Medicare Program; Solvency Standards for Provider-Sponsored Organizations

Federal RegisterDec 22, 1999

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 422

[HCFA-1011-F]

RIN 0938-AI83

Medicare Program; Solvency Standards for Provider-Sponsored

Organizations

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

ACTION: Final rule.

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SUMMARY: The Balanced Budget Act of 1997 established a new

Medicare+Choice (M+C) program that offers eligible individuals Medicare

benefits through enrollment in one of an array of private health plans

that contract with us. Among the new options available to Medicare

beneficiaries is enrollment in a provider-sponsored organization (PSO).

This final rule revises and responds to comments on solvency standards

that certain entities must meet to contract as PSOs under the new M+C

program. These standards, originally established in an interim final

rule published on May 7, 1998, apply to PSOs that have received a

waiver of the requirement that M+C organizations must be licensed by a

State as risk-bearing entities.

DATES: Effective date: These regulations are effective on January 21,

2000.

FOR FURTHER INFORMATION CONTACT: Marty Abeln, (410) 786-1032.

SUPPLEMENTARY INFORMATION:

I. Background--Balanced Budget Act of 1997 and the Medicare+Choice

Program

Section 4001 of the Balanced Budget Act (BBA) (Public Law 105-33),

enacted August 5, 1997, added a new Part C (sections 1851 through 1859)

to title XVIII of the Social Security Act (the Act), establishing the

``Medicare+Choice'' (M+C) program. Under Part C, M+C eligible

individuals (generally individuals with both Part A and Part B coverage

who do not have End Stage Renal Disease (ESRD) may elect to receive

their Medicare benefits through private health plans (M+C

organizations) that choose to contract with HCFA. M+C organizations may

offer one or more M+C plans of one of three types. Under ``coordinated

care plans,'' beneficiaries receive benefits through a network of

providers, as in the case of an health maintenance organization (HMO)

or preferred provider organization (P.O.). A ``provider sponsored

organization'' (PSO), which is owned by providers through which it

provides benefits, and which is the subject of this final rule,

necessarily offers a coordinated care plan. (See section 1851(a)(2)(A)

of the Act). Other M+C plan options provided for in Part C, but not yet

offered by any M+C organization, are private-fee-for service plans and

medical savings account (MSA) plans (that is, a combination of a high

deductible, catastrophic insurance plan with a contribution to an M+C

MSA account). Interim final regulations for the overall implementation

of the M+C program were published in the Federal Register on June 26,

1998 (63 FR 34968) and are set forth in part 422 of title 42 of the

Code of Federal Regulations (CFR). Provisions enacted by the BBA and

implemented in the interim final M+C regulations establish broad and

comprehensive requirements for contracting as an M+C organization,

including basic benefits, payment, access to service, quality

assurance, beneficiary hold harmless, continuation of benefits, appeals

mechanisms, marketing, and enrollment processes. These overall M+C

regulations apply to M+C organizations that are PSOs.

A PSO is described in section 1855(d) of the Act as a public or

private entity--

That is established or organized, and operated, by a

health care provider or group of affiliated health care providers;

That provides a substantial proportion of the health care

items and services directly through the provider or affiliated group of

providers; and

With respect to which the affiliated providers share,

directly or indirectly, substantial financial risk for the provision of

these items and services and have at least a majority financial

interest in the entity.

