Medicare and Medicaid Programs; Requirements for Physician Incentive Plans in Prepaid Health Care Organizations

DEPARTMENT OF HEALTH AND HUMAN SERVICES

42 CFR Parts 417 and 434

[OMC-010-F]

RIN 0938-AF74

Medicare and Medicaid Programs; Requirements for Physician

Incentive Plans in Prepaid Health Care Organizations

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

ACTION: Final rule.

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

SUMMARY: This final rule amends the regulations established by a March

27, 1996, final rule with comment period. The regulations govern

physician incentive plans operated by Federally-qualified health

maintenance organizations and competitive medical plans contracting

with the Medicare program, and certain health maintenance organizations

and health insuring organizations contracting with the Medicaid

program.

As explained in the March 27 rule, the provisions of this final

rule will also have an effect on certain entities subject to the

physician referral rules in section 1877 of the Social Security Act.

DATES: Effective date. These regulations are effective on January 1,

1997.

FOR FURTHER INFORMATION CONTACT: Beth Sullivan, (410) 786-4596.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

Prepaid health care organizations, 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. The

goal of prepaid health care delivery is to control health care costs

through preventive care and case management and provide enrollees with

affordable, coordinated, quality health care services. Titles XVIII and

XIX of the Social Security Act (the Act) authorize contracts with

prepaid health care organizations (hereinafter referred to as

``organizations'' or ``prepaid plans'') for the provision of covered

health services to Medicare beneficiaries and Medicaid recipients,

respectively. Such organizations may contract under either a risk-based

or cost-reimbursed contract.

B. Medicare

Section 1876 of the Act authorizes the Secretary to enter into

contracts with eligible organizations (HMOs that have been Federally

qualified under section

[[Page 69035]]

1310(d) of the Public Health Service Act and CMPs that meet the

requirements of section 1876(b)(2) of the Act) to provide Medicare-

covered services to beneficiaries and specifies the requirements the

organizations must meet. Payment under these contracts may either be

made on a risk capitation basis, under which a fixed amount is paid per

Medicare enrollee per month, or on a reasonable cost basis, under which

costs are reimbursed retrospectively. Implementing Federal regulations

for the organization and operation of Medicare HMOs and CMPs, contract

requirements, and conditions for payment are located at 42 CFR 417.400

through 417.694.

The amount paid to risk HMOs/CMPs is the projected actuarial

equivalence of 95 percent of what Medicare would have paid if the

beneficiaries had received services from fee-for-service providers or

suppliers. Organizations paid on a risk basis are liable for any

difference between the Medicare prepaid amounts and the actual costs

they incur in furnishing services, and they are therefore ``at risk.''

Cost-reimbursed organizations are paid monthly interim per capita

payments that are based on a budget. Later, a retrospective cost

settlement occurs to reflect the reasonable costs actually incurred by

the organization for the covered services it furnished to its Medicare

enrollees.

C. Medicaid

Section 1903(m) of the Act specifies requirements that must be met

for States to receive Federal financial participation (FFP) for

contracts with organizations (HMOs, and certain HIOs) to furnish,

either directly or through arrangements, specific arrays of services on

a risk basis. Federal implementing regulations for these contract

requirements and conditions for payment are located at 42 CFR part 434.

States determine the per capita monthly rates that are to be paid

to risk-based organizations. FFP is available for these payments at the

matching rate applicable in the State as long as HCFA determines that

the contracts comply with detailed requirements in section

1903(m)(2)(A) and 42 CFR part 434.

II. Legislative and Regulatory History

Section 9313(c) of the Omnibus Budget Reconciliation Act of 1986

(OBRA '86), Public Law 99-509, prohibited, effective April 1, 1989,

hospitals and prepaid health care organizations with Medicare or

Medicaid risk contracts from knowingly making incentive payments to a

physician as an inducement to reduce or limit services to Medicare

beneficiaries or Medicaid recipients. Under the OBRA '86 provisions,

parties who knowingly made or accepted these payments would have been

subject to specified civil money penalties. Additionally, the

provisions required that the Secretary report on incentive arrangements

in HMOs and CMPs. Section 4016 of the Omnibus Budget Reconciliation Act

of 1987 (OBRA '87), Public Law 100-203, extended the original

implementation date for the OBRA '86 physician incentive provisions to

April 1, 1991. Subsequently, sections 4204(a) and 4731 of the Omnibus

Budget Reconciliation Act of 1990 (OBRA '90), Public Law 101-508,

repealed, effective November 5, 1990, the prohibition of physician

incentive plans in prepaid health care organizations and enacted

requirements, effective January 1, 1992, for regulating these plans.

Specifically, section 4204(a)(1) of OBRA '90 added paragraph (8) to

section 1876(i) of the Act to specify that each Medicare contract with

a prepaid health care organization must stipulate that the organization

must meet the following requirements if it operates a physician

incentive plan:

That it not operate a physician incentive plan that

directly or indirectly makes specific payments to a physician or

physician group as an inducement to limit or reduce medically necessary

services to a specific individual enrolled with the organization.

That it disclose to us its physician incentive plan

arrangements in detail that is sufficient to allow us to determine

whether the arrangements comply with Departmental regulations.

That, if a physician incentive plan places a physician or

physician group at ``substantial financial risk'' (as defined by the

Secretary) for services not provided directly, the prepaid health care

organization: (1) Provide the physician or physician group with

adequate and appropriate stop-loss protections (under standards

determined by the Secretary) and (2) conduct surveys of currently and

previously enrolled members to assess the degree of access to services

and the satisfaction with the quality of services.

Section 4204(a)(2) of OBRA '90 amended section 1876(i)(6)(A)(vi) of

the Act to add violations of the above requirements to the list of

violations that could subject a prepaid health care organization to

intermediate sanctions and civil money penalties.

Section 4731 of OBRA '90 enacted similar provisions for the

Medicaid program by amending sections 1903(m)(2)(A) and 1903(m)(5)(A)

of the Act.

Section 13562 of OBRA '93 amended section 1877 of the Act, which

prohibits physicians from referring Medicare patients to an entity for

the furnishing of certain designated health services if the physician

(or an immediate family member) has a financial relationship with that

entity. A financial relationship can consist of either an ownership or

investment interest in the entity or a compensation arrangement with

the entity. OBRA '93 provides an exception to the section 1877

physician referral prohibition that incorporates the physician

incentive plan rules implemented in this final rule. Under this

exception, compliance with these physician incentive rules is one of

several conditions that must be satisfied if a physician's or family

member's personal services compensation arrangement with an entity

involves compensation that varies based on the volume or value of

referrals. OBRA '93 also extended the provisions in section 1877 to

Medicaid.

In the December 14, 1992 issue of Federal Register, we published,

in conjunction with the Office of Inspector General, our proposal for

implementing the requirements in sections 4204(a) and 4731 of OBRA '90

(57 FR 59024). On March 27, 1996, again in conjunction with the Office

of Inspector General, we published, at 61 FR 13430, a final rule with

comment period that set forth in regulations incentive plan

requirements that govern Federally-qualified HMOs and CMPs contracting

with the Medicare program and certain HMOs and HIOs contracting with

the Medicaid program. On September 3, 1996, we published, at 61 FR

46384, a final rule correction that clarified and changed some of the

dates by which prepaid health plans had to comply with the requirements

of the March 27 rule. Readers who desire additional background

information are referred to the above cited Federal Register documents.

III. Provisions of the March 27, 1996 Rule

This section contains a brief summary of the provisions of the

March 27, 1966 rule. If we received public comments on a particular

provision, a fuller description of the provision is given in section IV

of this preamble (Analysis of and Responses to Public Comments), and we

indicate that in this section. Note that we do not describe below those

provisions of the March 27, 1996 rule that amended 42 CFR Part 1003

(Civil Money Penalties, Assessments

[[Page 69036]]

and Exclusions) since they are not the subject of this revised final

rule.

The requirements for physician incentive plans are set forth in

Sec. 417.479. Paragraph (a) of that section specifies that the contract

between HCFA and an HMO or CMP must specify that the HMO or CMP may

operate a physician incentive plan only if: (1) No specific payment is

made directly or indirectly under the plan to a physician or physician

group as an inducement to reduce or limit medically necessary services

furnished to an individual enrollee, and (2) the stop-loss protection,

enrollee survey, and disclosure requirements of Sec. 417.479 are met.

Section 417.479(b) provides that the physician incentive plan

requirements apply to physician incentive plans between HMOs/CMPs and

individual physicians or physician groups with whom the HMOs or CMPs

contract to provide medical services to enrollees. It further provides

that the requirements apply only to physician incentive plans that base

compensation (in whole or in part) on the use or cost of services

furnished to Medicare beneficiaries or Medicaid recipients.

Section 417.479(c) defines the following terms for purposes of

Sec. 417.479: Bonus, capitation, payment, physician group, physician

incentive plan, referral services, risk threshold, and withhold.

Section 417.479(d) prohibits payment of any kind made directly or

indirectly under the incentive plan as an inducement to reduce or limit

medically necessary services covered under the HMO's or CMP's contract

that are furnished to an individual enrollee.

Section 417.479(e) sets forth a general rule for determining when

substantial financial risk occurs. (See section IV.)

Section 417.479(g) mandates that, if an HMO or CMP operates an

incentive plan that places physicians or physician groups at

substantial financial risk, it must conduct enrollee surveys that meet

specified requirements and ensure that all physicians and physician

groups at substantial financial risk have either aggregate or per-

patient stop-loss protection that meets specified requirements. (See

section IV.)

Section 417.479(h) requires that organizations with physician

incentive plans disclose information about those plans to us and to any

Medicare beneficiary who requests it. (See section IV.)

Section 417.479(i) sets forth requirements related to

subcontracting arrangements. (See section IV.)

Section 417.479(j) specifies that we may apply intermediate

sanctions, or the Office of Inspector General may apply civil money

penalties, if we determine that an HMO or CMP fails to comply with the

physician incentive plan requirements. In addition, failure to comply

with the physician incentive plan requirements was added to the list of

bases for imposition of sanctions at Sec. 417.500.

The March 27, 1996 final rule also amended the Medicaid rules at

Sec. 434.70 (Conditions for Federal financial participation (FFP)) to

specify that FFP is available in expenditures for payments to an HMO or

HIO only if it complies with the physician incentive plan requirements.

The final rule also incorporated these requirements into Secs. 434.44

(Special rules for certain HIOs) and 434.67 (Sanctions against HMOs

with risk comprehensive contracts).

IV. Analysis of and Responses to Public Comments

We received 38 timely items of correspondence on the March 27, 1996

final rule with comment period. Commenters included prepaid plans,

national and local associations of managed care providers, physician

associations, a State medical association, and consumer advocacy

groups. This section of the preamble contains a summary of the comments

and our responses. Note that a national association that indicated that

it represents approximately 1,000 health plans and identified below as

``a major association'' submitted comments. Although some of the

comments below are attributed only to the major association, individual

health plans also made some of these same comments.

