Medicare Program; Medicare Integrity Program, Intermediary and Carrier Functions, and Conflict of Interest Requirements

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 400 and 421

[HCFA-7020-P]

RIN 0938-AI09

Medicare Program; Medicare Integrity Program, Intermediary and

Carrier Functions, and Conflict of Interest Requirements

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement section 1893 of the Social

Security Act (the Act) by establishing the Medicare integrity program

(MIP) to carry out Medicare program integrity activities that are

funded from the Medicare Trust Funds. Section 1893 expands our

contracting authority to allow us to contract with ``eligible

entities'' to perform Medicare program integrity activities. These

activities include review of provider and supplier activities,

including medical, fraud, and utilization review; cost report audits;

Medicare secondary payer determinations; education of providers,

suppliers, beneficiaries, and other persons regarding payment integrity

and benefit quality assurance issues; and developing and updating a

list of durable medical equipment items that are subject to prior

authorization. This proposed rule would set forth the definition of

eligible entities, services to be procured, competitive requirements

based on Federal acquisition regulations and exceptions (guidelines for

automatic renewal), procedures for identification, evaluation, and

resolution of conflicts of interest, and limitations on contractor

liability.

In addition, this proposed rule would bring certain sections of the

Medicare regulations concerning fiscal intermediaries and carriers into

conformity with the Act. The rule would distinguish between those

functions that the statute requires be included in agreements with

intermediaries and those that may be included in the agreements. It

would also provide that some or all of the listed functions may be

included in carrier contracts. Currently all these functions are

mandatory for carrier contracts. These changes would give us the

flexibility to transfer functions from one intermediary or carrier to

another or to otherwise limit the functions an intermediary or carrier

performs if we determine that to do so would result in more effective

and efficient program administration.

DATES: Comments will be considered if we receive them at the

appropriate address, as provided below, no later than 5 p.m. on May 19,

1998.

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

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: HCFA-7020-P, P.O. Box 26676,

Baltimore, MD 21207-0519.

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 HCFA-7020-P. 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: Brenda Thew (410) 786-4889.

SUPPLEMENTARY INFORMATION:

I. Background

A. Current Medicare Contracting Environment

The current Medicare contracting authorities have been in place

since the inception of the Medicare program in 1965. At that time, the

health insurance and medical communities raised concerns that the

enactment of Medicare could result in a large Federal presence in the

provision of health care. In response, under sections 1816(a) and

1842(a) of the Social Security Act (the Act), Congress provided that

public or private entities and agencies may participate in the

administration of the Medicare program under agreements or contracts

entered into with us.

These Medicare contractors are known as intermediaries (section

1816(a) of the Act) and carriers (section 1842(a) of the Act). With

certain exceptions, intermediaries perform bill processing and benefit

payment functions for Part A of the program (Hospital Insurance) and

carriers perform claims processing and benefit payment functions for

Part B of the program (Supplementary Medical Insurance).

(For the following discussion, the terms ``provider'' and

``supplier'' are used as those terms are defined in 42 CFR 400.202.

That is, a provider is a hospital, rural care primary hospital, skilled

nursing facility, home health agency, or a hospice that has in effect

an agreement to participate in Medicare, or a clinic, a rehabilitation

agency, or a public health agency that has a similar agreement to

furnish outpatient physical therapy or speech pathology services.

Supplier is defined as a physician or other practitioner or an entity

other than a ``provider,'' that furnishes health care services under

Medicare.)

Section 1842(a) of the Act authorizes us to contract with private

entities (carriers) for the purpose of administering the Medicare Part

B program. Medicare carriers determine payment amounts and make

payments for services (including items) furnished by physicians and

other suppliers such as nonphysician practitioners, laboratories, and

durable medical equipment suppliers. In addition, carriers perform

other functions required for the efficient and effective administration

of the Part B program. Section 1842(f) of the Act provides that a

carrier must be a ``voluntary association, corporation, partnership, or

other nongovernmental entity which is lawfully engaged in providing,

paying for, or reimbursing the cost of, health services under group

insurance policies or contracts, medical or hospital service

agreements, membership or subscription contracts, or similar group

arrangements, in consideration of premiums or other periodic charges

payable to the carrier, including a health benefits plan duly sponsored

or underwritten by an employee entity.'' No entity may be considered

for carrier contracts unless it can demonstrate that it meets this

definition of carrier.

Section 1842(b) provides us with the discretion to enter into

carrier contracts without regard to any provision of the law requiring

competitive bidding. Other provisions of generally applicable Federal

contract law and regulations, as well as HHS procurement regulations,

remain in effect for carrier contracts.

Section 1816(a) of the Act authorizes us to enter into agreements

with private agencies or entities (intermediaries) for the purpose of

administering Medicare Part A. These entities are responsible for

determining the amount of payment due to providers in consideration of

services provided to beneficiaries and for making

[[Page 13591]]

these payments. We may enter into an agreement with an entity to serve

as an intermediary if the entity has first been ``nominated'' by a

group or association of providers to make Medicare payments to it.

Other portions of section 1816 of the Act provide further details

concerning the ``nomination process'' and assignment and reassignment

of providers to intermediaries.

Our regulations at Sec. 421.100 require that the agreement between

us and an intermediary specify the functions the intermediary must

perform. In addition to requiring any items specified by us in the

agreement that are unique to that intermediary, our regulations require

that all intermediaries perform activities relating to determining and

making payments for covered Medicare services, fiscal management,

provider audits, utilization patterns, resolution of cost report

disputes, and reconsideration of determinations. Finally, our

regulations require that all intermediaries furnish information and

reports, perform certain functions with respect to provider-based home

health agencies and provider-based hospices, and comply with all

applicable laws and regulations and with any other terms and conditions

included in their agreements.

Similarly, Sec. 421.200 of our regulations, requires that the

contract between us and a Part B carrier specify the functions the

carrier must perform. In addition to requiring any items specified by

us in the contract that are unique to that carrier, our regulations

require that all Part B carriers perform activities relating to

determining and making payments (on a cost or charge basis) for covered

Medicare services, fiscal management, provider audits, utilization

patterns, and Part B beneficiary hearings. In addition, Sec. 421.200

requires that all carriers furnish information and reports, maintain

and make available records, and comply with any other terms and

conditions included in their contracts.

It is within the above context that Medicare intermediary and

carrier contracts are significantly different from standard Federal

Government contracts.

Specifically, the Medicare intermediary and carrier contracts are

normally renewed automatically from year to year, in contrast to the

typical Government contract that is recompeted at the conclusion of the

contract term. Congress, in providing for the nomination process under

section 1816 of the Act, and authorizing the automatic renewal of the

carrier contracts in section 1842(b)(5) of the Act, contemplated a

contracting process that would permit us to noncompetitively renew the

Medicare contracts from year to year.

For both intermediaries and carriers, Sec. 421.5 states that we

have the authority not to renew a Part A agreement or a Part B contract

when it expires. Section 421.126 provides for termination of the

intermediary agreements in certain circumstances, and, similarly,

Sec. 421.205 provides for termination of carrier contracts.

Each year, Congress appropriates funds to support Medicare

contractor activities. These funds are distributed to the contractors

through an annual Budget Performance Requirements process, which

allocates funds by program activity to each of the current 69 Medicare

contractors. Historically, approximately one-half of the funds have

been for payment for the processing of claims; one-quarter of the funds

have been for ``payment safeguard'' activities to fund activities such

as conducting medical review of claims to determine whether services

are medically necessary and constitute an appropriate level of care,

deterring and detecting Medicare fraud, auditing provider cost reports,

and ensuring that Medicare acts as a secondary payer when a beneficiary

has primary coverage through other insurance. The remainder of the

funds have been allocated for beneficiary and provider/supplier

services and for various productivity investments.

B. The Medicare Integrity Program

The Health Insurance Portability and Accountability Act of 1996

(Public Law 104-191) was enacted on August 21, 1996. Section 202 of

Public Law 104-191 adds a new section 1893 to the Act establishing the

Medicare integrity program (MIP). This program is funded from the

Medicare Hospital Insurance Trust Fund for activities related to both

Part A and Part B of Medicare. Specifically, section 1893 of the Act

expands our contracting authority to allow us to contract with eligible

entities to perform Medicare program integrity activities performed

currently by intermediaries and carriers. These activities include

medical, fraud, and utilization review; cost report audits; Medicare

secondary payer determinations; overpayment recovery; education of

providers, suppliers, beneficiaries, and other persons regarding

payment integrity and benefit quality assurance issues; and developing

and updating a list of durable medical equipment items that, under

section 1834(a)(15) of the Act, are subject to prior authorization.

Section 1893(d) of the Act requires us to set forth, through

regulations, procedures for entering into contracts for the performance

of specific Medicare program integrity activities. These procedures are

to include the following:

(1) A process for identifying, evaluating, and resolving

organizational conflicts of interest that are generally applicable to

Federal acquisition and procurement.

(2) Competitive procedures for entering into new contracts under

section 1893 of the Act, a process for entering into contracts that may

result in the elimination of responsibilities of an individual

intermediary or carrier, and other procedures we deem appropriate.

(3) A process for renewing contracts entered into under section

1893 of the Act.

Section 1893(d) also provides that we may enter into these

contracts without publication of final rules.

In addition, section 1893(e) of the Act requires us to set forth,

through regulations, the limitation of a contractor's liability for

actions taken to carry out a contract.

Congress established section 1893 of the Act to strengthen our

ability to deter fraud and abuse in the Medicare program in a number of

ways. First, it provides a separate and stable long-term funding

mechanism for MIP activities. Historically, Medicare contractor budgets

had been subject to wide fluctuations in funding levels from year to

year. The variations in funding did not have anything to do with the

underlying requirements for program integrity activities. This

instability made it difficult for us to invest in innovative strategies

to control fraud and abuse. Our contractors also found it difficult to

attract, train, and retain qualified professional staff, including

auditors and fraud investigators. A dependable funding source allows us

the flexibility to invest in innovative strategies to combat fraud and

abuse. It will help us shift emphasis from post-payment recoveries on

fraudulent claims to prepayment strategies designed to ensure that more

claims are paid correctly the first time.

Second, to allow us to more aggressively carry out the MIP

functions and to require us to use procedures and technologies that

exceed those currently being used, section 1893 greatly expands our

contracting authority. Previously, we had a limited pool of entities

with whom to contract. This limited our ability to maximize efforts to

effectively carry out the MIP functions. Section 1893 now permits us to

attract a variety of offerors with potentially new and different skill

sets and will allow those offerors to propose

[[Page 13592]]

innovative approaches to implement MIP to deter fraud and abuse. By

using competitive procedures, as established in the FAR, our ability to

manage the MIP activities is greatly enhanced, and the Government can

seek to obtain the best value for its contracted services.

Third, section 1893 requires us to address potential conflicts of

interest among potential MIP contractors before entering into any

contracting arrangements with them. By requiring offerors/contractors

to report situations that may constitute conflicts of interest, we can

minimize the number of situations where there is either an actual or an

apparent conflict of interest. This is a concern particularly when

intermediaries and carriers processing Medicare claims are also private

health insurance companies.

From the inception of the Medicare program, intermediary and

carrier contracts have contained provisions that have precluded

contractors from using their Medicare contract to benefit their private

lines of business. These conflicts of interest were rarely a problem in

the early years of Medicare because these companies did only health

insurance business within prescribed market areas. In recent years,

however, Medicare intermediaries and carriers, like most health

insuring organizations, have expanded their businesses and product

lines to become large integrated health care delivery systems. Some

organizations have diversified into corporations with many subsidiaries

and a variety of arrangements. These range from overlapping ownership

of other insurers, third party administrators, providers, and managed

care entities to the marketing of management services and software

products. This creates a conflict of interest when the contractor

reviews claims, identifies Medicare secondary payer instances, and

performs other payment safeguard activities for its own providers and

suppliers as well as for its provider's and supplier's competitors.

We have been criticized for the lack of effective mechanisms to

mitigate these conflicts of interest. Even when we are assured that

proper mechanisms are in place, the appearance of a conflict remains in

the eyes of competitors. An even more difficult problem arises with

respect to program integrity activities. Medicare contractors exercise

considerable discretion in their audit functions, the use of prepayment

screens, the conduct of fraud investigations, and referrals to law

enforcement agencies regarding incidences of fraud and abuse. These

activities depend upon the ability of the contractor to conduct

independent reviews, negotiate disputes, and to manipulate data with

great sophistication to discover situations where providers and

suppliers are engaged in fraudulent activity. These activities would be

largely ineffective if contractor-owned providers and suppliers benefit

from bias or forewarning.