On April 14, 1998, we published an interim final rule in the

Federal Register at 63 FR 18124, titled ``Definition of Provider-

Sponsored Organization and Related Requirements'' with an opportunity

for public comment setting out the PSO definition, clarifying certain

terms, and establishing related requirements. This PSO definitions rule

established 42 CFR part 422 and subpart H of that part, dealing with

PSOs. The terms and requirements related to the definition of a PSO are

now found at Secs. 422.350 through 422.356. On May 7, 1998, we

published an interim final rule in the Federal Register at 63 FR 25360

titled ``Waiver Requirements and Solvency Standards for Provider

Sponsored Organizations,'' establishing solvency requirements that

apply to PSOs that obtain a waiver of the M+C State licensure

requirement and setting forth procedures and standards that apply to

requests for the waivers. The solvency portion of the interim final PSO

regulation was based on the work of the PSO negotiated rulemaking

committee, as required at section 1856(a) of the Act, which provides

that the Secretary establish through a negotiated rulemaking process

the solvency standards that entities will be required to meet if they

obtain a waiver of the otherwise applicable requirement that

[[Page 71674]]

they be licensed by a State. The results of the PSO solvency negotiated

rulemaking committee are described in the preamble to the interim final

regulation published on May 7, 1998 (63 FR 25360).

In this final rule, we focus solely on the solvency standards that

will apply to PSOs that have obtained a waiver. Other PSO provisions

will be addressed in the upcoming overall final M+C regulation. We note

that based on Secs. 422.352(a) and 422.380, State-licensed

organizations that meet the PSO definition (see Secs. 422.350 through

422.356) may qualify for the minimum enrollment standards established

under section 1857(b) of the Act but are not subject to these solvency

standards.

II. Response to Comments

The PSO solvency standards are the result of a negotiated

rulemaking process. The participants in the negotiated rulemaking

described their agreement on the PSO solvency standards in a Committee

Statement titled ``Negotiated Rulemaking Committee on PSO Solvency

Standards'' dated March 5, 1998. Based on these agreed upon PSO

solvency standards, we published an interim final PSO solvency

regulation on May 7, 1998 (63 FR 25360). The participants in the

negotiated rulemaking process agreed not to submit negative comments on

the interim final rule unless they determined that any provision of the

interim rule incorrectly reflects the Committee solvency agreement.

Section 1856(a)(9) of the Act, as amended by the BBA, requires that we

publish final solvency standards within 1 year of the interim final

regulations. Accordingly, this final regulation will address only the

solvency standards for PSOs. Other comments on PSOs (for example, on

the waiver process and definitions) will be addressed in the final M+C

regulation due to be published in the fall of 1999.

We received eight public comments. Seven of the letters were from

major organizations, and one letter was from a State. The comments we

received are summarized below along with our responses.

Comment: We received several comments regarding whether unique

solvency standards should be established for PSOs operating in rural

areas. Several commenters discouraged establishing separate solvency

standards for rural PSOs. One commenter noted that no State has

separate solvency standards for entities that operate in distinct

geographic areas. Another commenter stated that developing a successful

Medicare managed care program is more difficult in a rural area than in

an urban area in part because enrollment growth is smaller in rural

areas, making it more difficult to cover fixed administrative costs.

The commenter was also concerned that it would be difficult to track

``rural'' and ``nonrural'' PSOs within a State. According to the

commenter, regulators would have the additional burden of monitoring

the rural PSOs to determine whether, through growth or other reasons,

it no longer met the definition of a rural PSO. If the PSO was no

longer considered rural, there could be a possible disruption of

services since the PSO would have to recapitalize in order to meet the

higher solvency requirements for non-rural PSOs. The commenters also

pointed out that rural PSOs, given less stringent solvency standards,

would have a more difficult time making the transition from meeting the

standards required for a Federal waiver to meeting the solvency

requirements of a State once the 36-month waiver period expires.

Two commenters suggested that we consider allowing rural PSOs to

``aggregate'' specifically for purposes of meeting solvency standards

(Regional PSOs). For example, we could permit rural providers or local

rural PSOs that band into a regional PSO or rural PSOs that link to

nonrural PSOs to be considered as one entity for the purpose of

satisfying the PSO solvency standards. The commenter contended that

such a regional approach to PSOs is likely to produce greater financial

stability and greater access to care and would reduce unnecessary

redundancy of solvency requirements as applied to individual entities

that comprise the regional plan.

