Medicare Program; Medicare Advantage and Prescription Drug Benefit Programs: Negotiated Pricing and Remaining Revisions

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 422 and 423

[CMS-4131-FC;-RIN 0938-AP24]

Medicare Program; Medicare Advantage and Prescription Drug Benefit Programs: Negotiated Pricing and Remaining Revisions

AGENCY:

Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION:

Final rule with comment period.

SUMMARY:

This rule contains final regulations governing the Medicare Advantage (MA) program (Part C) and prescription drug benefit program (Part D), and interim final regulations governing certain aspects of the Retiree Drug Subsidy (RDS) Program, and reflecting new statutory definitions relating to Special Needs Plans under Part C. The final regulations revising the Part C and Part D regulations include provisions regarding medical savings account (MSA) plans, cost-sharing for dual eligible enrollees in the MA program, the prescription drug payment and novation processes in the Part D program, and the enrollment and appeals processes for both programs. This final rule with comment period also responds to public comments on the May 16, 2008 proposed rule and takes into account statutory revisions contained in the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA).

DATES:

Effective Date:

These regulations are effective on March 13, 2009.

Applicability Date:

The revisions to the definition of “negotiated prices” in § 423.100, with the exception of the revision to include a reference to “other network dispensing provider,” which is applicable on March 13, 2009, are applicable for contract year 2010. The revisions to the definitions of “administrative costs,” “allowable risk corridor costs,” and “gross covered prescription drug costs” in § 423.308 are also applicable for contract year 2010.

Comment Period:

We will consider comments on the provisions concerning the new statutory definitions relating to special needs plans (see section II.A.1 of the preamble to this final rule with comment period) and those concerning negotiated prices and retained rebates under the Retiree Drug Subsidy (RDS) program (see section II.B.5.e. of the preamble to this final rule with comment period), provided that they are received at one of the addresses provided below no later than March 13, 2009.

ADDRESSES:

In commenting, please refer to file code CMS-4131-FC. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

You may submit comments in one of four ways (please choose only one of the ways listed).

1.

Electronically.

You may submit electronic comments on specific issues in this regulation to

http://www.regulations.gov

. Follow the instructions under the “More Search Options” tab.

2.

By regular mail.

You may mail written comments to the following address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and Human Services,

Attention:

CMS-4131-FC, P.O. Box 8013, Baltimore, MD 21244-8013.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3.

By express or overnight mail.

You may send written comments to the following address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and Human Services,

Attention:

CMS-4131-FC, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

4.

By hand or courier.

If you prefer, you may deliver (by hand or courier) your written comments before the close of the comment period to either of the following addresses:

a. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201;

(Because access to the interior of the Hubert H. Humphrey (HHH) Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.)

b. 7500 Security Boulevard, Baltimore, MD 21244-1850.

If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7197 in advance to schedule your arrival with one of our staff members.

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

For information on viewing public comments, see the beginning of the

SUPPLEMENTARY INFORMATION

section.

FOR FURTHER INFORMATION CONTACT:

Change of Ownership:

Scott Nelson, 410-786-1038.

Civil Money Penalties:

Christine Reinhard, 410-786-2987.

Definitions related to the Part D drug benefit, Subparts F and G: Deondra Moseley, 410-786-4577, or Meghan Elrington, 410-786-8675.

Definitions related to the Part D drug benefit, Subpart R: David Mlawsky, 410-786-6851.

Enrollment:

Jeff Maready, 415-744-3523.

Low-Income Cost-Sharing:

Christine Hinds, 410-786-4578.

Medicare Medical Savings Account Plans:

Anne Manley, 410-786-1096.

Payment:

Frank Szeflinski, 303-844-7119.

Reconsiderations:

John Scott, 410-786-3636, or Kathryn McCann Smith, 410-786-7623.

Special Needs Plans:

LaVern Baty, 410-786-5480.

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments:

All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received:

http://regulations.gov. Follow the search instructions

on that Web site to view public comments.

Comments received timely will be also available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

I. Background and Legislative History

The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33) established a new “Part C” in the Medicare statute (sections 1851 through 1859 of the Social Security Act (the Act)) that established the Medicare+Choice (M+C) program. Under section 1851(a)(1) of the Act, every individual entitled to Medicare Part A and enrolled under Medicare Part B, except for most individuals with end-stage renal disease (ESRD), could elect to receive benefits either through the original Medicare program or an M+C plan, if one was offered where he or she lived.

The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA), (Pub. L. 106-111), amended the M+C provisions of the BBA. Further amendments were made to the M+C program by the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554), enacted December 21, 2000.

Subsequently, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (Pub. L. 108-173) was enacted on December 8, 2003. This landmark legislation established the Medicare prescription drug benefit program (Part D) and made significant revisions to the provisions in Medicare Part C, governing what was renamed the Medicare Advantage (MA) program (formerly Medicare+Choice). The MMA directed that important aspects of the new Medicare prescription drug benefit program under Part D be similar to and coordinated with regulations for the MA program. The MMA also created a subsidy program involving payments to sponsors of Retiree Prescription Drug Programs, or the Retiree Drug Subsidy (RDS) Program. This program allows subsidy payments to sponsors of qualified retiree prescription drug plans for Part D drug costs for individuals who are eligible for, but not enrolled in, a Medicare Part D plan.

The MMA also specified that implementation of the prescription drug benefit and revised MA program provisions take place by January 1, 2006. Thus, we published final rules for the MA and Part D prescription drug programs in the

Federal Register

on January 28, 2005 (70 FR 4588 through 4741 and 70 FR 4194 through 4585, respectively). (For further discussion of these revisions, see the respective final rules (70 FR 4588 through 4741) and (70 FR 4194 through 4585).)

Since the publication of these rules, we have gained a great deal of experience with all aspects of these programs. Based on this experience, as well as on recommendations from representatives of both the organizations that provide care and the Medicare beneficiaries that they serve, we determined that proposed changes to the existing Part C, Part D, and RDS regulations were warranted. We believed that these changes would help plans understand and comply with our policies for all three programs, and aid MA organizations and Part D and RDS plan sponsors in implementing their health care and prescription drug benefit plans in ways that will better serve the Medicare population.

Thus, on May 16, 2008, we published a proposed rule (73 FR 28556) that would revise certain aspects of both the MA, Part D, and RDS programs. Many of these proposed revisions were designed to clarify existing policies or codify current guidance for these programs. Subsequent to the publication of that proposed rule, the Medicare Improvements for Patients and Providers Act (MIPPA) (Pub. L. 110-275) was enacted on July 15, 2008. MIPPA included a number of provisions that addressed the same requirements that we had addressed in the proposed rule. In some cases, the MIPPA provisions paralleled our proposed requirements and in other instances they complemented or superseded them. Thus, in order to implement both the new MIPPA provisions and those proposed in our May 2008 proposed rule, we have published a series of rules to set forth the appropriate regulatory changes.

In the September 18, 2008

Federal Register

(73 FR 54208), we published a final rule that finalized certain marketing provisions, effective October 1, 2008, that paralleled provisions in MIPPA. In the same issue of the

Federal Register

(73 FR 54226), we also published a separate interim final rule that addressed the other provisions of MIPPA impacting the MA and Part D programs.

This final rule responds to comments on the May 16, 2008 proposed rule and generally finalizes provisions of that rule that were not addressed in either of the rules published on September 18, 2008. We received over 100 comments on the proposed rule. Commenters included managed care and prescription drug plans and their representatives, provider groups, and Medicare beneficiary advocates. The comments ranged from general support or opposition to the proposed provisions, to very specific questions or comments regarding a proposed change.

Some of these comments have been addressed in the rules discussed above. All comments pertaining to the provisions set forth in this final rule are discussed below. We are providing brief summaries of each proposed provision, a summary of the public comments we received, and our responses to the comments.

II. Analysis of and Response to Public Comments

In the sections that follow, we discuss the changes to the regulations in parts 422 and 423 governing the MA and prescription drug benefit programs that were proposed in our May 16, 2008 rule, and the comments we received on those provisions as well as conforming changes to the regulations to reflect two new statutory definitions affecting the MA program that were enacted in MIPPA. Several of the revisions and clarifications discussed below affect both the MA and prescription drug benefit programs.

A. Changes to Part 422—Medicare Advantage Program

1. Special Needs Plans

The MMA first authorized special needs plans (SNP), a type of MA plan designed to exclusively, or disproportionately, enroll individuals with special needs. The three types of special needs individuals eligible for enrollment identified in the MMA include—(1) Institutionalized individuals (defined in 42 CFR 422.2 as an individual residing or expecting to reside for 90 days or longer in a long term care facility); (2) individuals entitled to medical assistance under a State plan under title XIX; and (3) other individuals with severe or disabling chronic conditions that would benefit from enrollment in a SNP.

The number of SNPs approved as of January 2008, is 787. This figure includes 442 dual eligible SNPs, 256 chronic care SNPs, and 89 institutional SNPs.

a.

Definitions:

Institutional-Equivalent and Severe or Disabling Chronic Condition (§ 422.2)

Section 164 of MIPPA contained two new statutory definitions that relate to eligibility for SNPs. Although these definitions were not included in our May 18 proposed rule, we are discussing these new definitions here in the context of the more general SNP-eligibility provisions, and incorporating these new definitions in interim final regulations as part of this rule.

Although the statute governing SNPs has always referred to individuals eligible to enroll in SNPs based on institutional status or on having a severe or disabling chronic condition, the statute previously did not define these terms. We believe that discussing these new definitions in this rule will both aid the understanding of the new statutory requirements and complement the eligibility requirements from the proposed rule that we are publishing as final regulations in this rule. In addition, because we received public comment on the May 2008 proposed rule closely related to eligibility for institutional-level and chronic care individuals, we believe that in order to fully respond to these comments it is important to discuss all of the provisions relating to chronic care and

institutional care eligibility. Public comments related to institutional and chronic care SNP eligibility are addressed below.

(1) Institutional-Equivalent Individual

Section 164 of MIPPA adds a new paragraph (2) to section 1859(f) of the Act related to eligibility requirements for institutional SNPs. Beginning on January 1, 2010, institutional SNPs that enroll a special needs individual who is living in the community but requires an institutional level of care (LOC) (

i.e.

, an “institutional-equivalent individual”) must meet two new eligibility requirements.

First, the determination of institutional LOC must be made using a State assessment tool. States have extensive experience in making LOC determinations, as demonstrated by a recently published survey

1

of State LOC assessment, which references several other investigative sources. The study describes varying State instruments and methodologies, and may be an important resource for institutional SNPs that are not already aware of existing State LOC assessment tools. In States and territories that have not designed a specific tool, SNPs must use the same LOC determination methodology employed in the respective State or territory in which the SNP is authorized to enroll eligible beneficiaries.

1

Henderickson, L. Kyzr-Sheeley, G. (2008). Determining Medicaid Nursing Home Eligibility: A Survey of State Level Care Assessment. Retrieved July 27, 2008 from

http://www.hcbs.org/moreInfo.php/nb/doc/2216/.

Second, the SNP must arrange to have the LOC assessment conducted by an entity other than the respective MA organization. We believe this entity must be both impartial and have the requisite professional knowledge to accurately identify institutional LOC criteria.

As a result of MIPPA provisions concerning institutionalized care, we have revised our definitions section in § 422.2 to incorporate the new statutory definition of “institutional equivalent” set forth in MIPPA.

(2) Severe or Disabling Chronic Condition

Section 164 of MIPPA also adds a new clause to section 1859(b)(6)(B)(iii) of the Act to clarify the eligibility requirements for chronic condition SNPs. Beginning on January 1, 2010, chronic condition SNPs that enroll a special needs individual who has a severe or disabling chronic condition must determine that the individual has one or more co-morbid and medically complex chronic condition(s) that are substantially disabling or life-threatening, has a high risk of hospitalization or other significant adverse health outcomes, and requires specialized delivery systems across domains of care. We have also updated our definitions in § 422.2 to incorporate this new statutory definition of severe or disabling chronic condition.

We note that the statute also directs the Secretary to convene a panel of clinical advisors to determine which chronic conditions meet this clarified definition. We will issue separate guidance describing the operational process the Secretary will use to comply with this directive.

b. Ensuring Special Needs Plans Serve Primarily Special Needs Individuals (§ 422.4)

The MMA generally authorized SNPs that “exclusively” serve individuals with the above-described special needs. However, section 231(d) of MMA provided the Secretary with the “authority” to designate MA plans as SNPs if the SNP only “disproportionately serve[s] special needs individuals,” while also serving non-special needs enrollees. Section 231(d) of the MMA provides that “the Secretary

may

provide” for such plans in regulations implementing the SNP provisions. In the final rule implementing this MMA provision, we exercised this discretion in

§ 422.4(a)(iv)(B), providing that a SNP could be a plan that “[e]nrolls a greater proportion of special needs individuals than occur nationally in the Medicare population * * *.”

In the May 16, 2008 proposed rule, we proposed to amend § 422.4(a) to require that MA organizations offering “disproportionate share” SNPs ensure that at least 90 percent of new plan membership consist of individuals that fell into the appropriate special needs category for the plan in question, as defined in § 422.2. Thus, no more than 10 percent of a plan's new enrollees could be non-special needs individuals. Based on the comments received on this proposal, and in light of the fact that section 164 of MIPPA eliminates the authority for disproportionate share SNPs effective January 1, 2010, we are revising the regulations to specify that all new SNP enrollees must be special needs individuals. In other words, we are declining to permit disproportionate share SNPs as permitted, at our discretion, under section 231(d) of MMA. As discussed below, we are amending § § 422.2 and 422.4 to reflect these changes.

Comment:

All commenters agreed that the current regulation permitting an MA plan to be designated a SNP if it enrolled special needs individuals in a higher proportion than they exist in the Medicare population diminishes the intended focus of special needs plans on providing care and services to special needs individuals. Commenters generally supported our proposal that at least 90 percent of new enrollees consist of individuals with the targeted condition or status. Many commenters, however, argued for a higher threshold. Some commenters suggested establishing a 95 percent threshold, as recommended by the Medicare Payment Advisory Commission (MedPAC). Still others suggested requiring that entire plan membership (100 percent) be in the targeted special needs group, or at least that all new enrollees fall into the targeted category of individuals. These commenters correctly noted that although section 231(d) of MMA allows plans to enroll a certain portion of members from the non-targeted population, there is no requirement that non-special needs individuals be permitted to join an SNP. Many commenters also indicated that having to monitor the proportion of plan membership that fell into the appropriate category would pose an administrative challenge, and was unnecessarily complex.

Response:

After considering all comments, and in light of the fact that disproportionate share SNPs will no longer be authorized as of January 1, 2010, we agree with the commenters who urged that SNPs should not be permitted to enroll individuals who do not meet the qualifying targeted conditions (dual eligibility for Medicare and Medicaid, institutional status, or severe or disabling chronic conditions). Thus, taking into consideration the MIPPA changes and the public comments described above, we are revising our proposal to prohibit the enrollment of nonqualifying members into all SNP plans. We believe that this change will emphasize the need for SNPs to focus on providing care and services to their targeted population.

