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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 417 and 434

Office of Inspector General

42 CFR Part 1003

[OMC-010-FC]

RIN 0938-AF74

Medicare and Medicaid Programs; Requirements for Physician

Incentive Plans in Prepaid Health Care Organizations

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

Inspector General (OIG), HHS.

ACTION: Final rule with comment period.

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SUMMARY: This final rule amends the regulations governing 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. It implements requirements in sections

4204(a) and 4731 of the Omnibus Budget Reconciliation Act of 1990 that

concern physician incentive plans.

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 (the Act) as amended by the Omnibus

Budget Reconciliation Act of 1993 (OBRA '93). Section 1877 provides

that, if a physician (or an immediate family member of the physician)

has a financial relationship with certain entities (that is, has an

ownership or investment interest in the entity or a compensation

arrangement with the entity), the physician may not make a referral to

the entity for the furnishing of certain health services for which

payment otherwise may be made under the Medicare program. Additionally,

effective December 31, 1994, section 1903(s) of the Act provides for

denial of Federal financial participation payment under the Medicaid

program to a State for expenditures for certain health services

furnished to an individual on the basis of a physician referral that

would result in denial of payment under the Medicare program if

Medicare covered the services in the same manner as they are covered

under the State plan.

Among other amendments, section 13562 of OBRA '93 sets forth an

exception to the physician referral prohibition that, in effect,

incorporates the provisions of this final rule. That is, it provides

that, under certain circumstances, compensation received under a

personal services arrangement that meets the physician incentive plan

requirements established by the Secretary does not trigger the ban on

referrals. Thus, the provisions of this final rule have implications

for entities that would not have been affected at the time we published

the proposed rule (December 14, 1992). (The proposed rule applied to

only prepaid health plans that contract with Medicare or Medicaid under

section 1876 or 1903(m) of the Act, respectively.) OBRA '93 applies the

requirements to any prepaid health care organization that bills

Medicare or Medicaid. The additional organizations that may be affected

include preferred provider organizations, health maintenance

organizations that do not contract with Medicare or Medicaid and are

not Federally qualified, prepaid health plans that contract with

Medicaid, and some States that contract with managed care organizations

under the Medicaid program (including those that operate under a

section 1115 waiver).

DATES: Effective dates. These regulations are effective on April 26,

1996.

Comment dates. To be considered, comments must be mailed or

delivered to the appropriate address, as provided below and must be

received by 5 p.m. on May 28, 1996.

Compliance dates. Affected organizations with contracts or

agreements on March 27, 1996 must comply with (1) the applicable

disclosure requirements at Sec. 417.479(h)(1)(i) through (h)(1)(v) or

with Sec. 434.70(a)(3) of this rule by May 28, 1996 or by the renewal

date of the contract or agreement, whichever is later, and (2) the

survey requirement at Sec. 417.479(g)(1)(iv) and the disclosure

requirement at Sec. 417.479(h)(1)(vi) by March 27, 1997. Affected

organizations must comply with all other requirements by May 28, 1996.

ADDRESSES: Mail written comments (1 original and 3 copies) to the

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: OMC-010-FC, P.O. Box 26688,

Baltimore, MD 21207.

If you prefer, you may deliver your written comments (1 original

and 3 copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue SW.,

Washington, DC 20201, or

Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.

Because of staffing and resource limitations, we cannot accept

comments by facsimile (FAX) transmission. In commenting, please refer

to file code OMC-010-FC. Comments received timely will be available for

public inspection as they are received, generally beginning

approximately 3 weeks after publication of a document, in Room 309-G of

the Department's offices at 200 Independence Avenue SW., Washington,

DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m.

(phone: (202) 690-7890).

FOR FURTHER INFORMATION CONTACT: Medicare: Tony Hausner, (410) 786-

1093. Medicaid: Beth Sullivan, (410) 786-4596. Office of Inspector

General: Joel Schaer, (202) 619-0089.

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.

[[Page 13431]]

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 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. Section 1876 of the Act also

provides for Medicare payment at predetermined rates to eligible

organizations that have entered into risk-based contracts under

Medicare or for Medicare payment of reasonable costs to eligible

organizations that have entered into cost-reimbursed contracts under

Medicare. Implementing Federal regulations for the organization and

operation of Medicare prepaid health care organizations, contract

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

through 417.694.

Risk-based organizations are paid a prospectively-determined per

capita monthly payment for each Medicare beneficiary enrolled in the

organization. This capitated payment 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 their

contracts with organizations (HMOs or 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:

(1) The HMO or HIO rates are actuarially sound; (2) the rates do not

exceed the cost of providing the same scope of services, to an

actuarially equivalent nonenrolled population group, on a fee-for-

service basis; and (3) the contract meets the additional requirements

at 42 CFR part 434 (``Contracts'') and 45 CFR part 74 (``Administration

of Grants'').

II. Legislative 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.

As noted earlier (in the ``Summary'' section), subsequent to the

December 1992 publication of the proposed rule, the Omnibus Budget

Reconciliation Act of 1993 (OBRA '93), Public Law 103-66, was enacted.

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

prohibits physician referrals to entities with which the physician (or

an immediate family member) has a financial relationship (which can

consist of either (1) an ownership or investment interest or (2) a

compensation arrangement). 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 personal services

compensation arrangement involves compensation that varies based on the

volume or value of referrals.

This exception affects managed care organizations that were not

specified in the December 1992 proposed rule on physician incentive

plans. The proposed rule applied to only prepaid plans that contract

with Medicare or Medicaid under section 1876 or 1903(m) of the Act,

respectively. The OBRA '93 physician referral provisions, however,

apply to any entity with an incentive plan that bills Medicare or

Medicaid. The additional organizations that may be affected include

preferred provider organizations, HMOs that do not contract with

Medicare or Medicaid and are not Federally qualified, and prepaid

health plans'' (PHPs) that contract with Medicaid. (PHPs are

organizations that are exempt from section 1903(m) of the Act.) Some

States that contract with managed care organizations under the Medicaid

program (including those that operate under a section 1115 waiver)

[[Page 13432]]

may also be affected. We believe that most prepaid health care

organizations will not be affected by these provisions since they apply

only if (1) the physician incentive plan includes services not

furnished by the physician group, and (2) there is a compensation

arrangement between the physician group and the entity furnishing the

services.

III. Opportunity for Public Comment

Because there may be entities that were not affected by the

proposed rule at the time it was published but are now affected, we are

publishing this rule as a final rule with a 60-day comment period so

that these newly-affected entities have an opportunity to comment. Note

also, we will incorporate the OBRA '93 amendments to section 1877 of

the Act into a final rule with comment covering the physician referral

prohibition as it relates to referrals for clinical laboratory

services. We will also publish a proposed rule to interpret or clarify

these OBRA '93 amendments as they relate to referrals for all of the

health services designated in section 1877 of the Act, including

clinical laboratory services. Once these rules are published, entities

will have had several opportunities to comment on the interaction

between the physician referral prohibition in section 1877 and the

physician incentive rules.

We are also providing the 60-day comment period because we are

interested in receiving comments on the changes from the proposed rule.

For example, we are particularly interested in receiving comments on

the thresholds we have set for determining substantial financial risk

and for determining per-patient stop loss limits.

Because of the large number of items of correspondence we normally

receive on a rule, we are not able to acknowledge or respond to them

individually. We will, however, consider all comments that we receive

by the date specified in the DATES section of this preamble and, if we

publish a subsequent document, we will respond to the comments in that

document.

IV. Discussion of Physician Incentive Plans

Effective utilization control that identifies both underutilization

and overutilization is essential for the efficient operation of prepaid

health care organizations. A prepaid health care organization needs to

minimize overutilization of services not only to prevent unnecessary

spending, but also to reduce the risk of unnecessary and intrusive

procedures. Nonetheless, a prepaid health care organization also needs

to ensure that all medically necessary services are furnished both to

protect patient health and to avoid the need for more costly care

later. Medicare and Medicaid require both cost-reimbursed and risk

organizations to have internal quality assurance programs, external

quality review or medical audits, and other mechanisms to ensure proper

delivery of health care services. Medicare and Medicaid contracts also

are subject to periodic monitoring for compliance. In addition,

sections 1876(i)(6) and 1903(m)(5) of the Act provide for intermediate

sanctions and civil money penalties that may be imposed if an HMO or

CMP fails substantially to provide medically necessary services.

(Regulations implementing this authority were published on July 15,

1994 (59 FR 36072).

One mechanism many prepaid health care organizations use to

encourage proper utilization is a financial incentive as part of a

physician incentive plan. OBRA '90 defines a physician incentive plan

as any compensation arrangement between an eligible organization and a

physician or physician group that may directly or indirectly have the

effect of reducing or limiting services furnished with respect to

individuals enrolled in the organization.

A review and analysis of physician incentive plans in a sample of

HMOs was conducted and presented in the Department's 1990 report to the

Congress, ``Incentive Arrangements Offered by Health Maintenance

Organizations and Competitive Medical Plans to Physicians.'' The

results showed a wide variety of incentive plans. There were

differences in the types of incentive payments, the distribution of

incentives, the basis for determining the incentive payments, and the

parties or entities the incentives affected.

Physicians in prepaid health care organizations generally receive

fee-for-service payments, salary, or capitation payments (a set dollar

amount per patient) for the services they furnish. Financial incentives

may be used with the various types of physician payments to encourage

appropriate levels of referral services. Referral services are any

specialty, inpatient, outpatient, or laboratory services that a

physician arranges for but does not provide directly. Prepaid health

care organizations may hold physicians or physician groups at risk for

all or a portion of the cost of referral services so that they have a

financial incentive to arrange for the furnishing of only medically

necessary services. If the physician or physician group successfully

controls the levels of referral services, the physician or group may

receive additional compensation (an incentive payment) from the prepaid

health care organization. The incentive payment may take the form of

unused capitation, a returned withhold, or a bonus payment. Each of

these methods is described below.

A capitation payment is a set dollar amount per patient per month

that a prepaid health care organization pays to a physician or a

physician group to cover a specified set of services, without regard to

the actual number of services furnished to each person. The capitation

may cover the physician's own services, referral services, or all

medical services and/or administrative costs. If patient costs exceed

the capitation amount, the physician or physician group must absorb

these additional costs. If costs are below the capitation, the

physician or physician group may keep the additional money.

Withholds are percentages of payments or set dollar amounts that a

prepaid health care organization deducts from each physician's or

physician group's payment (salary, fees, or capitation). The amount

withheld is set aside in pools to pay for specialty referral services

and inpatient hospital services. If referral costs exceed a prepaid

health care organization's budget, part or all of the withhold may be

forfeited depending on the terms of the physician's contract. If

referral costs do not exceed the ceiling, part or all of the withhold

may be returned to a physician or a physician group. Some plans limit

the amount of the risk to the withhold; others hold the physician or

physician group liable for amounts beyond the amount withheld.

Bonuses are payments prepaid health care organizations make to a

physician or a physician group beyond the physician's set salary, fee-

for-service payments, or capitation. Bonuses may be based on a

physician's or physician group's level of referral services or may be

based on the overall performance of the organization.

If the physician or physician group has excessive referrals (as

defined by the prepaid health care organization), it may not receive

any incentive funds. In addition, the prepaid health care organization

may hold the physician or physician group liable for referral costs

that exceed a specified threshold. The prepaid health care organization

may also increase the physician's or physician group's withhold or make

other changes in its incentive arrangements.

[[Page 13433]]

Many physician incentive plans incorporate stop-loss protection to

limit the liability of the physician or physician group. Most often,

the stop-loss protection limits a physician's maximum liability per

patient to a specific dollar amount.

Other variables may affect the amount of risk or the effect of

financial incentives on physicians; for example, whether incentive

payments are calculated according to each individual physician's

performance or according to a physician group's performance; the size

of the physician group; the length of time over which performance is

evaluated; the number of enrollees; and the amount of total income at

risk. In addition, the relative health status of the patients involved

affects the level of risk. If because of their health status the

patients served require more services than the average enrollee, the

risk increases. Conversely, if they are healthier than the average

enrollee, the risk may be lower.

V. Provisions of the Proposed Regulations

On December 14, 1992, we published a proposed rule (57 FR 59024)

that set forth our proposal for implementing the requirements of

sections 1876(i) and 1903(m) of the Act as amended, respectively, by

sections 4204(a) and 4731 of OBRA '90. Sections 1876(i)(8) and

1903(m)(2)(A)(x) of the Act require that physician incentive plans be

regulated, and sections 1876(i)(6)(A) and 1903(m)(5)(A) provide

penalties for violation of the regulation. To implement these

provisions for Medicare, we proposed to impose new contract

requirements pertaining to physician incentive plans. For Medicaid, we

proposed new requirements for the granting of FFP for State Medicaid

agency contracts with HMOs and HIOs. The requirements address--

The scope of the regulation;

Disclosure requirements;

Criteria for the determination of substantial financial

risk;

Requirements for physician incentive plans that place

physicians at substantial financial risk;

Prohibition on certain physician payments; and

Enforcement.