When a Medicare contractor owns a provider or supplier, it

necessarily finds itself in a situation in which potential conflicts of

interest could arise. On the one hand, it has a fiduciary duty to its

stockholders to use its best efforts to capture market share and to

maximize profits. On the other hand, it has an obligation to Medicare

and to the public not to take advantage of its position as a Medicare

contractor. For example, the Medicare contractor--

Has access to information about beneficiaries, providers,

and suppliers that would be enormously useful in marketing and other

business decisions, including provider/supplier information that is

considered ``proprietary.''

As the claims administrator for an area, it has

extraordinary leverage over providers and suppliers. That leverage

could be used, implicitly or explicitly, to persuade providers and

suppliers to join a network or to agree to business arrangements that

are favorable to the Medicare contractor.

Has knowledge and experience as a Medicare claims

administrator that would give it a competitive advantage in knowing how

to submit claims to avoid payment screens and in having other

information that is not available to other providers/suppliers that

could assist in maximizing payments to its own providers/suppliers.

May also offer other health insurance coverage that is

primary or supplemental to Medicare. In this situation, there is always

the temptation to let Medicare pay first, knowing that even if the

mistaken Medicare payment is later discovered and reimbursed, the

contractor has received a temporary interest free loan from the

Government.

The MIP, however, allows us to separate payment safeguard functions

from all of the functions now being performed by current intermediaries

and carriers. This allows current contractors that are performing

important functions such as beneficiary and provider/supplier services

well to continue to do so, or possibly to review claims from providers/

suppliers with which they have no financial relationship.

Conflict of interest situations can also occur when Medicare

contractors own managed care entities, for example health maintenance

organizations (HMOs). The mere ownership of an HMO by a Medicare

contractor would seem to create no conflict of interest concerns since

the HMO would be dealing directly with the Government. However, in the

situation in which a physician both works for a contractor-owned HMO

and maintains a fee-for-service practice, the contractor could give the

physician a ``bonus'' by doing a less thorough review of his or her

claims. Additionally, the contractor-owned HMO could use its Medicare

beneficiary database to perform health screening of beneficiaries, or

its utilization data, marketing information, etc. for its commercial

benefit. It could also influence the HMO market by promoting itself as

the local intermediary or carrier.

Medicare contractors also provide management services and develop

software to facilitate the filing of claims and compliance with

Medicare requirements. Since Medicare contractors have an intimate

knowledge of Medicare claims systems and administration, they may

derive an unfair competitive advantage if they were to sell information

that is not generally available to the public. They may also shift

development and training costs to Medicare for services they market to

the public.

For all these reasons this legislation is providing us an

opportunity to increase our ability to protect the Medicare program

from instances of fraud and abuse by establishing procedures for

identifying, evaluating, and resolving organizational conflicts of

interest.

II. Provisions of the Proposed Rule

This regulation is part of our overall contracting strategy, which

is designed to build on the strengths of the marketplace. We intend to

implement the MIP incrementally in a manner that will provide a way to

test alternatives and to transition integrity activities to MIP

contractors. We are committed to conducting procurements using full and

open competition that will provide opportunities for a wide range of

contractors to participate in the program. We will continue to

encourage new and innovative approaches in the marketplace to protect

the Medicare Trust Funds.

A. The Medicare Integrity Program

1. Basis, Scope, and Applicability

In accordance with section 1893 of the Act, this proposed rule

would amend part 421 by adding a new subpart D entitled, ``Medicare

Integrity Program Contractors''. This subpart would define the types of

entities

[[Page 13593]]

eligible to become MIP contractors; identify the program integrity

functions a MIP contractor may perform; describe procedures for

awarding and renewing contracts; establish procedures for identifying,

evaluating, and resolving organizational conflicts of interest;

prescribe responsibilities; and set forth limitations on MIP contractor

liability. The provisions of this subpart supplement the Federal

acquisition regulations set forth at 48 CFR chapter 1 and the

Department's acquisition regulations at 48 CFR chapter 3. Subpart D

would be applicable to entities that seek to compete for or receive

award of a contract under section 1893 of the Act including entities

that perform functions under this subpart emanating from the processing

of claims for individuals entitled to benefits as qualified railroad

retirement beneficiaries. We would set forth the basis, scope, and

applicability of subpart D in Sec. 421.300.

2. Definition of Eligible Entities

As discussed earlier, under sections 1816(a) and 1842(a) of the

Act, public or private entities and agencies (Medicare intermediaries

and carriers) participate in the administration of the Medicare program

under agreements or contracts entered into with us (on the Secretary's

behalf). Basically, the carrier must be a voluntary association,

corporation, partnership, or other nongovernmental entity lawfully

engaged in providing or paying for health services under group

insurance policies or contracts, medical or hospital service

agreements, membership or subscription contracts, or similar group

arrangements. In general, the intermediary must be an entity that has

an agreement with us and has been nominated by a provider to determine

and make Medicare Part A payments and to perform other related

functions. Current regulations at Secs. 421.110 and 421.202 specify the

eligibility requirements current Medicare contractors must meet before

entering into or renewing an agreement or contract.

In accordance with section 1893(c) of the Act, proposed

Sec. 421.302 would provide that an entity is eligible to enter into a

MIP contract if, in general, it demonstrates the capability to perform

MIP contractor functions; it agrees to cooperate with the Office of

Inspector General (OIG), the Attorney General, and other law

enforcement agencies in the investigation and deterrence of fraud and

abuse of the Medicare program, including making referrals; it complies

with the conflict of interest standards in 48 CFR Chapters 1 and 3 and

is not excluded under the conflict of interest provisions established

by this rule; and it meets other requirements that we may impose. Also,

in accordance with the undesignated paragraph following section

1893(c)(4) of the Act, we would specify that Medicare carriers are

deemed to be eligible to perform the activity of developing and

periodically updating a list of durable medical equipment items that

are subject to prior authorization.

Note that, in accordance with section 1893(d) of the Act, we may

continue to contract, for the performance of MIP activities, with

intermediaries and carriers that had a contract with us on August 21,

1996 (the effective date of enactment of Public Law 104-191). However,

in accordance with section 1816(l) or section 1842(c)(6) of the Act

(both added by Public Law 104-191), they may not duplicate activities

under both an intermediary agreement or carrier contract and a MIP

contract, with one excepted activity. The exception permits a carrier

to develop and update a list of items of durable medical equipment that

are subject to prior authorization both under the MIP contract and its

contract under section 1842 of the Act.

3. Definition of MIP Contractor

We propose to define ``Medicare integrity program contractor,'' at

Sec. 400.202 (Definitions specific to Medicare), as an entity that has

a contract with us under section 1893 of the Act to perform program

integrity activities.

4. Services to be Procured

A MIP contractor may perform some or all of the MIP activities

performed currently by intermediaries and carriers. Section 421.304

would state that the contract between HCFA and a MIP contractor

specifies the functions the contractor performs. In accordance with

section 1893(b) of the Act, proposed Sec. 421.304 identifies the

following as MIP activities.

a. Medical, utilization, and fraud review. Medical and utilization

review includes the processes necessary to ensure both the appropriate

utilization of services and that services meet the professionally

recognized standards of care. These processes include review of claims,

medical records, and medical necessity documentation and analysis of

patterns of utilization to identify inappropriate utilization of

services. This would include reviewing the activities of providers/

suppliers and other individuals and entities (including health

maintenance organizations, competitive medical plans, and health care

prepayment plans). This function results in the identification of

overpayments, prepayment denials, recommendations for changes in

national coverage policy, changes in local medical review policies and

payment screens, referrals for fraud and abuse, and the identification

of the education needs of beneficiaries, providers, and suppliers.

Fraud review includes fraud prevention initiatives, responding to

external customer complaints of alleged fraud, the development of

strategies to detect potentially fraudulent activities that may result

in improper Medicare payment, and the identification and development of

fraud cases for referral to law enforcement. Each solicitation will

specify when cases should be referred to the OIG. In general, however,

identified overpayments exceeding a threshold amount set by the OIG,

recurring acts of improper billing, and substantiated allegations of

fraudulent activity will be promptly referred to a Regional Office of

Investigation.

b. Cost report audits. Providers and managed care plans receiving

Medicare payments are subject to audit for all payments applicable to

services furnished to beneficiaries. The audit ensures that proper

payments are made for covered services, provides verified financial

information for making a final determination of allowable costs,

identifies potential instances of fraud and abuse, and ensures the

completion of special projects.

This functional area includes the receipt, processing, and

settlement of cost reports based on reasonable costs, prospective

payment, or any other basis, and the establishment or adjustment of the

interim payment rate using cost report or other information.

c. Medicare secondary payer activities. The Medicare secondary

payer function is a process developed as a payment safeguard to protect

the Medicare program against mistaken primary payments. The focus of

this process is to ensure that the Medicare program pays only to the

extent required by statute. Entities under a MIP contract that includes

Medicare secondary payer functions would be responsible for identifying

Medicare secondary payer situations and/or pursuing recovery of

mistaken payments from the appropriate entity or individual, depending

on the specifics of the contract.

This functional area includes the processes performed to identify

beneficiaries for whom there is coverage which is primary to Medicare.

Through these processes, information may be acquired for subsequent use

in

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beneficiary claims adjudication, recovery, and litigation.

d. Education. This functional area includes educating

beneficiaries, providers, suppliers, and other individuals regarding

payment integrity and benefit quality assurance issues.

e. Developing prior authorization lists. This functional area

includes developing and periodically updating a list of durable medical

equipment items that, in accordance with section 1834(a)(15) of the

Act, are subject to prior authorization. Section 1834(a)(15) requires

prior authorization to be performed on the following items of durable

medical equipment: Items identified as subject to unnecessary

utilization; items supplied by suppliers that have had a substantial

number of claims denied under section 1862(a)(1) of the Act as not

reasonable or necessary or for whom a pattern of overutilization has

been identified; or a customized item if the beneficiary or supplier

has requested an advance determination. Prior authorization is a

determination that an item of durable medical equipment is covered

prior to when the equipment is delivered to the Medicare beneficiary.

Application of MIP--It should be noted that the MIP functions are

not limited to services furnished under fee-for-service payment

methodologies. MIP functions are applicable to all types of claims.

They are also applicable to all types of payment systems including, but

not limited to, managed care and demonstration projects.

5. Competitive Requirements

We would specify, in Sec. 421.306(a), that MIP contracts will be

awarded in accordance with 48 CFR chapters 1 and 3, 42 CFR part 421

subpart D, and all other applicable laws and regulations. Further, in

accordance with section 1893(d)(2) of the Act, we would specify that

the procedures set forth in these authorities will be used: (1) When

entering into new contracts; (2) when entering into contracts that may

result in the elimination of responsibilities of an individual

intermediary or carrier; and (3) at any other time we consider

appropriate.

In proposed section 421.306(b), we would establish an exception to

competition which allows a successor in interest to an intermediary

agreement or carrier contract to be awarded a contract for MIP

functions without competition, if its predecessor performed program

integrity functions under the transferred agreement or contract and the

resources, including personnel, which were involved in performing those

functions, were transferred to the successor.

This proposal is made in anticipation that some intermediaries and

carriers may engage in transactions under which the recognition of a

successor in interest by means of a novation agreement may be

appropriate, and the resources involved in the intermediary's or

carrier's MIP activities are transferred along with its other Medicare-

related resources to the successor in interest. For example, the

intermediary or carrier may undergo a corporate reorganization under

which the corporation's Medicare business is transferred entirely to a

new subsidiary corporation. When all of a contractor's resources or the

entire portion of the resources involved in performing a contract are

transferred to a third party, HCFA may recognize the third party as the

successor in interest to the contract through approval of a novation

agreement. See 48 CFR 42.12.

If the intermediary or carrier were performing MIP activities under

its contract on August 21, 1996, the date of the enactment of the MIP

legislation, the statute permits HCFA to continue to contract with the

intermediary or carrier for the performance of those activities without

using competitive procedures. In the context of a corporate

reorganization, under which all of the resources involved in performing

the contract, including those involved in performing MIP activities,

are transferred to a successor in interest, HCFA may determine that

breaking out the MIP activities and competing them separately would not

be in the best interest of the government.

Inherent in the requirement of section 1893(d) of the Act that the

Secretary establish competitive procedures to be used when entering

into contracts for MIP functions is the authority to establish

exceptions to those procedures. See 48 CFR 6.3. Moreover, intermediary

agreements and carrier contracts have, by statute, been

noncompetitively awarded under sections 1816(a) and 1842(b)(1) of the

Act. Furthermore, those agreements and contracts have in recent years

prior to the enactment of the MIP legislation included program

integrity activities, a fact that the Congress acknowledged in section

1893(d)(2) of the Act. We believe that creating an exception to the use

of competition for cases in which the same resources, including the

same personnel, continue to be used by a third party as successor in

interest to an intermediary agreement or carrier contract is consistent

with Congress' authorization to forgo competition when the contracting

entity was carrying out the MIP functions on the date of enactment of

the MIP legislation. Section 421.306(b) would provide an interim

solution to permit continuity in the performance of the MIP functions

until such time as we are prepared to procure MIP functions on the

basis of full and open competition.