We recognize that this means that a spouse of an individual in a chronic care SNP generally will not be able to join the same plan (unless the spouse has the same condition), which has been presented in the past as a reason to permit some non-special need individuals to enroll in SNPs. Note that a plan may not disenroll a non-special needs individual who has already enrolled in the SNP consistent with the current disproportionate percentage methodology. Such individuals may

remain in their plans unless and until they choose to disenroll. Note that they would not be permitted to re-enroll in another SNP unless they had a qualifying condition. We are revising § § 422.2 and 422.4 to reflect these changes.

Comment:

One commenter requested that the 90 percent disproportionate percentage requirement be measured on an aggregate basis for a given calendar year, rather than on a monthly or day-to-day basis.

Response:

Since we are eliminating use of any disproportionate percentage methodology in the future, this issue has become moot.

Comment:

Several commenters were confused by the wording of the proposed regulations and asked that CMS clarify whether the proposed 90 percent rule applied only to new members, or applied to the overall membership in the plan. Given the current proportions of special needs individuals in many SNPs, they noted that establishing an overall target of 90 percent would effectively require that all new enrollees be members of the appropriate category in any event.

Response:

We recognize that the wording of the proposed requirements left some room for confusion as to the precise intent of the provisions in question. Our proposal would only have applied to new enrollees, so regardless of how many current members were special needs individuals, 10 percent of new enrollees could have been non-special needs individuals under our proposal. However, as explained above, the final regulations clearly specify that the 100 percent requirement applies only to new members.

c. Ensuring Eligibility To Elect an MA Plan for Special Needs Individuals (§ 422.52)

We proposed in § 422.52 that MA organizations be required to establish a process approved by CMS to verify that potential SNP enrollees meet the SNP's eligibility requirements. While this issue is addressed, to some degree, in our manual guidance (section 20.11 of Chapter 2 of the Medicare Managed Care Manual), we believe that it is important to set forth in regulations our explicit authority to establish verification requirements. The proposed regulations were also intended to ensure that plans were aware of, and met, their obligations to verify an applicant's eligibility prior to enrolling individuals in a SNP. As discussed below, we are adopting these changes in final regulations as proposed and, as noted above, we are in interim final regulations codifying the related MIPPA eligibility requirements concerning institutional-level and chronic care SNP. We are also making a conforming change to § 422.52(f) by deleting the currently existing paragraph, which refers to SNPs serving disproportionately special needs individuals.

Comment:

Commenters did not object to our proposal to establish in regulations that SNPs must use a CMS-approved process to verify SNP eligibility. However, several commenters requested that we revise either the proposed regulations or manual guidance to specify that SNPs have 60 days to verify enrollment for individuals with special needs. Alternatively, the commenters suggested that CMS take into consideration the amount of time for verifying enrollment status when monitoring plan compliance with the SNP provisions. Another commenter recommended that CMS maintain the previous requirements (established in our May 31, 2007 HPMS memo) for time frames and sources for verification of Chronic Care SNP enrollment qualifications. The commenter suggested that the 30-day timeframe now established in the manual is impractical, and they further recommended that sources other than providers be allowed for verification of chronic care SNP enrollees' eligibility for the SNP.

Response:

We are strongly committed to ensuring that SNPs carry out proper verification of all eligibility criteria, consistent with the requirements discussed above concerning SNP enrollment requirements. Thus, we are adopting the proposed requirement that SNPs follow a CMS-approved verification process. Note that although we are not setting out specific verification requirements in the regulations, manual current guidance already requires that prompt verification take place (generally either before enrollment or no later than the end of the first month of enrollment). We continue to believe that prompt verification is necessary to prevent large numbers of subsequent, unnecessary disenrollments from SNPs of individuals who never should have been enrolled.

As noted in the May 2008 proposed rule (73 FR 28559), we have given plans a number of options for meeting the verification requirements, including post-enrollment confirmation under certain circumstances (such as when a pre-enrollment qualification assessment tool is used, as opposed to direct contact with a provider). In addition, to assist SNP plans in obtaining timely verification from appropriate medical professional personnel, we have made clear in subregulatory guidance (Chapter 2, Section 20-11, Medicare Advantage Manual) that for the purposes of verification of chronic care SNP eligibility, verification may be obtained through a provider or provider's office. This includes any licensed health care professional in a position to validate and verify the beneficiary's medical history and status, such as nurse practitioners or pharmacists. However, we are concerned that the use of organizational data alone, such as claims or medical records, may not always be sufficient to confirm SNP eligibility. Thus, we intend to continue to evaluate the issue of when and how data may be appropriately used to verify SNP eligibility and we are willing to consider reasonable alternative proposals presented by plans to verify eligibility. Still, given that the underlying intent of chronic care SNPs is to provide care services to a population with a need for carefully managed services, we do not believe it is unreasonable to expect early contact with a suitable health care professional.

Comment:

A commenter suggested that CMS include language addressing pre-enrollment qualification assessment tools and post-enrollment confirmation of eligibility procedures as aspects of the SNP eligibility verification process for all SNPs, not just chronic care SNPs.

Response:

We do not believe that such changes are warranted or necessary for non-chronic care SNPs, given the other available sources of eligibility verification. As discussed in our recent interim final rule (73 FR 54228), in accordance with the recent MIPPA legislation, dual-eligible SNPs and institutional SNPs must have arrangements with the appropriate entities to verify Medicaid eligibility or institutional status in an ongoing and routine manner.

Comment:

A commenter described our suggestion in the preamble of the proposed rule that dual-eligible SNPs be required to enter into an agreement with state agencies as “impractical.” The commenter further suggested that CMS establish a process similar to that used under the Part D low-income subsidy status for determining dual eligibility status for Part C dual-eligible SNP plans, or as an alternative establish a best available evidence policy for dual-eligible SNP plans. Thus, rather than the SNP plan being responsible for obtaining Medicaid eligibility information, the commenter requested that CMS furnish the eligibility information to dual-eligible SNP plans.

Response:

The establishment of successful partnerships and processes to

share information about dual status with State Medicaid agencies is a key aspect of the SNP's ability to provide specialized services to this population, ensure beneficiary understanding of both programs' benefits, and provide meaningful coordination between the Medicare and Medicaid programs. Furthermore, section 164 of MIPPA requires dual eligible SNPs to have a contract with a State Medicaid Agency effective as of January 1, 2010, to provide benefits (or arrange for benefits to be provided) that an individual is entitled to receive under the Medicaid program.

With respect to the commenter's suggestion that we establish a process similar to our current Part D “Best Available Evidence” policy to allow plans to provide evidence of dual-eligibility status, we decline to establish such a process at this time. We believe that beneficiaries and SNPs would be better served by an arrangement with States to exchange eligibility information on a regular basis. Such arrangements could be incorporated into the contracts between SNPs and the appropriate State Medicaid Agency that will now be required as of January 1, 2010.

d. Model of Care (§ 422.101(f))

In order to ensure that SNPs were providing care targeted to such special needs beneficiaries, under our authority in section 1856(b)(1) of the Act to establish standards by regulation, we proposed that SNPs develop a model of care specific to the special needs population they are serving. In order to more clearly establish and clarify delivery of care standards for SNPs and to codify standards which we have included in other CMS guidance and instructions (the 2008 and 2009 Call Letters, “Special Needs Plan Solicitation”

2

), we proposed to add new paragraph (f) to § 422.101. This proposed paragraph specified that SNPs have networks with clinical expertise specific to the special needs population of the plan; use performance measures to evaluate models of care; and be able to coordinate and deliver care targeted to the frail/disabled, and those near the end of life based on appropriate protocols. Section 164 of the MIPPA subsequently added care management requirements for all SNPs as directed in section 1859(f)(5) of the Act (42 U.S.C. 1395w-28(f)). The new mandate required dual-eligible, institutional, and chronic condition SNPs to implement an evidence-based model of care having two explicit components. The first component was an appropriate network of providers and specialists to meet the specialized needs of the SNP target population. The second component was a battery of case management services that includes— (1) A comprehensive initial health risk assessment and annual reassessments; (2) an individualized plan of care having goals and measurable outcomes; and (3) an interdisciplinary team to manage care. This law laid a statutory foundation for much of our proposed regulatory standards for the model of care. Therefore, we address the comments we received on our proposals from both a statutory and regulatory basis.

2

The solicitation may be found at

http://www.cms.hhs.gov/SpecialNeedsPlans.

Comment:

The overwhelming majority of commenters expressed support for a required SNP model of care. However, many argued that the proposed language was too weak to permit genuine oversight of SNPs or assure adequate protection for vulnerable beneficiaries. They urged us to require a more prescriptive model of care similar to the PACE program or state integrated care waiver demonstration projects. Among their recommendations were that we require that model of care include elements such as: Care coordination through an individualized care plan; at least one network physician with network hospital privileges and one network provider with access to diagnostics and ancillary health services; transition coverage across care settings, providers, and services to ensure continuity of care; a comprehensive risk assessment on which to base the individualized care plan; public reporting of performance data as evidence that remuneration pays for services actually delivered; a complaint/grievance process used in monitoring activities; SNP staff trained on the respective state Medicaid program; and mandatory publishing of the SNP model of care in marketing materials. One of these commenters specifically advocated that pharmacists be an integral member of a SNP provider network, but was countermanded by another commenter that who opposed prescribing the provider network composition. Finally, one commenter suggested that we require all MA organizations, not just SNPs, to serve enrollees that are frail/disabled or near the end of life.

Response:

Over the past 2 years, we collected and reviewed models of care from existing SNPs. We also reviewed models of care such as medical home models and chronic care models published in healthcare books, peer-reviewed journals, and advocacy group and industry reports. Based on our extensive review of models of care for vulnerable populations, we agree with the majority of commenters who indicated that a required SNP model of care that contains certain minimal elements is necessary to provide regulatory oversight and effective monitoring of SNPs. MIPPA demonstrated further support that care management required an organizational structure represented by the model of care. Specifically, MIPPA required SNPs to conduct initial and annual comprehensive health risk assessments, develop and implement an individualized plan of care, and implement an interdisciplinary care team for each beneficiary. We believe that combination of MIPPA's statutory elements and our regulatory prescription for the SNP model of care establishes the standardized architecture for effective care management, yet gives plans the flexibility to design the unique services and benefits that enable them to meet the identified needs of their target population. To illustrate this balance between the model of care architecture and its plan-specific components, we present the following examples. All SNPs must have an interdisciplinary team to coordinate the delivery of services and benefits; however, one SNP may choose to contract with an interdisciplinary team to deliver care in community health clinics and another SNP may hire its team to deliver care in the home setting. Under our final regulations, all SNPs must coordinate the delivery of services and benefits through integrated systems of communication among plan personnel, providers, and beneficiaries; however, one SNP may coordinate care through a telephonic connection among all stakeholders and a second SNP may coordinate care through an electronic system using Web-based records and electronic mail accessed exclusively by the plan, network providers, and beneficiaries. All SNPs must coordinate the delivery of specialized benefits and services that meet the needs of their most vulnerable beneficiaries; however, dual-eligible SNPs may need to provide state-identified services while an institutional SNP may need to facilitate hospice care for its beneficiaries near the end of life. These examples demonstrate the variety of ways SNPs currently implement their systems of care. We will continue to study SNP models of care and issue guidance through our Call Letters and informational memoranda to facilitate improvement in the SNP model of care framework.

Comment:

One commenter noted that our proposed language required the model of care to deliver services to targeted enrollees as well as those who are frail/disabled or near the end of life. The entity clarified that SNPs do not “deliver” care, but provide access to care practitioners.

Response:

We acknowledge the distinction that most SNPs are not healthcare providers, but are entities that coordinate care through provider networks. We believe that our references to delivering care can reasonably be read as referring to delivering services through such networks.

Comment:

Several commenters supported a requirement for the use of evidence-based or nationally recognized clinical protocols in the delivery of care to special needs beneficiaries. One commenter argued that, if we were to prescribe specific disease management protocols for SNPs in the future, we should do so through published regulations that would permit the medical community to comment. A second commenter urged us to clarify “protocols” to include process as well as clinical protocols because nationally recognized protocols do not exist for all clinical conditions.

Response:

We agree that SNPs must coordinate and deliver care with healthcare professionals that use protocols, whether clinical or administrative in nature, which are evidence-based or, where possible, derived from nationally recognized guidelines. We refer beneficiaries, plans, and providers to the Agency for Healthcare Research and Quality (

http://www.ahrq.gov/

) which provides public access to both an extensive repository of evidence-based protocols through its National Guidelines Clearinghouse, as well as discussions regarding ongoing research on clinical practice. If we propose future regulation related to the use of clinical or administrative protocols, we will elicit appropriate public comments from all stakeholders. Presently, we expect SNPs to have personnel (employed, contracted, or non-contracted) prepared to discuss their implemented protocols at monitoring visits or other oversight activities. Because we have not prescribed the use of specific protocols, the comment that we should do so through rulemaking does not apply.

Comment:

A few commenters proposed that we work with recognized standards organizations to develop better ways to monitor SNPs and inform the public about plan performance. However, one commenter cautioned that, in developing SNP-specific measures, we must address the broad range of special care needs and the limitations of available data sources.

Response:

We have contracted with the National Committee for Quality Assurance (NCQA) to develop, collect, analyze, and report on SNP-specific performance measures at the plan benefits package (PBP) level. We will continue to work with NCQA and other quality measurement experts such as the Geriatric Measurement Advisory Panel to explore valid and reliable ways to measure and improve SNP performance. As we identify new directions in quality measurement for vulnerable populations, we will elicit public, professional, and beneficiary comment to inform our regulatory and informational guidance to SNPs.

e. Special Needs Plans and Other MA Plans With Dual Eligibles: Responsibility for Cost-Sharing (§ 422.504(g)(1))

In order to protect beneficiaries and ensure that providers do not bill for cost-sharing that is not the beneficiary's responsibility, we proposed to amend § 422.504(g)(1)(i) and (g)(1)(ii) to require that all MA organizations, including SNPs, with enrollees who are eligible for both Medicare and Medicaid specify in their contracts with providers that enrollees would not be held liable for Medicare Parts A and B cost sharing when the State is liable for the cost-sharing. Plans may not impose cost-sharing that exceeds the amount of cost-sharing that would be permitted with respect to the individual under title XIX if the individual were not in such plan. We also proposed therefore, that contracts with providers state that the provider will do this by either accepting the MA plan payment in full (§ 422.504(g)(1)(iii)(A)) or by billing the appropriate State source (for example, Medicaid) (§ 422.504(g)(1)(iii)(B)). Additionally, we proposed that all MA organizations with enrollees eligible for both Medicare and Medicaid must inform providers of the Medicare and Medicaid benefits and rules for enrollees eligible for Medicare and Medicaid (§ 422.504(g)(1)(iii)). Section 165 of MIPPA only required that full benefit dual-eligible individuals and qualified Medicare beneficiaries in SNPs for dual-eligibles not be held liable for Medicare Parts A and B cost-sharing. Our proposal included all MA plans that have dual eligibles enrolled in their plan.

