[Federal Register: March 21, 2005 (Volume 70, Number 53)]
[Rules and Regulations]
[Page 13397-13400]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21mr05-17]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 400, 403, 411, 417, 423

CMS-4068-F2
RIN 0938-AN08


Medicare Program; Medicare Prescription Drug Benefit;
Interpretation

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

ACTION: Final rule; interpretation.

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SUMMARY: This final rule modifies or clarifies our interpretations in
several areas of the final rule titled ``Medicare Prescription Drug
Benefit'' published in the Federal Register on January 28, 2005. First,
it clarifies our interpretation of ``entity'', to respond to inquiries
we received subsequent to the publication of the Prescription Drug
Benefit (Part D) final rule on January 28, 2005. We were asked whether
a joint enterprise could be considered an ``entity'' under section
1860D-12(a)(1) of the Social Security Act (the Act), for purposes of
offering a prescription drug plan (PDP). Our interpretation is
discussed in the Supplementary Information section of this final rule.
    Second, also subsequent to the publication of the Prescription Drug
Benefit (Part D) final rule on January 28, 2005, we received inquiries
from parties about our discussion of the actuarial equivalence standard
and the manner in which an employee health plan sponsor could apply the
aggregate net value test in the regulatory text of the final rule. Our
interpretation is discussed in the ``Provisions'' section of this final
rule.
    In addition, subsequent to publishing the August 3, 2004 proposed
rule (69 FR 46684), we received comments on how the late enrollment
penalty would be coordinated with the late enrollment penalty for Part
B, and whether the one percent penalty would be sufficient to control
for adverse selection. We clarify in the Provisions section of this
final rule that the example given in the proposed rule, published on
August 3, 2004, did not accord with the proposed or final regulatory
language because it did not account for the fact that the base
beneficiary premium increases on an annual basis. To remedy this error
and in response to comments received on the proposed rule, we provide
an interpretation that as the base beneficiary premium increases, the
late enrollment penalty must also increase, and is in keeping with how
the Part B penalty is calculated.
    Finally, we are providing clarifying language related to
transitioning Part D enrollees from their prior drug coverage to their
new Part D plan coverage.
    The Medicare Prescription Drug Benefit final rule will take effect
on March 22, 2005. Our interpretations are deemed to be included in
that final rule.

DATES: Effective Date: These interpretations are effective on March 22,
2005.

FOR FURTHER INFORMATION CONTACT: Tracey McCutcheon, (410) 786-6715.

SUPPLEMENTARY INFORMATION:

[[Page 13398]]