Another commenter recommended that solvency adjustments for rural

PSOs be allowed in circumstances under which the commenter believes the

solvency rules require more financial resources than might be necessary

for smaller rural PSOs. The commenter suggested that certain solvency

requirements could be reduced for rural PSOs without placing the PSO in

financial jeopardy. Specifically, this commenter recommended that we

have discretion to--(1) selectively allow for reductions in the minimum

cash and liquidity requirements for rural PSOs; (2) allow for a

reduction in the insolvency deposit for small and rural PSOs; (3) allow

the use of irrevocable letters of credit for the insolvency deposit;

and (4) allow for a reduction in the minimum cash portion of a rural

PSO's net worth requirement.

Response: At this time, we will not establish separate solvency

standards for rural PSOs. We believe that the lack of current rural PSO

activity makes it difficult to realistically evaluate under what

circumstances it would be feasible for us to reduce certain solvency

standards for rural PSOs. We note that the States do not have different

solvency requirements depending on whether an entity is operating in a

rural area compared to an urban area. As a commenter noted, PSOs will

be subject to State standards at the end of the 36-month waiver period.

In addition, we are concerned about lessening solvency requirements and

thereby putting beneficiaries at increased risk if the rural PSO

becomes insolvent.

With respect to the proposal to allow rural PSOs to band together

for the purpose of collectively meeting the solvency requirements, we

are concerned that if more than one of these PSOs becomes insolvent,

there will not be adequate funds available to protect beneficiaries. We

believe the possibility of two PSOs becoming insolvent at the same time

is significant because the PSOs will be operating in the same region.

Accountability questions would also be raised if we allow organizations

to combine for the purpose of meeting certain requirements in

regulations. If several PSOs combine to meet the solvency standards, it

is not clear whether these combined PSOs would be in noncompliance if

one of the PSOs experienced financial difficulty. In regard to

recommendations that we reduce or modify various solvency reserves, we

believe these changes would be a significant departure from the

solvency standards carefully worked out during the negotiated

rulemaking process. For that reason and those cited above, we will not

selectively reduce the solvency requirements for rural PSOs.

Comment: A commenter noted that with respect to affiliate

guarantees, the Solvency Committee agreed that it was up to us to

determine which entities could provide guarantees. Because of this

agreement, the commenter believed that it is appropriate to comment on

this part of the interim final regulation. The commenter recommended

that the independently audited financial statement provided by a

guarantor can only be acceptable to us if it consists of unqualified

opinions from the auditor.

Response: We will not require that guarantee opinions in audited

independent financial statements always be unqualified. There may be

circumstances where a qualification of a financial opinion does not

significantly affect the conclusions regarding the entity's ability to

meet the financial solvency standards. Accordingly, we reserve the

right to accept or reject a

[[Page 71675]]

financial statement depending on the nature and significance of the

qualification of the opinion.

Comment: Several commenters requested that we clarify in this

regulation whether Federal bankruptcy or State receivership law should

take precedence if a PSO goes bankrupt.

Response: We recognize the importance of this question.

Accordingly, we are researching the alternatives regarding the

appropriate jurisdiction and venue in which to administer a financially

insolvent PSO. However, resolving the precedence of Federal bankruptcy

law versus State receivership law is beyond the scope of this

regulation.

Comment: Several commenters stated that a current ratio of 1:1

should be a factor we will use in evaluating the ongoing solvency of a

PSO but not an absolute requirement as indicated at Sec. 422.386 of the

interim final rule. Section 422.386(d) of the interim final regulations

states that if a PSO fails to maintain a current ratio requirement of

1:1, we will require the PSO to initiate corrective action. The

commenters pointed out that the Liquidity section of the PSO Solvency

Committee Statement states that we may require a PSO to initiate

corrective action if either of the following is evident--(1) the

current ratio declines significantly, or (2) there is a continued

downward trend in the current ratio.

