had complete success. A recent survey of large employers found that 36 percent of the firms indicated retirees would lose all retiree medical coverage upon enrollment in a Part D plan, and another 32 percent specified the retirees would lose their employer group drug coverage only. More importantly, 82 percent of employers indicated that if a retiree is enrolled in a Medicare Part D plan, the spouse of that individual would not be allowed to keep employer sponsored coverage. Finally, 57 percent of the firms surveyed indicated that they would not allow retirees to rejoin the company's coverage in the future, should they decide that they would prefer the employer coverage to the Part D coverage in which they were automatically enrolled based on their FBDE status. (See December 13, 2006, Kaiser/Hewitt Survey Report of Large Employers at

http://www.kff.org/medicare/med121306nr.cfm

).

To address those concerns, we propose to revise § 423.34(d)(1), and add new § 423.34(d)(3), to establish a process under which FBDE individuals who we know to be enrolled in a qualifying employer group plan would be deemed to decline Part D coverage if, following a notice of their options, they do not indicate that they wish to receive it. As a result, these individuals would not be part of the group that is subject to default auto-enrollment. In order to ensure that only individuals with creditable employer coverage would be

included in this process, we would limit the applicability of this process to individuals enrolled in a plan for which CMS is paying an employer subsidy. Under our proposal, the individuals would be notified in advance by CMS of their prospective auto-enrollment, and of the need to carefully consider the possible repercussions of such an enrollment, including the impact that enrollment into Medicare Part D would have on their retiree coverage for themselves and other family members. We would recommend contacting the sponsor or administrator of the retiree group plan to discuss the effect of enrollment in Medicare Part D on the retiree coverage.

Individuals would further be informed that by taking no action, they will be deemed to have elected to decline enrollment into a Part D plan. We would further inform them that they could enroll in a Part D plan at any time in the future if they wish to do so, and that the enrollment could be made retroactive. Thus, absent a confirmation of the individual's desire to be auto-enrolled into a Part D plan, he or she would retain the employer group coverage.

In considering whether to adopt this approach, we recognized that to the extent that declining Part D could possibly have any negative consequences for FBDE individuals who are not auto-enrolled, CMS has the discretionary authority to make retroactive enrollment changes that can address such problems. In contrast, CMS has no authority to insist that a retiree plan sponsor allow individuals back into its plan should the retirees or their family members be adversely affected by auto enrollment. Given that 56 percent of employers surveyed have specifically stated that they would not allow re-enrollment into their retiree plans after an individual began Part D coverage, we believe that our proposed change in policy would clearly be in the best interests of the FBDE population with retiree coverage.

2. Part D Late Enrollment Penalty (§  423.46)

Section 1860D-22(b) of the Act established a Part D late enrollment penalty (LEP) for beneficiaries who have a continuous period of 63 days or longer following the end of an individual's Part D initial enrollment period without creditable prescription drug coverage. This requirement is codified in § 423.46. Although § 423.46 describes which individuals would be subject to a penalty, it does not specify the role of the Part D plan in the LEP determination process. We have subsequently outlined plan responsibilities in our existing guidance (Chapter 4 of the Medicare Prescription Drug Benefit Manual) and now propose to clarify the general responsibilities of Part D plans in our regulations.

First, we would clarify under § 423.46(b) that Part D plans must obtain information on prior creditable coverage from all enrolled or enrolling beneficiaries. Under this process, plans first query CMS systems for previous plan enrollment information, which is a standard part of the beneficiary enrollment process. When no previous enrollment information exists, however, the process for obtaining creditable coverage information must also include plan interaction with the beneficiary. This is due in large part to the limited information available in CMS' systems about forms of creditable coverage other than Part D coverage or coverage through an employer group under the retiree drug subsidy (RDS). Therefore, it is critical that plans obtain historical creditable coverage information from the beneficiary in order to determine the number of uncovered months, if any, and retain any information collected concerning that determination (as specified under proposed § 423.46(d)).

The related requirement that we are proposing under § 423.46(b) is that plans must then report creditable coverage information in a manner specified by CMS. Specifically, that would entail reporting the number of uncovered months to CMS, which will then calculate the penalty and report the penalty back to the plan. The plan then notifies the beneficiary of the determination of the LEP amount and of their ability to request a reconsideration of this determination.

Thus, we would also establish under § 423.46(c) that, consistent with section 1860(D)-22(b)(6)(C) of the Act, individuals who are determined to have a late enrollment penalty, have the opportunity to ask for a reconsideration of this determination. (Note that existing § 423.56(g) briefly references the ability to “apply to CMS” when an individual believes that he or she was not adequately informed that his or her prescription drug coverage was not creditable, and we would cross-reference that section here.) We believe that the statute clearly intends that individuals have an opportunity to provide CMS, or an independent review entity acting under CMS' authority, with additional information related to prior prescription drug coverage in support of a request for reconsideration of a late enrollment penalty determination. While the statute expressly provides for this opportunity only with respect to an argument that proper notice was not given concerning whether existing coverage was creditable, we believe that the same rationale could apply to other arguments that the penalty should not apply (for example, an argument that the individual is eligible for a waiver of the penalty under a demonstration project).

Finally, we would specify that a beneficiary would not have the right to further review of the reconsideration decision of CMS, or the independent review entity acting under CMS' authority. CMS would, however, have the discretion to reopen, review, and revise such a decision.

3. Medicare Prescription Drug Benefit Program Definitions

These proposed clarifications to our policies associated with the Medicare Prescription Drug Benefit (also known as Medicare Part D) include refining our definitions related to what may be included in the drug costs Part D sponsors use as the basis for calculating beneficiary cost sharing, reporting drug costs to CMS for the purposes of reinsurance reconciliation and risk sharing, as well as submitting bids to CMS. We also propose a new definition for administrative costs in order to further clarify costs that must not be included in Part D drug costs. We also propose to create corollary definitions for drug cost reporting for purposes of the Retiree Drug Subsidy (RDS). We propose that the effective date of these changes be the effective date of a final rule with the exception of specific changes to the Part D definition of “negotiated prices”, “gross covered prescription drug costs”, and “allowable risk corridor costs” related to the use of pass-through versus lock-in prices, which we propose to be effective for coverage year 2010. We propose that the effective date of the RDS definitions be the effective date of a final rule, that is, for all plan years beginning after the effective date of a final rule.

a. Subpart C—Benefits and Beneficiary Protections (Definitions)

i. Incurred Costs

CMS is proposing to amend the definition of “incurred costs” to reflect our current policy that certain nominal co-payments assessed by manufacturer Patient Assistance Programs (PAPs) can be applied toward an enrollee's TrOOP balance or total drug spend (the accumulated total prices for covered Part D drugs paid by the plan or by or on behalf of the beneficiary). CMS allows PAPs to provide assistance for covered Part D drugs to Part D enrollees

outside the Part D benefit. This means that payments made by PAPs do not count toward enrollees' TrOOP or total drug spend balances. However, if a PAP requires their enrollees—including those enrolled in a Part D plan—to pay a nominal copayment when they fill a prescription for a covered Part D drug for which the PAP provides assistance, such amounts would count toward TrOOP if the plan is notified of the copayment. As explained in Appendix C of Chapter 14 (Coordination of Benefits) of the Prescription Drug Benefit Manual, these nominal PAP copayment amounts, when paid by or on behalf of a Part D enrollee, are applicable to the enrollee's TrOOP and total drug spend balances, provided the enrollee submits appropriate documentation to their Part D plan. We are proposing to revise the definition of incurred costs to clearly indicate that these nominal PAP copayments are included in incurred costs. This revision to the definition of “incurred costs” in § 423.100 is consistent with the proposed changes to the definition of “gross covered prescription drug costs”, which has also been revised to ensure that these nominal PAP copayments are included in gross covered prescription drug costs and allowable reinsurance costs.

ii. Negotiated Prices

In the January 2005 final rule, CMS defined a number of terms related to drug prices and costs in order to identify the costs that should be used to calculate beneficiary cost sharing, to advance the beneficiary through the benefit, and to calculate final plan payments for reinsurance subsidies and risk sharing during payment reconciliation. For instance, under § 423.104(d)(2)(i), beneficiary cost sharing under the initial coverage limit is equal to 25 percent of “actual cost.” (70 FR 4535) “Actual cost” is defined in § 423.100 as “the negotiated price for a covered Part D drug when the drug is purchased at a network pharmacy, and the usual and customary price when a beneficiary purchases the drug at an out-of-network pharmacy consistent with § 423.124(a).” (70 FR 4533) And in § 423.100, the term “negotiated prices” is defined as “prices for covered Part D drugs that (1) are available to beneficiaries at the point of sale at network pharmacies; (2) are reduced by those discounts, direct or indirect subsidies, rebates, other price concessions, and direct or indirect remunerations that the Part D sponsor has elected to pass through to Part D enrollees at the point of sale; and (3) includes any dispensing fees. (70 FR 4534)

Since that time, we have received questions over what we meant in this last definition when we refer to prices for covered Part D drugs that are available to beneficiaries at the point of sale. These questions are particularly important because beneficiary cost sharing is a function of the negotiated price, either directly as in coinsurance percentages of negotiated price, or indirectly, as copayments are ultimately tied to actuarial equivalence requirements based on negotiated prices. That is, for instance, the higher the negotiated prices, the higher the fixed copayments must be to result in actuarial equivalence to 25 percent in the aggregate in the initial coverage phase.

The “total drug spend” (the accumulated total prices for covered Part D drugs paid at the point of sale by the plan or by or on behalf of the beneficiary) also is a function of the negotiated price. Because the total drug spend is used to determine when the beneficiary advances through the deductible and the initial coverage phases of the Part D benefit, higher negotiated drug prices would cause the beneficiary to more quickly advance through those various phases. Accordingly, because higher negotiated prices would advance the beneficiary through the initial coverage phase more quickly, fewer prescriptions on average would be subsidized by the plan through the initial coverage period. Also, a beneficiary enrolled in basic prescription drug coverage (as defined in § 423.100) would reach the coverage gap more quickly, with the costs of covered Part D drugs purchased during the coverage gap phase financed entirely by the beneficiary. In addition, since beneficiaries must have access to the same negotiated prices during the coverage gap, the higher the negotiated prices, the higher the amounts paid by beneficiaries for drugs in the coverage gap may be. Similarly, higher negotiated prices would mean higher cost-sharing for beneficiaries who reach the catastrophic threshold. Because cost-sharing for the catastrophic phase of the benefit generally is based on 5 percent of the negotiated price, the higher the negotiated price, the higher the cost-sharing at the catastrophic level.

For all these same reasons, higher negotiated prices would mean higher low-income cost sharing subsidies paid by the government. Under the low-income cost sharing subsidy, low-income subsidy eligible individuals pay reduced or no cost sharing for covered Part D drugs. The government subsidizes the cost sharing for these beneficiaries by reimbursing Part D sponsors for the difference between the cost sharing paid by other Part D beneficiaries and the cost sharing paid by low-income subsidy (LIS) eligible individuals. Higher negotiated prices would result in higher cost sharing paid by other Part D beneficiaries and therefore, higher low-income cost sharing subsidies paid by the government to plan sponsors.

Because higher negotiated prices (and therefore, higher total drug spend) will advance beneficiaries through the phases of the Part D benefit more quickly, a greater number of beneficiaries will reach the catastrophic phase of the benefit more quickly. In addition, higher negotiated prices generally will result in higher covered Part D drug costs during the catastrophic phase. As a result, the reinsurance subsidies paid by the government to Part D sponsors to reimburse 80 percent of the covered Part D drug costs in the catastrophic phase of the benefit will be higher.