Applicability

Comment: A commenter asked whether the regulations apply to

enrollees who are enrolled through the prepaid plan's commercial line

of business if the enrollees are also Medicare beneficiaries. For

example, if an individual who is over 65 but is actively working is

covered by the prepaid plan's commercial product through his or her

employer, would the physician incentive arrangement between the prepaid

plan and the physician(s) treating that individual under the commercial

product be subject to the regulations?

Response: Yes, the regulations apply to these plans. The employer's

plan is the first payer, and the Medicare capitation payment is

adjusted downward, but the enrollee is still a Medicare beneficiary.

Comment: One commenter stated that the regulation defines

``physician group'' as a corporation or other group that ``distributes

income from the practice among members.'' [Emphasis added by

commenter.] The commenter stated that community health centers (CHCs)

are clearly not included within this definition. As a result, the

commenter is unable to ascertain whether plans contracting with CHCs

will be required to provide to CHCs the stop-loss protection described

in the regulation. The commenter recommends that the definition of

``physician group'' be changed as regards distribution of income and

membership so as to include CHCs. The commenter pointed out the

following: CHCs are by definition public or private nonprofit entities.

As tax-exempt entities, they cannot ``distribute'' income like a for-

profit entity does. CHC physicians are not ``members'' of the

corporation. Usually they are employees or, in some instances,

contractors.

Response: We disagree that the definition needs to be revised. We

believe the commenter has misinterpreted the definition as describing

profit sharing among the members of a for-profit entity. The term

``income'' does not equate to ``profits.'' The definition does include

CHCs.

Disclosure

We received several comments concerning the disclosure requirements

in the March 27 rule. Specifically, Sec. 417.479(h)(1) requires each

HMO or CMP with a physician incentive plan to provide us with

information concerning its physician incentive plans as required or

requested by us. The disclosure must contain the following information

in detail sufficient to enable us to determine whether the incentive

plan complies with the requirements of Sec. 417.479:

Whether services not furnished by the physician or

physician group are covered by the incentive plan. If only the services

furnished by the physician or physician group are covered by the plan,

disclosure of other aspects of the plan need not be made.

The type of incentive arrangement.

If the incentive plan involves a withhold or bonus, the

percent of the withhold or bonus.

The amount and type of stop-loss protection.

The panel size, and if patients are pooled, the pooling

method used.

In the case of a capitated physician or physician group,

capitation paid to primary care physicians for the most recent year

broken down by percent for primary care services, referral services to

specialists, and hospital and other types of provider services.

[[Page 69037]]

In the case of an HMO or CMP that is required to conduct

beneficiary surveys, the survey results.

Section 417.479(h)(2) requires an HMO or CMP to provide the above

information to us (1) upon application for a contract; (2) upon

application for a service area expansion; and (3) within 30 days of a

request by us. This section also requires an HMO or CMP to notify us at

least 45 days before implementing a change in the type of incentive

plan, a change in the amounts of risk or stop-loss protection, or

expansion of the risk formula to cover services not furnished by the

physician group that the formula had not included previously.

Section 417.479(h)(3) of the March 27 rule requires an HMO or CMP

to provide the following information to any Medicare beneficiary who

requests it:

Whether it uses a physician incentive plan that affects

the use of referral services.

The type of incentive arrangement.

Whether stop-loss protection is provided.

If it was required to conduct a beneficiary survey, a

summary of the survey results.

Section 417.479(i) requires a prepaid plan that contracts with a

physician group that places the individual physician members at

substantial financial risk for services they do not furnish to disclose

to us any incentive plan between the physician group and its individual

physicians that bases compensation to the physician on the use or cost

of services furnished to Medicare beneficiaries or Medicaid recipients.

The disclosure must include the information specified in Sec. 417.479

(h)(1)(i) through (h)(1)(vii) and be made at the times specified in

Sec. 417.479(h)(2).

Section 434.70(a) provides that Federal financial participation is

available in expenditures for payment to HMOs or HIOs only for periods

that the HMO or HIO has (1) supplied the information listed in

Sec. 417.479(h)(1) to the State Medicaid agency; and (2) supplied the

information on physician incentive plans listed in Sec. 417.479(h)(3)

to any Medicaid recipient who requests it. The timeframes for

disclosure to the State Medicaid agency are the same as those for

Medicare.

Comment: One commenter suggested that health plans be permitted to

deem themselves to have transferred substantial financial risk without

having to describe to us the specific incentive arrangements and

analyses of each arrangement. The commenter also questioned our

authority for requiring disclosure of incentive arrangements and

believed that disclosure presents an enormous administrative burden.

The commenter asked: If an HMO agrees to provide stop-loss and to

conduct surveys, must it still disclose the information to HCFA as

required by the regulation?

Response: Yes, under the statute and the regulation, health plans

must disclose this information. This information serves many purposes.

For example, it will be used to monitor compliance, evaluate the impact

of the regulation, and ensure the delivery of high quality health care.

In addition, this information will be useful to beneficiaries in

ensuring that they get needed care. Section 1876(i)(8) of the Act

requires the HMO or CMP provide the Secretary with descriptive

information regarding the plan that is sufficient to permit the

Secretary to determine whether the plan is in compliance with the

physician incentive plan requirements. Congress clearly intended health

plans to disclose information about the nature of physician incentive

compensation arrangements and the extent to which physicians are being

placed at substantial risk by the arrangements.

In preparing both the March 27 regulation and these amendments and

clarifications, we have tried to limit the information being reported

to only that which is essential for us to carry out this explicit

statutory responsibility to ensure that plans are in compliance. We are

not requiring extensive detail about the compensation arrangements

being used, but rather are seeking information about the general nature

and scope of these arrangements.

Comment: One commenter believed that the information to be

disclosed to us under the regulation is proprietary and should be

protected under the Freedom of Information Act (FOIA). The commenter

stated that we should adopt the same policy we use for disclosure of a

risk contractor's adjusted community rating (ACR). The commenter

believed that the physician incentive information merits comparable

treatment.

Response: To the degree that physician incentive information

constitutes ``trade secrets or commercial or financial information

obtained from a person [that is] privileged or confidential,'' the

information will be protected from release under exemption (b)(4) of

the FOIA (5 U.S.C. 552(b)(4).) In accordance with 45 CFR 5.65 (c) and

(d), the submitter of such information may designate all or part of the

information as confidential and exempt from disclosure at the time the

information is submitted to the government. Also, the Freedom of

Information and Privacy Office, HCFA, upon receipt of a FOIA request

for the information, will ask that the involved submitter specify what

it believes to be confidential commercial or financial information. In

both situations, we will follow procedures set forth at 45 CFR 5.65(d),

with the initial disclosure decisions independently made by our Freedom

of Information Officer. The information specified as available to a

beneficiary upon request will be available under FOIA. For instance,

whether or not the incentive plan covers referral services, the type of

incentive arrangement (for example, withhold or capitation), and

whether adequate stop-loss protection is in place would be available

under FOIA.

Comment: One commenter did not believe that disclosure requirements

would pose an undue burden on plans, because ``plans routinely provide

information to patients at the time of enrollment.'' The commenter

stresses the time that notice is provided as well as the substance of

what is provided. The commenter believed that all financial information

should be provided at enrollment (and annually thereafter), but also

notes that plans should report information regarding the scope of

benefits and procedures for review of grievances. The commenter stated

that one of its internal publications includes a statement on incentive

plans, asserting that these plans ``should be disclosed to the patient

upon enrollment and at least annually thereafter.'' The commenter

elaborated on that assertion by stating, ``[we] strongly support

disclosure to patients of physician incentive plans affecting Medicare

and Medicaid patients'' and ``strongly support disclosure by all

managed care plans to patients of information regarding the scope of

benefits and procedures for review of grievances.''

The commenter also stated the disclosures are necessary to serve as

notice to patients that incentives exist. The commenter went on to

state that it believes the information is necessary in place of

outcomes measures until such measures are widely accepted and

available.

In contrast, a major association of health plans asked that we give

plans broad discretion to decide how this information will be

presented.

Another commenter contended that section 1876(i)(8) of the Act does

not give us the authority to require that a prepaid plan release

information about its incentive plans to Medicare beneficiaries and

Medicaid recipients, and that there is no such grant of authority in

parallel medical provisions. The commenter added that, even if it

[[Page 69038]]

were to assume that a general authority conferred upon us allows us to

impose this obligation, the regulation goes far beyond what the

commenter believes to be reasonable. The commenter noted that, under

the regulation, every beneficiary or recipient in the country,

regardless of location and regardless of the relationship to the

prepaid plan, may obtain information about the incentive plan. The

commenter recommended that only enrollees of the prepaid plan or

beneficiaries or recipients who file an application to join the plan

should be entitled to obtain the information. The commenter also

recommended that the information be limited to the following: (1)

Whether the physician has an arrangement with the prepaid plan that has

the potential to compensate him or her for controlling the services he

or she provides; (2) that the amount of risk is limited because of

stop-loss protection; and (3) the results of any enrollee survey will

be provided, upon request, including information about quality of care.

Response: Some of the information may be confidential and will be

protected by FOIA. Nonetheless, we intend to require plans to publish

in the evidence of coverage (EOC) notices that beneficiaries can

request summary information on the HMO's physician incentive plans.

These EOC notices are available at enrollment. We will provide further

guidance on this in the future.

On the question of our legal authority to require disclosure to

beneficiaries, we believe that in requiring disclosure of information

on physician incentive plans, Congress intended that this information

be used in the best interests of the beneficiary. While the statute

refers only to disclosure of this information to the Secretary, this

information is clearly of interest to beneficiaries as well. Requiring

plan disclosure directly is simply more efficient than having the

Secretary provide this information to beneficiaries, which the

Secretary clearly has legal authority to do.

We do not agree that this information should be made available only

to an enrollee or applicant for enrollment in a managed care plan. This

information is potentially very important and useful to a beneficiary

in deciding whether to select managed care rather than fee-for-service

care and which of the available managed care plans to select.

Comment: A major association of health plans stated that we should

make available to the public all the information on incentive plans

that we and the States receive. The commenter did not explain why the

information should be made public, but just noted that there is ``no

valid reason to keep this information from the public'' and that

publication would allow health policy researchers to better understand

the relationship between specific risk arrangements and access and

quality of care provided to enrollees.

Response: We plan to publish aggregate information on physician

incentive plans obtained under the regulation; therefore, the

information will be public. Publication of additional information,

beyond that specified in the regulation, however, would be a

substantial administrative task and would not advance the purposes of

the law.

Comment: One commenter stated that requiring the HMO or CMP to

collect information about incentive plans operated by physician groups

or subcontractors is not the most efficient or effective means of

collecting the necessary information. The commenter suggested that we

collect the information directly from the physician groups and

subcontractors. This commenter believed we should allow a physician

group to attest that it has no physician incentive plan or no physician

incentive plan related to use of referral services for Medicare or

Medicaid enrollees and that HMOs should be allowed to rely upon that

attestation.