The corrective action may include change in the distribution of

assets, a reduction of liabilities, or alternative arrangements to

secure additional funding requirements to restore the current ratio to

1:1.

Response: We agree that the Committee Statement indicates that a

PSO current ratio of 1:1 should be a factor we will use in evaluating

the solvency of a PSO but not an absolute requirement that will always

result in corrective action when violated. Accordingly, we will change

Sec. 422.386(d) in the final regulation to read as follows:

(d) If HCFA determines that a PSO fails to meet the requirement

of paragraph (b)(2) of this section, HCFA may require the PSO to

initiate corrective action to* * *

Comment: A commenter noted that Sec. 422.382(a) requires that the

initial net worth requirement be met at ``* * * the time an

organization applies to contract with us as a PSO.'' The commenter

recommended that this requirement be changed to require that the

initial net worth requirement be met at the time the application is

approved or the contract entered into, rather than on the date the

application is first submitted. The commenter expressed concern that

since the application process can take a number of months, the PSO

might have drawn down its net worth in the intervening months after the

initial application and may have an inadequate net worth by the time

the PSO actually enters into the contract with us.

Response: The Committee Statement on the PSO solvency standards

specifies that the PSO minimum net worth amount must be met when the

PSO submits the initial application. The interim final PSO regulations

at Sec. 422.382 reflect this Committee Statement. We believe it is

necessary that the net worth requirement be met at the start of the

application process to ensure that the applicant is financially able to

enter into a contract with us. We also believe that the ongoing net

worth requirement will ensure that PSOs have adequate net worth on the

effective date of the contract.

Comment: Section 422.382(b) describes the ongoing net worth

requirement as the greater of four amounts. The fourth amount, set

forth in Sec. 422.382(b)(4), begins with the statement ``Using the most

recent annual financial statement filed with HCFA, an amount equal to

the sum of * * *'' A commenter contended that this language was

intended to be an adaptation of a similar provision set forth in

Section 13.A.(2)(d) of the National Association of Insurance

Commissioners (NAIC) HMO Model Act, requiring that the calculation be

based ``* * * on the most recent financial statement filed with the

commissioner * * *'' rather than the most recent annual financial

statement.

The commenter noted that while the calculation results in an

annualized number, the calculation should be based on the most recent

HCFA filing, which could be a quarterly statement, not an annual

statement. Accordingly, the commenter requested that the word

``annual'' be deleted from Sec. 422.382(b)(4) in order to conform to

the NAIC structure.

Response: We agree with the commenter that the word ``annual''

should be removed from Sec. 422.382(b)(4). This is also consistent with

the PSO Committee Agreement in which the ongoing minimum net worth

requirements are specified and verification is through ``* * * the most

recent financial statement filed with us.'' Accordingly, we will revise

Sec. 422.382(b)(4) to read as follows:

Using the most recent financial statement filed with us, an

amount equal to the sum of * * *

Comment: A commenter noted that Sec. 422.384(b)(5) requires

certification of reserves and actuarial liabilities by a ``qualified

HMO actuary,'' which is not defined (the regulation does define

``qualified actuary''). The commenter requested clarification of what

is meant by ``qualified HMO actuary.''

Response: We agree that the use of the phrase ``qualified HMO

actuary'' at Sec. 422.384(b)(5) is confusing. Accordingly, we will

change the reference at Sec. 422.384(b)(5) to read ``qualified

actuary.'' We are not imposing any requirements on the qualifications

of an actuary employed by a PSO beyond what is stated in the definition

of qualified actuary under Sec. 422.350(b).

Comment: Section 422.382(b)(4) describes the four-tiered minimum

net worth test that will be applied to a PSO after the effective date

of its M+C contract. Section 422.382(b)(4)(iii) states that the annual

health care expenditures that are paid on a capitated basis to

affiliated providers must not be included in the calculation of net

worth under paragraphs (a) and (b)(4) of Sec. 422.382. A commenter

noted that the negotiated rulemaking committee specifically addressed

this issue and was careful to note that the exclusion set forth in

paragraph (b)(4)(iii) of Sec. 422.382 would apply regardless of the

downstream risk arrangements among providers. The commenter recommended

that this nuance be noted in the text of the regulations.