We believe that, in a competitive market, negotiated prices would be minimized when such prices are fully transparent to plan sponsors and beneficiaries. Consequently we strove to base our guidance on the principle of limiting drug costs to the price paid at the pharmacy (meaning any pharmacy, including mail-order pharmacies). In the preamble to the final rule we explained that drug costs include: Ingredient cost, dispensing fee, and sales tax (70 FR 4307). These three terms refer to specific fields on the automated prescription drug claim transaction that unambiguously indicate the amounts paid to the pharmacy by the payer of the claim. Therefore, by using these terms, CMS intended to refer to the price paid at the pharmacy and not the price paid by the sponsor to the PBM. Furthermore, the preamble states that “we assume that ingredient cost and dispensing fee reflect point of sale price concessions in accordance with purchase contracts between plans (or their agents, such as PBMs) and pharmacies * * *” (70 FR 4307), and that ingredient cost and dispensing fee reflect the drug price paid to the pharmacy and should reflect any point-of-sale price concessions from the pharmacy whether they are provided directly to the Part D sponsor or indirectly through a contracted PBM. Thus, we intended to define the term “negotiated prices” consistent with “pass-through” prices, an industry term for the prices negotiated with and paid to the pharmacy (either directly by the sponsor or indirectly through an

intermediary contracting organization, such as a PBM on the sponsor's behalf). With “pass-through” prices, the price paid to the pharmacy is the price passed on to the beneficiary (and, in the case of LIS eligible individuals, to the government) at the point of sale.

However, after publication of the final rule and issuance of clarifying subregulatory guidance in Spring 2006, CMS received comments that the notice and comment rulemaking had not made this point clearly, and that the regulation could be read to allow an alternative interpretation of the price paid at the point of sale. Specifically, these comments asserted that the “lock-in” pricing approach, a contract method by which a plan sponsor agrees to pay a PBM a set rate for a particular drug which may vary from the price that the PBM negotiates with each pharmacy, also met the definition of negotiated prices issued in the regulation.

Under such pricing arrangements, the PBM consistently bills one “lock-in” price negotiated with the sponsor for a drug (often based on AWP), but may pay a variety of different prices to network pharmacies based on varying contractual terms. On any given drug purchase, the PBM may pay the pharmacy a higher or lower price than it will bill the plan sponsor. However, we assume that the prices billed to the plan sponsor are generally higher than the prices paid to pharmacies, resulting in an overall net profit to the PBM that is marketed as a “risk premium” earned for shielding the sponsor from price variability. We welcome comments on this assumption. Commenters argued that these stable prices negotiated between the sponsor and the PBM also met the definition of “negotiated prices” in the final rule. (We note that when the negotiated price under the plan is the lock-in price, if the pharmacy price is lower than the lock-in price, the pharmacy will still have to collect the higher lock-in price from the beneficiary during the deductible or coverage gap and transfer the excess amount to the PBM in some manner.) On the basis of that alternative interpretation, some Part D sponsor applicants who held network contracts through PBMs based on the lock-in pricing methodology had based their 2006 and 2007 bids on such prices and could not renegotiate such contracts easily.

Consequently, on July 20, 2006, we issued guidance to Part D sponsors stating that, in order to minimize disruption to plan operations, for 2006 and 2007, sponsors could, at their option, base beneficiary cost-sharing not on the price ultimately charged by the pharmacy for the drug, but on the “lock-in” price, the price the sponsor paid a pharmacy benefit manager (PBM) or other intermediary for the drug. We also stated our intent to issue a proposed rule that would require a single approach for calculating beneficiary cost sharing, based upon the price ultimately received by the pharmacy.

Therefore, we are now proposing to amend our definition of negotiated prices. We previously proposed to amend this definition in the notice of proposed rule making, Policy and Technical Changes to the Medicare Prescription Drug Benefit (72 FR 29403-29423). However, we chose not to finalize this proposed definition in the final rule (73 FR 20486-20509) in order to further examine the impact of this proposal and provide the public with an additional opportunity to comment on this proposed definition. We have noted below, some of the impact concerns for which we would like to receive additional comments. We will consider the comments received on this definition from the previous proposed rule, as well as comments received on this proposed rule when determining whether to finalize this policy.

In order to resolve the confusion caused by the Prescription Drug Benefit final rule, we are now proposing to amend the definition of “negotiated prices” (to be effective for Part D contract year 2010) to require that Part D sponsors base beneficiary cost sharing on the price ultimately received by the pharmacy or other dispensing provider. Specifically, we are proposing to revise § 423.100 so that the first part of the definition of “negotiated prices” would state that negotiated prices are prices that the Part D sponsor (or other intermediary contracting organization) and the network dispensing pharmacy or other network dispensing provider have negotiated as the amount the network dispensing pharmacy or other network dispensing provider will receive, in total, for a particular drug. The term “intermediary contracting organization” refers to organizations such as pharmacy benefit managers (PBMs) that contract with plan sponsors to provide one or more of a variety of administrative functions on the sponsor's behalf, such as negotiating pharmacy contracts, negotiating rebates and other price concessions from manufacturers, and/or providing drug utilization management or benefit adjudication services. The term “intermediary contracting organization” encompasses any entity that contracts with a plan sponsor to pay pharmacies and other dispensers for Part D drugs provided to enrollees in the Part D sponsor's plan, regardless of whether the intermediary contracting organization negotiates pharmacy contracts on behalf of the plan sponsor or on its own behalf. Similarly, the term “intermediary contracting organization” encompasses any entity that negotiates rebates or other price concessions with manufacturers for Part D drugs provided to enrollees in the Part D sponsor's plan, regardless of whether the intermediary contracting organization negotiates the rebate agreements explicitly on behalf of the plan sponsor or on its own behalf. Our proposed definition excludes any differential between the price paid to the pharmacy and the price paid to the PBM or other intermediary contracting organization, and instead treats that differential (or “risk premium”) as an administrative cost paid to the PBM or intermediary contracting organization rather than a drug cost under Part D. We elaborate on our reasons for in effect proposing to require the reporting of “pass-through” versus “lock-in” prices for Part D drug costs further below, as well as solicit specific comments from multiple stakeholders to ensure we are aware of all of the ramifications of this proposed policy.

We would also revise the definition of “negotiated prices” (to be effective upon the effective date of a final rule) to include prices for covered Part D drugs negotiated between the Part D sponsor (or its intermediary contracting organization) and other network dispensing providers. Part D sponsors can contract with providers other than a pharmacy to dispense covered Part D drugs, including them in their network. Therefore, we are amending the definition of negotiated prices to reflect the prices for covered Part D drugs that Part D sponsors (or their intermediary contracting organizations) negotiate with all their network dispensing providers.

There are a number of reasons for our decided preference for drug costs at the point of sale to be based on the amount actually paid to the pharmacy or other dispensing provider (hereafter referred to as pass-through prices) as opposed to the amount paid to the PBM (hereafter referred to as lock-in prices). In addition to our original intentions discussed above, we believe that continuing to allow lock-in prices to be used for Part D drug cost calculations and reporting could have several undesirable results:

1. Continued and probably increased cost shifting from the government to beneficiaries in the form of higher beneficiary out-of-pocket costs.

2. Interference with market competition among Part D sponsors.

3. Beneficiary confusion over actual drug prices.

4. Difficulties for pharmacies in explaining drug prices to customers and managing cash transfers to Part D sponsors or their intermediary contracting organizations contracting.

5. Continued and possibly increased risk of government risk-sharing on amounts that reflect administrative costs, contrary to Congressional intent to exclude risk-sharing on administrative expenses.

First, relative to pass-through prices, lock-in prices result in a cost shift from costs that would otherwise be fully paid by the government in the administrative cost portion of the basic Part D bid to costs that are paid in full or in part by the beneficiary. When the differential between the price paid to the pharmacy and the price paid to the PBM (sometimes referred to as “PBM spread” or “risk premium”) is treated as a drug cost, this amount is part of the cost basis on which beneficiary cost sharing is calculated. This is true whether the beneficiary is paying the total cost of the drug in the deductible or coverage gap in a basic plan, or whether cost sharing is structured as coinsurance or fixed copayments. Again, cost sharing for the basic portion of a Part D plan is based on the negotiated prices either directly, as a coinsurance percentage of the price of the drug, or indirectly, as a fixed copayment derived to result in actuarial equivalence in the aggregate to 25 percent of drug prices in the initial coverage phase or to approximately 5 percent in the catastrophic phase. Thus, when the PBM spread is added to the pharmacy's price in computing cost sharing, a beneficiary who utilizes drugs will generally pay more in cost sharing both during covered benefit intervals and during deductible and coverage gap periods for their drugs when the negotiated price is based on lock-in prices rather than pass-through prices, resulting in higher out-of-pocket beneficiary costs.

On the other hand, when the PBM spread is included in the administrative costs component of a Part D sponsor's bid, as opposed to being treated as a drug cost, the plan sponsor's bid would be increased by these amounts. Consequently, all other things being equal, the sponsor's bid must be higher with pass-through prices than with lock-in prices. While a higher bid increases premiums for the beneficiary and direct subsidy costs for the government, because of the formulas for calculating premiums and federal subsidies, the beneficiary only pays about 25 percent of this increase and the government pays the other approximately 75 percent.

Under the pass-through approach, therefore, for the vast majority of beneficiaries who utilize Part D drugs, total out-of-pocket costs, including both monthly Part D premiums and cost-sharing, are lower because (1) cost sharing per script is lower, (2) the lower drug costs advance the beneficiary through the benefit more slowly—allowing in general more scripts to be subsidized in the initial coverage phase, and (3) increased premium costs are principally borne by the government. On net, beneficiaries who utilize their drug benefits pay less under our proposed approach with negotiated prices based on pass-through prices because out-of-pocket costs are 100% borne by the beneficiary, but the beneficiary only pays about 25% of the premium.

We believe that the beneficiary is almost always better off paying the lowest possible point-of-sale price. Under the lock-in pricing approach, the lock-in prices that some plan sponsors pay to their PBMs are uniform for each drug across multiple network pharmacies. However, the pass-through prices paid to the pharmacy may differ across network pharmacies. Some plan sponsors may perceive value in the use of lock-in prices to define negotiated prices, so that beneficiaries may pay a uniform price across different network pharmacies. However, we believe that beneficiaries receive no value from paying more for drugs in return for always paying a uniform stable price. Therefore, we believe that beneficiaries who utilize their Part D benefits are almost always better off paying pass-through prices under our proposed approach.

We would acknowledge that lower premiums at the expense of higher out-of-pocket costs would advantage some Part D beneficiaries who are non- or very low utilizers of the benefit. However, from a public policy perspective, lowering premiums at the expense of higher cost sharing for those individuals who most need the benefit dilutes the insurance principle. The drug purchases of those beneficiaries who utilize their Part D benefits are subsidized in part by those who do not need the benefit. Shifting costs from premiums to cost sharing would reduce the sharing of risk and drug costs across beneficiaries by shifting a greater percentage of the drug costs to those beneficiaries who use more prescription drugs and, therefore, pay more cost sharing. Those beneficiaries who use fewer prescription drugs are more likely to enroll in those plans with lower premiums and higher cost sharing (for example, plans that utilize lock-in prices). Less healthy beneficiaries who use more prescription drugs are more likely to enroll in those plans with higher premiums and lower cost sharing (for example, plans that use pass-through prices). This would distort the risk pool for those plans using pass-through prices and drive their costs up as those enrollees who use fewer prescription drugs disenroll from these plans as the premiums increase to reflect the increased percentage of high utilizers in the plan. It is important to create and maintain the most robust risk pool possible under the Medicare Part D to maintain program stability.

