Full Reporting by Health Maintenance Organizations (HMOs) and Competitive Medical Plans (CMPs) Paid on a Cost Basis

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 417

[OMC-022-F]

Full Reporting by Health Maintenance Organizations (HMOs) and

Competitive Medical Plans (CMPs) Paid on a Cost Basis

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule.

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SUMMARY: This rule affects HMOs and CMPs that contract with HCFA to

furnish services to Medicare beneficiaries and be paid on a cost basis.

It requires a cost HMO or CMP to include in its cost report the costs

of hospital and skilled nursing facility (SNF) services even if it has

elected (under Sec. 417.532(c) of the HCFA regulations) to have HCFA's

intermediary process those claims and pay the hospital or SNF directly.

This change is necessary so that HCFA can determine and compare the

cost of all services furnished by HMOs and CMPs with the cost of

equivalent services paid for under the fee-for-service system.

This rule also adds a definition and makes technical changes to

clarify and update certain related provisions of subparts O and U of

part 417 of the HCFA rules.

DATES: Effective Date: This rule is effective August 4, 1995.

FOR FURTHER INFORMATION CONTACT: Alfred D'Alberto, (410) 966-7610.

SUPPLEMENTARY INFORMATION:

I. Notice of Proposed Rulemaking

On February 22, 1994, we published a proposed rule (at 59 FR 8435)

that would establish--

Presumptive limits on Medicare payments to cost HMOs and

CMPs and to health care prepayment plans (HCPPs) that furnish inpatient

hospital services;

An exception process under which an affected HMO, CMP or

HCPP could demonstrate that payment above the presumptive limit is

justified as ``reasonable'' because of the special needs of its

Medicare enrollees, or because of extraordinary circumstances beyond

its control; and

Criteria for the ``reasonableness'' of the costs of HCPPs

that do not furnish inpatient hospital services.

The rule also proposed to require cost HMOs and CMPs to include in

their cost reports the costs of hospital and SNF services that the HMO

or CMP elects to have paid by the Medicare intermediary, and to make a

number of technical changes.

Under this election, although HCFA intermediaries process and pay

claims, the HMO or CMP authorizes the services and retains

responsibility for coordinating those services with other services it

furnishes to Medicare enrollees.

[[Page 34886]]

Although section 1876(b)(4)(A) of the Act requires that the HMO or

CMP report its ``per capita incurred cost'', HMOs and CMPs currently

report only the deductibles and coinsurance they incur for the hospital

and SNF services and not the full costs paid directly by the Medicare

intermediary.

II. Public Comments

We received 60 letters of comment on the February 22 proposals.

Seven of those letters commented on the full reporting and one on the

technical changes. Careful consideration of the bulk of the comments

and of the very complex exception process will delay publication of a

final rule on payment limits. We have, therefore, separated those

portions of the proposal that pertain to full reporting and technical

changes, which need not be subjected to that delay. Those comments are

discussed under part III of this preamble.

III. Discussion of Comments

A. Full Reporting

This new requirement applies only to HMOs and CMPs, because HCFA

contracts with HCPPs cover only Part B services, not provider services.

Comment: All seven commenters recommended that full reporting not

be required or that implementation be delayed. They expressed concern

about--

Obtaining from HCFA and its intermediaries complete and

adequate information on a timely basis;

The additional time, staff, and systems enhancement that

would be required;

The need to reimburse the HMO or CMP for these additional

administrative costs.

They noted specifically the need to--

Relate HCFA data to plan data so as to match beneficiary

number, date of service, place of service and deductible and

coinsurance;

Summarize deductible and coinsurance amounts;

Identify beneficiary status in terms of institutionalized,

Medicaid-eligible, or ESRD;

Estimate the value of incurred but not reported claims.

One commenter specifically objected to having intermediary-paid

part A costs included because administrative and general (A & G) costs

attributed to those services are not reimbursable to cost HMOs and

CMPs.

