FR Doc 05-11775

[Federal Register: June 17, 2005 (Volume 70, Number 116)]
[Proposed Rules]
[Page 35204-35220]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jn05-14]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare and Medicaid Services

42 CFR Parts 400 and 421

[CMS-6030-P2]
RIN 0938-AN72

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

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would establish the Medicare Integrity
Program (MIP) and implement program integrity activities that are
funded from the Federal Hospital Insurance Trust Fund. This proposed
rule would set forth the definition of eligible entities; services to
be procured; competitive requirements based on Federal acquisition
regulations and exceptions (guidelines for automatic renewal);
procedures for identification, evaluation, and resolution of conflicts
of interest; and limitations on contractor liability.
This proposed rule would bring certain sections of the Medicare
regulations concerning fiscal intermediaries and carriers into
conformity with the Social Security Act (the Act). The rule would
distinguish between those functions that the statute requires to be
included in agreements with fiscal intermediaries and those that may be
included in the agreements. It would also provide that some or all of
the functions may be included in carrier contracts. Currently all these
functions are mandatory for carrier contracts.

DATES: To be assured consideration, comments must be received at one of
the addresses provided below, no later than 5 p.m. e.d.t on August 16,
2005.

ADDRESSES: In commenting, please refer to file code CMS-6030-P2.
Because of staff and resource limitations, we cannot accept comments by
facsimile (FAX) transmission.
You may submit comments in one of three ways (no duplicates,
please):
1. Electronically. You may submit electronic comments to http://www.cms.hhs.gov/regulations/ecomments
, (attachments should be in

Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft
Word).
2. By mail. You may mail written comments (one original and two
copies) to the following address ONLY: Centers for Medicare & Medicaid
Services,

[[Page 35205]]

Department of Health and Human Services, Attention: CMS-6030-P2, P.O.
Box 8014, Baltimore, MD 21244-8014.
Please allow sufficient time for mailed comments to be received
before the close of the comment period.
3. By hand or courier. If you prefer, you may deliver (by hand or
courier) your written comments (one original and two copies) before the
close of the comment period to one of the following addresses. If you
intend to deliver your comments to the Baltimore address, please call
telephone number 1-800-743-3951 in advance to schedule your arrival
with one of our staff members.
Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue,
SW., Washington, DC 20201; or 7500 Security Boulevard, Baltimore, MD
21244-1850.
(Because access to the interior of the 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.)
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: Brenda Thew, (410) 786-4889.

SUPPLEMENTARY INFORMATION:
Submitting Comments: We welcome comments from the public on all
issues set forth in this rule to assist us in fully considering issues
and developing policies. Comments will be most useful if they are
organized by the section of the proposed rule to which they apply. You
can assist us by referencing the file code [CMS-6030-P2] and the
specific ``issue identifier'' that precedes the section on which you
choose to comment.
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. After the close of the
comment period, CMS posts all electronic comments received before the
close of the comment period on its public website. Comments received
timely will be 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

[If you choose to comment on issues in this section, please include the
caption ``Background'' at the beginning of your comments.]

A. Current Medicare Contracting Environment

Since the inception of the Medicare program, the Medicare
contracting authorities have been in place and largely unchanged until
the last few years. At the inception of the Medicare program, the
health insurance and medical communities raised concerns that the
enactment of Medicare could result in a large Federal presence in the
provision of health care. In response, under sections 1816(a) and
1842(a) of the Social Security Act (the Act), the Congress provided
that public agencies or private organizations may participate in the
administration of the Medicare program under agreements or contracts
entered into with CMS.
These Medicare contractors are known as fiscal intermediaries
(section 1816(a) of the Act) and carriers (section 1842(a) of the Act).
With certain exceptions, fiscal intermediaries perform bill processing
and benefit payment functions for Part A of the program (Hospital
Insurance) and carriers perform claims processing and benefit payment
functions for Part B of the program (Supplementary Medical Insurance).
(For the following discussion, the terms ``provider'' and
``supplier'' are used as those terms are defined in Sec. 400.202. That
is, a provider is a hospital, rural care primary hospital, skilled
nursing facility (SNF), home health agency (HHA), a hospice that has in
effect an agreement to participate in Medicare, or a clinic, a
rehabilitation agency, or a public health agency that has a similar
agreement to furnish outpatient physical therapy or speech pathology
services. Supplier is defined as a physician or other practitioner or
an entity other than a ``provider,'' that furnishes health care
services under Medicare.)
Section 1842(a) of the Act authorizes us to contract with private
entities (carriers) for the purpose of administering the Medicare Part
B program. Medicare carriers determine payment amounts and make
payments for services (including items) furnished by physicians and
other suppliers such as nonphysician practitioners (NPP), laboratories,
and durable medical equipment (DME) suppliers. In addition, carriers
perform other functions required for the efficient and effective
administration of the Part B program. Section 1842(f) of the Act
provides that a carrier must be a ``voluntary association, corporation,
partnership, or other nongovernmental organization which is lawfully
engaged in providing, paying for, or reimbursing the cost of, health
services under group insurance policies or contracts, medical or
hospital service agreements, membership or subscription contracts, or
similar group arrangements, in consideration of premiums or other
periodic charges payable to the carrier, including a health benefits
plan duly sponsored or underwritten by an employee organization.'' No
entity may be considered for a carrier contract unless it can
demonstrate that it meets this definition of carrier.
Section 1842(b) of the Act provides us with the discretion to enter
into carrier contracts without regard to any provision of the statute
requiring competitive bidding. Many other provisions of generally
applicable Federal contract law and regulations, as well as the
Department of Health and Human Services (HHS) procurement regulations,
remain in effect for carrier contracts.
Section 1816(a) of the Act authorizes us to enter into agreements
with public agencies or private organizations (fiscal intermediaries)
for the purpose of administering Part A of the Medicare program. These
entities are responsible for determining the amount of payment due to
providers in consideration of services provided to beneficiaries, and
for making these payments. We may enter into an agreement with an
entity to serve as a fiscal intermediary if the entity was first
``nominated'' by a group or association of providers to make Medicare
payments to it. Effective October 1, 2005, section 911 of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (MMA)
(Pub. L. 108-173) eliminates the requirement that fiscal intermediaries
be nominated, and establishes the requirement that Medicare contracts
awarded to Medicare Administrative Contractors (MACs) be competitively
bid.
Section 421.100 requires that the agreement between us and a fiscal
intermediary specify the functions the fiscal intermediary must
perform. In addition to requiring any items

[[Page 35206]]

specified by us in the agreement that are unique to that fiscal
intermediary, our regulations require that all fiscal intermediaries
perform activities relating to determining and making payments for
covered Medicare services, fiscal management, provider audits,
utilization patterns, resolution of cost report disputes, and
reconsideration of determinations. Finally, our regulations require
that all fiscal intermediaries furnish information and reports, perform
certain functions for provider-based HHAs and provider-based hospices,
and comply with all applicable laws and regulations and with any other
terms and conditions included in their agreements.
Similarly, Sec. 421.200 requires that the contract between CMS and
a Part B carrier specify the functions the carrier must perform. In
addition to requiring any items specified by CMS in the contract that
are unique to that carrier, we require that all Part B carriers perform
activities relating to determining and making payments (on a cost or
charge basis) for covered Medicare services, fiscal management,
provider audits, utilization patterns, and Part B beneficiary hearings.
In addition, Sec. 421.200 requires that all carriers furnish
information and reports, maintain and make available records, and
comply with any other terms and conditions included in their contracts.
It is within this context that Medicare fiscal intermediary and carrier
contracts are significantly different from standard Federal Government
contracts.
Specifically, the Medicare fiscal intermediary and carrier
contracts are normally renewed automatically from year to year, in
contrast to the typical Government contract that is recompeted at the
conclusion of the contract term. The Congress, in providing for the
nomination process under section 1816 of the Act, and authorizing the
automatic renewal of the carrier contracts in section 1842(b)(5) of the
Act, contemplated a contracting process that would permit us to
noncompetitively renew the Medicare contracts from year to year.
For both fiscal intermediaries and carriers, Sec. 421.5 states
that we have the authority not to renew a Part A agreement or a Part B
contract when it expires. Section 421.126 provides for termination of
the fiscal intermediary agreements in certain circumstances, and,
similarly, Sec. 421.205 provides for termination of carrier contracts.
Each year, the Congress appropriates funds to support Medicare
contractor activities. These funds are distributed to the contractors
based on annual budget and performance negotiations, which allocate
funds by program activity to each of the current Medicare contractors.
Historically, approximately one-half of the funds were for payment for
the processing of claims; an additional one-quarter of the funds were
for program integrity activities to fund activities such as conducting
medical review of claims to determine whether services are medically
necessary and constitute an appropriate level of care, deterring and
detecting potential Medicare fraud, auditing provider cost reports, and
ensuring that Medicare acts as a secondary payer when a beneficiary has
primary coverage through other insurance. The remainder of the funds
was allocated for beneficiary and provider or supplier services and for
various productivity investments.

B. Discussion About Medicare Administrative Contractors (MACs)

The MMA was enacted on December 8, 2003. Section 911 of the MMA
adds new section 1874A to the Act, establishing the Medicare Fee-for-
Service (FFS) Contracting Reform (MCR) initiative that will be
implemented over the next several years. Under this provision,
effective October 1, 2005, we have the authority to replace the current
Medicare fiscal intermediary and carrier contracts with new MACs using
competitive procedures.
Between 2005 and 2011, we will conduct full and open competitions
to replace the current contracts with MACs. These MACs will handle many
of the same basic functions that are now performed by fiscal
intermediaries and carriers. Additionally, MACs may be charged with
performing functions under the Medicare Integrity Program under section
1893 of the Act. The statute does not preclude the current fiscal
intermediaries and carriers from competing for the MAC contracts.
Among other provisions, section 1874A of the Act establishes
eligibility requirements for the MACs, describes the functions these
new contractors may perform (which may include functions of section
1893 of the Act so long as these responsibilities do not duplicate
activities that are being carried out under a Medicare Integrity
Program contract), and specifies various requirements for the
structure, terms and conditions of these new MAC contracts. In
particular, section 1874A of the Act specifies that the Federal
Acquisition Regulation (FAR) will apply to the MAC contracts, except to
the extent inconsistent with a specific requirement of section 1874A of
the Act. Unlike the contracting authority of section 1893 of the Act,
the new authority of section 1874A of the Act does not mandate that the
Secretary publish either a proposed or final regulation prior to
entering into MAC contracts. Instead, the Congress when enacting the
authority of section 1874A of the Act, placed a clear reliance on the
existing well-defined regulatory framework of the FAR.
We considered whether we should propose regulations for the MAC
authority in conjunction with this proposed rule to implement the
authority of section 1893 of the Act. Since we are still analyzing
whether any of the specific requirements of section 1874A of the Act
need elaboration in the regulations, we are not prepared to do so at
this time. As section 1874A of the Act places reliance on the FAR for
MAC contracts and since section 1874A of the Act does not impose any
requirement to issue additional rules in order to initiate procurements
under the MAC authority, we do not believe such rules are required to
initiate the implementation of section 1874A of the Act. We will,
however, continue to analyze issues posed by the new contracting
authority and the transition to that framework, and will propose rules
for the authority of new section 1874A of the Act if and when we
identify issues that need to be addressed through rulemaking.
However, because the history and structure of the Medicare program
dictate that claims processing, customer service, and program integrity
functions are highly interdependent, and since sections 1816, 1842,
1893 and 1874A of the Act are part of the same legislative development
relating to Medicare administration, we will from time-to-time discuss
the section 1874A of the Act authority and its potential impact on
fiscal intermediaries, carriers, and the MIP contractors in this
preamble. Further, this proposed rule was modified from our earlier
proposal on this topic to make clear that section 1874A of the Act
authorizes MAC contractors to perform functions of section 1893 of the
Act. We also make clear that we may impose certain MIP requirements
(for example, those proposed for Sec. 421.302(a)) on the MACs when we
elect to include functions of section 1893 of the Act in their
contracts. Finally, it is our intention that the proposed rule changes
at Sec. 421.100 and Sec. 421.200 discussed below would remain in
effect only until all the Medicare fiscal intermediary and carrier
contracts are replaced by MAC contracts in accordance with the MMA.
The MMA establishes a phase-in process for the transition of the
current contractors to MACs. We are currently in the process of
developing the Statement of Work (SOW) and

[[Page 35207]]

performance requirements for MACs, and further regulatory and
administrative guidance will be published as these details are
developed. More information about our plans to implement Medicare
contracting reform, including our Report to the Congress on this
subject, can be obtained by accessing the Internet at http://www.cms.hhs.gov/medicarereform/contractingreform/
.

