Medicare and State Health Care Programs: Fraud and Abuse, Civil Money Penalties and Intermediate Sanctions for Certain Violations by Health Maintenance Organizations and Competitive Medical Plans

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of the Secretary

42 CFR Parts 417, 431, 434, and 1003

RIN 0991-AA44

Medicare and State Health Care Programs: Fraud and Abuse, Civil

Money Penalties and Intermediate Sanctions for Certain Violations by

Health Maintenance Organizations and Competitive Medical Plans

AGENCY: Office of the Secretary, HHS, Office of Inspector General (OIG)

and the Health Care Financing Administration (HCFA).

ACTION: Final rule.

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SUMMARY: This final rule implements sections 9312(c)(2), 9312(f), and

9434(b) of Public Law 99-509, section 7 of Public Law 100-93, section

4014 of Public Law 100-203, sections 224 and 411(k)(12) of Public Law

100-360, and section 6411(d)(3) of Public Law 101-239. These provisions

broaden the Secretary's authority to impose intermediate sanctions and

civil money penalties on health maintenance organizations (HMOs),

competitive medical plans, and other prepaid health plans contracting

under Medicare or Medicaid that (1) substantially fail to provide an

enrolled individual with required medically necessary items and

services; (2) engage in certain marketing, enrollment, reporting, or

claims payment abuses; or (3) in the case of Medicare risk-contracting

plans, employ or contract with, either directly or indirectly, an

individual or entity excluded from participation in Medicare. The

provisions also condition Federal financial participation in certain

State payments on the State's exclusion of certain prohibited entities

from participation in HMO contracts and waiver programs. This final

rule is intended to significantly enhance the protections for Medicare

beneficiaries and Medicaid recipients enrolled in a HMO, competitive

medical plan, or other contracting organization under titles XVIII and

XIX of the Social Security Act.

EFFECTIVE DATE: These rules are effective September 13, 1994.

FOR FURTHER INFORMATION, CONTACT:

Zeno W. St. Cyr, II, Legislation, Regulations, and Public Affairs

Staff, OIG, (202) 619-3270 or

Marty Abeln, Office of Managed Care, HCFA, (202) 205-9582 or

Mike Fiore, Medicaid Bureau, HCFA, (410) 966-4460

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

Managed care plans, such as health maintenance organizations

(HMOs), competitive medical plans (CMPs), and health insuring

organizations (HIOs) are entities that provide enrollees with

comprehensive, coordinated health care in a cost-efficient manner.

Payment for these plans is generally made on a prepaid, capitation

basis. The goal of prepaid health care delivery is to control health

care costs while at the same time providing enrollees with affordable,

coordinated, quality health care services. Titles XVIII and XIX of the

Social Security Act (the Act) authorize contracts with managed health

care plans for the provision of covered health services to Medicare

beneficiaries and Medicaid recipients.

B. Medicare

Section 1876 of the Act provides for Medicare payment at

predetermined rates to eligible organizations that have entered into

risk contracts with HFCA, or for payment of reasonable costs to

eligible organizations that have entered into cost contracts. Eligible

organizations include HMOs that have been federally qualified under

section 1310(d) of title XIII of the Public Health Service Act, and

CMPs that meet the requirements of section 1876(b)(2) of the Act.

Medicare enrollees of risk-contracting CMPs or HMOs are required to

receive covered services only through the organization, except for

emergency services and urgently needed out-of-area services. In the

case of a cost contract, the Medicare beneficiary may also receive

services outside the organization, with Medicare paying for the

services through the general Medicare fee-for-service system. If an HMO

or CMP fails to comply with a contract provision, the Secretary may

decide to not renew or to terminate the contract. Regulations governing

nonrenewal of a contract are found at 42 CFR 417.492, and regulations

governing termination of a contract are at 42 CFR 417.494.

C. Medicaid

Section 1903(m) of the Act contains requirements that apply to

State Medicaid contracts for the provision, on a risk basis, either

directly or through arrangements, of at least certain specified

services (``comprehensive services''). HCFA regulations at 42 CFR part

434 implement the requirements in section 1903(m) and contain other

requirements applicable to Medicaid contracts generally. Section 434.70

provides that HCFA may withhold Federal matching payments, known as

Federal financial participation (FFP), for State expenditures for

services provided to Medicaid recipients when either party to a

contract substantially fails to carry out the terms of the contract.

D. New Legislation

1. The Omnibus Budget Reconciliation Act of 1986

Section 9312(c)(2) of Public Law 99-509, the Omnibus Budget

Reconciliation Act of 1986 (OBRA 86), added section 1876(f)(3) to the

Act. This provision authorizes the Secretary to suspend enrollment of

Medicare beneficiaries by an HMO/CMP or to suspend payment to the HMO/

CMP for individuals newly enrolled, after the date the Secretary

notifies the organization of noncompliance with the requirement in

section 1876(f)(1) that limits enrollment to no more than 50 percent

Medicare beneficiaries and Medicaid recipients. Prior to OBRA 86,

HCFA's only recourse against an organization for noncompliance with any

contract provisions was to non-renew or initiate termination of the

contract. The new authority provides alternative remedies that may be

used in place of or in addition to contract nonrenewal or termination

for organizations that do not comply with the enrollment composition

requirement.

Additionally, sections 9312(f) and 9434(c) of OBRA 86 added

sections 1876(i)(6) and 1903(m)(5), respectively, to the Act. These

provisions authorize a civil money penalty not greater than $10,000 for

each instance of failure by an organization with a Medicare risk

contract, or certain organizations with a comprehensive risk contract

under Medicaid, to provide required medically necessary items or

services to Medicare or Medicaid enrollees if the failure adversely

affects (or has the likelihood of adversely affecting) the enrollee.

2. The Medicare and Medicaid Patient and Program Protection Act of 1987

Section 7 of Public Law 100-93, the Medicare and Medicaid Patient

and Program Protection Act of 1987 (MMPPPA), added section 1902(p) of

the Act, which grants States the authority to exclude individuals or

entities from participation in their Medicaid programs for any of the

reasons that constitute a basis for exclusion from Medicare under

sections 1128, 1128A, or 1866(b)(2) of the Act. In addition, section 7

of MMPPPA established a new condition that States must meet in order to

receive FFP for payments to HMOs or entities furnishing services under

a waiver approved under section 1915(b)(1) of the Act. The latter

provision conditioned FFP upon a State's providing that it will exclude

from participation, as an HMO or an entity furnishing services under a

section 1915(b)(1) waiver, any entity that could be excluded under

section 1128(b)(8) of the Act (that is, any individual or entity

against whom criminal or civil penalties have been imposed). FFP is

also conditioned upon a State excluding an entity that has, directly or

indirectly, a substantial contractual relationship with a person

described in section 1128(b)(8)(B) of the Act.

3. The Omnibus Budget Reconciliation Act of 1987

Section 4014 of Public Law 100-203, the Omnibus Budget

Reconciliation Act of 1987 (OBRA 87), provides the Department with

increased penalty amounts and greater statutory authority and

flexibility to take action against HMOs or CMPs that commit certain

abuses. This authority also may be exercised in addition to or in place

of initiating contract termination proceedings. Section 4014 of OBRA 87

amends section 1876(i)(6) of the Act to authorize the Secretary to

impose civil money penalties, suspend enrollment, and suspend payments

for newly enrolled individuals in the case of an organization with a

Medicare contract (both risk and cost contract) that the Secretary

determines has (1) failed substantially to provide required medically

necessary items and services to Medicare enrollees if the failure

adversely affects (or has the likelihood of adversely affecting) the

enrollee; (2) imposed premiums on Medicare enrollees in excess of

permitted premium amounts; (3) acted to expel or refused to reenroll an

individual in violation of section 1876 of the Act; (4) engaged in any

practice that can reasonably be expected to deny or discourage

enrollment (except as permitted under section 1876) by Medicare

enrollees whose medical condition or history indicates a need for

substantial future medical services; (5) misrepresented or falsified

information provided under section 1876 to the Secretary, an

individual, or any other entity; or (6) fails to comply with the

requirements of section 1876(g)(6)(A) regarding prompt payment of

claims. Under OBRA 87, the maximum allowable civil money penalty that

can be imposed for each determination of a violation is increased to

$25,000, or $100,000 in the case of a HMO or CMP determined to have

committed acts in (4) above or for misrepresenting or falsifying

information furnished to the Secretary under section 1876.

4. The Medicare Catastrophic Coverage Act of 1988

The Medicare Catastrophic Coverage Act of 1988 (MCCA), Public Law

100-360, amended sections 1876 and 1903(m) of the Act by adding new

civil money penalty authority for violations occurring within the

Medicare program and by applying the OBRA 87 HMO and CMP intermediate

sanction and civil money penalty authority to the Medicaid program.

Section 224 of MCCA amended section 1876(i)(6)(B)(i) of the Act. In

addition to other civil money penalties, in cases where Medicare

enrollees are charged more than the allowable premium, section 224

imposes a penalty which doubles the amount of excess premium charged by

the HMO or CMP. The excess premium amount is deducted from the penalty

and returned to the Medicare enrollee. Section 224 also imposes a

$15,000 penalty for each individual not enrolled if it is determined

that the HMO or CMP engaged in any practice which denied or discouraged

enrollment (except as permitted under section 1876 of the Act) by

Medicare enrollees whose medical condition or history indicated a need

for substantial future medical services.

Section 411(k)(12) of MCCA amended section 1903(m)(5) of the Act to

provide the Secretary with authority to impose civil money penalties on

contracting organizations, and to deny payments for new enrollees of

contracting organizations, in cases where the Secretary determines that

an organization has (1) failed substantially to provide required

medically necessary items and services to Medicaid enrollees if the

failure adversely affects (or has the likelihood of adversely

affecting) the enrollee; (2) imposed premiums on Medicaid enrollees in

excess of premium amounts permitted under title XIX of the Act; (3)

discriminated among individuals in violation of the provisions of

section 1903(m)(2)(A)(v) of the Act, including expelling or refusing to

reenroll an individual or engaging in any practice which could

reasonably be expected to deny or discourage enrollment (except as

permitted under section 1903(m)) by Medicaid recipients whose medical

condition or history indicates a need for substantial future medical

services; or (4) misrepresented or falsified information provided under

section 1903 of the Act to the Secretary, State, an individual, or any

other entity.

Under the amendments to section 1903(m)(5) made by MCCA, the

maximum allowable civil money penalty that can be imposed for each

determination of a violation is increased to $25,000, or $100,000 in

the case of a determination that a contracting organization has (1)

violated the provisions of section 1903(m)(2)(A)(v) by expelling or

refusing to reenroll an individual or by engaging in a practice which

denied or discouraged enrollment (except as permitted under section

1903(m)) by Medicaid recipients whose medical condition or history

indicated a need for substantial future medical services; or (2)

misrepresented or falsified information furnished to the Secretary or

State under section 1903(m).

Additionally, in cases where Medicaid enrollees are charged more

than the allowable premium, section 411(k)(12) of MCCA amended section

1903(m)(5) of the Act to authorize imposition of an additional penalty

which doubles the amount of excess premium charged by the contracting

organization, with the excess premium amount deducted from the penalty

and returned to the Medicaid enrollee. Imposition of an additional

$15,000 penalty is authorized for each individual not enrolled if it is

determined that the contracting organization has violated the

provisions of section 1903(m)(2)(A)(v) by expelling or refusing to

reenroll an individual or by engaging in any practice which denied or

discouraged enrollment (except as permitted under section 1903(m)) by

Medicaid recipients whose medical condition or history indicated a need

for substantial future medical services.