One commenter asked whether we would expect them to include items

that are not considered in the DRG computations, and if so, where they

would get the data.

Response: We are providing lead time before the full reporting

requirement goes into effect. During that time, we will be working to

achieve the most efficient, least burdensome procedures for handling

the data. Comments and recommendations from HMOs and CMPs can be useful

for improving HCFA reports and minimizing systems problems. The

additional administrative costs incurred because of full reporting are

allowable.

We recognize that, under full reporting, there may be some

reduction in payments to HMOs and CMPs. This reduction would involve

service-related A & G costs only, and only a small percentage of these

costs. Service-related A & G costs are generally allocated on the basis

of direct identification, functional allocation, or pooling. To the

extent service-related A & G costs cannot be allocated to a specific

service, they are allocated to services based upon a given service's

percentage of the total service costs included on the HMO's or CMP's

cost report. It is this small portion of A & G costs that could be

affected by full cost reporting. The inclusion of hospital and SNF

services in the cost report would result in a larger portion of this

category of pool A & G costs being allocated to those services. This,

in turn, would result in lower payment, because the amount already paid

directly to a hospital or SNF for the services they provide would

constitute payment in full for those services, and any pool A & G costs

allocated to those services would be disallowed. Because the portion of

service-related A & G costs that could be affected in this manner is

small, however, we do not anticipate that there would be a significant

reduction in payments to the HMO or CMP.

With respect to the last question noted above, we would expect the

report to reflect the full cost incurred by the hospital or SNF,

including such things as day and cost outliers, pass throughs, graduate

medical education, etc. Part of our effort during the lead time will be

to ensure that we can provide accurate information on these as well as

other pertinent costs.

The fact is that, without full reporting, there is no way to

determine the full actual cost of services furnished by cost HMOs and

CMPs and how that cost compares with the cost of the same services

furnished under the fee-for-service system.

Comment: Two commenters contended that full reporting is in

conflict with generally accepted accounting principles (GAAP) and with

certain statements of the Financial Accounting Standards Board (the

Board).

Noted as an Example: When the intermediary pays a provider, for

the HMO or CMP there is no inflow or outflow of assets.

Accordingly, the transaction does not meet the Board's definition

of revenue and expense.

Response: The basic rule is that HCFA pays the HMO or CMP all the

allowable costs it incurs to furnish covered services to its Medicare

enrollees. By law and under the contract, the HMO or CMP is required to

provide or arrange for all Medicare-covered services that are generally

available in the area it serves. The fact that the HMO or the CMP

elects to have HCFA process and pay provider claims does not--

Relieve it of the responsibility for furnishing provider

services when necessary and appropriate; or

Change the fact that the sums paid by the intermediary are

part of the cost of providing Medicare services through an HMO or CMP.

Comment: One commenter argued that full reporting was not supported

by current laws and regulations, and others contended that the amounts

referred to in section 1876(b)(2) (A) and (B) of the Act and the

implementing regulations (Sec. 417.532(g) of the HCFA rules) are in

fact an actuarial projection of the average cost of Medicare covered

services, and an actuarial value of the intermediary's payments.

Response: We find support for the requirement in the following

provisions of the statute and regulations:

a. Section 1876(h)(4) of the Act provides that under a cost

contract, the Secretary must require the HMO or CMP to report ``* * *

its per capita incurred cost * * * for providing services described in

subsection (a)(1) * * *'' (The services referred to in (a)(1) are all

the covered services available to Medicare beneficiaries in the area

served by the HMO or CMP.)

b. Section 1876(h)(2)(A) allows the HMO or CMP to elect to have

HCFA pay for provider services. Section 1876(h)(2)(B) provides that the

amounts paid under the election shall be deducted from the payment that

would otherwise be made to the HMO or CMP * * * for the allowable costs

of all Medicare-covered services.