Each proposed requirement is summarized individually below. Readers who

desire more specifics are referred to the proposed rule.

A. Scope

Because sections 4204(a)(2) and 4731 of OBRA '90 amended sections

that govern Medicare and Medicaid contracts, but did not amend title

XIII of the Public Health Service Act, which governs all Federally-

qualified HMOs, we proposed to apply these requirements to only

physician incentive plans that base incentive payments (in whole or in

part) on services provided to Medicare beneficiaries or Medicaid

recipients. Nonetheless, because relevant statutory language uses the

term ``individuals enrolled with the organization,'' which could be

interpreted as all of an organization's enrollees, not just Medicare or

Medicaid enrollees, we specifically sought comments regarding the

proposed scope of the regulations.

B. Disclosure

We proposed that an HMO, CMP, or HIO disclose to HCFA (for

Medicare) or to the State Medicaid agency (for Medicaid) information on

physician incentive plans that affect Medicare beneficiaries or

Medicaid recipients that is sufficient for us or the States to

determine whether the organization is in compliance with our

requirements. We also proposed when submittal of the information would

be required.

C. Substantial Financial Risk

We proposed that a physician or physician group is considered to be

at substantial financial risk if more than a specified percentage (the

risk threshold) of the prepaid health care organization's total

potential payments to the physician or physician group is at risk and

the risk is based on the costs of services the physician or physician

group does not provide (for example, referrals to specialists or the

cost of inpatient care).

For purposes of determining substantial financial risk, we proposed

to define payments as any amounts the organization pays physicians or

physician groups for services they provide, plus amounts paid for

administration and controlling levels or costs of referral services. We

proposed that payments do not include bonuses or other forms of

compensation that are not based on referral levels (such as bonuses

based solely on the quality of care provided, patient satisfaction, and

participation on committees).

Under our proposal, the risk threshold that determines substantial

financial risk would depend on the frequency with which the health plan

assesses or distributes incentive payments. We proposed that, for

prepaid health care organizations that assess or distribute incentive

payments no more often than annually, the risk threshold is 25 percent.

The risk threshold we proposed for prepaid health care organizations

that assess or distribute incentive payments more often than annually

was 15 percent.

Often, prepaid health care organizations use more than one type of

compensation arrangement. If more than one type of arrangement is used,

we proposed to consider all the different risk arrangements placed on

physicians or physician groups to determine whether they collectively

exceeded either of the thresholds.

D. Requirements for Physician Incentive Plans That Place Physicians at

Substantial Financial Risk

1. Enrollee Surveys

We proposed that HMOs, CMPs, and HIOs that place their physicians

or physician groups at substantial financial risk must conduct enrollee

surveys at least annually. We proposed that the surveys must--

Either survey all current Medicare/Medicaid enrollees in

the organization and those who have disenrolled (due to other than loss

of eligibility in Medicaid) in the past 12 months, or survey a

statistically valid sample of these same enrollees and disenrollees;

Be designed, conducted, and results analyzed in accordance

with commonly accepted principles of survey design and statistical

analysis; and

Address enrollees'/disenrollees' satisfaction with the

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

services.

2. Stop-loss Protection

We proposed two levels of stop-loss protection depending on the

incentive plan's risk threshold. If the risk threshold is 25 percent,

the stop-loss protection must protect physicians and physician groups

from losses greater than 30 percent of the payments for services they

furnish, plus payments for administrative costs and controlling levels

of referral services. If the risk threshold is 15 percent, the stop-

loss protection must protect physicians and physician groups from

losses greater than 20 percent of payments.

We proposed that the organization may provide the stop-loss

protection directly or purchase it, or the physician or physician group

may purchase it.

E. Prohibited Physician Payments

We proposed language reflecting section 1876(i)(8)(A)(i) of the

Act, which provides that physician incentive plans may operate only if

no specific payment is made directly or indirectly under the plan as an

inducement to reduce or limit medically necessary services furnished to

a specific enrollee. We

[[Page 13434]]

proposed that indirect payments include offerings of monetary value

(such as stock options or waivers of debt) measured in the present or

future.

F. Enforcement

We proposed that noncompliance with the proposed requirements

discussed above could result in civil money penalties, intermediate

sanctions, and/or contract termination (for Medicare) or withholding of

FFP (for Medicaid). The civil money penalties would be limited to

$25,000 for each determination of noncompliance. Under the intermediate

sanctions provision, HCFA could (for Medicare) suspend the enrollment

of individuals into noncompliant plans and HCFA (for Medicare) or the

State (for Medicaid) could suspend payment for new enrollees until it

is satisfied that the basis for the determination is not likely to

recur. The process for applying civil money penalties and intermediate

sanctions would be the same process as that proposed in the July 22,

1991, proposed rule on civil money penalties and intermediate sanctions

(56 FR 33404).

VI. Analysis of and Responses to Public Comments

We received 41 timely comments on the December 1992 proposed rule.

(Comments related to the provisions that were proposed in the July 1991

proposed rule on civil money penalties and intermediate sanctions and

that were merely republished in the December 1992 proposed rule were

not considered timely.) Commenters included prepaid plans, State

agencies, national and local associations of managed care providers,

physician associations, consumer advocacy groups, and an insurance

industry trade association. This section of the preamble contains a

summary of the comments and our responses.

Note: This final rule changes the CFR designation of a number of

the proposed provisions. To aid the reader, we have provided in

section VI. of this preamble, a crosswalk between the proposed

provisions and the provisions of this final rule.

Scope of Regulation

Comment: Many commenters agreed with our position that the proposed

rule should apply to only Medicare and Medicaid risk contracts. In

contrast, one commenter believed protection should be extended to plans

governed by title XIII of the Public Health Service Act but conceded

that the scope of the authorizing legislation is not clear on this

point. This commenter recommended that we seek congressional

clarification of the intent of the statute.

Response: As indicated in the preamble to the proposed regulation

(hereinafter referred to as the ``proposed preamble''), the original

legislation amended only titles XVIII and XIX of the Act. Subsequent

legislation, however, applies to all physicians that furnish services

under the Medicare or Medicaid program.

Comment: One commenter suggested that we apply the proposed

requirements only if there is a greater risk for Medicare and Medicaid

contracts than for commercial contracts.

Response: The legislation requires us to develop these regulations

for Medicare and Medicaid prepaid plans but not for commercial plans.

It does not provide us with flexibility to make this determination.

Thus, we will examine only incentive plans between a prepaid plan and a

physician or physician group that apply to Medicare and Medicaid

enrollees. We will not examine the incentive plans as they relate to

commercial enrollees, even if the commercial enrollees are in addition

to Medicare and Medicaid enrollees. The only exception to this is if

the plan uses the pooling methods described later in this preamble.

Comment: One commenter suggested that the Department of Health and

Human Services should evaluate the feasibility of applying these

regulations to accountable health plans or other health care delivery

systems that may be created under health care reform.

Response: This suggestion does not fall within the scope of this

rulemaking, which implements enacted legislation in regulations.

Comment: Some commenters stated that there are no published studies

that link quality problems to physician incentive plans. They suggest,

therefore, that the regulation be dropped. In addition, some commenters

suggested that we are only responding to pressures from press reports.

Furthermore, some commenters believed this rule would not improve

quality of care and that it would only add to the cost of care.

One commenter believed that the proposed rule is too restrictive.

The commenter stated that it would make far more sense to monitor the

health outcomes of enrollees to ensure that they are receiving quality

health care services than to micromanage the administrative

arrangements within these health organizations.

Response: We reject these recommendations for the following

reasons:

OBRA '90 requires us to issue these regulations.

While we acknowledged in the proposed preamble that no

link between quality problems and incentive plans has been established,

the issue has not been sufficiently examined. In the report to the

Congress entitled ``Incentive Arrangements Offered by Health

Maintenance Organizations and Competitive Medical Plans to Physicians''

(hereinafter referred to as the ``Report''), no study is cited that

directly tests the link. Instead the Report cites studies that show no

differences in quality between prepaid plans and fee-for-service

arrangements. From this evidence, the Report infers that incentive

plans do not affect quality. It should be noted that studies to date

have used limited outcome measures.

Furthermore, the OBRA '90 provisions that require these regulations

were enacted after the submission of the Report, confirming legislative

intent subsequent to the Report.

HCFA is sponsoring quality assurance reform initiatives in

both Medicare and Medicaid that will begin to develop outcome measures

for HMOs. HCFA's first efforts contain some outcome measures. Future

projects will develop even more of these measures. The state of the art

in outcome measures is still in the early stages and, thus, at this

time, they cannot serve as a reliable measure of potential

underutilization.

While there is no guarantee that these requirements will result in

improvements in the quality of care, the Congress was concerned with

ensuring that underuse of necessary services does not occur. We are all

concerned with ensuring adequate protection of beneficiaries and

recipients so that they have access to all necessary and appropriate

care. As indicated in both the proposed preamble and later in this

document, 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.

Comment: A major organization suggested that we examine incentive

plans only if quality problems are detected.

Response: We rejected this recommendation for the following

reasons:

The legislation does not provide for an exception if there

is an absence of quality problems.

As indicated in the Report, there are limitations in the

quality studies and methodologies used to detect quality problems.

Prohibited Arrangements

Comment: One commenter recommended that we revise proposed

[[Page 13435]]

Sec. 417.479(c) (``Prohibited physician payments'') to clarify that

medically necessary services means medically necessary covered

services.

Response: In this final rule, we have revised proposed

Sec. 417.479(c) (now designated as Sec. 417.479(d)) to include all

medically necessary services covered by the prepaid plan contract. We

have included all services covered in the contract since some plans

contain services in their Medicare and Medicaid contracts that are in

addition to those covered under the regular Medicare or Medicaid

program. Furthermore, as established under title XIX of the Act, if a

plan contracts to provide early and periodic screening and diagnosis

and treatment services, the plan is responsible for any medically

necessary Medicaid covered services, regardless of whether these

services are covered under the State plan.

Disclosure

Comment: Several commenters, including major organizations,

requested that we require disclosure of the incentive plans to all

enrollees at the time of enrollment. They believed that disclosure is

necessary to protect patients and physicians.

In contrast, several commenters, also including major

organizations, stated that incentive plans are proprietary information

and, as such, should be exempt from disclosure under the Freedom of

Information Act (FOIA).

Response: We agree that disclosure of the incentive plans to

patients can aid them in ensuring that they receive needed services.

This information in the hands of Medicare beneficiaries and Medicaid

recipients will also help physicians to counter pressure from the

prepaid plans to reduce services. At the same time, we want to protect

the proprietary aspects of the information. To effectively balance

these conflicting goals, this final rule adds new Secs. 417.479(h)(3)

and 434.70(a)(4) to require that prepaid plans provide a summary of

three items of information to Medicare beneficiaries and Medicaid

recipients, respectively, when they request it. The three items are

identified in the next response. As the prepaid plans' experience with

physician incentive plans and disclosure increases, we encourage them

to voluntarily share summaries of the incentive plans with all

enrollees. We have not asked that more information be provided for the

following reasons:

We do not want to put an undue burden on the prepaid

plans.

We do not require fee-for-service physicians to provide a

notice that they have incentives to provide excessive services.

Certain information in the incentive plans is proprietary

information and is exempt from disclosure under the FOIA.

Comment: One commenter recommends we clarify what constitutes

``sufficient information'' for disclosure purposes.

Response: This final rule revises proposed Secs. 417.479(h) and

434.70(a) to provide for two types of disclosure. Disclosure to HCFA

and the States requires that prepaid plans submit information that

describes (1) whether services not furnished by the physician or

physician group are covered by the incentive arrangement (if only the

services furnished by the physician or physician group are covered by

the incentive plan, there is no need for disclosure of other aspects of

the plan); (2) the type of incentive arrangement, for example,

withhold, bonus, capitation; (3) the percent of the withhold or bonus,

if any; (4) the amount and type of stop-loss protection; (5) the panel

size and, if enrollees are pooled according to the principles discussed

later, the method of pooling used; (6) in the case of capitated

physicians or physician groups, capitation payments paid to primary

care physicians for the most recent year broken down by percent for

primary care services, referral services to specialists, hospital

services, and other types of provider (for example, nursing homes and

home health agencies) services; and (7) in the case of those prepaid

plans that are required to conduct beneficiary surveys, the survey

results. We are requesting the information described in item 6 so that

we can determine whether additional standards are necessary in the

future.