5. The Omnibus Budget Reconciliation Act of 1989

Public Law 101-239, the Omnibus Budget Reconciliation Act of 1989

(OBRA 89), amended sections 1876 and 1902(p) of the Act to provide the

Secretary with an additional civil money penalty and intermediate

sanction authority for violations occurring within the Medicare program

and with additional conditions for FFP.

Section 6411(d)(3)(A) of OBRA 89 amended section 1876(i)(6)(A) of

the Act to authorize the Secretary to restrict enrollment in, suspend

payment to, and impose a civil money penalty against an organization

with a risk contract that (1) employs or contracts with any individual

or entity excluded from Medicare participation under sections 1128 or

1128A of the Act for the provision of health care, utilization review,

medical social work, or administrative services; or (2) employs or

contracts with any entity for the provision of such services (directly

or indirectly) through an excluded individual or entity. The maximum

allowable civil money penalty that may be imposed for each

determination of a violation of this nature is $25,000.

Section 6411(d)(3)(B) of OBRA 89 amended section 1902(p)(2) of the

Act to condition FFP in payments to HMOs, or to entities furnishing

services under a Sec. 1915(b)(1) waiver, upon the State's barring the

following entities from participation as HMOs or section 1915(b)(1)

waiver participants: (1) Any organization that employs or contracts

with any individual or entity excluded from Medicaid participation

under sections 1128 or 1128A of the Act for the provision of health

care, utilization review, medical social work, or administrative

services; or (2) any organization that employs or contracts with any

entity for the provision of such services (directly or indirectly)

through an excluded individual or entity.

II. Provisions of the Proposed Rule

On July 22, 1991, we published a proposed rule with a 60-day

comment period (56 FR 33403) that would amend 42 CFR Part 417, Subpart

C; Part 431, Subpart B; Part 434, Subparts C, D, E, and F; and Part

1003 specifically by establishing sanctions and civil money penalties

which may be imposed on contracting organizations that substantially

fail to provide an enrollee with required medically necessary items and

services or that engage in certain marketing, enrollment, reporting,

claims payment, employment, or contracting abuses.

In the July 1991 proposed rule, we proposed to incorporate the

Medicare sanction provisions of OBRA 86, OBRA 87, MCCA, and OBRA 89

into agency regulations largely without substantial modifications.

Under the proposed regulations, after HCFA (or a State) determines that

a contracting organization has committed a violation under sections

1876(i)(6)(A) or 1903(m)(5)(A), information pertaining to the violation

would be provided to the OIG.

Briefly, our proposed changes to the regulations were designed to

implement the Department's new authorities by detailing HCFA's (and

States') role in imposing intermediate sanctions, and the OIG's role in

imposing civil money penalties, for certain abuses committed by

contracting organizations providing health care items or services to

Medicare beneficiaries or Medicaid recipients. We proposed that--

Once it is determined that a Medicare contracting

organization has committed a violation, and in place of initiating

contract termination proceedings, HCFA may:

--Require the contracting organization to suspend enrollment of

Medicare beneficiaries;

--Suspend payments to the contracting organization for individuals

enrolled after a specified date.

If a State Medicaid agency determines that a Medicaid

contracting organization has committed a violation, it may, in place of

terminating the contract, recommend to HCFA that HCFA's intermediate

sanction authority be exercised to deny payment to the contracting

organization for Medicaid recipients enrolled with the organization

after a specified date. This recommendation takes effect absent HCFA

action.

In addition to or in place of other remedies available

under law, the OIG may:

--Impose a penalty of up to $25,000 for each determination that a

contracting organization has--

(1) Failed substantially to provide an enrollee with required

medically necessary items and services, if the failure adversely

affects (or has the likelihood of adversely affecting) the enrollee; or

(2) Committed enrollment, marketing, claims payment, or certain

reporting violations;

--Impose a penalty of up to $25,000 for each determination that a

contracting organization with a Medicare risk-sharing contract employs

or contracts with--

(1) Individuals or entities excluded from participation in Medicare,

under sections 1128 or 1128A of the Act, for the provision of health

care, utilization review, medical social work, or administrative

services; or

(2) Any entity for the provision of such services (directly or

indirectly) through an excluded individual or entity; and

--Impose a penalty of up to $100,000 for each determination that a

contracting organization has--

(1) Misrepresented or falsified information furnished under the

provisions of the statute to the Secretary or State; or

(2) Expelled or refused to reenroll an individual or engaged in any

practice that would reasonably be expected to have the effect of

denying or discouraging enrollment (except as permitted by statute) by

enrollees whose medical condition or history indicates a need for

substantial future medical services.

In cases where a civil money penalty is imposed against a

plan for charging enrollees more than the allowable premium, the OIG

will impose an additional penalty equal to double the amount of excess

premium charged by the contracting organization. The excess premium

amount will be deducted from the penalty and returned to the enrollee.

The OIG will impose an additional $15,000 penalty for each

individual not enrolled if it is determined that a contracting

organization expelled or refused to reenroll an individual or engaged

in any practice that would reasonably be expected to have the effect of

denying or discouraging enrollment (except as permitted by statute) by

enrollees whose medical condition or history indicates a need for

substantial future medical services.

The provisions also condition FFP in certain State

payments on the State's exclusion of certain entities excluded (or

excludable) from Medicare.

III. Analysis of and Responses to Public Comments

In response to the July 22, 1991 proposed rule, we received 14

timely items of correspondence. The comments were from group health

associations, State agencies, health insurance plans, and law firms. A

summary of these comments are discussed below:

A. Intermediate Sanctions

Comment: Several commenters wanted clarification on how

Sec. 417.495(a)(1), which describes the first basis for the imposition

of intermediate sanctions, will be defined. There was particular

interest expressed about the criteria by which the terms ``fails

substantially'' and ``medically necessary'' will be evaluated.

Response: In determining if an organization has violated

Sec. 417.495(a)(1), HCFA and State Medicaid agencies will make a

comprehensive three-part evaluation. Specifically, this will involve

determining if the organization has: (1) Failed substantially to

provide medically necessary items or services and this has (3)

adversely affected (or has the substantial likelihood of adversely

affecting) the enrollee. To determine if the three principal

requirements of Sec. 417.495(a)(1) have been violated, HCFA and State

Medicaid agencies will have recourse to a number of sources of

information and guidance. For Medicare, the information sources include

the attending physician, other health care personnel, the HMO or CMP,

utilization reviewers, the Peer Review Organization (PRO), the Medicare

enrollee or authorized representatives, and internal or possibly third-

party expertise. Additional sources of guidance will include clinical

practice standards; guidelines or advisories promulgated by

authoritative bodies; and Medicare law, regulations, and manuals.

States, in making an initial finding on Medicaid contractor

violations, also have a number of sources of information available to

them. These include health care experts conducting the required

periodic medical audits; the health professionals under contract to the

State to perform the annual quality review of services delivered by

HMOs and HIOs; other health consultants to the State agency; clinical

practice standards, guidelines, or advisories promulgated by

authoritative bodies; and Medicaid law, regulations, and manuals.

In making determinations of ``substantial failure,'' consideration

will be given to the impact on the health status of a Medicare or

Medicaid enrollee of not having received covered items and services

and, in cases where patterns of withholding items and services are

identified, the frequency of the events and the resulting impact on the

health status of enrollees.

In making determinations of ``medical necessity,'' HCFA and the

States will rely on their respective coverage or payment requirements

but will also utilize various sources of expert opinion (as described

above) in order to determine if required medically necessary care has

either been denied or inappropriately provided.

Comment: A commenter asked whether the same criteria used for

``medical necessity'' for Medicare and Medicaid coverage of services

will be used to determine medical necessity under the final rule.

Response: In making medical necessity decisions, Medicare and

Medicaid will continue to utilize the current oversight processes and

coverage and payment criteria. Under the intermediate sanction,

however, HCFA and States will also have recourse, on a case by case

basis, to other sources of expert information and guidance (as

described in the previous response) in making medical necessity

decisions.

Comment: A number of commenters wanted changes made to the

definition of ``adverse affect.'' One commenter suggested that the

definition is too narrow, and unreasonably requires the patient to

suffer a high degree of risk to his or her health before a sanction can

be applied. Another commenter said that the definition was too vague

and suggested amending the definition to indicate that adverse effect

is limited to the withholding of or failure to provide medically

necessary care covered by the contract. Another commenter expressed

concern that the definition of adverse affect appears to be lacking in

that it addresses only those instances in which care has been withheld

and fails to address those instances where substandard or inappropriate

care has been delivered. Still another commenter believed the

regulation should provide a definition for ``adverse affect'' that

specifically includes sanctions against HMOs that fail to provide

timely and adequate prenatal and children's preventive care.

Response: The expertise needed to determine what constitutes

``adverse effect'' are similar to those previously discussed which are

needed to evaluate ``substantial failure'' and ``medically necessary.''

HCFA and States will rely on the same sources of information and

guidance (as previously described) to determine when an enrollee has

been adversely affected by the failure to provide the required

medically necessary services.

It should be noted that in addition to a substantial failure to

provide medically necessary services, ``adverse effect'' may also be

found to be the result of providing inappropriate or substandard care.

Specifically, for medical services that are Medicare or Medicaid

approved and are found to be medically necessary, if HCFA or the State

determines that a failure to appropriately provide required services

has adversely affected (or has a substantial likelihood of adversely

affecting) an enrollee, then this will constitute a violation. This

includes Medicaid required prenatal and children's preventive care.

Comment: One commenter stated that ``adversely affects'' should be

defined in terms of a detrimental effect on the condition(s) for which

the person is seeking treatment.

Response: HCFA and State Medicaid agencies will not limit a

determination of adverse effect to only those conditions for which the

person is seeking treatment. For example, instances may arise where

beneficiaries are seeking treatment for one condition and the physician

will determine that another condition is actually the cause of their

symptoms.

Comment: One commenter stated that the penalties should apply only

to instances where the plan acts negligently or with intent to

wrongfully deny medically necessary services. Similarly, a few

commenters believed that any sanctions and/or civil money penalties

should apply only when an organization has knowingly and willfully

violated the law. Two of those commenters suggested that we add a

requirement that any violations must be ``knowingly and willfully''

committed before we impose a sanction.

Response: Sanctions will not be limited to instances where plans

act negligently or with wrongful intent. Aggravating and mitigating

factors, such as the degree of culpability of the organization, will be

considered in determining any sanction or civil money penalty. As in

all our determinations on intermediate sanctions, the scope, and

duration of the violation, as well as the level of threat to enrollee

health and safety, will be evaluated in determining the severity of a

particular sanction. Further, we believe that an absolute requirement

for ``knowingly and willfully'' violations is more stringent than the

law anticipated. We will consider evidence that an organization has

willfully violated the statute as an aggravating circumstance.

Nevertheless, we will not add the requirement that violations must be

``knowingly and willfully'' committed before the imposition of a

sanction.

Comment: One commenter asked whether it would be considered a

failure to provide medically necessary services if an HMO determined,

according to its standard procedures, that a particular service did not

qualify as an emergency or out-of-area urgently needed care and denied

the service. This commenter recommended that the regulation exclude

from any definition of ``substantial failure to provide medically

necessary services'' those circumstances in which care is not provided

based upon a medical judgment made in accord with the HMO's standard

operating policies determining coverage. In addition, the commenter

asked under what circumstances the failure of a physician, with whom

the HMO contracts on an independent contractor basis, to furnish a

medically necessary item or service can be imputed to the HMO, absent a

clear showing that the HMO knowingly contracted with a physician (or

other provider) with a history of improper treatment of patients.