In addition, as noted in the preamble to the final rule: “[a]s required under section 1860D-11(e)(2)(D)(i) of the Act and in § 423.272(b)(2), the structure of the benefit design (including cost sharing provisions and formulary design) must not be discriminatory; that is, it must not discourage enrollment by any Part D enrollee on the basis of health status * * *”. (70 FR 4297) We could argue that a business model and resulting benefit structure that by design shifts costs from the premium (where they would be paid by all) to cost sharing (where they are paid only by benefit utilizers) is per se discriminatory. That is, knowledgeable beneficiaries who seek to minimize their costs, who must utilize numerous prescription drugs due to their health status, and who use a tool such as the Medicare Prescription Drug Plan Finder, will determine that their costs are never minimized in a plan that bases their costs on lock-in prices—despite the lower premiums—and they will elect not to join that plan. Only non- or low utilizers of drug benefits might find that this plan design minimizes their costs. We believe that Congress instructed CMS to review Part D benefits in order to prohibit just this sort of systematically discriminatory benefit design.

All other things being equal then, requiring that those amounts paid by sponsors to PBMs (or other intermediary contracting organizations) that exceed the amounts paid by PBMs (or other intermediary contracting organizations) to pharmacies be treated as administrative costs will increase the basic Part D bid for any plan sponsor that previously based its bid on lock-in prices, shifting the majority of the cost to the direct subsidy paid by the government. This increase in direct subsidy costs will be offset somewhat by other payment impacts on the government. Specifically, reinsurance payments will be lower because (1) reinsurance payments are based on drug costs which generally are lower using

pass-through prices, and (2) fewer beneficiaries will reach catastrophic coverage due to being advanced through the earlier phases of the benefit more slowly. Similarly, the government's payments for low-income subsidy cost sharing are lower, as these subsidies are based on the negotiated price, which as previously explained is generally lower when based on pass-through prices. Thus, overall, a change from lock-in to pass-through prices will result in a cost shift from the beneficiaries who need the benefit most to the government—a result that, as we have argued above, is more consistent with the insurance principle.

The second potential undesirable impact of lock-in prices being used for drug cost calculations and reporting under the Part D program is interference with market competition. Because the cost shift from the government to the beneficiary lowers the bid, it also causes the plan's bid to become relatively more competitive. In fact, utilizing lock-in prices would seem to provide a competitive advantage to plans relative to other comparable plans that use pass-through prices, since premium levels are tied to the relationship between the plan's bid and the national average bid amount. The lower the plan's bid, the lower the difference between the plan's bid and the national average bid amount, and therefore, the lower the plan's premium. Unlike sponsors who do not use PBMs or other intermediary contracting organizations and, therefore, must base their bids on pass-through prices, those using PBMs or other intermediary contracting organizations currently have the option of using either pass-through or lock-in prices as the basis for their bids. This greater flexibility may give the latter a competitive advantage over the former. For example, to the extent a sponsor believes a lower premium rather than lower cost-sharing makes its plan more marketable, a sponsor contracting with a PBM may decide to use lock-in prices in its bid in order to obtain a lower premium. In addition, a sponsor may use lock-in prices in its bid to increase the likelihood that its plan qualifies for auto-enrollment and facilitated enrollment of LIS eligible individuals. To qualify for auto-enrollment and facilitated enrollment, a plan's premium must be at or below the low-income premium subsidy amount. A sponsor that is trying to gain or retain enrollment of LIS eligible individuals may use lock-in prices to help ensure that its plan premium is below the low-income premium subsidy amount. Thus, CMS believes that allowing both pricing approaches creates an unlevel playing field among plan sponsors. We specifically solicit comments on the economic and public policy impacts of this differential and whether it does in fact create an undesirable unlevel playing field, as between Part D sponsors contracting with PBMs or other intermediary contracting organizations and those who do not. We also solicit comments on each of the potential undesirable results discussed above.

In the discussion above we assumed that all other things were equal, and that the shift from one pricing methodology to the other only resulted in a shift in costs between the government and the beneficiary. That is, that overall program costs remained the same under either policy. However, arguments can be made that costs, both administrative as well as drug costs, would not remain the same under our proposed single approach.

On the one hand, some proponents of the lock-in approach have expressed concerns that our proposal would increase drug costs over time by discouraging the risk premium inherent in the lock-in method. They assert that the resultant pressure for downward pricing from the Part D sponsor would create a disincentive for PBMs to enter into this type of payment arrangement with plan sponsors. They are concerned that the demise of the lock-in model would result in the PBMs' role being reduced to one of mere claims processing agents with less incentive to negotiate the lowest possible network pharmacy discounts. In contrast, they contend that the risk premium incentives inherent in the lock-in approach result in significantly lower drug costs for Part D sponsors than other contractual models, and that the loss of this model could potentially increase drug costs, bids, premiums, and Part D program costs.

On the other hand, however, in response to the contention that the risk premium payment results in lower drug prices in the long run, we could argue that in a competitive market any potential increase in administrative fees (from transferring the spread to administrative costs) would be negotiated away in whole or in part with more perfect information in a fully transparent environment. For instance, our proposed changes do not prohibit Part D sponsors from contracting with PBMs for drug utilization management services and paying administrative incentive fees for reducing costs through such services. In a transparent environment, plans would be negotiating on lowest possible drug prices, as well as minimizing administrative costs, and these would be more clearly comparable among PBMs (or other intermediaries). It is not clear to us why PBMs would compete any less vigorously for the same level of profits included in administrative fees, or for the lowest possible network pharmacy negotiated prices in order to earn those fees. Therefore, we are more persuaded by the counterargument that the PBM spread is in fact an additional profit earned due to asymmetry in market information that might well be reduced with more transparency in pricing. Under these assumptions, leaving the additional costs in administrative costs would reduce bids, premiums, and total Part D program costs over time.

Moreover, nothing in our proposed rule prohibits the payment of a risk premium to the PBM by the plan sponsor. Our proposed changes to the definition of negotiated prices do not interfere with the negotiations between Part D sponsors, pharmacy benefit managers, and pharmacies for covered Part D drugs. Rather, we propose that Part D sponsors would be required to use the price ultimately received by the pharmacy (or other dispensing provider) as the basis for calculating beneficiary cost sharing, total drug spend, and cost reporting to CMS. We do not require a Part D sponsor to use a particular pricing approach in its contracting agreements with PBMs. Part D sponsors may continue to use either the pass-through or lock-in pricing approach when contracting with a PBM—provided that beneficiary cost sharing, total drug spend, and the drug costs reported to us are based on the price ultimately received by the pharmacy. To the extent that Part D sponsors believe that the lock-in pricing contracting approach reduces their total costs, we expect that they will continue to use it when contracting with a PBM. We solicit comments on whether Part D sponsors and PBMs would use the lock-in pricing contracting approach in certain cases if the proposed policy were finalized.

We solicit comments from plan sponsors, other industry contracting experts, benefit consultants, and market analysts on the impact of our proposed change on aggregate pricing exhibited between plans and PBMs, as well as on the prevalence of and trends in lock-in pricing arrangements between plan sponsors and PBMs. In particular, we are soliciting comments on whether lock-in pricing truly offers benefits to sponsors equal to the value of the risk premium, or whether the existence of the risk premium is in effect a higher

price exacted from sponsors without the leverage to negotiate lower costs or due to asymmetry in market information as between PBMs and sponsors. We also solicit comments on whether stakeholders consider the proposed definition of “negotiated prices” to represent strictly a change in reporting requirements for Part D plan sponsors. We solicit comments on how contractual relationships and requirements may change between and among Part D plan sponsors and their first-tier, downstream, and related entities.

Our third concern with lock-in pricing involves the confusion that may be caused for beneficiaries whenever they see the difference between the price paid to the pharmacy and the price charged to the plan sponsor. While we understand that the intent is for the beneficiary to see the same information on drug prices on the pharmacy's receipt, on the Medicare Prescription Drug Plan Finder, and on the plan's Explanation of Benefits (EOB), this does not always happen. Under lock-in pricing, the EOB which the beneficiary receives from the plan may currently reflect the price the plan sponsor pays its PBM (the lock-in price) instead of the price negotiated with the pharmacy. We understand that pharmacies generally do not customize receipts for payers, and those that print total amounts paid on their receipts will not always be able to alter those amounts to correspond to the prices the plan sponsor pays its PBM. Even for cases in which the pharmacy does not print out total amounts received on its receipt, the same issues may occur in the deductible or coverage gap when the patient pay amount may equal the lock-in price, which could be higher than the price paid to the pharmacy. Whenever the pharmacy receipt does display the pharmacy's price, the beneficiary may see the discrepancy in price between the receipt and the plan's EOB. Even when receipts display the plan's price, the beneficiary may see discrepancies between the price they pay and pharmacy advertised specials or prices offered to a friend and believe the price they paid was wrong. Beneficiaries may perceive these discrepancies in drug prices as fraud and place complaints or inquiries. Reviewing and addressing these types of inquiries serves to increase administrative costs for pharmacies, plan sponsors, and the government. Moreover, if pharmacies were to err and charge pass-through prices during the coverage gap instead of the lock-in prices, actual beneficiary true out-of-pocket (TrOOP) expenses might diverge from the amounts reported on the plan's EOB, possibly leading to an overstatement of TrOOP costs in plan (PBM) claims payment systems. We solicit comments, particularly from beneficiary advocates, on the extent to which they are hearing of beneficiary concerns around such discrepancies.

The fourth potential undesirable impact concerns difficulties that may be caused for pharmacies in explaining apparent price discrepancies to customers, as well as the additional administrative burden of managing the resulting cash transfers between the beneficiary and the PBM. If a beneficiary notices an apparent price discrepancy as described above, the beneficiary is likely to ask the pharmacy for an explanation. We believe the pharmacy must then expend scarce staff resources on explaining the discrepancy and managing the beneficiary's reaction. Moreover, whenever the additional amount that exceeds the price negotiated between the PBM and pharmacy has been collected from the beneficiary, the pharmacy must have in place and manage accounting processes to transfer the additional amounts to the PBM and support ongoing reconciliations. We solicit comments from both chain and independent pharmacies on the extent to which these or any other impacts from lock-in prices have been incurred.

We are not aware of any advantages to pharmacies from lock-in prices. We have heard the argument that the proposed changes would have a disproportionately negative impact on small independent pharmacies. Under the lock-in pricing approach, Part D sponsors negotiate a single rate with their contracted PBMs and, therefore, are generally not aware of the different rates paid by the PBMs to each pharmacy. This argument suggests that under the revised definition of negotiated prices, Part D sponsors would be made aware of the different rates paid to each pharmacy, and, in particular, Part D sponsors would become aware of higher-cost pharmacy providers, which are generally small independent pharmacies that are unable to offer the more aggressive drug prices provided by retail chain pharmacies. This argument presupposes that in their efforts to reduce drug costs, Part D sponsors would then remove these higher-cost pharmacies from their pharmacy networks, leading to a significant impact on the financial viability of these pharmacies.

We are not persuaded by this argument at this time. First, as discussed above, we believe that under the revised definition of negotiated prices Part D sponsors may still use either the pass-through or lock-in pricing approach in their contracts with PBMs if sponsors continue to place value on being shielded from price variations. Moreover, even under transparent pricing arrangements, we expect that Part D sponsors would continue to contract with small independent pharmacies in order to satisfy our pharmacy access standards as outlined in § 423.120. In order to meet these rigorous pharmacy access standards, Part D sponsors would have to continue to contract with many if not most of these independent pharmacies and include them in their pharmacy networks. Moreover, we expect that Part D sponsors likely will determine that the proportion of their utilization that comes through independent pharmacies with the leverage to negotiate significantly higher reimbursements is generally not sufficiently large to significantly affect aggregate drug costs. Therefore, we are unable to conclude at this time that these proposed changes would have any adverse effects on pharmacies, including small independent pharmacies, and we solicit comments from all pharmacies on this question.