Disclosure to Medicare beneficiaries and Medicaid recipients

requires that only a summary of the above information be made available

if requested by the beneficiary. This information will indicate, 1)

whether the prepaid plan uses a physician incentive plan that affects

the use of referral services, 2) the type of incentive arrangement, 3)

and whether stop-loss protection is provided. In addition, those

prepaid plans that must conduct enrollee surveys must provide a summary

of the survey results to those beneficiaries and recipients who request

it.

Comment: One commenter stated that disclosure should not be needed

each time there is any change in the incentive plan. A second commenter

stated that we should require disclosure only initially and when

changes occur relative to rules.

Response: We agree with these recommendations. Therefore, we have

revised proposed Sec. 417.479(h)(3) and proposed Sec. 434.70(a)(2)(ii)

to specify that an organization must provide information concerning any

of the following changes in its incentive plan: A change as to 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

provided by the physician group which the formula had not included

previously. We also specify that this information must be provided to

HCFA at least 45 days (rather than the proposed 30 days) before the

change takes effect. This latter change is made to make this rule

consistent with existing Sec. 417.428, which requires that HMOs and

CMPs submit to HCFA all marketing information 45 days in advance of

distribution. (Proposed Sec. 417.479(h)(3) is now

Sec. 417.479(h)(2)(C)(ii).)

Comment: One commenter recommended that the due date for submission

of the required information by organizations that have a contract with

us be extended from 30 days after publication of the final rule to 60

days after publication. The commenter stated that 30 days is not

sufficient for organizations to become aware of the rule, study its

details, analyze their incentive plans, and formulate disclosures that

meet the rule's requirements.

One commenter believed there should be a phase-in period for

organizations to comply with the regulations. The commenter suggested

that the phase-in period be the remainder of the term of the

organization's existing provider contract.

Response: We agree that organizations should be given more than 30

days to comply with the provisions of this rule. Since 60 days for

compliance is a standard time period used in many of our regulations,

particularly in the Medicaid program, we have extended the time period

in which organizations must comply with this rule to at least 60 days

from the date of publication. Further, we now require that

organizations with existing contracts with us comply with most of the

disclosure requirements by the date of the contract renewal or at least

60 days from the date of publication of this final rule, whichever is

later. We now require compliance with the disclosure requirement

related to capitation data within 1 year from the date of publication

of this rule. (See Dates section of this rule.)

Comment: One commenter believed that subcontracting poses an

[[Page 13436]]

impediment to an HMO's ability to comply with the disclosure

requirement. The commenter stated that subcontracting will result in

numerous contracts being subject to disclosure, particularly in the

case of larger HMOs. This commenter also pointed out that the proposed

rule does not address the extent to which subcontractors will be

compelled to disclose information concerning incentive arrangements.

The commenter stated that HMOs need to know the extent of the

disclosure obligation of the HMO where subcontracting has resulted in

incentive arrangements currently unknown to the HMO.

This same commenter believed that our estimate of 4 hours per

organization to meet disclosure requirements is a serious

underestimation given the complexity of current industry contracting

practices. The commenter did not offer an alternate estimate.

Response: Under this final rule, if the prepaid plan contracts with

a physician group that puts its individual physician members at

substantial financial risk for services not provided, the prepaid plan

must disclose to us (or in the case of Medicaid, to the State agency)

any physician incentive plans between the physician group and its

individual physicians that base compensation on the use or cost of

services furnished to beneficiaries or recipients.

Additionally, if a prepaid plan contracts with an ``intermediate

entity'' that, in turn, subcontracts with individual physicians or a

physician group, the prepaid plan, under all circumstances, must

disclose to us (or the State agency) any physician incentive plans

between the intermediate entity and the individual physician or

physician group that base compensation on the use or cost of services

furnished to beneficiaries. This information is necessary to ensure

that physicians are not placed at substantial financial risk for

services not provided.

For purposes of this requirement, we define intermediate entities

as organizations or individuals who contract with the prepaid plan and,

in turn, subcontract with one or more physician groups. Thus, for

example, an individual practice association (IPA) is an intermediate

entity if it subcontracts with one or more physician groups. (It is

simply a physician group when it is composed of a set of individual

physicians and has no subcontracts with physician groups.) A physician

hospital organization is also an example of an intermediate entity.

The information to be disclosed for each of the situations

described above includes the following:

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

incentive plan, disclosure of other aspects of the plan need not be

made.

The type of incentive arrangement; for example, withhold,

bonus, capitation.

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 according to

one of the permitted methods, which method is used.

In the case of capitated physicians or physician group,

capitation payments 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.

In the case of those prepaid plans that are required to

conduct beneficiary surveys, the survey results.

In subcontracting relations, if, under any circumstances, a

physician group and/or individual physicians are put at substantial

financial risk, the prepaid plan must conduct the beneficiary survey

required by this rule and provide adequate stop-loss protection to the

physician group and/or individual physicians. We have taken this

position because recent investigations by HCFA of HMOs in a number of

States has led us to conclude that, in subcontracting situations, some

physicians have been put at substantial financial risk without adequate

examination of the effect this has on the quality of care furnished to

the enrollees.

We have set forth the above requirements in this final rule by

adding a new paragraph (i) to Sec. 417.479 (for Medicare) and revising

proposed Sec. 434.70(a) (for Medicaid). We have also revised the

proposed definition of ``physician group'' at Sec. 417.479(b) to

clarify that an IPA is a physician group only if it is composed of

individual physicians and has no subcontracts with physician groups.

We believe these additional requirements will increase the burden

on prepaid health plans by an additional 4 hours, resulting in a total

of 8 hours per organization to meet the disclosure requirements. The

organization can either submit copies of its incentive plans or submit

information that addresses the required items listed in

Sec. 417.479(h)(1).

We would welcome comments on our estimate of the burden imposed by

the above requirements. We are particularly interested in receiving

empirical data supporting any estimates the commenter may offer.

Comment: One commenter believed the disclosure requirements are

excessively burdensome. This commenter noted that, as stated in the

preamble of the proposed rule, the justification for these disclosure

requirements is that, if the information is only disclosed during site

visits, an organization could change its physician incentive plan

shortly after the site visit, and we would not know of the new

arrangement for 2 years. The commenter pointed out that there are many

items of information that we review at site visits that could be

changed shortly thereafter without our knowledge; for example, HMO

marketing material, provider contracts, and quality assurance plans.

The commenter pointed out that these are reviewed during site visits

and not re-reviewed during the 2-year cycle. The commenter stated that

the proposed rule offered no explanation for different treatment for

incentive plans, and, therefore, the requirements are not based on an

acceptable justification.

Response: Section 1876(i)(8)(A)(iii) of the Act requires that we

obtain sufficient information to determine if substantial financial

risk occurs, adequate stop-loss protection is provided, etc. As

indicated in an earlier response, we have limited the amount of

information prepaid plans are required to submit to HCFA and the States

to information on just a few key items. As prescribed by legislation,

marketing materials are submitted to us every year. Further, as a

change from the proposed rule, we are requiring that we be notified of

only significant changes in the incentive plan, rather than each

change, thereby reducing the burden of this requirement.

Comment: One commenter suggested that HCFA use a simple disclosure

form that can quickly be completed by HMO personnel and reviewed

promptly by HCFA.

Response: HCFA will consider the feasibility of a form and, if it

decides to adopt the recommendation, in accordance with the Paperwork

Reduction Act of 1995, will publish a document in the Federal Register

soliciting public comments on a proposed form.

Comment: One commenter recommended that disclosure not be required

if the HMO essentially admits substantial financial risk by agreeing to

comply with enrollee survey and stop-loss requirements.

[[Page 13437]]

Response: The statute requires that organizations disclose their

incentive plan arrangements.

Comment: One commenter asked what timeframes an organization may

anticipate for HCFA's review of its incentive arrangements.

Response: Timeframes for the review of incentive plans will be

addressed in a forthcoming manual issuance. At this time, we anticipate

that the average review time will be 60 days.

Implementation

Comment: One commenter recommended that the final rules provide an

explicit mechanism for dealing with disputes arising from and during

the determination of whether physicians are at substantial financial

risk.

Response: We agree with the commenter that there should be

procedures for these disputes. Details on the dispute procedures will

be addressed in a forthcoming manual issuance.

Referral service

Comment: We proposed to define ``referral services'' as any

specialty, inpatient, outpatient, or laboratory services that a

physician or physician group orders or arranges, but does not provide

directly. One commenter believed that this definition is ambiguous. The

commenter questioned whether we intended to distinguish between the

services provided by the prepaid plan's physician employees and

services provided by independent contract physicians. The commenter

believed that absent knowing our position on this issue, the terms

``provide directly'' in the definition is ambiguous. The commenter

believed we should clarify that services provided by specialist

physicians through a contract with the physician group would not

constitute referral services. In addition, the commenter believed that

``referral services'' should be limited to services that a physician is

not licensed to provide, such as hospital services.

Response: We disagree that the definition is ambiguous. We believe

the problem the commenter had with this definition is related to the

understanding of another term used in the definition, that is, the

meaning of ``physician group.'' We assume that what the commenter is

really asking is ``If a physician group contracts for services of a

specialist, is the contract physician considered a member of the

physician group?'' We see this as the real issue because, if the

contract physician is a member of the physician group, then services

furnished by that physician would be services furnished directly by the

group. Thus, the services would not be referral services.

We proposed to define ``physician group'' as a partnership,

association, corporation, individual practice association, or other

group that distributes income from the practice among members according

to a prearranged plan unrelated to the members' referral levels. (For

reasons that will be discussed later in this preamble, this final rule

adopts a revised version of that definition. That is, we have deleted

from the definition the phrase ``according to a prearranged plan

unrelated to the members' referral levels''. We also no longer include

an individual practice association in the definition.) According to

this definition, a contract physician is not a member of the physician

group.

We disagree with the comment that referral services should be

limited to services that a physician is not licensed to provide. The

legislation requires the Secretary to determine if the plan places the

physicians at substantial financial risk for services not provided by

the physician group. Thus, referrals to specialists who are not part of

the group practice are considered referral services in the

determinations of risk. It is these services that the legislation

intended to address. Prepaid plans generally use primary care

physicians as gatekeepers. These models encourage the primary care

physician gatekeeper to not use specialist services if he or she can

perform the services. We support these models. The legislation,

however, is designed to prevent restrictions on necessary specialist

care.

Substantial Financial Risk

Comment: Several commenters believed the definition of

``substantial financial risk'' is overly restrictive. They believed it

fails to fulfill the goal of only identifying outliers because it fails

to address the variables that affect risk. One commenter suggested that

it be redrafted or, if HCFA is unwilling to redraft the definition,

that organizations be given the choice of either complying with the

regulation as written or demonstrating to HCFA that their incentive

plan does not put physicians at substantial financial risk.

A number of commenters recommended, more specifically, that HCFA

include the size of patient and physician pools (panels) in the risk

formula threshold as, in their view, required by the legislation. On

the other hand, one commenter stated that attempting to incorporate

patient panel size as a risk factor would prove unduly complex and less

workable than the approach contained in the proposed rule.

Response: We have reconsidered this issue and, in this final rule,

we take panel size into account in determining adequate stop-loss

requirements (See Sec. 417.479(g)(2)(ii).) Analyses by Rossiter and

Adamache (1990) (Health Care Financing Review, vol. 12, pp. 19-30) show

that there is no significant variation in costs from year to year for

counties with populations greater than 25,000. Based on these analyses,

we have determined that physician groups with more than 25,000 patients

are able to adequately spread risk and, therefore, are not at

substantial financial risk, even if 100 percent of the physician

group's income is at risk for referral services. This does not apply to

panels of more than 25,000 patients as a result of pooling. (See

Sec. 417.479(f).) Pooling of patients is discussed later in this

preamble.

As stated, our decision to set the threshold at 25,000 was based on

the analyses done by Rossiter and Adamache. We would welcome

information as to whether there are data that would support another

threshold.

With regard to the suggestion that we allow organizations the

choice of either complying with the regulation as written or

demonstrating that their incentive plan does not put physicians at

substantial financial risk, we would be interested in receiving

comments on how we might implement such an exception process.

The remainder of this response applies to panels of less than

25,000 patients. As stated in the proposed preamble, the size of the

patient or physician pool can have several theoretical effects on

substantial financial risk. Furthermore, there is no empirical evidence

that could guide us on the effects of these and other factors. We

requested information in this regard in the proposed preamble.