Response: In general, an organization which reasonably follows

approved guidelines and policies in making medical care decisions will

not be found to have denied medically necessary services. It is

important to emphasize that we expect medical care decisions to be made

judiciously and appropriately. There may be instances when the

organization's rules are inadequate; in such circumstances we expect

the organization to protect the welfare of the beneficiary.

With respect to an HMO contracting with an independent contractor

physician, we consider the HMO responsible for the quality of care its

members receive. The HMO has a duty to ensure that the care enrollees

receive is appropriate, whether the physician or provider is an

employee of the HMO or an independent contractor. If a HMO knowingly

contracts with a provider that has a history of improper treatment

toward patients, we would consider this a serious aggravating

circumstance in determining a sanction or civil money penalty.

Comment: One commenter pointed out that not all HMOs offer all

routine covered services in their own health care centers, and

therefore must contract out with other providers to offer those

services. If it occurs that routine services cannot be scheduled

without some minor delay, under what circumstances would such a delay

result in a determination that the HMO failed substantially to provide

medically necessary services?

Response: Such a situation will be evaluated based on the judgement

of experts with whom HCFA will consult and in accordance with Medicare

law and regulations. As previously noted, these experts include

physicians, other medical personnel, the PRO, and utilization

reviewers. Factors such as the effect of delays on the beneficiary's

health and whether such delays are reasonable given the type of service

and the needs of the beneficiary will be considered. An HMO that

contracts for various services remains responsible for the quality and

timeliness of those services.

Comment: Several commenters wanted more guidance as to what

constitutes an excess premium for purposes of imposing intermediate

sanctions in Sec. 434.67(a)(2). One commenter suggested that the

regulation include language stating that HCFA approval of the premium

amount is consistent with the statutory requirement. Another commenter

believed that penalties in premium setting should be limited to

instances in which plans knowingly and intentionally seek to overcharge

beneficiaries.

Response: In Medicare contracting organizations the premiums and

other charges for Medicare enrollees are required to be the actuarial

equivalent of what a Medicare beneficiary would pay in fee-for-service

for Medicare covered services (section 1876(e)). Premium charges in

excess of the HCFA approved amount would be considered excessive.

Although premiums are not typically employed for Medicaid

contracting HMOs for Medicaid enrollees, if the State and the HMO/HIO

agreed to do so, the use of the premiums would have to be explicitly

described in the HMO/HIOs contract with the State. The use of premiums

in this way would also have to be described in the State plan, and

could not exceed the actual value of deductibles and co-payment amounts

provided for under the State plan. Both the State plan provision and

the contract terms are required to have the approval of HCFA. Therefore

any use of premiums which is not explicitly provided for in an HMO's or

HIO's contract with the State, which has been approved by HCFA, would

be in excess of a permitted premium.

Comment: Proposed Sec. 417.495(a)(8), which we have designated as

Sec. 417.500(a)(8) in this final rule, prohibits Medicare risk

contractors from employing or contracting with or through individuals

or entities (either directly or indirectly) which have been excluded

from participating in Medicare. One commenter believed this provision

placed an onerous burden on the risk contractor to conduct extensive

inquiries into the background of each of its participating providers

and subcontractors, as well as imposing an obligation to obtain from

HCFA the most recent information regarding excluded entities. In

addition, this commenter wanted clarification of the meaning of

``employing or contracting * * * (directly or indirectly) through an

excluded individual or entity,'' so the risk contractor will know the

extent of background information it must require of participating

providers and others. Further, the commenter suggested that HCFA

implement this provision by, (1) providing the risk contractor with a

periodic listing of all excluded entities; and (2) specifying that the

statutory obligation is satisfied if the risk contractor requests the

background information, checks the information furnished by the

subcontractor against the most recent list of excluded entities

provided by HCFA, and the contracting entity or entities are not on the

list.

Response: As part of its current operating procedures, HCFA makes

available to Medicare contractors the Medicare/Medicaid Sanction-

Reimbursement Report, which lists entities, contractors, and providers

excluded from Medicare. While we consider review of the sanction report

a critical step in complying with the requirement prohibiting

contracting with an excluded individual or entity, it is not conclusive

proof of having satisfied the legal obligation. In general, beyond

reviewing the sanction report, we expect a reasonable effort to comply

with this requirement. This would include reasonable activities to

verify provider credentials, and review of other relevant State and

professional records. We do not require or expect contracting

organizations to go beyond making a reasonable and conscientious effort

to comply with this requirement.

Comment: Many commenters wanted more than 15 days to respond to the

notice of intermediate sanctions. The suggested time limits ranged from

30 to 60 days with the option of additional extensions.

Response: We agree that allowing more time for an organization to

respond to a notification of sanction may be necessary in some

instances. We have revised our regulations at Sec. 417.500(b)(2) and

Sec. 434.67(c) to permit a 15 day extension to the original 15 days if

HCFA approves a written request from the organization. The request for

an extension must provide a credible explanation of why additional time

is needed and must be received by HCFA or the State agency, as

appropriate, before the end of the 15 day period following the

organization's date of notification of sanction. An extension will not

be available in instances where HCFA, or HCFA in consultation with the

State agency, finds that the organization's conduct poses a serious

threat to an enrollees' health and safety or if HCFA or the State

agency, as appropriate, judges the additional 15 days to be unnecessary

for the organization to respond.

Comment: Two commenters wanted the regulation to specify the

information that would be provided in the notice of intermediate

sanctions. Another commenter suggested the following information be

provided: (1) The sanction or sanctions to be imposed; (2) the

effective date and duration of the sanction; (3) the authority for the

sanction; (4) the reason for the sanction; (5) specific information

regarding the organization's right to contest the determination,

including timeframes for submission of the organization's request for

reconsideration, the permissible content of the request and supporting

materials, and to whom the request should be submitted; and (6)

information regarding any rights to hearing or appeal, including

judicial review, that the organization may have if the sanction is

imposed. In addition, the organization should be provided with copies

of any documents on which HCFA or the State Agency relied in

determining that a violation occurred.

Response: Confidentiality may not allow the release of certain

documents which have influenced HCFA's decision to impose a sanction.

However, most of the information listed above will be provided to an

organization in the notification of sanction. Specifically, the notice

of sanction will provide: (1) The sanction or sanctions to be imposed,

(2) the reason for the sanction, (3) the authority for the sanction,

(4) the effective date of the sanction, and (5) the time available for

submission of the request for reconsideration and to whom the request

should be submitted.

HCFA will specify the above information in operating procedures

rather than in the regulations. Under the intermediate sanctions,

appeal rights will be limited to the reconsideration period.

Comment: One commenter wanted the following information provided by

HCFA following a reconsideration: (1) Whether the intermediate sanction

will be imposed; (2) the reasons for imposing the sanction, addressing

the evidence and arguments submitted by the organization; (3) the

effective date and duration of the sanction; and (4) specific

information regarding the organization's right to appeal the imposition

of a sanction.

Response: We will provide this information at the conclusion of a

reconsideration, with two exceptions. First, the duration of the

sanction will depend largely on the organization's corrective action

plan and willingness and ability to resolve the problem(s). An

organization that cannot immediately correct a deficiency for which it

has been sanctioned will be expected to submit a corrective action plan

to HCFA. This plan will be the organization's description of how and

when it will resolve the problems that caused the sanctions to be

imposed. Because each corrective action plan is unique, the duration of

the sanction cannot be specified at the time it is imposed. Second,

there will not be additional appeal steps beyond the initial

reconsideration. HCFA will, however, act as quickly as possible when an

organization believes it has resolved the violation(s) and wishes to be

re-evaluated.

Comment: One commenter recommended that the Medicaid regulations

contain minimum standards for the State review procedure. In addition,

this commenter believed that an organization sanctioned by a State

should have an opportunity for a separate review determination on the

Federal level which would supersede any State determination.

Response: State Medicaid agencies are currently responsible for

establishing and implementing procedures to monitor HMO and HIO

contracts. The areas States monitor through these procedures are

broader than the areas identified in this rule. Because States already

have these monitoring and review procedures in place, we prefer to

allow States to implement these additional responsibilities within

their current activities. We will not, in these regulations, specify

national standards for this one aspect of the overall monitoring and

review of HMO and HIO contracts conducted by States.

In response to the second comment, the Medicaid program is

administered by States as opposed to the Federal government. We stated

in the preamble of the proposed rule that we believe that States are in

the best position to monitor the identified violations and to make a

determinations as to whether a violation has occurred. The proposed

rule and this final rule offer an additional opportunity for an HMO or

HIO to receive a reconsideration of a State's determination. We do not

see the need for a third level of review and determination.

Comment: A commenter recommended that HCFA require States to

collect information quarterly from Medicaid participating HMOs on the

timeliness and frequency of prenatal visits for each Medicaid enrollee.

The commenter also recommended requiring States to annually submit data

to HCFA demonstrating that the State's rates for prenatal and Early

Periodic Screening Diagnosis and Testing (EPSDT) services are adequate

to ensure access under Medicaid's statutory requirements.

Response: This comment goes beyond the scope of this rulemaking,

which implements legislative authority for intermediate sanctions and

civil money penalties for HMOs (and some HIOs). HMOs and HIOs are not

yet obligated to pay EPSDT providers State rates. The adequacy of such

State rates is not relevant in the case of HMO enrollees. Note,

however, section 1926(a) of the Social Security Act requires that State

Medicaid agency payments must be sufficient to enlist enough providers

to ensure that obstetric and pediatric services are available to

Medicaid recipients at least to the same extent available to the

general population. HCFA is developing a proposed rule which would

implement the provisions of section 1926(a) in regulations.

Comment: One commenter believed that, without additional FFP, the

Federal requirements mandating additional specific monitoring functions

under this regulation would be burdensome for the States.

Response: HCFA expects States to integrate these new areas of

monitoring into their existing monitoring and review activities; for

example, those required for monitoring an HMO's enrollment and

termination practices and grievance procedures. There will continue to

be FFP in the costs for conducting these activities at each State's

current Federal matching rate.

Comment: One commenter recommended that HCFA affirmatively adopt

those State decisions with which it agrees. The commenter believes this

will mean that HCFA will more closely examine State agency

determinations or decisions if it is required to formally adopt them.

Response: The regulation at Sec. 434.67(b) provides for a mechanism

whereby HCFA must uphold or reject a State decision that a sanction be

or not be imposed. We believe that HCFA's consequent imposition of a

sanction or decision not to impose a sanction provides sufficient

formal affirmative adoption or rejection of a State's recommendation.

Comment: One commenter recommended that the final regulation should

specify that the informal appeal must be conducted by an official

``experienced and knowledgeable'' about contracting under sections 1876

or 1903(m) of the Act.

Response: HCFA will ensure that sanction reconsiderations are

evaluated by qualified HCFA officials. However, we do not believe it is

necessary to mandate specific qualifications in the regulation.

Comment: A number of commenters were interested in HCFA's approach

to beneficiary complaints. HCFA was encouraged to add provisions to the

intermediate sanctions establishing timeframes and methodologies for

the investigation of complaints. A specific recommendation was made to

amend 42 CFR part 417 to require HCFA to have procedures to monitor and

investigate violations of section 1876 of the Act. Other commenters

believed that HCFA should require contracting organizations to

publicize the availability of intermediate sanctions along with

information on how to file complaints. Another commenter suggested the

rules specify that the complainant receive: (1) Verification of receipt

of the complaint; (2) a copy of the notice of intermediate sanction;

(3) a copy of the HMOs response, if any, and; (4) a copy of the

reconsideration determination. Finally, two commenters wanted a time

limit placed on HCFA's investigation and review of beneficiary

complaints, suggesting a 60-day deadline for processing the initial

complaint and informing the complainant on the outcome of the

investigation.