Response: The HMO/CMP is responsible for ensuring that the

requirements of this regulation are met if a physician group or

individual physicians are placed at substantial financial risk by a

subcontractor or physician group. Requiring that the HMO or CMP collect

the information ensures that it is aware of all arrangements subject to

the regulations. In addition, since lines of communication between the

physician group or subcontractor and the prepaid plan are already in

place, the HMO or CMP is the most efficient conduit for the disclosure

of information. We will allow physician groups to make attestations and

will provide further guidance on this item. We will also develop a

disclosure form that will describe the minimum amount of information

that the prepaid plan must obtain from physician groups.

Substantial Financial Risk

We received significant comments on our definition of ``substantial

financial risk.'' Section 417.479(e) provides that substantial

financial risk occurs when an incentive arrangement places a physician

or physician group at risk for amounts beyond the risk threshold (25

percent), if the risk is based on the use or costs of referral

services. Amounts at risk based solely on factors other than a

physician's or physician group's referral levels do not contribute to

the determination of substantial financial risk.

Section 417.479(f) provides that physician incentive plans with any

of the following features place physicians at substantial financial

risk if the risk is based (in whole or in part) on use or costs of

referral services, and the patient panel size is not greater than

25,000 patients, or is greater than 25,000 patients only as a result of

pooling patients:

Withholds greater than 25 percent of potential payments.

Withholds less than 25 percent of potential payments if

the physician or physician group is potentially liable for amounts

exceeding 25 percent of potential payments.

Bonuses greater than 33 percent of potential payments

minus the bonus.

Withholds plus bonuses if the withholds plus bonuses equal

more than 25 percent of potential payments. The threshold bonus

percentage for a particular withhold percentage may be calculated using

the formula: Withhold % = -0.75(Bonus %)+25%.

Capitation arrangements if--

+ The difference between the maximum possible payments and minimum

possible payments is more than 25 percent of the maximum possible

payments; or

+ The maximum and minimum possible payments are not clearly

explained in the physician's or physician group's contract.

Any other incentive arrangements that have the potential

to hold a physician or physician group liable for more than 25 percent

of potential payments.

Section 417.479(f) defines ``potential payments'' as the maximum

anticipated total payments (based on the most recent year's utilization

and experience and any current or anticipated factors that may affect

payment amounts) that could be received if use or costs of referral

services were low enough.

Comment: A major association contended that the methodology for

determining substantial financial risk is flawed because a substantial

number of affected prepaid plans will be viewed as transferring

substantial financial risk and be subject to the stop-loss and enrollee

survey requirements. The association pointed out that we stated in the

proposed rule that the original choice of a 25 percent threshold for

substantial financial risk was based on the assumption that only

``outlier'' risk levels would be considered ``substantial.'' The

association contends

[[Page 69039]]

that our methodology in fact covers ``mainstream'' arrangements, and

thus implicitly suggests that they are outliers. The association

believes that the proportion of outliers in a given population should

be quite small (typically in the range of 5 percent) and that a

methodology that purports to only identify outliers is invalid to the

extent it includes a proportion of the population beyond that

represented by the extreme. The association has concluded, based on

extensive communications with its membership and its work group, that

application of the methodology in the March 27 rule will result in the

inclusion of substantial numbers of what it contends to be

``mainstream'' incentive arrangements as involving substantial

financial risk. The association stated that, based upon information

from its member organizations, a large number of plans combine

capitation or withholds with bonuses, and the result is that the risk

level exceeds 25 percent.

The association reminded us that, in the preamble of the proposed

rule, we stated that we anticipate most prepaid plans will not incur

significant additional costs because most of them already meet the

requirements that are specified in this regulation, but that if new

information regarding the influence of various elements of physician

incentive plans becomes available, we will evaluate it to determine if

the approach in our proposed regulations should be reconsidered. The

association contended that a reevaluation of this structure is clearly

necessary at this time and that the regulations need to be modified to

address five areas: (1) The association believes that the risk

threshold should be refined to allow for the transfer of a larger

portion of risk for referral services; (2) the association believes

that the regulation needs a mechanism to estimate the amount of risk

transferred if a precise calculation cannot be made; (3) the

association recommends that maximum and minimum thresholds be

calculated based on standards that are more ``realistic'' in its view;

(4) the association would like more latitude in the pooling rules to

allow large physician groups that spread risk across large total

numbers of health plan patients to be exempt from the requirements; and

(5) the association suggests that a good cause exemption be available

to allow for the approval of physician incentive plans that, for policy

reasons, should not be considered as transferring substantial financial

risk, although the circumstances were not envisioned when the

regulations were drafted.

To achieve the above objectives, the association presented a number

of recommendations. These recommendations and our response to each of

them follow, but first we respond to the above comment that many plans

would be identified as outliers.

Response: At the time we were developing these regulations in

proposed form, it was our understanding that most physician incentive

plans created financial incentives to reduce unnecessary referrals

through the use of bonuses or withholds or some combination of the two.

On the assumption that a specific amount of payment was ``at risk''

(whether an amount withheld when referrals are high or a bonus paid if

they are low), we had to come up with a threshold beyond which risk

would be considered ``substantial.'' As the commenting association

correctly notes, we used an outlier approach to determine what level of

risk would be considered ``substantial'' under this methodology. This

resulted in a figure of 25 percent of potential payments. It is our

view that 25 percent represents a significant amount of income to lose.

This may be in addition to discounts that physicians may give to

various patients or prepaid plans. Many consumer and physician groups,

in fact, believe that 25 percent is too high. We now recognize that an

increasing number of plans use capitation arrangements under which

referral service costs must be covered with capitation amounts, and

that these plans will be determined to be at substantial financial risk

if the maximum and minimum potential payments are not clearly explained

in the physician's or physician group's contract. Raising the risk

threshold to a higher level will not affect these plans since they

would still be deemed to involve substantial financial risk and trigger

stop-loss insurance requirements. However, in most of these cases, the

physicians already have stop-loss protection comparable to the

requirements of this regulation. With regard to suggestions to lower

the threshold, here, again, changing the threshold would not affect

these plans. We thus believe that the 25 percent threshold should

remain in place.

Recommendation: The association recommended that an exception to

the 25 percent risk threshold be created for certain bonus

arrangements. This exception would permit prepaid plans to supplement

their incentive programs by offering an opportunity for a bonus, in

addition to capitation payments or withholds, or an opportunity for an

additional bonus where a bonus is already in place. The supplemental

bonus could not exceed 15 percent of the ``payments.''

Response: Under the March 27, 1996 rule, any combination of

incentive arrangements that exceeds the 25 percent threshold, whether

labeled a bonus or withhold, puts the physician or physician group at

substantial financial risk. We adopted this policy towards bonuses

because (1) if the same amount of money is at risk based on referral

levels, it should not matter whether this money is labeled a withhold

or a bonus, and (2) we did not want plans to avoid these rules merely

by ``re-labeling'' withholds or other arrangements as bonuses. The

incentive arrangement described in this comment would exceed the 25

percent threshold for substantial financial risk as we interpret this

term and, accordingly, should not be permitted in our view.

Recommendation: The association recommended that a prepaid plan

that capitates physicians or physician groups be permitted to estimate

the portion of the capitation allocated to referral services for

purposes of determining whether there is substantial financial risk.

This is because it is the association's belief that many large prepaid

plans do not have, and cannot obtain, this information. The association

believes that the regulatory requirement that contracts specify the

allocation between services provided by the physician or physician

group and the amount allocated for referral services (provided outside

the physician group or the physician's practice) has two objectives:

(1) To provide a basis for the calculation of risk transference to

determine whether substantial financial risk is transferred; and (2) to

apprise the physician or physician group of the portion of its

capitation ``at risk.'' The association contends that we could achieve

the first of these two objectives by allowing the prepaid plan to

estimate the expected portion of referrals through the use of

historical data or actuarial tables. The prepaid plan could be required

to certify that its decision was made in good faith based on the best

available data. In accepting this proposal, the association contends

that we would be meeting our responsibilities under E.O. 12866 to find

an alternative regulatory approach that imposes the least burden on

society while still achieving its objective.

The association questioned whether the second objective it has

presumed, to apprise the physician or physician group of the portion of

its capitation ``at

[[Page 69040]]

risk,'' is meaningful today since physicians are far more aware of the

implications of risk assumption than they once were.

As an alternative approach, the association suggested that the

physician/physician group put in the contract the estimated portion of

services that would not be provided by the physician or physician

group. The association stated that, although this amount may change

over time, it would not support revisions to the contract to reflect

changes made within the discretion of the individual physician or

physician group. The association notes that this alternative approach

would not be the most desirable because it would require the burdensome

step of recontracting with large numbers of physicians.

Response: As indicated in the March 27, 1996 rule, prepaid plans

have the option of specifying in the contract maximum and minimum

payment amounts. As long as the difference between these amounts does

not exceed 25 percent of the maximum amount, the physician or physician

group is not at substantial financial risk. Without specifying these

limits, physicians who are capitated for all services are potentially

at risk of losing 100 percent of their income. Given this potential

loss, they may feel the pressure to reduce necessary services.

Prepaid plans have the opportunity to include a provision in their

contract with a physician group that would require the physician group

to specify the level of potential risk for referral services. Relying

on historical or actuarial data may not be reflective of risk in

current contracts. While it may be true that physicians today are more

aware of the implications of risk assumption, there is no evidence that

the ability to manage this risk has substantially changed. Further,

while physician groups may want the flexibility to change risk sharing

arrangements on an ad hoc basis, we have to question the impact of

these changes on patient care decisions.

Recommendation: The association recommends that the regulation be

amended to allow for the pooling of the total prepaid enrollment from

the prepaid plan and across prepaid plans for purposes of determining

substantial financial risk. The regulation exempts from the

requirements of the regulations physicians or physician groups who

provide services to 25,000 Medicare or Medicaid enrollees of the

prepaid plan. The association maintains that this approach, which does

not allow for the pooling of patients, is unnecessarily and

inappropriately rigid and conservative. The association stated that it

believed the 25,000 patient exemption is permitted because physician

groups with a patient base this large can assume the risk for referral

services greater than the risk threshold without the need for stop-loss

coverage. As the number of enrollees under the responsibility of the

physician group increases, so does the ability of the physician group

to assume that risk. The association believed that this risk is reduced

regardless of whether the patients are Medicare, Medicaid, or

commercial. Similarly, this risk is reduced regardless of whether the

patients are the enrollees of a single prepaid plan or the enrollees of

several prepaid plans. Thus, for purposes of qualifying for the

substantial financial risk exemption, a prepaid plan should be allowed

to consider the total number of prepaid enrollees served by a physician

group. These pooled enrollees should, in the association's view,

include all enrollees of that prepaid plan and enrollees of other

prepaid plans that have selected the physician or physician group,

provided that the physician or physician group is at risk for the

provision of services to those enrollees.