We would further specify, in Sec. 421.306(c), that an entity must

meet the eligibility requirements established in proposed Sec. 421.302

to be eligible to be awarded a MIP contract.

We would state, in Sec. 421.308(a), that we specify an initial

contract term in the MIP contract and that contracts may contain

renewal clauses. Contract renewal provides a mutual benefit to both

parties. Renewing a contract, when appropriate, results in continuity

both for us and the contractor and is in the best interest of the

Medicare program. The benefits are realized through early communication

of our intention whether to renew a contract, which permits both

parties to plan for any necessary changes in the event of nonrenewal.

Furthermore, as a prudent administrator of the Medicare program, we

must ensure that we have sufficient time to transfer the MIP functions

should a reassignment of the functions be necessary (either because the

contractor has given notice of its intent to nonrenew or because we

have determined that reassignment is in the best interest of the

Medicare program). Therefore, in Sec. 421.308(a), we would specify that

we may renew a MIP contract, as we determine appropriate, by giving the

contractor notice, within timeframes specified in the contract, of our

intention to do so. (The solicitation document that resulted in the

contract will contain further details regarding this provision.)

Based on section 1893(d)(3) of the Act, we would specify, in

paragraph (b) of Sec. 421.308, that we may renew a MIP contract without

competition if the contractor continues to meet all the requirements of

proposed subpart D of part 421, the contractor meets or exceeds all

performance standards and requirements in the contract, and it is in

the best interest of the Government.

We would provide, at Sec. 421.308(c), that, if we do not renew the

contract, the contract will end in accordance with its terms, and the

contractor does not have a right to a hearing or judicial review

regarding the nonrenewal. This is consistent with our longstanding

policy with regard to intermediary and carrier contracts.

6. Conflict of Interest Rules

This proposed rule would establish the process for identifying,

evaluating, and resolving conflicts of interest as required by section

1893(d)(1) of the Act. The process has been designed to

[[Page 13595]]

ensure that the more diversified business arrangements of potential

contractors do not inhibit competition between providers/suppliers or

in other types of businesses related to the insurance industry or have

the potential for harming Government interests.

On December 6, 1996, we held an open forum discussion with certain

organizations and groups that may, or whose members may, be directly

affected by contracts awarded to perform functions under the MIP.

During the forum, participants discussed whether certain examples were

conflicts of interest and how the conflicts, when present, could be

mitigated. In addition, the conflict of interest situations were made

available for public review on our Internet home page.

In general, some of the participants had concerns that a MIP

contractor could not perform audit or review functions on itself, its

subsidiaries, its direct competitors, or its private sector clients

without the presence of a potential conflict of interest. The conflicts

of interest described could make it impossible for contractor personnel

to be objective in performing contract work or to provide impartial

assistance or advice to the Government or could give the contractor an

unfair competitive advantage.

Some of the participants recommended that the conflict of interest

standards we establish restrict a MIP contractor from having an

ownership interest or contractual relationship with any provider it

will be auditing or reviewing. Also, the participants generally agreed

that requirements dictating disclosure of a contractor's financial

interests would help mitigate conflicts of interest and that each

contractor's situation should be considered on a case-by-case basis.

In developing the conflict of interest requirements, we had several

options. We could refuse to contract with any entity if a conflict of

interest situation either exists or is perceived to exist, or we could

choose not to contract with any health-care related entities. We could

try to develop a list of all potential situations where a conflict of

interest could possibly arise.

We rejected all of these options and adopted a ``process

approach.'' While the process described below employs a greater test

than generally prescribed in the Federal acquisition regulations for

conflict of interest situations, we believe that the sensitive nature

of the work to be performed under the contract, the need to preserve

the public trust, and the history of fraud and abuse in the Medicare

program merits these further requirements. The emphasis on process

requires--

Disclosure by the offeror or contractor via an

Organizational Conflicts of Interest Certificate;

The offeror or contractor to submit a plan to mitigate

situations that could be considered potential conflicts of interest;

The offeror to describe a program that it will establish,

if awarded the contract, to monitor its compliance with any plans

approved by us to resolve conflicts of interest; and

The offeror to describe plans to have a compliance audit

completed by an independent auditor.

Specifically, in Sec. 421.310(b), we would state the general rule

that, except as provided in Sec. 421.310(d), we do not enter into a MIP

contract with an offeror or contractor that we have determined has, or

has the potential for, an unresolved organizational conflict of

interest. Paragraph (d) of Sec. 421.310 would provide that we may

contract with an offeror or contractor that has an unresolved conflict

if we determine that it is in the best interest of the Government to do

so. We would define ``organizational conflict of interest,'' at

Sec. 421.310(a), basing our definition on the definition of that term

contained in the FAR at 48 CFR 9.501(d). That definition states that

organizational conflict of interest means ``that because of other

activities or relationships with other persons, a person is unable or

potentially unable to render impartial assistance or advice to the

Government, or the person's objectivity in performing the contract work

is or might be otherwise impaired, or a person has an unfair

competitive advantage.'' To clarify how this definition would apply to

the MIP contract, we would add that, for purposes of the MIP contract,

the activities and relationships described include those of the offeror

or contractor itself and other business related to it and those of its

officers, directors (including medical directors), managers, and

subcontractors.

In paragraph (c) of Sec. 421.310, we would state that we determine

that an offeror or contractor has an organizational conflict of

interest, or a potential for the conflict exists, if the offeror or

contractor either is, or has a present, or known future, direct or

indirect financial relationship with, an entity we describe in

Sec. 421.310(c)(3), which is discussed later in this preamble. In

paragraph (a) of Sec. 421.310, we would define ``financial

relationship'' as (1) a direct or indirect ownership or investment

interest (including an option or nonvested interest) in any entity that

exists through equity, debt, or other means and includes any indirect

ownership or investment interest no matter how many levels removed from

a direct interest, or (2) a compensation arrangement with an entity.

This definition is similar to the definition at Sec. 411.351, which is

used for purposes of the provision which generally prohibits physicians

from making referrals for Medicare services to entities with which the

physician or a member of the physician's immediate family has a

financial relationship. The definition at Sec. 411.351 was based on

section 1877(a)(2) of the Act as it read before January 1, 1995. To

reflect the current reading of section 1877(a)(2), we have added, in

our proposed definition, that an indirect interest can exist through

multiple levels.

In paragraph (c)(2) of Sec. 421.310, we would specify that a

financial relationship may exist either through an offeror's or

contractor's parent companies, subsidiaries, affiliates,

subcontractors, or current clients. We would also specify that a

financial relationship may exist from the activities and relationships

of the officers, directors (including medical directors), or managers

of the offeror or contractor and may be either direct or indirect. We

would define an indirect financial relationship as an ownership or

investment interest that is held in the name of another but provides

benefits to the officer, director, or manager.

In Sec. 421.310(c)(3), we would provide that an offeror or

contractor has a conflict of interest, or a potential conflict of

interest, if it is, or has a present or known future financial

relationship with, an entity that--

Provides, insures, or pays for health benefits, with the

exception of health plans provided as the entity's employee fringe

benefit;

Conducts audits of health benefit payments or cost

reports;

Conducts statistical analysis of health benefit

utilization;

Would review or does review, under the contract, Medicare

services furnished by a provider or supplier that is a direct

competitor of the offeror or contractor;

Prepared work or is under contract to prepare work that

would be reviewed under the MIP contract; or

Is affiliated, as that term is explained in 48 CFR 19.101,

with a provider or supplier to be reviewed under the MIP contract.

(Section 19.101 of 48 CFR states that--

* * * business concerns are affiliates of each other if, directly

or indirectly, either one controls or has the power to control the

other, or another concern controls or has the power to control

[[Page 13596]]

both. In determining whether affiliation exists, consideration is given

to all appropriate factors including common ownership, common

management, and contractual relationships; provided, that restraints

imposed by a franchise agreement are not considered in determining

whether the franchisor controls or has the power to control the

franchisee, if the franchisee has the right to profit from its effort,

commensurate with ownership, and bears the risk of loss of failure. Any

business entity may be found to be an affiliate, whether or not it is

organized for profit or located inside the United States.

Section 19.101 explains that control may exist through stock ownership,

stock options, convertible debentures, voting trusts, common

management, and contractual relationships.)

We would be interested in receiving comments as to how we might

better identify those situations that create a conflict of interest.

For example, we had originally considered including all entities that

provide, insure, or pay for health benefits. We have, however,

identified the situation in which an offeror or contractor provides

health benefits as an employee fringe benefit as being one where the

likelihood of a conflict would not exist. We would be interested in

receiving comments as to whether it would be appropriate to create

other exceptions.

In Sec. 421.310(c)(4), we would specify that we may determine that

an offeror or contractor has an organizational conflict of interest, or

the potential for one exists, based on apparent organizational

conflicts of interest or on other contracts and grants with the Federal

Government. We would provide that an apparent conflict of interest

exists if a prudent business person has cause to believe that the

offeror or contractor would have a conflict of interest in performing

the requirements of the MIP contract. We would further provide that no

inappropriate action by the offeror or contractor is necessary for an

apparent conflict to exist. We believe it is necessary to consider the

offeror's or contractor's other contracts and grants with the Federal

Government to determine whether the offeror's or contractor's financial

dependence upon the Government could influence the likelihood that it

would provide unbiased opinions, conclusions, and work products.

In paragraph (e) of Sec. 421.310, we would specify that an offeror

or contractor is responsible for determining whether an organizational

conflict of interest exists in any of its proposed or actual

subcontractors and consultants at any tier. We also would specify that

the offeror or contractor is responsible for ensuring that its

subcontractors and consultants have mitigated any conflicts or

potential conflicts.

In paragraph (f) of Sec. 421.310, we would state that we consider

that a conflict of interest has occurred if, during the term of the

contract, the contractor received any fee, compensation, gift, payment

of expenses, or any other thing of value from an entity that is

reviewed, audited, investigated, or contacted during the normal course

of performing activities under the MIP contract. We have considered

creating an exception for those compensations, fees, gifts, and other

things of value that are in an amount that would not affect a

contractor's impartiality or objectivity in carrying out its

responsibilities under the MIP contract. We would be interested in

receiving comments suggesting how we might determine an appropriate

dollar amount for such an exception.

We would also specify in paragraph (f) of Sec. 421.310 that a

conflict of interest has occurred during the term of the contract if we

determine that the contractor's activities are creating a conflict. In

addition, we would specify that, if we determine that a conflict of

interest exists, among other actions, we may, as we deem appropriate--

Not renew the contract for an additional term;

Modify the contract; or

Terminate the contract.

In Sec. 421.312(a), we would specify that offerors and MIP

contractors must submit an Organizational Conflicts of Interest

Certificate that contains the following information unless it has

otherwise been provided in the proposal, in which case it must be

referenced:

A description of all business or contractual relationships

or activities that may be viewed by a prudent business person as a

conflict of interest.

A description of the methods the offeror or contractor

will apply to mitigate any situation listed in the Certificate that

could be identified as a conflict of interest.

A description of the offeror's or contractor's program to

monitor its compliance and the compliance of its proposed and actual

subcontractors and consultants with the conflict of interest

requirements as identified in the relevant solicitation.

A description of the offeror's or contractor's plans to

contract for a compliance audit to be conducted by an independent

auditor would be required for all MIP contractor procurements.

An affirmation, using language that we may prescribe,

signed by an official authorized to bind the offeror or contractor,

that the offeror or contractor understands that we may consider any

deception or omission in the Certificate grounds for nonconsideration

for contract award in the procurement process, termination of the

contract, or other contract action.

Corporate and organizational structure.

Financial interests in other entities, including the

following:

+ Percentage of ownership in any other entity.

+ Income generated from other sources.

+ A list of current or known future contracts or arrangements,

regardless of size, with any insurance organization; subcontractor of

an insurance organization; or providers or suppliers furnishing

services for which payment may be made under the Medicare program. This

information is to include the dollar amount of the contracts or

arrangements, the type of work performed, and the period of

performance.

Information regarding potential conflicts of interest and

financial information regarding certain contracts for all of the

offeror's or contractor's officers, directors (including medical

directors), and managers who would be or are involved in the

performance of the MIP contract. We may also require officers,

directors (including medical directors) and managers to provide

financial information regarding their ownership in other entities and

their income from other sources.