Nonetheless, while commenters suggested that size is a factor, none of

the commenters provided information on the exact relationship between

size and risk. Therefore, we have no basis for specifying this

relationship. Finally, the legislation discusses panel size only in

regard to stop-loss protection and not in regard to substantial

financial risk.

Comment: One major organization stated that, under the proposed

rule, prepaid plans that assess and/or distribute incentive payments

more often than annually are subject to lower risk thresholds. It

maintains that there are problems with this requirement as follows:

First, it contends that the term ``assess'' as used in this regard

is not

[[Page 13438]]

clear. It might, the organization suggests, be interpreted to bar plans

from communication with physicians as to their progress in meeting

annual goals. The organization stated that it disagrees with any

interpretation of this requirement that might prevent plans that

distribute incentive payments annually from working with their

physicians on their mutual cost containment goals on a more frequent

basis.

Second, the proposed regulation does not achieve its goal of using

an outlier approach in this area. Many organizations that use withhold

and distribute, or assess, incentive payments more often than once a

year exceed the 15 percent risk threshold. These organizations,

however, fall within the 25 percent threshold set for plans

distributing or assessing payments annually or less often.

Another commenter stated that the frequency of the assessment or

distribution should not affect the level or risk necessary to qualify

as substantial financial risk.

Response: The term ``assess'' is meant to refer to imposing a

charge. It is not used in the meaning of an evaluation or appraisal of

progress toward a goal.

We agree that a 15 percent threshold is not an outlier, since the

median withhold is between 10 and 20 percent. Also, there is no

evidence that making assessments or distributions more often than

annually affects the amount of risk placed on physicians. While our

rationale in the proposed rule was based upon reasonable assumptions as

to the impact of more frequent assessments or distributions, we now

agree that the 15 percent threshold is inconsistent with our intent to

use an outlier approach. Therefore, we have eliminated making a

distinction on the basis of the frequency of the assessment or

distribution. We establish the 25 percent threshold in all cases. The

25 percent threshold is an outlier since it exceeds the median withhold

of 10 to 20 percent. Proposed Sec. 417.479 has been revised to reflect

the elimination of the distinction.

Comment: One commenter stated that the proposed threshold for

combination of withholds and bonuses does not identify only outliers.

The commenter also stated that, in practice, physician performance will

be either in the bonus area or in the withhold area; therefore, to

limit the amount of financial risk that a physician will ultimately

accept, it is not necessary to limit the combination. The commenter

also pointed out that there is no evidence that upward variations on

physician payments (bonuses) have the same potential to cause

underutilization as downward variations (withholds).

Response: If organizations do not use a combination of withholds

and bonuses, there is no problem with setting the same limit for the

combinations as for withholds and bonuses individually. Since it is

possible for plans to use combinations of withholds and bonuses, it is

necessary to set a limit on the combination. As indicated in the

proposed preamble, to avoid putting physicians at substantial financial

risk, we determined it necessary to use the same threshold for the

combination.

With regard to the last comment, we are not aware of any data on

the effect of bonuses as opposed to withholds on physician behavior. We

would, therefore, appreciate receiving any information in this regard.

Comment: Several commenters recommended that we lower the

threshold.

Response: The proposed preamble had an extensive discussion of this

issue. As we stated, because of the limited information available on

this issue, the only logical approach is to use an outlier formula.

Given this decision, the threshold of 25 percent that we proposed is

consistent with the data that showed that the median withhold was

between 10 to 20 percent. It is also consistent with the concept of

substantial financial risk, which implies a greater than average risk.

As indicated, the threshold is based on withhold data. Averaging in the

organizations with capitation arrangements, which are the majority of

organizations, and treating them as equal to 100 percent withhold would

raise the threshold rather than lower it. We decided not to raise the

threshold because that would not make a difference to the capitation

arrangements. This would be so because, if capitation were considered

equal to 100 percent withhold, all plans using capitation would be

placing their physicians at substantial financial risk (unless the

threshold were set at 100 percent). Furthermore, as indicated in the

proposed preamble, the 25 percent withhold figure is within the range

of discounts that physician groups frequently provide to various

insurers. Physicians also lose similar amounts to bad debts.

Comment: One commenter suggested that we include the risk

arrangements between the physician groups and their individual

physicians, because the prepaid plan may use this strategy to

circumvent the process. The commenter maintained that the statute does

not specifically exclude these arrangements from scrutiny. The

commenter pointed out that the statute defines an incentive plan as

``any compensation arrangement between an eligible organization and a

physician that may directly or indirectly have the effect of reducing *

* *'' [Emphasis added.] The commenter believed that the use of the

words ``or indirectly'' indicates that the types of compensation

arrangements should be looked at broadly.

Response: As stated in an earlier response, we are requiring a

prepaid health plan that contracts with an intermediate entity to

disclose information about the physician incentive plans that the

entity has with physician groups or physicians. This will prevent a

prepaid plan from creating intermediate entities merely to evade the

requirements of this rule.

Furthermore, if the physician group subcontract with its physicians

places the latter at substantial financial risk, the prepaid health

plan must disclose the incentive arrangements. In order to minimize the

burden on prepaid plans, we are not requiring disclosure of every

incentive arrangement between physician groups and individual

physicians, only of those under which the physicians are placed at

significant financial risk.

In regard to the phrase ``indirectly have the effect of reducing or

limiting services,'' this phrase applies only to the arrangement

between the plan and physician group. It does not apply to the

relationship between the physician group and its individual physicians.

``Indirect'' as used in the statute refers to methods of compensation

to the physician groups that are not strictly monetary, but can be

considered the equivalent. Examples would include providing stocks,

waivers of debt, or equipment.

The commenter has raised the issue of physician groups that have

incentive arrangements with their individual physicians. As we examined

this issue, we noted that the definition of ``physician group'' in

proposed Sec. 417.479(b) technically would exclude such a physician

group, since it would not be a group that ``distributes income from

practice among members according to a * * * plan unrelated to the

members' referral levels.'' (Emphasis added.) It was not intended that

any physician group fall outside the scope of our definition, and thus

technically outside the scope of these regulations. We, accordingly,

are deleting ``according to a prearranged plan unrelated to the

member's referral levels'' from the definition of ``physician group.''

It is also for this reason that we did not adopt any existing

definitions of a physician group

[[Page 13439]]

or group practice that may similarly have contained provisions that

would exclude a group Congress intended to reach in this rule (for

example, the existing definition of ``medical group'' at 42 CFR 417.1

or ``group practice'' in section 1877 of the Act.

We are also taking this opportunity to point out that, although we

define a ``physician incentive plan'' as ``any compensation arrangement

between an organization and a physician or physician group that may

directly or indirectly have the effect of reducing or limiting services

furnished to Medicare beneficiaries or Medicaid recipients enrolled in

the organization'' [emphasis added], this definition also encompasses a

compensation arrangement between an entity with which the organization

contracts and physicians/physician groups and a compensation

arrangement between a physician group and its individual physicians.

This is because, although not a direct relationship, a linkage between

the organization and the physician group or individual physicians has

been established through the entity or physician group with which the

organization contracts.

Comment: One commenter suggested that we not apply substantial

financial risk to individual practice association (IPA) and direct

contracting models. The commenter stated that there would be no loss if

a few providers drop out.

Response: While the organization may not feel a loss, the enrollees

may be concerned about the loss. Furthermore, this may be an indication

that the incentive plans are having an undesired effect. The

legislation requires us to apply these regulations to all prepaid

plans. There is no justification for treating IPA and direct

contracting models differently. If anything, since these models

frequently involve contracts with individual physicians, these

physicians are less in a position to spread risk and may be at even

greater risk than other models.

Comment: Several commenters, including a major organization, raised

the concern that they do not know the total payments and patient loads

until the end of the year. They suggested that we substitute total

potential payments, based on the most recent year's utilization and

experience, in the substantial financial risk and stop-loss formulas.

Response: We agree that this option is acceptable, unless the

organization has information that suggests a significantly different

situation; for example, the addition of a major new contract.

Appropriate revisions have been made to proposed Sec. 417.479 to

clarify this.

Comment: A major organization suggested that we substitute an

actuarially derived threshold instead of an outlier approach.

Response: We reviewed this recommendation with several actuaries,

including staff from HCFA's Office of the Actuary. We concluded that it

is not feasible to make such an analysis. Actuaries can perform

analyses for certain kinds of losses, such as loss of life or loss of

income. However, the determination of what is a substantial loss of

income to a physician or physician group is more of a subjective or

policy decision than a measurable amount.

The actuaries also indicated that they could not perform such an

analysis because there are no empirical data to indicate how physicians

respond to different levels of financial risk.

Actuaries have supplied us with recommendations as to stop-loss

protection, discussed later in this preamble. The recommendations

result in different stop-loss requirements for different panel sizes.

Also, as discussed earlier, we have determined that physicians or

physician groups serving panels of over 25,000 patients are not at

substantial financial risk. We are, however, interested in receiving

current data on how physicians respond to different levels of financial

risk.

Comment: One commenter raised a concern that the Internal Revenue

Service (IRS) is developing policy on withholds that defines them as

discounts that would not be tax-exempt.

Response: We have held discussions with the IRS to coordinate

consistent policies and will continue to work with them.

Comment: One organization commented that the threshold should only

apply to the aggregate group of physicians and not to individual

physicians. It stated that its incentive plan is within the specified

limits for physician groups, but will exceed the limits for individual

physicians whose behavior exceeds certain norms.

Response: The legislation is concerned with whether a plan puts

physicians or physician groups at substantial financial risk. Thus, the

threshold policy applies to contracts between an organization and

individual physicians, but only if the contract is specifically between

the organization and an individual physician. As indicated earlier, we

have not interpreted the legislation to apply to subcontracts between

the physician group and its individual physicians.

Comment: A major organization asked if a contract for primary care

services outside the service area equals referral services.

Response: Primary care services outside the service area are not

``referral services.'' The prepaid plan, however, must ensure that all

necessary services are available and accessible within the service

area.

Comment: A major organization commented that the proposed

regulation poses a problem for staff model HMOs in medically

underserved areas (MUAs). The commenter stated that, because the

salaries of many physicians in community health centers (CHCs) are low

(because they are often working under a Federal student loan repayment

program), the formula we use to determine the risk threshold results in

a threshold that is artificially low for these HMO programs. The

commenter added that, to impose additional administrative obligations

on these community programs, because of their bonus payment

arrangements for salaried physicians, would divert time, energy, and

resources away from their mission of providing health services in MUAs.

Response: We share the concerns raised by this commenter. The low

salaries do create an artificially lower threshold, and the centers

have much more limited administrative resources. Nevertheless, these

circumstances result in even greater pressures on these physicians to

contain costs. With lower salaries, the physicians are more sensitive

to factors that can affect their income. Therefore, it is even more

appropriate to have the policies in this regulation apply to these

centers. Unfortunately, we have not been able to develop a different

policy for these centers. Note, however, that if an HMO contracts with

a CHC, then, as indicated in an earlier response, these regulations

would not apply to contracts between the centers and their physicians

because they are subcontracts.

Capitation Arrangements With Physicians

Comment: Several commenters, including a major organization, stated

that the threshold should not apply to capitation. Their argument was

that the thresholds were based on withhold data and, further, that it

is difficult to separate services furnished by the physicians from

referral services. The commenters also claimed that we did not specify

that the capitation applies only to referral services.

The commenters raised the concern that the capitation payments may

include payments for services furnished directly by the physician

group. Thus, they point out, we are limiting the

[[Page 13440]]

amount of risk a physician can accept for his or her own services. The

commenters stated that to do so is beyond the mandate of the statute,

which is intended to apply only to services not provided by the

physician group.

Response: We gave this issue a great deal of thought. We decided,

however, to continue with our proposed policy of applying a 25 percent

threshold. To exempt capitation from the threshold could place

physicians who are compensated in this manner at substantial financial

risk, without subjecting the prepaid plans to the requirement either to

set limits to the risk in the form of maximums and minimums, or provide

adequate stop-loss protection and conduct beneficiary surveys as

required by the statute. Furthermore, the commenters are incorrect; the

proposed and final rules are concerned with referral services. If the

incentive plan applies only to the services furnished by the physician

group, these rules do not apply. The legislation specifies that we

address services not furnished by the physician group. If the incentive

plan applies to all services or just referral services, these rules

apply.

The commenters are correct on these two points: our policy does

affect services that the physician group directly provides if we are

dealing with capitation for all services; and services furnished

directly by the physician group or physician are not covered by the

statute. However, when the capitation covers all services, we are not

able to separate those service furnished directly from the referral

services. And, since the referral services are our primary concern, we

need to be inclusive rather than exclusive.

Comment: One commenter recommended that we not require the maximum

and minimum formula for capitation arrangements if the organization can

show that a 25 percent differential had not occurred in the past.