Response: In the preamble, we provided evidence from analyses by

Rossiter and Adamache (1990) (Health Care Financing Review, vol. 12,

prepaid plan. 19-30) that supported the decision that physician groups

with more than 25,000 patients are able to adequately spread risk and

are so unlikely to lose money that we could determine them to not be at

substantial financial risk.

We have decided to allow pooling of Medicare, Medicaid, and

commercial members for purposes of determining substantial financial

risk because this kind of pooling is consistent with the rationale for

permitting pooling (that is, the spreading of risk). The physician

group may also pool patients across more than one managed care plan

with which it has a contract. Note, however, that, as revised by this

final rule, Sec. 417.479(h)(1)(v) allows for pooling of patients for

purposes of determining substantial financial risk and meeting various

stop-loss requirements. This section then specifies that pooling is

permitted only if: (1) Pooling is otherwise consistent with the

relevant contracts governing the compensation arrangements for the

physician or physician group; (2) the physician or physician group is

at risk for referral services with respect to each of the categories of

patients being pooled; (3) the terms of the compensation arrangements

permit the physician or physician group to spread the risk across the

categories of patients being pooled; (4) the distribution of payments

to physicians from the risk pool is not calculated separately by

patient category; and (5) the terms of the risk borne by the physician

or physician group are comparable for all categories of patients being

pooled.

In general, the purpose of these conditions is to ensure that all

patients included in the risk pool are being treated under comparable

payment arrangements; that is, the risk or reward to the physician or

physician group would be the same for referring services for any

individual patient in the pool. The patient categories refer to

Medicare, Medicaid, and commercial members. The type of incentive

arrangements, such as withholds and capitation would usually be the

same throughout the pool to be considered comparable. Pools over the 25

percent risk threshold can be combined with those arrangements below

the 25 percent risk threshold. The pool represents the total dollars on

which the payout is made to the doctor or the stop-loss threshold is

assessed.

This final rule, however, eliminates the arrangement that allows

the HMO, CMP, or HIO to pool across physician groups to reduce the

stop-loss requirements. We believe physician behavior is influenced by

the number of patients using the physician group, rather than total

enrollment in the HMO, CMP, or HIO. A physician group that has a small

number of patients does not spread its risk throughout the prepaid

plan, but only within its group. Allowing pooling across groups does

not provide patients enough protection.

Recommendation: The association recommended that the regulations

apply a ``reasonableness test'' in calculating compensation under a

physician incentive plan. The association noted that plans often use

formulas to calculate the amount of the withhold to be returned or the

bonus to be distributed. These formulas allow for distributions of a

certain percentage of savings to the physician or physician group when

utilization or costs are less than projected. These arrangements often

do not cap the upside potential gain from a bonus although natural

limits may exist because there is no expectation that the scenario in

which no services are provided will occur. The physicians and physician

groups understand these de facto limits, and it would be unnecessarily

burdensome to require prepaid plans to amend thousands of contracts to

insert bonus limits in their contracts. The regulations should be

amended to confirm that prepaid plans may use an amount for purposes of

determining the maximum

[[Page 69041]]

payment that is realistic rather than the theoretical highest payment

level. The same standard should be applied in calculating minimum

levels.

Response: We believe that past behavior is no guarantee of future

behavior. Physicians could still feel the pressure if they are placed

at substantial financial risk, regardless of past payments. Therefore,

the incentive plan contracts must contain these limits explicitly.

Recommendation: The association recommends that the regulation

should allow for a ``good cause'' exemption from the requirements of

the regulation in the event that substantial financial risk is

transferred. The association argued that in an ever-changing health

care delivery system, the regulation should provide for flexibility to

adapt to unanticipated circumstances. The association notes that our

regulations frequently allow for good cause exemptions from

requirements, and it contends that circumstances may arise in the

future that merit an exemption from the regulatory requirements.

According to the association, inclusion of a good cause exemption would

give us the flexibility to approve appropriate physician incentive

plans without the need to amend our regulations. An example of one

instance in which a good cause exemption may be appropriate is if the

prepaid plan can demonstrate that the physician group is assured of

receiving compensation on an encounter basis comparable to or at a

certain percentage of the resource-based relative value scale fee

schedule amount.

The association stated that it is currently exploring functional

ways in which a good cause exemption could be designed and

appropriately implemented.

Response: We have no legal authority to permit plans to fail to

comply with the rules in section 1876(i)(8) for ``good cause.''

Moreover, even if we did, we do not know of any systematic basis for

providing a good cause exemption to this regulation. The example cited

by the commenter can be written into the contract to ensure that the

physician receives a certain percentage of the fee schedule amount.

However, the issue is not guaranteeing a minimum level of income.

Rather it is setting parameters so that decisions are not made because

of a concern with unforseen circumstances, such as adverse selection,

bad incentive plan design, etc. Our goal is to protect beneficiaries in

these circumstances.

Comment: A group that advocates on behalf of individuals with

disabilities recommended that we consider alternative methods to

determine the appropriate levels of stop-loss insurance for those

involved in the care of persons or communities who are at high risk for

unexpected, adverse medical events (For example, urban providers with a

high patient load of pregnant women with histories of substance abuse).

The group stated that these providers may have difficulties determining

an accurate estimate of expected expenditures based on a previous

year's per-patient costs. The group suggested that other methods to

determine substantial financial risk may include:

(1) The use of several years of longitudinal data to determine a

realistic substantial risk level (in order to adjust for the

periodicity of certain illnesses); or

(2) The use of retrospective analyses to determine the incidence of

unexpected events within the provider's pool, with adjustments made to

correct for current levels of expected ``substantial risk'' related to

the likelihood of these previous events.

This group further recommended that we examine alternative methods

of determining substantial risk for providers who are likely to care

for ``medically needy'' eligibles. The association gave the following

example, a preferred provider organization (PPO) medical specialist

provider may care for a substantial number of persons with life-

threatening illness, such as cancer, Alzheimer's or AIDS. If patients

switch from private to public health insurance while under the care of

the medical provider (due to ``spending down'' into poverty), the

provider's determination of ``substantial risk'' may be underestimated.

In this case, the PPO medical specialist may be subject to various

levels of financial incentives (through both private and public funded

health plans) without having to demonstrate adequate quality of care or

financial liability provisions.

Response: The goal of the substantial financial risk analysis is to

determine whether stop-loss protection is needed. The stop-loss

protection is designed to provide protection if the physician group

experiences patients with a greater than average risk. Thus, there is

no need to set a different substantial financial risk threshold for

high risk cases. The stop-loss protection addresses this concern.

Comment: A commenter recommended that we consider lowering the

threshold at which plans are required to provide stop-loss coverage for

CHCs. The commenter suggested that we consider whether it is

appropriate to compare risks to CHCs with risks to other kinds of

primary care providers. The commenter pointed out that CHCs provide

services almost exclusively to Medicaid/Medicare beneficiaries and

impoverished uninsured patients. Thus, CHCs essentially have no

capacity to generate revenues to offset losses sustained on referrals

under a capitated rate. In addition, the commenter suggested that the

schedule reducing the amount of protection required should be modified

so that it decreases more slowly as a CHC's patient panel increases.

The commenter said such a change is justified because CHCs may incur

even greater risk as their capitated patient enrollment increases

because the CHC's patients are likely to be in poorer health than the

average patient.

Response: We are giving additional consideration to the impact of

the current risk threshold on physician incentive plans with CHCs.

During the implementation of this regulation, we will collect data on

the impact of the 25 percent threshold on CHCs, and consider whether

some form of relief may be appropriate. We are concerned, however, that

lowering the threshold as the commenter suggests would require a

substantial number of these centers to provide stop-loss protection to

their physicians that they may not be able to afford.

Comment: A commenter asked whether ancillary services are

considered referral services.

Response: For purposes of Sec. 411.479, if the physician group

performs the ancillary services then the services are not referral

services. If the physician group refers patients to other providers of

services for the ancillary services, then the services are referral

services.

Comment: A commenter pointed out that a response in the March 27

final rule at 61 FR 13438, column 2, states that, if the HMO uses a

combination of withhold and/or bonus arrangements, these arrangements

will be aggregated for purposes of determining whether the physician is

placed at substantial financial risk. The commenter adds that, in

column 3 of that page, however, the response states that we are not

requiring disclosure of every incentive arrangement between a physician

group and its physicians, only those under which the physician is

placed at substantial financial risk. A prepaid plan wanted to know how

it could be expected to know that in the aggregate the arrangements

created substantial financial risk if the physician group is not

required to disclose the individual arrangements.

Response: The above comment reflects a misconception. The quote

from the third column addresses what

[[Page 69042]]

information must be disclosed by the prepaid plan to us, not what

information the physician group must disclose to the prepaid plan. It

is incumbent upon the prepaid plan to obtain from the physician group

all the information that it needs to determine whether individual

physicians are placed at substantial financial risk. This can be a

subject addressed as part of the contract negotiations between the

prepaid plan and the physician group.

Comment: A commenter stated that the methodology used to determine

substantial financial risk has consequences that they believe we never

intended. For example, certain bonus arrangements could be construed as

transferring substantial financial risk. The commenter described a

program under which bonuses that are added to a base capitation are

aimed at rewarding the primary care physician (PCP) for high quality

care, full service capacity, long office hours, accepting all new

patients, and cost-effectiveness. The commenter offered the following

illustration: a PCP might get $10.50 per member/per month (PMPM) as

capitation, $1.50 PMPM for scoring well on member surveys and office

record reviews, $1.00 PMPM for being open to new patients, and $1.50

PMPM for having average utilization. The total compensation would then

be $14.50 PMPM. The commenter stated it does not believe that these

quality performance and service bonuses are the ``substantial financial

risk'' with which we are concerned. The commenter stated that there is

no downside risk here, but there is the ability to add to income for

good performance. If the intent is to include these bonus arrangements,

the commenter wanted to know whether the relevant amount was the

maximum attainable bonus or the average bonus paid to all PCPs in the

network. The commenter also pointed out that, in applying our

methodology to calculate substantial financial risk, a physician who is

paid a higher quality office component than a second physician (both

with the same utilization), would be found to have assumed a greater

financial risk than the second, even though the first physician's

revenues were greater.

Response: While we are supportive of a quality bonus payment, there

is very limited experience with its use, and whether a physician will

actually receive it is speculative. We will revisit the issue when more

information is available on the nature, extent, and experience with

quality bonuses.

Subcontracting

A number of commenters, including a major association, made the

same comment on the provisions of section 417.479(i), which requires

that the disclosure, stop-loss protection, and survey requirements of

Sec. 417.479 be satisfied when an HMO or CMP contracts with a physician

group that places the individual physician members at substantial

financial risk for services they do not furnish. The major

association's comment, which was the most comprehensive, is presented

below.