The final potential undesirable impact we attribute to lock-in prices is the continued, and possibly increased, risk of government risk-sharing on costs that may be better treated as administrative expenses. The payment of risk-sharing on those portions of “drug costs” under the lock-in methodology that are retained by the PBM or other intermediary appears contrary to Congressional intent. For both reinsurance and risk-sharing payments CMS is required to exclude “administrative costs” from the calculations. In accordance with § 1860D-15(b)(2) of the statute, and as codified at § 423.308, “allowable reinsurance costs” are defined as a subset of “gross covered prescription drug costs.” “Gross covered prescription drug costs” are defined as “ * * * the costs incurred under the plan, not including administrative costs, but including costs directly related to the dispensing of covered Part D drugs * * *” (§ 1860D-15(b)(3)). Similarly, definitions of “allowable risk corridor costs”, at § 1860D-15(e)(1)(B) of the statute and § 423.308 of the regulations, exclude administrative costs. We believe that any “risk premium” paid to the PBM to smooth actual drug expenses should be considered an administrative contracting cost, or like a drug utilization management program cost to

the plan. Thus, in order to exclude those amounts from being included in the reinsurance and risk-sharing calculations, we believe CMS should treat these costs as administrative costs and not as drug costs.

While there is no question that reinsurance costs to the government increase with lock-in prices (since per claim drug costs are higher and a greater number of beneficiaries will reach catastrophic coverage), it is possible that there would be no significant difference between the lock-in and pass-through prices with respect to government risk sharing

under certain constraints

. Very simply stated, risk sharing involves comparing the sum of drug costs anticipated in the plan sponsor's bid and paid prospectively through government and beneficiary monthly premiums (the “target amount”) to the drug costs actually incurred, with the government then paying or recouping a portion of the difference. As long as the drug costs reflected in the bid are calculated in precisely the same way as the drug costs submitted to CMS as allowable costs, the target amount and the allowable costs will rise together. However, if a plan were to submit bids based on one level of PBM spread, but then submit costs to CMS reflecting a higher level of spread, then the difference between prospective costs and incurred costs would be increased. In the long run we believe lack of transparency could allow plans to game risk sharing and include extra administrative costs in the allowable drug cost reporting. If this would happen, and the plans used lower drug costs in the bid but included additional administrative costs in the allowable costs submitted in reconciliation, then the government risk sharing costs would increase. We solicit comments on the issues identified above concerning government risk sharing on costs that may more appropriately be considered administrative expenses.

b. Subpart G—Payments to Part D Plan Sponsors for Qualified Prescription Drug Coverage (Definitions and Terminology, § 423.308)

i. Actually Paid (§ 423.308)

In the April 2006 Call Letter, CMS stated that Part D sponsors must report 100 percent of the rebates and price concessions they receive, including the portion of manufacturer rebates retained by PBMs. In other words, in defining price concessions that must be netted from drug costs, CMS does not make a distinction between a price concession that is passed fully through to the plan sponsor by the PBM (or any other intermediary contracting organization) and a price concession that is partially passed on and partially retained by the PBM (or any other intermediary contracting organization). When a PBM retains rebate amounts associated with drugs being purchased for enrollees in a Part D plan with which the PBM contracts, this revenue permits the PBM to charge the Part D sponsor a lower amount in administrative fees and still make the same income on the transaction. When a rebate of x amount is paid to the PBM, the Part D sponsor benefits from that rebate whether it is passed on to the sponsor in its entirety, or it is available as revenue to the PBM.

Thus, regardless of whether the PBM passes through 100% of rebates and the Part D sponsor in turn writes a check for 100% of administrative fees owed the PBM, or whether the PBM retains a portion of rebates and the Part D sponsor benefits from the fact that this revenue permits the PBM to charge a lower administrative fee for the transaction—the result is the same. The total amount of rebates received by the PBM for the Part D drugs dispensed under the Part D sponsor's contract must be reported as a price concession through DIR reporting to CMS. If we did not adopt this approach, a PBM and a Part D sponsor would be able to manipulate the amount reported in amounts actually paid simply by recasting administrative fees, which must be excluded, as rebates retained by the PBM that would not have to be reported as rebates to the PDP sponsor that benefits from the PBM's receipt of this revenue.

Therefore, we are proposing to include language in the definition of “actually paid” that codifies and clarifies our previous guidance, and provides that direct or indirect remuneration includes discounts, chargebacks or rebates, cash discounts, free goods contingent on a purchase agreement, up-front payments, coupons, goods in kind, free or reduced-price services, grants, or other price concessions or similar benefits from manufacturers, pharmacies or similar entities obtained by an intermediary contracting organization with which the Part D sponsor has contracted for administrative services, regardless of whether the intermediary contracting organization retains all or a portion of the direct and indirect remuneration or passes the entire direct and indirect remuneration to the Part D sponsor. Similarly, we are clarifying that this definition of actually paid applies regardless of the terms of the contract between the plan sponsor and any intermediary contracting organization. We solicit comment on this proposed clarification.

We believe that the above analysis has equal applicability in the Retiree Drug Subsidy (RDS) context, when a qualified retiree prescription drug plan contracts with a PBM, and the PBM retains rebate amounts associated with drugs obtained for a qualifying covered retiree. Again, the qualified retiree prescription drug plan benefits from the fact that revenue attributable to drugs purchased for its retirees is available to the PBM, because the PBM would not need to charge the sponsor of the qualified retiree prescription drug plan as much in administrative fees to make the same revenue on the transaction. As in the case of a Part D sponsor, if rebate amounts retained by a PBM were not deducted from the qualified retiree prescription drug plan's costs, the plan and the PBM could ensure higher RDS payments simply by recasting administrative costs as retained rebates. Therefore, as discussed below, we are proposing to make similar amendments to the definitions in Subpart R that apply to the RDS program.

ii. Administrative Costs (§ 423.308)

The statute requires CMS to exclude administrative costs from the calculation of gross covered prescription drug costs and allowable risk corridor costs. However, administrative costs are not defined in either the statute or the January 28, 2005 final rule. Therefore, to explain this term and clarify which costs are included in administrative costs, we are proposing to add a definition for the term “administrative costs”. We previously proposed to add this definition in the notice of proposed rule making, Policy and Technical Changes to the Medicare Prescription Drug Benefit (72 FR 29403 through 29423). However, we chose not to finalize this proposed definition in order to further examine the impact of this proposal and provide the public with an additional opportunity to comment on this proposed definition. We will consider the comments received on this definition from the previous proposed rule, as well as comments received on this proposed rule when finalizing this rule.

In this definition, we propose to define “administrative costs” as the Part D sponsor's costs other than those incurred to purchase or reimburse the purchase of Part D drugs under the Part D plan. Included in the definition of administrative costs are any costs incurred by Part D plans on drug claims that differ from the price charged by a dispensing entity for covered Part D drugs. As discussed above in the section

on Negotiated Prices, any net profit (or “risk premium”) retained by a PBM that is added to the prices paid to pharmacies and billed to a Part D sponsor would be considered an administrative cost and not a drug cost. As discussed above, we believe this is because such amounts are more appropriately considered costs the plan chooses to incur to mitigate its market risk around the costs of drugs, rather than the cost of the drugs itself, and should be viewed as analogous to the cost of drug utilization management programs and similar services purchased from PBMs to manage drug costs. In order to create a level playing field around the treatment of all such related costs, we propose to clearly categorize this “net profit”, “risk premium”, or “PBM spread” as an administrative cost to the Part D plan sponsor.

The proposed policy would also refine our interpretation of the statutory and regulatory definitions of “allowable reinsurance costs” and “allowable risk corridor costs,” which in both cases exclude any administrative costs of the sponsor. By statute, “allowable reinsurance costs” are a subset of “gross covered prescription drug costs,” and Congress specifically defined these gross costs as “not including administrative costs.” (See sections 1860D-15(b)(2) and 1860D-15(b)(3) of the Act.) Similarly, Congress defined “allowable risk corridor costs” as “not including administrative costs.” (See section 1860D-15(e)(1)(B) of the Act.) In the January 28, 2005 final rule, we adopted these definitions. (70 FR 4547.) As noted above, we interpret administrative costs to include any net profit (or loss) incurred by an intermediary contracting organization (for example, a pharmacy benefit manager (PBM)) as a result of lock-in pricing. Therefore, this net profit or loss must not be included in the reinsurance and risk corridor payments made by the government, as these payments exclude administrative fees. Thus, the Ingredient Cost, Dispensing Fee, Sales Tax, Gross Drug Cost below the Out of Pocket Threshold, and Gross Drug Cost above the Out of Pocket Threshold fields on Prescription Drug Event (PDE) records submitted to CMS would need to reflect the final amount ultimately received by the pharmacy at the point of sale.

We are aware of concerns that the proposed definition of administrative costs would indirectly prohibit the purchase of drugs from certain entities such as PBMs. In addition, it has been argued that any costs incurred to buy drugs should be considered drug costs regardless of the party from whom the drug is purchased. However, the proposed definition for administrative costs would not directly or indirectly require Part D sponsors to purchase drugs from dispensing providers only. Part D sponsors would continue to have the option to contract or purchase drugs from other entities such as PBMs. However, to the extent that the amounts paid to a PBM for administrative services provided to a Part D sponsor are included in the cost of the drug under the lock-in pricing approach, Part D sponsors would be required to report this spread amount as an administrative cost. These administrative costs would be excluded from the Part D sponsor's allowable reinsurance and allowable risk corridor costs as required by statute.

The proposed definition of administrative cost does not include administrative fees or other remuneration that a PBM receives on behalf of a plan from pharmaceutical manufacturers or biotechnology companies. CMS considers these amounts price concessions which directly or indirectly reduce the Part D sponsor's costs under its Part D plan. Therefore, Part D sponsors would continue to report these administrative fees as DIR to ensure that they are excluded from allowable reinsurance costs and allowable risk corridor costs.

Again, this same analysis applies in the RDS context to amounts a PBM retains in connection with price concessions that reduce the qualified retiree prescription drug plan's drug costs.

iii. Gross Covered Prescription Drug Costs and Allowable Risk Corridor Costs (§ 423.308)

Part D sponsors are required to report drug costs to CMS for the purposes of reconciliation and risk sharing. We are required by statute to calculate reinsurance payments using “allowable reinsurance costs,” a subset of “gross covered prescription drug costs,” which Congress specifically defined as “not including administrative costs.” (See sections 1860D-15(b)(2) and 1860D-15(b)(3)of the Act). Risk sharing payments are calculated using “allowable risk corridor costs,” which are also defined as “not including administrative costs.” (See section 1860D-15(e)(1)(B) of the Act.)

There have been several questions regarding the appropriate drug costs to report, particularly when a Part D sponsor has contracted with a PBM. The January 28, 2005 final rule defines “gross covered prescription drug costs” as “those actually paid costs incurred under a Part D plan, excluding administrative costs * * * [equal to:] (1) All reimbursement paid by a Part D sponsor to a pharmacy (or other intermediary) * * * plus (2) All amounts paid under the Part D plan by or on behalf of an enrollee (such as the deductible, coinsurance, cost sharing, or amounts between the initial coverage limit and the out-of-pocket threshold) in order to obtain drugs covered under the Part D plan.” (70 FR 4547)

The January 28, 2005 final rule definition of “gross covered prescription drug costs” specifically recognizes that reimbursement may be paid by a Part D sponsor “to a pharmacy (or other intermediary).” (70 FR 4547) Many interpreted the term “intermediary” to mean PBM (rather than an agent of the pharmacy or other dispensing provider). Using this definition, many plan sponsors reported as gross covered prescription drug costs the prices they negotiated with their PBMs, rather than the prices that were agreed upon as the amount to be received by the pharmacies.