The above proposals have been superseded in part by section 165 of MIPPA, “Limitation on Out-of-Pocket Costs for Dual Eligibles and Qualified Medicare Beneficiaries Enrolled in a Specialized Medicare Advantage Plan for Special Needs Individuals,” which establishes that for full benefit-dual-eligible individuals or qualified Medicare beneficiaries enrolled in a special needs plan, an MA organization may not impose cost-sharing that exceeds the amount of cost-sharing that would be permitted if the individual were under title XIX and were not enrolled in a special needs plan. The effective date of this provision is January 1, 2010.

After considering comments discussed below, we are finalizing our proposal to impose the requirement that MIPPA imposed in the case of dual-eligible SNPs on duals in all MA plans, and on all dual Medicaid eligibility categories for which a State provides a zero cost-share. Consistent with the MIPPA requirements that apply to dual-eligible SNPs, we are specifying in the regulations that these provisions are effective on January 1, 2010.

Comment:

Several commenters supported CMS' effort to protect dual eligible individuals from being charged for cost sharing under Medicare Parts A and B when the state is responsible. However, many requested that CMS either allow MA plans to send a notification to the providers of this change or to allow MA organizations to amend contracts at the end of the contract term, in 2 years, or whenever the contracts are renegotiated. Some commenters requested that CMS establish a process for Medicare Advantage Organizations to work with CMS to develop and disseminate this information. Other commenters stated that CMS should go further by requiring all MA plans to provide to all of their physicians and other providers with specific information about when dual eligibles are not liable for cost-sharing and include the matrix CMS developed on cost-sharing and the dual eligibility types.

Several commenters also stated that CMS should go further by requiring plans to have a designated contact person who is knowledgeable about the Medicaid programs who can answer cost sharing questions for providers and that plans should be required to refund any cost-sharing that has been inappropriately charged to dual eligible individuals. One commenter recommended that CMS require this of dual-eligible SNPs only and not all plans that serve dual eligible individuals.

Response:

We do not believe it would sufficiently protect dual-eligible enrollees to simply require notice to providers. We also do not believe that these protections should be delayed for up to 2 years, particularly when MIPPA

imposes them in the case of enrollees in dual eligible SNPs effective January 1, 2010. However, we do not believe that it is necessary to require that SNPs necessarily designate a specific person to address dual-eligible issues. We believe that MA organizations should have flexibility in complying with these requirements. As noted above, we disagree with the commenter who believed that these requirements should only apply to dual SNPs as the MIPPA requirement did, because we believe that all dual eligibles need these protections.

2. MA Medical Savings Accounts (MSA) Transparency (§ 422.103(e))

Consistent with the best practices of health savings accounts (HSAs) and other high-deductible health plans, we proposed in a new § 422.103(e) to require that all medical savings account (MSA) plans provide enrollees with information on the cost and quality of services and provide information to CMS on how they would provide this information to enrollees.

3

3

HSAs are health insurance plans with a high deductible and a savings account for the under 65 population and are administered by the U.S. Department of the Treasury. Medicare MSAs are a type of medical savings account, also with a high deductible and a savings account, designed for the Medicare population and are administered by the U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services. HSAs and MSAs are governed by different statutes, and while these health insurance products are similar in many ways, there are also important differences between them. For further information on HSAs, go to

http://www.ustreas.gov/offices/public-affairs/hsa/.

Comment:

We received a number of public comments on the proposed cost and quality transparency requirements for Medicare MSA plans. Several commented on the developing and pioneering nature of reporting on cost and quality of health care information. Some comments simply expressed general support for the proposal. One comment from a state government human services department expressed general support for this proposal. One comment from a pharmacy association expressed support for providing consumers with cost and quality information.

Three comments were from health insurance plans with experience with Medicare MSAs, which also expressed support for this proposal, but requested flexibility for plans in development of cost and quality transparency information. One organization argued against separate standards for Internet vs. other forms of communication to allow flexibility in how information is communicated. Another comment from a health plan not currently participating as an Medicare MSA indicated its concern for the burden on health plans of transparency, and thought we intended to require that information be sent to all enrollees.

Two comments from major physician organizations requested that providers and other stakeholders have input into the reporting of cost and quality reporting measures. The physician organizations specifically reference guidelines from the Consumer-Purchaser Disclosure Project's “Patient Charter for Physician Performance Measurement, Reporting and Tiering Programs.”

A number of consumer groups, including organizations representing the disabled, requested that cost and quality information be linked so that consumers can readily see where they meet, and so that consumers are not steered solely by price considerations. Consumer groups were also interested in information being posted on the out-of-pocket costs for enrollees in MSA plans, as well as on information for enrollees on how accounts operate and on any account fees or interest rates.

Response:

Public comments indicate support for the proposal, and also indicate interest in making information useful for enrollees and equitable to health care providers on whom the information is reported. We acknowledge these comments of general support. We also understand comments requesting that stakeholders and consumers be allowed input and their interest in making the information fully useful to consumers.

As indicated in the proposed rule in the discussion of calculation of burden on health plans, we are expecting plans to provide the same level of information on cost and quality of services that they provide to commercial enrollees and to provide whatever information is available. Therefore, we are anticipating that the burden level would not be undue on health plans. We hope that consumers will also provide input because they are the parties intended to use the information, and so we expect that consumer demand will shape the design of reporting standards over time. Therefore, we agree with the comment that plans should have flexibility in design of transparency standards. We are not specifying standards for Internet or for other forms of communication at this time. It also makes sense for physicians and other providers and any interested stakeholders to provide input directly to plans or to CMS.

We do not want to specify further requirements at this time for transparency and want primarily to allow plans to work with enrollees to develop that information. Note that the statutory exemption from quality improvement programs for MSAs at section 1852(e) of the Act was recently eliminated by section 163 of MIPPA. MSA and PFFS plans must participate in quality improvement programs beginning in 2010. This new quality improvement requirement implemented in regulations at § 422.152(a), will work in conjunction with transparency efforts and enable transmission of information directly to enrollees of these health care plans.

B. Changes to Part 423—Medicare Prescription Drug Benefit Program

1. Passive Election for Full Benefit Dual Eligible Individuals Who Are Qualifying Covered Retirees (§ 423.34)

We proposed to revise § 423.34(d) to establish an exception to our normal auto-enrollment procedures for full benefit dual eligible individuals who we know to be enrolled in a qualifying employer group plan. Rather than auto-enrolling these individuals into a PDP (no individuals are auto-enrolled into MA-PD), we proposed that such individuals would be deemed to decline Part D coverage if, following a notice of their options, they do not indicate that they wish to receive it. As discussed below, this final rule adopts the proposed regulatory changes to § 423.34(d) in their entirety.

Comment:

All commenters supported the policy where full benefit dual-eligible individuals (eligible for both Medicare and Medicaid), who are also qualifying covered retirees, would not be automatically enrolled in a Medicare Part D plan by CMS. Although commenters expressed no objections to the proposed regulatory changes, several commenters objected to a statement in the preamble to the proposed regulation (73 FR 28562) indicating that if a full benefit dual eligible individual with qualifying retiree coverage decided to enroll in a Part D plan at a later time, that enrollment could be made effective retroactively to the date of the dual eligibility. The commenters asserted that retroactive Part D coverage would inappropriately shift the liability for past drug spending to a Part D plan. Other commenters supported the option of retroactive coverage.

Response:

Consistent with our proposal, this final rule establishes that full benefit dual eligible individuals with qualified retiree coverage will not be automatically enrolled in a Medicare Part D plan. (That is, we will not auto-enroll individuals for whom we have approved a group health plan sponsor to receive the Retiree Drug Subsidy (RDS)

described in 42 CFR Part 423, Subpart R for the period of time the automatic enrollment in Part D would otherwise cover.) Instead, we will send these individuals a notice informing them that they will be deemed to have declined such enrollment unless they take an affirmative action to choose a plan or opt for auto-enrollment. They may choose to enroll in a Medicare Part D plan at any time, as long as they retain that dual status, but we will not automatically enroll them in a Part D plan.

In general, we believe that dual eligible individuals who decide to enroll in a Medicare Part D plan at a later time should do so on a prospective basis, like most other enrollment elections. These individuals have made an election initially to not enroll in a Medicare Part D plan and instead to remain in their current employer plan. Thus, there is no “coverage gap” involved, which obviates the usual premise for retroactive Medicare coverage for dual eligibles. We agree with commenters that retroactive coverage under Medicare Part D could lead to an inappropriate shift of beneficiary drug expenditures to the Medicare program. However, as currently occurs under both the MA and Part D programs, we acknowledge that special circumstances may arise which would justify a retroactive enrollment into Medicare Part D. We will issue clarifying guidance on the appropriateness for retroactive coverage and consider those requests on a case-by-case basis.

Comment:

Several commenters requested that other individuals who are automatically enrolled into a Medicare Part D plan, such as individuals eligible for one of the Medicare Savings Programs, also be exempted from automatic enrollment when they have qualified retiree coverage.

Response:

Other individuals with qualified retiree coverage, such as non-dual eligible individuals who are also eligible for low-income subsidy assistance under the Medicare Savings Programs, are already excluded from automatic enrollment under Medicare Part D.

Comment:

Several commenters suggested that the regulations specify that the notice individuals receive advise them to discuss the impact of Medicare Part D coverage with their group health plan administrator or personnel office. They also suggested that we share the model beneficiary notice with beneficiary representatives for their review.

Response:

We do not believe it is necessary or appropriate to specify in the regulations the exact content of the notice that will be sent to the affected individuals, such as where individuals should turn to receive information to help them make a decision. However, in the notice that we send to beneficiaries, we will specify that individuals should discuss their drug benefits with the appropriate retiree staff who handle their coverage and benefits. We will be pleased to share the model beneficiary notice in draft with beneficiary representatives to obtain their input and guidance.

Comment:

Several commenters requested we revise the regulations to specify that the notice will be provided to the individual or their representatives to the extent that we are aware that the individual has someone acting on his/her behalf. They expressed concern that some of the affected individuals may lack the capacity to understand the notice and the action to be taken.

Response:

We are not modifying the regulations to include this suggested change, because we have no way to collect and retain address information for an individual authorized to act on behalf of a beneficiary, or verify that someone asserting such status is in fact so authorized.

Comment:

Several commenters requested that CMS extend the process for non-automatic enrollment into Medicare Part D to full benefit dual eligible individuals with non-qualifying retiree coverage in addition to those individuals with qualifying retiree coverage.

Response:

Currently, we receive information only for individuals who have qualifying retiree prescription drug coverage, and for whom we have approved a group health sponsor to receive the RDS. The information we receive, among other data, specifies that the individual's retiree drug coverage is at least equal to the actuarial value of the Medicare Part D defined standard prescription drug coverage, and records are maintained for audit purposes (§ 423.884). We do not have similar information for non-qualifying retiree prescription drug coverage, and thus would be unable to extend the non-automatic enrollment process to cover those situations. To accomplish the request would require soliciting information on the other coverage, verifying its authenticity, and entering it into the database which includes creditable coverage information. Should this information become readily available, we would consider this proposal. However, we note that we would not be certain, in the case of other retiree coverage, whether the coverage had a value to beneficiaries at least as good as that they would get if defaulted to a Part D plan. This would also be a factor for us to consider.

Comment:

Several commenters requested that CMS establish a special enrollment period for retroactive disenrollment from Medicare Part D plans for any beneficiary who was auto-enrolled in a plan that conflicted with a retiree plan.

Response:

Our current Medicare Prescription Drug Plan guidance permits full benefit dual eligible individuals to opt out of Medicare Part D coverage at any time. If the beneficiary makes the request prior to the effective date of auto-enrollment, then the enrollment is cancelled and the individual is considered not enrolled. If the effective date of the auto-enrollment is retroactive, the beneficiary may request a retroactive cancellation as long as the request is made by the 15th of the month after the month in which auto-enrollment occurred. If the request occurs after those dates, then the disenrollment would be effective with the last day of the month in which the request is made. With the retroactive cancellations, we caution individuals or their representatives to be careful to ensure individuals do not have a gap in prescription drug coverage, given that we have no authority to require that employer plans accept re-enrollments from former members of such plans. We also caution that such a disenrollment would not necessarily retroactively restore eligibility under an employer plan if that eligibility is lost as the result of an enrollment in a Part D plan.

2. Part D Late Enrollment Penalty (§ 423.46)

Under section 1860D-13(b) of the Act, a Part D late enrollment penalty (LEP) generally applies when a Medicare beneficiary has a continuous period of 63 days or longer without creditable prescription drug coverage subsequent to the beneficiary's initial enrollment period. This requirement is codified in regulations at § 423.46. Although § 423.46 describes which individuals are subject to a penalty, it does not specify the role of the Part D plan in the LEP determination process. We have subsequently outlined plan responsibilities in our existing guidance (Chapters 4 and 18 § 80.7.1, of the Medicare Prescription Drug Benefit Manual), and in our May 16, 2008 proposed rule we proposed to clarify the general responsibilities of Part D plans in the regulations.

First, we proposed to clarify under § 423.46(b) that Part D plans must obtain information on prior creditable coverage from all enrolled or enrolling

beneficiaries. Under this process, plans must first query CMS systems for previous plan enrollment information, which is a standard part of the beneficiary enrollment process. When there is a qualifying gap in creditable coverage, however, the process for obtaining creditable coverage information must also include plan interaction with the beneficiary. This is due in large part to the limited information available in CMS' systems about forms of creditable coverage other than Part D coverage or coverage through an employer group under the retiree drug subsidy (RDS). Therefore, it is critical that plans obtain historical creditable coverage information from the beneficiary in order to determine the number of uncovered months, if any, and retain any information collected concerning that determination (as specified under proposed § 423.46(d)).

The related requirement that we proposed under § 423.46(b) is that plans must then report creditable coverage information in a manner specified by CMS. Specifically, plans would report the number of uncovered months to CMS, which would then calculate the penalty and report the penalty back to the plan. The plan would then notify the beneficiary of the determination of the LEP amount and of their ability to request a reconsideration of this determination.

We also proposed under § 423.46(c) that, consistent with section 1860(D)-13(b) of the Act, individuals who are determined to have a late enrollment penalty have the opportunity to ask for a reconsideration of this determination. (Note that existing § 423.56(g) briefly references the ability to “apply to CMS” when an individual believes that he or she was not adequately informed that his or her prescription drug coverage was not creditable, and we would cross-reference that section here.) We believe that the statute clearly intends that individuals have an opportunity to provide CMS with additional information related to prior prescription drug coverage in support of a request for reconsideration of a late enrollment penalty determination. While the statute expressly provides for this opportunity only with respect to an argument that proper notice was not given concerning whether existing coverage was creditable, we believe that the same rationale could apply to other arguments that the penalty should not apply (for example, an argument that the individual had prior creditable prescription drug coverage that the enrollee believes may not have been considered).