Response: While there is merit to this recommendation, we have

decided to reject it. The legislation requires that organizations that

place their physicians at substantial financial risk, as determined by

the Secretary, provide stop-loss protection and conduct enrollee

surveys. Thus, the formula is necessary for us to determine if

substantial financial risk exists. Also, past behavior is no guarantee

of future behavior. Thus, physicians could still feel the pressure if

they are placed at substantial financial risk, regardless of past

payments.

Comment: One commenter believed the rule should distinguish between

a monthly capitation payment to a physician group that includes an

amount for referral services, and an incentive plan assessment or

payment.

Response: The applicability of the provisions of this rule depends

upon the specific arrangements in the incentive plan. As stated

earlier, if the incentive plan applies only to services directly

furnished by the physician or physician group and does not cover

referral services, the regulations do not apply. If the capitation

includes payment for referral services, the provisions of

Sec. 417.479(f)(5) apply. If the organization capitates its physicians

only for services they directly furnish and uses withholds or bonuses

(or a combination of withholds and bonuses) as incentives to control

referrals, the requirements of Sec. 417.479(f)(5) concerning capitation

do not apply. In this case, however, if the withholds or bonuses or

combination of withholds and bonuses exceed the 25 percent risk

threshold, the stop-loss and survey requirements of this rule apply.

Comment: One commenter suggested that, if a physician group

achieves a patient population of approximately 250 members from a

single capitated HMO, there is no longer a need for the risk

protection.

Response: There is no evidence that supports this number. As

indicated later in this preamble, we have set an exception for the

stop-loss requirements that is based on panel size.

Comment: A number of commenters stated that the proposed rules, as

they relate to capitated payment arrangements, do not accommodate

common, longstanding contractual arrangements and should be withdrawn

to permit additional study.

Response: The Group Health Association of America (GHAA) has

supplied us with updated data as of the Winter 1993-94. Furthermore,

Mathematica has published data from 1995. We took these data into

account as we revisited our decisions regarding specific risk

thresholds and issues concerning capitation and stop-loss protection.

These data support the approach we have taken in this final rule. If

more recent data exists, we would appreciate receiving it.

Comment: Several commenters stated that they capitate their

physicians but also provide adequate stop-loss protection. They

believed that these physicians are not at risk, because of the stop-

loss protection.

Response: We agree in principle with this view. If an HMO has stop-

loss protection in place that ensures that no more than 25 percent of a

physician's or physician group's income is at risk, we would determine

that the plan does not involve substantial financial risk.

Stop-Loss

Comment: A commenter recommended that we put physicians at risk

beyond the stop-loss limit. The commenter believed that setting an

absolute limit on the amount of risk that physicians can accept (that

is, requiring stop-loss protection to cover the cost of referrals in

excess of 30 percent of payments) obstructs an organization's ability

to control physician behavior beyond that point. The commenter

suggested that the stop-loss requirement be constructed to allow for

continued, but limited, risk sharing. The commenter recommended that

the organization be allowed to hold physicians or physician groups

responsible for 20 percent of the cost of referrals beyond the point at

which the stop-loss protection begins. The commenter stated that it

does not believe the statute requires an absolute limit on the amount

of risk, but instead only ``adequate and appropriate'' stop-loss

protection.

Response: The approach suggested by this commenter is consistent

with the policy used by a number of HMOs. The practice of requiring

physicians to continue to share in the risk beyond a stop-loss limit

makes the physicians sensitive to the need to avoid furnishing

unnecessary services. Therefore, this final rule allows for continued,

but limited, risk sharing beyond the point at which the stop-loss

protection begins.

For those prepaid plans that provide an aggregate stop-loss policy,

we are setting the required stop-loss limit at 25 percent. The prepaid

plan will bear 90 percent of the losses beyond this level and the

physicians will bear 10 percent of the losses. (See

Sec. 417.479(g)(2)(i).) Because we are adding a 90/10 ratio to the

potential loss level, we believe it is necessary to reduce the proposed

30 percent stop-loss limit to 25 percent to compensate for the added

element of risk sharing. Furthermore, the 25 percent level is

consistent with the threshold we established for substantial financial

risk.

The 90/10 split also applies to those plans that provide per

patient stop-loss protection.

Comment: Several commenters, including major organizations, stated

that aggregate stop-loss policies are not currently used and would be

difficult to obtain. They recommended that patient, dollar, and/or

specific disease protections be substituted.

Response: We have decided to allow plans to provide either

aggregate or per-patient limit stop-loss policies. (See

[[Page 13441]]

Sec. 417.479(g)(2).) The amount of the per patient policy required to

be considered adequate and appropriate will vary with the patient panel

size and will be discussed later in this preamble. We reached this

decision on the following basis.

We agree that some organizations might have trouble purchasing

aggregate stop-loss policies or that it may be expensive to switch from

a per patient limit to an aggregate policy. Since most organizations do

not have such policies, this aggregate policy requirement would, at the

least, cause a significant change in policy, which could be very

difficult or expensive to implement. Furthermore, actuarial analyses

indicate that aggregate coverage is unlikely to be needed.

On the other hand, there are some organizations that do provide

aggregate stop-loss protection. Requiring them to switch to a per-

patient limit would also be expensive. There are advantages and

disadvantages to both aggregate and per-patient stop-loss coverage.

Aggregate policies provide greater overall protection, while per-

patient policies provide better protection at the individual patient

level.

Both of these options provide reasonable protection for physicians

and their patients. By providing an option, we have eliminated the

burden organizations might face to switch policies.

We considered the recommendation to include specific disease

protections. We reviewed the Department's preliminary plans for

implementing the Medicare Catastrophic Coverage Act of 1988 (Public Law

100-203), major provisions of which were repealed before being

implemented. The Department had not planned to specify any specific

diseases as catastrophic and instead planned to use specific dollar

levels to define ``catastrophic'' expenses.

Comment: Several commenters stated that the prepaid plans should

not be required to pay for the cost of stop-loss protection. They

believed they should be allowed to charge the physicians a reasonable

premium for stop-loss protection.

Response: Section 1876(i)(8)(ii) of the Act reads, in relevant

part, as follows:

(ii) If the plan places a physician or physician group at

substantial financial risk * * * the organization--(I) provides stop-

loss protection for the physician or group * * *.

In the case where the physician or physician group decides to purchase

its own stop-loss protection, we interpret ``provides'' to mean that

the organization either pays for the premium or reduces the level at

which the stop-loss protection applies by the cost of the stop-loss. We

also rejected the proposal of allowing HMOs to make available stop-loss

protection rather than paying for it. Making available is not

consistent with providing.

Thus, we provide, in Sec. 417.479(g)(2)(iii), that the prepaid plan

may either (1) Provide the stop-loss protection directly, (2) purchase

the stop-loss protection, or (3) if the physician or physician group

purchases the protection, 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 the stop-loss. We are interested in any comments

on this provision and alternative proposals.

Comment: Several commenters suggested that we establish a case-by-

case exceptions process for stop-loss requirements.

Response: As stated previously for substantial financial risk, such

a process would be administratively burdensome. Further, it would be

difficult to make judgments.

Comment: One commenter, a major organization, disputed our

statement that there is little information available regarding the

impact of various factors on physician behavior.

Several commenters believed we should take patient panel size into

account and exclude large panels from this requirement. Other

commenters suggested that we have a higher stop-loss requirement, for

example, $200,000 per patient, for larger panels. They noted that the

legislation instructed us to take panel size into account for stop-loss

protection. The commenters argued that, with a sufficiently large

patient panel (generally a clinic), the physicians are able to spread

the risk across all the patients.

In addition, several commenters pointed out that a number of

physician groups have contracts with many different HMOs, particularly

IPA models, and have the equivalent of a large panel spread out among

the HMOs. The commenters recommended that HMOs that contract with these

groups be exempt from the stop-loss requirements.

Response: Analyses by several actuarial firms and data from several

HMOs support the position that having a large panel does reduce the

level of risk. The data is also consistent with the findings of

Rossiter and Adamache (1990) discussed previously. Based on these

analyses, we have determined the limits specified in the following

table (Table 1) for different panel sizes and have revised proposed

Sec. 417.479(g)(2) accordingly. Providing a higher stop-loss

requirement (a higher stop-loss level is a lower level of protection)

is consistent with the legislation, which specified that we take panel

size into account.

Table 1.--Stop Loss Limits Per Patient Panel Size

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

Number of patients Stop-loss limits per patient

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

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

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

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

Greater than 25,000 (unpooled)............ None

Greater than 25,000 (as a result of $200,000

pooling).

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

There are two ways physician groups can pool patients to meet the

panel size requirements specified in the table: (1) Including

commercial, Medicare, and/or Medicaid enrollees in the calculation of

panel size, and (2) Pooling together, by the organization, of several

physician groups into a single panel. Each method may lead to a panel

size large enough to reduce the financial risk. These methods may be

used to pool patients, provided they are consistent with the relevant

contract between the physician or physician group and the prepaid plan.

(For instance, if there are separate contracts for commercial,

Medicare, and/or Medicaid enrollees, then, absent contractual

provisions to the contrary, pooling would be precluded).

We consider physician groups whose panels are greater than 25,000

patients without pooling of patients as not at substantial financial

risk. Thus, the organization would be exempt from stop-loss protection

and beneficiary survey requirements.

For those groups whose panel size is greater than 25,000 patients

as a result of pooling, the organization is required to provide stop-

loss protection at the same level that is required if the panel size is

between 10,000 to 25,000 patients ($200,000 per patient). This policy

is adopted so that plans will not use pools to circumvent the stop-loss

requirements. Furthermore, physicians may be at higher risk for panels

that are pooled than panels that are not pooled since the former may

experience greater variability in costs than the latter.

We have not established an increasing scale for the aggregate stop-

loss option, except that those panels over 25,000 patients without

pooling do not need aggregate stop-loss coverage. The scale does not

need to increase because, since a percentage formula is used, the

dollar

[[Page 13442]]

amount represented by the threshold rises as the panel size increases.

We are willing to consider policy alternatives that are supported

by empirical data. We are interested in receiving public comments in

this regard.

Surveys

Comment: Several commenters believed a survey of enrollee

satisfaction should be required of all prepaid plans, not just those

where there is substantial financial risk.

Response: While most prepaid plans do conduct surveys, there is no

legislative requirement to do so except as prescribed by this

regulation.

Comment: One commenter, a major organization, stated that the

proposed rule is silent about what HCFA must do with the survey

results. This organization proposed that the regulations explicitly

require HCFA to (1) Annually review the results as they are filed, (2)

share the complete results with the appropriate PRO, (3) take

appropriate action if the results indicate a problem; and (4) ensure

public access to the survey results by requiring that they be published

and disseminated to interested parties by the PRO, the organization, or

HCFA.

Response: We partially addressed this comment earlier in this

preamble. The survey results will be submitted to plan managers in

HCFA's central and regional offices. They will review the results in

conjunction with PRO results, disenrollment data, reconsiderations, and

related information, as part of ongoing compliance monitoring

activities. As HCFA develops performance measures and report cards over

the next several years, it will consider the best way to make the

survey results available to consumers and providers.

Comment: One commenter suggested that disenrollees that move be

excluded from the surveys.

Response: We agree with this recommendation since it may be very

hard to locate these beneficiaries. Therefore, we have revised proposed

Sec. 417.479(g) accordingly.

Comment: One commenter, a major organization, requested that we

specify that surveys do not need to be done more often than annually.

Response: This final rule, at Sec. 417.479(g)(1)(iv), revises the

requirement to specify that the survey must be conducted no later than

1 year from the effective date of the incentive plan, and at least

every 2 years thereafter. As noted in the DATES section of this

preamble, compliance with Sec. 417.479(g)(1)(iv) is not required until

1 year after the effective date of this rule.

Medicaid

Comment: One commenter asked whether States have the option to

prohibit incentive plans that place providers at a substantial

financial risk. The commenter believed this option would eliminate the

need to obtain and monitor stop-loss requirements and a member survey.

Response: Nothing in OBRA '90 prohibits States from placing more

restrictive requirements under State law on the physician incentive

plans of their HMO and HIO contractors. As a result, States do have the

option of under State law prohibiting altogether incentive plans that

place providers at substantial financial risk, regardless of any stop-

loss arrangements and member satisfaction surveys used by the

contractor. We point out, however, that the sanctions and penalties

provided for under this final rule would apply only with respect to

violations of the Federal requirements in this rule.

Comment: One commenter asked whether, if annual member surveys are

already required under quality assurance standards, an additional

member survey is necessary for those plans placing providers at

substantial financial risk.