Response: We agree as referenced in the Committee Statement that

the exclusion from the net worth requirement calculation at

Sec. 422.382(b)(4)(iii) applies regardless of the downstream risk

arrangements among providers. Accordingly, we will change the

regulation at Sec. 422.382(b)(4)(iii) by adding the following

parenthetical clarification:

Annual health care expenditures that are paid on a capitated

basis to affiliated providers are not included in the calculation of

the net worth requirement (regardless of downstream arrangements

from the affiliated provider) under paragraphs (a) and (b)(4) of

this section.

Comment: A commenter recommended that a statement be added to the

preamble of the final solvency regulation clarifying (1) that funds

accumulated by a PSO as subordinated liabilities may be disbursed to

the affiliated providers if they are not needed to satisfy net worth

requirements during the period for which the funds were held and (2)

that the PSO has the flexibility to convert those funds to equity or

debt to benefit the providers.

[[Page 71676]]

Response: As long as the minimum net worth requirement is

maintained, any assets including those associated with subordinated

liabilities may be disbursed as the PSO deems appropriate on the basis

of sound business judgment. We do not believe any additional

clarification in the preamble is necessary.

Comment: Under Sec. 422.386(b)(3), in determining liquidity, we

evaluate the level of outside financial resources to the PSO. A

commenter recommended that we change Sec. 422.386(e) to clarify that we

will require a PSO to obtain funding from alternative financial

resources under this provision only if there has been a change in the

availability of outside financial resources available to the PSO. In

support of its recommendation, the commenter pointed out that the

language of the Solvency Standards Agreement (under the Part C

Liquidity requirements) reads, ``If there is a change in the

availability of the outside resources, we will require the PSO to

obtain funding from alternative financial resources.''

Response: We agree with this comment. Section 422.386(b)(3)

provides that, in monitoring liquidity, we will examine the

``availability of outside financial resources to the PSO.'' We will

change Sec. 422.386(e) to read as follows:

If HCFA determines that there has been a change in the

availability of outside financial resources as required by paragraph

(b)(3) of this section, HCFA requires the PSO to obtain funding from

alternative financial resources.

Comment: Under Sec. 422.390(d)(2)(ii), a guarantor must agree to

not subordinate the PSO guarantee to any other claim on its resources.

A commenter contended that in a typical PSO scenario, a tax-exempt

hospital or health system may provide the guarantee to the PSO. In this

case, the commenter believes it is likely that the hospital or health

system has tax-exempt bonds in place that contain certain covenants

with respect to the use and disposition of assets, including a pledge

of revenues. Under most circumstances and bond documents, it would not

be problematic in the commenter's view to satisfy the requirements at

Sec. 422.390(d)(2)(ii). However, the commenter believes that if a PSO

were able to demonstrate that this requirement was unduly and

substantially burdensome to the guarantor, we should have the authority

to consider the specific facts and circumstances and sufficient

discretion to modify this requirement.

Response: Section 422.390(a) of the Medicare+Choice regulations

explicitly states that we have the discretion to approve or deny

approval of the use of a guarantor. We believe this authority generally

allows us to exercise discretion in the approval or modification of a

guarantor agreement. We do not believe further clarification of this

authority in the regulations is necessary.

Comment: One commenter expressed concerns that the requirement that

the guarantor have a net worth of three times the amount of the

guarantee may not always be adequate. The commenter noted that this

amount may be adequate for some companies, but it may be a very slender

margin. As an alternative approach, the commenter suggested that

perhaps the net worth of a guarantor be determined as a percentage of

assets or related to total liabilities in some fashion.