Response: The purpose of the intermediate sanction is to provide

more tools and authority to protect the Medicare beneficiary or

Medicaid recipient. HCFA already has procedures in the regional offices

and State Medicaid agencies for reporting and responding to beneficiary

or recipient complaints. In addition, we already require that HMOs have

a formal appeals process through which Medicare enrollees may submit

complaints to HCFA. Information about this process must be included in

written marketing materials, as set forth in Sec. 417.426. Thus, if an

HMO or competitive medical plan denies a service or payment for a

service to a Medicare enrollee, the HMO or competitive medical plan

must advise the enrollee of his or her rights under Medicare that

afford the beneficiary the right to appeal the denial to HCFA.

Establishing a separate complaint mechanism for the intermediate

sanctions regulation would only serve to divert scarce resources from

oversight and enforcement activities. Nevertheless, enrollee complaints

will continue to be used as a key indicator of potential problems in

Medicare or Medicaid contracting plans as well as identifying potential

problems where intermediate sanctions or civil money penalties would be

effective.

Comment: One commenter stated that an appropriate sanction for

marketing abuse would be to require future marketing materials and/or

membership materials to publicize the imposition of sanctions.

Response: This goes beyond our legislative authority. We are

constrained, by the provisions of the enabling legislation, in the

sanctions we may apply.

Comment: Two commenters were concerned that if the informal

reconsideration results in a reversal of the initial determination,

there is no provision to ensure that notice of the decision to reverse

is provided to the OIG.

Response: We agree that it is important that OIG be notified by

HCFA if, in the course of reconsideration or at a later time, a

sanction is rescinded. The single determination applies to the initial

determination and HCFA will promptly forward to the OIG information on

reversals or termination of sanctions. Generally, HCFA will only notify

OIG of an intermediate sanction after HCFA has confirmed the imposition

of a sanction. This confirmation of sanction will occur at the

conclusion of the notification of sanction period or at the end of a

reconsideration.

Comment: One commenter believed that the sanctions available to

HCFA were too limited and recommended that this final regulation

include a third category of sanctions to include such additional

sanctions as HCFA considers appropriate and as justice requires.

Another commenter specifically suggested we broaden the intermediate

sanctions to include sanctions for inappropriate marketing activities

and noncompliance with appeal timeframes.

Response: We cannot broaden the intermediate sanctions regulation

by introducing a third new category of sanctions that would be

determined by what HCFA would consider ``appropriate and as justice

requires.'' To do so would exceed our statutory authority.

With regard to applying the intermediate sanctions to marketing

violations, section 1876(i)(6)(A)(V) of the Act authorizes HCFA to

impose sanctions if an HMO/CMP misrepresents or falsifies information

that it furnishes under section 1876 of the Act to HCFA, an individual,

or to any other entity. We believe this provides us authority to

address a wide range of potential marketing abuses. One of the

sanctions provided by the statute is the suspension of enrollment

Medicare beneficiaries by the HMO/CMP (section 1876(i)(B)(ii)). Because

we consider marketing activities to be an integral part of the

enrollment process, we believe the statute gives HCFA the authority to

require the offending HMO/CMP to suspend marketing activities directed

to Medicare beneficiaries. Therefore, in this final rule, we clarify

this by adding a new Sec. 417.500(d)(3). Accordingly, Secs. 417.500

(d)(1)-(d)(3) require the sanctioned HMO/CMP to stop accepting

applications for enrollment made by Medicare beneficiaries, suspend

payment to the HMO/CMP for Medicare beneficiaries enrolled during the

sanction period, and, finally, requires the HMO/CMP to suspend all

marketing activities to Medicare beneficiaries.

Additionally, we believe that, even in cases where HCFA imposes the

suspension of payment sanction, HCFA may require the HMO/CMP to suspend

marketing activities to Medicare beneficiaries. We believe that, if

HCFA could suspend all enrollment entirely at its discretion,

conditions could be attached to a decision to permit an HMO/CMP to

continue to enroll new members--namely that actual marketing to new

members cease until the sanction is lifted.

Noncompliance with appeal time frames may also be a violation of

section 1876(i)(6)(A)(v) if, for example, HCFA finds that an HMO/CMP is

misrepresenting information regarding its appeal process or is

providing beneficiaries inaccurate information regarding appeal time

frames. In addition, since the Medicare appeals process protects the

Medicare enrollee's right to appeal an HMO's or competitive medical

plan's decision not to furnish or pay for services, a violation of the

appeals process is a failure to substantially provide required

medically necessary items and services.

Comment: One commenter requested that an organization which is

under the sanction of suspension of new enrollment applications also be

prohibited from any new subscriber marketing activities. Another

commenter asked what the implications for the organization are if an

intermediate sanction of suspension of enrollment is imposed. Does the

organization still have an obligation to conduct the annual open

enrollment period if it occurs during the sanction period? Also, if the

sanction is the suspension of payments for new enrollees, will the

organization still be required to accept new enrollees and provide

health services for which they may not be paid?

Finally, one commenter asked for a specific definition of

``suspension.'' For example, if payments are suspended, the commenter

wanted to know whether the organization can recover for services

furnished during the sanction period after the sanction is lifted. The

commenter also asked whether the organization may engage in marketing

activities during the suspension period, holding applications in

abeyance until the sanction is removed.

Response: Based on the authority granted the Secretary under

section 1876(f)(3) of the Act and established in this regulation at

Secs. 417.500 (d)(1) through (d)(3), HCFA has the authority to impose

the following penalties on offending HMOs or CMPs:

1. Require the HMO or CMP to suspend the enrollment of Medicare

beneficiaries during the sanction period; or

2. Suspend payments to the organization for Medicare beneficiaries

enrolled during the sanction period.

Depending on the severity and nature of the violation, HCFA will

determine which of the two penalties available under the intermediate

sanctions is appropriate. A discussion of the two penalties under the

intermediate sanctions available to HCFA follows.

Suspension of new Medicare enrollments: Under this sanction, HCFA

requires the HMO or CMP to cease all enrollments of Medicare

beneficiaries. On the date the sanction is effective, the plan would be

prohibited from accepting applications or otherwise enrolling any new

Medicare beneficiaries in the plan. However, individuals already

enrolled in the plan and who become Medicare eligible (age in) while

the plan is under the suspension of new enrollments, may be enrolled,

if they choose, in the plan during the sanction period. Under this

sanction, the plan would also be prohibited from engaging in any

marketing activities directed to Medicare beneficiaries.

The organization would continue to be paid by HCFA for

beneficiaries enrolled before the imposition of this sanction.

Suspension of payments: Under the suspension of payments penalty,

the HMO or CMP may continue to enroll beneficiaries but would not be

paid for those beneficiaries during the sanction period. Once the

sanction period ends, there will be a retroactive payment for

beneficiaries enrolled during the sanction period. Thus, this penalty

is purely a financial one, affecting only the withholding of the HMO's

or competitive medical plan's capitation payment for new medicare

enrollees during the sanction period.

Enrollment of new members would be allowed to continue; thus the

plan would not necessarily ``lose'' potential enrollees who would

enroll with another HMO or CMP if enrollment was suspended under

section 1876(i)(6)(B)(iii) of the Act. As was described in a previous

response to a comment, at the time an HMO or CMP is notified that it is

subject to the intermediate sanctions, the notice of sanction will

inform the plan what specific intermediate sanction has been imposed,

including what the plan must do to comply with the sanction, and the

effective date of the sanction. In addition to whatever sanction HCFA

imposes, the HMO or CMP may also be subject to civil money penalties

levied by the Office of Inspector General.

Comment: Several commenters suggested that the informal

reconsideration be required to be conducted promptly, for example,

within 30 or 60 days of receipt of the organization's evidence. In

addition, one commenter requested that the review be expedited if the

organization demonstrates that there is a pressing need for swift

action.

Response: It is our intent to conduct reconsiderations promptly.

The purpose of an intermediate sanction is to allow us to resolve a

problem quickly. Nevertheless, we do not choose to specify a time

limit. We encourage organizations to inform us of any circumstances

that require expedited reconsideration.

Comment: One commenter stated that the language in proposed

Sec. 417.495(e)(1), now designated as Sec. 417.500(e)(1), implies that

HCFA's reconsideration will inevitably result in upholding the initial

determination. They recommended the language of this paragraph be

revised to clarify that the sanctions are effective only if HCFA

decides to uphold the initial determination.

Response: We disagree with the commenters interpretation of

Sec. 417.500(e)(1) and we do not believe the recommended clarification

is necessary. We believe it is clear that the provision on the

effective date for a sanction only applies when a final decision to

impose a sanction is made. The reconsideration process is meant to be a

serious assessment of the response by the sanctioned organization. As

such, HCFA will not inevitably uphold its initial decision. If HCFA

reverses its initial decision, Sec. 417.500(e)(1) would have no

applicability.

Comment: One commenter noted that the regulation allows HCFA to

make the intermediate sanction effective immediately if the

organization's conduct poses a serious threat to an enrollee's health

and safety. The commenter stated that if the health and safety of

enrollees is at issue, HCFA should take steps to terminate the contract

in its entirety, and that intermediate sanctions are not appropriate in

such critical circumstances.

Response: There may be instances in which HCFA will impose the

intermediate sanction to stop the organization from enrollment and

marketing activities at the same time a termination action is being

initiated. We believe it is in the best interest of the enrollee that

we maintain our authority to respond simultaneously with both actions.

Comment: Three commenters wanted to know if the intermediate

sanctions could be imposed retroactively.

Response: Intermediate sanctions will always be imposed

prospectively. Civil money penalties, on the other hand, may be imposed

for conduct which has already occurred.

Comment: One commenter asked that we clarify what ``generally''

means as it appears in proposed Secs. 417.495(e)--now Sec. 417.500(e)--

and 434.67(f)(1). These sections specify that if an HMO seeks

reconsideration of a HCFA sanction, ``the intermediate sanction

generally will be effective on the date the organization is notified of

HCFA's decision.''

Response: The notice of intermediate sanction, (or notice of

reconsideration of an intermediate sanction) will specify the effective

date. Usually this will be on the date of the reconsideration notice.

We have revised these sections, however, to more clearly state that the

sanction is effective on the date specified in the sanction notice or

reconsideration notice, respectively.

Comment: One commenter suggested a definition of ``substantial''

contractual relationship under a Medicaid contract. The commenter

proposed that the regulation define ``substantial'' as greater than 5

percent of the total annual volume of payments for categories of

services under the program.

Response: We considered use of a quantitative approach to defining

a ``substantial'' contractual relationship--either a numerical dollar

amount or, as suggested by the commenter, expressed as a percent. We

dismissed such approaches because contracts of seemingly small

financial value could still have a significant effect on Medicare or

Medicaid enrollees. Furthermore, if an organization is large, with a

substantial contracting budget, even a small percent, such as 5

percent, could involve substantial sums of money. We are therefore

adhering to the definition of a ``substantial'' contractual

relationship contained in the proposed rule. Nevertheless, we will

consider relative size as a factor in our determination of whether to

impose intermediate sanctions or civil money penalties.

Comment: A number of commenters believed that the imposition and

duration of sanctions in both Medicare and Medicaid should be subject

to a formal review instead of the proposed informal review process. One

commenter stated that the formal review steps should consist of an

independent review by an administrative law judge (ALJ), with review by

the Departmental Appeals Board and, finally, judicial review; with

sanctions not taking effect until all appeals are exhausted.

Response: The legislative intent for the intermediate sanctions is

to provide HCFA with the authority to respond in a flexible and timely

manner to violations of contracting organizations. Allowing the

sanction process to become linked to extended review procedures would

not serve the interests of the beneficiary or meet the intent of

legislation. We believe that the reconsideration process will provide

organizations ample opportunity to explain their position.