C. The Medicare Integrity Program

The Health Insurance Portability and Accountability Act of 1996
(HIPAA) (Pub. L. 104-191) was enacted on August 21, 1996. Section 202
of HIPAA added new section 1893 to the Act establishing the Medicare
Integrity Program (MIP). This program is funded from the Medicare
Hospital Insurance Trust Fund for program integrity activities.
Specifically, section 1893 of the Act expands our contracting authority
to allow us to contract with eligible entities to perform Medicare
program integrity activities. These activities include: Medical,
potential fraud, and utilization review; cost report audits; Medicare
secondary payer determinations; overpayment recovery; education of
providers, suppliers, beneficiaries, and other persons regarding
payment integrity and benefit quality assurance issues; and, developing
and updating a list of DME items that, under section 1834(a)(15) of the
Act, are subject to prior authorization.
Section 1893(d) of the Act requires us to set forth, through
regulations, procedures for entering into contracts for the performance
of specific Medicare program integrity activities. These procedures are
to include the following:
Procedures for identifying, evaluating, and resolving
organizational conflicts of interest that are consistent with rules
generally applicable to Federal acquisition and procurement.
Competitive procedures for entering into new contracts
under section 1893 of the Act and for entering into contracts that may
result in the elimination of responsibilities of an individual fiscal
intermediary or carrier, and other procedures we deem appropriate.
A process for renewing contracts entered into under
section 1893 of the Act.
Section 1893(d) of the Act also specifies the process for
contracting with eligible entities to perform program integrity
activities. In addition, section 1893(e) of the Act requires us to set
forth, through regulations, the limitation of a contractor's liability
for actions taken to carry out a contract.
The Congress established section 1893 of the Act to strengthen our
ability to deter potential fraud and abuse in the Medicare program in a
number of ways. First, it provides a separate and stable long-term
funding mechanism for MIP activities. Historically, Medicare contractor
budgets were subject to wide fluctuations in funding levels from year
to year. The variations in funding did not have anything to do with the
underlying requirements for program integrity activities. This
instability made it difficult for us to invest in innovative strategies
to control potential fraud and abuse. Our contractors also found it
difficult to attract, train, and retain qualified professional staff,
including auditors and fraud investigators. A dependable funding source
allows us the flexibility to invest in innovative strategies to combat
potential fraud and abuse. The funding mechanism will help us shift
emphasis from post-payment recoveries on potentially fraudulent claims
to prepayment strategies designed to ensure that more claims are paid
correctly the first time.
Second, to allow us to more aggressively carry out the MIP
functions and to require us to use procedures and technologies that
exceed those generally in use in 1996, section 1893 of the Act greatly
expands our contracting authority relative to the contracting authority
of original sections 1816 and 1842 of the Act. Previously, we had a
limited pool of entities with whom to contract. This limited our
ability to maximize efforts to effectively carry out the MIP functions.
Section 1893 of the Act allows us to attract a variety of offerors with
potentially new and different skill sets and permits those offerors to
propose innovative approaches to implement MIP to deter potential fraud
and abuse. By using competitive procedures, as established in the FAR
and supplemented by the Department of Health and Human Services
Acquisition Regulation (HHSAR), our ability to manage the MIP
activities is greatly enhanced, and we can seek to obtain the best
value for our contracted services.
Third, section 1893 of the Act requires us to address potential
conflicts of interest among prospective MIP contractors before entering
into any contracting arrangements with them. Section 1893 of the Act
instructs the Secretary to establish procedures for identifying,
evaluating, and resolving organizational conflicts of interest that are
generally applicable to FAR contracts.

D. Experience With MIP Contractors

The MIP authority, established by HIPAA, gave CMS specific
contracting authority, consistent with the FAR, to enter into contracts
with entities to promote the integrity of the Medicare program.
On March 20, 1998, we issued a proposed rule to implement
provisions of section 1893 of the Act to which we received comments (63
FR 13590). We reviewed and considered all the comments received
concerning the MIP regulation. Comments received addressed a variety of
issues, such as conflict of interest issues, coordination among
Medicare contractors, contractor functions, and eligibility
requirements. Overall, we found that few changes were needed to the
regulatory text. Due to time constraints, however, a final rule was
never published. Notwithstanding, section 1893 of the Act granted us
the authority to contract with eligible entities to perform program
integrity activities prior to publication of the final rule.
Section 902 of the MMA mandated that final rules relating to the
Medicare program based on a previous publication of a proposed
regulation or an interim final regulation be published within three
years except under exceptional circumstances. Given that it has been
greater than three years since the publication of the initial proposed
MIP regulations, we are reissuing these regulations in proposed form at
this time.
The publication of the 1998 proposed rule (63 FR 13590) enabled us
to contract with entities to perform Medicare program integrity
functions to promote the integrity of the Medicare program prior to the
publication of a final rule.
Since the publication of the 1998 proposed rule and in accordance
with this MIP authority, we currently maintain the following MIP
contracts: 12 Indefinite Delivery-Indefinite Quantity (IDIQ) contracts
for the Program Safeguard Contractor (PSC) effort; one Coordination of
Benefits (COB) contract, and 8 IDIQ contracts for the Medicare Managed
Care (MMC) Program Integrity Contractors effort. (IDIQ contracts are
explained in detail in FAR 48 CFR subpart 16.5.) After being awarded an
IDIQ contract, organizations can competitively bid on task orders
released by CMS to specifically address program integrity issues within
the scope of the IDIQ contract. These MIP contractors are discussed
below.

[[Page 35208]]

1. Program Safeguard Contractors (PSCs)
Since 1999, we have awarded more than 40 individual task orders
under the PSC IDIQ contract, including 17 Benefit Integrity (BI) Model
PSCs. These BI PSCs are tasked with performing fraud and abuse
detection and prevention activities for their respective jurisdictions.
Specific activities include fraud case development, local and national
data analysis to identify potentially fraudulent billing schemes or
patterns, law enforcement support, medical review for a BI purpose, and
identification and development of appropriate administrative actions.
Four of the 17 BI PSCs have additional medical review functions. The
remaining task orders issued under the PSC IDIQ contract have focused
on specific program vulnerabilities and problem areas (for example,
Comprehensive Error Rate Testing (CERT), Correct Coding Initiative
(CCI), and Data Assessment & Verification (DAVe)). More information on
PSCs can be accessed on the Internet at http://www.cms.hhs.gov/PROVIDERS/PSC/pscwebp2.asp
.

Overall, we have seen success in the implementation of the PSC
program. Since 2002, 12 of the 17 BI Model PSCs were awarded and
transitioned. Typically, a 3 to 6 month period was allowed for the PSCs
to transition the BI workload from the Fiscal Intermediary and Carrier
that had previously been performing this workload.
2. Coordination of Benefits Contractor (COB)
In November 1999, we awarded one COB contract to consolidate
activities that support the collection, management, and reporting of
other health insurance coverage for Medicare beneficiaries. The
purposes of the COB program are to identify the health benefits
available to a Medicare beneficiary and to coordinate the payment
process to prevent mistaken payment of Medicare benefits. In January
2001, the COB contractor assumed all Medicare Secondary Payer (MSP)
claims investigations. Implementing this single-source development
approach greatly reduced the amount of duplicate MSP investigations. It
also offered a centralized, one-stop customer service approach for all
MSP-related inquiries, including those seeking general MSP information,
except for those related to specific claims or recoveries that serve to
protect the Medicare Trust Funds.
3. Medicare Managed Care Program Integrity Contractors (MMC-PICs)
MMC-PICs supplement our regional office integrity responsibilities
related to Medicare Advantage (MA), formerly known as Medicare+Choice
(M+C). Similar to the PSC, MMC-PIC was designed specifically to
identify, stop, and prevent fraud, waste, and abuse.
Services performed under MMC-PIC include--
Complete monthly analysis of plan discrepancies and report
to MA Organizations;
Review and analyze State regulatory practices;
Evaluate marketing operations;
Audit financial and medical records including claims,
payments, and benefit packages;
Evaluate enrollment and encounter data;
Collect information and review matters that may contain
evidence of fraud, waste, and abuse and make referrals to the
appropriate government authority;
Compliance testing of internal controls of Health Care
Prepayment Plan (HCPP) contracting organizations;
Complete all Retroactive Payment Adjustments and
Retroactive Enrollments or Disenrollments submitted by MA
Organizations;
Complete final reconciliation of payment for non-renewals
of MA contracts; and,
Make reconsideration determinations with plans that
request decisions regarding payments.

II. Provisions of the Proposed Rule

[If you choose to comment on issues in this section, please include the
caption ``Provisions of the Proposed Rule'' at the beginning of your
comments.]
This regulation is part of our overall contracting strategy, which
is designed to build on the strengths of the marketplace. We are
committed to conducting procurements using full and open competition
that will provide opportunities for a wide range of contractors to
participate in the program. We will continue to encourage new and
innovative approaches in the marketplace to protect the Medicare Trust
Funds.
As discussed earlier in the background section, the implementation
of section 1874A of the Act is also a major element of our contracting
strategy. We are not including extensive rules relating to that
authority in this proposal, for the reasons discussed earlier, but
interested parties can gain information about our plans for
implementing section 1874A of the Act by accessing the Internet at
http://www.cms.hhs.gov/medicarereform/contractingreform. In addition,

the public can also send us informal questions about the Medicare
administrative contractor (MAC) implementation through this site; any
official comments on this proposed rule should be submitted in
accordance with the instructions contained in the ``Addresses'' section
of this preamble.