Response: No additional survey is required, as long as the survey

conducted under the quality assurance standards meets the requirements

specified at Sec. 417.479(g) of this rule.

Comment: One commenter stated that sufficient time must be allowed

for States to incorporate the new provisions in program rules and

existing provider agreements.

Response: We agree with this comment. As a result, as stated in the

DATES section of this preamble, the compliance date for most provisions

is 60 days after publication of this final rule. This time period is

the standard commonly used for implementation under Medicaid.

Comment: One commenter stated that incentive plans for physicians

serving Medicaid recipients need to address access to primary and

preventive services and quality of care services. The commenter stated

that these plans must include incentives based on specific health

outcomes, timely access to primary care, and enrollee satisfaction

based on specific health outcomes.

Response: OBRA '90: (1) Prohibits certain physician incentive

arrangements and (2) specifies two requirements to be met if other

types of arrangements that place physicians at substantial financial

risk are used. The statute does not go beyond these prohibitions and

requirements to mandate the use of any particular type of incentive

arrangements, including those described by the commenter. Accordingly,

the rule does not include any requirements that certain types of

incentives be used.

Comment: One State agency stated that incentive plans for

physicians serving Medicaid must limit the payment of any incentives to

once annually. The commenter believed this would decrease the

possibility that physicians will cut back on services or refuse to

treat individual patients because of fear of financial losses.

Response: OBRA '90 prohibited only one type of incentive

arrangement: those that make specific payments, ``directly or

indirectly under the plan to a physician or physician group as an

inducement to reduce or limit medically necessary services provided

with respect to a specific individual enrolled with the organization.''

All other types of incentive arrangements are allowed, including those

that place physicians at ``substantial financial risk.'' (Those that

place physicians at substantial financial risk must meet certain

requirements for the provision of stop-loss protection for physicians

and periodic enrollee satisfaction surveys.) The statute makes no

provision, including the one recommended by the commenter, for banning

other types of incentive plans. We cannot impose the restrictions on

the incentive program that were recommended by the commenter. As noted

above, however, OBRA '90 would not prohibit a State from imposing such

a restriction under State law.

Comment: One commenter recommended that the reporting and other

requirements for physician incentive plans be limited to only those

HMOs, CMPs, or HIOs that institute percentage risk levels that are

greater for the Medicaid and Medicare populations than for their

commercial contracts.

Response: With respect to Medicaid, OBRA '90 amended section

1903(m)(2)(A) of the Act to condition a State's receipt of FFP for

expenditures in prepaid capitation or other risk-based reimbursement

contracts upon a contractor's adherence to the requirements for

physician incentive plans also described in OBRA '90. The statute does

not authorize the Secretary to exempt certain plans or State Medicaid

contracts from compliance with these reporting and other requirements.

Therefore, we cannot change the regulation as the commenter has

proposed.

[[Page 13443]]

Comment: One commenter stated that the definitions of ``substantial

risk,'' ``withhold,'' and ``bonus'' are too inflexible to meet the

special needs related to the Medicaid program. Citing monthly

eligibility variation and differences in payments based on varying

Medicaid eligibility categories as examples of variables that can

affect payment to a provider in any given period, the commenter

questioned how, if incentive payments are based on end of year results

and a percent sharing arrangement, a plan can know in advance if its

providers will be at substantial risk.

Response: The maximum potential (as opposed to the actual) amount

of withhold or bonus lost or awarded, respectively, determines whether

a prepaid plan has placed a physician or physician group at substantial

financial risk. If the plan places the practitioner at risk of losing

more than 25 percent of his/her potential earnings, then the plan has

placed the physician or physician group at substantial financial risk.

The actual amount of withhold returned or not returned or bonus awarded

or not awarded at the end of the assessment and disbursement period is

not the determinant of substantial financial risk because money

returned or awarded after care has already been delivered does not

serve as an inducement. It is the promise of potential earnings (or the

prospect of loss thereof) that serves as the inducement. Therefore, a

prepaid plan does not need to know its end of year results in order to

determine if it is placing its physicians and physician groups at

substantial financial risk.

The minimum and maximum potential earnings, including the portions

that are the result of incentive arrangements, should be known both to

the plan and the physician or physician group under contract at the

beginning of each risk assessment period. As a result, the regulation

states that capitation arrangements in which the maximum and minimum

possible payments are not clearly explained in the physician's or

physician group's contract constitute substantial financial risk.

Comment: One commenter stated that the rules are not very clear on

defining a number of terms. As examples, the commenter asked the

following questions:

What does ``risk based on the levels or costs of referral

services'' mean? Are the ``levels or costs'' applied to an individual

capitated physician, physician group, or organization?

What if the amount allocated to cover referral services is

placed in a pool account for debiting patient costs and the amount from

these services that might be paid as part of the incentive plan depends

on the performance of the larger pool formed by a number of separate

physicians and these physicians pool accounts?

What if the ``capitation'' amount actually paid to a

physician is meant to cover that physician's services and involves a 15

percent withhold?

Response: In response to the first question, the term ``referral

services'' is defined in Sec. 417.479(c) of the regulation. In

addition, the word ``level'' has been changed to ``use'' for greater

clarity.

In response to the first two questions, it is important to note

that, in general, the regulation does not attempt to address how a

prepaid plan chooses to design or implement its physician incentive

plan. Rather, it attempts to regulate one of the final products, that

is, the maximum financial risk to which a physician or physician group

may be exposed for referral services. Plans may use a variety of

incentive arrangements, including those identified by the commenter, in

structuring their physician incentive plans. However, prepaid plans

should be able to determine or establish, as part of their physician

incentive plans, the maximum financial risk, when the risk is based on

referral services, to which a physician or physician group may be

exposed under the physician incentive plan. If a plan is unable, based

on the structure and operation of its incentive plan, to determine the

amount of the financial risk, then, according to

Sec. 417.479(f)(5)(ii), we would determine that the plan places

physicians or physician groups at ``substantial financial risk'' and

the plan would be required to implement stop-loss protection and

conduct enrollee surveys. As indicated previously, we have decided to

allow a plan to pool patients for different physician groups.

In response to the third question, the threshold for withhold

arrangements is established in Sec. 417.479(f) of this final rule. This

section would apply only if the withhold is based in part or in its

entirety on utilization or costs of referral services. If the return of

the withhold is based solely on the physicians' own services, then,

under Sec. 417.479(f) of this final rule, these regulations would not

apply.

Comment: One commenter stated that the proposed rule does not allow

for the differences found in HIOs, specifically that they have

mandatory enrollment in a specific area, may be at-risk for

retroactively eligible individuals, and may be responsible for an

ongoing category of special members who are not capitated to a

particular physician. The commenter noted that the cost of services to

this population affects the incentive plan (withhold payment and

surplus sharing). The commenter also specifically noted that the HIOs

in California which are Medicaid only were not specifically addressed

in the proposed rule.

Response: The Consolidated Omnibus Budget Reconciliation Act of

1985 (COBRA '85) generally subjected HIOs which were operational on or

after January 1, 1986, to the same requirements as other organizations

contracting with Medicaid agencies on a risk basis to provide or

arrange for comprehensive services (HMOs). (Certain exceptions to this

are allowed under the law.) Therefore, this proposed rule did not

reiterate the fact that HIOs subject to the same requirements for HMOs

are also subject to these requirements for physician financial

incentive plans.

Further, OBRA '90 did not contain any provisions calling for the

differential treatment of HIOs. Because of this, and the historical

interest of the Congress in subjecting HIOs to the same standards as

HMOs, we did not identify the need for differential treatment of HIOs

in this regulation.

Comment: One commenter stated that the proposal on enrollee surveys

excludes only those Medicaid enrollees who have disenrolled because of

a loss of Medicaid eligibility. The commenter recommended we consider

excluding those who disenroll from a prepaid plan because they moved

from the plan's service area.

Response: As stated earlier, we agree that individuals who have

disenrolled from the plan because they have moved outside of a plan's

service area may be omitted from the plan's enrollee survey. The

regulations text at Sec. 417.479(g)(1) has been appropriately modified.

Comment: One commenter stated that, in addition to an enrollee

survey, monitoring of the complaint/appeals process for the plan and

the State's Medicaid fair hearing process would be another check on the

quality of care and the denial of needed service.

Response: OBRA '90 does not address monitoring the complaint/

appeals process for the plan and the State Medicaid fair hearing

process in the State. However, monitoring the plan's complaint hearing

process is the responsibility of the State Medicaid agency as part of

its routine monitoring of its managed care contractors. In addition,

HCFA routinely monitors a State's fair hearing process as part of the

monitoring of each State's Medicaid plan. As a result, these areas are

not included in these regulations.

[[Page 13444]]

Miscellaneous

Comment: One commenter recommended that we clarify the definition

of ``medically necessary services'' as it applies in the prohibition on

specific payment as an inducement to reduce or limit medically

necessary services to a specific enrollee.

Response: We are preparing a final rule entitled ``Medicare

Program: Criteria and Procedures for Making Medical Services Coverage

Decisions that Relate to Health Care Technology.'' This rule will

specify the definition of medically necessary services that will apply

for purposes of the prohibition in question. (The rule will be in

response to a notice we published in the Federal Register on April 29,

1987, at 52 FR 15559, that requested comments on procedures for medical

services coverage decisions.)

Comment: One commenter stated that managed care plans should be

specifically directed to provide for effective physician participation

in the development of incentive plans and other elements of the

organization's management.

Response: Physicians have the opportunity for input before they

sign a contract with the organization. Physicians have the opportunity

to negotiate all aspects of the contract. Since the contract specifies

the nature of the incentive arrangements, the physicians have an

opportunity for input through the negotiation process.

Comment: Some commenters recommended that patients be allowed

direct access to specialists and/or that the prepaid plan explain, as

part of the enrollment contract, that patients have limited access to

specialists.

Response: HCFA supports the practice of HMOs using gatekeepers to

limit patients from direct access to specialists. HMOs have found this

to be an effective way to limit inappropriate utilization and

expenditures. HMOs are required to explain this practice as part of the

enrollment.

Comment: Several commenters suggested that there be an appeals

process for physicians and patients.

Response: HCFA requires prepaid plans to provide an appeals process

for enrollees. For physicians, there are several arrangements. All

physicians have an opportunity to informally appeal decisions through

the plan's medical review board and through the contract negotiation

process. In addition, for Medicare risk contractors, unaffiliated

physicians can represent a Medicare beneficiary in an appeal to the

prepaid plan. In the case of a cost contract, the physician can

represent a beneficiary in an appeal to whichever entity (prepaid plan,

carrier, or intermediary) made the determination.

VII. Provisions of the Final Regulations

The proposed rule is adopted, with the changes listed below. Many

of these changes are discussed in section V. of this preamble. If the

change is not discussed in section V, the reason for the change is

given below.

Changes to Proposed Sec. 417.479

We add a new paragraph (a); and designated proposed

paragraph (a) as paragraph (b). New paragraph Sec. 417.479(a) is added

to reflect the requirement at section 1876(i)(8) of the Act that each

contract between HCFA and an eligible organization contain provisions

related to physician incentive plans. This new paragraph also makes it

clear why this provision is placed in part 417, subpart L (Medicare

Contract Requirements).

We designate paragraph (b) as paragraph (c) and revise the

definition of ``physician group'' so that it no longer inadvertently

excludes physician groups that pay their physicians using a methodology

under which the amount of payment is affected by referrals. We also

clarify, in that definition, that an IPA is a physician group only if

it is composed of individual physicians and has no subcontracts with

physician groups.

We designate proposed (c) as paragraph (d). We also revise

this paragraph to remove language that, because of the addition of new

paragraph (a), became redundant. Also, in response to a comment, we

change ``to reduce or limit medically necessary services'' to ``to

reduce or limit medically necessary services covered under the

organization's contract''.

Proposed paragraph (d) is designated as paragraph (e).

Additionally, the difference in risk threshold based on the frequency

of distribution or assessment of incentive payments is removed.

Proposed paragraph (e) is designated as paragraph (f) and

is revised to--

+ Provide a definition of ``potential payments'' and clarify that

it is these payments that are used in the calculation of the level of

risk.

+ Provide that substantial financial risk does not exist if,

without pooling, the patient panel size is 25,000 patients or more.

Proposed paragraph (g) is revised to--

+ Specify that individuals who disenroll from a prepaid plan

because they relocate outside the plan's service area need not be

included in the enrollee survey.

+ Provide that, in the case of aggregate stop-loss protection, the

protection must cover 90 percent of the costs of referral services

(beyond allocated amounts) that exceed 25 percent of potential

payments.

+ Establish, in the case of stop-loss protection based on a per-

patient limit, requirements as to the amount of stop-loss protection

that are based on patient panel size.