Comment: One major association challenged our legal authority to

reach arrangements between a contracting physician group and its

individual physicians (or between an ``intermediate entity'' and

physicians or a physician group). The association pointed out that

section 1876(i)(8)(B) of the Act defines a physician incentive plan

as--

any compensation arrangement between an eligible organization and

physician or physician group that may directly or indirectly have

the effect of reducing or limiting services provided with respect to

individuals enrolled with the organization. [Emphasis added by the

association.]

The association argued that, regardless of the policy

considerations that favor extending the reach of these rules to

subcontracts (for example, the possibility that failure to do so could

create a ``loophole'' that could be abused), doing so was inconsistent

with the ``plain meaning'' of this statute. The association accordingly

contended that our interpretation was legally impermissible, regardless

of the policy considerations in its favor.

The association also argued that expanding the scope of the

regulation to cover other incentive plans without a new opportunity for

notice and comment violated the Administrative Procedure Act (APA). The

association pointed out that the APA requires that there be a general

notice of proposed rulemaking published in the Federal Register that

includes, among other things, the terms or substance of a proposed rule

or a description of the subjects and issues involved. The association

included the following quotation from a decision by the Court of

Appeals for the District of Columbia Circuit discussing a standard that

the court applied for determining whether the APA requirement has been

met:

Statutory duty to submit proposed rule for comment does not include

obligation to provide new opportunities for comments whenever final

rule differs from proposed rule; rather, an agency adopting final

rules that differ from proposed rules is required to renotice when

changes are so major that original notice did not adequately frame

subjects for discussion. (Air Transport Association of America v.

C.A.B., 732 F.2d 219 (D.C. Cir. 1984))

The association argued that revising the proposed rule to extend

its provisions to subcontractor arrangements was a sufficiently

``major'' change that a new notice and opportunity for comment was

required under the above standard.

Finally, the association contended that support for its position

could be found in language from earlier legislation directing HHS to

study incentive arrangements. This language referred to ``incentive

arrangements offered by health maintenance organizations and

competitive medical plans to physicians.''

Response: We believe that in referring both to individual

``physician[s]'' and to ``physician group[s],'' Congress intended to

cover all incentive arrangements that could provide incentives for a

physician treating an HMO enrollee to reduce or limit services; both

those affecting only an individual physician and those affecting a

group of physicians as a whole. A letter from the original author of

this legislation confirms that this was his intent in drafting this

language.

As noted above, the association attempts to place significance on

the use of the word ``between'' in the definition of physician

incentive plan in section 1876(i)(8)(B) (quoted above). The association

reads this as limiting the scope of the definition of physician

incentive plan to arrangements in a contract directly between a prepaid

plan and a physician or physician group. In fact, however, an

individual physician who serves a prepaid plan's enrollees as a member

of a physician group does have a relationship with that prepaid plan,

albeit an indirect one. There is an indirect but clear link ``between''

that physician and the prepaid plan whose enrollees the physician

treats. The only difference is that instead of a single direct contract

between the physician and the prepaid plan, the physician has a

contract with the group, and the group in turn contracts with the

prepaid plan.

Even though this is a two or more step arrangement rather than a

single direct contract, there nonetheless is a physician incentive plan

involving the prepaid plan's enrollees that exists ``between'' the

physician providing services to a prepaid plan's enrollees and the

prepaid plan that is accountable for these services. There is simply an

added layer of organization and legal arrangements ``between'' the

physician and the prepaid plan. During our review

[[Page 69043]]

of applications for Medicare contracts, we currently review the plan's

contracting arrangements to ensure that subcontracts actually signed by

the physician at the ``retail'' end of the prepaid plan's health care

delivery network inform physicians of their responsibility to carry out

the prepaid plan's obligations under section 1876. This longstanding

practice is fully consistent with our view that an individual physician

contract with a physician group is part of the total arrangement

``between'' that physician and the prepaid plan that is accountable for

the services the physician is providing to the plan's members. For

instance, we hold the plan accountable for the quality of care

delivered by all components subcontracting with the plan including the

care delivered by the physicians.

For all of the above reasons, we believe that it is fully

consistent with the words of the statute to reach all incentive

arrangements that exist ``between'' doctors providing the care and a

prepaid plan accountable for that care, whether they are contained in a

physician's contract with a physician group or other intermediate

entity, or in the contract the group or entity has with the prepaid

plan. (With respect to the association's reliance on language in past

legislation, we do not believe that it has any relevance in

interpreting section 1876(i)(8). Indeed, it is inconsistent with the

language in section 1876(i)(8), since it references only arrangements

with a physician, and not those with a physician group.)

In addition to being consistent with the words of the statute, we

believe that our interpretation is consistent with the purpose of the

statute, which is to protect Medicare beneficiaries enrolled in prepaid

plans from the possible effects of financial incentives to deny or

limit medically necessary care. It is irrelevant to this statutory

objective whether incentives are contained in the prepaid plan's

contract with a physician group, or in the group's contract with the

physician. It is fully consistent with the intent and purpose of

section 1876(i)(8) to reach any plan that could contain the incentives

Congress wanted to address. As suggested above, it also would make no

sense to establish a regulatory scheme that could be circumvented

simply by erecting a ``protective shield'' between the prepaid plan and

individual physicians in the form of an intermediate entity or

physician group structure. The possibility of such a ``loophole''

permitting plans to circumvent these regulations was a major factor in

our decision to extend the reach of these regulations to

subcontractors.

We also disagree with the association that the change we made in

the final rule violated the APA under the standards of the Air

Transport Association case cited by the association. Indeed, we believe

that this type of revision is precisely the kind the court had in mind

when it wrote that there is no ``obligation to provide new

opportunities for comments whenever a final rule differs from a

proposed rule.'' We believe that it is clear that this is not a change

``so major that original notice did not adequately frame [the] subject

[] for discussion.'' Clearly the ``original notice'' did ``frame'' this

as a ``subject [] for discussion,'' since commenters in fact commented

on this question. A second notice thus was not required under the Air

Transport decision.

In any event, even if a second opportunity to comment had been

required under the Air Transport standard, any such requirement has now

been satisfied through the notice and comment process culminating in

this revised rule.

Stop-loss

We received several comments on the stop-loss requirements in the

March 27 rule. Section 417.479(g)(2) requires that HMOs or CMPs that

operate incentive plans that place physicians or physician groups at

substantial financial risk ensure that these physicians or physician

groups have either aggregate or per-patient stop-loss protection in

accordance with the following requirements:

If aggregate stop-loss protection is provided, it must

cover 90 percent of the costs of referral services (beyond allocated

amounts) that exceed 25 percent of potential payments.

If the stop-loss protection provided is based on a per-

patient limit, the stop-loss limit per patient must be determined based

on the size of the patient panel. In determining patient panel size,

the patients may be pooled using one of the approved methods (discussed

below) if pooling is consistent with the relevant contract between the

physician or physician group and the prepaid plan. Stop-loss protection

must cover 90 percent of the costs of referral services that exceed the

per patient limit. The per-patient stop-loss limit is as follows:

Less than 1,000 patients--$10,000.

1,000 to 10,000 patients--$30,000.

10,000 to 25,001 patients--$200,000.

Greater than 25,000 patients:

+ Without pooling patients--none; and

+ As a result of pooling patients--$200,000.

Section 417.479(h)(1)(v) provides that, for purposes of determining

panel size, patients may be pooled according to one of the following

methods:

Including commercial, Medicare, and/or Medicaid patients

in the calculation of the panel size.

Pooling together, by the HMO or CMP, of several physician

groups into a single panel.

Section 417.479(g)(2)(iii) provides that the HMO or CMP may provide

the stop-loss protection directly or purchase it, or the physician or

physician group may purchase the stop-loss protection. This section

also provides that, if the physician or physician group purchases the

stop-loss protection, the HMO or CMP must pay the portion of the

premium that covers its enrollees or reduce the level at which the

stop-loss protection applies by the cost of that protection.

Comment: A major association stated that enormous confusion exists

among its membership as to the meaning and application of the stop-loss

provisions. The association urged us to reevaluate not only the

substantive requirements, but the manner in which we expressed the

information and to explain more clearly our intentions. The

association's comments on this issue fall into two categories: (1) The

obligation for payment of the stop-loss coverage and (2) the

substantive requirements for stop-loss. In making its comments, the

association also offered recommendations for amendments to the

regulations. We summarize the association's comments and

recommendations below:

Comment 1. The association believed that the responsibility of

paying for the stop-loss protection should be a negotiable issue

between the HMO or CMP and its physician group or physician. The

association argued that the language used in section 1876(i)(8) of the

Act requiring HMOs or CMPs to provide stop-loss can be reasonably

interpreted to impose an obligation that the stop-loss coverage be made

available to the physician or physician group.

The association also maintained that public policy supports

allowing the financial responsibility for stop-loss coverage to be

determined between the parties and not mandated by us. The association

noted that a common element in a capitation arrangement between an

organization and a physician group is a requirement that stop-loss be

obtained to protect the physician group from undue risk. This stop-loss

could be purchased by the prepaid plan or by the physician group.

[[Page 69044]]

The association stated that typically, these arrangements provide that

the physician group, and not the prepaid plan, has the responsibility

to pay for the stop-loss coverage. Another option the association noted

would be to give the physician group the option either of purchasing

the stop-loss coverage made available by the prepaid plan or purchasing

the stop-loss coverage itself. The association pointed out that in all

cases, the cost of the stop-loss coverage is an element of the

compensation (the capitation would be reduced if the prepaid plan pays

for the stop-loss coverage and would be higher if the physician group

does).

The association stated that stop-loss coverage at the levels

required by the regulations is very expensive to obtain and that

requiring prepaid plans to bear that cost would result in an enormous

financial burden shifted from physician groups to prepaid plans. To

avoid this, and consistent with the discussion above, the association

recommended that we allow the prepaid plan and the physician group or

physician to negotiate the financial responsibility for the stop-loss

coverage.

Response: After further analysis, and for the reasons set forth in

the above comment, we are amending the regulation to require only that

the HMO or CMP provide us proof that the physician groups have adequate

stop-loss protection in place. We believe this is consistent with the

primary goal of the regulation of ensuring that if the physicians are

at substantial risk, they have adequate stop-loss protection. In

addition, we have further information that physician groups may have

access to more affordable stop-loss as a result of their participation

in a number of HMOs or CMPs.

Comment 2. The association recommended that we revise the

regulations to reflect what it believes to be more appropriate stop-

loss levels, to account for existing stop-loss arrangements, and to

provide an appropriate means of applying the stop-loss requirements to

bonus and withhold arrangements. The association believed that the

stop-loss limits are inappropriately low. It stated that a $10,000

limit might be appropriate for a panel size less than 250 patients, but

is not reasonable for a 1,000 patient panel. The association stated

that one of its members projects that the cost of stop-loss over

$10,000 for hospital services for a Medicare enrollment would be about

20 percent of the total medical cost; this could be about $80 to $100

per member per month depending on geographic area. Therefore, the

association believed that it is incumbent upon us to reevaluate the

stop-loss limits and to replace the existing limits with ones that are

more appropriate and less costly to obtain.