A. The Medicare Integrity Program

1. Basis, Scope, and Applicability
In accordance with section 1893 of the Act, this proposed rule
would amend part 421 by adding a new subpart D entitled, ``Medicare
Integrity Program Contractors.'' This subpart will:
Define the types of entities eligible to become MIP
contractors. We also clarify that, in accordance with section 1874A of
the Act, a MAC may perform MIP functions under certain conditions;
Identify program integrity functions a MIP contractor may
perform;
Describe procedures for awarding and renewing contracts;
Establish procedures for identifying, evaluating, and
resolving organizational conflicts of interest consistent with the FAR;
Prescribe responsibilities; and,
Set forth limitations on MIP contractor liability.
Subpart D will apply to entities that seek to compete for, or
receive award of, a contract under section 1893 of the Act including
entities that perform functions under this subpart emanating from the
processing of claims for individuals entitled to benefits as qualified
railroad retirement beneficiaries. We would set forth the basis, scope,
and applicability of subpart D in Sec. 421.300.
2. Definition of Eligible Entities (Sec. 421.302)
In accordance with section 1893(c) of the Act, proposed Sec.
421.302(a) would provide that an entity is eligible to enter into a MIP
contract if it:
Demonstrates the capability to perform MIP contractor
functions;
Agrees to cooperate with the Office of Inspector General
(OIG), the Department of Justice (DOJ), and other law enforcement
agencies in the investigation and deterrence of potential fraud and
abuse in the Medicare program, including making referrals;
Complies with the conflict of interest standards in 48 CFR
Chapters 1 and 3 and is not excluded under the conflict of interest
provisions established by this rule;
Maintains an appropriate written code of conduct and
compliance

[[Page 35209]]

policies that include, without limitation, an enforced policy on
employee conflicts of interest;
Meets financial and business integrity requirements to
reflect adequate solvency and satisfactory legal history; and,
Meets other requirements that we may impose.
Also, in accordance with the undesignated paragraph following
section 1893(c)(4) of the Act, we would specify that Medicare carriers
are deemed to be eligible to perform the activity of developing and
periodically updating a list of DME items that are subject to prior
authorization.
It is not possible to identify in this rule each and every possible
contractor eligibility requirement that may appear in a future
solicitation. In order to permit us maximum flexibility to tailor our
contractor eligibility requirements to specific solicitations while
satisfying the intent of section 1893 of the Act, any contractor
eligibility requirements in addition to those specified in proposed
Sec. 421.302(a)(1) through (a)(4) will be contained in the applicable
solicitation.
At Sec. 421.302(b)(1), we propose to make clear that a MAC under
section 1874A of the Act may perform any or all of the MIP functions as
are listed and described in Sec. 421.304. However, in performing such
functions, the MAC may not duplicate work being performed under a MIP
contract. We believe this proposed provision is consistent with
sections 1874A(a)(4)(G) and 1874A(a)(5) of the Act, as added by the
MMA.
At Sec. 421.302(b)(2), we also make clear our discretion to
require a MAC performing any of the MIP functions under Sec. 421.304
to abide by the eligibility requirements applicable to MIP contracts,
that is, the four elements listed at Sec. 421.302(a). The first
requirement at Sec. 421.302(a) relating to demonstrated capability and
the third requirement relating to addressing conflicts of interest are
consistent with provisions in the authorizing statute for MAC contracts
(section 1874A(a)(2)of the Act). While the second requirement, which
pertains to cooperation with the OIG and other forms of law
enforcement, is not reiterated in section 1874A of the Act, we believe
this requirement is not inconsistent with section 1874A of the Act or
the FAR. This requirement is, in fact, compatible with our general
practices, multiple statutes and regulations governing HHS operations
and contracts, and finally also with provisions within title XI of the
Act. Once again, the fourth requirement makes clear our authority to
impose additional reasonable requirements through contract and it makes
sense to apply this element to MAC contractors. Our specific approach
to all these issues, of course, will be made clear in any solicitation
for MAC contracts.
Note that, in accordance with section 1893(d) of the Act, we may
continue to contract, for the performance of MIP activities, with
fiscal intermediaries and carriers that had a contract with us on
August 21, 1996 (the effective date of enactment of Pub. L. 104-191).
However, in accordance with sections 1816(l) or 1842(c)(6) of the Act
(both added by Pub. L. 104-191), and section 1874A(a)(5)(A) of the Act
(added by the MMA), these contractors as well as MACs may not duplicate
activities under a fiscal intermediary agreement or carrier contract
and a MIP contract, with one excepted activity. The exception permits a
carrier or a MAC to develop and update a list of items of DME that are
subject to prior authorization both under the MIP contract and its
contract under section 1842 of the Act. This discretion to continue the
performance of MIP activities through the fiscal intermediary and
carrier contracts until they are phased out in accordance to section
911(d) of the MMA, is provided for in proposed changes to Sec. 421.100
and Sec. 421.200 discussed later in this preamble.
3. Definition of MIP Contractor (Sec. 400.202)
We propose to define ``Medicare integrity program contractor,'' at
Sec. 400.202 (Definitions specific to Medicare), as an entity that has
a contract with us under section 1893 of the Act to perform exclusively
one or more of the program integrity activities specified in that
section. The inclusion of the word ``exclusively'' in this definition
is intended to conform with section 1874A(a)(5)(B) of the Act as added
by the MMA.
4. Services to be Procured (Sec. 421.304)
A MIP contractor may perform some or all of the MIP activities
listed in Sec. 421.304. Section 421.304 would state that the contract
between CMS and a MIP contractor specifies the functions the contractor
performs. In accordance with section 1893(b) of the Act, proposed Sec.
421.304 identifies the following as MIP activities.
(a) Medical, utilization, and potential fraud review. Medical and
utilization review includes the processes necessary to ensure both the
appropriate utilization of services and that services meet the
professionally recognized standards of care. These processes include
review of claims, medical records, and medical necessity documentation
and analysis of patterns of utilization to identify inappropriate
utilization of services. This would include reviewing the activities of
providers or suppliers and other individuals and entities (including
health maintenance organizations, competitive medical plans, health
care prepayment plans, and MA plans). This function results in the
identification of overpayments, prepayment denials, recommendations for
changes in national coverage policy, changes in local coverage
determinations (LCD) policies and payment screens, referrals for
potential fraud and abuse, and the identification of the education
needs of beneficiaries, providers, and suppliers.
Potential fraud review includes fraud prevention initiatives,
responding to external customer complaints of alleged fraud, the
development of strategies to detect potentially fraudulent activities
that may result in improper Medicare payment, and the identification
and development of potential fraud cases for referral to law
enforcement. Each solicitation will specify when cases should be
referred to the OIG or other law enforcement agency. In general,
however, identified overpayments, recurring acts of improper billing,
and substantiated allegations of potentially fraudulent activity will
be promptly referred to a Regional OIG.
(b) Cost report audits. Providers and managed care plans receiving
Medicare payments are subject to audits for all payments applicable to
services furnished to beneficiaries. The audit ensures that proper
payments are made for covered services, provides verified financial
information for making a final determination of allowable costs,
identifies potential instances of fraud and abuse, and ensures the
completion of special projects. This functional area includes the
receipt, processing, and recommended settlement terms for cost reports
based on reasonable costs, prospective payment, or any other basis, and
the establishment or adjustment of the interim payment rate using cost
report or other information.
(c) Medicare secondary payer activities. The Medicare secondary
payer function is a process developed as a payment safeguard to protect
the Medicare program against making mistaken primary payments. The
focus of this process is to ensure that the Medicare program pays only
to the extent required by statute. Entities under a MIP contract that
includes Medicare secondary payer functions would be responsible for
identifying Medicare secondary payer situations and pursuing recovery
of mistaken

[[Page 35210]]

payments from the appropriate entity or individual, depending on the
specifics of the contract. This functional area includes the processes
performed to identify beneficiaries for whom there is coverage which is
primary to Medicare. Through these processes, information may be
acquired for subsequent use in beneficiary claims adjudication,
recovery, and litigation.
(d) Education. This functional area includes educating
beneficiaries, providers, suppliers, and other individuals regarding
payment integrity and benefit quality assurance issues.
(e) Developing prior authorization lists. This functional area
includes developing and periodically updating a list of DME items that,
in accordance with section 1834(a)(15) of the Act, are subject to prior
authorization. Prior authorization is a determination that an item of
DME is covered prior to when the equipment is delivered to the Medicare
beneficiary. Section 1834(a)(15) of the Act requires prior
authorization to be performed on the following items of DME:
Items identified as subject to unnecessary utilization;
Items supplied by suppliers that have had a substantial
number of claims denied under section 1862(a)(1) of the Act as not
reasonable or necessary or for whom a pattern of overutilization has
been identified; or
A customized item if the beneficiary or supplier has
requested an advance determination.
We note that the MIP functions are not limited to services
furnished under fee-for-service payment methodologies. MIP functions
apply to all types of claims. They also apply to all types of payment
systems including, but not limited to, managed care and demonstration
projects. MIP functions will also apply to payments made under the
Medicare Part D prescription drug benefit that will be implemented on
January 1, 2006.
5. Competitive Requirements (Sec. 421.306)
We would specify, in Sec. 421.306(a), that MIP contracts will be
awarded in accordance with 48 CFR chapters 1 and 3, 42 CFR part 421
subpart D, and all other applicable laws and regulations. Furthermore,
in accordance with section 1893(d)(2) of the Act, we would specify that
the procedures set forth in these authorities will be used: (a) When
entering into new contracts; (b) when entering into contracts that may
result in the elimination of responsibilities of an individual fiscal
intermediary or carrier; and (c) at any other time we consider
appropriate.
In proposed Sec. 421.306(b), we will establish an exception to
competition that allows a successor in interest to a fiscal
intermediary agreement or carrier contract to be awarded a contract for
MIP functions without competition if its predecessor performed program
integrity functions under the transferred agreement or contract and the
resources, including personnel, which were involved in performing those
functions, were transferred to the successor. This provision will
remain in effect until all fiscal intermediary agreements and carrier
contracts are transitioned to MACs in accordance with section 911(d) of
the MMA.
This proposal is made in anticipation that some fiscal
intermediaries and carriers, prior to the competition of their
contracts in accordance with the MMA, may engage in transactions under
which the recognition of a successor in interest by means of a novation
agreement may be appropriate, and the resources involved in the fiscal
intermediary's or carrier's MIP activities are transferred along with
its other Medicare-related resources to the successor in interest. For
example, the fiscal intermediary or carrier may undergo a corporate
reorganization under which the corporation's Medicare business is
transferred entirely to a new subsidiary corporation. When all of a
contractor's resources or the entire portion of the resources involved
in performing a contract are transferred to a third party, we may
recognize the third party as the successor in interest to the contract
through approval of a novation agreement. (See 48 CFR 42.12.)
If the fiscal intermediary or carrier was performing program
integrity activities under its contract on August 21, 1996, the date of
the enactment of the MIP legislation, the statute permits us to
continue to contract with the fiscal intermediary or carrier for the
performance of those activities without using competitive procedures
(but only through and, no later than, September 30, 2011). In the
context of a corporate reorganization under which all of the resources
involved in performing the contract, including those involved in
performing MIP activities, are transferred to a successor in interest,
we may determine that breaking out the MIP activities and competing
them separately (prior to the MAC contract competitions) would not be
in the best interest of the Government.
Inherent in the requirement of section 1893(d) of the Act that the
Secretary establish competitive procedures to be used when entering
into contracts for MIP functions is the authority to establish
exceptions to those procedures. (See 48 CFR 6.3) Moreover, the statute
states that fiscal intermediary agreements and carrier contracts will
be noncompetitively awarded under sections 1816(a) and 1842(b)(1) of
the Act. Furthermore, those agreements and contracts have, in recent
years prior and subsequent to the enactment of the MIP legislation,
included program integrity activities, a fact that the Congress
acknowledged in section 1893(d)(2) of the Act. Creating an exception to
the use of competition for cases in which the same resources, including
the same personnel, continue to be used by a third party as successor
in interest to a fiscal intermediary agreement or carrier contract is
consistent with the Congress' authorization to forego competition when
the contracting entity was carrying out the MIP functions on the date
of enactment of the MIP legislation. Section 421.306(b) permits
continuity in the performance of the MIP functions until such time as
we determine a need to procure MIP functions on the basis of full and
open competition.
The exception to competition will operate only where a fiscal
intermediary or carrier that performed program integrity functions
under an agreement or a contract in place on August 21, 1996, transfers
its functions by means of a valid novation agreement in accordance with
the requirements of the FAR. This exception is intended to be applied
only until we are prepared to award MIP contracts on the basis of FAR
competitive procedures, or until we compete the full fiscal
intermediary and carrier workloads (both MIP and non-MIP functions) in
accordance with the MMA. The exception is not intended, and will not be
used, to circumvent the competitive process when we make competitive
awards of MIP and MAC contracts. This provision is intended to provide
us with flexibility in handling Medicare functions in the face of bona
fide changes in corporate structure that often have little, if
anything, to do with the Medicare program.
We further specify, in Sec. 421.306(c), that an entity must meet
the eligibility requirements established in proposed Sec. 421.302 to
be eligible to be awarded a MIP contract.
6. Renewal of MIP Contracts (Sec. 421.308)
Proposed Sec. 421.308(a) specifies that an initial contract term
will be defined in the MIP contract and that contracts may contain
renewal clauses. Contract renewal provides a mutual benefit to both
parties. Renewing a contract, when appropriate, results in continuity
both for us and the contractor and is in the best interest of the
Medicare program. The benefits are realized through early