We would also specify that the solicitation may require more

detailed information than identified above. Our proposed provisions do

not describe all of the information that may be required, or the level

of detail that would be required, because we wish to have the

flexibility to tailor the disclosure requirements to each specific

procurement.

With regard to ownership, we invite public comments to establish

the level of financial interest that could be considered a material

interest in different situations. While we would not establish this

level in the final rule, it may be included in solicitations for

specific contract situations.

We intend to reduce the reporting and recordkeeping requirements as

much as is feasible, while taking into consideration our need to have

assurance that a conflict of interest does not exist in the MIP

contractors.

[[Page 13597]]

By providing documentation of potential conflicts of interest and

how the offeror plans to mitigate those conflicts in the Certificate,

the offeror gives us enough information to determine on a case-by-case

basis if conflicts of interest have been adequately mitigated or should

preclude award of MIP contracts. The burden associated with providing

the requested information is justified by the large expansion of

competition the process allows.

We propose, in Sec. 421.312(b) that the Organizational Conflicts of

Interest Certificate be disclosed--

With the offeror's proposal;

When the HCFA Contracting Officer requests a revision in

the Certificate;

As part of a compliance audit by the independent auditor;

Forty-five days before any change in the information

submitted on the Certificate. In this case, only changed information

must be submitted.

We would state, in Sec. 421.312(c), that we evaluate organizational

conflicts of interest and potential conflicts using the information

provided in the Certificate.

Because potential offerors may have questions about whether

information submitted in response to a solicitation, including the

Organizational Conflicts of Interest Certificate, may be redisclosed

under the Freedom of Information Act, we provide the following

information.

To the extent that a proposal containing the Organizational

Conflicts of Interest Certificate is submitted to us as a requirement

of a competitive solicitation under 41 U.S.C. Chapter 4, Subchapter IV,

we will withhold the proposal when requested under the Freedom of

Information Act. This withholding is based upon 41 U.S.C. Sec. 253b(m).

However, there is one exception to this policy. It involves any

proposal that is set forth or incorporated by reference in the contract

awarded to the proposing bidder. Such a proposal may not receive

categorical protection. Rather, we will withhold, under 5 U.S.C.

552(b)(4), information within the proposal (and Certificate) that is

required to be submitted that constitutes trade secrets or commercial

or financial information that is privileged or confidential provided

the criteria established by National Parks & Conservation Association

v. Morton, 498 F.2d 765 (D.C. Cir 1974), as applicable, are met. For

any such proposal, we will follow pre-disclosure notification

procedures set forth at 45 CFR 5.65(d). In addition, we will protect

under 5 U.S.C. 552(b)(6) any information within the Certificate that is

of a highly sensitive personal nature.

Any proposal containing the Organizational Conflicts of Interest

Certificate submitted to us under an authority other than 41 U.S.C.

Chapter 4, Subchapter IV, and any Certificate or information submitted

independent of a proposal will be evaluated solely on the criteria

established by National Parks & Conservation Association v. Morton and

other appropriate authorities to determine if the proposal or

Certificate in whole or in part contains trade secrets or commercial or

financial information that is privileged or confidential and protected

from disclosure under 5 U.S.C. 552(b)(4). Again, for any such proposal

or Certificate, we will follow pre-disclosure notification procedures

set forth at 45 CFR 5.65(d) and will also invoke 5 U.S.C. 552(b)(6) to

protect information that is of a highly sensitive personal nature.

We already protect information we receive in the contracting

process. However, to allay any fears potential offerors might have

about disclosure, we propose to provide, at Sec. 421.312(d), that we

protect disclosed proprietary information as allowed under the Freedom

of Information Act and that we require signed statements from our

personnel with access to proprietary information that prohibit personal

use during the procurement process and term of the contract.

In proposed Sec. 421.314, we describe how conflicts of interest are

resolved. We specify that we establish a Conflicts of Interest Review

Board to resolve conflicts of interest and that we determine when the

Board is convened. We would define resolution of an organizational

conflict of interest as a determination that----

The conflict has been mitigated;

The conflict precludes award of a contract to the offeror;

The conflict requires that we modify an existing contract;

The conflict requires that we terminate an existing

contract; or

It is in the best interest of the Government to contract

with the offeror or contractor even though the conflict exists.

Examples of methods an offeror or contractor may use to mitigate

organizational conflicts of interest, including those created as a

result of the financial relationships of individuals within the

organization are shown below. These examples are not intended to be an

exhaustive list of all the possible methods to mitigate conflicts of

interest nor are we obligated to approve a mitigation method that uses

one or more of these examples. An offeror's or contractor's method of

mitigating conflicts of interest would be evaluated on a case-by-case

basis.

Divestiture of or reduction in the amount of the financial

relationship the organization has in another organization to a level

acceptable to us and appropriate for the situation.

If shared responsibilities create the conflict, a plan,

included in the Organizational Conflicts of Interest Certificate and

approved by us, to separate lines of business and management or

critical staff from work on the MIP contract.

If the conflict exists because of the amount of financial

dependence upon the Federal Government, negotiating a phasing out of

other contracts or grants that continue in effect at the start of the

MIP contract.

If the conflict exists because of the financial

relationships of individuals within the organization, divestiture of

the relationships by the individual involved.

If the conflict exists because of an individual's indirect

interest, divestiture of the interest to levels acceptable to us or

removal of the individual from the work under the MIP contract.

In the procurement process, we determine which proposals are in a

``competitive range.'' The competitive range is based on cost or price

and other factors that are stated in the solicitation and includes all

proposals that have a reasonable chance for contract award. Using the

process proposed in this regulation, offerors will not be excluded from

the competitive range based solely on conflicts of interest. If we

determine that an offeror in the competitive range has a conflict of

interest that is not adequately mitigated, we would inform the offeror

of the deficiency and give it an opportunity to submit a revised

Certificate. At any time during the procurement process, we may convene

the Conflict of Interest Review Board to evaluate and resolve conflicts

of interest.

By providing a better process for the identification, evaluation,

and resolution of conflicts of interest, we not only protect Government

interests but help ensure that contractors will not restrict

competition in their service areas by using their position as a MIP

contractor.

7. Limitation on MIP Contractor Liability and Payment of Legal Expenses

As discussed earlier, contractors who perform activities under the

MIP contract will be reviewing activities of providers and suppliers

that provide services to Medicare beneficiaries. Their contracts will

authorize them to evaluate the performance of providers,

[[Page 13598]]

suppliers, individuals, and other entities that may subsequently

challenge their decisions. To reduce or eliminate a MIP contractor's

exposure to possible legal action from those it reviews, section

1893(e) of the Act requires that we, by regulation, limit a MIP

contractor's liability for actions taken in carrying out its contract.

We must establish, to the extent we find appropriate, standards and

other substantive and procedural provisions that are the same as, or

comparable to, those contained in section 1157 of the Act.

Section 1157 of the Act limits liability and provides for the

payment of legal expenses of an Utilization and Quality Control Peer

Review Organization (PRO) that contracts to carry out functions under

section 1154(e) of the Act. Specifically, section 1157 provides that

PROs, their employees, fiduciaries, and anyone who furnishes

professional services to a PRO are protected from civil and criminal

liability in performing their duties under the Act or their contract,

provided these duties are performed with due care. Following the

mandate of section 1893(e), this proposed rule, at Sec. 421.316(a),

would protect MIP contractors from liability in the performance of

their contracts provided they carry out their contractual duties with

care.

In accordance with section 1893(e), we propose to employ the same

standards for the payment of legal expenses as are contained in section

1157(d) of the Act. Therefore, Sec. 421.316(b) will provide that we

will make payment to MIP contractors, their members, employees, and

anyone who provides them legal counsel or services for expenses

incurred in the defense of any legal action related to the performance

of a MIP contract. We propose that the payment be limited to the

reasonable amount of expenses incurred, as determined by us, provided

funds are available and that the payment is otherwise allowable under

the terms of the contract.

In drafting Sec. 421.316(2), we considered employing a standard for

the limitation of liability other than the due care standard. For

example, we considered whether it would be appropriate to provide that

a contractor would not be criminally or civilly liable by reason of the

performance of any duty, function, or activity under its contract

provided the contractor was not grossly negligent in that performance.

However, section 1893(e) requires that we employ the same or comparable

standards and provisions as are contained in section 1157 of the Act.

We do not believe that it would be appropriate to expand the scope of

immunity to a standard of gross negligence, as it would not be a

comparable standard to that set forth in section 1157(b) of the Act.

We also considered indemnifying MIP contractors employing

provisions similar to those contained in the current Medicare

intermediary agreements and carrier contracts. Generally,

intermediaries and carriers are indemnified for any liability arising

from the performance of contract functions provided the intermediary's

or carrier's conduct was not grossly negligent, fraudulent, or

criminal. However, we may indemnify a MIP contractor only to the extent

we have specific statutory authority to do so. Section 1893(e) does not

provide that authority. In addition, Sec. 421.316(a) provides for

immunity from liability in connection with the performance of a MIP

contract provided the contractor exercised due care. Indemnification is

not necessary since the MIP contractors will have immunity from

liability under Sec. 421.316(a).

B. Intermediary and Carrier Functions

Section 1816(a) of the Act, which provides that providers may

nominate an intermediary, requires only that nominated intermediaries

perform the functions of determining payment amounts and making

payment, and section 1842(a) of the Act requires only that carriers

perform ``some or all'' of the functions cited in that section. Our

requirements at Secs. 421.100 and 421.200 concerning functions to be

included in intermediary agreements and carrier contracts far exceed

those of the statute. Therefore, on February 22, 1994, we published a

proposed rule (59 FR 8446) that would distinguish between those

functions that the statute requires be included in agreements with

intermediaries and those functions, which although not required to be

performed by intermediaries, may be included in intermediary agreements

at our discretion. We also proposed that any functions included in

carrier contracts would be included at our discretion. In addition, we

proposed to add payment on a fee schedule basis as a new function that

may be performed by carriers.

In light of the expansion of our contracting authority by section

1893 of the Act to allow us to contract with eligible entities to

perform Medicare program integrity activities performed currently by

intermediaries and carriers, we have decided not to finalize the

February 1994 proposed rule. Instead, in this proposed rule we are

setting forth a new proposal to bring those sections of the regulations

that concern the functions Medicare intermediaries and carriers perform

into conformity with the provisions of sections 1816(a), 1842(a), and

1893(b) of the Act.

As noted in section I.A. of this preamble, our regulations at

Sec. 421.100 specify a list of functions that must, at a minimum, be

included in all intermediary agreements. Similarly, Sec. 421.200

specifies a list of functions that must, at a minimum, be included in

all carrier contracts. These requirements far exceed those of the

statute.

Section 1816(a) of the Act requires only that an intermediary

agreement provide for determination of the amount of payments to be

made to providers and for the making of the payments. Section 1816(a)

permits, but does not require, an intermediary agreement to include

provisions for the intermediary to provide consultative services to

providers to enable them to establish and maintain fiscal records or to

otherwise qualify as providers. It also provides that, for those

providers to which the intermediary makes payments, the intermediary

may serve as a channel of communications between us and the providers,

may make audits of the records of the providers, and may perform other

functions as are necessary.

We believe that section 1816(a) mandates only that an intermediary

make payment determinations and make payments and that, because of the

nomination provision of section 1816(a), these functions must remain

with intermediaries. We believe that section 1816(a) does not require

that the other functions set forth at Sec. 421.100 (c) through (i) be

included in all intermediary agreements. Further, section 1893 of the

Act permits the performance of functions related to Medicare program

integrity by other entities. Thus, Sec. 421.100 needs to be revised to

be consistent with section 1893 and the implementing regulation. We

also believe that mandatory inclusion of all functions in all

agreements limits our ability to efficiently and effectively administer

the Medicare program. For example, if an otherwise competent

intermediary performs a single function poorly, it would be efficient

and effective to have that function transferred to another contractor

that could carry it out in a satisfactory manner. The alternative is to

not renew or to terminate the agreement of that intermediary and to

transfer all functions to a new contractor that may not have had an

ongoing relationship with the local provider community.

[[Page 13599]]

Therefore, we would revise Sec. 421.100 to specify that an

agreement between us and an intermediary specifies the functions to be

performed by the intermediary and that these must include determining

the amount of payments to be made to providers for covered services

furnished to Medicare beneficiaries and making the payments and may

include any or all of the following functions:

Any or all of the MIP functions identified in proposed

Sec. 421.304, provided that they are continuing to be performed under

an agreement entered into under section 1816 of the Act that was in

effect on August 21, 1996, and they do not duplicate work being

performed under a MIP contract.

Undertaking to adjust overpayments and underpayments and

to recover overpayments when it has been determined that an overpayment

has been made.

Furnishing to us timely information and reports that we

request in order to carry out our responsibilities in the

administration of the Medicare program.