Comment: Two commenters stated that, if a pre-sanction hearing was

not allowed, there should be a post-sanction hearing before an ALJ or

other impartial body, held as soon as possible after the imposition of

any sanctions.

Response: As was stated previously, the intent of the statutory

provisions implemented in this regulation is to allow HCFA to respond

quickly to a problem. During the reconsideration process the decision

to impose or not impose a sanction will be made judiciously. In the

event a sanction is applied, HCFA will work with the organization to

resolve the problem as rapidly as possible. We expect sanctions to be

of short duration. If the violation persists, the likely outcome would

be termination of the contract rather than an indefinite sanction. We

believe that additional hearings would only serve to delay the

resolution of problems.

Comment: One commenter stated that an organization should have an

``opportunity to cure'' by which the organization could avoid the

imposition of sanctions by demonstrating not only that the alleged

violation had not occurred, but that any prior violation already had

been remedied.

Response: We agree that an organization which has received a notice

of sanction should have a reasonable opportunity to present its

position. In the event the risk contractor demonstrates during the

reconsideration period that the sanction is not appropriate, the

sanction will not be imposed. The organization's prior contract

performance will be considered as we determine whether to impose a

sanction and the amount of any civil money penalty.

Comment: One commenter requested than an organization be allowed to

submit both documentary evidence, including statements and affidavits,

and written arguments in response to a notice that HCFA intends to

impose an intermediate sanction.

Response: We agree. The rule provides for the submission of such

information as part of the reconsideration process. (See Secs. 417.500

(b) (proposed Sec. 417.495(b)) and 434.67(c))

Comment: One commenter expressed concern about the potential

duration of an intermediate sanction and recommended a procedure by

which, once a sanction is imposed, it will remain in effect until the

organization submits a credible allegation of compliance. The commenter

defined this as a senior officer's written statement that the

organization has taken steps to ensure alleged violations have been

examined and, where necessary, corrected. The commenter stated that

HCFA should then have 14 days to determine whether the sanction should

be terminated. If HCFA is unable to make a determination within 14

days, then the commenter believes that the intermediate sanction should

be removed.

Response: We disagree with the recommendation. Our review and

decision if we should end a sanction will be done as quickly as

possible, but the timing will depend largely on the complexity of the

problem and responsiveness of the organization. If a sanction is

imposed, the sanctioned organization will develop a corrective action

plan, effectively setting their own timetable for the removal of

sanctions. HCFA will respond as quickly as possible to review an

organization that believes it has corrected its deficiencies.

Comment: Several commenters wanted some means available to ensure

prompt reevaluation of an existing sanction and a time limit placed on

the duration of a sanction. A related comment was that any renewal of a

contract should constitute ratification of the organization's

performance under the contract and, thus, the end of the sanction

period.

Response: In the event a sanction is applied to an organization,

HCFA will respond as quickly as possible to their request for a re-

evaluation. We, however, will not set specific limits on the timing or

frequency of our reevaluations, or view contract renewal as HCFA's

acknowledgement that sufficient corrective action has been taken.

Comment: One commenter pointed out what was believed to be an error

in proposed Sec. 434.67(f)(1). The last sentence of this citation in

the proposed rule referred to ``the date the organization is notified

of HCFA's decision under paragraph (d)(1)(ii) of this section.''

However, paragraph (d)(1)(ii) of that section does not relate to a

notification of a decision following reconsideration by HCFA, but

rather to a decision by a State agency.

Response: We have modified Sec. 434.67(d)(2) to clarify that the

State agency decision to impose a sanction becomes HCFA's decision

except in instances where HCFA decides to modify or reverse that agency

decision. We also have revised Sec. 434.67(f) so that it, (1) refers in

paragraph (f)(1) to the date the HMO is ``notified * * * under

paragraph (c),'' rather than ``under paragraph (d)(1)(ii);'' and, (2)

refers in paragraph (f)(2) to ``the date specified in HCFA's

reconsideration notice.''

B. Factors To be Considered in Levying Civil Money Penalties

Comment: One commenter believed that the proposed ``Factors To Be

Considered in Levying Civil Money Penalties'' greatly dilutes the

effectiveness of the penalties by creating many opportunities for HMOs

to argue for minimal fines. The commenter stated that the imposition of

a full penalty is tied to proof that the HMO engaged in prohibited

behavior on a repeated and knowing basis--which is excessively

difficult to prove. The commenter suggested that the deterrent effect

of the civil money penalties should be preserved by imposing maximum

fines for all violations that come to light.

Response: The intent of penalties is to quickly bring about

corrective action on the part of a sanctioned organization and to deter

further violations. The OIG will use the ``Factors to Be Considered in

Levying Civil Money Penalties'' as a guide in determining the

appropriate amount of any civil money penalty. Organizations that have

made honest errors and are responsive to HCFA regulators will face less

severe penalties than organizations that demonstrate a pattern of

knowingly committing violations. We believe that, in performing our

oversight responsibilities, it is important to retain flexibility in

responding to violations. However, once all evidence has been evaluated

and weighed, the OIG will act on the facts of the case in the manner it

believes will best achieve the objectives of enrollee protection and

regulatory compliance.

Comment: One commenter had several suggestions regarding the

enumeration of specific mitigating and aggravating circumstances for

the imposition of civil money penalties.

The commenter stated that the statute and regulation establish

sanctions that can be imposed against organizations that charge

enrollees premiums in excess of those permitted. The commenter believed

it should be a mitigating circumstance if the premiums were only

incidentally in excess of those permitted; it should be an aggravating

circumstance if the premiums were greatly in excess of those permitted.

The commenter stated that the statute and regulations also provide

sanctions for contracting with excluded individuals or entities. The

commenter believed it should be an aggravating circumstance if the

entity was excluded because of its dealings with the HMO and the

excluded entity is contracting with the HMO for health care services.

The commenter believed it should be a mitigating circumstance if the--

(1) Entity was excluded because of activities unrelated to its

dealings with the HMO.

(2) Contract with the excluded entity is unrelated to the delivery

of health care services.

(3) Violation is confined to a particular service area of the HMO.

Response: We do not agree with these comments. We believe that the

current factors listed under proposed Sec. 1003.106(a)(4) provide for

sufficient consideration of the circumstances surrounding violations

where premiums in excess of the allowable amount are charged by a

contracting organization. Therefore, a separate factor addressing such

a violation is unnecessary. With regard to the second comment, we

believe that this goes beyond the scope of the statute. The enabling

legislation provides for imposition of a civil money penalty without

regard to the specific activities which resulted in an individual being

excluded from the Medicare program. Additionally, since the statute

provides that the penalty may be imposed in instances where excluded

individuals are contracted to provide other than patient care, we see

no need to mitigate this circumstance. Finally, we believe that the

current factors listed under Sec. 1003.106(a)(4) provide for sufficient

consideration of the scope of a violation. Therefore, an amendment

addressing violations that may be confined to a particular service are

not necessary.

Comment: One commenter wanted the OIG to consider prior offenses

for which the organization was not assessed any sanctions or money

penalties. The commenter believed that even if prior violations had not

been sanctioned, a pattern of violations should be considered more

serious and dealt with more harshly. The commenter also suggested that

proposed Sec. 1003.106(a)(4)(vii), which concerns the history of prior

offenses, should be amended to include, in the list of factors to be

considered, whether there were any prior offenses by the organization,

regardless of administrative or civil sanctions assessed.

Response: In making a determination on the imposition of sanctions

we will consider an organization's pattern of conduct. A background of

repeated violations would be considered an aggravating circumstance. We

believe the current provisions in proposed Sec. 1003.106 allow the OIG

to consider the prior conduct of an organization in levying civil money

sanctions. Therefore, an amendment is unnecessary.

Comment: One commenter stated that the standards in Sec. 1003.106

relating to determinations regarding the amount of the penalty and

assessment are subjective criteria which could result in arbitrary

determinations by the OIG.

Response: We disagree with this comment. Congress authorized a

maximum penalty amount for certain violations contained in the

underlying statutes. The proposed factors listed in Sec. 1003.106

represent an attempt to provide a measure for impartially determining a

penalty amount against a culpable organization. Moreover, the public is

afforded an opportunity to comment on the proposed factors before their

adoption in final regulations. This process is intended to inform the

public about what factors will be used in determining penalty amounts,

and, to the extent possible, remove subjectivity from penalty

determination decisions.

Comment: One commenter wanted to add the ``enrollee's compliance

with rules and protocols of the contracting organization'' as a factor

in our determination of imposing civil money penalties.

Response: We believe that the current factors listed under proposed

Sec. 1003.106(a)(4) provide for sufficient consideration of the

commenter's concerns. Specifically, in paragraph (a)(4)(ii) the factor

is the degree of culpability of the contracting organization. Under

this factor, in determining whether or not to impose a penalty, as well

as in determining the amount of any penalty which may be imposed,

consideration will be given to the enrollee's culpability for the

violation, including compliance with rules and protocols of the

contracting organization. Therefore, a separate factor addressing this

issue is unnecessary.

Comment: One commenter asked if proposed Sec. 1003.103(c)(1)(iv),

now designated as Sec. 1003.103(e)(1)(iv), establishes degrees or

levels of misrepresentation and falsification of information that will

be subject to varying amounts of civil money penalties. In addition,

the commenter wanted a distinction to be made in the regulation between

a misrepresentation and falsification and a mistake with no fraudulent

intent.

Response: Concerning a violation of this nature, we believe that

once all pertinent information is examined, any reasonable person could

discern the difference between a ``misrepresentation'' and ``a mistake

with no fraudulent intent.'' Therefore, we believe that the language in

Sec. 1003.103(c)(1)(iv) is sufficient as written.

Comment: Section 1003.103(c)(1)(v) specifies that the failure to

comply with prompt payment of claims as established in section

1876(g)(6)(A) of the Act is the basis for a money penalty. A commenter

asked what constitutes a violation of timely claims payment, whether it

is one late claim or a percentage of claims beyond the standard. In

addition, this commenter questioned whether late claims will be

determined from a monthly report, Medicare carriers, on-site review, or

beneficiary or provider complaints and asked whether this includes

claims from nonparticipating providers.

Response: Section 1876(g)(6)(A) of the Act contains a cross-

reference to sections 1816(c)(2) and 1842(c)(2) of the Act, which

describe prompt payment. These sections require that 95 percent of

claims be paid within a specified time period (currently 24 calendar

days after receipt). As a result, a definition in this regulation is

unnecessary.

Comment: One commenter questioned whether Qualified Medicare

Beneficiaries (QMBs) are subject to this rule.

Response: This rule applies to plans that have a Medicare or

Medicaid contract. QMBs could be enrolled (or want to enroll) in these

plans, and thus, could be affected by these rules.

Comment: One commenter wanted to know what constitutes

``discouraging enrollment.'' Another commenter stated that a penalty

should be imposed for discouraging enrollment only if a beneficiary is

discouraged from enrolling because of a medical condition or a future

need for substantial services.

Response: It is not possible to set out all the possible ways that

enrollments in a contracting organization might be discouraged.

Essentially, such a determination would be made after judging all the

facts and circumstances surrounding an alleged violation. We agree,

however, that violations of this nature pertain to certain

circumstances. The statute specifically authorizes imposition of a

penalty in those instances in which, except as permitted by law, a

contracting organization expels or refuses to reenroll an individual or

engages in any practice that would reasonably be expected to have the

effect of denying or discouraging enrollment by enrollees whose medical

condition or history indicate a need for substantial future medical

services.