[[Page 35211]]

communication of our intention whether to renew a contract, which
permits both parties to plan for any necessary changes in the event of
nonrenewal. Furthermore, as a prudent administrator of the Medicare
program, we must ensure that we have sufficient time to transfer the
MIP functions if a reassignment of the functions becomes necessary
(either because the contractor has given notice of its intent to non-
renew or because we have determined that reassignment is in the best
interest of the Medicare program). Therefore, in Sec. 421.308(a), we
would specify that we may renew a MIP contract, as we determine
appropriate, by giving the contractor notice, within timeframes
specified in the contract, of our intention to do so. (The solicitation
document that results in the contract will contain further details
regarding this provision.)
The renewal clause referred to in this section is not an ``option''
as defined in the FAR at 48 CFR 2.101. Section 1893 of the Act allows
for the renewal of MIP contracts without regard to any provision of the
law requiring competition if the contractor has met or exceeded
performance requirements. As stated in FAR 48 CFR 2.101, `` `Option'
means a unilateral right in a contract by which, for a specified time,
the Government may elect to purchase additional supplies or services
called for by the contract, or may elect to extend the term of the
contract.''
As described in the FAR, 48 CFR subpart 17.2, an option is
different than a renewal clause in several respects. The length of time
of an option is established in a contract. In contrast, the length of a
renewal period in a MIP contract may not be defined. Furthermore, an
option must be exercised during the life of the contract. A MIP renewal
clause can be invoked only after the exhaustion of the initial contract
period of performance, including any option provisions. Finally, an
option allows us to extend the term of a contract only up to 60 months,
the maximum term allowed by the FAR (excluding GSA awards). A MIP
contract renewal clause allows the term of a MIP contract to surpass
that limit, as long as the contractor meets the conditions in the
regulation and the contract (including performance standards
established in its contract) and we have a continuing need for the
supplies or services under contract.
Based on section 1893(d)(3) of the Act, we would specify, in Sec.
421.308(b), that we may renew a MIP contract without competition if the
contractor continues to meet all the requirements of proposed subpart D
of part 421, the contractor meets or exceeds the performance standards
and requirements in the contract, and it is in the best interest of the
Government.
We would provide, at Sec. 421.308(c), that, if we do not renew the
contract, the contract will end in accordance with its terms, and the
contractor does not have a right to a hearing or judicial review
regarding the non-renewal. This is consistent with our longstanding
policy for fiscal intermediary and carrier contracts.
7. Conflict of Interest Rules
This proposed rule would establish the process for identifying,
evaluating, and resolving conflicts of interest as required by section
1893(d)(1) of the Act. The process was designed to ensure that the more
diversified business arrangements of potential contractors do not
inhibit competition between providers, suppliers, or other types of
businesses related to the insurance industry, or have the potential for
harming Government interests.
When soliciting for MIP contracts, we will adhere to the
requirements of the FAR organizational conflict of interest guidance,
found at 48 CFR subpart 9.5. Given the sensitive nature of the work to
be performed under the contract, the need to preserve the public trust,
and the history of fraud and abuse in the Medicare Program, we will
maintain the rebuttable presumption that each prospective contract
involves a significant potential organizational conflict of interest.
In light of this presumption, we will apply the general rules in FAR
905.5 and such requirements as may be applicable to an individual
procurement.
Prior to awarding a MIP contract, our contracting officer will
fashion an organizational conflict of interest clause specific to the
contractor for inclusion in the contract. In general, we will not enter
into a MIP contract with an offeror or contractor that we have
determined has, or has the potential for, an unresolved organizational
conflict of interest.
In Sec. 421.310(a), we will specify that an offeror for MIP
contracts is, and MIP contractors are, subject to the conflict of
interest standards and requirements of the FAR organizational conflict
of interest guidance, found at 48 CFR subpart 9.5, and the requirements
and standards as are contained in each individual contract awarded to
perform functions found at section 1893 of the Act.
In Sec. 421.310(b), we state that we consider that a conflict of
interest has occurred if, during the term of the contract, the
contractor or its employee, agent or subcontractor has received,
solicited, or arranged to receive any fee, compensation, gift, payment
of expenses, offer of employment, or any other thing of value from any
entity that is reviewed, audited, investigated, or contacted during the
normal course of performing activities under the MIP contract. We
incorporate the definition of ``gift'' from 5 CFR 2635.203(b) of the
Standards of Ethical Conduct for Employees of the Executive Branch,
which excludes from the definition items such as greeting cards, soft
drinks, and coffee.
We also specify in Sec. 421.310(b), if we determine that the
contractor's activities are creating a conflict, then a conflict of
interest has occurred during the term of the contract. In addition, we
would specify that, if we determine that a conflict of interest exists,
among other actions, we may, as we deem appropriate:
Not renew the contract for an additional term;
Modify the contract; or
Terminate the contract for default.
We would also specify that the solicitation may require more
detailed information than identified above. Our proposed provisions do
not describe all of the information that may be required, or the level
of detail that would be required, because we wish to have the
flexibility to tailor the disclosure requirements to each specific
procurement.
We intend to reduce the reporting and recordkeeping requirements as
much as is feasible, while taking into consideration our need to have
assurance that a conflict of interest does not exist in the MIP
contractors.
Because potential offerors may have questions about whether
information submitted in response to a solicitation, including
information regarding potential conflicts of interest, may be
redisclosed under the Freedom of Information Act (FOIA), we provide the
following information.
To the extent that a proposal containing information is submitted
to us as a requirement of a competitive solicitation under 41 U.S.C.
Chapter 4, Subchapter IV, we will withhold the proposal when requested
under the FOIA. This withholding is based upon 41 U.S.C. 253b(m).
However, there is one exception to this policy. It involves any
proposal that is set forth or incorporated by reference in the contract
awarded to the proposing bidder. Such a proposal may not receive
categorical protection. Rather, we will withhold, under 5 U.S.C.
552(b)(4), information within the proposal that is required to be
submitted that constitutes

[[Page 35212]]