Finally, we proposed to specify that a beneficiary would not have the right to further administrative review of the reconsideration decision of CMS, or the independent review entity acting under CMS' authority. However, we would, have the discretion to reopen, review, and revise such a decision.

Comment:

Several commenters support the regulatory changes proposed; several other commenters, however, raised concerns about the role of Medicare Part D plan sponsors in the creditable coverage period determination process associated with the Part D LEP. Two of these commenters stated that having plans obtain and validate the required information could create inconsistencies in acceptable documentation, possible errors in reports to the government, and additional burden to plans. These two respondents suggested that CMS be responsible for the creditable coverage period determination, and one of them stated that the reporting process should be the same as the one for the Medicare Part B premium surcharge. Additionally, one of these commenters also suggested that, at the very least, and until such time as CMS is able to conduct this verification process without plan involvement, CMS should enhance its current Beneficiary Eligibility Query (BEQ) to provide the number of uncovered months rather than covered months. The commenter suggests that plans would then be able to simply transfer this information to the attestation form that must be sent to the beneficiary rather than have to convert it.

Response:

The structure of the Medicare Part D program differs significantly from the Supplementary Medical Insurance program (Medicare Part B) in that beneficiaries interact directly with Part D plan sponsors to enroll in Part D coverage. In contrast, the majority of beneficiaries are automatically enrolled in Part B, while the rest apply at the Social Security Administration. Moreover, since we do not have information about all of the possible forms of creditable coverage for individual beneficiaries, this information has to come directly from beneficiaries. Since Part D plans correspond directly with their members at various times (for example, when the enrollment request is submitted and accepted by the plan), they are better able to determine whether the beneficiary is enrolling late and, if so, whether the beneficiary had creditable coverage. Thus, we continue to believe that plans are the appropriate entity to administer the initial stages of the LEP process.

With respect to the commenter's request that we enhance our BEQ to provide the number of uncovered months rather than covered months, we modified its system to include information about prior creditable coverage so that plans could query our data through the BEQ mentioned above. During this modification, we opted to include the date ranges that correspond to the months in which the individual has, or had, Part D coverage or when the retiree drug subsidy (RDS) is being claimed by an employer for that individual. This creditable coverage history that we provide in the BEQ is based on information we can confirm (that is, Part D or RDS coverage). Therefore, when there is a qualifying gap outside of these covered months, we are unable to determine whether an individual had other creditable coverage during the period in question. Since Part D plan sponsors correspond directly with their members when the enrollment request is submitted and accepted by the plan, they are better able to obtain creditable coverage information from the beneficiary about these uncovered months. Therefore, we decline to change the query at this time.

Additionally, we have developed operational procedures and policies that are intended to be as simple and straightforward as possible and impose minimal administrative burden on plans and beneficiaries. Most recently, on April 11, 2008, we released a memorandum, “Updated Guidance on Creditable Coverage Determinations and the Late Enrollment Penalty” via our Health Plan Management System (HPMS). This memorandum further clarified and expanded operational and policy guidance in a number of areas based on our experience implementing this policy and in response to questions and concerns raised. One significant change we made was to allow Part D plan sponsors to accept telephonic attestations in place of a missing or incomplete written attestation. We also expanded the existing timeframes that Part D plan sponsors have to report the creditable coverage information to us, thus affording Part D plan sponsors more time to follow up with beneficiaries to obtain the appropriate information.

Comment:

Several commenters suggested that we simplify our creditable coverage documentation requirements for beneficiaries who change plans. For example, enrollees should be able to simply state on their enrollment application that they have had drug coverage, and CMS should then be responsible for verifying this information, since CMS should have

records of all the drug plans in which they were enrolled.

Response:

We have already limited the scope of the plans' review when there is prior Part D plan or RDS enrollment in order to further simplify documentation requirements for plans and beneficiaries. If the beneficiary has prior Part D or RDS plan coverage, the plan only needs to determine whether the member has any months without creditable coverage since the date that he or she disenrolled from his or her prior Part D or RDS plan. That is, the current plan does not have to repeat the work done by the prior plan, and beneficiaries do not need to attest again to prior coverage when they simply change plans.

Additionally, if the individual, on his/her own initiative, includes creditable coverage information or documentation or both with the enrollment form, the plan must take that information into account when determining whether there has been a gap in coverage. As mentioned previously, we believe plans are in the best position to make creditable coverage determinations and report such determinations to CMS. We will continue to improve the process in response to comments and concerns from plans and beneficiaries.

Comment:

One commenter stated that, although information about an individual's LEP is sent to the beneficiary, many beneficiaries do not open or read their mail. The commenter suggested that the beneficiary's LEP status be included in the Plan Finder, so that the beneficiary (and others assisting the beneficiary) could access such information. The commenter suggests that the Plan Finder include an indication as to whether or not an LEP has been assessed; the percentage of the penalty; and where applicable, LEP exempt status due to low income subsidy (LIS) eligibility.

Response:

We appreciate the commenter's suggestion for using the Plan Finder as a tool to display information about a beneficiary's late enrollment penalty, and will consider whether this is viable in the future. However, no changes in the Plan Finder are possible in 2008. In the meantime, we have developed a “Tip Sheet” for Partners that provides key points for those assisting beneficiaries to use when answering questions from beneficiaries about the penalty. We are also developing another “Tip Sheet” that will focus on beneficiaries’ role in responding to information received from their Part D plan sponsor, such as the attestation form. We have also simplified the current attestation form and included a new checklist designed to focus beneficiaries' attention on the form and emphasize the urgency of completing the attestation process. We expect these changes will improve beneficiaries' understanding of the importance of providing information about prior creditable coverage to their Part D plan sponsor.

Comment:

Several commenters urged that the regulations include waiver of the LEP for individuals receiving the low income subsidy (LIS).

Response:

Section 114 of the MIPPA eliminates the penalty for these individuals. Therefore, we have amended our regulations at § 423.46(a) and § 423.780(e) in a separate interim final rule to reflect this change. (

See

the September 15, 2008 interim final rule with comment period (73 FR 54226)). (Note that, under an existing Part D payment demonstration, CMS has not imposed an LEP on LIS beneficiaries.)

Comment:

Several commenters urged that individuals have the full array of appeal rights available with respect to a decision subject to the Part D beneficiary appeals process, including ALJ hearings, and should not be limited to the reconsideration level of review. These commenters also believed that the regulation should contain more information about the reconsideration process, such as procedures and required timeframes for requesting a reconsideration, and that the regulation should at least set out a simple procedure whereby a beneficiary can submit evidence at any time to eliminate or reduce a late enrollment penalty. One commenter asked that members be provided LEP reconsideration rights when they are informed of their LEP. Another commenter indicated support for the existing process, with beneficiaries being permitted to seek reconsideration of their LEP.

Response:

We have carefully considered this issue and believe that the current independent review process is sufficient and appropriate. Thus, we do not believe we need to offer beneficiaries expanded LEP appeal rights for several reasons.

First, we are offering significantly more due process to enrollees to dispute the imposition of an LEP than the law requires. The Part D beneficiary appeals process does not by its own terms apply to a decision on the applicability of an LEP, but only to decisions on whether drugs are covered, or how much a beneficiary is required to pay for covered drugs. With respect to the imposition of an LEP, the statute only provides individuals with an opportunity to apply to CMS to have their coverage treated as creditable upon establishing to CMS that they were not adequately informed that their prescription drug coverage was not creditable. (

See

section 1860D-13(b)(6)(C) of the Act.) Providing a reconsideration process to resolve other LEP-related matters, such as the question of whether an individual was enrolled in another plan offering creditable prescription drug coverage, is not required by the statute and is an added beneficiary protection under our current process.

Second, Chapter 18, § 80.7.1 of the Medicare Prescription Drug Benefit Manual and CMS' April 11, 2008 memorandum (cited above) provide beneficiaries with numerous added protections that are intended to help reduce the need for beneficiaries to seek reconsideration of their LEP. For example, plans must submit corrections when they receive a late attestation form that indicates the member had creditable coverage for the period in question if the plan has already reported uncovered months to CMS.

As described above, we have improved the attestation process by simplifying the creditable coverage attestation form, adding a new model checklist, and permitting Part D plan sponsors to allow beneficiaries or their representatives to complete the entire attestation process over the telephone. In addition, CMS guidance now affords Part D plan sponsors additional time to attempt to obtain information missing from the creditable coverage attestation form and to report their creditable coverage determinations to CMS.

Finally, as we noted in the proposed rule, we have the discretion to reopen, review and revise an LEP reconsideration decision. Reopenings are discretionary but may be granted, for example, upon presentation of new and material evidence. Given the flexibility afforded plans in making corrections to previously reported uncovered months if an enrollee submits an untimely attestation or other evidence of prior creditable prescription drug coverage, there should be a minimal need to look at decisions again.

Additionally, we disagree with the comment that we should detail all aspects of the reconsideration process in the regulation. We believe it is more practical to establish timeframes and other specific procedural and operational requirements related to LEP reconsiderations in CMS guidance so that necessary revisions can be made to ensure the needs of beneficiaries and plans are met in a timely manner. Updates to Chapters 4 and 18, § 80.7.1 of the Medicare Prescription Drug

Benefit Manual will be incorporated, as needed.

Lastly, we agree with the comment that member reconsideration rights should be provided to a beneficiary who is informed of his or her LEP. Plans now are required to provide both the LEP reconsideration notice and LEP reconsideration request form at the time they notify the enrollee of his/her LEP.

See

Chapters 4 and 18 § 80.7.1 of the Medicare Prescription Drug Benefit Manual for additional information.

Comment:

A number of commenters suggested that the regulations confirm that CMS has the ultimate authority to determine whether previous coverage is creditable, thereby obviating the imposition of the late enrollment penalty. One commenter urged CMS to monitor the implementation of the proposed regulations to ensure that plans adequately inform beneficiaries of the importance of providing evidence of creditable coverage and work with beneficiaries to ensure an adequate timeframe to do so.

Response:

We have retained the ability to deem coverage creditable in certain situations, and has defined the procedures for documenting such coverage at § 423.56. Therefore, we decline to take additional steps to address this comment in this regulation. With respect to the commenter's request that we ensure that plans adequately inform beneficiaries of the importance of providing evidence of creditable coverage and work with the beneficiaries to ensure they have adequate time to do so, we have already modified our attestation form and process, which addresses concerns such as these. For example, as previously described, our updated guidance allows Part D plan sponsors more time to follow up with beneficiaries when plans do not receive the beneficiaries' attestation or the attestation form is incomplete. This extended timeframe is in addition to the 30 calendar days beneficiaries already have to attest to prior creditable coverage. Also, if a beneficiary attests to having creditable coverage beyond the prescribed timeframe, again, we require Part D plan sponsors to accept the late attestation and make any corrections to the number of uncovered months previously reported to CMS. Lastly, as with other requirements, we will continue to monitor plans' compliance in this area and will follow up with those when problem areas are identified.

3. Subpart C—Benefits and Beneficiary Protections (Definitions)

a. Incurred Costs

In our May 16, 2008 proposed rule, we proposed to amend the definition of “incurred costs” to reflect our current policy that certain nominal co-payments assessed by manufacturer Patient Assistance Programs (PAPs) can be applied toward an enrollee's true out-of-pocket costs (TrOOP) balance or total drug spend (the accumulated total prices for covered Part D drugs paid by the plan or by or on behalf of the beneficiary). We allow PAPs to provide assistance for covered Part D drugs to Part D enrollees outside the Part D benefit. This means that payments made by PAPs do not count toward enrollees' TrOOP or total drug spend balances. However, if a PAP requires their enrollees—including those enrolled in a Part D plan—to pay a nominal copayment when they fill a prescription for a covered Part D drug for which the PAP provides assistance, such amounts would count toward TrOOP if the plan is notified of the copayment. As explained in Appendix C of Chapter 14 (Coordination of Benefits) of the Prescription Drug Benefit Manual, these nominal PAP copayment amounts, when paid by or on behalf of a Part D enrollee, are applicable to the enrollee's TrOOP and total drug spend balances, provided the enrollee submits appropriate documentation to their Part D plan.

Based on the numerous comments we received, we are finalizing the proposed definition of incurred costs to indicate that nominal PAP copayments are included in “incurred costs.” This revision to the definition of “incurred costs” in § 423.100 is consistent with the proposed changes to the definition of “gross covered prescription drug costs”, which is also being revised to ensure that nominal PAP copayments are included in “gross covered prescription drug costs” and allowable reinsurance costs.

Comment:

Several commenters expressed strong support for this proposed change to the definition of “incurred costs,” saying it would ensure that nominal PAP copayments are included in TrOOP and total drug spend balances. However, many of these commenters also expressed concern about the potential burden for beneficiaries in submitting these claims to their Part D plans. Some commenters asked us to draft a model form for submitting these claims, and asked us to encourage all Part D sponsors to adopt this model form. In addition, we were asked to provide this model form to SHIPs and other organizations that provide aid to LIS beneficiaries. Other commenters recommended that we require or encourage PAPs to provide one standard form to Part D beneficiaries. We were also asked to encourage pharmacies to fill out the required forms for Part D beneficiaries.

Response:

We will consider developing a model form which Part D sponsors could provide to their enrollees. We would make this form available to PAPs, pharmacies, SHIPs, and other organizations as appropriate.

Comment:

Some commenters asked us to require Part D sponsors to include instructions regarding the process for submitting the appropriate documentation of nominal PAP co-payments in the Evidence of Coverage (EOC) and other member-communications with Part D beneficiaries. One commenter recommended that we set uniform timelines for plans to include instructions for submitting this documentation in the EOC. This commenter also asked us to give sponsors broad authority for setting timeframes for the submission of PAP claims.

Response:

Currently Part D sponsors are required to provide information on how to submit a paper claim to have beneficiary copayments that are paid under a PAP outside the Part D benefit accrue toward an enrollee's TrOOP and gross drug spend balances. Part D sponsors have flexibility in setting reasonable timeframes for the submission of such paper claims, keeping in mind CMS deadlines for submission of prescription drug event (PDE) records for purposes of the Part D payment reconciliation process.

Comment:

We received one comment asking us to encourage PAPs to develop a means for transmitting the appropriate documentation electronically—in order to reduce the burden for beneficiaries.

Response:

Currently, the Health Insurance Portability and Accountability Act (HIPAA) standard for claims submission does not accommodate the e-transmission of this claim information by PAPs or network pharmacies. We would support any industry efforts to streamline the submission of these and other paper claims.

Comment:

One commenter asked that we provide a definition of a Patient Assistance Program (PAP) in order to help differentiate a PAP from a manufacturer sponsored pharmacy benefits card program.

Response:

We use the term PAP with respect to pharmaceutical manufacturer sponsored patient assistance programs

that provide free products or assistance through in kind product donations to low income patients—particularly those with incomes below 200 percent of the Federal poverty level (FPL)—with no or insufficient prescription drug coverage. Manufacturer PAPs operate outside of the Medicare Part D program.