Establishing and maintaining procedures that we approve

for the review and reconsideration of payment determinations.

Maintaining records and making available to us the records

necessary for verification of payments and for other related purposes.

Upon inquiry, assisting individuals with respect to

matters pertaining to an intermediary contract.

Serving as a channel of communication to and from us of

information, instructions, and other material as necessary for the

effective and efficient performance of an intermediary contract.

Undertaking other functions as mutually agreed to by us

and the intermediary.

In Sec. 421.100(c), we would specify that, with respect to the

responsibility for services to a provider-based HHA or a provider-based

hospice, when different intermediaries serve the HHA or hospice and its

parent provider under Sec. 421.117, the designated regional

intermediary determines the amount of payment and makes payments to the

HHA or hospice. The intermediary and/or MIP contractor serving the

parent provider performs fiscal functions, including audits and

settlement of the Medicare cost reports and the HHA and hospice

supplement worksheets.

Section 1842(a), which pertains to carrier contracts, requires that

the contract provide for some or all of the functions listed in that

paragraph, but does not specify any functions that must be included in

a carrier contract. As in the case of intermediary agreements, our

experience has been that mandatory inclusion of a long list of

functions in all contracts restricts our ability to administer the

carrier contracts with optimum efficiency and effectiveness. We believe

that the requirements of the regulations for both intermediaries and

carriers should be brought into conformity with the statutory

requirements. Therefore, we would revise existing Sec. 421.200,

``Carrier functions,'' to make it consistent with section 1893 of the

Act and the implementing regulations. We would provide that a contract

between HCFA and a carrier specifies the functions to be performed by

the carrier, which may include the following:

Any or all of the MIP functions described in Sec. 421.304

if the following conditions are met: (1) The carrier is continuing

those functions under a contract entered into under section 1842 of the

Act that was in effect on August 21, 1996; and (2) they do not

duplicate work being performed under a MIP contract, except that the

function related to developing and maintaining a list of durable

medical equipment may be performed under both a carrier contract and a

MIP contract.

Receiving, disbursing, and accounting for funds in making

payments for services furnished to eligible individuals within the

jurisdiction of the carrier.

Determining the amount of payment for services furnished

to an eligible individual.

Undertaking to adjust incorrect payments and recover

overpayments when it has been determined that an overpayment has been

made.

Furnishing to us timely information and reports that we

request in order to carry out our responsibilities in the

administration of the Medicare program.

Maintaining records and making available to us the records

necessary for verification of payments and for other related purposes.

Establishing and maintaining procedures under which an

individual enrolled under Part B will be granted an opportunity for a

fair hearing.

Upon inquiry, assisting individuals with matters

pertaining to a carrier contract.

Serving as a channel of communication to and from us of

information, instructions, and other material as necessary for the

effective and efficient performance of a carrier contract.

Undertaking other functions as mutually agreed to by us

and the carrier.

C. Technical and Editorial Changes

Because we propose to add a new subpart D to part 421 that would

apply to MIP contractors, we propose to change the title of part 421

from ``Intermediaries and Carriers'' to ``Medicare Contracting''. We

also propose to revise Sec. 421.1, which sets forth the basis, scope,

and applicability of part 421. We would revise this section to add

section 1893 of the Act to the list of provisions upon which the part

is based. We would also make editorial and other changes (such as

reorganizing the contents of the section and providing headings) that

improve the readability of the section without affecting its substance.

In addition, numerous sections of our regulations specifically

refer to an action being taken by an intermediary or a carrier. If the

action being described may now be performed by a MIP contractor that is

not an intermediary or a carrier, we would revise those sections to

indicate that this is the case. As an example, Sec. 424.11, which sets

forth the responsibilities of a provider, specifies, in paragraph

(a)(2), that the provider must keep certification and recertification

statements on file for verification by the intermediary. A MIP

contractor now may also perform the verification. Therefore, we would

revise Sec. 424.11(a)(2) to specify that the provider must keep

certification and recertification statements on file for verification

by the intermediary or MIP contractor. Because our regulations are

continuously being revised and sections redesignated, we have not

identified all such sections that will have technical changes in this

rule, but we will do so in the final rule. If we determine that

substantive changes to our regulations are necessary, we will make

those changes through separate rulemaking.

III. Response to Comments

Because of the large number of items of correspondence we normally

receive on Federal Register documents published for comment, we are not

able to acknowledge or respond to them individually. We will consider

all comments we receive by the date and time specified in the DATES

section of this preamble, and, if we proceed with a subsequent

document, we will respond to the comments in the preamble to that

document.

IV. 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

[[Page 13600]]

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:

The need for the information collection and its usefulness

in carrying 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.

We are soliciting public comment on each of the issues for sections

Secs. 421.310 and 421.312 of this document, which contain information

collection requirements.

Section 421.310 Conflict of Interest Identification

Section 421.310(e) requires offerors to determine if an

organizational conflict of interest exists in any of its proposed or

actual subcontractors at any tier and to ensure that the subcontractors

have mitigated any conflict of interest or potential conflict of

interest. As discussed below, the information collection requirements

for Sec. 421.312 also require an offeror to list in an Organizational

Conflicts of Interest Certificate situations that could be identified

as conflicts of interest and to describe methods it would apply to

mitigate those situations. Based on our best estimate, we believe that

the requirement will impose a burden of 80 hours on each offeror with

respect to information it provides for its own organization. It is

assumed that offerors will impose the same or similar disclosure

requirements on their proposed or actual subcontractors as imposed by

us on offerors, with the understanding that we would not expect them to

require that independent auditors perform compliance audits on

subcontractors. Based on this assumption, an offeror's burden with

respect to its subcontractors is estimated to be one-half the burden

imposed on an offeror with respect to its own organization.

We expect 15 offerors for each type of MIP contract. We estimate

that the requirement of this provision will impose a burden of 40 hours

per subcontractor on each offeror to identify and mitigate any

organizational conflicts of interest for its subcontractors at any

tier. We believe that, on average, each offeror will need to evaluate

three subcontractors. The total burden referenced in Sec. 421.310(e)

with respect to an offeror's subcontractors is 1,800 burden hours.

Section 421.312 Conflict of Interest Evaluation

Section 421.312 requires offerors that wish to be eligible for the

award of a contract under this subpart and MIP contractors to submit an

Organizational Conflicts of Interest Certificate for pre-and post-award

purposes.

Based on comments provided by the public on possible methods we

could use to identify, evaluate, and resolve potential conflicts of

interest, we found that only by imposing the information collection

requirements referenced in this section could competition remain open

to all interested parties regardless of their current lines of business

and, at the same time provide us with enough information to determine

on a case-by-case basis if conflicts of interest have been properly

identified and adequately mitigated. Only by imposing these information

collection requirements can we determine whether an offeror should be

awarded a MIP contract.

Below is a summary of the proposed Organizational Conflict of

Interest Certificate disclosure requirements and related burden

required with the offeror's proposal. The items of information

described below will be required for all MIP contractor procurements,

unless the information is otherwise provided in the proposal, in which

case it must be referenced. The last item identifies some information

that officers, directors, and managers will be required to provide in

all MIP procurements and some information that they may be required to

provide in a MIP procurement.

A description of all business or contractual relationships

or activities that a prudent business person may view as a conflict of

interest.

We have received comments from the insurance industry and

affiliated sources that some situations that we may not readily

identify as conflicts nonetheless appear to create conflicts of

interest. If a prudent business person could believe a conflict of

interest exists in a situation, the entity is required to report the

situation even if we have not created a ``classification'' for the

situation. We would use this information to evaluate the situation and

to determine if it is adequately mitigated or requires no mitigation.

In addition, we would use this information to adapt to changing

environments and to modify the conflict of interest requirements.

A description of the methods the offeror/contractor will

apply to mitigate any situations listed in the Certification that could

be identified as conflicts of interest.

We would use the description of the methods the offeror/contractor

will apply to mitigate any situations listed in the Certification that

could be identified as conflicts of interest to determine if conflicts

would be neutralized effectively by the methods described. Generally,

we consider a conflict of interest to exist when a contractor's ability

to make impartial decisions or perform its work under its contract

objectively has been or may be compromised. The offeror/contractor

could propose to mitigate a conflict of interest by using methods such

as divestiture or reduction of a conflicting financial interest,

reassignment of work responsibilities to exclude individuals with

conflicting interests from performing work under the contract, or

separating lines of business. We would assess the effectiveness of the

mitigation method using the information disclosed regarding an

offeror's/contractor's organizational structure, financial interests,

or other relationships as may be required in a solicitation as

discussed below.

A description of the offeror's/contractor's program to

monitor its compliance and the compliance of its proposed and actual

subcontractors with the conflict of interest requirements as identified

in the relevant solicitation.

We would evaluate the proposed compliance program to determine if

the program would enable an offeror/contractor to effectively monitor

its compliance and its subcontractors' compliance with conflict of

interest requirements specific to the contract. This requirement is

integrally connected with an entity's description of its method to

mitigate conflicts. Once conflicts are mitigated at the inception of a

contract, an entity must be vigilant to ensure that the methods are

followed and that new conflicts of interest that arise during the term

of the contract are identified and mitigated. We would use the

compliance program to ensure we award contracts only to offerors that

will follow proposed methods for mitigation of conflicts and that

offerors establish an administrative mechanism for disclosure of

changing situations that may require contract modifications.

An affirmation, using language that we may prescribe, that

the offeror/contractor understands that we may consider any deception

or omission in the Certificate grounds for nonconsideration in the

procurement

[[Page 13601]]

process, termination of the contract, or other contract action.

The affirmation places a higher degree of accountability on the

entity for the accuracy of the information disclosed than would

otherwise be afforded. By signing the affirmation, the offeror/

contractor will be put on notice of the consequences for any false

statement or omission of information regarding conflicts of interest.

The person signing the affirmation will be put on notice of the

offeror's/contractor's responsibility for ensuring the veracity of the

information disclosed. We would consider the provision of false or

deceptive information in the affirmation as possible grounds for

elimination of an offeror from consideration in the procurement process

or taking other appropriate contract or legal action.

A description of the offeror's/contractor's plans to

contract with an independent auditor to conduct a compliance audit.

We would use this information to ensure that the offeror has an

arrangement with an independent source that will verify compliance with

conflict of interest requirements.

Corporate and organizational structure.

We would require this information to determine if legal entities

are connected through partnerships, joint ventures, or other legal

arrangements. We would assess the types of relationships, evaluate an

offeror's/contractor's mitigation methods, and determine if the

conflicts of interest based on an offeror's/contractor's relationships

have been resolved as part of the procurement process. This information

would also be used during the term of the contract to evaluate the

mitigation of conflicts when structures change.

Financial interests in other entities, including the

following:

+ Percentage of ownership in any other entity.

We would use the percentage of ownership interest and the dollar

value of financial interests to evaluate reported conflicts of interest

and the adequacy of an offeror's/contractor's mitigation methods. Both

these measures were suggested by the participants in the 1996 open

forum discussion as appropriate considerations in evaluating conflicts

of interest. We would perform the evaluation on a case-by-case basis.

Income generated from other sources.

We would use this information to determine if the offeror/

contractor could be unduly influenced by other financial relationships

it may have with possible customers, competitors, or other parties

interested in influencing the performance of the MIP contractor. Income

can be generated in a variety of ways, for example, as fees, salaries,

reimbursements, or stock options. This information would enable us to

evaluate the adequacy of an offeror's/contractor's proposed mitigation

methods for conflicts of interest that arise from financial dependence

on other entities.

A list of current or known future contracts or

arrangements, regardless of size, with any insurance organization;

subcontractor of an insurance organization; or provider or supplier

furnishing services for which payment may be made under the Medicare

program. This information is to include the dollar amount of the

contracts or arrangements, the type of work performed, and the period

of performance.

We would use this information to evaluate an offeror's/contractor's

conflicts that are based on contractual arrangements and to assess the

adequacy of its mitigation method. The offeror/contractor would be

required to disclose future contracts so that we can assess whether

mitigation methods address conflicts that will develop during the

procurement process or during the term of the contract.

Information regarding potential conflicts of interest and

financial information regarding certain contracts for all of the

offeror's/contractor's officers, directors (including medical

directors), and managers who would be or are involved in the

performance of the MIP contract.

We would evaluate this information to determine if individuals who

can control the outcome of work performed under a MIP contract may be

unduly influenced by their own or their close relatives' business

relationships or contracts. We need the information to protect the

monies disbursed for both program and administrative services and to

ensure that an offeror's/contractor's mitigation methods adequately

eliminate any conflicts that exist due to relationships of an

offeror's/contractor's officers, directors, or managers.