trade secrets or commercial or financial information that is privileged
or confidential provided the criteria established by National Parks &
Conservation Association v. Morton, 498 F.2d 765 (D.C. Cir 1974), as
applicable, are met. For any such proposal, we will follow pre-
disclosure notification procedures set forth at 45 CFR 5.65(d).
Any proposal containing the information submitted to us under an
authority other than 41 U.S.C. Chapter 4, Subchapter IV, and any
information submitted independent of a proposal will be evaluated
solely on the criteria established by National Parks & Conservation
Association v. Morton and other appropriate authorities to determine if
the proposal in whole or in part contains trade secrets or commercial
or financial information that is privileged or confidential and
protected from disclosure under 5 U.S.C. 552(b)(4). Again, for any such
proposal, we will follow pre-disclosure notification procedures set
forth at 45 CFR 5.65(d) and will also invoke 5 U.S.C. 552(b)(6) to
protect information that is of a highly sensitive personal nature. It
should be noted that the protection of proposals under FOIA does not
preclude CMS from releasing contractor proposals when necessitated by
law, such as in the case of a lawful subpoena.
We already protect information we receive in the contracting
process. However, to allay any fears potential offerors might have
about disclosure, at Sec. 421.312(d) we propose to provide, that we
protect disclosed proprietary information as allowed under the FOIA and
that we require signed statements from our personnel with access to
proprietary information that prohibit personal use during the
procurement process and term of the contract.
In proposed Sec. 421.312, we describe how conflicts of interest
are resolved. We specify that we may establish a Conflicts of Interest
Review Board to assist the contracting officer in resolving conflicts
of interest and we determine when or if the Board is convened. We would
define resolution of an organizational conflict of interest as a
determination that:
The conflict has been mitigated;
The conflict precludes award of a contract to the offeror;
The conflict requires that we modify an existing contract;
The conflict requires that we terminate an existing
contract for default; or,
It is in the best interest of the Government to contract
with the offeror or contractor even though the conflict exists.
The following are examples of methods an offeror or contractor may
use to mitigate organizational conflicts of interest, including those
created as a result of the financial relationships of individuals
within the organization. These examples are not intended to be an
exhaustive list of all the possible methods to mitigate conflicts of
interest nor are we obligated to approve a mitigation method that uses
one or more of these examples. (An offeror's or contractor's method of
mitigating conflicts of interest would be evaluated on a case-by-case
basis.)
Divestiture of, or reduction in the amount of, the
financial relationship the organization has in another organization to
a level acceptable to us and appropriate for the situation.
If shared responsibilities create the conflict, a plan,
subject to our approval, to separate lines of business and management
or critical staff from work on the MIP contract.
If the conflict exists because of the amount of financial
dependence upon the Federal Government, negotiating a phasing out of
other contracts or grants that continue in effect at the start of the
MIP contract.
If the conflict exists because of the financial
relationships of individuals within the organization, divestiture of
the relationships by the individual involved.
If the conflict exists because of an individual's indirect
interest, divestiture of the interest to levels acceptable to us or
removal of the individual from the work under the MIP contract.
In the procurement process, we determine which proposals are in a
``competitive range.'' The competitive range is based on cost or price
and other factors that are stated in the solicitation and includes the
most highly rated proposals that have a reasonable chance for contract
award unless the range is further reduced for purposes of efficiency in
accordance with FAR 15.306. Using the process proposed in this
regulation, offerors will not be excluded from the competitive range
based solely on conflicts of interest. If we determine that an offeror
in the competitive range has a conflict of interest that is not
adequately mitigated, we would inform the offeror of the deficiency and
give it an opportunity to submit a revised mitigation plan. At any time
during the procurement process, we may convene the Conflict of Interest
Review Board to evaluate and assist the contracting officer in
resolving conflicts of interest.
By providing a better process for the identification, evaluation,
and resolution of conflicts of interest, we not only protect Government
interests but help ensure that contractors will not hinder competition
in their service areas by misusing their position as a MIP contractor.
8. Limitation on MIP Contractor Liability and Payment of Legal Expenses
Contractors which perform activities under the MIP contract will be
reviewing activities of providers and suppliers that provide services
to Medicare beneficiaries. Their contracts will authorize them to
evaluate the performance of providers, suppliers, individuals, and
other entities that may subsequently challenge their decisions. To
reduce or eliminate a MIP contractor's exposure to possible legal
action from those it reviews, section 1893(e) of the Act requires that
we, by regulation, limit a MIP contractor's liability for actions taken
in carrying out its contract. We must establish, to the extent we find
appropriate, standards and other substantive and procedural provisions
that are the same as, or comparable to, those contained in section 1157
of the Act.
Section 1157 of the Act limits liability and provides for the
payment of legal expenses of a Quality Improvement Organization (QIO)
(formerly Peer Review Organization (PRO)) that contracts to carry out
functions under section 1154(e) of the Act. Specifically, section 1157
of the Act provides that QIOs, their employees, fiduciaries, and anyone
who furnishes professional services to a QIO, are protected from civil
and criminal liability in performing their duties under the Act or
their contract, provided these duties are performed with due care.
Following the mandate of section 1893(e) of the Act, this proposed
rule, at Sec. 421.316(a), would protect MIP contractors from liability
in the performance of their contracts provided they carry out their
contractual duties with care.
In accordance with section 1893(e) of the Act, we propose to employ
the same standards for the payment of legal expenses as are contained
in section 1157(d) of the Act. Therefore, Sec. 421.316(b) will provide
that we will make payment to MIP contractors, their members, employees,
and anyone who provides them legal counsel or services for expenses
incurred in the defense of any legal action related to the performance
of a MIP contract. We propose that the payment be limited to the
reasonable amount of expenses incurred, as determined by us, provided
funds are available and that the payment is otherwise allowable under
the terms of the contract.

[[Page 35213]]

In drafting Sec. 421.316(a), we considered employing a standard
for the limitation of liability other than the due care standard. For
example, we considered whether it would be appropriate to provide that
a contractor would not be criminally or civilly liable by reason of the
performance of any duty, function, or activity under its contract
provided the contractor was not grossly negligent in that performance.
However, section 1893(e) of the Act requires that we employ the same or
comparable standards and provisions as are contained in section 1157 of
the Act. We do not believe that it would be appropriate to expand the
scope of immunity to a standard of gross negligence, as it would not be
a comparable standard to that set forth in section 1157(b) of the Act.
We also considered indemnifying MIP contractors employing
provisions similar to those contained in the current Medicare fiscal
intermediary agreements and carrier contracts. Generally, fiscal
intermediaries and carriers are indemnified for any liability arising
from the performance of contract functions provided the fiscal
intermediary's or carrier's conduct was not grossly negligent,
fraudulent, or criminal. However, we may indemnify a MIP contractor
only to the extent we have specific statutory authority to do so.
Section 1893(e) of the Act does not provide that authority. Note
however, that section 1874A of the Act as added by the MMA would
provide us with some discretion to indemnify MAC contractors. In
addition, proposed Sec. 421.316(a) provides for immunity from
liability in connection with the performance of a MIP contract provided
the contractor exercised due care. Indemnification is not necessary
since the MIP contractors will have immunity from liability under Sec.
421.316(a).

B. Intermediary and Carrier Functions

Section 1816(a) of the Act, which provides that providers may
nominate a fiscal intermediary, requires only that nominated fiscal
intermediaries perform the functions of determining payment amounts and
making payment, and section 1842(a) of the Act requires only that
carriers perform some or all of the functions cited in that section.
Section 911 of the MMA eliminates the requirement that fiscal
intermediaries be nominated, and effective October 1, 2005, establishes
the requirement that Medicare contracts awarded to MACs be
competitively bid by September 30, 2011.
Our existing requirements at Sec. 421.100 and Sec. 421.200
concerning functions to be included in fiscal intermediary agreements
and carrier contracts far exceed those of the statute. Therefore, on
February 22, 1994, we published a proposed rule (59 FR 8446) that would
distinguish between those functions that the statute requires be
included in agreements with fiscal intermediaries and those functions,
which although not required to be performed by fiscal intermediaries,
may be included in fiscal intermediary agreements at our discretion. We
also proposed that any functions included in carrier contracts would be
included at our discretion. In addition, we proposed to add payment on
a fee schedule basis as a new function that may be performed by
carriers.
The February 1994 proposed rule was never finalized, but its
content was re-proposed in our initial 1998 proposed rule for the MIP
program (63 FR 13590). This second proposed rule sets forth a new
proposal to bring those sections of the regulations that concern the
functions Medicare fiscal intermediaries and carriers perform into
conformity with the provisions of sections 1816(a), 1842(a), and
1893(b) of the Act, for so long as the fiscal intermediary and carrier
contracts exist until they are all replaced by MAC contracts.
As noted in section I.A. of this preamble, our current regulations
at Sec. 421.100 specify a list of functions that must, at a minimum,
be included in all fiscal intermediary agreements. Similarly, Sec.
421.200 specifies a list of functions that must, at a minimum, be
included in all carrier contracts. These requirements far exceed those
of the statute.
Until October 1, 2005, section 1816(a) of the Act, in its present
form, requires only that a fiscal intermediary agreement provide for
determination of the amount of payments to be made to providers and for
the making of the payments. Pending the effective date of changes made
by the MMA, section 1816(a) permits, but does not require, a fiscal
intermediary agreement to include provisions for the fiscal
intermediary to provide consultative services to providers to enable
them to establish and maintain fiscal records or to otherwise qualify
as providers. It also provides that, for those providers to which the
fiscal intermediary makes payments, the fiscal intermediary may serve
as a channel of communications between us and the providers, may make
audits of the records of the providers, and may perform other functions
as are necessary.
Section 1816(a) of the Act, in its present form until October 1,
2005, mandates only that a fiscal intermediary make payment
determinations and make payments and, because of the nomination
provision of section 1816(a) of the Act, these functions must remain
with fiscal intermediaries. We believe that, pending the effective date
of changes made by the MMA, section 1816(a) of the Act does not require
that the other functions set forth at Sec. 421.100(c) through (i) be
included in all fiscal intermediary agreements. Furthermore, section
1893 of the Act permits the performance of functions related to
Medicare program integrity by other entities. Thus, Sec. 421.100 would
be revised to be consistent with section 1893 of the Act and the
implementing regulation. The mandatory inclusion of all functions in
all agreements limits our ability to efficiently and effectively
administer the Medicare program. For example, if an otherwise competent
fiscal intermediary performs a single function poorly, it would be
efficient and effective to have that function transferred to another
contractor that could carry it out in a satisfactory manner. The
alternative is to not renew or to terminate the agreement of that
fiscal intermediary and to transfer all functions to a new contractor,
which may not have had an ongoing relationship with the local provider
community.
Therefore, we will revise Sec. 421.100 to state that an agreement
between CMS and a fiscal intermediary specifies the functions to be
performed by the fiscal intermediary and that these must include
determining the amount of payments to be made to providers for covered
services furnished to Medicare beneficiaries and making the payments
and may include any or all of the following functions:
Any or all of the MIP functions identified in proposed
Sec. 421.304, provided that they are continuing to be performed under
an agreement entered into under section 1816 of the Act that was in
effect on August 21, 1996, and they do not duplicate work being
performed under a MIP contract.
Undertaking to adjust overpayments and underpayments and
to recover overpayments when it is determined that an overpayment has
been made.
Furnishing to us timely information and reports that we
request in order to carry out our responsibilities in the
administration of the Medicare program.
Establishing and maintaining procedures that we approve
for the review and reconsideration of payment determinations.
Maintaining records and making available to us the records
necessary for verification of payments and with other related purposes.

[[Page 35214]]

Upon inquiry, assisting individuals with matters
pertaining to a fiscal intermediary contract.
Serving as a channel of communication to and from us of
information, instructions, and other material as necessary for the
effective and efficient performance of a fiscal intermediary contract.
Undertaking other functions as mutually agreed to by us
and the fiscal intermediary.
In Sec. 421.100(c), we specify that, for the responsibility for
services to a provider-based HHA or a provider-based hospice, when
different fiscal intermediaries serve the HHA or hospice and its parent
provider under Sec. 421.117, the designated regional fiscal
intermediary determines the amount of payment and makes payments to the
HHA or hospice. The fiscal intermediary or MIP contractor serving the
parent provider performs fiscal functions, including audits and
settlement of the Medicare cost reports and the HHA and hospice
supplement worksheets.
Pending the effective date of changes made by the MMA, section
1842(a) of the Act, which pertains to carrier contracts, requires that
the contracts provide for some or all of the functions listed in that
paragraph, but does not specify any functions that must be included in
a carrier contract. As in the case of fiscal intermediary agreements,
our experience has been that mandatory inclusion of a long list of
functions in all contracts restricts our ability to administer the
carrier contracts with optimum efficiency and effectiveness. We believe
that the requirements of the regulations for both fiscal intermediaries
and carriers should be brought into conformity with the statutory
requirements. Therefore, we would revise existing Sec. 421.200,
``Carrier functions,'' to make it consistent with section 1893 of the
Act and the implementing regulations. We state that a contract between
CMS and a carrier specifies the functions to be performed by the
carrier, which may include the following:
Any or all of the MIP functions described in Sec. 421.304
if the following conditions are met: (1) The carrier is continuing
those functions under a contract entered into under section 1842 of the
Act that was in effect on August 21, 1996; and (2) they do not
duplicate work being performed under a MIP contract, except that the
function related to developing and maintaining a list of DME may be
performed under both a carrier contract and a MIP contract.
Receiving, disbursing, and accounting for funds in making
payments for services furnished to eligible individuals within the
jurisdiction of the carrier.
Determining the amount of payment for services furnished
to an eligible individual.
Undertaking to adjust incorrect payments and recover
overpayments when it has been determined that an overpayment has been
made.
Furnishing to us timely information and reports that we
request in order to carry out our responsibilities in the
administration of the Medicare program.
Maintaining records and making available to us the records
necessary for verification of payments and for other related purposes.
Establishing and maintaining procedures under which an
individual enrolled under Part B will be granted an opportunity for a
fair hearing.
Upon inquiry, assisting individuals with matters
pertaining to a carrier contract.
Serving as a channel of communication to and from us of
information, instructions, and other material as necessary for the
effective and efficient performance of a carrier contract.
Undertaking other functions as mutually agreed to by us
and the carrier.