These statutory provisions are reflected in Sec. 417.532 of the

regulations. The distinction between actuarial values and actual

payment amounts is clear from a comparison between Sec. 417.532(c)(3)

and Sec. 417.532(g). The first provides for deducting, from the

reasonable cost actually incurred by the HMO or CMP, ``an amount equal

to the

[[Page 34887]]

actuarial value * * * of deductible and coinsurance amounts that would

have applied * * * if these enrollees had not enrolled in this or

another HMO or CMP.''

Section 417.532(g) states, in part, that ``HCFA will deduct these

payments * * * in computing the payments to the HMO or CMP''.

Over the years there have been discussions about how to handle

these payments within the Medicare program budgeting. There has never

been any doubt that these are actual payment amounts and not actuarial

representations.

Comment: Two commenters considered that the current cost report

form is not adequate for full reporting.

Response: As noted above, we want to ensure the most efficient and

least burdensome procedures for full reporting. This will probably

require changes in the form, to be worked out during the lead time.

Comment: One commenter thought that including intermediary payments

in the cost report might require the auditor that certifies the report

to extend its testing procedures to include the intermediaries.

Response: This will not be necessary. The auditor will certify that

the amounts reported as paid by the intermediary are part of the HMO's

or CMP's incurred costs.

B. Technical Amendments

1. Comment: Three commenters inferred, from our proposed revision

of Sec. 417.800(c), that we intended to change our current policy of

paying 100 percent of reasonable costs for services for which

beneficiaries are not liable for coinsurance.

Response: That was not our intent. We have revised paragraph

(c)(2)(ii) to clearly state that coinsurance is deducted only for

services that are subject to coinsurance.

2. Other changes. We have incorporated the proposed definition of

``furnished'', and removed obsolete provisions that applied only to

contract periods that began before January 1986.

C. Changes in the Regulations

1. Definitions. In Sec. 417.1, we added a definition of

``furnished'' to make clear that, in part 417, the term means made a

available by the HMO, CMP, or HCPP either directly or under

arrangements it makes with other entities.

2. Full reporting. We have amended Sec. 417.576 to make clear that

the incurred per capita costs in the cost report must include the costs

paid by the Medicare intermediary.

3. Deductions from HCPP reasonable costs. In Sec. 417.800, we have

revised paragraph (c)(2) to make clear that the 20 percent deduction

from the reasonable costs incurred by the HCPP applies only to services

that are subject to coinsurance.

4. Obsolete provisions. We have removed the following paragraphs

and sections that applied to contract periods that began before January

1986:

Paragraph (b) of Sec. 417.546 (Physician services and

other Part B services furnished under arrangements), and the Editorial

note at the end of the section.

Paragraph (d)(2) of Sec. 417.560 (Apportionment: Part B

physician and supplier services).

All of Sec. 417.562 (Weighting of direct services

furnished by physicians and other practitioners).

D. Other Required Information

1. Information Collection Requirements

Section 417.576 requires ``full reporting'' as discussed under part

D of this preamble. This requirement is subject to review by the Office

of Management and Budget under the Paperwork Reduction Act of 1980, and

has been submitted for their review. The time required for compiling

and processing the information and completing the report with the

additional costs is estimated to be 180 hours per year.

2. Regulatory Impact Statement

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

through 612), we prepare a regulatory flexibility analysis unless the

Secretary certifies that a rule will not have a significant economic

impact on a substantial number of small entities. We consider all HMOs

and CMPs that contract with us to furnish services to Medicare

beneficiaries on a cost basis to be small entities.

In addition, under section 1102(b) of the Act, the Secretary is

required to prepare a regulatory impact analysis if a rule may have a

significant impact on the operation 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 small rural hospital as a hospital that has fewer than 50 beds

and is not located in a Metropolitan Statistical Area.

This final rule requires HMOs and CMPs paid on a cost basis to

include in their cost reports the costs of hospital and SNF services

even if a Medicare intermediary processes those claims and makes

payments directly to the hospital or SNF. There are approximately 25

HMOs and CMPs that have elected to have the Medicare intermediaries pay

for these services. As noted earlier in this preamble, we believe that

payments to these HMOs and CMPs will not be reduced significantly

because of the statutory limits on the A & G costs related to inpatient

hospital and SNF care paid by Medicare intermediaries.