In addition, the association maintained that the stop-loss

requirements fail to identify how prepaid plans can analyze stop-loss

coverage that is already being provided to the physicians or physician

groups to determine whether it meets the regulatory standard. The

association stated that while it assumes we would allow prepaid plans

to obtain ``credit'' for stop-loss coverage that already exists, it may

be exceedingly difficult to compare the coverage. For example, existing

stop-loss coverage may have a lower attachment point (that is,

deductible), but higher coinsurance amounts or vice versa. Some stop-

loss coverage may vary by disease. Also, some coverage may vary

depending on whether the cost is related to inpatient care or specialty

care. Some prepaid plans apply individual and aggregate stop-loss

simultaneously. Some stop-loss limits are linked to utilization levels

and not cost levels. Some physician groups decline the coverage offered

by the prepaid plan because it may be less costly to obtain the

coverage for all their patients rather than only those who are

enrollees of a single prepaid plan. In light of this, the association

recommended that we do the following:

Reevaluate the stop-loss limits in light of actuarial

input on the appropriate need for stop-loss coverage and its cost.

Allow a prepaid plan to retain the services of an actuary

who would assign an actuarial value to the stop-loss coverage currently

being provided to the physician or physician group. Allow the prepaid

plan to meet the stop-loss requirements by providing (that is, making

available) the difference between the actuarial value of the

requirement and the value of the stop-loss currently being provided to

the physician or physician group. The prepaid plan, in consultation

with its actuary, could convert this difference into an actuarial

equivalent in order that the new coverage be consistent with the nature

of the stop-loss coverage already provided to the physician or

physician group. The association stated that this recommendation is

intended to accomplish two objectives: (1) The prepaid plan would

obtain credit for stop-loss coverage already provided to the physician

or physician group; (2) the prepaid plan would have more flexibility in

determining how the requirement was met; for example, if it wished, the

prepaid plan could meet the requirement by building on the structure of

its existing stop-loss coverage.

A second issue raised by the association concerns the applicability

of the stop-loss requirements to withhold and bonus arrangements. When

physicians or physician groups are at risk for referral services under

a capitation arrangement, stop-loss coverage would protect the

physician group or physician from excessive costs. In contrast, when an

organization uses withholds or bonuses as its incentive arrangements,

no large potential economic loss would occur at which the stop-loss

would attach. The association recommended that we rethink the

application of the stop-loss requirements to withhold and bonus

situations. It also argued that we should amend our regulation to allow

for adjustments in the stop-loss attachment points to account for

inflation; that is, as health care costs increase, the limits need to

be raised accordingly. Otherwise, the stop-loss coverage provided by

the prepaid plan would become unduly and inappropriately comprehensive.

Response: Based on actuarial analyses and consultation with experts

knowledgeable about current stop-loss insurance practices, this final

rule makes a number of changes to the stop-loss provision. Because many

of the stop-loss arrangements currently in place differentiate between

professional services and hospital or other institutional services, we

are revising Sec. 417.478(g)(2)(ii) to permit prepaid plans and

physician groups to choose either a single combined limit or separate

limits for professional services and institutional services. We are

also revising the categories of patient panel size to increase the

number of categories and smooth out the gradation of attachment points.

This final rule establishes the following limits:

[[Page 69045]]

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

Single Separate Separate

Panel Size Combined Institutional Professional

Limit Limit Limit

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

1-1000........................ * $6,000 * $10,000 * $3,000

1,001-5000.................... 30,000 40,000 10,000

5,001-8,000................... 40,000 60,000 15,000

8,001-10,000.................. 75,000 100,000 20,000

10,001-25,000................. 150,000 200,000 25,000

> 25,000...................... none none none

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

The asterisks indicate that, at this level, stop-loss insurance is

impractical. The premiums would be prohibitively expensive. Plans and

physician groups clearly should not be putting physicians at financial

risk for panel sizes this small. It is our understanding that doing so

is not common. For completeness, however, we do show what the limits

would be in these circumstances.

In regard to the comments on bonuses and withholds, we specifically

indicated that when bonuses and withholds put physicians at substantial

financial risk, the physicians need to have stop-loss protection. The

legislation and regulation require that all forms of incentive

arrangements that put physicians at substantial financial risk have

stop-loss protection. Even though current stop-loss policies may not

cover bonuses and withholds, this is the requirement of this

regulation. Thus, if current policies do not cover these arrangements,

the prepaid plans, physician groups, and/or the reinsurance companies

must arrange for protection against losses that can occur due to

withholds or the potential loss of bonus payments.

With regard to the suggestion that we account for inflation, we

will be periodically reviewing the requirements of this regulation in

light of new or more complete information about compensation

arrangements and their impact on patients. We will consider this and

other recommendations again in the future.

Comment: A commenter asked how frequently panel size can be updated

and how soon this increased panel size can be reflected in higher stop-

loss limits for the group. The commenter also asked whether an HMO that

increases enrollment in a physician panel and correspondingly raises

its stop-loss limits must refile its physician incentive arrangement

with us.

Response: There is no limitation on the frequency with which panel

size can be updated.

Comment: One commenter noted that the stop-loss protection required

by this regulation would cover only 90 percent of the costs of referral

services that exceed 25 percent of potential payments. The commenter

believed that the financial incentive to reduce or withhold referral

services to Medicare patients could, in this situation, be

overwhelming. The commenter said this would be particularly true in

situations in which the physician treated an atypical mix of patients

requiring referrals for specialty care.

Response: We adopted our position based upon comments on the

proposed rule. As indicated in the preamble to the March 27, 1996 final

rule, this policy is currently used by many prepaid plans and has

worked well to ensure that physicians are sensitive to avoid the

furnishing of unnecessary services. Recent information from prepaid

plans and actuaries confirms that this 90/10 standard is consistent

with actual practices and policies. We set the ratio at the high end of

the continuum of ratios used in the industry since they range from 90/

10 to 75/25. Thus, we have allowed for limited risk sharing beyond the

stop-loss limits. Further, as indicated in the preamble to the March

1996 rule, we made changes in the stop-loss limits to adjust for the

incorporation of this additional risk sharing.

Comment: A major organization representing physicians believed that

we should require a reduced, but still substantial, amount of stop-loss

for plans with enrollment in excess of 25,000 patients.

Response: As stated earlier, evidence from analyses by Rossiter and

Adamache supports the decision that physician groups with more than

25,000 patients are able to adequately spread risk. Therefore we

concluded that they are not at substantial financial risk. The

commenter did not provide any data or rationale that would lead us to a

different conclusion. Note also that the change made by this final rule

discussed earlier that eliminates pooling by the prepaid plan across

physician groups to achieve the 25,000 base should alleviate the

commenter's concern.

Survey

We received a single comment on the enrollee survey provisions in

the rule. Section 417.479(g)(1) requires that HMOs or CMPs that operate

incentive plans that place physicians or physician groups at

substantial financial risk conduct enrollee surveys. These surveys

must--

Include either all current Medicare/Medicaid enrollees of

the HMO or CMP and those who have disenrolled (other than because of

loss of eligibility in Medicaid or relocation outside the HMO's or

CMP's service area) in the past 12 months, or a sample of these same

enrollees and disenrollees.

Be designed, implemented, and analyzed in accordance with

commonly accepted principles of survey design and statistical analysis.

Address enrollees/disenrollees satisfaction with the

quality of the services provided and their degree of access to the

services.

Be conducted no later than 1 year after the effective date

of the incentive plan, and at least every 2 years thereafter.

Comment: A major organization suggested that we require health

plans to use a standardized survey questionnaire designed by HCFA;

require health plans to oversample disenrollees and persons with

chronic conditions or high cost illnesses; provide detailed

instructions to plans on survey design; and publish a comparison report

card of all survey results.

Response: The final rule did not specify that the plans conduct a

separate survey for this regulation because most plans already

administer surveys that meet the requirements of this regulation. We

do, however, recognize the value of having a standardized survey

instrument and have developed one, as part of our effort to measure and

improve quality of care, that can be used to satisfy the requirements

of this regulation.

We have, in concert with the Agency for Health Care Policy and

Research through the latter's CAHPS process

[[Page 69046]]

(Consumer Assessments of Health Plans Study), sponsored the development

of a Medicare-specific consumer satisfaction instrument, so that the

unique health care concerns of the senior population are adequately

addressed. CAHPS is a 5-year project whose purpose is to develop a set

of standardized consumer satisfaction instruments usable across all

populations; subpopulation specific modules are being developed not

only for the Medicare population, but also for Medicaid, the

chronically ill and disabled, and children.

We have notified plans of our intention to require all Medicare

contracting plans that have had a Medicare contract for at least 1 year

as of January 1, 1997 to participate in this CAHPS survey. The CAHPS

Medicare survey will be administered by an independent third-party

contractor to the Government, secured through an open, competitive

bidding process. The primary purpose of the survey is to provide

information to consumers that will enable them to make plan-to-plan

comparisons and thereby to make better-informed health plan choices.

Key results of the survey will be published in a comparability chart

that contains cost and benefit information on all Medicare contracting

plans.

We will consider participation by a plan in the CAHPS survey as

satisfying the requirements of this regulation, subject to the

following two additional considerations. First, the current version of

CAHPS does not contain a module addressed to disenrollees. Efforts are

underway to develop such a module, which may be available by 1998. For

1997, we are preparing guidelines to managed care plans on how to

satisfy the requirement to survey disenrollees. That guidance will be

available in the spring of 1997.

Second, as noted above, under the requirements of our quality

initiative, plans that received their initial Medicare contract after

January 1, 1996, are not required to participate in the CAHPS survey

until calendar year 1998. There will likely be plans, however, that

received their first contract after January 1, 1996, that will be

required to meet the enrollee and disenrollee survey requirements of

this regulation in calendar year 1997. Those plans may wish to use the

CAHPS survey to meet this requirement.

We have issued an operational policy letter explaining this

requirement in more detail (See OPL number 96.045, December 3, 1996).

Oversampling for the chronically ill and disabled, dually eligible,

and various racial and ethnic groups is a complex issue. Strategies for

doing so are being seriously considered. We will be forwarding

additional guidance to managed care plans.

It should also be noted that the CAHPS survey collects information

at the level of the managed care plans, without distinguishing among

patients of various physician groups within the plan. Ideally, the

survey required under this regulation, however, should do so. We will

accept the CAHPS survey as satisfying this regulation at this time,

while we continue to evaluate additional measures that might be taken

to collect information by physician group.

Finally, we will not require that the Medicaid version of the CAHPS

survey be administered by HMOs with Medicaid contracts. However, we are

willing to assist States that wish to require administration of the

CAHPS Medicaid survey.

Other Comments

We received other comments that were not specifically directed to

the provisions of the regulation. Since these comments do not directly

address the regulations, we are not responding to them in this

preamble.