Comment:

One commenter expressed concern that PAPs tend to promote brand drugs which is inconsistent with the efforts of Part D sponsors to promote generics.

Response:

We appreciate the commenter's concern but note that we do not have any regulatory authority over PAPs. To the extent that Part D sponsors learn that their enrollees are purchasing brand drugs outside of the Medicare prescription drug benefit through a PAP, the sponsors may undertake efforts to promote any generic equivalents or therapeutically equivalent drugs available on Part D plan formularies.

Comment:

We received a few comments regarding the automation of “true out-of-pocket costs” (TrOOP) reporting. One commenter asked that we continue to address challenges associated with TrOOP tracking. Another commenter recommended that we work with the National Council for Prescription Drug Programs (NCPDP) to update HIPAA Standards in order to automate TrOOP reporting and help pharmacies better support the Medicare Part D program.

Response:

We are currently working with the industry to implement an automated TrOOP balance transfer process to better facilitate the tracking of TrOOP. Additional guidance regarding this effort will be provided at a future date.

Comment:

One commenter noted that in the case of LIS enrollees, it is possible that the nominal PAP co-pay will exceed the LIS cost sharing due from the beneficiary. The commenter asked that we clarify that in such cases, Part D sponsors should reflect the cost sharing due as the LIS cost sharing amount and that we require the Part D sponsors to send the LIS beneficiary a check for the difference between the PAP co-payment and LIS cost sharing amount.

Response:

We disagree with this recommendation. LIS beneficiaries do not receive the low-income cost sharing subsidy for drugs they obtain through PAPs because these programs operate outside of the Medicare Part D program. Therefore, there is no coordination of benefits between a PAP and Part D sponsors. Sponsors cannot make adjustments through refund or otherwise to nominal co-payments assessed by PAPs to LIS eligible enrollees. The proposed change to the definition of “incurred costs” simply allows affected beneficiaries to have their nominal PAP co-payments included in their TrOOP and gross drug spend balances.

b. Negotiated Prices

In order to address questions that have arisen since the Prescription Drug Benefit final rule was issued, we proposed to amend the definition of “negotiated prices” (to be effective for Part D contract year 2010) to require that Part D sponsors base beneficiary cost sharing and price reporting to CMS on the price ultimately received by the pharmacy or other dispensing provider, also known as the pass-through price. We received questions regarding whether Part D sponsors of prescription drug plans (PDPs) and Medicare Advantage prescription drug plans (MA-PDs) who utilize the lock-in pricing approach when contracting with a pharmacy benefit manager (PBM) may base beneficiary cost sharing on the price paid to the PBM, also known as the lock-in price. The lock-in pricing approach is a contract method by which the sponsor agrees to pay the PBM a set rate for a particular drug and the PBM negotiates with pharmacies to achieve the best possible price, which may vary from the rate paid to the PBM. Under the lock-in pricing approach, the price paid to the PBM or lock-in price is often greater than the price paid by the PBM to the pharmacy (the pass-through price) due to the inclusion of a “risk premium” which the Part D sponsor pays to the PBM to mitigate market risk and shield the Part D sponsor from price variability between pharmacies. This “risk premium” is analogous to the cost of drug utilization management, drug price negotiation, and other administrative costs incurred by Part D sponsors. Therefore, the lock-in price includes an administrative fee paid to the PBM by the Part D sponsor.

Beneficiary cost sharing is a function of the negotiated price, either directly as in coinsurance percentages of the negotiated price, or indirectly, as co-payments which are ultimately tied to actuarial equivalence requirements based on negotiated prices. We believe that it is important to ensure that negotiated prices are based upon the actual drug price paid at the point-of-sale and do not include any of the administrative fees paid by Part D sponsors to their intermediary contracting organizations because higher negotiated prices advance beneficiaries through the phases of the Part D benefit more quickly such that a greater number of beneficiaries reach the coverage gap phase of the benefit. In addition, using lock-in prices to determine negotiated prices increases the low-income cost sharing and reinsurance subsidy payments made by the Federal government. The low-income cost sharing subsidy is calculated based on the difference between the maximum cost sharing amounts for LIS beneficiaries as defined by the statute and, if greater, the beneficiary cost sharing charged under the Part D plan. Thus, higher beneficiary cost sharing leads to higher low-income cost sharing subsidy amounts. The reinsurance subsidy, which is calculated as 80 percent of allowable reinsurance costs, is increased as negotiated prices, and therefore, allowable reinsurance costs increase. We believe that continuing to permit Part D sponsors to use lock-in prices as the basis for determining beneficiary cost sharing, and reporting drug costs to CMS could also have the following undesirable results:

• Cost shifting from the government to beneficiaries in the form of higher beneficiary out-of-pocket costs.

• Interference with market competition among Part D sponsors.

• Beneficiary confusion over actual drug prices.

• Difficulties for pharmacies in explaining drug prices to customers and managing cash transfers to Part D sponsors or their intermediary contracting organizations.

• Government risk sharing on amounts that reflect administrative costs, contrary to Congressional intent to exclude risk-sharing on administrative expenses.

Please see the preamble to the May 16, 2008 proposed rule for a more detailed discussion of the potential impact of using lock-in prices to determine negotiated prices and beneficiary cost sharing.

For these reasons, we proposed to revise § 423.100 so that the first part of the definition of “negotiated prices” would state that negotiated prices are prices that the Part D sponsor (or other intermediary contracting organization) and the network dispensing pharmacy, or other network dispensing provider, have negotiated as the amount the network dispensing pharmacy or other network dispensing provider, will receive, in total, for a particular drug. The term “intermediary contracting organization” refers to organizations such as PBMs that contract with plan sponsors to perform one or both of the following functions: (1) Pay pharmacies and other dispensers of Part D drugs provided to enrollees in the Part D

sponsor's plan, regardless of whether the intermediary contracting organization negotiates pharmacy contracts on behalf of the plan sponsor or on its own behalf; or (2) negotiate rebates or other price concessions with manufacturers for Part D drugs provided to enrollees in the Part D sponsor's plan, regardless of whether the intermediary contracting organization negotiates on behalf of the plan sponsor or on its own behalf.

Under this proposed definition, Part D sponsors who utilize the lock-in pricing approach when contracting with a PBM would no longer be permitted to base beneficiary cost sharing on the price paid to the PBM (the lock-in price). Thus, our proposed definition would exclude any differential between the price paid to the pharmacy and the price paid to the PBM or other intermediary contracting organization, and instead would treat that differential (or “risk premium”) as an administrative cost paid to the PBM or intermediary contracting organization rather than as a drug cost under Part D.

We also proposed to revise the definition of “negotiated prices” (to be effective upon the effective date of the final rule) to include prices for covered Part D drugs negotiated between the Part D sponsor (or its intermediary contracting organization) and other network dispensing providers. Part D sponsors can contract with providers other than a pharmacy to dispense covered Part D drugs by including them in their network. Therefore, we proposed to amend the definition of negotiated prices to reflect the prices for covered Part D drugs that Part D sponsors (or their intermediary contracting organizations) negotiate with all of their network dispensing providers.

Our proposed changes to the definition of negotiated prices would not interfere with the negotiations between Part D sponsors, pharmacy benefit managers, and pharmacies for covered Part D drugs. Rather, Part D sponsors would be required to use the price ultimately received by the pharmacy (or other dispensing provider) as the basis for calculating beneficiary cost sharing, total drug spend, and cost reporting to CMS. The proposed definition would not require a Part D sponsor to use a particular pricing approach in its contracting agreements with PBMs. Part D sponsors could continue to use either the pass-through or lock-in pricing approach when contracting with a PBM—provided that beneficiary cost sharing, total drug spend, and the drug costs reported to CMS are based on the price ultimately received by the pharmacy, or other dispensing providers. To the extent that Part D sponsors believe that the lock-in pricing approach reduces their total costs, we indicated that we expected that they would continue to use it when contracting with a PBM.

While we did receive some comments in opposition to the proposed changes to the definition of negotiated prices, most of the comments received were in strong support of our proposals. Based on the comments received and the responses provided below, we are finalizing the revisions to the definition of “negotiated prices” in § 423.100 as proposed. The change to the definition of “negotiated prices” to include prices for covered Part D drugs negotiated between the Part D sponsor (or its intermediary contracting organization) and other network dispensing providers is effective upon the effective date of this final rule. The revision to the definition of “negotiated prices” to require Part D sponsors to base beneficiary cost sharing on the price paid to the pharmacy or other dispensing provider will be effective for Contract Year 2010.

Comment:

Several commenters agreed with our assertion that the proposed changes to the definition of negotiated prices would increase transparency. One commenter supported the proposed change because it would improve transparency but still allow Part D sponsors to utilize the lock-in pricing approach. Another commenter indicated that the increased transparency would serve as an effective tool for helping to control prescription drug costs. Another commenter indicated that the benefits of transparency and the enhanced ability of beneficiaries to manage their benefit that would result from the proposed changes would outweigh the advantages of lock-in pricing for Part D sponsors. A commenter stated that often plan sponsors are not fully aware of the “PBM spread.” This commenter and other commenters recommended that we require PBMs to be compliant and fully transparent with Part D sponsors about pricing structures, rebating, formulary management incentives, marketing, and compliance requirements.

Response:

We agree with commenters that the proposed revision to the definition of “negotiated prices” would increase transparency by ensuring that the drug prices paid to pharmacies are transparent to beneficiaries and Part D sponsors. We believe that this transparency will help Part D sponsors to better manage their drug costs and negotiate lower drug costs and administrative fees by making them fully aware of the “PBM spread” or “risk premium” which they are paying to their PBMs. This transparency will also be helpful to beneficiaries as they evaluate and choose among Part D plans. While we understand the final commenter's concern about transparency, we do not have the authority to regulate Part D sponsors' first tier, downstream and related entities to this degree. We contract with Part D sponsors, not with first tier, downstream and related entities, such as a sponsor's PBM, for the provision of the Medicare prescription drug benefit. Therefore, we do not have the direct authority to require PBMs and other intermediary contracting organizations to be fully transparent regarding their pricing structures. However, we strongly encourage Part D sponsors to include provisions in their contracts with first tier, downstream and related entities that ensure compliance with our reporting requirements and enhance transparency. We note that all plan contracts with PBMs must include provisions that allow us to review their financial statements, books, and records.

Comment:

Some commenters asserted that the Medicare Part D program currently has transparency in the form of “price transparency,” where the prices paid by Part D sponsors are fully known to sponsors and beneficiaries and are also listed on the CMS Medicare Web site. The commenters asserted that the proposed changes to the definition of negotiated prices would instead create “cost transparency.” The commenters stated that there are several studies concluding that “cost transparency” increases prices because, when aware of one another's costs or discount agreements, competitors no longer offer special or deep discounts that are unnecessary to win the competition.

Response:

We disagree. The use of lock-in prices reduces “price transparency” for Part D sponsors by combining the administrative fees charged by PBMs with the drug price. The proposed changes to the definition of negotiated prices would increase “price transparency” by ensuring that only the actual drug price is used to determine beneficiary cost sharing and report drug costs to CMS. We believe that the competitive nature of the Part D program will continue to provide incentives for Part D sponsors and their contracted PBMs to negotiate with pharmacies and other dispensing providers for lower drug prices. In addition, the revised definition of negotiated prices will provide an additional incentive for Part D sponsors

to negotiate with PBMs for lower administrative fees.

Comment:

One commenter stated that under pass-through pricing, Part D sponsors have less transparency regarding their ultimate drug costs because the drug prices are not fixed. The commenter asserted that this makes it difficult for Part D sponsors to predict their drug costs, which could lead to higher risk sharing payments by the Federal government.

Response:

We disagree. We do not believe that requiring Part D sponsors to develop their Part D bids and report drug costs to CMS using pass-through prices will make it significantly more difficult for Part D sponsors to predict their drug costs, such that risk sharing will be higher. In addition, Part D sponsors may take several steps to alleviate this concern, including negotiating their drug prices prior to developing their Part D bids and using the lock-in pricing approach when contracting with a PBM.

Comment:

Several commenters indicated that the proposed changes to the definition of “negotiated prices” would achieve beneficiary cost savings. One commenter indicated that these beneficiary cost savings would ensure improved access to prescription drugs for beneficiaries. In addition, commenters stated that the proposed changes would protect beneficiaries from being prematurely advanced into the coverage gap. However, several commenters stated that elimination of the “risk premium” received by PBMs would not decrease out-of-pocket costs for beneficiaries. These commenters stated the “risk premium” provides incentives for PBMs to control costs and negotiate deep discounts on prescription drugs that are then passed on by Part D plans to beneficiaries.

Response:

We agree with those commenters who believe that the proposed changes would create cost savings for beneficiaries. We believe that lock-in prices are generally higher than the prices paid to pharmacies due to the inclusion of the “risk premium” paid to the PBM for shielding the Part D sponsor from price variability. These higher drug prices lead to higher cost sharing for Part D beneficiaries. In addition, beneficiaries are advanced more quickly through the Part D benefit such that a greater number of beneficiaries enter the coverage gap phase where they pay 100 percent of the higher drug price. As a result, we believe that beneficiaries enrolled in Part D plans which currently utilize the lock-in pricing approach generally will experience cost savings under the proposed revision to the definition of “negotiated prices” that would require Part D sponsors to base negotiated prices and beneficiary cost sharing on the price paid to the pharmacy, which is generally lower than the lock-in price.

We acknowledge that the “risk premium” may provide an incentive for PBMs to negotiate for lower drug prices which would reduce drug costs. Under the revised definition of “negotiated prices,” Part D sponsors may continue to pay “risk premiums” to PBMs provided that the amount of these risk premiums is appropriately categorized as administrative cost and not drug cost. In addition, Part D sponsors may include other incentives in their contracts with PBMs whereby PBMs would receive higher administrative fees for better managing drug expenditures and reducing overall drug costs. We also note that the increased transparency created under the proposed changes to the definition of negotiated prices would provide Part D sponsors with information regarding administrative fees and the cost of drugs that they can use to negotiate more effectively with PBMs to further reduce the cost of providing the prescription drug benefit.

Comment:

One commenter asserted that lock-in pricing is more equitable to beneficiaries than pass-through pricing because it protects beneficiaries who live in less competitive or underserved areas by providing uniform pricing to beneficiaries irrespective of where they live.

Response:

While we acknowledge that the uniform pricing provided under the lock-in pricing approach may provide lower cost sharing for some beneficiaries, we believe that using lock-in prices to determine beneficiary cost sharing generally results in higher cost sharing for most beneficiaries. As a result, we believe that requiring plans to determine beneficiary cost sharing based upon the pass-through price paid to the pharmacy or other dispensing provider will reduce out-of-pocket costs for most beneficiaries and slow their advance through the initial coverage phase of the benefit.

Comment:

Another commenter agreed with our assertion that Part D premiums may be lower under the lock-in pricing approach. The commenter indicated that these lower premiums result in a more robust benefit that covers more beneficiaries and therefore, results in a healthier population at an overall lower cost to the government.