I. Background and Clarification of ``Entity''

    Subsequent to the publication of the Medicare Prescription Drug
Benefit (Part D) final rule on January 28, 2005 (70 FR 4194), we have
received inquiries from parties interested in offering a prescription
drug plan (PDP) concerning what organizational requirements they must
meet in order to be eligible to offer such a plan. Several health
plans, each licensed by a State as a risk-bearing entity, have inquired
as to whether they could jointly enter into a contract with us to offer
a single PDP in a multistate region. The participating health plans
would contract with each other to create a single ``joint enterprise.''
They have asked us whether such a joint enterprise could be considered
an ``entity'' under section 1860D-12(a)(1) of the Act, for purposes of
offering a PDP.
    The statute generally requires that the ``entity'' be licensed by
the State as a risk bearing entity where it offers benefits. The health
plans seeking jointly to offer a PDP propose to meet this requirement
through the State license each participating health plan holds in the
State in which it does business. Each plan would be at risk, and fully
responsible, for each PDP enrollee in its State, or portion of a State
in which it is licensed and operating. Together, the entire region will
be covered by an insurer licensed by the State to bear risk in the
State where the enrollee lives.
    We have determined that such a joint enterprise could be treated as
a single ``entity'' for purposes of offering a PDP, as long as the
enterprise as a whole meets all applicable Medicare requirements, and
there is no substantive difference between this arrangement and a
traditional entity from a Medicare enrollee's perspective. This means
that the joint enterprise must, at a minimum: (1) Enter into a single
contract under which it was accountable, through its participants
individually or in the aggregate, for meeting all applicable Medicare
requirements, including, since a regional entity cannot continue to
operate in a service area that is less than the entire region,
providing us with a description of the contracting entity's plan in the
event that one or more parties in the joint enterprise terminates its
participation (or is terminated by another party) in the enterprise in
a contract year; (2) submit a single bid covering the entire PDP
Region, which includes a uniform benefit, uniform cost-sharing, as well
as a uniform premium, including how the joint enterprise will allocate
risk among the multiple parties in the region; (3) offer a region-wide
network of providers that is accessible to all enrollees in the plan,
regardless of where in the region they live; (4) market the plan under
a single name throughout the region; and (5) provide uniform enrollee
customer service and appeal and grievance rights throughout the region.
In addition, where the regulations specifically govern the activities
of the entity, such as the requirement for fidelity bonds for officers,
or certifications associated with receipt of payment, each State-
licensed plan comprising the joint enterprise will be required to meet
such requirements individually. We will issue operational guidance
concerning the process by which we will make payment to these joint
enterprise entities. The preamble to the Part D final rule scheduled to
take effect on March 22, 2005 is hereby deemed to include the foregoing
clarification concerning our interpretation of the word ``entity.'' We
may also issue further guidance on how individual requirements (such
as, for example, those related to termination, apportionment of
liability, and the imposition of sanctions) will apply to joint
enterprises and the plans participating in such enterprises.

Requirements for Issuance of Regulations

    Section 902 of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) amended section 1871(a) of the Act and
requires the Secretary, in consultation with the Director of the Office
of Management and Budget, to establish and publish timelines for the
publication of Medicare final regulations based on the previous
publication of a Medicare proposed or interim final regulation. Section
902 of the MMA also states that the timelines for these regulations may
vary but shall not exceed 3 years after publication of the preceding
proposed or interim final regulation except under exceptional
circumstances.
    This final rule provides, prior to the effective date of the final
regulations published on January 28, 2005, interpretations of the final
regulations. In addition, this final rule was published within the 3-
year time limit imposed by section 902 of the MMA. Therefore, we
believe that the final rule is in accordance with the Congress' intent
to ensure timely publication of final regulations.

II. Provisions of the Final Regulations

    Subsequent to the publication of the Prescription Drug Benefit
(Part D) final rule on January 28, 2005, we have received inquiries
from parties about our discussion of the actuarial equivalence
standard, as applied to a single retiree group health plan with
multiple benefit options under Sec.  423.884(d)(5)(iv) of the final
rule. Specifically, these parties have inquired as to whether an
employee health plan sponsor could apply the aggregate net value test
under that rule to a chosen subset of those benefit options that meet
the gross value test, rather than to all of them. For the reasons that
follow, while we had not considered this option when we drafted the
final rule, we find that it will be consistent with the principle of
letting the sponsor identify the benefit options to which it wants the
net value test applied. We accordingly believe that this option should
be added to the two options discussed in the preamble to the final
rule.
    Section 423.884(d)(5)(iv) of the final rule provides that for a
sponsor maintaining employment-based retiree health coverage with two
or more benefit options, a sponsor must attest that all benefit options
for which the sponsor claims the retiree subsidy separately satisfy the
gross value test, and either separately or in the aggregate satisfy the
net value test. This establishes the principle that the sponsor can
identify the benefit options for which it is potentially seeking a
subsidy. After considering the above inquiry, we believe that Sec.
423.884(d)(5)(iv) can be read to permit a sponsor to claim the retiree
subsidy for: (1) All benefit options that separately meet the gross
value test and the net value test; (2) all benefit options that
separately meet the gross value test and in the aggregate meet the net
value test; and (3) a subset of the benefit options that separately
meet the gross value test and in the aggregate meet the net value test.
For example, if a retiree group health plan consists of five benefit
options, all of which separately meet the gross value test, the plan
could claim the subsidy for: (1) Each of the benefit options that
separately meets the net value test; (2) all five benefit options if in
the aggregate they meet the net value test; or (3) a subset of the five
benefit options if in the aggregate this subset meet the net value test
(for example, three of the five benefit options). If a sponsor should
choose to aggregate a subset of the benefit options in a plan in order
to meet the net value test, it could not collect the subsidy for the
remaining options in the plan if the remaining options do not pass the
net value test individually or in the aggregate.
    In response to comments on the application of the actuarial
equivalence