C. Technical and Editorial Changes

Because we propose to add a new subpart D to part 421 that would
apply to MIP contractors, and because we may eventually propose
regulations pertaining to MAC contracts, we propose to change the title
of part 421 from ``Intermediaries and Carriers'' to ``Medicare
Contracting.'' We also propose to revise Sec. 421.1, which sets forth
the basis, scope, and applicability of part 421. We would revise this
section to add section 1893 of the Act to the list of provisions upon
which the part is based. We would also make editorial and other changes
(such as reorganizing the contents of the section and providing
headings) that improve the readability of the section without affecting
its substance.
In addition, numerous sections of our regulations specifically
refer to an action being taken by a fiscal intermediary or a carrier.
If the action being described may now be performed by a MIP contractor
that is not a fiscal intermediary or a carrier, we would revise those
sections to indicate that this is the case. For example, Sec. 424.11,
which sets forth the responsibilities of a provider, specifies, in
paragraph (a)(2), that the provider must keep certification and
recertification statements on file for verification by the fiscal
intermediary. A MIP contractor now may also perform the verification.
Therefore, we will revise Sec. 424.11(a)(2) to specify that the
provider must keep certification and recertification statements on file
for verification by the fiscal intermediary or MIP contractor. Because
our regulations are continuously being revised and sections
redesignated, we have not identified all sections that will have
technical changes in this proposed rule, but we may do so in the final
rule. If we determine that substantive changes to our regulations are
necessary, we will make those changes through separate rulemaking.

III. Response to Comments

Because of the large number of items of correspondence we normally
receive on Federal Register documents published for comment, we are not
able to acknowledge or respond to them individually. We will consider
all comments we receive by the date and time specified in the DATES
section of this preamble, and, if we proceed with a subsequent
document, we will respond to the comments in the preamble to that
document.

IV. Collection of Information Requirements

This document does not impose new information collection and
recordkeeping requirements subject to the Paperwork Reduction Act of
1995 (PRA). Consequently, it need not be reviewed by the Office of
Management and Budget under the authority of the PRA of 1995.

V. Regulatory Impact Statement

A. Introduction

[If you chose to comment on issues in this section, please include the
caption ``Regulatory Impact Statement'' at the beginning of your
comments.]
We have examined the impacts of this proposed rule as required by
Executive Order 12866 and the Regulatory Flexibility Act (RFA) (Pub. L.
96-354). Executive Order 12866 directs agencies to assess all costs and
benefits of available regulatory alternatives and, when regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). The RFA requires agencies
to analyze options for regulatory relief of small businesses. For
purposes of the RFA, small entities include small businesses, non-
profit organizations, and governmental agencies. Most hospitals and
most other providers and suppliers are small entities, either by
nonprofit status or by having revenues of $5 million or less annually.
Fiscal

[[Page 35215]]

intermediaries and carriers are not considered to be small entities.
Section 1102(b) of the Act requires us to prepare a regulatory
impact analysis for any proposed rule that may have a significant
impact on the operations of a substantial number of small rural
hospitals. This analysis must conform to the provisions of section 603
of the RFA. For purposes of section 1102(b) of the Act, we define a
small rural hospital as a hospital that is located outside a
Metropolitan Statistical Area and has fewer than 50 beds.

B. Summary of the Proposed Rule

This rule implements section 1893 of the Act, which encourages
proactive measures to combat waste, fraud, and abuse, and to protect
the integrity of the Medicare program. On March 20, 1998, we issued a
proposed rule to implement provisions of section 1893 of the Act (63 FR
13590). Section 1893 of the Act grants us the authority to contract
with eligible entities to perform program integrity activities prior to
a final rule being published. Since the publication of the 1998
proposed rule, this authority has allowed us to enter into contracts,
consistent with FAR, with new specialty contractors to promote the
integrity of the Medicare program, despite a final rule never being
published.
Section 902 of the MMA mandates that final rules based on a
previous publication of a proposed regulation or an interim final
regulation must be published within three years except under
exceptional circumstances. Given that it has been greater than three
years since the publication of the initial proposed Medicare Integrity
Program regulations, we are publishing this new proposed rule in order
to maintain our authority to enter into contracts with contractors to
promote the integrity of the Medicare program. However, our experience
in contracting with entities to perform MIP functions allows us to
discuss some of the successes we have had with MIP.
The objective of this proposed regulation is to maintain our
authority to contract with entities to perform program integrity
functions, and to provide a procurement procedure to supplement the
requirements of the FAR and specifically address contracts to perform
MIP functions identified in the law.
According to the previously published proposed rule and mirrored in
this current proposed rule, the following functions, as specified
below, may be performed under MIP contracts:
Review of provider activities such as medical review,
utilization review, and potential fraud review.
Audit of cost reports.
Medicare secondary payer review and payment recovery.
Provider and beneficiary education on payment integrity
and benefit quality assurance issues.
Developing and updating lists of DME items that are to be
subject to prior approval provisions.

C. Discussion of Impact

Our MIP experience since 1999 suggests that this rule will continue
to have a positive impact on the Medicare program, Medicare
beneficiaries, providers, suppliers, and entities that have not
previously contracted with us. Existing MIP contractors that seek
renewal of MIP contracts should not expect any additional costs in
complying with the requirements set forth in the rule, as these
requirements are similar yet more streamlined than those set forth in
the 1998 proposed rule and are currently applied by MIP contractors. To
the extent that small entities could be affected by the rule, and
because the rule raises certain policy issues for conflict of interest
standards, we provide an impact analysis for those entities that we
believe will be most heavily affected by the rule.
We believe that this rule will have an impact, although not a
significant one, in five general areas: (1) The Medicare program and
Health Insurance Trust Fund; (2) Medicare beneficiaries and taxpayers;
(3) current fiscal intermediaries and carriers; (4) entities that have
not previously contracted with us; and (5) Medicare providers and
suppliers.
1. The Medicare Program and Health Insurance Trust Fund
HIPAA provides for a direct apportionment from the Health Insurance
Trust Fund for program integrity activities to thwart improper billing
practices. Appropriations totaled $700 million for 2002, and $720
million for FY 2003 and all subsequent years.
A separate and dependable long-term funding source for MIP allows
us the flexibility to invest in innovative strategies to combat the
fraud and abuse drain of the Medicare Trust Funds. By shifting emphasis
from post-payment recoveries on incorrectly paid claims to pre-payment
strategies, most claims will be paid correctly the first time.
Improper billing and health care fraud are difficult to quantify
because of their hidden nature. However, estimates suggest that the
percentage of improper Medicare fee for service payments as compared to
total fee for service payments have declined since the implementation
of MIP contractors:

------------------------------------------------------------------------
Improper Percentage Total FFS
payment of FFS payments
Year (in total (in
billions) (percent) billions)
------------------------------------------------------------------------
1998............................. $12.6 7.1 $176.1
1999............................. 13.5 7.97 169.5
2000............................. 11.9 6.8 173.6
2001............................. 12.1 6.3 191.8
2002............................. 13.3 6.3 212.7
2003............................. 11.6 5.8 200
2004............................. 19.9 9.3 \1\ 213.5
------------------------------------------------------------------------
\1\ Since 1996, HHS has annually determined the rate of improper
payments for fee-for-service claims paid by Medicare contractors. The
survey measures claims found to be medically unnecessary, inadequately
documented, or improperly coded. From 1996 until 2002, the survey was
conducted by the OIG based on a survey of some 6,000 claims. In 2003,
CMS launched an expanded effort, reviewing approximately 128,000
Medicare claims to learn more precisely where errors are being made.
The 2003 figures used in the above table reflect the adjusted error
rate figures. The unadjusted figures, calculated using CMS' expanded
effort, were $19.6 billion for improper payment and an error rate of
9.8. The numbers reported for 2004 are unadjusted and reflect CMS''
findings since employing its expanded effort.

We should note that the positive error rate trend also relates to
other initiatives including fiscal intermediary and carrier education
efforts, partnering with the American Medical Association (AMA), and
anti-fraud and abuse efforts such as Operation Restore Trust.
In 2004, we announced new steps to measure error rates in Medicare
payments more accurately and comprehensively at the contractor level,

[[Page 35216]]

and to further reduce improper payments through targeted error
improvement initiatives. Under the new measurement process for the
Medicare error rate, the net national rate for fiscal year 2004 was 9.3
percent. This error rate is not comparable to the rates determined by
the previous method used by CMS. We hope to reduce the error rate by
more than half to 4.7 percent in four years, by building on recent
reforms in payment oversight and new authorities in the Medicare law.
In addition to economic advantages, MIP funding and contracting
improvements will allow us to better serve Medicare beneficiaries in a
qualitative way. MIP gives us a tool to better administer the Medicare
program and accomplish our mission of providing access to quality
health care for Medicare beneficiaries. We will continue to use
competitive procedures to contract separately for the performance of
integrity functions. In general, economic theory postulates that
competition results in a better price for the consumer which, in this
instance, is CMS on behalf of Medicare beneficiaries and taxpayers.
Competition should also encourage the use of innovative techniques to
perform integrity functions that will, in turn, result in more
efficient and effective safeguards for the Trust Funds.
2. Medicare Beneficiaries and Taxpayers
MIP contracts have had, and we expect will continue to have, an
overall positive effect on Medicare beneficiaries and taxpayers.
Beneficiaries pay deductibles and Part B Medicare premiums. Taxpayers,
including those who are not yet eligible for Medicare, contribute part
of their earnings to the Part A Trust Fund. Taxpayers and beneficiaries
contribute indirectly to the Part B Trust Fund because it is funded, in
part, from general tax revenues. Consistent performance of program
integrity activities will ensure that less money is wasted on
inappropriate treatment or unnecessary services. As evidence, MIP funds
have contributed to a reduction in the total percentage of improper
payments made for fee-for-service (FFS) claims paid in 2003 to 5.8 \2\
percent of all FFS claims, down from 7.1 percent of FFS claims in
1998.\3\ As a result, current and future beneficiaries will obtain more
value for every Medicare dollar spent.
---------------------------------------------------------------------------

\2\ This 2003 figure reflects the adjusted error rate figures.
The unadjusted figures, calculated using CMS' expanded effort, were
$19.6 billion for improper payment and an error rate of 9.8%. See
note 1 for more detail.
\3\ From 1996 until 2002, the HHS OIG used a sample size of
about 6,000 claims to conduct the process used to measure Medicare
payment error rates. The measured error rate declined from 13.8
percent in 1996 to 6.3 percent in 2002. In fiscal year 2003, and as
part of the agency's enhanced efforts to improve payment accuracy,
CMS began calculating the Medicare FFS error rate and estimate of
improper claim payments using a new methodology approved by the OIG.
Under the new measurement process for the Medicare error rate, the
net national rate for fiscal year 2004 was 9.3 percent.
---------------------------------------------------------------------------