Response:

We agree that lower beneficiary premiums may help to encourage healthier beneficiaries to enroll in Medicare Part D. However, we do not think that it is appropriate to inflate the cost sharing paid by beneficiaries with higher drug utilization in order to reduce premiums for healthier beneficiaries. The goal of the Medicare Prescription Drug Benefit is to make prescription drugs more affordable for all Part D beneficiaries, not just those who are healthier and have lower drug utilization. The proposed revision to the definition of “negotiated prices” will lead to higher Part D bids and therefore, higher premiums, for Part D plans which currently utilize the lock-in pricing approach. This increase in Part D bids will increase the direct subsidy payments made by the Federal government as well as the premiums paid by beneficiaries. However, these additional costs to the Federal government would be partially offset by reductions in the low-income cost sharing and reinsurance subsidy payments made by the Federal government. A reduction in low-income cost sharing subsidy payments is expected due to lower beneficiary cost sharing. The reinsurance subsidy, which is calculated as 80 percent of allowable reinsurance costs, is expected to decrease due to lower negotiated prices and therefore, lower allowable reinsurance costs. Moreover, while the beneficiary premiums will increase for plans using the “lock-in” pricing methodology, cost sharing would be lower for all beneficiaries enrolled in these plans.

Comment:

Some commenters indicated that they agreed with our assertion that the lock-in pricing approach currently creates an uneven playing field for Part D sponsors. They explained that generally beneficiaries tend to weigh premiums more than cost sharing so that plans utilizing the lock-in pricing approach may appear more cost effective to some beneficiaries. However, these commenters stated that, in the end, such plans cost enrollees considerably more than plans using the pass through pricing approach as a result of increased cost sharing.

Response:

We agree with the commenter that plans which have lower beneficiary premiums due to the lock-in pricing approach may ultimately be more costly for beneficiaries due to higher beneficiary cost sharing. To ensure that beneficiaries have the resources necessary to assess the premiums and cost sharing of different plan options and make informed plan choices, we will continue our current outreach and education efforts, including the plan comparison information available on the plan finder.

Comment:

A few commenters indicated that they would prefer that

CMS retain the current flexibility for Part D sponsors to choose either the pass-through or lock-in pricing approach, and the continued flexibility to reflect lock-in prices as part of drug costs. Commenters indicated that maintaining this flexibility would preserve the competitive nature of the Part D program.

Response:

We agree that competition is an important aspect of the Part D program. We believe that this competition will be retained under our proposed approach as Part D sponsors will continue to have the incentive to negotiate for the lowest possible drug prices in order to keep their premiums low and encourage beneficiaries to enroll in their plans. We note that Part D sponsors will continue to have the option to use either pricing approach when contracting with a PBM. However, we believe that the advantages for beneficiaries under the proposed revision to the definition of “negotiated prices” outweigh the possible benefits Part D sponsors would receive from continuing to use the lock-in pricing approach.

Comment:

One commenter asserted that Part D sponsors are fully aware of the potential that drug costs under the lock-in pricing approach include a risk premium paid to the PBM and understand the value this premium brings in reducing their drug costs.

Response:

To the extent that this statement is true, we would expect Part D sponsors to continue providing this risk premium to their contracted PBMs. Even if Part D sponsors are aware that there is a potential for risk premium under the lock-in pricing approach, however, it is unlikely they know the actual amount of the risk premium they are paying if they are not made aware of the price actually paid to the pharmacy. This incomplete information makes it difficult for a Part D sponsor to fully quantify the value of paying this risk premium to a contracted PBM in the first place. The proposed revision to the definition of “negotiated prices” would provide Part D sponsors with the increased transparency they need to fully quantify the value of paying the risk premium. We believe that this transparency will provide Part D sponsors with the information needed to more effectively negotiate with PBMs to reduce their risk premiums as well as other administrative fees.

Comment:

One commenter indicated that the proposed changes violate the non-interference requirement of the MMA at Section 1860D-11(i)(2), which prohibits CMS interference with negotiations between sponsors and manufacturers or pharmacies and the institution of a price structure for the reimbursement of covered Part D drugs.

Response:

Our proposed changes to the definition of negotiated prices do not interfere with the negotiations between Part D sponsors and pharmaceutical manufacturers and pharmacies, nor do they institute a price structure for reimbursement of covered Part D drugs. While Part D sponsors will be required to use the price ultimately received by the pharmacy (or other dispensing provider) as the basis for calculating beneficiary cost sharing and reporting drug costs, Part D sponsors will not be required to use a particular pricing approach in their contractual agreements with PBMs. Part D sponsors may continue to use the pass-through or lock-in pricing approach when contracting with a PBM, provided that beneficiary cost sharing and the drug costs reported to us are based on the price ultimately received by the pharmacy or other dispensing provider.

Comment:

We received a few comments indicating that the proposed changes essentially mandate a price structure because it is not feasible to compensate PBMs under the lock-in pricing approach and yet price drugs using pass-through pricing. The commenters assert that this dichotomy would require PBMs to build parallel claims adjudication modules and keep track of a parallel universe of claims.

Response:

While we understand that the proposed revisions to the definition of negotiated prices may require some PBMs to implement certain system changes in order to accommodate the requirement to report the price paid to the pharmacy, it is unclear to us why this would not be feasible. Currently, PBMs that offer the lock-in pricing approach have the capacity for dual pricing as they must track both the price they paid to the pharmacy and the lock-in price they received from the Part D sponsor. The proposed changes to the definition of “negotiated prices” would simply change which of these two prices is reported to CMS.

Comment:

Several commenters indicated that it was not Congress' intent to permit plans to charge higher prices under the lock-in pricing approach as a result of the PBM spread. We received a few comments indicating that the lack of transparency in the spread allows the intermediary to manipulate the spread amount to its advantage which ultimately works against beneficiaries. One commenter recommended that we consider requiring that Part D plans use a fiscal intermediary which will have no personal interest in what the pharmacy is paid.

Response:

We agree that a lack of transparency may lead PBMs to charge plans a higher drug price under the lock-in pricing approach in order to generate greater profit for the PBM, and that these higher prices are passed on to beneficiaries and the Medicare program. We believe that the proposed changes to the definition of “negotiated prices” would increase transparency for Part D sponsors and enhance their ability to negotiate with PBMs for lower administrative costs by ensuring that they are informed of the actual drug price (the price paid to the pharmacy) and the administrative fees paid to the PBM. Thus, this increase in transparency could affect drug costs. However, we acknowledge that the direct subsidy paid by the Medicare program and the premiums paid by beneficiaries may be somewhat higher under the pass through pricing approach than under the lock-in approach. CMS does not have the authority to require Part D sponsors to use a specific fiscal intermediary or approach when negotiating prices and contracts with pharmacies. Furthermore, in response to the suggestion that we consider requiring Part D plans to use a fiscal intermediary with no personal interest in the amount paid to the pharmacy, we note that it may not be beneficial to the Medicare Part D program to require Part D sponsors to use fiscal intermediaries with no personal interest in the price paid to the pharmacy.

Comment:

One commenter indicated that the “PBM spread” represents an additional profit for PBMs which will be reduced with greater transparency in pricing. However, we received a few comments which stated that the proposed changes could increase program costs for Medicare Part D by increasing Part D sponsors' administrative costs. One commenter expressed concerns that the proposed changes would require Part D sponsors to re-negotiate their contracts with PBMs. As a result of these negotiations, the commenter stated, PBMs could charge Part D sponsors higher administrative fees, which would lead to higher beneficiary premiums.

Response:

While we acknowledge that the administrative fees paid by Part D sponsors to PBMs will be higher as a result of the proposed changes, we believe that when the “risk premium” that is currently included in drug prices under the lock-in model is taken into account, overall the administrative fees paid by Part D sponsors will not change significantly. We also believe that the increased transparency would help Part D sponsors negotiate more effectively

with PBMs. In addition, the competitive nature of the Medicare Part D program will continue to provide ample incentives for Part D sponsors to minimize their costs in order to keep their beneficiary premiums low.

Comment:

Two commenters indicated that the proposed changes may not reduce costs for the Medicare Part D program, but may in fact increase costs. The commenters explained that the proposed changes would not permit PBMs to utilize all of the tools and incentives needed to provide prescription drug trend management programs, which are benefit management tools designed to keep drug costs down while maintaining and improving beneficiary health outcomes.

Response:

It is unclear to us how the proposed changes to the definition of “negotiated prices” would prohibit PBMs from providing services to help Part D sponsors manage drug costs. The proposed changes would in no way prohibit Part D sponsors from paying PBMs for these services. To the extent that prescription drug trend management programs provide an important and valued resource for managing and reducing drug costs, CMS would expect Part D sponsors to continue paying administrative fees to PBMs for the provision of such services. The proposed changes to the definition of “negotiated prices” would simply ensure that Part D sponsors appropriately report these fees as administrative costs and not as drug costs.

Comment:

In the preamble to the proposed rule, we explained that an argument could be made that the lock-in model is discriminatory to the extent it may favor low drug utilizers over high drug utilizers. One commenter asserted that a plan should not be considered discriminatory if it affects certain utilizers more than others. If such plans were considered discriminatory, the commenter argued, any plan type other than defined standard coverage could be considered discriminatory. The commenter stated that Congressional intent was to allow for choice in this regard. Another commenter indicated that differences in plan design and cost sharing cannot be equated with discrimination. There is no discrimination, this commenter stated, against a beneficiary because each beneficiary may make an informed plan choice with all relevant information available.

Response:

We continue to believe that certain differences in plan design and cost-sharing can be discriminatory. While it is important to maintain a variety of drug plan choices in Medicare Part D, it is also important for CMS to review plan designs to ensure that they do not inappropriately discourage the enrollment of less healthy beneficiaries or high drug utilizers in certain plans in order to maintain a robust risk pool and preserve the concept of community rating in the Medicare Part D program. It is also of paramount importance for CMS to ensure that there is a level playing field so that true competition can occur that benefits all parties—the taxpayer, beneficiaries, and plans. The actuarial equivalence test for basic Part D coverage is intended to ensure that there is a level playing field between plan types. However, currently two different price bases (pass-through prices and lock-in prices) may be used when determining actuarial equivalence. Furthermore, because Part D plan sponsors that use the lock-in methodology are paying a “risk premium” as part of drug costs, they often can negotiate a lower administrative fee with their PBMs. As a result, these plans can submit lower bids in order to receive lower premiums. These lower bids may increase the likelihood that a plan's premium will be below the regional low-income subsidy benchmarks such that the plan will qualify for auto-enrollment and facilitated enrollment of LIS-eligible individuals. As a result, we continue to believe that providing Part D sponsors with the option to develop their Part D bids using either the pass-through approach or the lock-in approach creates an uneven playing field for Part D sponsors who utilize the pass-through pricing approach.

Comment:

One commenter indicated that it was unclear why we believed that lock-in pricing would shift costs from the government to beneficiaries in the form of higher beneficiary out-of-pocket costs. The commenter explained that in their observation, the lock-in model has been the dominant pricing model in the commercial market. The “risk premium” allows PBMs to carry out a broad spectrum of services which favorably influence overall drug spending trends. The commenter also stated that this pricing model is preferred in the commercial market because it holds PBMs accountable for the drug costs incurred. The commenter indicated that the “regulated transparency” resulting from the proposed changes would be less effective in reducing drug costs than vigorous PBM competition. Another commenter indicated that the lock-in pricing approach may generate deeper discounts than the pass-through pricing approach.

Response:

The use of lock-in prices to develop Part D bids shifts administrative costs that would be paid primarily by the Federal government as part of the direct subsidy to drug costs paid by beneficiaries through higher cost sharing. The proposed revision to the definition of “negotiated prices” would ensure that these administrative costs are not paid by beneficiaries through beneficiary cost sharing. We note that Part D sponsors will continue to have the option to utilize the lock-in pricing approach in their contracts with PBMs, provided that the pass-through price is used to determine beneficiary cost sharing and to report drug costs to CMS. To the extent that the lock-in pricing approach generates deeper discounts or reduces total drug costs, we would expect Part D sponsors to continue using this pricing approach when contracting with PBMs.

Comment:

In the preamble to the proposed rule, we requested comments regarding the impact of the proposed changes on pharmacies, particularly small independent pharmacies. We received comments from several pharmacist associations as well as pharmacies. The commenters were generally very supportive of the proposed changes and noted that the proposed changes will not have a negative effect on pharmacies. One commenter indicated that lock-in pricing negatively impacts the ability of pharmacies to serve beneficiaries. Another commenter indicated that the additional transparency created by the proposed changes to the definition of “negotiated prices” would likely make competition more difficult for small pharmacies although these pharmacies would not be removed from Part D sponsors' networks due to CMS' pharmacy access standards. Another commenter indicated that small independent pharmacies do not tend to receive higher reimbursement rates and therefore, would not be negatively impacted by the proposed change. The commenter explained that independent pharmacies are often forced to accept whatever price is offered by the PBM. However, because of their size, chain pharmacies are often able to negotiate higher reimbursement rates. One commenter indicated that the proposed change would not have an adverse effect or increased burden on LTC pharmacies. Another commenter expressed concern that the decrease in beneficiary cost sharing resulting from the proposed changes could reduce the operational cash-flow for pharmacies. This commenter recommended developing guidance regarding prompt payment to

pharmacies to help alleviate this concern.

Response:

Based on the comments received from pharmacies and pharmacists' associations, which were very supportive of the proposed changes, we have concluded that the proposed changes would not negatively impact pharmacies, including small independent pharmacies. Rather, we believe that the proposed changes will help pharmacies by reducing the administrative burden associated with tracking lock-in prices and addressing beneficiary confusion resulting from discrepancies between the pass-through price charged by the pharmacy and the lock-in price reflected on the beneficiary's EOB. With respect to the comment suggesting that CMS develop guidance regarding prompt payment to pharmacies, we note that section 171 of MIPPA establishes timely claims payment requirements for Part D plans that will become effective for plan years beginning 2010. CMS is currently developing and implementing guidance to ensure prompt payment to pharmacies.

Comment:

One commenter expressed concern that Part D sponsors may believe that the proposed revisions to the definition of “negotiated prices” will require Part D sponsors to set negotiated prices equal to 340B prices for 340B-participating Part D network pharmacies. The commenter explained that making drugs available to non-340B patients at 340B prices will create significant losses for 340B pharmacies, which must obtain these drugs at prices above 340B levels. Therefore, the commenter asked CMS to clarify that Part D sponsors may not require 340B providers to provide 340B prices to Part D plans under § 423.104(g)(1).