[[Page 13399]]

standard to retiree group health plans with multiple benefit options,
the preamble to the January 28, 2005 final rule (70 FR 4409) stated
that ``the final rule provides sponsors with flexibility by allowing
them to choose whether to apply the net prong of the actuarial
equivalence test for each benefit option, or to apply the net prong of
the actuarial equivalence test on an aggregated basis for all benefit
options within a group health plan that satisfy the gross test.'' While
we believe that both these options should be available, limiting
sponsors to these two options will foreclose sponsors from claiming the
retiree subsidy for a subset of the benefit options separately meeting
the gross value that in the aggregate meet the net value test (the
third option described above). We believe the following statement is a
more accurate reflection of our policy of maximizing sponsor choice and
flexibility, as reflected in the final rule at Sec.  423.884(d)(5)(iv):
``The final rule provides sponsors with flexibility by allowing them to
choose whether to apply the net prong of the actuarial equivalence test
for each benefit option, or to apply the net prong of the actuarial
equivalence test on an aggregated basis to two or more benefit options
within a group health plan that satisfy the gross test and for which
the sponsor is claiming the retiree subsidy.'' The preamble to the Part
D final rule scheduled to take effect on March 22, 2005 is hereby
amended to include the foregoing alternative interpretation in place of
that set forth in the final rule published on January 28, 2005
concerning application of the actuarial equivalence standard to
employment-based retiree health coverage with multiple benefit options.
    We believe our policy, as described in this final rule, is a
reasonable extension of the interpretation of section 1860D-22(a)(2)(A)
of the Act set forth in the final rule. Section 1860D-22(a)(2)(A) of
the Act provides that a sponsor's attestation regarding the actuarial
equivalence of the prescription drug coverage under its plan to
standard prescription drug coverage under Part D shall be made in
accordance with the processes and methods described in section 1860D-
11(c) of the Act. As noted elsewhere in the preamble, we interpret
section 1860D-11(c) of the Act as providing the Secretary with broad
discretion to establish more than one process for determining the
actuarial valuation of prescription drug coverage. Moreover, we believe
the reference to ``the actuarial value of prescription drug coverage
under the [sponsor's] plan'' in section 1860D-22(a)(2)(A) of the Act is
ambiguous, and reasonably could be interpreted to mean the actuarial
value of a single benefit option or multiple benefit options within the
group health plan in the aggregate. At this point in time, we elect not
to choose among these reasonable interpretations of section 1860D-
22(a)(2)(A) of the Act, and instead provide sponsors with flexibility
that will accommodate their offering a wide variety of benefit options
for their retirees while promoting our stated goals of maximizing the
number of beneficiaries that retain their employer/union-sponsored
retiree drug coverage while avoiding windfalls to sponsors.
    The final rule at Sec.  423.286(d)(3) contains our formula for
calculation of the late enrollment penalty. That section states that
for 2006 and 2007 the penalty equals one percent of the base
beneficiary premium (computed under Sec.  423.286(c)) ``unless another
amount is specified in a separate issuance based on available analysis
or other information as determined by the Secretary.'' The same
language for Sec.  423.286(d)(3) also was included in the proposed rule
published on August 3, 2004. In the proposed rule, at 69 FR 46684, we
provided an example stating that if the penalty amount is $.36 per
month in 2004, and a beneficiary is subject to 12 months of penalty,
the beneficiary will pay an additional $.36 * 12 or $4.32 per month as
long as they are enrolled in Part D. We are clarifying in this final
rule that the example provided in the proposed rule conflicted with
regulatory language and could not be correct because it did not account
for the fact that the base beneficiary premium, upon which the penalty
is based, changes on an annual basis. Given these changes, the
reference to the base beneficiary premium in Sec.  423.286(d) must be
read to mean that as the base beneficiary premium changes, the late
enrollment penalty, when set at one percent of the amount, also
changes. Thus, assuming the one percent rule, the late enrollment
penalty for 2007 would be based on the amount of the base beneficiary
premium for 2007. In addition, during the comment period on the
proposed rule, we received comments asking how the late enrollment
penalty would be coordinated with the late enrollment penalty for Part
B, and whether a one percent penalty would be sufficient to control for
adverse selection. Our clarification also responds to these comments
because it ensures that the late enrollment penalty is calculated in a
manner that coordinates more properly with the Part B penalty, where
the penalty is always a percentage of the current year's premium.
Finally, in response to some the commenters' statements that any late
enrollment penalty should properly account for adverse selection, the
statute provides that the late enrollment penalty is the greater of an
actuarially determined amount or one percent for each uncovered month.
Given the newness of the program and the lack of data to determine an
actuarially based penalty, we are initially implementing the penalty
based on the one percent methodology. Once we have sufficient program
experience, we will reassess this policy. To the extent that an
actuarially determined amount provides a greater disincentive to late
enrollment, we will move to that methodology given the statutory
requirement that the penalty be the larger amount. The preamble to the
Part D final rule scheduled to take effect on March 22, 2005 is hereby
deemed to include the foregoing clarification.
    In the preamble to the final Medicare Prescription Drug Benefit
regulation (FR 70 4194), published on January 28, 2005, we responded to
comments on the need expressed by a number of commenters supporting a
transition period for beneficiaries, particularly full-benefit dual
eligibles who are transitioning to the Medicare Part D benefit from
other drug coverage. We responded by agreeing with the commenters that
Part D plans should have processes in place to transition current
enrollees from their old coverage to their new Part D plan coverage,
particularly in cases in which the beneficiary is taking Part D drugs
that are not covered on the plan's formulary at time of enrollment. We
further responded that ``we envision that the need for such a
transition period will be limited for several reasons.'' We would like
to clarify what we meant by this latter statement. We did not intend to
signal with this statement that there should be a very limited
application of, need for or duration of transition plans. What we
intended to say is that there are other beneficiary protections in the
formulary review and exceptions and appeals processes that would meet
some of the same needs.
    Instead, we know that there are a variety of circumstances in which
a beneficiary will need to be appropriately transitioned from their
currently prescribed drugs to alternative drugs covered under the Part
D plan's formulary. It is for these special circumstances that we
require Part D plans to have an established transition process. To
further clarify this transition