We also want to clarify an inconsistency that occurred in the

preamble to the March 27, 1996 final rule. While the regulation text

was accurate in specifying that subcontracts were covered by the

regulations, we were inconsistent in different sections of the

preamble. In the first column at 61 FR 13439, we indicated that

subcontracts are covered, while in the second and third column of the

same page we indicated that they were not covered. The statements in

the second and third column were incorrect.

V. Provisions of this Final Rule

This final rule reflects the March 27, 1996 final rule with comment

period, with changes. Many of the substantive change listed below have

been discussed in section IV of this preamble. Those that have not are

explained below.

Section 417.479(b) is revised to clarify that the

physician incentive plan requirements also apply to subcontracting

arrangements.

Section 417.479(f), which describes arrangements that

cause substantial financial risk, is revised to permit pooling by

physician groups of patients across prepaid plans. A technical change

is also made to change ``possible payments'' wherever it appears to

``potential payments''. This latter change reflects the fact that

``potential payments'' is the term defined in the paragraph's

introductory text.

In Sec. 417.479(g), which sets forth the requirements that

HMOs and CMPs that place physicians or physician groups at substantial

financial risk must meet, the following changes are made:

+ Paragraph (g)(1) is revised to require that the enrollee survey

be conducted no later than 1 year after the effective date of the

Medicare contract and at least annually thereafter.

+ Paragraph (g)(2)(ii) is revised to establish new stop-loss limits

based either on a single combined limit or on separate limits for

professional services and institutional services.

+ Paragraph (g)(2)(iii) is removed to eliminate the requirement

that the HMO or CMP pay for the stop-loss protection.

In Sec. 417.479(h), which concerns disclosure

requirements, the following changes are made:

+ Paragraph (h)(1)(iv) is revised to specify that the HMO or CMP

must provide us with proof that the physician or physician group has

adequate stop-loss protection, including the amount and type of stop-

loss protection.

+ Existing paragraph (h)(1)(v) is removed to eliminate, as an

approved method of pooling, pooling together, by the organization, of

several physician groups into a single panel. A new paragraph (h)(1)(v)

is added to permit pooling, by a physician group, of patients across

prepaid plans. New paragraph (h)(1)(v) also specifies the conditions

under which pooling is permitted.

+ Paragraph (h)(2) is revised to change when the HMO or CMP must

provide the required information. The current regulation requires this

to be done upon application for a contract, upon application for a

service area expansion, within 30 days of a request by us, and at least

45 days before implementing certain changes in the incentive plan. We

have changed this to make it an annual requirement. This first

submission must be done prior to approval of a new contract, with

subsequent submissions prior to each renewal of the contract. This

change is intended to simplify the requirement and reduce the reporting

burden on the prepaid plans.

In addition we now specify, in paragraph (h)(2)(ii), that an HMO or

CMP must provide the capitation data for the previous calendar year to

us by April 1 of each year. This change is being made to eliminate

confusion about the reporting period and ensure consistency.

In Sec. 434.70, which concerns conditions for FFP,

paragraph (a)(3) is revised to--

+ Eliminate the requirement that the HMO or HIO must disclose

certain

[[Page 69047]]

information within 30 days of a request by the State or HCFA.

+ To specify that an HMO or HIO must provide the capitation data

for the previous calendar year to the State Medicaid agency by April 1

of each year.

+ Eliminate the requirement that the HMO or HIO submit the required

information at least 45 days before implementing certain changes in its

incentive plan.

VI. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995, agencies are required to

provide 60-day notice in the Federal Register and solicit public

comment before a collection of information requirement is submitted to

the Office of Management and Budget (OMB) for review and approval. This

final rule contains information collections that are subject to review

by OMB under the Paperwork Reduction Act of 1995. The title,

description, and respondent description of the information collections

are shown below with an estimate of the annual reporting and

recordkeeping burden. Included in the estimate is the time for

reviewing instructions, searching existing data sources, gathering and

maintaining the data needed, and collecting and reviewing the

collection of information.

We are, however, requesting an emergency review of these

regulations. In compliance with the requirement of section

3506(c)(2)(A) of the Paperwork Reduction Act of 1995, we have submitted

to OMB the following requirement for emergency review. We are

requesting an emergency review because the collection of this

information is needed prior to the expiration of the normal time limits

under OMB's regulations at 5 CFR part 1320, to ensure compliance with

the physician incentive regulation necessary to implement congressional

intent with respect to incentive arrangements between managed care

entities and their contracting providers. We cannot reasonably comply

with the normal clearance procedures because public harm is likely to

result due to the delay in reporting and monitoring of these

incentives. If emergency clearance is not provided, we will be forced

to postpone the collection of these data for 12 months due to the

timing of contract cycles.

We are requesting that OMB provide a 5-day public comment period

with a 2-day OMB review period and a 180-day approval. During this 180-

day period, we will publish a separate Federal Register notice

announcing the initiation of an extensive 60-day agency review and

public comment period on these requirements. Then we will submit the

requirements for OMB review and an extension of this emergency

approval.

Type of Information Request: New collection.

Title of Information Collection: Incentive Arrangement Disclosure

Form and Supporting Regulations 42 CFR 417.479 (g)(1), 417.479(h)(1)

and (h)(2), 417.479(i), and 434.70(a)(3).

Form Number: HCFA-R-201.

Use: Incentive Arrangement Form and supporting regulations will be

used to monitor physician incentive plans.

Frequency: Annually.

Affected Public: Nonprofit and for profit HMOs, CMPs, and HIOs.

Number of Respondents: 450.

Total Annual Responses: 450.

Total Annual Hours Requested: 45,000.

To request copies of the proposed paperwork collections referenced

above, call the Reports Clearance Office at (410) 786-1326.

The sections in these final regulations that contain information

collection requirements are:. Secs. 417.479 (h)(1) and (h)(2),

417.479(i), 434.70(a)(3), and 417.479(g)(1), (and Sec. 434.70(a)(3) for

Medicaid) of this document. However, the information collection

requirements referenced in Secs. 417.479(g)(1) and 434.70(a)(3) of this

final rule, described below, are currently pending approval by OMB

(under the title ``HEDIS 3.0 (Health Plan Data and Information Set) and

supporting regulations 42 CFR 417.470 and 42 CFR 417.126'').

The information collection requirements at existing

Secs. 417.479(h) (1) and (h)(2), 417.479(i), and 434.70(a)(3) were

established by the March 27, 1996 final rule with comment period. These

sections of the regulations specify that disclosure concerning

physician incentive plans must be made to us or the State, as

appropriate. The requirements apply to physician incentive plans

between prepaid plans and individual physicians or physician groups

with whom they contract to furnish medical services to enrollees. The

requirements apply only to physician incentive plans that base

compensation on the use or cost of services furnished to Medicare

beneficiaries or Medicaid recipients. Under the existing regulations, a

prepaid plan must provide the information upon application for a

contract; upon application for a service area expansion; at least 45

days before implementing certain changes in its incentive plan, and

within 30 days of a request by us or the State. This rule would amend

the regulations by removing the requirements that disclosure be made

upon application for a service area expansion, within 30 days of a

request by us or the State, and at least 45 days before implementing

certain changes in the incentive plan. It would add that disclosure

must be made prior to the approval of a new contract or agreement and

annually thereafter. These changes should reduce the reporting burden

on prepaid plans. At the time we published the March 1996 rule, we

estimated that approximately 600 entities will submit the information.

We estimated the burden as 8 hours per response. As discussed in

section IV above, we received numerous comments stating that we greatly

underestimated the burden associated with complying with the disclosure

requirements and suggesting alternative approaches. We now estimate

that approximately 450 prepaid plans will disclose information. We

estimate that the burden per response will be 100 hours, for an annual

total burden of 45,000 hours. This estimate includes time spent by

subcontractors in furnishing information to the prepaid plan.

Existing Sec. 417.479(g)(1) (and Sec. 434.70(a)(3) for Medicaid)

concern prepaid plans that operate physician incentive plans that place

physicians or physician groups at substantial financial risk and

require them to conduct enrollee surveys that include either all

current Medicare/Medicaid enrollees in the prepaid plan and those who

have disenrolled (other than because of loss of eligibility in Medicaid

or relocation outside the prepaid plan's) in the past 12 months, or a

sample of these same enrollees and disenrollees. These surveys are

required to be conducted annually.

The information collection and recordkeeping requirements,

referenced in Sec. 417.479 (h)(1) and (h)(2), 417.479(g)(1),

417.479(i), and 434.70(a)(3) of these regulations are not effective

until they have been approved by OMB. The agency has submitted a copy

of this final rule with comment period to OMB for its review of these

information collections. A notice will be published in the Federal

Register when approval is obtained. Interested persons are invited to

send comments regarding this burden or any other aspect of these

collections of information, including any of the following subjects:

(1) The necessity and utility of the information collection for the

proper performance of the agency's functions; (2) the accuracy of the

estimated burden; (3) ways to enhance the quality, utility, and clarity

of the information to be collected; and (4) the use of automated

collection

[[Page 69048]]

techniques or other forms of information technology to minimize the

information collection burden.

Comments on these information collections should be mailed directly

to the following address:

Office of Information and Regulatory Affairs, Office of Management

and Budget, Room 10235, New Executive Office Building, Washington, DC

20503, Attn: Allison Herron Eydt, HCFA Desk Officer.

In addition, comments may be faxed to: Allison Herron Eydt at (202)

395-6974.

A copy of the comments may be mailed to the following address:

Health Care Financing Administration, Office of Financial and Human

Resources, Management Analysis and Planning Staff, Room C2-26-17, 7500

Security Boulevard, Baltimore, MD 21244-1850.

We will also be undertaking an overall evaluation of all of the

reporting and disclosure requirements in this regulation within the

next year, to assess the value of the information compared with the

burden of reporting. All of the disclosure and reporting requirements,

and any related forms, will continue to be subject to review under the

Paperwork Reduction Act.

VII. 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. For purposes of the

RFA, we consider all HMOs, CMPs, and HIOs to be small entities.

In addition, section 1102(b) requires the Secretary to prepare a

regulatory impact analysis if a rule may have a significant impact on

the operations of a substantial number of small rural hospitals. This

analysis must conform to the provisions of section 604 of the RFA. For

purposes of section 1102(b), we define a small rural hospital as a

hospital that is located outside of a Metropolitan Statistical Area and

has fewer than 50 beds.

In the preamble to the March 27, 1996 rule, which provided an

opportunity for comments, we stated that we had decided not to prepare

a regulatory flexibility analysis because we believed that few

incentive plans will require changes to comply with the regulations. A

major association of health plans, which submitted comments on behalf

of its membership, strongly disagreed with this position.

The association maintained that the regulations, as adopted, will

result in substantial administrative and financial burdens on a large

number of organizations. The association requested that, in light of

the information it was providing to us in its other comments, we

reconsider our decision not to prepare a regulatory impact analysis.