Response: While we agree with the commenter's concern that the

guarantor having a net worth of three times the amount of the guarantee

may not always be adequate, we do not believe it is necessary to change

the regulation to address this concern. Section 422.390(a) explicitly

states that we have the discretion to approve or deny approval of the

use of a guarantor. We believe this authority generally allows us to

exercise discretion in determining the net worth to be required of a

particular guarantor that could be based on alternative approaches like

those suggested by the commenter.

Comment: Section 422.384(e)(i) provides that guarantees will be an

acceptable resource to fund projected losses of a PSO provided that,

before the effective date of the PSO's M+C contract, the PSO obtains

from the guarantor cash or cash equivalents to fund the amount of

projected losses for the first two quarters. A commenter noted that the

preamble to the interim final rule stated that funding for the first

two quarters will need to be in the PSO ``at least (45) days before the

effective date of the contract''. The commenter recommended that,

rather than enforcing a uniform 45-day requirement, we exercise

discretion consistent with the current language of Sec. 422.384(e)(i).

The commenter maintained that under certain circumstances the 45-day

requirement could prove to be unduly burdensome and we have sufficient

discretion to ensure that the guarantee amounts are sufficiently

prefunded for the first quarter of operation under the contract.

Response: The preamble of the May 7, 1998 interim final rule (63 FR

25370) calls for organizations to have assets to fund the first two

quarters of projected losses on their balance sheets 45 days before the

effective date of the contract. However, this 45-day time period is a

guideline to ensure that there is adequate time before the contract

date for us to update necessary data systems. If a PSO is unable to

have this funding in place 45 days before the contract effective date,

this may result in a delay in the implementation of the contract.

III. Provisions of the Final Rule

We have agreed to the following changes in regulations text in

response to comments on the interim final rule: Each change is based on

a commenter establishing that the interim final regulation was not

consistent with the agreement developed through the solvency negotiated

rulemaking process.

We have revised Sec. 422.382(b)(4), which states that the

ongoing net worth requirement be evaluated based on the most recent

financial statement filed with us and not restricted to the most recent

``annual'' financial statement.

We have accepted a comment to clarify in the final

regulation that the exclusion from the net worth requirement

calculation at Sec. 422.382(b)(4)(iii) applies regardless of the

downstream risk arrangements among providers.

We have clarified that we are not imposing any requirement

on the qualification of an actuary employed by a PSO beyond what is

stated in the definition of a qualified actuary at Sec. 422.384.

We have changed Sec. 422.386(d) to state that the PSO

current ratio will be a factor we will use in evaluating the solvency

of a PSO but not an absolute requirement that will always result in

corrective action being imposed by us when violated.

We have accepted a comment to change Sec. 422.386(e) to

make it clear that we will require a PSO to obtain funding from

alternative financial resources if there is a change in the

availability of outside financial resources available to the PSO.

IV. Regulatory Impact Analysis

A. Introduction

We have examined the impact of this final rule as required by

Executive Order 12866, the Unfunded Mandates Reform Act of 1995 (Public

Law 104-4), 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, if regulation is

necessary, to select regulatory approaches that maximize net benefits

(including potential economic, environmental, public health and safety

[[Page 71677]]

effects, distributive impacts, and equity). A regulatory impact

analysis (RIA) must be prepared for major rules with economically

significant effects ($100 million or more annually). The Regulatory

Flexibility Act (RFA) requires agencies to analyze options for

regulatory relief for small businesses, unless we certify that the

regulation will not have a significant economic impact on a substantial

number of small entities. Most hospitals, and most other providers,

physicians, and health care suppliers, are small entities either by

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

annually. The impact of this regulation will be to create a new

business opportunity for these small entities to form provider-

sponsored organizations to contract with the Medicare program.