The lead time before implementation of the full reporting

requirement will enable HCFA and the affected HMOs and CMPs to work out

the most efficient, least burdensome, procedures for handling these

additional data. The additional costs incurred by the HMOs and CMPs for

full reporting are allowable costs.

We have not prepared a regulatory flexibility analysis because we

have determined, and the Secretary certifies that this final rule will

not have a significant economic impact on a substantial number of small

entities or a significant impact on the operations of a substantial

number of small rural hospitals.

In accordance with the provisions of Executive Order 12866, this

regulation was not reviewed by the Office of Management and Budget.

List of Subjects in 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 417 is amended as set forth below.

1. The authority citation for part 417 continues to read as

follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42

U.S.C. 1302 and 1395hh), secs. 1301, 1306, and 1310 of the Public

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

U.S.C. 9701.

2. In Sec. 417.1, the following definition is added, in

alphabetical order:

* * * * *

Furnished, when used in connection with prepaid health care

services, means services that are made available to an enrollee either

directly by, or under arrangements made by, the HMO, CMP, or HCPP.

* * * * *

Sec. 417.546 [Amended]

3. In Sec. 417.546, the following changes are made:

a. Paragraph (b) and the Editorial note are removed.

b. In paragraph (a), the ``(a)'' designation is removed, and the

``(1)''

[[Page 34888]]

and (``2'') designations are changed to ``(a)'' and ``(b)'',

respectively.

Sec. 417.560 [Amended]

4. In Sec. 417.560, the following changes are made:

a. Paragraph (d)(2) is removed.

b. In paragraph (d)(1), the designation ``(1)'', and the clause

``Except as provided in paragraph (d)(2) of this section,'' are

removed, and the word ``the'', preceding ``Medicare share'' is revised

to read ``The''.

Sec. 417.562 [Removed]

5. Sec. 417.562 is removed.

6. In Sec. 417.576, paragraph (b)(2)(i) is revised to read as

follows:

Sec. 417.576 Final settlement.

* * * * *

(b) * * *

(2) Content of cost report. The cost report and supporting

documents must include the following:

(i) The per capita costs incurred in furnishing covered services to

its Medicare enrollees, determined in accordance with subpart O of this

part and including--

(A) The costs incurred by entities related to the HMO or CMP by

common ownership or control; and

(B) For reports for cost-reporting periods that begin on or after

January 1, 1996, the costs of hospital and SNF services paid by

Medicare's intermediaries under the option provided by Sec. 417.532(d).

* * * * *

7. Sec. 417.800 is amended to revise the heading and paragraph

(c)(2) to read as follows:

Sec. 417.800 Payment to HCPPs: Definitions and basic rules.

* * * * *

(c) Payment of reasonable cost. * * *

(2) Payment for Part B services: Basic rules--(i) Cost basis

payment. Except as provided in paragraph (d) of this section, HCFA pays

an HCPP on the basis of the reasonable costs it incurs, as specified in

subpart O of this part, for the covered Part B services furnished to

its Medicare enrollees.

(ii) Deductions. In determining the amount due an HCPP for covered

Part B services furnished to its Medicare enrollees, HCFA deducts, from

the reasonable cost actually incurred by the HCPP, the following:

(A) The actuarial value of the Part B deductible.

(B) An amount equal to 20 percent of the cost incurred for any

service that is subject to the Medicare coinsurance.

(Catalog of Federal Domestic Assistance Program No. 93.773,

Medicare--Hospital Insurance; and Program No. 93.774, Medicare--

Supplementary Medical Insurance Program)

Dated: April 20, 1995.

Bruce C. Vladeck,

Administrator, Health Care Financing Administration.

Dated: June 19, 1995.

Donna E. Shalala,

Secretary.

[FR Doc. 95-16411 Filed 7-3-95; 8:45 am]

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