Private sector participants at the December 6, 1996 open forum

discussion expressed the opinion that full disclosure of all of an

offeror's/contractor's relationships would ameliorate conflicts of

interest. We considered that, while this might be appropriate in some

MIP contractor procurements, it would be unduly burdensome and

unnecessary as a blanket requirement in all MIP procurements. Instead,

we identified information, described above, that we believe to be

essential to the process and require this information to be disclosed

in MIP procurements.

The amount of burden associated with these requirements will

generally decrease as the size of the offeror/contractor decreases.

Smaller offerors/contractors and those not involved in the insurance

industry may have no potential conflicts of interest to report if they

do not participate in other lines of business and/or if they do not

participate in lines of business related to the insurance, health, and

health management and consulting industries that are likely to have

potential conflicts of interest.

Therefore, based on comments provided by the public and our prior

experience, we expect the Certificate and supporting materials will

take approximately 80 hours to prepare by each offeror/contractor for

its own organization. This estimate is based on the fact that the

majority of these disclosure requirements will be compiled using

existing data, which an offeror/contractor uses to satisfy other

business needs, and the assumption that approximately one-third of the

offerors will not have any potential conflicts of interest to report.

We expect 15 offerors for each MIP contract. The total burden

referenced in this section is 1,200 burden hours.

As required by section 3504(h) of the Paperwork Reduction Act of

1995, we have submitted a copy of this document to the Office of

Management and Budget (OMB) for its review of these information

collection requirements.

If you comment on these information collection and recordkeeping

requirements, please mail copies directly to the following:

Health Care Financing Administration, Office of Financial and Human

Resources, Management Planning and Analysis Staff, Attn: John Burke,

Attn: HCFA-7020-P, Room C2-26-17, 7500 Security Boulevard, Baltimore,

MD 21244-1850

Office of Information and Regulatory Affairs, Office of Management and

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

20503, Attn: Allison Herron Eydt, HCFA Desk Officer

V. Regulatory Impact Statement

A. Introduction

We have examined the impacts of this proposed rule as required by

Executive Order 12866 and the Regulatory Flexibility Act (RFA) (Public

Law 96-354). Executive Order 12866 directs agencies to assess all costs

and benefits of available regulatory alternatives and,

[[Page 13602]]

when regulation is necessary, to select regulatory approaches that

maximize net benefits (including potential economic, environmental,

public health and safety effects, distributive impacts, and equity).

The RFA requires agencies to analyze options for regulatory relief of

small businesses. For purposes of the RFA, small entities include small

businesses, non-profit organizations and governmental agencies. Most

hospitals and most other providers and suppliers are small entities,

either by nonprofit status or by having revenues of $5 million or less

annually. Intermediaries and carriers are not considered to be small

entities.

Section 1102(b) of the Social Security Act requires us to prepare a

regulatory impact analysis for any proposed rule that 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 603 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 a

Metropolitan Statistical Area and has fewer than 50 beds.

B. Summary of the Proposed Rule

As discussed in detail above, this rule implements section 1893 of

the Act, which encourages proactive measures to combat waste, fraud,

and abuse and to protect the integrity of the Medicare program. The

objective of the proposed regulation is to provide a procurement

procedure to supplement the requirements of the FAR and specifically

address contracts to perform MIP functions identified in the law.

As part of their existing contractual duties, both intermediaries

and carriers must perform certain program integrity activities or

payment safeguard activities. These activities include, but are not

limited to, conducting review of claims to determine whether services

were reasonable and necessary, deterring and detecting Medicare fraud,

auditing provider cost reports, and ensuring that Medicare pays the

appropriate amount when a beneficiary has other health insurance. This

rule provides that these functions, as specified below, will be

performed under new MIP contracts:

Review of provider activities such as medical review,

utilization review, and fraud review.

Audit of cost reports.

Medicare secondary payer review and payment recovery.

Provider and beneficiary education on payment integrity

and benefit quality assurance issues.

Developing and updating lists of durable medical equipment

items that are to be subject to prior approval provisions.

C. Discussion of Impact

We expect that this rule will have a positive impact on the

Medicare program, Medicare beneficiaries, providers, suppliers, and

entities that have not previously contracted with us. It is possible

that some providers and suppliers may experience a slight increase in

administrative costs as their claims are subjected to closer review.

Current intermediaries and carriers that seek award of MIP contracts

may incur costs in complying with new requirements set forth in the

rule, but the effect is not expected to be material. To the extent that

small entities could be affected by the rule, and because the rule

raises certain policy issues with respect to conflict of interest

standards, we provide an impact analysis for those entities we believe

will be most heavily affected by the rule.

We believe that this rule will have an impact, although not a

significant one, in five general areas. The Medicare program and Health

Insurance Trust Funds, Medicare beneficiaries and taxpayers, entities

that have not previously contracted with us, and Medicare providers and

suppliers would benefit from the rule. Current intermediaries and

carriers may experience a somewhat negative impact, although the effect

on these organization should be tempered by the benefits the new rule

will confer.

1. The Medicare Program and Health Insurance Trust Funds

In recent years, sizable cuts in intermediaries' and carriers'

budgets for program safeguards have diminished efforts to thwart

improper billing practices. The Health Insurance Portability and

Accountability Act provides for a direct apportionment from the Health

Insurance Trust Funds for carrying out the MIP. Appropriations totaled

$440 million for FY 1998 and $500 million for FY 1998. By FY 2003,

appropriations are expected to grow to $720 million.

Creating a separate and dependable long-term funding source for MIP

will allow us the flexibility to invest in innovative strategies to

combat the fraud and abuse drain on the Trust Funds. By shifting

emphasis from post-payment recoveries on incorrectly paid claims to

pre-payment strategies, most claims will be paid correctly the first

time.

Improper billing and health care fraud are difficult to quantify

because of their hidden nature. However, a General Accounting Office

(GAO) report on Medicare (GAO/HR-91-10, February 1997) suggests that by

reducing unnecessary or inappropriate payments, the Federal Government

would realize large savings and help slow the growth in Medicare costs.

In this report, the GAO states that estimates of ``the costs of fraud

and abuse ranging from 3 to 10 percent have been cited for health

expenditures nationwide, so applying this range to Medicare suggests

that such losses in fiscal year 1996 could have been from $6 billion to

as much as $20 billion.''

The savings realized from our payment safeguard activities for FYs

1988-1996 were as follows:

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

Total Return on

Year Total cost savings * investment

----------------------------------------*-------------------------------

FY1988........................... $313.6 $3,654.1 12:1

FY1989........................... 376.3 3,961.6 11:1

FY1990........................... 348.7 5,234.4 15:1

FY1991........................... 360.7 5,703.4 16:1

FY1992........................... 350.7 5,153.2 15:1

FY1993........................... 406.3 6,506.6 16:1

FY1994........................... 412.4 5,412.7 13:1

FY1995........................... 428.3 6,314.9 15:1

FY1996........................... 441.1 6,190.4 14:1

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

* Dollars in millions.

[[Page 13603]]

In our Justification of Estimates for Appropriations Committees for

fiscal year 1998, we projected the return on investment for various

payment safeguard activities under MIP. Overall, we expect that every

dollar expended in fiscal year 1998 to perform integrity functions will

save $12 for the Medicare program. We estimate that medical review and

utilization review performed under MIP will produce a return on

investment of 8:1 for Part A claims and 14:1 for Part B claims. Every

dollar spent on audit functions under MIP is expected to save $6 for

the Medicare program. For Medicare secondary payer functions, we

project a 50:1 return on investment for Part A claims and a 9:1 return

for Part B claims. The overall return for Medicare secondary payer

functions performed under MIP is estimated to be 26:1.

In addition to these economic advantages, the Medicare program will

benefit in a qualitative way. MIP, as this proposed rule would

implement it, gives us a tool to better administer the Medicare program

and accomplish our mission of providing access to quality health care

for Medicare beneficiaries. Under this rule, program integrity

activities will be performed under specialized contracts that are

subject to more stringent conflict of interest standards than were

previously employed. In addition, for the first time we will be able to

use competitive procedures to separately contract for the performance

of integrity functions. In general, economic theory postulates that

competition results in a better price for the consumer who, in this

instance, is HCFA on behalf of Medicare beneficiaries and taxpayers.

Competition should also encourage the use of innovative techniques to

perform integrity functions that will, in turn, result in more

efficient and effective safeguards for the Trust Funds.

2. Medicare Beneficiaries and Taxpayers

We expect that overall this rule would have a positive effect on

Medicare beneficiaries and taxpayers. Beneficiaries pay deductibles and

Part B Medicare premiums. Taxpayers, including those who are not yet

eligible for Medicare, contribute part of their earnings to the Part A

Trust Fund. Taxpayers and beneficiaries contribute indirectly to the

Part B Trust Funds because it is funded, in part, from general tax

revenues. Consistent performance of program integrity activities will

ensure that less money is wasted on inappropriate treatment or

unnecessary services. As a result, current and future beneficiaries

will obtain more value for every Medicare dollar spent.

Medicare contractors estimate that of the 130,000 calls they

receive yearly concerning potential fraud and abuse, 94,000 are from

beneficiaries, many of whom call to question the propriety of claims

made on their behalf. Beneficiary education monies, especially when

used to provide more Medicare ``scam alerts,'' will enhance a

beneficiary's attention to detail and increase savings.

Beneficiaries may experience higher denial rates due to the more

stringent claims review. It is expected, however, that most of the

potential increase in denials will result from a determination that the

services provided were not reasonable and necessary under Medicare

authorities and guidelines. There are established limitations on

beneficiary liability when claims are denied on this basis; thus the

impact on beneficiaries will be minimized.

3. Current Intermediaries and Carriers

Although intermediaries and carriers are not considered small

entities for purposes of the RFA, we are providing the following

analysis. There are currently 43 Medicare intermediaries and 27

Medicare carriers plus 4 durable medical equipment regional

contractors. All but 13 of these contractors are Blue Cross/Blue Shield

plans. Presently, all contractors perform payment safeguard activities,

and, in FY 1996, approximately 28 percent of the total contractor

budget was dedicated to program integrity.

We considered prohibiting current intermediaries and carriers from

entering into MIP contracts. We also considered entering into contracts

with new organizations to perform all functions while simultaneously

removing all payment safeguard functions from current contractors.

Neither of these options appeared viable because the effect on the

Medicare program would have been unduly disruptive. We do, however,

expect to reduce the number of contractors when we shift and

consolidate the integrity functions to MIP contractors, but the exact

number cannot be determined until we begin implementing the program.

The reduction in the number of contractors performing integrity

functions does not mean that local contractor presence will be

eliminated. Medical directors would continue to play an important role

in benefit integrity activities, and we intend to retain locally-based

medical directors to continue our relationship with local physicians by

using groups like Carrier Advisory Committees. Locally-based fraud

investigators and auditors are also likely to be used. Review policies

will be coordinated across contractors to ensure consistency, but local

practice will be incorporated where appropriate.

This rule may have a negative impact on current intermediaries and

carriers in some respects. Current contractors will lose a portion of

their Medicare business as payment safeguard functions are transferred

to MIP contractors. Although their workload will be reduced, the effect

on current contractors will be gradual because we have a long-term

strategy for the implementation of MIP. As discussed above, we believe

that it would be too disruptive to the Medicare program to make a

sudden, across-the-board change in contractors. The change will be made

over time, in an incremental fashion, as MIP contracts are awarded;

therefore, we cannot quantify the effect.

On the other hand, current contractors would benefit from this

proposed rule because, under its provisions, they are eligible to

compete for MIP contracts as long as they comply with all conflict of

interest and other requirements. (Current contractors may not receive

payment for performing the same program integrity activities under both

a MIP contract and their existing contract.) We considered proposing

rules that identified specific conflict of interest situations that

would prohibit the award of a MIP contract. We also considered

prohibiting a MIP contractor whose contract was completed or terminated

from competing for another MIP contract for a certain period. Instead,

the proposed rule would establish a process for evaluating, on a case-

by-case basis, situations that may constitute conflicts of interest. It

permits current contractors to position themselves to be eligible for a

MIP contract by mitigating any conflicts of interest they may have in

order to compete. The economic impact on intermediaries and carriers is

lessened by the proposed approach when compared to the alternatives we

considered.

The current contractors who are awarded MIP contracts will also

benefit from the consistent funding provided by the law for program

integrity activities. This stable, long-term funding mechanism will

allow Medicare contractors to attract, train, and retain qualified

professional staff to perform claims review and audit, to identify and

refer fraud cases to law enforcement agencies and to support the

ongoing development of these cases for prosecution by the Department of

Justice.