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

impact analysis if a final rule may have a significant impact on the

operations of a substantial number of small rural hospitals. This

analysis must conform to the provisions of section 604 of the RFA. For

purposes of section 1102(b) of the Act, we define a small rural

hospital as a hospital that is located outside a Metropolitan

Statistical Area and has fewer than 50 beds. We are not preparing an

analysis for section 1102(b) of the Act because we have determined, and

we certify, that this final rule will not have a significant impact on

the operations of a substantial number of small rural hospitals.

Section 202 of the Unfunded Mandates Reform Act of 1995 also

requires that agencies assess anticipated costs and benefits before

issuing any rule that may result in an expenditure in any one year by

State, local, or tribal governments, in the aggregate, or by the

private sector, of $100 million. This final rule does not mandate any

requirements for State, local, or tribal governments. Therefore, we

have not prepared an assessment of anticipated costs and benefits of

this final rule.

Because of the probability that these solvency standards may have

an impact on certain hospitals, physicians, health plans, and other

providers we prepared the following analysis which constitutes both a

regulatory impact analysis and a regulatory flexibility analysis.

B. Background

While the term ``provider-sponsored organization'' has been used

generally in reference to health care delivery systems that providers

own or control and operate, the term has a more specific meaning for

purposes of the M+C program. Accordingly, we defined, by regulation,

the fundamental organizational requirements for entities seeking to be

PSOs. These definitions are set forth at Sec. 422.350. Organizations

that meet these definitional requirements can apply for a Federal

waiver and an M+C contract. Having defined the term PSO and the waiver

process in earlier regulations, the purpose of this final rule is to

finalize the interim standards for financial solvency to which these

Federally waived organizations must adhere.

The solvency standards only affect organizations that have received

a Federal waiver and are either applying for or actually have received

an M+C contract. It is likely that waiver activity will be greater in

States that have solvency standards that differ significantly from the

standards developed in this regulation. Below we consider the

anticipated impact of this rule.

C. Anticipated Effects

1. Effects on Providers

This final regulation establishes solvency standards for PSOs that

have an approved waiver and are applying for a Medicare PSO contract.

These solvency requirements are designed to ensure that provider groups

have the necessary financial resources to participate in the M+C

program. In addition, the regulations are intended to ensure the

ongoing solvency of PSOs and to protect enrolled beneficiaries if an

insolvency occurs. Through the negotiated rulemaking process and our

own deliberations, we have carefully balanced the PSO solvency

requirements to ensure that we are not imposing unreasonable financial

barriers to the participation of provider groups in the M+C program. We

believe that these solvency requirements will make it easier for

provider groups to participate in the M+C program.

2. Effects on the Market Place

Since solvency standards vary by State, and State standards are

evolving, it is difficult to assess the relative effect of these

solvency standards. However, with several key exceptions (for example,

a different initial minimum net worth requirement and a lower

insolvency deposit), these solvency standards track the HMO Model Act.

Therefore, we do not believe there will be a significant impact due to

the existence of an unlevel playing field between PSOs and other

entities. We believe that establishing standards of financial solvency

is necessary to ensure that PSOs have the financial resources to

provide adequate quality care and to reduce the possibility of

disrupting beneficiary care.

3. Effects on States

For PSOs that obtain a Federal waiver, responsibility for

monitoring their financial solvency will be transferred from the States

to us. This a temporary reduction, since waivers last only 36 months

and the Secretary's authority to grant waivers ends on November 1,

2002. By the end of a PSO's waiver, it will need a State license in

order to continue its M+C contract. Therefore, to ease the transition

from a Federal waiver to a State license, we encourage PSOs to

establish a relationship with regulators in their respective States

soon after receiving a waiver.

4. Effects on Beneficiaries

We expect that the advent of PSOs and M+C in general will have the

effect of further mainstreaming managed care plans among Medicare

enrollees. We do not anticipate an increase in the potential for

service interruptions because these new PSOs will be subject to the

same beneficiary hold-harmless provisions and continuation of benefits

requirements as all M+C organizations. Lastly, section 1855(a)(2)(G) of

the Act requires PSOs to comply with all existing State consumer

protection and quality standards as if the PSO were licensed under

State law.