[[Page 13400]]

issue, we provide a brief discussion of the importance we place on
protecting beneficiaries as they transition from a prior plan's drug
coverage to a new Part D plan's coverage and an overview of our
expectations for Part D plans as they develop their transitions
processes.
    We strongly believe that this is an important issue not only for
beneficiaries during the initial transition to the Medicare drug
benefit on January 1, 2006, but also for new enrollees after the
initial implementation of the program, and for individuals who switch
from one plan to another after implementation of the benefit. We also
believe it is important to differentiate the transition process to
appropriately address the different needs of beneficiaries moving
between treatment settings due to changes in level of care.
    As noted in the preamble and in Sec.  423.120(b)(3) of our final
rule, Part D plans are required to establish an appropriate transition
process for new enrollees who are transitioning to Part D from other
prescription drug coverage, and whose current drug therapies may not be
included in their Part D plan's formulary. Also as noted in the
preamble we will review Part D plans' transition processes. Our
proposed approach to evaluating a transition process review is
consistent with our intent to provide potential plan sponsors with
maximum flexibility to develop their own formularies in order to manage
their prescription drug benefit offerings. We expect plans to document
how it will ensure that new enrollees, who are stabilized on drugs that
are not on the plan's formulary and that are known to have risks
associated with any changes in the prescribed regimen, will continue to
have access to medically necessary drugs without adverse health
consequences. In addition, it is important that the transition process
take into account the unique needs of residents of long term care (LTC)
facilities enrolling into a new Part D plan, especially given the fact
that a large proportion of residents may be dually eligible for both
Medicare and full Medicaid benefits, and therefore, could be auto-
enrolled into the plan without making an affirmative selection based on
the individual's existing treatment needs.