There will be an economic impact on current contractors that

propose to

[[Page 13604]]

perform MIP contracts using subcontractors. MIP contractors would be

required to determine if any of their subcontractors, at any tier, have

conflicts of interest and to ensure that any conflicts are mitigated. A

MIP contractor would apply to its subcontractors the same conflict of

interest standard to which it must adhere. It is impossible to assess

the precise economic impact of this portion of the proposed rule

because a MIP contractor is free to contract with any subcontractor. A

MIP contractor may seek out subcontractors that are conflict free,

which would reduce or eliminate the time expended monitoring conflict

of interest situations.

4. New Contracting Entities

Entities that have not previously performed Medicare payment

safeguard activities will experience a positive effect from this rule.

Integrity functions such as audit, medical review, and fraud

investigation may be consolidated in a MIP contract to allow suspect

claims to be identified and investigated from all angles. Contractors

may subcontract for these specific integrity functions, thus creating

new markets and opportunities for small, small disadvantaged, and

woman-owned businesses.

Use of full and open competition to award MIP contracts may

encourage innovation and the creation of new technology. Historically,

cutting edge technologies and analytical methodologies created for the

Medicare program have benefitted the private insurance arena.

This proposed rule, however, could also have an adverse economic

impact on newly-contracting entities. They, like existing contractors,

will be required to absorb the cost of mitigating conflicts of interest

and complying with conflict of interest requirements.

5. Providers and Suppliers

There could be some burden imposed on providers and suppliers that

are small businesses or not-for-profit organizations by the need to

deal with a new set of contractors. There are approximately 1 million

health care providers and suppliers (depending on how group practices

and multiple locations are counted) that bill independently. The

proposed rule does not necessarily impose any action on the part of

these providers and suppliers. It is possible that some of them would

have to devote more effort in responding to MIP contractors' inquiries

generated by more stringent claims review and that they could incur a

modest increase in administrative costs. In our analysis of possible

administrative costs to providers and suppliers, we assumed that a

contractor would make two follow-up inquiries to a provider or supplier

for each potential recovery of an incorrect payment. Assuming that the

response to each inquiry would require a provider or supplier to expend

30 minutes of clerical time, at $10 per hour, and 15 minutes of

professional time, at $100 per hour, we estimate that the average

response to an inquiry would cost $30. The resulting added cost to

providers and suppliers would be under $10 million annually.

Most Medicare contractors do not maintain toll-free lines for

providers or suppliers. A provider's or supplier's telephone bill could

increase if it must contact a MIP contractor that is out of its calling

area. However, it is possible that a provider's or supplier's

intermediary or carrier may also be its MIP contractor. We believe that

the centralization of certain functions would result in more consistent

policy and lessen the need for a provider or supplier to communicate

with its contractor. Since we plan to phase-in the transfer of the MIP

activities, we do not anticipate a significant annual impact on

telephone bills.

Overall, we expect that providers and suppliers will benefit

qualitatively from this proposed rule. Many providers and suppliers

perceive that their reputations are tarnished by the few dishonest

providers and suppliers that take advantage of the Medicare program.

The media often focus on the most egregious cases of Medicare fraud and

abuse, leaving the public with the perception that physicians and other

health care practitioners routinely make improper claims. This rule

would allow us to take a more effective and wider ranging approach to

identifying, stopping, and recovering from unscrupulous providers and

suppliers. As the number of dishonest providers and suppliers and

improper claims diminishes, ethical providers and suppliers will

benefit.

This proposed rule could be considered to have a negative impact on

any provider or supplier that routinely submits questionable claims and

would impact those that have been receiving inappropriate payments.

Since the objective of this proposed rule is to eliminate improper

payments, we will not analyze the effect the rule may have on

unscrupulous providers or suppliers. We do not believe that this rule

will reduce a provider's or supplier's legitimate income from Medicare.

As claims are more closely and systematically reviewed, providers and

suppliers may experience an increase in the number of claims denied.

This slight negative impact should decrease as providers become more

knowledgeable regarding what claims are appropriate.

D. Conclusion

We conclude that money would be saved and the solvency of the Trust

Funds extended as a result of this proposed rule. The dynamic nature of

fraud and abuse is illustrated by the fact that wrongdoers continue to

find ways to evade safeguards. This supports the need for constant

vigilance and increasingly sophisticated ways to protect against

``gaming'' of the system. We solicit public comments as well as data on

the extent to which any of the affected entities would be significantly

economically affected by this proposed rule. However, based on the

above analysis, we have determined, and certify, that this proposed

rule would not have a significant economic impact on a substantial

number of small entities. We also have determined, and certify, that

this proposed rule would not have a significant impact on the

operations of a substantial number of small rural hospitals. In

accordance with the provisions of Executive Order 12866, this proposed

rule was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 400

Grant programs--health, Health facilities, Health maintenance

organizations (HMO), Medicaid, Medicare, Reporting and recordkeeping

requirements.

42 CFR Part 421

Administrative practice and procedure, Health facilities, Health

professions, Medicare, Reporting and recordkeeping requirements.

42 CFR chapter IV would be amended as follows:

A. Part 400

PART 400--INTRODUCTION; DEFINITIONS

1. The authority citation for part 400 continues to read as

follows:

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

U.S.C. 1302 and 1395hh) and 44 U.S.C. Chapter 35.

2. Section 400.202 is amended by adding the following definition in

alphabetical order, to read as follows:

Sec. 400.202 Definitions specific to Medicare.

* * * * *

Medicare integrity program contractor means an entity that has a

contract with

[[Page 13605]]

HCFA under section 1893 of the Act to perform program integrity

activities.

* * * * *

B. Part 421

PART 421--MEDICARE CONTRACTING

1. The part heading is revised to read as set forth above.

2. The authority citation for part 421 continues to read as

follows:

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

U.S.C. 1302 and 1395hh).

3. Section 421.1 is revised to read as follows:

Sec. 421.1 Basis, applicability, and scope.

(a) Basis. This part is based on the indicated provisions of the

following sections of the Act:

1124--Requirements for disclosure of certain information.

1816 and 1842--Use of organizations and agencies in making

Medicare payments to providers and suppliers of services.

1893--Requirements for protecting the integrity of the Medicare

program.

(b) Additional basis. Section 421.118 is also based on 42 U.S.C.

1395(b)-1(a)(1)(F), which authorizes demonstration projects involving

intermediary agreements and carrier contracts.

(c) Applicability. The provisions of this part apply to agreements

with Part A (Hospital Insurance) intermediaries, contracts with Part B

(Supplementary Medical Insurance) carriers, and contracts with Medicare

integrity program contractors that perform program integrity functions.

(d) Scope. The provisions of this part state that HCFA may perform

certain functions directly or by contract. They specify criteria and

standards HCFA uses in selecting intermediaries and evaluating their

performance, in assigning or reassigning a provider or providers to

particular intermediaries, and in designating regional or national

intermediaries for certain classes of providers. The provisions provide

the opportunity for a hearing for intermediaries and carriers affected

by certain adverse actions. They also provide adversely affected

intermediaries an opportunity for judicial review of certain hearing

decisions. They also set forth requirements related to contracts with

Medicare integrity program contractors.

4. Section 421.100 is revised to read as follows:

Sec. 421.100 Intermediary functions.

An agreement between HCFA and an intermediary specifies the

functions to be performed by the intermediary.

(a) Mandatory functions. The contract must include the following

functions:

(1) Determining the amount of payments to be made to providers for

covered services furnished to Medicare beneficiaries.

(2) Making the payments.

(b) Additional functions. The contract may include any or all of

the following functions:

(1) Any or all of the program integrity functions described in

Sec. 421.304, provided the intermediary is continuing those functions

under an agreement entered into under section 1816 of the Act that was

in effect on August 21, 1996, and they do not duplicate work being

performed under a Medicare integrity program contract.

(2) Undertaking to adjust incorrect payments and recover

overpayments when it has been determined that an overpayment has been

made.

(3) Furnishing to HCFA timely information and reports that HCFA

requests in order to carry out its responsibilities in the

administration of the Medicare program.

(4) Establishing and maintaining procedures as approved by HCFA for

the review and reconsideration of payment determinations.

(5) Maintaining records and making available to HCFA the records

necessary for verification of payments and for other related purposes.

(6) Upon inquiry, assisting individuals with respect to matters

pertaining to an intermediary contract.

(7) Serving as a channel of communication to and from HCFA of

information, instructions, and other material as necessary for the

effective and efficient performance of an intermediary agreement.

(8) Undertaking other functions as mutually agreed to by HCFA and

the intermediary.

(c) Dual intermediary responsibilities. With respect to the

responsibility for services to a provider-based HHA or a provider-based

hospice, when different intermediaries serve the HHA or hospice and its

parent provider under Sec. 421.117, the designated regional

intermediary determines the amount of payment and makes payments to the

HHA or hospice. The intermediary and/or Medicare integrity program

contractor serving the parent provider performs fiscal functions,

including audits and settlement of the Medicare cost reports and the

HHA and hospice supplement worksheets.

5. Section 421.200 is revised to read as follows:

Sec. 421.200 Carrier functions.

A contract between HCFA and a carrier specifies the functions to be

performed by the carrier. The contract may include any or all of the

following functions:

(a) Any or all of the program integrity functions described in

Sec. 421.304 provided--

(1) The carrier is continuing those functions under a contract

entered into under section 1842 of the Act that was in effect on August

21, 1996; and

(2) The functions do not duplicate work being performed under a

Medicare integrity program contract, except that the function related

to developing and maintaining a list of durable medical equipment may

be performed under both a carrier contract and a Medicare integrity

program contract.

(b) Receiving, disbursing, and accounting for funds in making

payments for services furnished to eligible individuals within the

jurisdiction of the carrier.

(c) Determining the amount of payment for services furnished to an

eligible individual.

(d) Undertaking to adjust incorrect payments and recover

overpayments when it has been determined that an overpayment has been

made.

(e) Furnishing to HCFA timely information and reports that HCFA

requests in order to carry out its responsibilities in the

administration of the Medicare program.

(f) Maintaining records and making available to HCFA the records

necessary for verification of payments and for other related purposes.

(g) Establishing and maintaining procedures under which an

individual enrolled under Part B will be granted an opportunity for a

fair hearing.

(h) Upon inquiry, assisting individuals with matters pertaining to

a carrier contract.

(i) Serving as a channel of communication to and from HCFA of

information, instructions, and other material as necessary for the

effective and efficient performance of a carrier contract.

(j) Undertaking other functions as mutually agreed to by HCFA and

the carrier.

6. A new subpart D is added to part 421 to read as follows:

Subpart D--Medicare Integrity Program Contractors

Sec.

421.300 Basis, applicability, and scope.

421.302 Eligibility requirements for Medicare integrity program

contractors.

421.304 Medicare integrity program contractor functions.

421.306 Awarding of a contract.

421.308 Renewal of a contract.

421.310 Conflict of interest identification.

421.312 Conflict of interest evaluation.

[[Page 13606]]

421.314 Conflict of interest resolution.

421.316 Limitation on Medicare integrity program contractor

liability.

Subpart D--Medicare Integrity Program Contractors

Sec. 421.300 Basis, applicability, and scope.

(a) Basis. This subpart implements section 1893 of the Act, which

requires HCFA to protect the integrity of the Medicare program by

entering into contracts with eligible entities to carry out Medicare

integrity program functions.

(b) Applicability. This subpart applies to entities that seek to

compete or receive award of a contract under section 1893 of the Act

including entities that perform functions under this subpart emanating

from the processing of claims for individuals entitled to benefits as

qualified railroad retirement beneficiaries.

(c) Scope. This subpart defines the types of entities eligible to

become Medicare integrity program contractors; identifies the program

integrity functions a Medicare integrity program contractor performs;

describes procedures for awarding and renewing contracts; establishes

procedures for identifying, evaluating, and resolving organizational

conflicts of interest; prescribes responsibilities; and sets forth

limitations on contractor liability. The provisions of this subpart are

based on the acquisition regulations set forth at 48 CFR Chapters 1 and

3.

Sec. 421.302 Eligibility requirements for Medicare integrity program

contractors.

If an entity meets the following conditions, HCFA may enter into a

contract with it to perform the functions described in Sec. 421.304:

(a) Demonstrates the ability to perform the Medicare integrity

program contractor functions described in Sec. 421.304. For purposes of

developing and periodically updating a list of DME under

Sec. 421.304(e), an entity is deemed to be eligible to enter into a

contract under the Medicare integrity program to perform the function

if the entity is a carrier with a contract in effect under section 1842

of the Act.

(b) Agrees to cooperate with the OIG, the Attorney General, and

other law enforcement agencies, as appropriate, including making

referrals, in the investigation and deterrence of fraud and abuse of

the Medicare program.

(c) Complies with conflict of interest provisions in 48 CFR

Chapters 1 and 3 and is not excluded under the conflict of interest

provision at Sec. 421.310.