Response:

The proposed definition of negotiated prices does not require Part D sponsors to set negotiated prices at 340B prices for 340B-participating Part D network pharmacies. While we understand the commenter's concern that Part D plans may try to require pharmacies to make drugs available to Part D beneficiaries at 340B prices, we note that we generally do not interfere in plan-pharmacy contract negotiations or opine on the reasonableness or relevancy of specific contractual terms. Instead, we use our oversight authority to ensure that Part D sponsors abide by our rules and allow appropriate access to their pharmacy networks. A Part D sponsor offering less than satisfactory or unclear contract terms to a pharmacy would likely find it difficult to retain enough pharmacies to meet our network requirements, and would therefore be unable to renew its Medicare Part D contract. We urge pharmacies to ensure that they understand and agree with all terms of a pharmacy network contract before contracting with a Part D sponsor.

Comment:

In the proposed rule, we asked for comments regarding the lack of transparency and the potential for beneficiary confusion as a result of lock-in prices. We received several comments indicating that the proposed changes to the definition of negotiated prices would create greater transparency for beneficiaries. Commenters also expressed concern that lock-in prices may lead to beneficiary confusion. One commenter explained that pharmacies are often unable to customize receipts to reflect the lock-in price. The discrepancy between the lock-in price reflected in the Explanation of Benefits (EOB) and the pharmacy price reflected on the receipt often leads to beneficiary anger and confusion. The commenter asserted that as a result of the additional time spent with beneficiaries to explain the discrepancy, pharmacies' administrative costs have increased. Other commenters stated that lock-in prices do not generate more beneficiary confusion than pass-through prices. These other commenters asserted that pass-through pricing generates greater beneficiary confusion than lock-in pricing by establishing different prices from pharmacy to pharmacy. In addition, these commenters stated that the full retail price is not usually shown on the customer receipt, rather, just the amount due from the beneficiary is shown. As a result, it is rare that the pharmacy receipt would reflect a drug price that conflicts with a lock-in price on the EOB.

Response:

We acknowledge that pass-through pricing may result in different prices at different pharmacies, which could create some confusion for Part D beneficiaries. However, it is customary for different pharmacies to charge different drug prices. We believe that the use of lock-in prices may lead to more significant beneficiary confusion due to the discrepancy between the pass-through price charged by the pharmacy and the lock-in price reflected on the beneficiary's EOB. We are aware of a number of cases where beneficiaries have received pharmacy receipts which show prices that differ from the prices indicated on their EOB due to lock-in prices. We also understand the burden this discrepancy places on pharmacies that must try to address beneficiary confusion. We believe implementing the proposed changes to the definition of negotiated prices will help to alleviate this burden.

Comment:

One commenter indicated that pharmacies incur significant administrative costs tracking the lock-in price collected from the beneficiary and transferring the additional amounts to the PBM. This burden is exacerbated by the fact that pharmacies are often forced to sell drugs to PBMs at prices below their acquisition cost. Another commenter indicated that the lock-in pricing approach does not require pharmacies to expend more staff resources than the pass-through pricing approach. This commenter explained that pharmacies are required to have accounting processes and the capability to conduct ongoing reconciliations under any pricing approach. Furthermore, the commenter indicated that typically pharmacies are not required to remit payments to PBMs since the amounts owed by the pharmacy are generally offset by the far greater amounts owed to the pharmacy by the PBM.

Response:

We agree with the second commenter that pharmacies would not incur additional administrative costs under the lock-in pricing approach from transferring additional amounts to PBMs because generally pharmacies are required to conduct ongoing reconciliations with PBMs and plan sponsors under either pricing approach. However, we believe that pharmacies do incur additional administrative costs from tracking the lock-in price, ensuring that this is the price conveyed to the beneficiary (rather than the price actually paid to the pharmacy by the PBM), and addressing beneficiary confusion regarding the drug price. We believe that the proposed changes to the definition of “negotiated prices” would help alleviate some of this administrative burden for pharmacies by ensuring that beneficiary cost sharing is based on the price negotiated with the pharmacy.

Comment:

Several commenters recommended that until the proposed changes are made effective in 2010, CMS should require Part D sponsors that utilize the lock-in pricing approach to indicate this policy in their marketing materials in order to create greater transparency for Part D beneficiaries. In addition, they recommended that we require Part D sponsors to inform their enrollees whenever they purchase a drug that is more highly priced because of lock-in prices, and that we require Part D sponsors to advise enrollees of their right to pay a lower cash price during all phases of the benefit.

Response:

We agree with the commenters' desire to provide greater transparency for beneficiaries and believe that the changes to the

definition of “negotiated prices” to require the reporting of pass through prices effective in 2010 will achieve that result. However, the commenters' recommendations would require Part D sponsors using the lock-in approach to incur significant administrative costs for plan year 2009. Given that these requirements would only be applicable for one year, we do not believe that it would be worthwhile to implement the commenters' recommendations.

Comment:

A commenter expressed concern that the proposed changes to the definition of “negotiated prices” would make calculating the negotiated price too complicated and therefore requested clarification that the negotiated price does not include post-hoc rebates, price concessions, or other adjustments to prices.

Response:

Under the proposed definition of “negotiated prices”, Part D sponsors would only apply the price concessions that they elect to pass through at the point of sale. We understand the difficulty in applying price concessions that are received after the point of sale purchase to the negotiated price at the point of sale. Part D sponsors would not be required to apply post-hoc rebates or price concessions to the negotiated price at the point of sale. Rather, these post-hoc rebates or price concessions must be reported to CMS outside the drug claim, consistent with our DIR reporting instructions, “Medicare Part D DIR Reporting Requirements for Payment Reconciliation”.

Comment:

Several commenters expressed concern that the proposed definition of negotiated prices would not prevent retail or mail order pharmacies that are wholly-owned by Part D sponsors from charging inflated drug prices under the Part D sponsors' plans. It was recommended that CMS and OIG exercise oversight over related parties to ensure that they are charging prices that are reasonable relative to the underlying drug cost.

Response:

We appreciate these concerns and will continue reviewing the prices charged by pharmacies that are wholly-owned by Part D sponsors and other related parties to ensure that their prices are comparable to those offered under other Part D plans, particularly when reviewing Part D bids.

Comment:

Several commenters indicated that the proposed definition fails to protect Part D beneficiaries from higher drug prices by not requiring Part D sponsors to pass through rebates and price concessions at the point of sale. They asserted that allowing Part D sponsors not to pass through rebates at the point of sale dilutes the insurance principle of the Part D program by shifting cost to the sickest beneficiaries and not giving these beneficiaries the benefit of the rebates which they generated through their higher volume of drug purchases.

Response:

As stated in the January 2005 final rule (70 FR 4244), we interpret the definition of the term negotiated prices in section 1860D-2(d)(1)(B) of the Act as requiring Part D sponsors to pass through some, but not necessarily all, price concessions to Part D beneficiaries at the point of sale. Section 1860D-2(d)(1)(B) of the Act specifically requires that negotiated prices “shall take into account negotiated price concessions, such as discounts, direct or indirect subsidies, rebates, and direct or indirect remunerations * * *” A phrase other than “take into account” would have been used, had the intent been to include all price concessions in the negotiated prices made available to Part D beneficiaries at the point of sale. The plain language of this provision demonstrates Congress' intent to be permissive—that Part D sponsors are permitted to choose how much of their negotiated price concessions to pass through to Part D beneficiaries at the point of sale. Generally speaking, however, rebates and certain price concessions are determined after the point of sale purchase, making it difficult for Part D sponsors to always apply these amounts to the negotiated price at the point of sale.

Comment:

One commenter recommended that we delay the implementation date for this proposed definition until 2011 in order to provide PBMs with sufficient time to adapt their information systems. This delay would especially help sponsors that wish to continue using the lock-in pricing approach. Another commenter supported the proposed effective date because it would provide sufficient time for Part D sponsors and PBMs to make any appropriate adjustments in reimbursement to pharmacies.

Response:

We understand that the proposed definition may require PBMs to implement some changes in their information systems. However, we believe the effective date of 2010 will provide sufficient time for PBMs to implement any necessary systems changes.

Comment:

One commenter asked whether Part D sponsors would be permitted to apply a negative adjustment to their administrative costs in cases where the lock-in price is lower than the pass-through price, rather than being higher.

Response:

Part D sponsors would be permitted to adjust their administrative cost estimates appropriately for the PBM spread when developing their Part D bids. However, we note that it is unlikely that overall lock-in prices will be lower than the pass-through prices.

Comment:

One commenter indicated that the proposed changes to the definition of “negotiated prices” would increase overall program costs, sponsors' ” administrative costs, Part D bids, and beneficiary premiums. The commenter asserted that these cost increases would defeat the purpose of the Medicare Part D program, which is to keep prescription drugs affordable for Medicare beneficiaries.

Response:

The goal of the Medicare Part D program is to serve Medicare beneficiaries and make prescription drugs affordable for them. The proposed changes will generally reduce cost sharing for beneficiaries, particularly those who have high drug utilization and, as a result, are most in need of assistance in purchasing prescription medications. We also believe that the increase in Federal costs due to higher plan bids will be balanced by the reduction in costs for Medicare Part D beneficiaries.

Comment:

A commenter indicated that the proposed changes to the definition of “negotiated prices” should apply equally to prices negotiated with network retail pharmacies and network mail order pharmacies.

Response:

We agree. The proposed definition of negotiated prices does not make a distinction between network retail pharmacies and network mail order pharmacies. Thus, the revised definition of “negotiated prices”, as implemented, would apply to all network pharmacies and other dispensing providers, including network mail order pharmacies.

Comment:

One commenter recommended revising the proposed definition of negotiated prices by adding “any” before the term “other network dispensing provider” to indicate that the term “negotiated prices” includes prices negotiated with all network dispensing providers.

Response:

We agree that negotiated prices include prices negotiated with all network dispensing providers. However, we believe that the proposed definition appropriately conveys this policy. Therefore, we do not believe that the change proposed by the commenter is necessary. Thus, we are finalizing the proposed revisions to the definition “negotiated prices” without modification.

4. Subpart G—Payments to Part D Plan Sponsors for Qualified Prescription Drug Coverage (Definitions and Terminology, § 423.308)

a. Actually Paid (§ 423.308)

In the proposed rule, we proposed to include language in the definition of “actually paid” that would codify and clarify our previous guidance, and provide that direct or indirect remuneration includes discounts, chargebacks or rebates, cash discounts, free goods contingent on a purchase agreement, up-front payments, coupons, goods in kind, free or reduced-price services, grants, or other price concessions or similar benefits from manufacturers, pharmacies or similar entities obtained by an intermediary contracting organization with which the Part D sponsor has contracted for administrative services, regardless of whether the intermediary contracting organization retains all or a portion of the direct and indirect remuneration or passes on the entire direct and indirect remuneration to the Part D sponsor. Similarly, we proposed to clarify that this definition of “actually paid” would apply regardless of the terms of the contract between the plan sponsor and any intermediary contracting organization.

After reviewing the comments we received regarding this proposal, which are discussed below, we are implementing the clarifications to the definition of “actually paid” as proposed with one change.

Comment:

A commenter expressed concern that the term “intermediary contracting organization” as described in the preamble of the notice of proposed rulemaking is too broad. The commenter stated that the proposed rule seems to suggest that all contractors that provide administrative services to a Part D sponsor could be considered “intermediary contracting organizations.” Based on this interpretation of the term, the commenter stated, remuneration received by entities with which Part D sponsors have contracted for audit services, as well as pharmacies that provide administrative services such as utilization management, could be considered to contribute to DIR which must be excluded from a sponsor's allowable costs. The commenter recommended limiting the term “intermediary contracting organization” to only those organizations that provide administrative services, negotiate drug prices,

and

also make payments to dispensing entities on behalf of Part D sponsors.

Response:

We agree with some of the concerns expressed by the commenter. It is not our intent to use the term “intermediary contracting organization” to refer to all organizations with which Part D sponsors may contract for administrative services. The term “intermediary contracting organization” encompasses any entity that contracts with a plan sponsor to perform one or both of the following functions: (1) Pay pharmacies and other dispensers of Part D drugs provided to enrollees in the Part D sponsor's plan, regardless of whether the intermediary contracting organization negotiates pharmacy contracts on behalf of the plan sponsor or on its own behalf; or (2) negotiate rebates or other price concessions with manufacturers for Part D drugs provided to enrollees in the Part D sponsor's plan, regardless of whether the intermediary contracting organization negotiates on behalf of the plan sponsor or on its own behalf. We have revised the proposed definition of “actually paid” to reflect this clarification. Specifically, we are removing the phrase “for administrative services” from the second sentence of the proposed definition of “actually paid” such that it now states that “Direct and indirect remuneration includes discounts, chargebacks or rebates, cash discounts, free goods contingent on a purchase agreement, up-front payments, coupons, goods in kind, free or reduced-price services, grants, or other price concessions or similar benefits from manufacturers, pharmacies or similar entities obtained by an intermediary contracting organization with which the Part D plan sponsor has contracted, regardless of whether the intermediary contracting organization retains all or a portion of the direct and indirect remuneration or passes the entire direct and indirect remuneration to the Part D plan sponsor and regardless of the terms of the contract between the plan sponsor and the intermediary contracting organization”.

Comment:

We received several comments in support of the proposed changes to the definition of “actually paid.” One commenter agreed that rebates retained by PBMs and price concessions received from manufacturers should be treated as part of the true drug cost. Another commenter expressed support for this change as a logical follow-on to our guidance in the April 2006 Call Letter on rebates retained by PBMs. Another commenter stated that the proposed clarification would reduce the overall cost of the Medicare prescription drug benefit and facilitate future efforts to reduce or eliminate the coverage gap from the Part D benefit design.

Response:

We appreciate the support received for this clarification. This clarification will help to ensure that all of each sponsor's administrative costs are excluded from allowable reinsurance costs and allowable risk corridor costs as required by sections 1860D-15(b)(3) and 1860D-15(e)(1) of the Act. In addition, this clarification will preserve the competitive nature of the Part D program by ensuring a level playing field for Part D sponsors regardless of their contractual arrangements with PBMs.

Comment:

A commenter requested that we delay the effective date of the proposed change until the 2010 contract year to provide Part D sponsors with sufficient time to identify any contractors, other than PBMs, that are covered by the new language in the rule and to allow them to revise their contracts accordingly.

Response:

The proposed change to the definition of “actually paid” reflects current Part D policy regarding the reporting of rebates retained by PBMs. Therefore, we do not believe that a delay in the effective date of this clarification is warranted.

Comment:

One commenter requested clarification regarding whether bona fide service fees are considered direct and indirect remuneration.

Response:

All rebates, grants, settlement amounts, or other price concessions received directly or indirectly from pharmaceutical manufacturers (with the exception of bona fide service fees) are considered price concessions that serve to reduce the drug costs incurred by the Part D sponsor and, therefore, must be reported to CMS as direct and indirect remuneration (DIR). Bona fide service fees are fees paid by a manufacturer to an entity, such as a Part D sponsor or the subcontractor of a Part D sponsor, that represent fair market value for a bona fide, itemized service actually performed on behalf of the manufacturer that the manufacturer would perform (or contract for) in the absence of the service arrangement and that are not passed on, in whole or in part, to a client or customer, whether or not the entity takes title to the drug. As a result, bona fide service fees do not reduce the drug costs incurred by the Part D sponsor and therefore, are not considered DIR.