Proposed paragraph (h) is revised to-

+ Specify the items of information that must be disclosed to HCFA

and to Medicare beneficiaries and, in accordance with Sec. 434.70(a)(3)

and (a)(4), to the State Medicaid agency or recipient, respectively.

+ Include methods that may be used in the calculation of panel

size.

+ Specify those types of changes in the incentive plan that must be

reported to HCFA and require that this information be submitted to HCFA

45 days before implementing the changes.

+ Remove proposed paragraph (h)(5). The proposed paragraph

addressed when organizations with existing contracts must comply with

the disclosure requirements. Because that provision would become

quickly irrelevant, we have decided to address this issue in the DATES

section of this final rule, rather than by incorporation into the CFR.

+ Require that organizations provide Medicare beneficiaries a

summary of the disclosure information, if they request it.

We designate proposed Sec. 417.479(i) as Sec. 417.479(j).

We add a new Sec. 417.479(i) to specify requirements related to

subcontracting arrangements.

Changes to Proposed Sec. 434.70

Proposed paragraph (a)(2) is revised to--

+ Require compliance with Secs. 417.479(d) through (g) and the

requirements related to subcontracts set forth at Sec. 417.479(i) if

the subcontract is for the provision of services to Medicaid

recipients.

+ Specify the items of information that must be disclosed to the

State agency.

+ Require that the organization provide certain information

concerning the physician incentive plan to any Medicaid recipient who

requests it.

+ Remove proposed paragraph (a)(2)(iv). The proposed paragraph

addressed when organizations with existing contracts (agreements) must

comply with the disclosure requirements. Because that provision

[[Page 13445]]

would quickly become irrelevant, we have decided to address this issue

in the DATES section of this final rule, rather than by incorporation

into the CFR.

Crosswalk Between Proposed Rule and This Final Rule

Note that those provisions related to civil money penalties and

intermediate sanctions that were included in the July 22, 1991,

proposed rule and that were merely republished in the December 1992

proposed rule on physician incentive plans are not included in this

final rule or in the following crosswalk.

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

Proposed This rule

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

Sec. 417.479(a)--new

contents.

Sec. 417.479(a).......................... Sec. 417.479(b).

Sec. 417.479(b).......................... Sec. 417.479(c).

Sec. 417.479(c).......................... Sec. 417.479(d).

Sec. 417.479(d).......................... Sec. 417.479(e).

Sec. 417.479(e).......................... Sec. 417.479(f).

Sec. 417.479(f).......................... Content deleted.

Sec. 417.479(g).......................... Sec. 417.479(g).

Sec. 417.479(h).......................... Sec. 417.479(h).

Sec. 417.479(i)--new

contents.

Sec. 417.479(i).......................... Sec. 417.479(j).

Sec. 417.495(a)(7)....................... Sec. 417.500(a)(9).

Sec. 434.44(a)........................... Sec. 434.44(a).

Sec. 434.70(a)(3) and

(a)(4)--added.

Sec. 1003.100(b)(vi)..................... Sec. 1003.100(b)(vi).

Sec. 1003.101 (definitions).............. Sec. 1003.101--only

definition of ``physician

incentive plan'' added by

this rule.

Sec. 1003.103(e)(iv) through (e)(vi)..... Sec. 1003.103(e)(iv)

through (e)(vi).

Sec. 1003.106(a)(4)(vii)................. Sec. 1003.106(a)(4)(vii).

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

VIII. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995, we 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. In

order to fairly evaluate whether an information collection should be

approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act

of 1995 requires that we solicit comment on the following issues:

Whether the information collection is necessary and useful

to carry out the proper functions of our agency.

The accuracy of our estimate of the information collection

burden.

The quality, utility, and clarity of the information to be

collected.

Recommendations to minimize the information collection

burden on the affected public, including automated collection

techniques.

Therefore, we are soliciting public comment on each of these issues

for the following sections of this document that contain information

collection requirements:

The information collection requirements in Sec. 417.479(g)(1) (and

Sec. 434.70(a)(3) for Medicaid) concern organizations that operate

incentive plans that place physicians or physician groups at

substantial financial risk and require them to conduct annual enrollee

surveys that include either all current Medicare/Medicaid enrollees in

the organization and those who have disenrolled (other than because of

loss of eligibility in Medicaid or relocation outside the

organization's service area) in the past 12 months, or a sample of

these same enrollees and disenrollees. These surveys must be designed,

implemented, and analyzed in accordance with commonly accepted

principles of survey design and statistical analysis. They must address

enrollees/disenrollees satisfaction with the quality of services

furnished and their degree of access to the services. We estimate that

200 organizations will conduct the surveys each year. We estimate that

a total of approximately 90,000 enrollees will respond to the survey.

The information collection requirements in Secs. 417.479(h)(1) and

(h)(2), 417.479(i), and 434.70(a)(3) specify that disclosure concerning

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

appropriate. The requirements apply to physician incentive plans

between eligible organizations 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.

The disclosure must contain the following information:

(1) Whether services not furnished by the physician or physician

group are covered by the incentive plan. (If not, disclosure of other

aspects of the plan need not be made.)

(2) The type of incentive arrangement.

(3) If the incentive plan involves a withhold or bonus, the percent

of the withhold or bonus.

(4) The amount and type of stop-loss protection.

(5) The patient panel size and, if patients are pooled, the pooling

method used.

(6) In the case of capitated physicians or physician groups,

capitation payments 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.

(7) In the case of prepaid plans that must conduct beneficiary/

recipient surveys, the survey results.

An organization 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 HCFA or the State. The respondents that

will provide the information are HMOs, CMPs, HIOs, and certain

subcontractor entities that contract with the Medicare program or

States and have physician incentive plans. We estimate that

approximately 600 organizations will submit the information.

Sections 417.479(h)(3) and 434.70(a)(4) require that the following

information be provided to any Medicare beneficiary or Medicaid

recipient, respectively, who requests it: Whether the plan uses a

physician incentive plan that affects the use of referral services; if

so, the type of incentive arrangement; whether stop-loss protection is

provided; and, if a survey is required, a summary of the survey

results. The respondents who will provide this information will be

HMOs, CMPs, HIOs, that contract with the Medicare program or States and

have physician incentive plans. We estimate that approximately 300

organizations will provide this information to a total of approximately

1,500 Medicare beneficiaries and 1,500 Medicaid recipients.

The table below indicates the annual number of responses for each

regulation section in this final rule containing information collection

requirements, the average burden per response in minutes or hours, and

the total annual burden hours.

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

Annual No. Annual

CFR section of Annual Average burden per response burden

responses frequency hours

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

417.479(g)(1).............................. 90,000 1 10 minutes.................... 15,000

417.479(h) (1) and (2) and 417.479(I)...... 600 1 1 hour........................ 600

[[Page 13446]]

417.479(h)(3).............................. 1,500 1 10 minutes.................... 250

434.70(a)(4)............................... 1,500 1 10 minutes.................... 250

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

We have submitted a copy of this final rule with comment period to

OMB for its review of the above information requirements. A document

will be published in the Federal Register when OMB approval is

obtained.

If you comment on these information collection and recordkeeping

requirements, please mail your comments to the following address:

Health Care Financing Administration, Office of Financial and Human

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

Security Boulevard, Baltimore, MD 21244-1850.

IX. 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, all HMOs, CMPs, and HIOs are considered to be small entities.

In addition, section 1102(b) of the Act 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) of the Act, we define a

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

Metropolitan Statistical Area and has fewer than 50 beds.

This final rule with comment period will amend the regulations

governing prepaid health care organizations with Medicare or Medicaid

risk contracts. Sections 4204(a) and 4731 of OBRA 1990 repealed the

prohibition of physician incentive plans in prepaid health care

organizations and enacted requirements, effective January 1, 1992, for

regulating these plans.

One of the requirements imposed was that each Medicare contract

with a prepaid health care organization stipulate that, if a physician

incentive plan places a physician or physician group at ``substantial

financial risk'' for services not provided directly, the prepaid health

plan organization must: (1) Provide the physician or physician group

with adequate and appropriate stop-loss protection, 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.

We received one comment that dealt with the impact statement in the

proposed rule published in the Federal Register on December 14, 1992

(57 FR 59034). The commenter believed that the proposed rule would have

a substantial impact on prepaid health care organizations. The

commenter stated that it would be required to make significant changes

to limit physician group participation in incentive programs. The

commenter also believed the proposed rule would limit its ability to

control costs and also result in higher administrative expenses. We

believe most plans already meet a majority of our requirements, as

indicated by the survey data collected by GHAA and Mathematica

discussed in the preamble. We strongly believe that if physicians are

at substantial financial risk, organizations must provide stop-loss

protection to ensure that essential health care services are received

by Medicare beneficiaries and Medicaid enrollees.

All of the approximately 600 HMOs, CMPs, and HIOs could be affected

by the revised incentive plan disclosure requirements. We believe,

however, that few incentive plans will require changes to comply with

the regulations. In addition, since we expect that most current

incentive plans already comply with the regulations, we believe that we

will rarely need to impose intermediate sanctions or civil money

penalties on prepaid health plan organizations that fail to provide

covered medically necessary services. Further, we expect few additional

surveys of currently and previously enrolled members will be necessary

to assess the degree of access to services and the satisfaction with

the quality of services. Thus, we believe that additional costs will be

incurred by only a small number of organizations.

We are not preparing analyses 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 impact on the

operations of a substantial number of small rural hospitals. We will,

however, publish a regulatory flexibility analysis and regulatory

impact analysis if we receive comments and data that would enable us to

do so.

In accordance with the provisions of Executive Order 12866, this

regulation was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 417

Administrative practice and procedure, Health maintenance

organization (HMO), Medicare, Reporting and recordkeeping requirements.

42 CFR Part 434

Grant programs--Health, Health maintenance organization (HMO),

Medicaid, Reporting and recordkeeping requirements.

42 CFR Part 1003

Administrative practice and procedure, Fraud, Grant programs--

Health, Health facilities, Health profession, Maternal and child

health, Medicaid, Medicare, Penalties.

CHAPTER IV--HEALTH CARE FINANCING ADMINISTRATION, DEPARTMENT OF HEALTH

AND HUMAN SERVICES

I. 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 is revised to read as

follows:

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

U.S.C. 1302 and 1395hh).

2. A new Sec. 417.479 is added to read as follows:

Sec. 417.479 Requirements for physician incentive plans.

(a) The contract must specify that an organization 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

[[Page 13447]]

(2) The stop-loss protection, enrollee survey, and disclosure

requirements of this section are met.

(b) Applicability. The requirements in this section apply to

physician incentive plans between eligible organizations and individual

physicians or physician groups with whom they contract to provide

medical services to enrollees. 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.

(c) Definitions. For purposes of this section:

Bonus means a payment an organization makes to a physician or

physician group beyond any salary, fee-for-service payments,

capitation, or returned withhold.

Capitation means a set dollar payment per patient per unit of time

(usually per month) that an organization pays a physician or physician

group to cover a specified set of services and administrative costs

without regard to the actual number of services provided. The services

covered may include the physician's own services, referral services, or

all medical services.

Payments means any amounts the organization pays physicians or

physician groups for services they furnish directly, plus amounts paid

for administration and amounts paid (in whole or in part) based on use

and costs of referral services (such as withhold amounts, bonuses based

on referral levels, and any other compensation to the physician or

physician group to influence the use of referral services). Bonuses and

other compensation that are not based on referral levels (such as

bonuses based solely on quality of care furnished, patient

satisfaction, and participation on committees) are not considered

payments for purposes of this subpart.

Physician group means a partnership, association, corporation,

individual practice association, or other group that distributes income

from the practice among members. An individual practice association is

a physician group only if it is composed of individual physicians and

has no subcontracts with physician groups.

Physician incentive plan means any compensation arrangement between

an organization and a physician or physician group that may directly or

indirectly have the effect of reducing or limiting services furnished

to Medicare beneficiaries or Medicaid recipients enrolled in the

organization.

Referral services means any specialty, inpatient, outpatient, or

laboratory services that a physician or physician group orders or

arranges, but does not furnish directly.

Risk threshold means the maximum risk, if the risk is based on

referral services, to which a physician or physician group may be

exposed under a physician incentive plan without being at substantial

financial risk.

Withhold means a percentage of payments or set dollar amounts that

an organization deducts from a physician's service fee, capitation, or

salary payment, and that may or may not be returned to the physician,

depending on specific predetermined factors.

(d) Prohibited physician payments. No specific payment of any kind

may be made directly or indirectly under the incentive plan to a

physician or physician group as an inducement to reduce or limit

covered medically necessary services covered under the organization's

contract furnished to an individual enrollee. Indirect payments include

offerings of monetary value (such as stock options or waivers of debt)

measured in the present or future.