3. Current Fiscal Intermediaries and Carriers
Although fiscal intermediaries and carriers are not considered
small entities for purposes of the RFA, and effective October 1, 2005,
we have the authority to replace the current Medicare fiscal
intermediary and carrier contracts with new MAC contracts, we are
providing the following analysis.
There are currently 25 Medicare fiscal intermediaries and 18
Medicare carriers plus 4 DME regional contractors which are also
carriers. Presently, all these contractors perform general program
integrity activities addressed in this proposed rule apart from, but
not duplicative of, MIP contractors. In FY 2004, approximately 29
percent of the total contractor budget was dedicated to program
integrity.
Current fiscal intermediaries and carriers are not prohibited from
entering into MIP contracts when we compete contracts for section 1893
of the Act activities. Medical directors continue to play an important
role in medical review activities, and locally-based medical directors
improve our relationship with local physicians by using groups like
Carrier Advisory Committees. Locally-based fraud investigators and
auditors are being used as necessary. Upon the publication of this
proposed regulation, we anticipate that review policies will continue
to be coordinated across contractors to ensure consistency, while local
practice will continue to be incorporated where appropriate.
This rule may have had a negative impact on current fiscal
intermediaries and carriers in some respects. Many current fiscal
intermediaries and carriers may have lost a portion of their Medicare
business since 1998 as fraud review functions were transferred to MIP
contractors. These contractors may have some additional functions
transferred to MIP contractors in the next few years. Nevertheless, the
effects of section 911 of the MMA will be more significant on the
current fiscal intermediary and carrier.
However, current contractors have benefited from the MIP program
and will benefit from this proposed rule. Under the provisions of this
proposal, they are eligible to compete for MIP contracts as long as
they comply with all conflict of interest and other requirements.
(Current contractors may not receive payment for performing the same
program integrity activities under both a MIP contract and their
existing contract.) We considered proposing rules that identified
specific conflict of interest situations that would prohibit the award
of a MIP contract. We also considered prohibiting a MIP contractor
whose contract was completed but not renewed or terminated from
competing for another MIP contract for a certain period. Instead, the
proposed rule would establish a process for evaluating, on a case-by-
case basis at the time of contracting, situations that may constitute
conflicts of interest in accordance with the FAR, subpart 9.5. It
permits current contractors to position themselves to be eligible for a
MIP contract by mitigating any conflicts of interest they may have in
order to compete. The economic impact on fiscal intermediaries and
carriers is lessened by the proposed approach when compared to the
alternatives we considered.
The current contractors that are awarded MIP contracts, or that
continue to perform MIP functions under their fiscal intermediary or
carrier contracts, will also benefit from more consistent funding
provided by the law for program integrity activities. This more stable,
long-term funding mechanism enables Medicare contractors to attract,
train, and retain qualified professional staff to assist these
contractors to fulfill their program integrity functions.
There will be an economic impact on current contractors that
propose to perform MIP contracts using subcontractors. A MIP contractor
would apply to its subcontractors the same conflict of interest
standard to which it must adhere. It is impossible to assess the
precise economic impact of this portion of the proposed rule because a
MIP contractor is free to contract with any subcontractor. A MIP
contractor may seek out subcontractors that are conflict free, which
would reduce or eliminate the time expended monitoring conflict of
interest situations. However, our requirements rely heavily on FAR
subpart 9.5, which normally apply to both prime contractors and
subcontractors. Thus, we do not believe this provision imposes any
additional negative burden on current fiscal intermediaries or
carriers.
4. New Contracting Entities
Entities that have not previously performed Medicare program
integrity activities will experience a positive

[[Page 35217]]

effect from this rule. Integrity functions such as audit, medical
review, and potential fraud investigation may be consolidated in a MIP
contract to allow suspect claims to be identified and investigated from
all angles. Contractors may subcontract for these specific integrity
functions, thus creating new markets and opportunities for small, small
disadvantaged, and woman-owned businesses.
Since the publication of the 1998 proposed rule and in accordance
to this MIP authority, we have awarded 12 Indefinite Delivery-
Indefinite Quantity (IDIQ) contracts for the Program Safeguard
Contractor (PSC) effort, one Coordination of Benefits (COB) contract,
and 8 IDIQ contracts for the Medicare Managed Care Program Integrity
Contractors (MMC-PICs) effort. With the forthcoming implementation of
the Part D prescription drug benefit included in the MMA, there will be
further opportunities for new entities to compete for MIP contracts to
perform program oversight activities for this new benefit.
Use of full and open competition to award MIP contracts may
encourage innovation and the creation of new technology. Historically,
cutting edge technologies and analytical methodologies created for the
Medicare program have benefited the private insurance arena.
5. Providers and Suppliers
Because MIP contractors have been in place since 1998, we
anticipate no additional burden imposed on providers and suppliers that
are small businesses or not-for-profit organizations by the need to
deal with a new set of contractors. There are approximately 1.1 million
health care providers and suppliers (depending on how group practices
and multiple locations are counted) that bill independently. The
proposed rule does not necessarily impose any action on the part of
these providers and suppliers.
Overall, we expect that providers and suppliers will benefit
qualitatively from this proposed rule. Many providers and suppliers
perceive that their reputations are tarnished by the few dishonest
providers and suppliers that take advantage of the Medicare program.
The media often focus on the most egregious cases of Medicare fraud and
abuse, leaving the public with the perception that physicians and other
health care practitioners routinely make improper claims. This rule
would allow us to take a more effective and wider ranging approach to
identifying, stopping, and recovering from unscrupulous providers and
suppliers. As the number of dishonest providers and suppliers and
improper claims diminishes, ethical providers and suppliers will
benefit.

D. Conclusion

Since the publication of the 1998 proposed rule, we have awarded
MIP contracts to contractors in order to perform program integrity
activities and there has been a decrease in the percentage of improper
claims paid. In anticipation of our continued authority to award
contracts to entities to continue these activities, we have announced
initiatives to measure error rates in Medicare payments more accurately
and comprehensively, and to further reduce improper payments.
We conclude that our continued authority would save the Medicare
program additional money and extend the solvency of the Trust Funds as
a result of this proposed rule. The dynamic nature of fraud and abuse
is illustrated by the fact that wrongdoers continue to find ways to
evade safeguards. This supports the need for constant vigilance and
increasingly sophisticated ways to protect against ``gaming'' of the
system. We solicit public comments as well as data on the extent to
which any of the affected entities would be significantly economically
affected by this proposed rule. However, based on the above analysis,
we have determined, and certify, that this proposed rule would not have
a significant economic impact on a substantial number of small
entities. We also have determined, and certify, that this proposed rule
would not have a significant impact on the operations of a substantial
number of small rural hospitals. In accordance with the provisions of
Executive Order 12866, this proposed rule was reviewed by the Office of
Management and Budget.

List of Subjects

42 CFR Part 400

Grant programs--health, Health facilities, Health maintenance
organizations (HMO), Medicaid, Medicare, Reporting and recordkeeping
requirements.

42 CFR Part 421

Administrative practice and procedure, Health facilities, Health
professions, Medicare, Reporting and recordkeeping requirements.
For reasons set forth in the preamble in this proposed regulation,
the Centers for Medicare & Medicaid Services propose to amend 42 CFR
chapter IV as follows:

PART 400--INTRODUCTION; DEFINITIONS

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

Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh) and 44 U.S.C. Chapter 35.

2. Section 400.202 is amended by adding the following definition in
alphabetical order, to read as follows:

Sec. 400.202 Definitions specific to Medicare.

* * * * *
Medicare integrity program contractor means an entity that has a
contract with CMS under section 1893 of the Act to perform exclusively
one or more of the program integrity activities specified in that
section.
* * * * *

PART 421--MEDICARE CONTRACTING

3. The part heading is revised to read as set forth above.
4. The authority citation for part 421 continues to read as
follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).

5. Section 421.1 is revised to read as follows:

Sec. 421.1 Basis, applicability, and scope.

(a) Basis. This part is based on the provisions of the following
sections of the Act:
Section 1124--Requirements for disclosure of certain information.
Sections 1816 and 1842--Use of organizations and agencies in making
Medicare payments to providers and suppliers of services.
Section 1893--Requirements for protecting the integrity of the
Medicare program.
(b) Additional basis. Section 421.118 is also based on 42 U.S.C.
1395(b)-1(a)(1)(F), which authorizes demonstration projects involving
fiscal intermediary agreements and carrier contracts.
(c) Applicability. The provisions of this part apply to agreements
with Part A (Hospital Insurance) fiscal intermediaries, contracts with
Part B (Supplementary Medical Insurance) carriers, and contracts with
Medicare integrity program contractors that perform program integrity
functions.
(d) Scope. The scope of this part is as follows:
(1) Specifies that CMS may perform certain functions directly or by
contract.
(2) Specifies criteria and standards CMS uses in selecting fiscal
intermediaries and evaluating their performance, in assigning or
reassigning

[[Page 35218]]

a provider or providers to particular fiscal intermediaries, and in
designating regional or national fiscal intermediaries for certain
classes of providers.
(3) Provides the opportunity for a hearing for fiscal
intermediaries and carriers affected by certain adverse actions.
(4) Provides adversely affected fiscal intermediaries an
opportunity for judicial review of certain hearing decisions.
(5) Sets forth requirements related to contracts with Medicare
integrity program contractors.
6. Section 421.100 is revised to read as follows:

Sec. 421.100 Intermediary functions.

An agreement between CMS and an intermediary specifies the
functions to be performed by the intermediary.
(a) Mandatory functions. The contract must include the following
functions:
(1) Determining the amount of payments to be made to providers for
covered services furnished to Medicare beneficiaries.
(2) Making the payments.
(b) Additional functions. The contract may include any or all of
the following functions:
(1) Any or all of the program integrity functions described in
Sec. 421.304, provided the intermediary is continuing those functions
under an agreement entered into under section 1816 of the Act that was
in effect on August 21, 1996, and they do not duplicate work being
performed under a Medicare integrity program contract.
(2) Undertaking to adjust incorrect payments and recover
overpayments when it is determined that an overpayment was made.
(3) Furnishing to CMS timely information and reports that CMS
requests in order to carry out its responsibilities in the
administration of the Medicare program.
(4) Establishing and maintaining procedures as approved by CMS for
the review and reconsideration of payment determinations.
(5) Maintaining records and making available to CMS the records
necessary for verification of payments and for other related purposes.
(6) Upon inquiry, assisting individuals for matters pertaining to
an intermediary agreement.
(7) Serving as a channel of communication to and from CMS of
information, instructions, and other material as necessary for the
effective and efficient performance of an intermediary agreement.
(8) Undertaking other functions as mutually agreed to by CMS and
the intermediary.
(c) Dual intermediary responsibilities. For the responsibility for
services to a provider-based HHA or a provider-based hospice, when
different intermediaries serve the HHA or hospice and its parent
provider under Sec. 421.117, the designated regional intermediary
determines the amount of payment and makes payments to the HHA or
hospice. The intermediary or Medicare integrity program contractor
serving the parent provider performs fiscal functions, including audits
and settlement of the Medicare cost reports and the HHA and hospice
supplement worksheets.
7. Section 421.200 is revised to read as follows:

Sec. 421.200 Carrier functions.