Comment:

A commenter recommended changing the definition of “actually paid” to reflect the fact that PBMs are actually a source of remuneration.

Response:

We disagree with this recommendation. While Part D sponsors may in fact receive remuneration from a PBM, we do not think that it is necessary to revise the definition of “actually paid” to reflect this. The definition of “actually paid” already indicates that Part D sponsors may receive remuneration from any source.

Comment:

One commenter stated that it is widely believed that PBMs collect more in rebates than they report. The commenter stated that PBM-retained rebates may provide incentives for less cost-effective drugs to be placed on preferred formulary lists. This works against both beneficiaries and plan sponsors by increasing their drug costs.

Response:

We agree with the commenter that the additional transparency created by the proposed changes to the definition of “actually paid” would allow Part D sponsors to better identify the most cost effective drugs for inclusion on preferred formulary lists. By providing Part D sponsors with additional cost information, the additional transparency will help Part D sponsors in their negotiations with manufacturers and PBMs.

Comment:

A commenter asked that we limit the proposed definition of “actually paid” so that it would only apply to basic Part D coverage and not to enhanced alternative benefits.

Response:

We disagree with this request. The definition of “actually paid” must be applied uniformly across the Part D benefit to ensure the accurate and consistent reporting of drug costs for Medicare Part D.

Comment:

A commenter asked for clarification regarding the appropriate classification of rebates retained by a PBM.

Response:

Rebates received from a manufacturer, whether directly or indirectly through a PBM, are price concessions that reduce the drug costs incurred by the Part D sponsor and therefore, are considered direct and indirect remuneration (DIR). To the extent that rebates are retained by a PBM, the dollar amount retained by the PBM represents an administrative fee which the Part D sponsor has paid to the PBM. Thus, the Part D sponsor essentially uses the remuneration from the manufacturer that the PBM retains to pay a portion of the Part D plan's administrative costs. As a result, when developing Part D bids, Part D sponsors should report this amount as an administrative cost.

Comment:

A commenter stated that manufacturer rebates negotiated and earned by a PBM are not earned or received by the plan sponsor. The commenter stated that the proposed definition of “actually paid” is too narrow in that it defines “price concessions” to include amounts, such as PBM-retained rebates, that the plan neither receives nor is entitled to receive, and therefore, cannot properly be viewed as reducing the amount the plan “actually paid” for drug costs. Thus, the commenter stated, the proposed changes are inconsistent with the statute and are beyond the scope of authority granted by Congress. The commenter concluded that Congress did not authorize CMS to force a Part D plan to account for rebates earned by a third-party intermediary.

Response:

We do not agree. While sponsors may not directly receive such remuneration from the manufacturer, sponsors do receive the amount indirectly through reduced administrative costs. Congress requires CMS to exclude all rebates from allowable costs, including those rebates that are received indirectly.

See

sections 1860D-15(b)(2) and 1860D-15(e)(1) of the Act. Similarly, we are also required to exclude administrative costs from allowable costs.

See

sections 1860D-15(b)(3) and 1860D-15(e)(1) of the Act. Thus, in order to calculate accurately the costs “actually paid” by a plan, the costs incurred by a plan must be adjusted to reflect any rebates retained by an intermediary in exchange for reduced administrative costs.

b. Administrative Costs (§ 423.308)

In the May 16, 2008 proposed rule, we proposed adding a definition for the term “administrative costs” in order to clarify what costs we consider “administrative” as well as to provide additional transparency to Part D plan pricing. We proposed to define “administrative costs” as the Part D sponsor's costs other than those costs incurred to purchase or reimburse the purchase of Part D drugs under the Part D plan. Any costs incurred by Part D plans on drug claims that differ from the price charged by a dispensing entity for covered Part D drugs would be included in the definition of “administrative costs.” We received several comments on this proposed definition. However, most of the comments received (including those opposed to the proposed definition) and our responses to them are discussed in the Negotiated Prices section of this final rule, as the policies are closely related. Comments that are related solely to the proposed definition of “administrative costs” are summarized below along with our responses. While we did receive some comments in opposition to the proposed definition (see below), several of the comments received were in support of the proposed definition. For the reasons discussed in the preamble to the proposed rule and in our responses to comments, we continue to believe that in order to ensure a level playing field for all Part D plan sponsors, the administrative costs reported by Part D plan must include any risk premium that is paid to an intermediary contracting organization. Therefore, we are implementing the new definition of “administrative costs” as proposed, to be effective for Part D contract year 2010.

Comment:

We received several comments in support of adding the proposed definition for the term “administrative costs”. One commenter agreed with our assertion that the proposed definition would create transparency and reduce beneficiary cost sharing. Another commenter expressed support for including the difference between the lock-in price and the price paid to the pharmacy in administrative costs, provided that CMS allowed Part D sponsors to continue using the lock-in pricing approach when contracting with a PBM.

Response:

We agree that the proposed definition of “administrative costs” would increase transparency and reduce beneficiary cost sharing by requiring Part D plan sponsors to report the difference between the lock-in price paid to the PBM and the price paid to the dispensing pharmacy as an “administrative cost.” Thus, beneficiary cost sharing and reinsurance and risk sharing payments by the Federal government under the Medicare Part D program will be computed based solely upon actual drug costs. As we stated in the discussion of “Negotiated Prices” above and in the proposed rule, Part D sponsors may continue to use the lock-in pricing approach when contracting with a PBM provided that the price paid to the pharmacy or other dispensing provider is used to develop the Part D bid, determine beneficiary cost sharing, and report drug costs to CMS. We appreciate the support received for this clarification.

Comment:

One commenter expressed concern that certain aspects of the proposed definition of “administrative costs” are ambiguous and overly broad. Specifically, the commenter asked that we define the term “drug costs” in the regulations and clarify whether dispensing fees would constitute “administrative costs” under the proposed definition. The commenter also requested clarification regarding whether there are any other categories of Part D costs, other than “drug costs” and “administrative costs”.

Response:

“Drug costs” consist of the ingredient cost, dispensing fee, and sales tax paid to a pharmacy or other dispensing provider for a prescription drug. We do not believe that it is necessary to include a definition for the term “drug costs” in the regulation at this time, as the definitions of “gross covered prescription drug costs” and “allowable risk corridor costs” already provide sufficient context for this term. Since dispensing fees are already considered drug costs under these definitions, such amounts are not considered “administrative costs”. Any cost incurred by a Part D sponsor under the Medicare Part D program which does not represent “gross covered prescription drug cost” incurred by the sponsor to purchase or reimburse the purchase of Part D drugs is considered an “administrative cost”. Therefore, there is currently no additional category of Part D costs.

Comment:

One commenter expressed concern that the proposed definition could lead Part D sponsors to reduce their administrative costs and Medication Therapy Management (MTM). The commenter stated that the proposed definition would shift the “PBM spread” (the difference between the lock-in price and the price received by the pharmacy) from drug cost to administrative cost. This change would potentially increase the Part D bids for sponsors who utilize the lock-in pricing approach. The commenter stated that Part D sponsors may elect to reduce their MTM services in order to keep their Part D premiums competitive. The commenter asked that we remind Part D sponsors of MTM program requirements.

Response:

We appreciate the concerns expressed by the commenter. The proposed definition may increase Part D bids for sponsors who utilize the lock-in pricing approach by shifting the “PBM spread” from drug cost to administrative cost. However, these potential increases may be offset partially by reductions in Part D sponsors' costs due to sponsors negotiating lower drug prices and administrative costs as a result of increased transparency. Furthermore, the proposed change is necessary in order to ensure that these administrative costs are not included in sponsors' allowable reinsurance and risk corridor costs as required by sections 1860D-15(b)(3) and 1860D-15(e)(1) of the Act. We note that the proposed definition does not change the MTM program requirements in any way. Part D sponsors must continue to comply with the MTM program requirements.

Comment:

A commenter indicated that the proposed definition of “administrative costs” inappropriately includes the PBM spread as an administrative cost. The commenter asserted that the cost to purchase drugs (versus paying for a service) is a drug cost, regardless of from whom the drug is purchased. Generally, the commenter stated, the profit retained by the seller is not considered an administrative cost but rather a part of the drug cost. The commenter explained that regardless of whether PBMs actually take title to prescription drugs, they incur many of the risks of ownership of these drugs. Their role in the supply chain cannot be considered merely “administrative” in nature. The commenter indicated that the profit retained by the PBM should be considered a drug cost, just as the profit retained by pharmacies and wholesalers is considered a part of the Part D sponsor's drug cost.

Response:

We disagree. The PBM spread represents an amount paid by Part D sponsors to PBMs as a service fee for negotiating prices on behalf of the Part D sponsor or providing other administrative services, and thus represents an administrative cost and not a drug cost paid to a seller.

c. Gross Covered Prescription Drug Costs and Allowable Risk Corridor Costs (§ 423.308)

We proposed revising the definitions of “gross covered prescription drug costs” and “allowable risk corridor costs” to establish that the amount received by the dispensing pharmacy or other dispensing provider (whether directly or through an intermediate contracting organization) and not the amount paid by the Part D sponsor to the PBM, is the basis for determining the drug costs that must be reported to CMS. This change will ensure that all administrative costs incurred by Part D sponsors, including the “risk premium” paid to PBMs to mitigate market risk around the cost of drugs, are excluded from the drug costs used to determine reinsurance and risk sharing payments. In addition, we proposed revising the definition of “gross covered prescription drug costs” to clarify that when a beneficiary is responsible for 100 percent of the cost for a covered Part D drug (as in any applicable deductible or coverage gap of a basic plan), and the beneficiary obtains that covered Part D drug at a network pharmacy for a price below the plan's negotiated price, the beneficiary's out-of-pocket costs that are considered “incurred costs” for covered Part D drugs count toward both TrOOP and total drug spend.

We received several comments in support of the proposed changes to the definitions of “gross covered prescription drug costs” and “allowable risk corridor costs.” In addition, we received some comments which opposed the proposed changes. Most of the comments received also included comments on our related proposal regarding the definition of “negotiated prices”, and, as a result, these comments and our responses to them are discussed in the Negotiated Prices section of this final rule. Comments that relate solely to the definitions of “gross covered prescription drug costs” and “allowable risk corridor costs” are summarized below along with our responses. Based on our review of all of the comments received on this issue, we are implementing the changes to the definitions of “gross covered prescription drug costs” and “allowable risk corridor costs” as they appeared in the May 2008 proposed rule to be effective for Part D contract year 2010.

Comment:

We received several comments in support of the proposed changes to the definitions of “gross covered prescription drug costs” and “allowable risk corridor costs.” These commenters indicated that the revised definitions along with the revised definition of “negotiated prices” would increase transparency and decrease beneficiary cost sharing.

Response:

We appreciate the comments received in support of the proposed changes. We agree that the proposed changes to the definitions of “gross covered prescription drug costs” and “allowable risk corridor costs” would increase transparency by ensuring that CMS and Part D sponsors are aware of actual Part D drug costs. In addition, Part D sponsors would be made aware of the administrative fees which they pay to their PBMs as part of the “risk premium”.

Comment:

Two commenters recommended that CMS take additional actions to improve transparency and ensure that the appropriate drug costs are reported to CMS. Specifically, one commenter suggested that CMS require Part D sponsors to identify hidden fees which are taken back from pharmacies by PBMs during check cycle payments, such as transaction fees and pharmacy network fees. Another commenter expressed continued concern that the proposed changes may require Part D sponsors that utilize the lock-in pricing approach to depend on information traditionally held exclusively by PBMs. This commenter urged CMS to work with Part D sponsors to ensure compliance from PBMs. One commenter recommended that CMS sample

pharmacy payments and compare them to the prices reported by PBMs on the PDE records to ensure that PBMs are accurately reporting the pass-through price paid to the pharmacy and not the lock-in price.

Response:

We will consider what further changes may be necessary to address concerns regarding transparency in the Medicare Prescription Drug Benefit. In addition, we will continue to provide information regarding the appropriate amounts to include in the reporting of drug costs and direct and indirect remuneration (DIR) in subregulatory guidance, such as the Medicare Part D DIR Reporting Requirements for Payment Reconciliation, and the Prescription Drug Event Data Training Participant's Guide. We currently conduct audits of plans' PDE data to ensure that drug costs are accurately reported to us. In the future, these audits will help us to identify discrepancies between the amount paid to the pharmacy and the drug costs reported on the PDE records. We will determine the appropriate corrective actions or penalties for Part D sponsors in cases where inaccurate or incorrect data have been provided. As indicated in the proposed rule, however, we contract with Part D sponsors, not with sponsors' first tier, downstream and related entity(ies), for the provision of the Medicare prescription drug benefit. Under § 423.505(i)(4)(ii), a Part D sponsor is required to include in its contract with downstream contractors and related entities a provision that either revokes the delegation of a Part D reporting responsibility or specifies other remedies if either CMS or the Part D sponsor determines that the downstream contractor or related entity has not performed satisfactorily. CMS may seek revocation of a delegation of the reporting responsibility or any other remedy provided for in the contract between the Part D sponsor and the PBM for non-compliance with delegated reporting responsibilities.

Nevertheless, the Part D sponsor has ultimate responsibility for compliance with the terms of its contract with us, including reporting accurate Part D data. While we will continue to work with Part D sponsors to ensure that the data submitted to us is accurate, we reiterate that Part D sponsors that choose to contract with a PBM or any other third party administrator must take steps necessary to ensure that the data submitted to us on their behalf is accurate and timely.

In the May 16, 2008 proposed rule (73 FR 28571), we also noted that § 423.308 includes a definition of the term “target amount.” Due to a technical formatting error, this definition appears to be the second paragraph of the definition of “gross covered prescription drug costs.” To clarify that the definition of “target amount” is not a component of the definition of “gross covered prescription drug costs”, but is a separate definition of a different term, we proposed to revise the current discussion of “target amount” and to provide an amendatory instruction to add the definition in § 423.308. We also proposed to make technical edits to this definition to ensure that the structure of the definition is similar to that of other definitions in this section. We proposed no substantive changes to the definition.

We received no comments on the proposed technical edits to the definition of “target amount.” Therefore, we are finalizing the technical edits to this definition as proposed.

5. Subpart R: Payments to Sponsors of Retiree Prescription Drug Programs (Definitions, § 423.882)

We proposed to make the following additions and revisions to regulations at § 423.882 governing the retiree drug subsidy (RDS) program in order to be consistent with the corresponding existing and proposed Part D definitions under § 423.100 and § 423.308. The proposed definitions under § 423.882 included codification of some of our existing guidance for the RDS program.

a. Actually Paid

We proposed to add this definition to the RDS regulations in order to mirror the proposed revised Part D definition under § 423.308, with the exception of technical changes and clarifications to reflect its application to the RDS program. Specifically, we proposed to define actually paid to mean that the costs must be actually incurred by the qualified retiree prescription dru

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