(e) General rule: Determination of substantial financial risk.

Substantial financial risk occurs when the incentive arrangements place

the physician or physician group at risk for amounts beyond the risk

threshold, 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. The risk threshold is

25 percent.

(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 or is greater than 25,000 patients only as

a result of pooling patients using a method set forth in paragraph

(h)(1)(v) of this section:

(1) Withholds greater than 25 percent of potential payments.

(2) 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.

(3) Bonuses that are greater than 33 percent of potential payments

minus the bonus.

(4) 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%.

(5) Capitation arrangements, if--

(i) The difference between the maximum possible payments and

minimum possible payments is more than 25 percent of the maximum

possible payments; or

(ii) The maximum and minimum possible payments are not clearly

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

(6) Any other incentive arrangements that have the potential to

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

potential payments.

(g) Requirements for physician incentive plans that place

physicians at substantial financial risk. Organizations 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--

(i) Include either all current Medicare/Medicaid enrollees in the

organization and those who have disenrolled (other than because of loss

of eligibility in Medicaid or relocation outside the organization's

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

enrollees and disenrollees;

(ii) Be designed, implemented, and analyzed in accordance with

commonly accepted principles of survey design and statistical analysis;

(iii) Address enrollees/disenrollees satisfaction with the quality

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

and

(iv) Be conducted no later than 1 year after the effective date of

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

(2) Ensure that all physicians and physician groups at substantial

financial risk have either aggregate or per-patient stop-loss

protection in accordance with the following requirements:

(i) 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.

(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

[[Page 13448]]

patient panel. In determining patient panel size, the patients may be

pooled using one of the methods set forth in paragraph (h)(1)(v) of

this section if pooling is consistent with the relevant contract

between the physician or physician group and the organization. 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:

(A) Less than 1,000 patients--$10,000.

(B) 1,000 to 10,000 patients--$30,000.

(C) 10,000 to 25,001 patients--$200,000.

(D) Greater than 25,000 patients--

(1) Without pooling patients--none; and

(2) As a result of pooling patients--$200,000.

(iii) The organization may provide the stop-loss protection

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

physician group may purchase the stop-loss protection. If the physician

or physician group purchases the stop-loss protection, the organization

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 the

stop-loss.

(h) Disclosure requirements for organizations with physician

incentive plans--(1) Disclosure to HCFA. Each organization must provide

to HCFA information concerning its physician incentive plans as

required or requested. The disclosure must contain the following

information in detail sufficient to enable HCFA to determine whether

the incentive plan complies with the requirements specified in this

section:

(i) 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 incentive plan,

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

(ii) The type of incentive arrangement; for example, withhold,

bonus, capitation.

(iii) If the incentive plan involves a withhold or bonus, the

percent of the withhold or bonus.

(iv) The amount and type of stop-loss protection.

(v) The panel size and, if patients are pooled according to one of

the following permitted methods, the method used:

(A) Including commercial, Medicare, and/or Medicaid patients in the

calculation of the panel size.

(B) Pooling together, by the organization, of several physician

groups into a single panel.

(vi) In the case of capitated physicians or physician groups,

capitation payments 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 (for

example, nursing home and home health agency) services.

(vii) In the case of those prepaid plans that are required to

conduct beneficiary surveys, the survey results.

(2) When disclosure must be made to HCFA. (i) An organization must

provide the information required by paragraph (h)(1) of this section to

HCFA--

(A) Upon application for a contract;

(B) Upon application for a service area expansion; and

(C) Within 30 days of a request by HCFA.

(ii) An organization must notify HCFA at least 45 days before

implementing any of the following changes in its incentive plan:

(A) A change as to the type of incentive plan.

(B) A change in the amounts of risk or stop-loss protection.

(C) Expansion of the risk formula to cover services not furnished

by the physician group that the formula had not included previously.

(3) Disclosure to Medicare beneficiaries. An organization must

provide the following information to any Medicare beneficiary who

requests it:

(i) Whether the prepaid plan uses a physician incentive plan that

affects the use of referral services.

(ii) The type of incentive arrangement.

(iii) Whether stop-loss protection is provided.

(iv) If the prepaid plan was required to conduct a survey, a

summary of the survey results.

(i) Requirements related to subcontracting arrangements--(1)

Physician groups. An organization that contracts with a physician group

that places the individual physician members at substantial financial

risk for services they do not furnish must do the following:

(i) Disclose to HCFA 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 paragraphs (h)(1)(i) through (h)(1)(vii) of this section

and be made at the times specified in paragraph (h)(2) of this section.

(ii) Provide adequate stop-loss protection to the individual

physicians.

(iii) Conduct enrollee surveys as specified in paragraph (g)(1) of

this section.

(2) Intermediate entities. An organization that contracts with an

entity (other than a physician group) for the provision of services to

Medicare beneficiaries must do the following:

(i) Disclose to HCFA any incentive plan between the entity and a

physician or physician group that bases compensation to the physician

or physician group on the use or cost of services furnished to Medicare

beneficiaries or Medicaid recipients. The disclosure must include the

information required to be disclosed under paragraphs (h)(1)(i) through

(h)(1)(vii) of this section and be made at the times specified in

paragraph (h)(2) of this section.

(ii) If the physician incentive plan puts a physician or physician

group at substantial financial risk for the cost of services the

physician or physician group does not furnish--

(A) Meet the stop-loss protection requirements of this subpart; and

(B) Conduct enrollee surveys as specified in paragraph (g)(1) of

this section.

(3) For purposes of paragraph (i)(2) of this section, an entity

includes, but is not limited to, an individual practice association

that contracts with one or more physician groups and a physician

hospital organization.

(j) Sanctions against the organization. HCFA may apply intermediate

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

penalties described at Sec. 417.500, if HCFA determines that an

eligible organization fails to comply with the requirements of this

section.

3. In Sec. 417.500, the introductory text of paragraph (a) is

republished, and a new paragraph (a)(9) is added to read as follows:

Sec. 417.500 Sanctions against HMOs and CMPs.

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

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

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

does one or more of the following:

* * * * *

(9) Fails to comply with the requirements of Secs. 417.479(d)

through (i) relating to physician incentive plans.

* * * * *

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).

[[Page 13449]]

2. In Sec. 434.44, the introductory text of paragraph (a) is

republished, and paragraph (a)(1) is revised to read as follows:

Sec. 434.44 Special rules for certain health insuring organizations.

(a) A health insuring organization that first enrolls patients on

or after January 1, 1986, and arranges with other providers (through

subcontract, or through other arrangements) for the delivery of

services (as described in Secs. 434.21(b)) to Medicaid enrollees on a

prepaid capitation risk basis is--

(1) Subject to the general requirements set forth in Sec. 434.20(d)

concerning services that may be covered and 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. 434.67, the introductory text of paragraph (a) is

republished, and a new paragraph (a)(5) is added to read as follows:

Sec. 434.67 Sanctions against HMOs with risk comprehensive contracts.

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

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

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

comprehensive contract does one or more of the following:

* * * * *

(5) Fails to comply with the requirements of Secs. 417.479(d)

through (g) of this chapter relating to physician incentive plans, or

fails to submit to the State Medicaid agency its physician incentive

plans as required or requested in Sec. 434.70.

* * * * *

4. Section 434.70 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--

(1) The contract--

(i) Meets the requirements of this part;

(ii) Meets the appropriate requirements of 45 CFR part 74; and

(iii) Is in effect;

(2) The HMO or HIO complies with the physician incentive plan

requirements specified in Secs. 417.479(d) through (g) of this chapter

and the requirements related to subcontracts set forth at

Sec. 417.479(i) of this chapter if the subcontract is for the provision

of services to Medicaid recipients;

(3) The HMO or 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 Secs. 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 this information to the State Medicaid

agencies as follows:

(i) Upon application for a contract.

(ii) At least 45 days before implementing any of the following

changes in its incentive plan:

(A) A change as to the type of incentive plan.

(B) A change in the amounts of risk or stop-loss protection.

(C) Expansion of the risk formula to cover services not furnished

by the physician group that the formula had not included previously.

(iii) Within 30 days of a request by the State or HCFA; and

(4) The HMO or HIO has provided the information on physician

incentive plans listed in Sec. 417.479(h)(3) of this chapter to any

Medicaid recipient who requests it.

(b) HCFA may withhold FFP for any period during which--

(1) The State fails to meet the State plan requirements of this

part;

(2) Either party to a contract substantially fails to carry out the

terms of the contract; or

(3) The State fails to obtain from each HMO or HIO contractor proof

that it meets the requirements for physician incentive plans specified

in Secs. 417.479(d) through (g) and (i) of this chapter.

CHAPTER V--OFFICE OF INSPECTOR GENERAL--HEALTH CARE, DEPARTMENT OF

HEALTH AND HUMAN SERVICES

II. 42 CFR part 1003 is amended as set forth below:

PART 1003--CIVIL MONEY PENALTIES, ASSESSMENTS AND EXCLUSIONS

1. The authority citation for part 1003 continues to read as

follows:

Authority: 42 U.S.C. 1302, 1320a-7, 1320a-7a, 1320b-10, 1395mm,

1395ss(d), 1395u(j), 1395u(k), 1396b(m), 11131(c) and 11137(b)(2).

2. In Sec. 1003.100, paragraph (b)(1) introductory text is revised

and paragraph (b)(1)(vii) is revised to read as follows:

Sec. 1003.100 Basis and purpose.

* * * * *

(b) Purpose. * * *

(1) Provides for the imposition of civil money penalties and, as

applicable, assessments against persons who--

* * * * *

(vii) Substantially fail to provide an enrollee with required

medically necessary items and services, or who engage in certain

marketing, enrollment, reporting, claims payment, employment or

contracting abuses, or that do not meet the requirements for physician

incentive plans for Medicare specified in Secs. 417.479 (d) through (i)

of this title;

* * * * *

3. Section 1003.101 is amended by adding, in alphabetical order, a

definition for the term ``Physician incentive plan'' to read as

follows:

Sec. 1003.101 Definitions.

* * * * *

Physician incentive plan means any compensation arrangement between

a contracting organization and a physician group that may directly or

indirectly have the effect of reducing or limiting services provided

with respect to enrollees in the organization.

* * * * *

4. In Sec. 1003.103, paragraph (f)(1) introductory text is

republished, paragraphs (f)(1)(iv) and (f)(1)(v) are revised, and a new

paragraph (f)(1)(vi) is added, to read as follows:

Sec. 1003.103 Amount of penalty.

* * * * *

(f)(1) The OIG may, in addition to or in lieu of other remedies

available under law, impose a penalty of up to $25,000 for each

determination by HCFA that a contracting organization has--

* * * * *

(iv) Misrepresented or falsified information furnished to an

individual or any other entity under section 1876 or section 1903(m) of

the Act;

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

of the Act, regarding prompt payment of claims; or

(vi) Failed to comply with the requirements of Secs. 417.479 (d)

through (i) of this title for Medicare, and Secs. 417.479 (d) through

(g) and (i) of this title for Medicaid, regarding certain prohibited

incentive payments to physicians.

* * * * *

5. In Sec. 1003.106, paragraph (a)(5) introductory text is

republished; paragraphs (a)(5)(vii) and (a)(5)(viii) are redesignated

as paragraphs (a)(5)(viii) and (a)(5)(ix), respectively; and a new

paragraph (a)(5)(vii) is added to read as follows:

[[Page 13450]]

Sec. 1003.106 Determinations regarding the amount of the penalty and

assessment.

(a) * * *

(5) In determining the appropriate amount of any penalty in

accordance with Sec. 1003.103(f), the OIG will consider, as

appropriate--

* * * * *

(vii) The extent to which the failure to provide medically

necessary services could be attributed to a prohibited inducement to

reduce or limit services under a physician incentive plan and the harm

to the enrollee which resulted or could have resulted from such

failure. It would be considered an aggravating factor if the

contracting organization knowingly or routinely engaged in any

prohibited practice which acted as an inducement to reduce or limit

medically necessary services provided with respect to a specific

enrollee in the organization;

* * * * *

(Catalog of Federal Domestic Assistance Program No. 93.733--

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

Supplementary Medical Insurance Program; No. 93.778--Medical

Assistance Program)

Dated: April 20, 1995.

Bruce C. Vladeck,

Administrator, Health Care Financing Administration.

Dated: May 19, 1995.

June G. Brown,

Inspector General, Department of Health and Human Services.

Dated: November 2, 1995.

Donna E. Shalala,

Secretary.

[FR Doc. 96-7228 Filed 3-25-96; 8:45 am]

BILLING CODE 4120-01-P