We propose rectifying these conflicting definitions to require the plan sponsor to include the net profit or loss retained or incurred by a PBM as part of lock-in pricing to be part of the administrative costs of the plan sponsor. This would require the amount ultimately received by the pharmacy (minus any other point-of-sale price concessions) to be used in calculating cost sharing for plan years 2010 and beyond. We previously proposed to amend this definition in the notice of proposed rule making, Policy and Technical Changes to the Medicare Prescription Drug Benefit (72 FR 29403-29423). However, we chose not to finalize this proposed definition in the final rule (73 FR 20486-20509) in order to further examine the impact of this proposal and provide the public with an additional opportunity to comment on this proposed definition. We will consider the comments received on this definition from the previous proposed rule, as well as comments received on this proposed rule when determining whether to finalize this policy. Specifically, we are proposing to amend the definition of “gross covered prescription drug costs” to eliminate the parenthetical “or other intermediary” to require that all plan sponsors report the amount ultimately received by the pharmacy or other dispensing provider. We propose that the amount ultimately received by the pharmacy or other dispensing provider (whether directly or indirectly) for the particular drug will be the basis for accumulating gross covered drug costs and reporting drug costs on the Prescription Drug Event (PDE) records.

Similarly, we propose clarifying our definition of “allowable risk corridor costs” so that it is clear that these costs are only based upon the amounts received directly by the pharmacy or other dispensing provider. This is because we would consider any net profit (or loss) earned by a PBM or other entity negotiating contracts with pharmacies to constitute an administrative cost, and therefore, to be exempt from the definition of allowable risk corridor costs, as well as gross covered prescription drug costs. Thus, for example, if a Part D sponsor pays a PBM a certain amount for a particular drug, and then the PBM negotiates a different price with the pharmacy, any differential retained or lost by the PBM would be considered an administrative cost, and could not be reported as part of drug costs. As discussed above in the section on Negotiated Prices, the net profit or loss (or “risk premium”) retained by a PBM that is added to the prices paid to pharmacies and billed to a Part D sponsor under the lock-in pricing approach would be considered an administrative cost. As argued above, such amounts are more appropriately considered costs that the plan chooses to incur to mitigate its market risk around the costs of drugs, rather than the cost of the drugs itself, and should be viewed as analogous to the cost of drug utilization management programs and similar services purchased from PBMs to manage drug costs. In order to create a level playing field around the treatment of all such related costs, we propose to clearly categorize this “profit”, “risk premium”, or “PBM spread” as an administrative cost to the Part D plan sponsor and to explicitly disallow it from gross covered prescription drug costs, allowable reinsurance costs (a subset of gross covered prescription drug costs), and allowable risk corridor costs.

We, therefore, propose revising the definitions of “gross covered prescription drug costs” and “allowable risk corridor costs” to establish that the amount received by the dispensing pharmacy or other dispensing provider (whether directly or through an intermediary contracting organization) is the basis for drug cost that must be reported to CMS, and not the amount paid by the Part D sponsor to the PBM. Accordingly, we are revising § 423.308 to incorporate these changes.

We are aware of concerns that these proposed changes to the definitions of gross covered drug costs and allowable risk corridor costs may require Part D sponsors to depend heavily on information traditionally held exclusively by PBMs. For the sponsor's convenience, or for other reasons, such as to protect the privacy of beneficiary personal health information data, a Part D sponsor's contractor may submit drug cost data on the Part D sponsor's behalf to CMS directly rather than through the Part D sponsor. Therefore, some have argued, the Part D sponsor cannot attest to the validity of drug cost data it does not see. However, because we contract with Part D sponsors for the provision of the Medicare prescription drug benefit, Part D sponsors, and not their subcontractors, are ultimately responsible for the quality of data submitted to us. Part D sponsors that choose to contract with a PBM or any other third party administrator, therefore, must take reasonable steps to ensure that the data submitted to us on their behalf is accurate and timely. For example, the sponsor may engage an independent auditor to audit the data prior to its submission to us.

We also propose amending the definition of “gross covered prescription drug costs” and “allowable risk corridor costs” to ensure that when entities other than pharmacies dispense Part D drugs and receive payment for Part D drugs, these expenditures also are reflected in gross covered prescription drug costs and allowable reinsurance costs, as well as allowable risk corridor costs. For instance, reimbursement for a vaccine that must be administered in a physician's office and reimbursement made to a third party payer in accordance with our coordination of benefits (COB) requirements are both legitimate drug costs that have been incurred through the payments indicated. In addition, in accordance with § 423.464, the Part D sponsor must coordinate benefits with other Part D plans as the result of any reconciliation process developed by CMS under § 423.464, such as when another Part D plan mistakenly paid for a prescription drug on the beneficiary's behalf based on an erroneous belief that the beneficiary was actually enrolled in its plan. In these cases, when the enrollment error is corrected, the beneficiary's true plan generally will reconcile payments with the original payer. The drug costs paid by Part D plans (as well as by the beneficiary) under these reconciliation processes reflect drug costs incurred by the plan's enrollees that a payer other than the correct Part D plan of record paid as primary. As drug costs paid for Part D covered drugs under Part D plans, these costs are included in the calculations of reinsurance costs and risk corridor costs. Therefore, we have amended the definition of “gross covered prescription drug costs” and “allowable risk corridor costs” in § 423.308 to include all these drug costs.

We also propose amending the definition of “gross covered prescription drug costs” to ensure that when a beneficiary is responsible for 100 percent of the cost for a covered Part D drug (as in any applicable deductible or coverage gap of a basic plan), and the beneficiary obtains that covered Part D drug at a network pharmacy for a price below the plan's negotiated price, the beneficiary's out-of-pocket costs that are considered “incurred costs” for covered Part D drugs count toward both TrOOP and total drug spending. This is consistent with guidance released via Q&A 7944 (issued May 9, 2006

http://questions.cms.hhs.gov/cgi-bin/cmshhs.cfg/php/enduser/std_alp.php?p_sid=gIVVcxhi.

) For example, when an enrollee is in an applicable coverage gap or deductible phase of the Part D benefit, the enrollee may be able to obtain a better cash price for a covered Part D drug at a network pharmacy than the plan offers via its negotiated price. The enrollee may take advantage of a special cash price or discount being offered to all pharmacy customers for the covered Part D drug or, alternatively, use a discount card. In such cases, the enrollee purchases a covered Part D drug without using the membership card for his or her Part D plan. If that purchase price is lower than the Part D plan's negotiated price, it will count toward TrOOP and total drug spend balances, provided the Part D plan finds out about the purchase. When the enrollee chooses not to use his/her membership card at a network pharmacy, that enrollee must take responsibility for submitting the appropriate documentation to the enrollee's Part D plan, consistent with plan-established processes and instructions for submitting that information, in order to have that amount aggregated to the beneficiary's TrOOP and total drug spend balances. We are aware of concerns that it is overly burdensome to require beneficiaries to submit claims for these reduced price purchases. However, we cannot require in-network pharmacies to submit these claims to Part D sponsors electronically, because at this time the HIPAA standard for claims submission does not accommodate the electronic transmission of this claim information by network pharmacies. To the extent that a future revision of the HIPAA standard does accommodate such transactions, we would support minimizing the submission of paper claims by beneficiaries.

The applicability of beneficiary out-of-pocket expenditures made outside the Part D benefit to TrOOP and total drug spend also extends to any nominal copayments assessed by manufacturer patient assistance programs (PAPs) that provide assistance with covered Part D drug costs to Part D enrollees outside the Part D benefit. Consistent with guidance provided via Q&A 7942 (

http://questions.cms.hhs.gov/cgi-bin/cmshhs.cfg/php/enduser/std_alp.php?p_sid=gIVVcxhi

), providing assistance with covered Part D drug costs to Part D enrollees outside the Part D benefit does not preclude a PAP sponsor from requiring its enrollees (including those enrolled in a Part D plan) from paying a nominal copayment when they fill a prescription for a covered Part D drug for which they provide assistance. We note that any copayments assessed by PAPs operating outside the Part D benefit should be nominal, since only nominal beneficiary cost-sharing is consistent with the concept of operating outside Part D. Moreover, given that copayments are typically assessed for purposes of minimizing drug over-utilization, the assessment of anything but nominal cost-sharing by PAPs is seemingly inconsistent with the mission of a charitable organization structured to provide assistance with prescription drug costs to low-income patients.

Although PAP payments made for covered Part D drugs outside the Part D benefit do not count toward enrollees' TrOOP or total drug spend balances, nominal PAP copayment amounts paid by affected Part D enrollees can be applied to their TrOOP and total drug spend balances, provided the enrollees submit the appropriate documentation to their plan consistent with plan-established processes and instructions for submitting the information. We are proposing to revise the definition of “gross covered prescription drug costs”, as well as the definition of “incurred costs” in § 423.100, to include these drug costs and to reflect this sub-regulatory guidance.

We also note that § 423.308 includes a definition of the term “target” amount. Due to a technical formatting error, this definition appears to be the second paragraph of the definition of gross covered prescription drug costs. To clarify that the definition of “target amount” is not part or a component of the definition of gross covered prescription drug costs, but is a separate definition of a different term, we are proposing to revise the current discussion of “target amount” and are providing an amendatory instruction to add the definition in § 423.308. We are proposing technical edits to this definition to ensure that the structure of the definition is similar to that of other definitions in this section. We are proposing no substantive changes to the definition.

c. Subpart R: Payments to Sponsors of Retiree Prescription Drug Programs (Definitions, § 423.882)

Section 423.882 codifies existing guidance. Given the similarities between the statutory definitions of “gross covered prescription drug costs” under section 1860D-15(b)(3) of the Act and “gross covered retiree plan-related prescription drug costs” under section 1860D-22(a)(3)(C)(ii) of the Act, we have consistently stated our intent to determine gross covered retiree plan-related prescription drug costs in a manner corresponding to our determination of gross covered prescription drug costs. Additionally, given the similarities between the statutory definitions of “allowable reinsurance costs” under section 1860D-15(b)(2) of the Act and “allowable retiree costs” under section 1860D-22(a)(3)(C)(i) of the Act, we determine allowable retiree costs in a manner parallel to how we determine allowable reinsurance costs. For example, for terminology not specifically defined under § 423.882, we generally utilize the relevant Part D definitions to the extent that they are consistent with the statutory provisions under section 1860D-22 of the Act. In addition, our RDS guidance related to the calculation of gross covered retiree plan-related prescription drug costs (or “gross retiree costs”) and allowable retiree costs generally corresponds with the Part D guidance on the calculation of gross covered prescription drug costs and allowable reinsurance costs.

In order to ensure continued consistency between the RDS program and Part D, and because, as noted above, we believe the same policy arguments in favor of the Part D definitions apply to similar arrangements under the RDS program, we believe that the regulatory definitions under § 423.882 applicable to the RDS program should mirror the corresponding Part D definitions under § 423.100 and § 423.308. Accordingly, we propose to make the following additions and revisions to § 423.882 to be consistent with the corresponding existing and proposed definitions under § 423.100 and § 423.308. The proposed definitions under § 423.882 include codification of existing CMS guidance.