Comment: One commenter stated that Sec. 434.80 would require a

State agency to exclude from participation, as a Medicaid contractor,

any HMO that is controlled or owned by an individual who has been

convicted of a criminal offense relating to financial misconduct. The

commenter said that this provision amounts to a lifetime ban on

participation in Medicaid for individuals who may have committed an

offense only marginally related to the delivery of health care. The

commenter recommended that this prohibition not be a lifetime ban, but

that the prohibitions be restricted in their effect to criminal

offenses which occurred within the past 10 years. The commenter also

stated that the relationship of the criminal offense to the delivery of

health care services should be a factor applied by the State agency in

determining the fitness of the HMO contractor.

Response: This requirement is based on the requirement in

1902(p)(2) of the Act. The law does not provide authority for the

Department to either grant exceptions to this requirement or make this

requirement effective for only a specified time period.

Comment: A commenter noted that proposed Sec. 1003.106(a)(1) refers

to determining the amount of a penalty under Sec. 1003.103(a), (b) and

(c)(1) through (c)(3), and proposed Sec. 1003.106(a)(4) refers to

factors for the OIG to consider in determining the penalty under

Sec. 1003.103(b)(4) [sic]. The commenter states that there is no

Sec. 1003.103(b)(4), and believes that both of these references are

incorrect.

Response: We agree. Several sections were incorrectly referenced in

Secs. 1003.106(a)(1) and 1003.106(a)(4) and we are revising the

regulations accordingly. Numerous revisions to referenced sections are

made in this final rule because of the publication of final OIG

regulations since this HMO regulation was published as a proposed rule.

IV. Provisions of the Final Regulations

After consideration of the comments received and our further

analysis of specific issues, we are publishing as final the July 22,

1991, proposed regulations with the revisions identified below. We have

also made numerous editorial changes to improve the readability of the

proposed text, without changing its substance.

On October 17, 1991 HCFA published a final rule (56 FR 51984) that

amended part 417 to simplify, clarify, and update regulations on

prepaid health care. Among other changes, that rule designated the

contents of Subpart C-- Health Maintenance Organization and Competitive

Medical Plans as Subpart L--Medicare Contract Requirements. In the July

1991 proposed rule, we proposed to add a new Sec. 417.495, ``Sanctions

against the organizations'' to subpart C. Therefore, as a change from

the proposed rule, we are designating proposed Sec. 417.495 as 417.500

and adding it to subpart L.

As discussed in section III of this preamble, we have revised

proposed Secs. 417.495(b) and 434.67(c), which concern the time limit

for seeking a reconsideration, to allow an additional 15 days under

certain circumstances. (Proposed Sec. 417.495(b) is now

Sec. 417.500(b).)

In addition to changes to improve its readability, proposed

Sec. 417.495(e), which concerns the effective date of a sanction, is

revised to replace the inexplicit phrase ``generally will be effective

on the date the organization is notified of HCFA's decision.'' In this

final rule, we specify that, if an organization seeks a

reconsideration, the sanction is effective on the date specified in

HCFA's notice of reconsidered determination. (Proposed Sec. 417.495(e)

is now Sec. 417.500(e). Proposed Sec. 431.55 is revised to improve its

readability.)

On January 29, 1992, the OIG published a final rule (57 FR 3298)

that amended, among other parts, part 1003. As a result of the

publication of the January 29, 1992 rule, we have made changes from our

July 22, 1991 proposed rule as follows:

The substance of proposed Secs. 1003.100(b)(1)(i) and

(b)(1)(ii), which concern the purpose of part 1003, were incorporated

into regulations at Secs. 100.100(b)(1)(i) and (b)(1)(iv),

respectively, by the January 29 rule. Therefore, proposed

Sec. 1003.100(b)(1)(i) is not included in this final rule. Section

1003.100(b)(1)(iv) is included in this final rule solely to make

technical corrections.

Proposed Sec. 1003.100(b)(1)(iii), which also concerns the

purpose of part 1003, is designated as Sec. 1003.100(b)(1)(vi) by this

final rule.

The substance of proposed Sec. 1003.102(b)(1), which

identifies those individuals against whom the OIG may impose a penalty,

was incorporated at Secs. 1003.102(b)(1) through (b)(3) by the January

29, 1992 rule. Therefore, it is not included in this rule.

Proposed Sec. 1003.102(b)(2), which concerns the

imposition of penalties against contracting organizations, is

designated as Sec. 1003.102(b)(8) by this final rule.

In Sec. 1003.103, which concerns the amount of a penalty,

proposed paragraph (c) is designated as paragraph (e). Further,

paragraph (a) as established by the January 29 rule is revised to

include a reference to the newly-established paragraph (e).

Also in Sec. 1003.103, subparagraph (e)(3)(ii) is revised

to more clearly reflect the penalty amount stipulated under the

statute.

In Sec. 1003.106, which concerns determining the amount of

a penalty and assessment, we have replaced the phrase ``person or

contracting organization'' with the phrase ``person.'' ``Person,'' as

it is broadly defined in Sec. 1003.101, includes contracting

organizations. Therefore, the phrase was replaced in the final rule.

As discussed in section III of this preamble, we have included, at

Sec. 1003.106(d), provisions regarding mitigating and aggravating

circumstances to be considered in determining the amount of any

penalty.

V. Information Collection Requirements

This final rule contains no information collection requirements.

Consequently, this final rule need not be reviewed by the Executive

Office of Management and Budget under the authority of the Paperwork

Reduction Act of 1980 (44 U.S.C. 3501 et seq.).

VI. Regulatory Impact Statement

This final rule implements sections of OBRA 1986, sections of the

Medicare and Medicaid Patient and Program Protection Act of 1987,

sections of the Medicare Catastrophic Coverage Act of 1988, and a

section of OBRA 1989. This final rule will implement the Secretary's

broadened authority to impose intermediate sanctions and civil money

penalties on HMOs and other prepaid health plans contracting under

Medicare or Medicaid that substantially fail to provide an enrolled

individual with required medically necessary items and services, engage

certain marketing, enrollment, reporting, or claims payment abuses, or,

in the case of Medicare, employ or contract with, either directly or

indirectly, an individual or entity excluded from participation in

Medicare.

This regulation is the result of statutory changes and serves to

clarify departmental policy with respect to the imposition of

intermediate sanctions and civil money penalties. We believe the

majority of plans, practitioners and providers do not engage in the

prohibited activities and practices discussed in this final rule. In

addition, we believe this final rule will have a deterrent effect upon

providers and practitioners. Therefore, we expect that the aggregate

economic impact would be minimal, affecting only those engaged in the

prohibited behavior in violation of this final rule.

The Office of Management and Budget has reviewed this final rule in

accordance with the provisions of Executive Order 12866.

We generally prepare a regulatory flexibility analysis that is

consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601

through 612) unless the Secretary certifies that a rule will not have a

significant economic impact on a substantial number of small entities.

For purposes of the RFA, we consider all HMOs, competitive medical

plans and other contracting organizations to be small entities.

In addition, section 1102(b) of the Act requires the Secretary to

prepare a regulatory impact analysis if a final rule may have a

significant impact on the operations of a substantial number of small

rural hospitals. This analysis must conform to the provisions of

section 604 of the RFA. For purposes of section 1102(b) of the Act, we

define a small rural hospital as a hospital that is located outside of

a Metropolitan Statistical Area and has fewer than 50 beds.

We do not have data to assist us in estimating the number of

contracting organizations that will be affected by this final rule or

the magnitude of any penalties that will be imposed. Nevertheless, any

impact will be minimal because we believe the number of providers and

practitioners engaged in prohibited activities are few. Therefore, we

are not preparing analyses for either the RFA or section 1102(b) of the

Act since we have determined, and the Secretary certifies, that this

final rule will not result in a significant economic impact on a

substantial number of small entities and will not have a significant

impact on the operations of a substantial number of small rural

hospitals.

List of Subjects

42 CFR Part 417

Administrative practice and procedure; Grant programs--health;

Health care; Health facilities; Health insurance; Health Maintenance

Organizations (HMO); Loan programs--health; Medicare; Reporting and

recordkeeping requirements.

42 CFR Part 431

Grant Programs--Health; Health facilities; Medicaid; Privacy;

Reporting and recordkeeping requirements.

42 CFR Part 434

Grant Programs--Health; Health Maintenance Organizations (HMO);

Medicaid; Reporting and recordkeeping requirements.

42 CFR Part 1003

Administrative practice and procedure; Fraud; Grant Programs--

Health; Health facilities; Health professions; Maternal and child

health; Medicaid; Medicare; Penalties.

A. 42 CFR part 417 is amended as set forth below:

PART 417--HEALTH MAINTENANCE ORGANIZATIONS, COMPETITIVE MEDICAL

PLANS, AND HEALTH CARE PREPAYMENT PLANS

1. The authority citation for part 417 is revised to read as

follows:

Authority: Secs. 1102, 1833(a)(1)(A), 1861(s)(2)(H), 1871, 1874,

and 1876 of the Social Security Act (42 U.S.C. 1302, 1395l(a)(1)(A),

1395x(s)(2)(H), 1395hh, 1395kk, and 1395mm); sec. 114(c) of Pub. L.

97-248 (42 U.S.C. 1395mm note); section 9312(c) of Pub. L. 99-509

(42 U.S.C. 1395mm note); and secs. 215, 353, and 1301 through 1318

of the Public Health Service Act (42 U.S.C. 216, 263a, and 300e

through 300e-17) and 31 U.S.C. 9701, unless otherwise noted.

Subpart L--Medicare Contract Requirements

2. In subpart L, a new section 417.500 is added to read as follows:

Sec. 417.500 Sanctions against HMOs and CMPs.

(a) Basis for imposition of sanctions. HCFA may impose the

intermediate sanctions specified in paragraph (d) of this section, as

an alternative to termination, if HCFA determines that an HMO or CMP

with a contract under this subpart does one or more of the following:

(1) Fails substantially to provide the medically necessary services

required to be provided to a Medicare enrollee and the failure

adversely affects (or has a substantial likelihood of adversely

affecting) the enrollee.

(2) Requires Medicare enrollees to pay amounts in excess of

premiums permitted.

(3) Acts, in violation of the provisions of this part, to expel or

to refuse to reenroll an individual.

(4) Engages in any practice that could reasonably be expected to

have the effect of denying or discouraging enrollment (except as

permitted by this part) by eligible individuals whose medical

conditions or histories indicate a need for substantial future medical

services.

(5) Misrepresents or falsifies information that it furnishes under

this part to HCFA, an individual, or to any other entity.

(6) Fails to comply with the requirements of section 1876(g)(6)(A)

of the Act relating to the prompt payment of claims.

(7) Fails to meet the requirement in section 1876(f)(1) of the Act

that not more than 50 percent of the organization's enrollment be

Medicare beneficiaries and Medicaid recipients.

(8) Has a Medicare risk contract and--

(i) Employs or contracts with individuals or entities excluded from

participation in Medicare under section 1128 or section 1128A of the

Act for the provision of health care, utilization review, medical

social work, or administrative services; or

(ii) Employs or contracts with any entity for the provision of

those services (directly or indirectly) through an excluded individual

or entity.

(b) Notice of sanction. (1) Before imposing the intermediate

sanctions specified in paragraph (d) of this section, HCFA--

(i) Sends a written notice to the HMO or CMP stating the nature and

basis of the proposed sanction; and

(ii) Sends the OIG a copy of the notice (other than a notice

regarding the restriction on Medicare and Medicaid enrollees as

described in paragraph (a)(7) of this section), once the sanction has

been confirmed following the notice period or the reconsideration.