III. Collection of Information Requirements

    This document does not impose information collection and
recordkeeping requirements. Consequently, it need not be reviewed by
the Office of Management and Budget under the authority of the
Paperwork Reduction Act of 1995 (44 U.S.C. 35).

IV. Waiver of 30-Day Delay in Effective Date

    We ordinarily provide an effective date 30 days after the
publication of a final rule in the Federal Register. We can waive this
delay, however, if we find good cause that it is impracticable,
unnecessary, or contrary to the public interest, and we incorporate a
statement of this finding and the reasons for it in the rule issued.
The Medicare Prescription Drug Benefit final rule goes into effect on
March 22, 2005. This final rule clarifies our interpretations in
several areas that are deemed to be included in the January 28, 2005
final rule. We believe that delaying the effective date of this
interpretation would be contrary to the public interest because it
would shorten the already tight time frame for the enrollment of health
plans into the Part D program. Therefore, we believe it is necessary to
have this interpretation of our existing policy take effect at the same
time as the Medicare Prescription Drug Benefit final rule. Accordingly,
we believe there is good cause to waive the 30-day delay in effective
date, and this interpretation will be effective on the effective date
of the Medicare Prescription Drug Benefit final rule, March 22, 2005.

V. Regulatory Impact

    We have examined the impact of this rule as required by Executive
Order 12866 (September 1993, Regulatory Planning and Review), the
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354),
section 1102(b) of the Social Security Act, the Unfunded Mandates
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
    Executive Order 12866 directs agencies to assess all costs and
benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). A regulatory impact
analysis (RIA) must be prepared for major rules with economically
significant effects ($100 million or more in any one year). This rule
does not reach the economic threshold and thus is not considered a
major rule.
    The RFA requires agencies to analyze options for regulatory relief
of small businesses. For purposes of the RFA, small entities include
small businesses, nonprofit organizations, and government agencies.
Most hospitals and most other providers and suppliers are small
entities, either by nonprofit status or by having revenues of $6
million to $29 million in any one year. Individuals and States are not
included in the definition of a small entity. We are not preparing an
analysis for the RFA because we have determined that this rule will not
have a significant economic impact on a substantial number of small
entities.
    In addition, section 1102(b) of the Act requires us to prepare a
regulatory impact analysis if a rule may have a significant impact on
the operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of section 604 of the RFA. For
purposes of section 1102(b) of the Act, we define a small rural
hospital as a hospital that is located outside of a Metropolitan
Statistical Area and has fewer than 100 beds. We are not preparing an
analysis for section 1102(b) of the Act because we have determined that
this rule will not have a significant impact on the operations of a
substantial number of small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also
requires that agencies assess anticipated costs and benefits before
issuing any rule that may result in expenditure in any one year by
State, local, or tribal governments, in the aggregate, or by the
private sector, of $110 million. This rule will have no consequential
effect on the governments mentioned or on the private sector.
    Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on State
and local governments, preempts State law, or otherwise has Federalism
implications. Since this regulation does not impose any costs on State
or local governments, the requirements of E.O. 13132 are not
applicable.
    In accordance with the provisions of Executive Order 12866, this
regulation was reviewed by the Office of Management and Budget.

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


    Dated: March 2, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: March 16, 2005.
Michael O. Leavitt,
Secretary.
[FR Doc. 05-5592 Filed 3-18-05; 8:45 am]

BILLING CODE 4120-01-P