•

Actually Paid:

We propose to add this definition to mirror the proposed revised definition under § 423.308, with the exception of technical changes and clarifications to reflect its application to the RDS program. Specifically, we propose to define actually paid to mean that the costs must be actually incurred by the qualified retiree prescription drug plan (and/or the qualifying covered retiree) and must be net of any direct or indirect remuneration from any source (including manufacturers, pharmacies, qualifying covered retirees, or any other person) that would serve to decrease the costs incurred under the qualified retiree prescription drug plan. Similarly, we are also proposing to include language in this definition that provides that direct or indirect remuneration includes discounts, chargebacks or rebates, cash discounts, free goods contingent on a purchase agreement, up-front payments, coupons, goods in kind, free or reduced-price services, grants, or other price concessions or similar benefits from manufacturers, pharmacies or similar entities obtained by an intermediary contracting organization with which the sponsor of the qualified retiree prescription drug plan has contracted for administrative services, regardless of whether the intermediary contracting organization retains all or a portion of the direct and indirect remuneration or passes the entire direct and indirect remuneration to the sponsor of the qualified retiree prescription drug plan. Similarly, we are clarifying that this definition of actually paid applies regardless of the terms of the contract between the sponsor of the qualified retiree prescription drug plan and any intermediary contracting organization.

•

Administrative costs:

We propose to add this definition to mirror the proposed revised definition under § 423.308 with the exception of minimal changes to reflect the RDS terminology. Specifically, we propose to define administrative costs to mean costs incurred by a qualified retiree prescription drug plan that are not drug costs incurred to purchase or reimburse the purchase of Part D drugs and that differ from the amount paid by or on behalf of the plan to a pharmacy or other entity that is the final dispenser of the drug. Similarly, we are proposing to include language in this definition that any profit or loss retained by the intermediary contracting organization (through discounts, rebates, or other direct or indirect price concessions) when negotiating prices with dispensing entities is considered an administrative cost.

•

Allowable Retiree Costs:

We propose to make changes to the existing definition to mirror the relevant portions of the existing definition of “allowable reinsurance costs” under

§ 423.308. Specifically, we propose to revise the definition of allowable retiree costs under § 423.882 by clarifying that allowable retiree costs are the subset of gross covered retiree plan-related prescription drug costs actually paid by the qualified retiree prescription drug plan or by or on behalf of a qualifying covered retiree.

•

Gross covered retiree plan-related prescription drug costs:

We propose to revise the existing definition of “gross covered retiree plan-related prescription drug costs” (or “gross retiree costs”) to mirror the proposed definition of “gross covered prescription drug costs” under § 423.308, with the exception of minimal changes to reflect the RDS terminology. Specifically, we propose to revise our definition of gross retiree costs to clarify that these costs equate to the sum of the negotiated prices (as defined in the proposed definition) actually paid by the qualified retiree prescription drug plan (and/or qualifying covered retirees) and received by the dispensing pharmacy (or other dispensing entity), or received by other entities pursuant to the plan's coordination of benefits (COB) activities. As with our existing definition of gross retiree costs, our proposed definition would exclude administrative costs from gross retiree costs.

•

Negotiated Prices:

We propose to add this definition to mirror the proposed definition of negotiated prices under § 423.100 with the exception of minimal changes to reflect RDS terminology. Specifically, we propose to define negotiated prices for Part D drugs as the prices that the qualified retiree prescription drug plan (or other intermediary contracting organization) and the network dispensing pharmacy or other network dispensing provider have negotiated as the amount such network entity will receive, in total, for a particular drug, net of discounts, direct or indirect subsidies, rebates, other price concessions, and direct or indirect remuneration that the qualified retiree prescription drug plan has elected to pass through to qualifying covered retirees at the point of sale. Similarly, we are proposing that negotiated prices include any dispensing fees.

Under these proposed definitions, payments made to RDS plan sponsors of qualified retiree prescription drug plans (or “RDS sponsors”) would be based upon “pass-through” prices and not “lock-in” prices that the RDS plan sponsor pays to a PBM or other intermediary contracting organization. We elaborate on our reasons for requiring “pass-through” versus “lock-in” prices for RDS plan drug costs further below, as well as solicit specific comments from stakeholders to ensure we are aware of all of the ramifications of this proposed policy.

The “pass through” vs. “lock in” approach is being proposed for RDS plan sponsors for many of the same policy considerations that, as discussed in section II.B.4 of this proposed rule, underlie our proposed modifications to the Part D definitions of “negotiated prices,” “administrative costs,” “allowable risk corridor costs,” and “gross prescription drug costs” under § 423.100 and § 423.308. Specifically, the RDS payment is calculated based on allowable retiree costs, which in turn is a subset of gross retiree costs. (See sections 1860D-22(a)(3)(A),(C)(i), and (C)(ii) of the Act.) The statute requires CMS to exclude administrative costs from the calculation of gross covered retiree plan-related prescription drug costs and subsidizing these costs would therefore be contrary to Congressional intent. (See section 1860D-22(a)(3)(C)(ii) of the Act.) As explained in section II.B.3.a.ii of this proposed rule, discussing the proposed Part D definition of Negotiated Prices, we believe any net profit (or “risk premium”) retained by a PBM that is added to the prices paid to pharmacies and billed to a Part D sponsor should be considered an administrative cost and not a drug cost. This same principle equally applies to the RDS program. Because we believe any net profit or risk premium retained by a PBM or similar intermediary contracting organization should be considered administrative costs and not drugs costs, we believe including these costs in gross retiree costs and allowable retiree costs would be contrary to Congressional intent that the RDS payment not subsidize an RDS sponsor's administrative costs. To ensure that these amounts are excluded from gross and allowable retiree costs, we, therefore, propose to define administrative costs as including any profit or loss retained by an intermediary contracting organization contracting with an RDS sponsor that differs from the amount paid to a pharmacy or other entity that is the final dispenser for drugs dispensed to qualifying covered retirees. We solicit comments on all proposed definitions discussed above.

We note that our proposed definition of administrative costs would not directly or indirectly require RDS plan sponsors to purchase drugs from dispensing providers only, and RDS plan sponsors would continue to have the option to contract or purchase drugs from other entities such as PBMs. However, to the extent that the amounts paid to a PBM or similar intermediary contracting organization for administrative services provided to a RDS plan sponsor are included in the cost of the drug under the lock-in pricing approach, RDS plan sponsors would be required to treat this spread amount as an administrative cost and these administrative costs would be excluded from the RDS plan sponsor's allowable retiree costs.

Our proposal would not require an RDS plan sponsor to use a particular pricing approach in its contracting agreements with PBMs. RDS plan sponsors may continue to use either the pass-through or lock-in pricing approach when contracting with a PBM—provided that drug costs reported to us are based on the price ultimately received by the pharmacy.

There may be concerns that these proposed changes may require RDS plan sponsors to depend heavily on information traditionally held exclusively by PBMs. To protect the privacy of beneficiary personal health information data, an RDS sponsor's PBM or other intermediary contracting organization may submit drug cost data on the RDS sponsor's behalf to CMS directly rather than through the RDS sponsor. However, RDS plan sponsors, and not the intermediary contracting organizations, are ultimately responsible for the data submitted to us, and those that choose to contract with a PBM or other third party to submit data to CMS, therefore, must take reasonable steps to ensure that the data submitted to us on their behalf is accurate and timely.

4. Limiting Copayments to a Part D Plan's Negotiated Price (§ 423.104)

Section 1860D-2(d)(1) of the Act requires Part D sponsors to offer their enrollees access to negotiated prices used for payment for covered Part D drugs. In previous operational guidance, Part D sponsors were advised that it was optional when administering a Part D plan's benefit to apply either a copayment (if the sponsor elected to charge a flat copayment in lieu of coinsurance) or the actual negotiated price of the drug when that amount was lower than the copayment as outlined in the plan benefit package. Although we expected that very few Part D sponsors would choose to impose a cost sharing charge higher than the negotiated price of the drug, we allowed the option consistent with commercial practices. In practice, CMS found that the majority of Part D sponsors administer the benefit in such a way that the lesser of a cost sharing charge or the negotiated price of

the drug is applied to the beneficiary at the point of sale.

Based on our experience in implementing the benefit, we believe that a policy where the plan sponsor charges the beneficiary the lesser of the cost sharing amount or the negotiated prices is more consistent with the intent of section 1860D-2(d) of the Act. Accordingly, we propose to revise our policy so that, for example, a beneficiary who is subject to a $5 copayment during the coverage gap cannot be required to pay more than the negotiated price of the covered Part D drug, if the negotiated price is less than $5. Specifically, we propose to revise the requirements related to qualified prescription drug coverage at § 423.104(g) to make clear that Part D sponsors must provide enrollees with access to, or make available at the point-of-sale, its negotiated prices of covered Part D drugs when the covered Part D drugs' cost-share is more than the Part D sponsor's negotiated price. In other words, if the negotiated price for a covered Part D drug under a Part D sponsor's benefit package is less than the applicable cost-sharing before the application of any deductible, before any initial coverage limit, before the annual out-of-pocket threshold, and after the annual out-of-pocket threshold.

5. Timeline for Providing Written Explanation of Plan Benefits (§ 423.128)

In accordance with the requirements of section 1860D-4(a)(4) of the Act, § 423.128(e) of our final rule implementing the provisions of the Part D program (which appeared in the

Federal Register

on January 28, 2005, and the provisions of which became effective March 22, 2005), requires Part D sponsors to furnish to enrollees who receive covered Part D drugs an explanation of benefits (EOB) when prescription drug benefits are provided. As articulated in the preamble to our January 2005 final rule, our intent was to ensure that an EOB was provided to Part D enrollees at least monthly if they used their prescription drug benefits in a given month. Section 423.128(e)(6) specifically requires that an EOB be provided “

during

any month when prescription drug benefits are provided * * *.”. This was an inadvertent error given that, operationally, it is not feasible for Part D sponsors to mail their members an EOB during the same month in which they used their prescription drug benefits.

Sponsors must build into their EOB mailing cycles sufficient time to not only process each member's EOB, but also to produce and mail an EOB to each member with activity in a given month. Since the implementation of the Part D program in January 2006, it has become clear that a more reasonable timeframe for the provision of an EOB is warranted given the operational impossibility of providing an EOB for a month in which a member used his or her benefits during that same month. We therefore propose a revision to § 423.128(e)(6) to require sponsors to provide an EOB no later than the end of the month following the month in which an enrollee uses his or her Part D benefits. We believe that our proposed revision to § 423.128(e)(6) strikes a reasonable balance between Part D sponsor production constraints and the timely provision of claims information to Part D enrollees.

6. Low-Income Subsidy Provisions

a. Low-Income Cost-Sharing and Payment Adjustments for Qualified Prescription Drug Coverage (§ 423.329)

CMS currently makes prospective payments to Part D plan sponsors of the low-income cost sharing subsidy (LICS) based solely on estimates provided as part of the annual bidding process. When LICS estimates are too high, excessive prospective payments are made that (under our current process) are not recovered until the year end reconciliation. In its report “Medicare Part D Sponsors: Estimated Reconciliation Amounts for 2006,” released October 2007, the HHS Office of the Inspector General recommended that CMS explore other payment methodologies to recoup excessive LICS payments earlier.

Section 1860D-14(c)(1)(C) of the Act, when providing for administration of the subsidy program, gives the Secretary flexibility in determining a process for payment of the LICS subsidies as long as plan sponsors are reimbursed “periodically and on a timely basis.”