(2) HCFA allows the HMO or CMP 15 days from receipt of the notice

to provide evidence that it has not committed an act or failed to

comply with a requirement described in paragraph (a) of this section,

as applicable. HCFA may allow a 15-day addition to the original 15 days

upon receipt of a written request from the HMO or CMP. To be approved,

the request must provide a credible explanation of why additional time

is necessary and be received by HCFA before the end of the 15-day

period following the date of receipt of the sanction notice. HCFA does

not grant an extension if it determines that the HMO's or CMP's conduct

poses a threat to an enrollee's health and safety.

(c) Informal reconsideration. If, consistent with paragraph (b)(2)

of this section, the HMO or CMP submits a timely response to HCFA's

notice of sanction, HCFA conducts an informal reconsideration that:

(1) Consists of a review of the evidence by a HCFA official who did

not participate in the initial decision to impose a sanction; and

(2) Gives the HMO or CMP a concise written decision setting forth

the factual and legal basis for the decision that affirms or rescinds

the original determination.

(d) Specific sanctions. If HCFA determines that an HMO or CMP has

acted or failed to act as specified in paragraph (a) of this section

and affirms this determination in accordance with paragraph (c) of this

section, HCFA may--

(1) Require the HMO or CMP to suspend acceptance of applications

for enrollment made by Medicare beneficiaries during the sanction

period;

(2) Suspend payments to the HMO or CMP for Medicare beneficiaries

enrolled during the sanction period; and

(3) Require the HMO or CMP to suspend all marketing activities to

Medicare enrollees.

(e) Effective date and duration of sanctions--(1) Effective date.

Except as provided in paragraph (e)(2) of this section, a sanction is

effective 15 days after the date that the organization is notified of

the decision to impose the sanction or, if the HMO or CMP timely seeks

reconsideration under paragraph (c) of this section, on the date

specified in the notice of HCFA's reconsidered determination.

(2) Exception. If HCFA determines that the HMO's or CMP's conduct

poses a serious threat to an enrollee's health and safety, HCFA may

make the sanction effective on a date before issuance of HCFA's

reconsidered determination.

(3) Duration of sanction. The sanction remains in effect until HCFA

notifies the HMO or CMP that HCFA is satisfied that the basis for

imposing the sanction has been corrected and is not likely to recur.

(f) Termination by HCFA. In addition to or as an alternative to the

sanctions described in paragraph (d) of this section, HCFA may decline

to renew a HMO's or CMP's contract in accordance with Sec. 417.492(b),

or terminate the contract in accordance with Sec. 417.494(b).

(g) Civil money penalties. If HCFA determines that a HMO or CMP has

committed an act or failed to comply with a requirement described in

paragraph (a) of this section (with the exception of the requirement to

limit the percentage of Medicare and Medicaid enrollees described in

paragraph (a)(7) of this section), HCFA notifies the OIG of that

determination. HCFA also conveys to the OIG information when it

reverses or terminates a sanction imposed under this subpart. In

accordance with the provisions of 42 CFR part 1003, the OIG may impose

civil money penalties on the HMO or CMP in addition to or in place of

the sanctions that HCFA may impose under paragraph (d) of this section.

B. 42 CFR part 431 is amended as set forth below:

PART 431--STATE ORGANIZATION AND GENERAL ADMINISTRATION

1. The authority citation for part 431 continues to read as

follows:

Authority: Sec. 1102 of the Social Security Act (42 U.S.C.

1302).

2. Section 431.55 is amended by adding a sentence at the end of

paragraph (a) and adding new paragraph (h) to read as follows:

Sec. 431.55 Waiver of other Medicaid requirements.

(a) Statutory basis. * * *. Section 1902(p)(2) of the Act

conditions FFP in payments to an entity under a section 1915(b)(1)

waiver on the State's provision for exclusion of certain entities from

participation.

* * * * *

(h) Waivers approved under section 1915(b)(1) of the Act--(1) Basic

Rules. (i) An agency must submit, as part of it's waiver request,

assurance that the entities described in paragraph (h)(2) of this

section will be excluded from participation under an approved waiver.

(ii) FFP is available in payments to an entity that furnishes

services under a section 1915(b)(1) waiver only if the agency excludes

from participation any entity described in paragraph (h)(2) of this

section.

(2) Entities that must be excluded. The agency must exclude an

entity that meets any of the following conditions:

(i) Could be excluded under section 1128(b)(8) of the Act as being

controlled by a sanctioned individual.

(ii) Has a substantial contractual relationship (direct or

indirect) with an individual convicted of certain crimes, as described

in section 1128(b)(8)(B) of the Act.

(iii) Employs or contracts directly or indirectly with one of the

following:

(A) Any individual or entity that, under section 1128 or section

1128A of the Act, is precluded from furnishing health care, utilization

review, medical social services, or administrative services.

(B) Any entity described in paragraph (h)(2)(i) of this section.

(3) Definitions. As used in this section, substantial contractual

relationship means any contractual relationship that provides for one

or more of the following services:

(i) The administration, management, or provision of medical

services.

(ii) The establishment of policies, or the provision of operational

support, for the administration, management, or provision of medical

services.

C. 42 CFR part 434 is amended as set forth below:

PART 434--CONTRACTS

1. The authority citation for part 434 continues to read as

follows:

Authority: Sec. 1102 of the Social Security Act (42 U.S.C.

1302).

Subpart C--Contracts with HMOs and PHPs: Contract Requirements

2. In subpart C, a new Sec. 434.22 is added to read as follows:

Sec. 434.22 Application of sanctions to risk comprehensive contracts.

A risk comprehensive contract must provide that payments provided

for under the contract will be denied for new enrollees when, and for

so long as, payment for those enrollees is denied by HCFA under

Sec. 434.67(e).

Subpart D--Contracts With Health Insuring Organizations

3. In subpart D, a new Sec. 434.42 is added to read as follows:

Sec. 434.42 Application of sanctions to risk comprehensive contracts.

A risk comprehensive contract must provide that payments provided

for under the contract will be denied for new enrollees when, and for

so long as, payment for those enrollees is denied by HCFA under

Sec. 434.67(e).

Subpart E--Contracts With HMOs and PHPs: Medicaid Agency

Responsibilities

4. In subpart E, Sec. 434.63 is revised to read as follows:

Sec. 434.63 Monitoring procedures.

The agency must have procedures to do the following:

(a) Monitor enrollment and termination practices.

(b) Ensure proper implementation of the contractor's grievance

procedures.

(c) Monitor for violations of the requirements specified in

Sec. 434.67 and the conditions necessary for FFP in contracts with HMOs

specified in Sec. 434.80.

Subpart E--Contracts With HMOs and PHPs: Medicaid Agency

Responsibilities

5. In subpart E, a new Sec. 434.67 is added to read as follows:

Sec. 434.67 Sanctions against HMOs with risk comprehensive contracts.

(a) Basis for imposition of sanctions. The agency may recommend

that the intermediate sanction specified in paragraph (e) of this

section be imposed if the agency determines that an HMO with a risk

comprehensive contract does one or more of the following:

(1) Fails substantially to provide the medically necessary items

and services required under law or under the contract to be provided to

an enrolled recipient and the failure has adversely affected (or has

substantial likelihood of adversely affecting) the individual.

(2) Imposes on Medicaid enrollees premium amounts in excess of

premiums permitted.

(3) Engages in any practice that discriminates among individuals on

the basis of their health status or requirements for health care

services, including expulsion or refusal to reenroll an individual, or

any practice that could reasonably be expected to have the effect of

denying or discouraging enrollment (except as permitted by section

1903(m) of the Act) by eligible individuals whose medical conditions or

histories indicate a need for substantial future medical services.

(4) Misrepresents or falsifies information that it furnishes, under

section 1903(m) of the Act to HCFA, the State agency, an individual, or

any other entity.

(b) Effect of an agency determination. (1) When the agency

determines that an HMO with a risk comprehensive contract has committed

one of the violations identified in paragraph (a) of this section, the

agency must forward this determination to HCFA. This determination

becomes HCFA's determination for purposes of section 1903(m)(5)(A) of

the Act, unless HCFA reverses or modifies the determination within 15

days.

(2) When the agency decides to recommend imposition of the sanction

specified in paragraph (e) of this section, this recommendation becomes

HCFA's decision, for purposes of section 1903(m)(5)(B)(ii) of the Act,

unless HCFA rejects this recommendation within 15 days.

(c) Notice of sanction. If a determination to impose a sanction

becomes HCFA's determination under paragraph (b)(2) of this section,

the agency must send a written notice to the HMO stating the nature and

basis of the proposed sanction. A copy of the notice is forwarded to

the OIG at the same time it is sent to the HMO. The agency allows the

HMO 15 days from the date it receives the notice to provide evidence

that it has not committed an act or failed to comply with a requirement

described in paragraph (a) of this section, as applicable. The agency

may allow a 15-day addition to the original 15 days upon receipt of a

written request from the organization. To be approved, the request must

provide a credible explanation of why additional time is necessary and

be received by HCFA before the end of the 15-day period following the

date the organization received the sanction notice. An extension is not

granted if HCFA determines that the organization's conduct poses a

threat to an enrollee's health and safety.

(d) Informal reconsideration. (1) If the HMO submits a timely

response to the agency's notice of sanction, the agency conducts an

informal reconsideration that includes--

(i) Review of the evidence by an agency official who did not

participate in the initial recommendation to impose the sanction; and

(ii) A concise written decision setting forth the factual and legal

basis for the decision.

(2) The agency decision under paragraph (d)(1)(ii) of this section

is forwarded to HCFA and becomes HCFA's decision unless HCFA reverses

or modifies the decision within 15 days from the date of HCFA's receipt

of the agency determination. In the event HCFA modifies or reverses the

agency decision, the agency sends the HMO a copy of HCFA's decision

under this paragraph.

(e) Denial of payment. If a HCFA determination that a HMO has

committed a violation described in paragraph (a) of this section is

affirmed on review under paragraph (d) of this section, or is not

timely contested by the HMO under paragraph (c) of this section, HCFA,

based upon the recommendation of the agency, may deny payment for new

enrollees of the HMO under section 1903(m)(5)(B)(ii) of the Act. Under

Secs. 434.22 and 434.42, HCFA's denial of payment for new enrollees

automatically results in a denial of agency payments to the HMO for the

same enrollees. A new enrollee is an enrollee that applies for

enrollment after the effective date in paragraph (f)(1) of this

section.

(f) Effective date and duration of sanction. (1) Except as

specified in paragraphs (f)(2) and (f)(3) of this section, a sanction

is effective 15 days after the date the HMO is notified of the decision

to impose the sanction under paragraph (c) of this section.

(2) If the HMO seeks reconsideration under paragraph (d) of this

section, the sanction is effective on the date specified in HCFA's

reconsideration notice.

(3) If HCFA, in consultation with the agency, determines that the

HMO's conduct poses a serious threat to an enrollee's health and

safety, the sanction may be made effective on a date prior to issuance

of the decision under paragraph (d)(1)(ii) of this section.

(g) Civil money penalties. If a determination that an organization

has committed a violation under paragraph (a) of this section becomes

HCFA's determination under paragraph (b)(1) of this section, HCFA

conveys the determination to the OIG. In accordance with the provisions

of 42 CFR part 1003, the OIG may impose civil money penalties on the

organization in addition to or in place of the sanctions that may be

imposed under this section.

(h) HCFA's role. HCFA retains the right to independently perform

the functions assigned to the agency in paragraphs (a) through (f) of

this section.

(i) State Plan requirements. The State Plan must include a plan to

monitor for violations specified in paragraph (a) of this section and

for implementing the provisions of this section.

6. In subpart F, a new Sec. 434.80 is added to read as follows:

Subpart F--Federal Financial Participation

Sec. 434.80 Condition for FFP in contracts with HMOs.