A contract between CMS and a carrier specifies the functions to be
performed by the carrier. The contract may include any or all of the
following functions:
(a) Any or all of the program integrity functions described in
Sec. 421.304 provided the following conditions are met:
(1) The carrier is continuing those functions under a contract
entered into under section 1842 of the Act that was in effect on August
21, 1996.
(2) The functions do not duplicate work being performed under a
Medicare integrity program contract, except that the function related
to developing and maintaining a list of DME may be performed under both
a carrier contract and a Medicare integrity program contract.
(b) Receiving, disbursing, and accounting for funds in making
payments for services furnished to eligible individuals within the
jurisdiction of the carrier.
(c) Determining the amount of payment for services furnished to an
eligible individual.
(d) Undertaking to adjust incorrect payments and recover
overpayments when it is determined that an overpayment was made.
(e) Furnishing to CMS timely information and reports that CMS
requests in order to carry out its responsibilities in the
administration of the Medicare program.
(f) Maintaining records and making available to CMS the records
necessary for verification of payments and for other related purposes.
(g) Establishing and maintaining procedures under which an
individual enrolled under Part B is granted an opportunity for a fair
hearing so long as these functions are not being performed by a
Qualified Independent Contractor under section 1869 of the Act.
(h) Upon inquiry, assisting individuals with matters pertaining to
a carrier contract.
(i) Serving as a channel of communication to and from CMS of
information, instructions, and other material as necessary for the
effective and efficient performance of a carrier contract.
(j) Undertaking other functions as mutually agreed to by CMS and
the carrier.
8. A new subpart D is added to part 421 to read as follows:
Subpart D--Medicare Integrity Program Contractors
Sec.
421.300 Basis, applicability, and scope.
421.302 Eligibility requirements for Medicare integrity program
contractors.
421.304 Medicare integrity program contractor functions.
421.306 Awarding of a contract.
421.308 Renewal of a contract.
421.310 Conflict of interest requirements.
421.312 Conflict of interest resolution.
421.316 Limitation on Medicare integrity program contractor
liability.
Subpart D--Medicare Integrity Program Contractors

Sec. 421.300 Basis, applicability, and scope.

(a) Basis. This subpart implements section 1893 of the Act, which
requires CMS to protect the integrity of the Medicare program by
entering into contracts with eligible entities to carry out Medicare
integrity program functions. The provisions of this subpart are based
on section 1893 of the Act (and, where applicable, section 1874A of the
Act) and the acquisition regulations set forth at 48 CFR Chapters 1 and
3.
(b) Applicability. This subpart applies to entities that seek to
compete or receive award of a contract under section 1893 of the Act,
including entities that perform functions under this subpart emanating
from the processing of claims for individuals entitled to benefits as
qualified railroad retirement beneficiaries.
(c) Scope. The scope of this subpart follows:
(1) Defines the types of entities eligible to become Medicare
integrity program contractors.
(2) Identifies the program integrity functions a Medicare integrity
program contractor performs.
(3) Describes procedures for awarding and renewing contracts.
(4) Establishes procedures for identifying, evaluating, and
resolving organizational conflicts of interest.
(5) Prescribes responsibilities.
(6) Sets forth limitations on contractor liability.

[[Page 35219]]

Sec. 421.302 Eligibility requirements for Medicare integrity program
contractors.

(a) CMS may enter into a contract with an entity to perform the
functions described in Sec. 421.304 if the entity meets the following
conditions:
(1) Demonstrates the ability to perform the Medicare integrity
program contractor functions described in Sec. 421.304. For purposes
of developing and periodically updating a list of DME under Sec.
421.304(e), an entity is deemed to be eligible to enter into a contract
under the Medicare integrity program to perform the function if the
entity is a carrier with a contract in effect under section 1842 of the
Act.
(2) Agrees to cooperate with the OIG, the DOJ, and other law
enforcement agencies, as appropriate, including making referrals, in
the investigation and deterrence of potential fraud and abuse of the
Medicare program.
(3) Complies with conflict of interest provisions in 48 CFR
Chapters 1 and 3 and is not excluded under the conflict of interest
provision at Sec. 421.310.
(4) Maintains an appropriate written code of conduct and compliance
policies that include, without limitation, an enforced policy on
employee conflicts of interest.
(5) Meets financial and business integrity requirements to reflect
adequate solvency and satisfactory legal history.
(6) Meets other requirements that CMS establishes.
(b) A MAC as described in section 1874A of the Act may perform any
or all of the functions described in Sec. 421.304, except that the
functions may not duplicate work being performed under a Medicare
integrity program contract.
(c) If a MAC performs any or all functions described in Sec.
421.304, CMS may require the MAC to comply with any or all of the
requirements of paragraph (a) of this section as a condition of its
contract.

Sec. 421.304 Medicare integrity program contractor functions.

The contract between CMS and a Medicare integrity program
contractor specifies the functions the contractor performs. The
contract may include any or all of the following functions:
(a) Conducting medical reviews, utilization reviews, and reviews of
potential fraud related to the activities of providers of services and
other individuals and entities (including entities contracting with CMS
under parts 417 and 422 of this chapter) furnishing services for which
Medicare payment may be made either directly or indirectly.
(b) Auditing cost reports of providers of services, or other
individuals or entities (including entities contracting with CMS under
parts 417 and 422 of this chapter), as necessary to ensure proper
Medicare payment.
(c) Determining appropriate Medicare payment to be made for
services, as specified in section 1862(b) of the Act, and taking action
to recover inappropriate payments.
(d) Educating providers, suppliers, beneficiaries, and other
persons regarding payment integrity and benefit quality assurance
issues.
(e) Developing, and periodically updating, a list of items of DME
that are frequently subject to unnecessary utilization throughout the
contractor's entire service area or a portion of the area, in
accordance with section 1834(a)(15)(A) of the Act.

Sec. 421.306 Awarding of a contract.

(a) CMS awards and administers Medicare integrity program contracts
in accordance with acquisition regulations set forth at 48 CFR chapters
1 and 3, this subpart, all other applicable laws, and all applicable
regulations. These requirements for awarding Medicare integrity program
contracts are used as follows:
(1) When entering into new contracts.
(2) When entering into contracts that may result in the elimination
of responsibilities of an individual fiscal intermediary or carrier
under section 1816(l) or section 1842(c) of the Act, respectively.
(3) At any other time CMS considers appropriate.
(b) CMS may award an entity a Medicare integrity program contract
without competition if all of the following conditions apply:
(1) Through approval of a novation agreement in accordance with the
requirements of the Federal Acquisition Regulation (FAR), CMS
recognizes the entity as the successor in interest to a fiscal
intermediary agreement or carrier contract under which the fiscal
intermediary or carrier was performing activities described in section
1893(b) of the Act on August 21, 1996.
(2) The fiscal intermediary or carrier continued to perform
Medicare integrity program activities until transferring the resources
to the entity.
(c) An entity is eligible to be awarded a Medicare integrity
program contract only if it meets the eligibility requirements
established in Sec. 421.302, 48 CFR chapters 1 and 3, and other
applicable laws and regulations.

Sec. 421.308 Renewal of a contract.

(a) CMS specifies an initial contract term in the Medicare
integrity program contract. Contracts under this subpart may contain
renewal clauses. CMS may, but is not required to, renew the Medicare
integrity program contract, without regard to any provision of law
requiring competition, as it determines to be appropriate, by giving
the contractor notice, within timeframes specified in the contract, of
its intent to do so.
(b) CMS may renew a Medicare integrity program contract without
competition if all of the following conditions are met:
(1) The Medicare integrity program contractor continues to meet the
requirements established in this subpart.
(2) The Medicare integrity program contractor meets or exceeds the
performance requirements established in its current contract.
(3) It is in the best interest of the government.
(c) If CMS does not renew a contract, the contract ends in
accordance with its terms.

Sec. 421.310 Conflict of interest requirements.

(a) Offerors for MIP contracts and MIP contractors are subject to
the following:
(1) The conflict of interest standards and requirements of the
Federal Acquisition Regulation (FAR) organizational conflict of
interest guidance, found under 48 CFR subpart 9.5.
(2) The standards and requirements as are contained in each
individual contract awarded to perform section 1893 of the Act
functions.
(b) Post-award conflicts of interest. (1) CMS considers that a
conflict of interest has developed if, during the term of the contract,
if either of the following occurs:
(i) The contractor or its employee, agent, or subcontractor
receives, solicits, or arranges to receive any fee, compensation, gift
(as defined at 5 CFR 2635.203(b)), payment of expenses, offer of
employment, or any other thing of value from any entity that is
reviewed, audited, investigated, or contacted during the normal course
of performing activities under the Medicare integrity program contract.
(ii) CMS determines that the contractor's activities are creating a
conflict of interest.
(2) In the event CMS determines that a conflict of interest exists
during the term of the contract, among other actions, it may, as it
deems appropriate:
(i) Not renew the contract for an additional term.
(ii) Modify the contract.
(iii) Terminate the contract for default.

[[Page 35220]]

Sec. 421.312 Conflict of interest resolution.

(a) Review Board. CMS may establish a Conflicts of Interest Review
Board to assist the contracting officer in resolving organizational
conflicts of interest and determine when the Board is convened.
(b) Resolution. Resolution of an organizational conflict of
interest is a determination by the contracting officer that:
(1) The conflict is mitigated.
(2) The conflict precludes award of a contract to the offeror.
(3) The conflict requires that CMS modify an existing contract.
(4) The conflict requires that CMS terminate an existing contract
for default.
(5) It is in the best interest of the Government to contract with
the offeror or contractor even though the conflict exists.

Sec. 421.316 Limitation on Medicare integrity program contractor
liability.

(a) A MIP contractor, a person or an entity employed by, or having
a fiduciary relationship with, or who furnishes professional services
to a MIP contractor is not in violation of any criminal law or civilly
liable under any law of the United States or of any State (or political
subdivision thereof) by reason of the performance of any duty,
function, or activity required or authorized under this subpart or
under a valid contract entered into under this subpart, provided due
care was exercised in that performance and the contractor has a
contract with CMS under this subpart.
(b) CMS will pay a contractor, a person or an entity described in
paragraph (a) of this section, or anyone who furnishes legal counsel or
services to a contractor or person, a sum equal to the reasonable
amount of the expenses, as determined by CMS, incurred in connection
with the defense of a suit, action, or proceeding, if:
(1) The suit, action, or proceeding was brought against the
contractor, such person or entity by a third party and relates to the
contractor's, person's or entity's performance of any duty, function,
or activity under a contract entered into with CMS under this subpart;
(2) The funds are available; and
(3) The expenses are otherwise allowable under the terms of the
contract.

(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare-Hospital Insurance; and Program No. 93.774, Medicare-
Supplementary Medical Insurance Program)

Dated: March 20, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
Approved: May 20, 2005.
Michael O. Leavitt,
Secretary.
[FR Doc. 05-11775 Filed 6-10-05; 4:00 pm]

BILLING CODE 4120-01-P