D. Effects on the Medicare Program

We assume that PSOs will be more prone to favorable selection than

other coordinated care plans since the providers in the PSO will, in

many cases, know their patients. This may increase the level of

favorable selection for the M+C program and could result in increased

costs for the Medicare program. However, since PSOs are expected to

make up a very small part of the M+C program, for the foreseeable

future any PSO favorable selection will have a minimal dollar impact on

the Medicare program.

We expect a greater insolvency rate from the PSOs than from the

current coordinated care plans because PSOs generally have less

business experience and they are smaller. Despite the insolvency rules

including hold harmless, Medicare can lose money when there is an

insolvency. This is particularly true when insolvency is imminent and

providers therefore defer nonemergency procedures to the next month.

Medicare may have to pick up the costs, especially if the beneficiary

elects fee-or-service. However, as noted above, given the small number

of PSOs participating in the M+C program, the

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expected cost of insolvencies for the Medicare program is low.

E. Alternatives Considered

As previously discussed, the PSO solvency standards were developed

through a formal negotiated rulemaking process. During the negotiated

rulemaking, a number of alternatives were considered in the process of

developing a consensus regarding the PSO solvency regulations. Please

refer to the interim final PSO solvency regulation published in the

Federal Register on May 7, 1998 for details on the negotiated

rulemaking process including the solvency alternatives considered.

F. Conclusion

We conclude that this regulation will have an indeterminable impact

on small health service providers. The provisions of this final rule

are expected to be favorable for the managed care community as a whole,

as well as for the beneficiaries that they serve. We have also

determined, and the Secretary certifies, that this final rule will not

result in a significant economic impact on a substantial number of

small entities and will not have a significant impact on the operations

of a substantial number of rural hospitals.

In accordance with the provisions of Executive order 12866, this

regulation was reviewed by the Office of Management and Budget.

G. Federalism

Executive Order 13132, Federalism, establishes certain requirements

that an agency must meet when it promulgates regulations that impose

substantial direct compliance costs on State and local governments,

preempt State law, or otherwise have Federalism implications.

In this final rule, we focus solely on the solvency standards that

apply to PSOs that have obtained a waiver from State licensure

requirements. The PSO waiver provisions that describe the process by

which a PSO obtains a waiver from HCFA of State licensure requirements

will be addressed in the final M+C regulation expected to be published

in the first quarter of 2000.

The solvency portion of the PSO regulation in this final regulation

is based on the work of the PSO negotiated rulemaking committee, as

required at section 1856(a) of the Act, which provides that we

establish through a negotiated rulemaking the solvency standards that

entities will be required to meet if they obtain a waiver of the

otherwise applicable requirement that they be licensed by a State. The

negotiated rulemaking process and participants are discussed in the

preamble to the interim final waiver and solvency regulations published

in the Federal Register on May 7, 1998 (63 FR 25364). Among the

participants in the negotiated rulemaking were the National Association

of Insurance Commissioners, which is the organization of the chief

insurance regulators from the 50 States, the District of Columbia, and

four U.S. territories. This final solvency regulation is consistent

with the solvency standards agreed upon by all participants in the

negotiated rulemaking process, which, as noted, included the NAIC. We

received no comments on the interim final waiver and solvency

regulation and made no determinations that materially altered the PSO

solvency standards agreed upon in the negotiated rulemaking. It is also

notable that with limited exceptions these solvency standards track

those in the HMO model act which are the model solvency standards

developed by all of the States through the NAIC. Accordingly, we

believe this final regulation meets Federalism requirements because we

have consulted with the appropriate State officials who are in

agreement with these solvency standards.

List of Subjects in 42 CFR Part 422

Health maintenance organizations (HMO), Medicare+Choice, Provider