(a) Basic rule. FFP in payments to an HMO is available only if the

agency excludes from participation as such an entity any entity

described in paragraph (b) of this section.

(b) Entities that must be excluded. (1) An entity that could be

excluded under section 1128(b)(8) of the Act as being controlled by a

sanctioned individual.

(2) An entity that has a substantial contractual relationship as

defined in Sec. 431.55(h)(2), either directly or indirectly, with an

individual convicted of certain crimes as described in section

1128(b)(8)(B) of the Act.

(3) An entity that employs or contracts, directly or indirectly,

with one of the following:

(i) Any individual or entity excluded from Medicaid participation

under section 1128 or section 1128A of the Act for the furnishing of

health care, utilization review, medical social work, or administrative

services.

(ii) Any entity for the provision through an excluded individual or

entity of services described in paragraph (b)(3)(i) of this section.

D. 42 CFR part 1003 is amended as set forth below:

PART 1003--CIVIL MONEY PENALTIES, ASSESSMENTS, AND EXCLUSIONS

1. The authority citation for part 1003 is revised to read as

follows:

Authority: 42 U.S.C. 1302, 1320a-7, 1320a-7a, 1320b-10, 1395mm,

1395ss(d), 1395u(j), 1395u(k), 1396b(m), 11131(c) and 11137(b)(2).

2. Section 1003.100 is amended by revising paragraph (a);

republishing paragraph (b)(1) introductory text; revising paragraphs

(b)(1)(iv) and (b)(1)(v); and adding a new paragraph (b)(1)(vi) to read

as follows:

Sec. 1003.100 Basis and purpose.

(a) Basis. This part implements sections 1128, 1128(c), 1128A,

1140, 1842(j), 1842(k), 1876(i)(6), 1882(d), and 1903(m)(5) of the

Social Security Act, and sections 421(c) and 427(b)(2) of Public Law

99-660 (42 U.S.C. 1320a-7, 1320a-7a, 1320a-7(c), 1320b-10, 1395mm,

1395ss(d), 1395u(j), 1395u(k), 1396b(m), 11131(c) and 11137(b)(2)).

(b) Purpose. * * *

(1) Provides for the imposition of civil money penalties and, as

applicable, assessments against persons who--

* * * * *

(iv) Fail to report information concerning medical malpractice

payments or who improperly disclose, use or permit access to

information reported under part B of title IV of Public Law 99-660, and

regulations specified in 45 CFR part 60;

(v) Misuse certain Medicare and social security program words,

letters, symbols and emblems; or

(vi) Substantially fail to provide an enrollee with required

medically necessary items and services, or that engage in certain

marketing, enrollment, reporting, claims payment, employment, or

contracting abuses.

* * * * *

3. Section 1003.101 is amended by adding, in alphabetical order,

definitions for the terms ``adverse effect,'' ``contracting

organization,'' and ``enrollee'' to read as follows:

Sec. 1003.101 Definitions.

* * * * *

Adverse effect means medical care has not been provided and the

failure to provide such necessary medical care has presented an

imminent danger to the health, safety, or well-being of the patient or

has placed the patient unnecessarily in a high-risk situation.

* * * * *

Contracting organization means a public or private entity,

including of a health maintenance organization (HMO), competitive

medical plan, or health insuring organization (HIO) which meets the

requirements of section 1876(b) of the Act or is subject to the

requirements in section 1903(m)(2)(A) of the Act and which has

contracted with the Department or a State to furnish services to

Medicare beneficiaries or Medicaid recipients.

Enrollee means an individual who is eligible for Medicare or

Medicaid and who enters into an agreement to receive services from a

contracting organization that contracts with the Department under title

XVIII or title XIX of the Act.

* * * * *

4. Section 1003.102, paragraph (b) introductory text is republished

and a new paragraph (b)(8) is added to read as follows:

Sec. 1003.102 Basis for civil money penalties and assessments.

* * * * *

(b) The OIG may impose a penalty, and where authorized, an

assessment against any person (including an insurance company in the

case of paragraphs (b)(5) and (b)(6) of this section) whom it

determines in accordance with this part--

* * * * *

(8) Is a contracting organization that HCFA determines has

committed an act or failed to comply with the requirements set forth in

Sec. 417.500(a) or Sec. 434.67(a) of this title or failed to comply

with the requirement set forth in Sec. 434.80(c) of this title.

* * * * *

5. Section 1003.103 is amended by revising paragraph (a) and adding

new paragraph (e) to read as follows:

Sec. 1003.103 Amount of penalty.

(a) Except as provided in paragraphs (b) through (e) of this

section, the OIG may impose a penalty of not more than $2,000 for each

item or service that is subject to a determination under Sec. 1003.102.

* * * * *

(e)(1) The OIG may, in addition to or in lieu of other remedies

available under law, impose a penalty of up to $25,000 for each

determination by HCFA that a contracting organization has:

(i) Failed substantially to provide an enrollee with required

medically necessary items and services and the failure adversely

affects (or has the likelihood of adversely affecting) the enrollee;

(ii) Imposed premiums on enrollees in excess of amounts permitted

under section 1876 or Title XIX of the Act;

(iii) Acted to expel or to refuse to re-enroll a Medicare

beneficiary in violation of the provisions of section 1876 of the Act

and for reasons other than the beneficiary's health status or

requirements for health care services;

(iv) Misrepresented or falsified information furnished to an

individual or any other entity under section 1876 or section 1903(m) of

the Act; or

(v) Failed to comply with the requirements of section 1876(g)(6)(A)

of the Act regarding prompt payment of claims.

(2) The OIG may, in addition to or in lieu of other remedies

available under law, impose a penalty of up to $25,000 for each

determination by HCFA that a contracting organization with a contract

under section 1876 of the Act:

(i) Employs or contracts with individuals or entities excluded,

under section 1128 or section 1128A of the Act, from participation in

Medicare for the provision of health care, utilization review, medical

social work, or administrative services; or

(ii) Employs or contracts with any entity for the provision of

services (directly or indirectly) through an excluded individual or

entity.

(3) The OIG may, in addition to or in lieu of other remedies

available under law, impose a penalty of up to $100,000 for each

determination that a contracting organization has:

(i) Misrepresented or falsified information furnished to the

Secretary under section 1876 of the Act or to the State under section

1903(m) of the Act; or

(ii) Acted to expel or to refuse to reenroll a Medicaid recipient

because of the individual's health status or requirements for health

care services, or engaged in any practice that would reasonably be

expected to have the effect of denying or discouraging enrollment

(except as permitted by section 1876 or section 1903(m) of the Act)

with the contracting organization by Medicare beneficiaries and

Medicaid recipients whose medical condition or history indicates a need

for substantial future medical services.

(4) If enrollees are charged more than the allowable premium, the

OIG will impose an additional penalty equal to double the amount of

excess premium charged by the contracting organization. The excess

premium amount will be deducted from the penalty and returned to the

enrollee.

(5) The OIG will impose an additional $15,000 penalty for each

individual not enrolled when HCFA determines that a contracting

organization has committed a violation described in paragraph

(e)(3)(ii) of this section.

(6) For purposes of paragraph (e) of this section, a violation is

each incident where a person has committed an act listed in

Sec. 417.500(a) or Sec. 434.67(a) of this title or failed to comply

with a requirement set forth in Sec. 434.80(c) of this title.

6. Section 1003.106 is amended by adding new paragraph (a)(4);

redesignating paragraph (d) as paragraph (e) and republishing it; and

adding a new paragraph (d) to read as follows:

Sec. 1003.106 Determinations regarding the amount of the penalty and

assessment.

(a) * * *

(4) In determining the appropriate amount of any penalty in

accordance with Sec. 1003.103(e), the OIG will consider as

appropriate--

(i) The nature and scope of the required medically necessary item

or service not provided and the circumstances under which it was not

provided;

(ii) The degree of culpability of the contracting organization;

(iii) The seriousness of the adverse effect that resulted or could

have resulted from the failure to provide required medically necessary

care;

(iv) The harm which resulted or could have resulted from the

provision of care by a person that the contracting organization is

expressly prohibited, under section 1876(i)(6) or section 1903(p)(2) of

the Act, from contracting with or employing;

(v) The harm which resulted or could have resulted from the

contracting organization's expulsion or refusal to reenroll a Medicare

beneficiary or Medicaid recipient;

(vi) The nature of the misrepresentation or fallacious information

furnished by the contracting organization to the Secretary, State,

enrollee, or other entity under section 1876 or section 1903(m) of the

Act;

(vii) The history of prior offenses by the contracting organization

or principals of the contracting organization, including whether, at

any time prior to determination of the current violation or violations,

the contracting organization or any of its principals was convicted of

a criminal charge or was held liable for civil or administrative

sanctions in connection with a program covered by this part or any

other public or private program of payment for medical services; and

(viii) Such other matters as justice may require.

* * * * *

(d) In considering the factors listed in paragraph (a)(4) of this

section, for violations subject to a determination under

Sec. 1003.103(e), the following circumstances are to be considered, as

appropriate, in determining the amount of any penalty--

(1) Nature and circumstances of the incident. It would be

considered a mitigating circumstance if, where more than one violation

exists, the appropriate items or services not provided were:

(i) Few in number, or

(ii) Of the same type and occurred within a short period of time.

It would be considered an aggravating circumstance if such items or

services were of several types and occurred over a lengthy period of

time, or if there were many such items or services (or the nature and

circumstances indicate a pattern of such items or services not being

provided).

(2) Degree of culpability. It would be considered a mitigating

circumstance if the violation was the result of an unintentional,

unrecognized error, and corrective action was taken promptly after

discovery of the error.

(3) Failure to provide required care. It would be considered an

aggravating circumstance if the failure to provide required care was

attributable to an individual or entity that the contracting

organization is expressly prohibited by law from contracting with or

employing.

(4) Use of excluded individuals. It would be considered an

aggravating factor if the contracting organization knowingly or

routinely engages in the prohibited practice of contracting or

employing, either directly or indirectly, individuals or entities

excluded from the Medicare program under section 1128 or section 1128A

of the Act.

(5) Routine practices. It would be considered an aggravating factor

if the contracting organization knowingly or routinely engages in any

discriminatory or other prohibited practice which has the effect of

denying or discouraging enrollment by individuals whose medical

condition or history indicates a need for substantial future medical

services.

(6) Prior offenses. It would be considered an aggravating

circumstance if at any time prior to determination of the current

violation or violations, the contracting organization or any of its

principals was convicted on criminal charges or held liable for civil

or administrative sanctions in connection with a program covered by

this part or any other public or private program of payment for medical

services. The lack of prior liability for criminal, civil, or

administrative sanctions by the contracting organization, or the

principals of the contracting organization, would not necessarily be

considered a mitigating circumstance in determining civil money penalty

amounts.

(e) (1) The standards set forth in this section are binding, except

to the extent that their application would result in imposition of an

amount that would exceed limits imposed by the United States

Constitution.

(2) The amount imposed will not be less than the approximate amount

required to fully compensate the United States, or any State, for its

damages and costs, tangible and intangible, including but not limited

to the costs attributable to the investigation, prosecution, and

administrative review of the case.

(3) Nothing in this section will limit the authority of the

Department to settle any issue or case as provided by Sec. 1003.126, or

to compromise any penalty and assessment as provided by Sec. 1003.128.

Dated: March 30, 1994.

June Gibbs Brown,

Inspector General.

Dated: April 12, 1994.

Bruce C. Vladeck,

Administrator, Health Care Financing Administration.

Approved: July 7, 1994.

Donna E. Shalala,

Secretary, Department of Health and Human Services.

[FR Doc. 94-17221 Filed 7-14-94; 8:45 am]

BILLING CODE 4110-60-P