The Part D program regulations at 42 CFR 423.329(d)(2) state that payments of the LICS subsidy under this section are based on a method that CMS determines. However, in paragraph (d)(2)(i) we also stated that LICS interim payments are to be made based on the low-income cost-sharing assumptions submitted with plan bids under § 423.265(d)(2)(iv) and negotiated and approved under § 423.272.

The language of § 423.329(d)(2)(i) regarding interim payments of the LICS subsidies has proven overly restrictive and has had the unintended effect of requiring CMS to make payments to Part D plan sponsors that are subsequently determined to have been significantly different from their actual costs, and which will not be recovered until payment reconciliation is completed. In contrast, the regulation governing interim payment of Part D reinsurance affords greater flexibility to CMS to determine the most appropriate interim payment methodology. The regulation at § 423.329(c)(2)(i) states that, “CMS establishes a payment method by which payments of [reinsurance] are made on a monthly basis during the year, based on either estimated or incurred allowable reinsurance costs.” Therefore, we propose to add to the end of § 423.329(d)(2)(i) the following qualifying statement: “or by an alternative method that CMS determines.” This proposed revision would afford CMS additional flexibility to make mid-year LICS payment adjustments or other modifications to the LICS interim payment methodology, as appropriate.

b. Lesser of Policy for Low-Income Subsidy Individuals (§ 423.782)

Section 1860D-14 of the Act establishes the low-income subsidy program available to Part D sponsors to provide low-income individuals assistance with their Part D plan cost-sharing amounts and premiums. The amount of a Part D sponsor's low-income cost-sharing subsidy is based upon the difference between the amount the non-subsidized beneficiary pays for his/her Part D covered drug under the plan's benefit package and the maximum cost-sharing amounts established in statute at section 1860D-14(a) of the Act. For calendar year 2008, full subsidy eligible individuals (as defined in the current regulation at 42 CFR 423.773(b)) are not subject to any deductible and cannot be charged cost sharing above the maximum cost sharing amounts of $1.05/$2.25 for generics and preferred multi-source brand name drugs; and $3.10/$5.60 for other brand name drugs in 2008. Other low-income subsidy eligible individuals, as defined at 42 CFR 423.780(d), cannot be charged more than $56 towards a Part D sponsor's deductible, and cannot be charged more per prescription than an amount equal to 15 percent coinsurance.

When we originally drafted the regulations, we assumed that the Part D sponsor benefit packages would routinely result in higher cost sharing amounts for non-subsidized beneficiaries than the maximum low-income subsidy deductible and cost sharing amounts. However, when Part D sponsors offer benefit packages that already provide beneficiaries with a deductible and cost sharing less than the low-income deductible and cost sharing maximum amounts established

in statute (such as for zero dollar generics), this turns out not to always be the case. There are also instances when the Part D sponsor's negotiated prices used for payment for covered Part D drugs are less than the low-income cost sharing amounts. In these cases, our operational guidance (Prescription Drug Event or PDE training guide

http://www.medicaretraining.net/federalemployees/ParticipantGuide.pdf

) has instructed that Part D sponsors charge low-income beneficiaries the lesser of (1) its plan benefit package's prescribed cost-sharing, (2) the sponsor's negotiated rate for the drug, or (3) the LIS cost sharing amount established in statute. If the Part D sponsor's plan deductible was either less than the maximum low-income subsidy deductible amount or zero, the beneficiary should not be charged more than the plan's actual deductible.

The basis of our PDE guidance is found both in regulation and in statute. Section 1860D-14(a) of the Act provides that a beneficiary is eligible for a “

reduction

in the annual deductible” and “

reduction

in cost-sharing [above or below] the out-of-pocket threshold.” We believe the statute does not require that the low-income subsidy beneficiary be charged the statutorily-defined cost-sharing amounts if the approved cost sharing for a specific drug under a plan is less than that amount. Nor does the statute require that the low-income subsidy beneficiary be subject to a defined deductible when a Part D sponsor's plan benefit structure does not include a deductible. Thus, our previously issued guidance is consistent with the statutory parameters outlining the reductions in beneficiary out-of-pocket cost sharing amounts. The statute at 1860D-2(d)(1) of the Act also requires Part D sponsors to offer their enrollees access to negotiated prices used for payment for covered Part D drugs. We believe a Part D sponsor that imposes the statutory low-income cost sharing amounts on low-income subsidy beneficiaries when the PDP sponsor's negotiated prices are less than the low-income cost sharing amounts, violates 1860D-2(d) of the Act with regard to an enrollee's access to negotiated drug prices.

Furthermore, our current regulations at 42 CFR 423.104(b) sets forth the requirement that Part D sponsors must offer the same drug plan to all Part D eligible beneficiaries residing in their plan service area. We commonly refer to this section of the regulation as the uniform benefit rule. This section prohibits Part D sponsors from varying plan benefits to beneficiaries in a service region and further supports the policy that low-income subsidy beneficiaries not be charged more than what they, or other non-LIS beneficiaries would be charged under the Part D sponsor's plan benefit package. For an extensive discussion of the statutory basis for 42 CFR 423.104(b), see 70 FR 4245 of the preamble to the final Medicare Prescription Drug Benefit Rule published January 28, 2005.

To ensure low-income subsidy eligible beneficiaries are not harmed when the statutory low-income subsidy cost-sharing amounts are in excess of cost-sharing imposed under their plan's benefit package, we propose to codify our existing guidance in regulation. We propose adding a new paragraph (c) to § 423.782 which would clarify that the cost-sharing subsidy under § 423.782(a) and (b) is not available when an individual's out-of-pocket costs, under his or her Part D sponsor's plan benefit package, are less than the amounts described in § 423.782(a) and (b).

c. Using Best Available Evidence to Determine Low-Income Subsidy Eligibility Status (§§ 423.772, 423.800)

Section 1860D-14(a)(3)(B)(v) of the Act requires the Secretary to treat Part D eligible individuals who are full-benefit dual eligible individuals (as defined under 1935(c)(6)) or recipients of supplemental security income under title XVI as full low-income subsidy eligible individuals. Section 1860D-14(c)(1) of the Act further requires that the Secretary provide for a process under which (1) the Secretary notifies the PDP sponsor that an individual is eligible for a low income subsidy, and (2) the PDP sponsor is required to reduce the premiums and cost sharing for such individuals to the amount a low-income subsidy eligible individual is required to pay.

The primary process CMS has employed to implement these requirements is for CMS to identify low-income subsidy-eligible individuals based upon information from the States on Medicaid eligibility and Social Security on SSI eligibility and the eligibility of LIS applicants. Because we do not always have timely or up-to-date information from these sources, however, we developed a process under which sponsors accept and use reliable documentation, known as “best available evidence,” to establish a beneficiary's low-income subsidy eligibility status and communicate this information to the Secretary.

This “best available evidence” policy derives from the fact that, while section 1860D-14(c)(1)(A) of the Act provides for CMS to inform sponsors of low-income subsidy eligibility, the sponsor's obligation under section 1860D-14(c)(1)(B) of the Act to reduce premiums and cost-sharing for all such individuals is not contingent upon CMS doing so. While CMS attempts to identify all subsidy eligible individuals to the full extent possible, experience has shown that this does not necessarily result in every such individual being successfully identified. CMS believes, therefore, that the Sponsors have an obligation to take reasonable steps to respond to documentation that identifies such individuals when they have not been identified by CMS, in order to fulfill their statutory obligation to reduce premiums and cost-sharing for such individuals.

Given the importance of this policy, we propose to codify it in § 423.800(b) and (d). Specifically, we propose to include in regulations text guidance (

Part D Guidance—Low-Income Subsidy (LIS) Status Corrections Based on Best Available Evidence

, dated June 27, 2007, available at:

http://www.cms.hhs.gov/PrescriptionDrugCovContra/Downloads/Final%20Sponsor%20Guidance%20on%20BAE%20062707.zip

) we have issued to Part D sponsors concerning our best available evidence (BAE) policy.

These revisions to § 423.800 reflect our current policy that Part D sponsors must accept and use BAE in those instances when this evidence, submitted by the beneficiary or another person on the beneficiary's behalf, substantiates that the beneficiary's information in CMS systems is not accurate. To ensure the appropriateness of corrections based on BAE, CMS policy requires sponsors to maintain for 10 years the original documentation used to substantiate requests for manual updating of the CMS system to accommodate subsequent periodic government audits. In addition, we plan to establish a feedback mechanism to the States to confirm the LIS corrections based on BAE and identify and address any problems in State to CMS reporting.

As noted above, this policy is necessary because the monthly files from the States and Social Security CMS uses to establish an individual's low-income subsidy eligibility pursuant to section 1860D-14(c)(1)(A) of the Act do not always accurately reflect an individual's true eligibility status. In certain cases, for example, the State has not yet reported the individual as Medicaid eligible, or has not reported him/her as institutionalized. As a result, CMS systems do not reflect a beneficiary's correct low-income subsidy (LIS) status at that point in

time. As a result, accurate subsidy information on these individuals has not been communicated to the Part D plan.

In these circumstances, beneficiaries, advocates or pharmacies have brought such errors to the Part D sponsor's attention. CMS believes that the Part D sponsor is in the best position to address such errors and appropriately apply the subsidy as it is required by statute to do under section 1860D-14(c)(1)(B) of the Act. This led to CMS's development of the best available evidence (BAE) policy that we are proposing to incorporate in this proposed rule.

Specifically, we are proposing to amend the regulations to require that Part D sponsors use BAE to substantiate a beneficiary's eligibility for a reduction in premiums and or cost-sharing in the case of individuals who indicate they are eligible for the low-income subsidy. These include full-benefit dual eligible individuals, partial dual eligible individuals (that is, those who are enrolled in a Medicare Savings Program as a Qualified Medicare Beneficiary, Specified Low-Income Medicare Beneficiary or Qualifying Individual), people who receive Supplemental Security Income (SSI) benefits but not Medicaid, and people who apply for and are determined eligible for a subsidy. Under the BAE policy we propose to incorporate in this proposed rule, sponsors are required to accept and use BAE to correct the beneficiary's low-income subsidy data in the sponsor's system and, as applicable, document requests for CMS to correct the beneficiary's low-income subsidy data in our system when the change has not occurred as a result of the routine reporting.

CMS continues to work to improve low-income subsidy data reporting. Such improvements would include, for example, permitting more frequent State submission of data files to CMS, more frequent CMS processing of data files and improved communication of the information to Part D sponsors.

Nevertheless, we anticipate that the BAE policy will remain in place for the indefinite future. As a result, we are proposing to modify § 423.800 by adding a fourth paragraph, consistent with our current policy, that would require Part D sponsors to use the CMS-developed BAE process to establish the appropriate cost-sharing for low-income beneficiaries whose information in CMS systems is not correct. By adding this provision to the regulation, we are ensuring that our best available evidence policy and its requirements are clear to all parties and, in so doing, that the administration of the low-income subsidy program takes advantage of all data currently available to the Part D sponsors to ensure low-income beneficiaries are not burdened by unnecessary cost sharing at the point of sale. We also believe we will be in a stronger position from a compliance perspective, as it will strengthen our ability to take action against plans that fail to implement our best available evidence process.

We expect that CMS guidance implementing the BAE policy will be updated as necessary to reflect appropriate process modifications as they become warranted, based on changes in technology and the types of documents that could in the future prove to reliably verify a beneficiary's status as an individual eligible for a full low-income subsidy.

We propose to define best available evidence at § 423.772 as documentation or information that is directly tied to authoritative sources, confirms that an individual meets the requirements for the low-income subsidy, and is used to support a change in an individual's low-income subsidy status. We are not proposing to specify in the regulation the specific documents that would meet these criteria, as there may be documents that meet these criteria in the future that do not currently exist.