A number of commenters believed that, in estimating a burden of 8

hours per response, we had grossly underestimated the time and

financial resources that need to be expended to comply with the

disclosure requirements. These commenters stated that this problem may

be alleviated to some extent if the prepaid plans were allowed to agree

that all or some of their physician incentive programs resulted in

substantial financial risk without having to disclose to us the

detailed information specified in the Regulations. One commenter added

that the regulations, in essence, require prepaid plans to act as

information gathering conduits for information related to physician

group and/or subcontractor incentive plans. The commenter stated that

this is not the most efficient or effective means and that a preferable

approach is for us to solicit the information directly from the

physician group or subcontractor. The commenter recommended that we

adopt a uniform and standardized calculation and attestation form that

prepaid plans could use to solicit the information.

Another commenter stated that the stop-loss limits are

inappropriately low and, because of this, the cost of stop-loss

coverage is very high. The commenter maintains that this rule results

in substantial financial burdens on a large number of prepaid plans.

The suggestions offered by the commenters have been addressed in

section IV above. With regard to our assessment of the impact of the

March 27, 1966 rule, we have reviewed our assessment. In this review,

we used information developed by a major accounting firm at the request

of a major association, which was shared with us.

Based on survey data from Mathematica (1995), approximately one-

third of prepaid plans capitate their physicians for all services. This

means that, of approximately 300 Medicare prepaid plans, about 100

plans will capitate for all services. Of approximately 300 Medicaid

HMOs and HIOs, approximately one-half will have Medicare contracts and,

thus, do not add to the total. Of the remaining 150 Medicaid plans,

many will be relatively new Medicaid plans. Most new Medicaid plans do

not capitate their physicians for all services. Therefore, we estimate

that there will be a total of 25 Medicaid prepaid plans in addition to

the 100 Medicare plans that capitate for all services. These 125 plans

will have to provide stop-loss insurance. Very few plans that use

bonuses or withholds will exceed the substantial risk threshold.

Of the 125 plans that will need to provide stop-loss insurance,

most of these plans already have such coverage. Taking into account the

changes made by this final rule, we estimate that approximately 44

prepaid plans (35 percent) will need to increase their stop-loss

coverage. The cost of this additional coverage is estimated at

approximately $65 million. Since the affected entities are large, $65

million represents a very small percentage of their gross annual

income. In addition, we expect that some of the $65 million will be

offset by monies received from the insurers because of the increased

coverage.

With regard to the financial burden associated with complying with

the disclosure requirements, we continue to estimate that approximately

450 plans will need to comply with the disclosure requirements. We now

estimate the burden to be 100 hours per response, at a cost of $20 per

hour. This includes the burden on the physician groups and

subcontractors in furnishing information to the prepaid plan. Thus, we

estimate the total impact of the disclosure requirements at $900,000

per year.

This rule changes the frequency of the survey requirements (from

biennially to annually), we believe that this imposes very little

additional burden on prepaid plans since most plans already conduct

annual surveys. In addition, as discussed in section V of the preamble,

this rule changes when disclosure must be made to HCFA or the State

Medicaid agency. While this rule adds that disclosure must be made upon

the contract or agreement renewal or anniversary date, it removes other

circumstances under which disclosure must be made. We believe the

overall effect of these changes as to when disclosure must be made is

to reduce the reporting burden on the affected prepaid plans.

We are not preparing analyses of this final rule for either the RFA

or section 1102(b) of the Act because we have determined, and the

Secretary certifies, that this rule will not have a significant

economic impact on a substantial number of small entities or a

significant economic impact on the operations of a substantial number

of small rural hospitals.

In accordance with the provisions of Executive Order 12866, this

regulation was reviewed by the Office of Management and Budget.

[[Page 69049]]

VIII. Waiver of Delayed Effective Date

We ordinarily provide for final rules to be effective no sooner

than 30 days after the date of publication unless we find good cause to

waive the delay.

This final rule amends existing regulations that set forth the

requirements that certain managed care organizations must meet in order

to contract with the Medicare and/or Medicaid program. A number of the

changes made by this final rule either reduce the burden associated

with the regulations or recognize existing industry practices. Since

many managed care Medicare and Medicaid contracts renew on January 1,

if this final rule does not become effective until after that date, the

benefits that result from the changes made by this rule will not be

realized until 1998. Therefore, we find that it would be against the

public interest to delay the effective date of this final rule.

Chapter IV of title 42 is amended as set forth below:

PART 417--HEALTH MAINTENANCE ORGANIZATIONS, COMPETITIVE MEDICAL

PLANS, AND HEALTH CARE PREPAYMENT PLANS

A. Part 417 is amended as follows:

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).

2. In Sec. 417.479, paragraph (g) introductory text and paragraph

(g)(1) introductory text are republished; paragraph (g)(2)(iii) is

removed; paragraph (b), paragraph (f) introductory text, paragraphs

(f)(5), (g)(1)(iv), (g)(2)(ii), (h)(1)(iv), (h)(1)(v), and (h)(2) are

revised to read as follows:

Sec. 417.479 Requirements for physician incentive plans.

* * * * *

(b) Applicability. The requirements in this section apply to

physician incentive plans between HMOs and CMP and individual

physicians or physician groups with which they contract to provide

medical services to enrollees. The requirements in this section also

apply to subcontracting arrangements as specified in Sec. 417.479(i).

These requirements apply only to physician incentive plans that base

compensation (in whole or in part) on the use or cost of services

furnished to Medicare beneficiaries or Medicaid recipients.

* * * * *

(f) Arrangements that cause substantial financial risk. For

purposes of this paragraph, potential payments means the maximum

anticipated total payments (based on the most recent year's utilization

and experience and any current or anticipated factors that may affect

payment amounts) that could be received if use or costs of referral

services were low enough. The following physician incentive plans cause

substantial financial risk if risk is based (in whole or in part) on

use or costs of referral services and the patient panel size is not

greater than 25,000 patients:

* * * * *

(5) Capitation, arrangements, if--

(i) The difference between the maximum potential payments and the

minimum potential payments is more than 25 percent of the maximum

potential payments; or

(ii) The maximum and minimum potential payments are not clearly

explained in the physician's or physician group's contract.

* * * * *

(g) Requirements for physician incentive plans that place

physicians at substantial financial risk. HMOs and CMPs that operate

incentive plans that place physicians or physician groups at

substantial financial risk must do the following:

(1) Conduct enrollee surveys. These surveys must--

* * * * *

(iv) Be conducted no later than 1 year after the effective date of

the Medicare contract and at least annually thereafter.

(2) * * *

(ii) If the stop-loss protection provided is based on a per-patient

limit, the stop-loss limit per patient must be determined based on the

size of the patient panel and may be a single combined limit or consist

of separate limits for professional services and institutional

services. In determining patient panel size, the patients may be pooled

in accordance with paragraph (h)(1)(v) of this section. Stop-loss

protection must cover 90 percent of the costs of referral services that

exceed the per patient limit. The per-patient stop-loss limit is as

follows:

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

Single Separate Separate

Panel size combined institutional professional

limit limit limit

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

1-1000........................ $6,000 $10,000 $3,000

1,001-5000.................... 30,000 40,000 10,000

5,001-8,000................... 40,000 60,000 15,000

8,001-10,000.................. 75,000 100,000 20,000

10,001-25,000................. 150,000 200,000 25,000

> 25,000...................... none none none

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

* * * * *

(h) * * *

(1) * * *

(iv) Proof that the physician or physician group has adequate stop-

loss protection, including the amount and type of stop-loss protection.

(v) The panel size and, if patients are pooled, the method used.

Pooling is permitted only if: it is otherwise consistent with the

relevant contracts governing the compensation arrangements for the

physician or physician group; the physician or physician group is at

risk for referral services with respect to each of the categories of

patients being pooled; the terms of the compensation arrangements

permit the physician or physician group to spread the risk across the

categories of patients being pooled; the distribution of payments to

physicians from the risk pool is not calculated separately by patient

category; and the terms of the risk borne by the physician or physician

group are comparable for all categories of patients being pooled. If

these conditions are met, the physician or physician group may use

either or both of the following methods to pool patients:

(A) Pooling any combination of commercial, Medicare, or Medicaid

patients enrolled in a specific HMO or CMP in the calculation of the

panel size.

(B) Pooling together, by a physician group that contracts with more

than one HMO, CMP, health insuring organization (as defined in

Sec. 434.2 of

[[Page 69050]]

this chapter), or prepaid health plan (as defined in Sec. 434.2 of this

chapter) the patients of each of those entities.

* * * * *

(2) When disclosure must be made to HCFA. (i) HCFA will not approve

an HMO's or CMP's application for a contract unless the HMO or CMP has

provided to it the information required by paragraphs (h)(1)(i) through

(h)(1)(v) of this section. In addition, an HMO or CMP must provide this

information to HCFA upon the effective date of its contract renewal.

(ii) An HMO or CMP must provide the capitation data required under

paragraph (h)(1)(vi) for the previous calendar year to HCFA by April 1

of each year.

* * * * *

PART 434--CONTRACTS

B. Part 434 is amended as follows:

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

follows:

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

1302).

2. In Sec. 434.44, paragraph (a)(1) is revised to read as follows:

Sec. 434.44 Special rules for certain health insuring organizations.

(a) * * *

(1) Subject to the general requirements set forth in Sec. 434.20(d)

concerning services that may be covered; Sec. 434.20(e), which sets

forth the requirements for all contracts; the additional requirements

set forth in Secs. 434.21 through 434.38; and the Medicaid agency

responsibilities specified in subpart E of this part; and

* * * * *

3. In Sec. 434.70, paragraph (a) introductory text is republished,

and paragraph (a)(3) is revised to read as follows:

Sec. 434.70 Condition for FFP.

(a) FFP is available in expenditures for payments to contractors

only for the periods that--

* * * * *

(3) The HMO, HIO (or, in accordance with Sec. 417.479(i) of this

chapter, the subcontracting entity) has supplied the information on its

physician incentive plan listed in Sec. 417.479(h)(1) of this chapter

to the State Medicaid agency. The information must contain detail

sufficient to enable the State to determine whether the plan complies

with the requirements of Secs. 417.479 (d) through (g) of this chapter.

The HMO or HIO must supply the information required under Secs. 417.479

(h)(l)(i) through (h)(1)(v) of this chapter to the State Medicaid

agency as follows:

(i) Prior to approval of its contract or agreement.

(ii) Upon the contract or agreements anniversary or renewal

effective date.

* * * * *

(Catalog of Federal Domestic Assistance Program No. 93.773,

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

Supplementary Medical Insurance Program; and Federal Domestic

Assistance Program No. 93.778, Medical Assistance Program)

Dated: December 17, 1996.

Bruce C. Vladeck,

Administrator, Health Care Financing Administration.

Dated: December 20, 1996.

Donna E. Shalala,

Secretary.

[FR Doc. 96-33330 Filed 12-30-96; 8:45 am]

BILLING CODE 4120-01-P