(d) Meets other requirements that HCFA establishes.

Sec. 421.304 Medicare integrity program contractor functions.

The contract between HCFA and a Medicare integrity program

contractor specifies the functions the contractor performs. The

contract may include any or all of the following functions:

(a) Conducting medical reviews, utilization reviews, and fraud

reviews related to the activities of providers of services and other

individuals and entities (including entities contracting with HCFA

under part 417 of this chapter) furnishing services for Medicare

payment. These reviews include medical, utilization, and fraud reviews.

(b) Auditing cost reports of providers of services, or other

individuals or entities (including entities contracting with HCFA under

part 417 of this chapter), as necessary to ensure proper Medicare

payment.

(c) Determining appropriate Medicare payment to be made for

services, as specified in section 1862(b) of the Act, and taking action

to recover inappropriate payments.

(d) Educating providers, suppliers, beneficiaries, and other

persons regarding payment integrity and benefit quality assurance

issues.

(e) Developing, and periodically updating, a list of items of

durable medical equipment that are frequently subject to unnecessary

utilization throughout the contractor's entire service area or a

portion of the area, in accordance with section 1834(a)(15)(A) of the

Act.

Sec. 421.306 Awarding of a contract.

(a) HCFA awards Medicare integrity program contracts in accordance

with acquisition regulations set forth at 48 CFR chapters 1 and 3, this

subpart, and all other applicable laws and regulations. These

requirements for awarding Medicare integrity program contracts are

used--

(1) When entering into new contracts;

(2) When entering into contracts that may result in the elimination

of responsibilities of an individual intermediary or carrier under

section 1816(l) or section 1842(c) of the Act, respectively; and

(3) At any other time HCFA considers appropriate.

(b) HCFA may award an entity a Medicare integrity program contract

without competition if--

(1) Through approval of a novation agreement, HCFA recognizes the

entity as the successor in interest to an intermediary agreement or

carrier contract under which the intermediary or carrier was performing

activities described in section 1893(b) of the Act on August 21, 1996;

(2) The intermediary or carrier has transferred to the entity all

of the resources, including personnel, that were involved in

performance under the intermediary agreement or carrier contract and

performance of Medicare integrity program activities; and

(3) The intermediary or carrier continued to perform Medicare

integrity program activities until transferring the resources to the

entity.

(c) An entity is eligible to be awarded a Medicare integrity

program contract only if it meets the eligibility requirements

established in Sec. 421.302.

Sec. 421.308 Renewal of a contract.

(a) HCFA specifies an initial contract term in the Medicare

integrity program contract. Contracts under this subpart may contain

renewal clauses. HCFA may renew the Medicare integrity program

contract, without regard to any provision of law requiring competition,

as it determines to be appropriate, by giving the contractor notice,

within timeframes specified in the contract, of its intent to do so.

(b) HCFA may renew a Medicare integrity program contract without

competition if--

(1) The Medicare integrity program contractor continues to meet the

requirements established in this subpart;

(2) The Medicare integrity program contractor meets or exceeds all

of the performance requirements established in its current contract;

and

(3) It is in the best interest of the Government.

(c) If HCFA does not renew a contract, the contract will end in

accordance with its terms, and the contractor does not have the right

to a hearing or judicial review of the nonrenewal decision.

Sec. 421.310 Conflict of interest identification.

(a) Definitions. As used in this subpart, the following definitions

apply:

Financial relationship means--

(1) A direct or indirect ownership or investment interest

(including an option or nonvested interest) in any entity that exists

through equity, debt, or other means and includes any indirect

ownership or investment interest no matter how many levels removed from

a direct interest; or

(2) A compensation arrangement with an entity.

Organizational conflict of interest has the meaning given at 48 CFR

9.501, except that, for purposes of this subpart, the activities and

relationships described include those of the offeror or contractor

itself and other business

[[Page 13607]]

related to it and those of its officers, directors (including medical

directors), managers, and subcontractors.

(b) General. Except as provided in paragraph (d) of this section,

HCFA does not enter into a contract under this subpart with an offeror

or contractor that HCFA determines has, or has the potential for, an

unresolved organizational conflict of interest.

(c) Identification of conflict. (1) HCFA determines that an offeror

or contractor has an organizational conflict of interest, or the

potential for the conflict exists, if--

(i) The offeror or contractor is an entity described in paragraph

(c)(3) of this section; or

(ii) The offeror or contractor has a present, or known future,

direct or indirect financial relationship with an entity described in

paragraph (c)(3) of this section.

(2) A financial relationship may exist either--

(i) Through an offeror's or contractor's parent companies,

subsidiaries, affiliates, subcontractors, or current clients; or

(ii) From the activities and relationships of the officers,

directors (including medical directors), or managers of the offeror or

contractor and may be either direct or indirect. An officer, director,

or manager has an indirect financial relationship if an ownership or

investment interest is held in the name of another but provides

benefits to the officer, director, or manager. Examples of indirect

financial relationships are holdings in the name of a spouse or

dependent child of the officer, director, or manager and holdings of

other relatives who reside with the officer, director, or manager.

(3) For purposes of paragraphs (c)(1)(i) and (c)(1)(ii) of this

section, the entity is one that--

(i) Provides, insures, or pays for health benefits, with the

exception of health plans provided as the entity's employee fringe

benefit;

(ii) Conducts audits of health benefit payments or cost reports;

(iii) Conducts statistical analysis of health benefit utilization;

(iv) Would review or does review, under the contract, Medicare

services furnished by a provider or supplier that is a direct

competitor of the offeror or contractor;

(v) Prepared work or is under contract to prepare work that would

be reviewed under the Medicare program integrity contract;

(vi) Is affiliated, as that term is explained in 48 CFR 19.101,

with a provider or supplier to be reviewed under the contract.

(4) HCFA may determine that an offeror or contractor has an

organizational conflict of interest, or the potential for a conflict

exists, based on the following:

(i) Apparent organizational conflicts of interest. An apparent

organizational conflict of interest exists if a prudent business person

has cause to believe that the offeror or contractor would have a

conflict of interest in performing the requirements of a contract under

this subpart. No inappropriate action by the offeror or contractor is

necessary for an apparent organizational conflict of interest to exist.

(ii) Other contracts and grants with the Federal Government.

(d) Exception. HCFA may contract with an offeror or contractor that

has an unresolved conflict of interest if HCFA determines that it is in

the best interest of the Government to do so.

(e) Offeror's or contractor's responsibility with regard to

subcontractors. An offeror or contractor is responsible for determining

whether an organizational conflict of interest exists in any of its

proposed or actual subcontractors at any tier and is responsible for

ensuring that the subcontractors have mitigated any conflict of

interest or potential conflict of interest.

(f) Post-award conflicts of interest. (1) In addition to the

conflicts identified in paragraph (c) of this section, HCFA considers

that a conflict of interest has occurred if during the term of the

contract--

(i) The contractor receives any fee, compensation, gift, payment of

expenses, or any other thing of value from any entity that is reviewed,

audited, investigated, or contacted during the normal course of

performing activities under the Medicare integrity program contract; or

(ii) HCFA determines that the contractor's activities are creating

a conflict of interest.

(2) In the event HCFA determines that a conflict of interest exists

during the term of the contract, among other actions, it may, as it

deems appropriate--

(i) Not renew the contract for an additional term;

(ii) Modify the contract; or

(iii) Terminate the contract.

Sec. 421.312 Conflict of interest evaluation.

(a) Disclosure. Offerors that wish to be eligible for the award of

a contract under this subpart and Medicare integrity program

contractors must submit, at times specified in paragraph (b) of this

section, an Organizational Conflicts of Interest Certificate. The

Certificate must contain the information specified in paragraphs (a)(1)

through (a)(8) of this section, unless the information has otherwise

been provided in the proposal, in which case it must be referenced.

Each solicitation issued for a contract under this subpart contains the

requirements for disclosure for pre- and post-award purposes. The

solicitation may require more detailed information than identified in

this section.

(1) A description of all business or contractual relationships or

activities that may be viewed by a prudent business person as a

conflict of interest.

(2) A description of the methods the offeror or contractor will

apply to mitigate any situations listed in the Certificate that could

be identified as a conflict of interest.

(3) A description of the offeror's or contractor's program to

monitor its compliance and the compliance of its proposed and actual

subcontractors with the conflict of interest requirements as identified

in the relevant solicitation.

(4) A description of the offeror's or contractor's plans to

contract with an independent auditor to conduct a compliance audit.

(5) An affirmation, using language that HCFA may prescribe, signed

by an official authorized to bind the contractor, that the offeror or

contractor understands that HCFA may consider any deception or omission

in the Certificate grounds for nonconsideration for contract award in

the procurement process, termination of the contract, or other contract

or legal action.

(6) Corporate and organizational structure.

(7) Financial interests in other entities, including the following:

(i) Percentage of ownership in any other entity.

(ii) Income generated from other sources.

(iii) A list of current or known future contracts or arrangements,

regardless of size, with any--

(A) Insurance organization or subcontractor of an insurance

organization; or

(B) Providers or suppliers furnishing health services for which

payment may be made under the Medicare program.

(iv) In the case of contracts or arrangements identified in

accordance with paragraph (a)(7)(iii) of this section, the dollar

amount of the contracts or arrangements, the type of work performed,

and the period of performance.

(8) The following information for all of the offeror's or

contractor's officers, directors (including medical directors),

[[Page 13608]]

and managers who would be or are involved with the performance of the

Medicare integrity program contract:

(i) The information required under paragraphs (a)(1), (a)(7)(iii),

and (a)(7)(iv) of this section.

(ii) If required by the solicitation, the information specified in

paragraphs (a)(7)(i) and (a)(7)(ii) of this section.

(b) When disclosure is made. The Organizational Conflicts of

Interest Certificate is submitted--

(1) With the offeror's proposal;

(2) When the HCFA Contracting Officer requests a revision in the

Certificate;

(3) As part of a compliance audit by an independent auditor; and

(4) 45 days before any change in the information submitted in

accordance with paragraph (a) or paragraph (b) of this section. Only

changed information must be submitted.

(c) Evaluation. HCFA evaluates organizational conflicts of interest

and potential conflicts, using the information provided in the

Organizational Conflicts of Interest Certificate, in order to promote

the effective and efficient administration of the Medicare program.

(d) Protection of proprietary information disclosed. (1) HCFA

protects disclosed proprietary information as allowed under the Freedom

of Information Act (5 U.S.C. 552).

(2) HCFA requires signed statements from HCFA personnel with access

to proprietary information that prohibit personal use during the

procurement process and term of the contract.

Sec. 421.314 Conflict of interest resolution.

(a) Review Board. HCFA establishes a Conflicts of Interest Review

Board to resolve organizational conflicts of interest and determines

when the Board is convened.

(b) Resolution. Resolution of an organizational conflict of

interest is a determination that--

(1) The conflict has been mitigated;

(2) The conflict precludes award of a contract to the offeror;

(3) The conflict requires that HCFA modify an existing contract;

(4) The conflict requires that HCFA terminate an existing contract;

or

(5) It is in the best interest of the Government to contract with

the offeror or contractor even though the conflict exists.

Sec. 421.316 Limitation on Medicare integrity program contractor

liability.

(a) None of the following will be held by reason of the performance

of any duty, function, or activity required or authorized under this

subpart or under a valid contract entered into under this subpart to

have violated any criminal law or to be civilly liable under any law of

the United States or of any State (or political subdivision thereof)

provided due care was exercised in that performance:

(1) An entity having a contract with HCFA under this subpart (that

is, a contractor under this subpart).

(2) A person employed by or who has a fiduciary relationship with

or who furnishes professional services to a contractor under this

subpart.

(b) HCFA makes payment, to a contractor under this subpart, or to a

member or employee of the contractor, or to any person who furnishes

legal counsel or services to the contractor, of an amount equal to the

reasonable amount of the expenses incurred in connection with the

defense of a suit, action, or proceeding, as determined by HCFA, if--

(1) The suit, action, or proceeding was brought against the

contractor, or a member or employee of the contractor, by a third party

and relates to the performance by the contractor, member, or employee

of any duty, function, or activity under a contract entered into with

HCFA under this subpart;

(2) The funds are available; and

(3) The expenses are otherwise allowable under the terms of the

contract.

(Catalog of Federal Domestic Assistance Program No. 93.773,

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

Supplementary Medical Insurance Program)

Dated: March 5, 1998.

Nancy-Ann Min DeParle,

Administrator, Health Care Financing Administration.

Approved: March 16, 1998.

Donna E. Shalala,

Secretary.

[FR Doc. 98-7190 Filed 3-16-98; 5:00 pm]

BILLING CODE 4120-01-P