Currently, however, evidence sufficient to make a change to a beneficiary's low-income status includes any one of the following:

• A copy of the member's Medicaid card which includes the member's name and an eligibility date during the discrepant period or no later than July of the preceding year.

• A report of contact including the date a verification call was made to the State Medicaid Agency and the name, title and telephone number of the state staff person who verified the Medicaid status during the discrepant period;

• A copy of a state document that confirms active Medicaid status during the discrepant period;

• A print out from the State electronic enrollment file showing Medicaid status during the discrepant period;

• A screen print from the State's Medicaid systems showing Medicaid status during the discrepant period; or

• Other documentation provided by the State showing Medicaid status during the discrepant period.

In addition, evidence to establish that a beneficiary is institutionalized and qualifies for zero cost-sharing includes any one of the following:

• A remittance from the facility showing Medicaid payment for a full calendar month for that individual during the discrepant period;

• A copy of a state document that confirms Medicaid payment to the facility for a full calendar month on behalf of the individual; or

• A screen print from the State's Medicaid systems showing that individual's institutional status based on at least a full calendar month stay for Medicaid payment purposes during the discrepant period.

Again, the proposed changes described in this portion of the proposed rule would not change current BAE policy. Rather they would codify existing operational processes and reflect our historic policy that Part D sponsors use BAE when this evidence substantiates that the beneficiary's information in CMS systems is not accurate. We invite comment on methods by which we can improve this policy in the future.

7. Certification of Allowable Costs (§ 423.505)

We propose, by revising § 423.505(k)(5), to clarify that the certification of allowable costs for risk corridor and reinsurance information includes direct and indirect remuneration that serves to decrease the costs incurred by a Part D sponsor for a Part D drug. The submission of accurate and complete data regarding direct and indirect remuneration that reduces a Part D sponsor's costs for Part D drugs under the Medicare prescription drug benefit is necessary to ensure accurate reinsurance and risk corridor payments.

8. Change of Ownership Provisions (§ 423.551)

We propose to amend the change of ownership provisions in 42 CFR 423.551, by adding paragraph (g) to clarify that PDP sponsors may not sell or transfer individual beneficiaries or groups of beneficiaries enrolled in any of their plan benefit packages (PBPs). This new provision is simply a clarification of an existing restriction on PDP sponsors' ability to sell portions of their Part D lines of business.

This proposed restriction on the sale of beneficiaries is based on two CMS determinations. First, in the preamble to the current Part D rule that published in the

Federal Register

January 28, 2005 (70 FR 4341), CMS stated that we would recognize the sale of PDP lines of business as asset transfers that constitute a change ownership which CMS may recognize through the execution of an agreement to novate the selling sponsor's PDP sponsor contract to a second qualified sponsor. Using a

common understanding of the phrase “line of business” as referring to a company's set of products or services, CMS maintains that a “PDP line of business” includes a PBP as well as the beneficiaries enrolled in that PBP. Therefore, there can be no sale of a line of business consisting solely of a set of beneficiaries without the accompanying transfer to the succeeding sponsor of the obligation to continue to provide the PBP services the beneficiaries have already elected.

Second, the sale of individual beneficiaries would allow PDP sponsors effectively to make enrollment elections on behalf of beneficiaries when the Part D statute grants that authority exclusively to beneficiaries (see section 1860D-1(a)(1)(A) of the Act) and, in the case of full-benefit dual eligible beneficiaries, CMS (see section 1860D-1(b)(1)(C) of the Act). The change of ownership provisions of subpart L may not be read as a grant of enrollment election authority to PDP sponsors.

We propose to add § 423.551(g) to provide necessary clarification on this change of ownership issue. During the first 2 years of the Part D program, several PDP sponsors have requested CMS approval of transactions involving the sale of beneficiaries. This clarification will minimize the number of sponsors that mistakenly begin negotiations on such sale agreements.

C. Proposed Changes to the MA and Prescription Drug Benefit Programs

In order to assist readers in understanding how the proposed provisions we discuss in this section would apply to both programs, we are including Table 1, which highlights the provisions affecting both programs and the pertinent Part 422 and Part 423 CFR sections.

Table 1.—Provisions Affecting Both the Part C and Part D Programs

Provision

Part 422

Subpart

Part 422

CFR section

Part 423

Subpart

Part 423

CFR section

Passive enrollment procedures

Subpart B

422.60

Subpart B

423.32

Involuntary disenrollment and non-payment of premium

Subpart B

422.74

Subpart B

423.44

Disclosure of plan information

Subpart C

422.111

Subpart C

423.128

Retroactive premium collection and beneficiary repayment options

Subpart F

422.262

Subpart F

423.293

Prohibiting improper billing of monthly premiums

Subpart F

422.262

Subpart F

423.293

Non-renewal notification timelines

Subpart K

422.506

Subpart K

423.507

Reconsiderations

Subpart M

422.578, 422.582

Subpart M

423.560, 423.580, 423.582

Civil money penalties

Subpart O

422.760

Subpart O

423.760

Marketing:

Definitions

Subpart V (all marketing sections)

422.2260

Subpart V (all marketing sections

423.2260

Marketing:

Review and distribution of marketing materials

422.2262

423.2262

Marketing:

Guidelines for CMS review

422.2264

423.2264

Marketing:

Deemed approval

422.2266

423.2266

Marketing:

Standards for MA/Part D marketing

422.2268

423.2268

Marketing:

Licensing of marketing representatives and confirmation of marketing resources

422.2272

423.2272

Marketing:

Broker and agent commissions

422.2274

423.2274

Marketing:

Employer and group retiree marketing (MA provision only)

422.2276

423.2276

1. Authorization of Automatic or Passive Enrollment Procedures (§§ 422.60 and 423.32)

Section 1851(c)(1) of the Act directs the Secretary to establish a process through which an individual makes an “election” to receive Medicare coverage through an MA plan or original Medicare, or to change from one MA plan to another, including the form and manner in which such elections are made. Section 1860D-1(b)(1)(A) of the Act similarly directs the Secretary to establish a process for enrolling in or disenrolling from a PDP, or changing enrollment from one PDP to another. This authority is implemented for MA plans in §§ 422.60, 422.62, 422.66, and 422.74, and for Medicare prescription drug plans in §§ 423.32 and 423.36, as well as in CMS manuals.

In rare instances, CMS is faced with situations in which organizations become insolvent, or are determined to have such serious compliance issues that immediate plan terminations may become necessary. Normally, an organization that elects to non-renew its contract for the following year is required to notify CMS in July of the contract year, several months before the non-renewal takes effect. All beneficiaries enrolled in that plan are required to be notified in early October, providing individuals at least 3 months to evaluate other plan options, and make a plan election for the subsequent year. Consistent with existing regulations and guidance, such elections would normally entail “active” measures, such as signing an enrollment form, submitting an on-line enrollment request or calling a plan to enroll.

However, when CMS identifies a situation that requires an immediate plan termination, or other situations in which CMS determines plan members might be harmed by remaining in their current plan, CMS believes that it is in the best interests of beneficiaries to protect those that may not have adequate time to elect a plan due to emergency terminations as well as those unable to, or who otherwise do not, focus on their plan options. In these circumstances, our primary goal is to ensure that minimal harm comes to the beneficiary who fails to act on his or her election options. To achieve this goal, we have determined that it is sometimes appropriate to use “passive” enrollment procedures under which an individual is notified that he or she can make an enrollment “election” by taking no action. Under these procedures, we strive, when possible, to select plans for individuals that will maintain a level of coverage equal to or better than their current coverage, without incurring

additional costs. We also generally assume that individuals who are currently enrolled in a particular type of coverage, such as prescription drug coverage, would want to maintain this type of coverage. Similarly, we assume that LIS-eligible individuals would prefer a plan where their premiums and deductibles were fully subsidized.

In addition to termination situations, we have provided for “passive” enrollment in cases in which a failure to elect the enrollment in question would harm the beneficiary. For example, we have employed passive enrollment in the case of employer group members who would lose employer benefits if they were not passively enrolled. We also have provided for passive enrollment in which the particular plan in which the beneficiary is enrolled was being terminated by CMS due to compliance and insolvency issues, as well as instances when a beneficiary was enrolled in a terminating plan but a similar plan was offered by the same organization with which the beneficiary had already chosen to enroll.

We are proposing to incorporate our current passive enrollment policies in the regulations in a new § 422.60(g) and § 423.32(g). These new provisions would set forth in the regulations that CMS may authorize plans to carry out “passive” enrollment procedures in situations involving immediate plan terminations or potential beneficiary harm from remaining enrolled in the beneficiary's current plan. Under these enrollment procedures, individuals will be notified that they will be deemed to have elected the MA or PDP plan selected for them by CMS if they take no action to cancel such enrollment. In conjunction with these provisions, we would set forth several key beneficiary protections that would be required any time such an enrollment would occur. Such protections would include requiring that the organization that is receiving the enrollment notify all prospective enrollees of the passive enrollment prior to the effective date of the passive enrollment or as soon as possible after the enrollment effective date if prior notification is not possible under the circumstances. The notices to the enrollees would be approved by CMS and would explain their right to choose another plan, and describe the costs and benefits of the new plan and how to access care under the plan, as well and any other conditions of enrollment established by CMS.

We would also specify that affected individuals would be entitled to a special enrollment period after their new enrollment took effect, as permitted under §§ 422.62(b)(4) and 423.38(c)(8)(ii).

2. Involuntary Disenrollment for Nonpayment of Premium (§§ 422.74 and 423.44)

The MMA provides individuals with the option to choose to have their premiums for either MA or PDP membership withheld from their Social Security benefit, as described in 42 CFR 422.262(f) and 423.293, respectively. Section 1851(g)(3)(A) of the Act provides Medicare Advantage organizations the option to disenroll members who fail to pay basic and supplemental monthly premiums, as set forth at 42 CFR 422.74(d)(1). Section 1860D-1(b)(1)(B)(v) of the Act makes this provision applicable to PDP sponsors. See 42 CFR 423.44(d)(1).

Although MA organizations and PDP sponsors may disenroll individuals for failing to pay premiums in a timely manner, we believe that such disenrollments should be an option only in cases where individuals pay their required premiums directly to the plan, as opposed to individuals who have chosen to have their premiums automatically withheld from their Social Security benefits. In cases where MA organizations or PDP sponsors are not receiving premiums on a timely basis from members who have chosen the premium withhold option, the member is clearly not at fault if the premium for some reason is not being deducted or paid to the plan properly. Thus, we do not believe that the organization or sponsor should have the option to disenroll a member in that situation. Similarly, individuals who have elected the premium withhold option also should not be subject to disenrollment during the time needed to initially establish premium withhold status on an individual account.

Therefore, we are revising the MA and Part D regulations in § 422.74(d)(1) and § 423.44(d)(1) by adding the cross reference to paragraph (d)(1)(iv) to prohibit plans from disenrolling individuals for failure to pay premiums if they have either requested the premium withhold option or if they are already in premium withhold status. Plans may initiate disenrollments for failure to pay premium only after an individual in “direct bill” status has been notified of the premium owed and, in the case of MA plans, provided the grace period required under § 422.74(d)(1)(i)(B), as currently outlined in the MA and Part D regulations discussed above.

3. Disclosure of Plan Information (§§ 422.111 and 423.128)

As provided in section 1852(c)(1) of the Act, MA organizations and prescription drug benefit plan (PDP) sponsors must disclose detailed information about the plans they offer to their enrollees. This detailed information is specified in section 1852(c)(1) of the Act and §§ 422.111(b) and 423.128(b) of the Part C and Part D program regulations, respec

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