[Federal Register: May 16, 2008 (Volume 73, Number 96)]
[Proposed Rules]               
[Page 28555-28604]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16my08-19]                         


[[Page 28555]]

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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 422 and 423



Medicare Program; Revisions to the Medicare Advantage and Prescription 
Drug Benefit Programs; Proposed Rule


[[Page 28556]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 422 and 423

[CMS 4131-P]
RIN 0938-AP24

 
Medicare Program; Revisions to the Medicare Advantage and 
Prescription Drug Benefit Programs

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would make revisions to the Medicare 
Advantage (MA) program (Part C) and prescription drug benefit program 
(Part D). The regulation contains new regulatory provisions regarding 
special needs plans, medical savings accounts (MSA) plans, and cost-
sharing for dual eligible enrollees in the MA program, the prescription 
drug payment and novation processes in the Part D program, and the 
enrollment, appeals, and marketing processes for both programs. We are 
proposing these changes based on lessons learned since 2006, the 
initial year of the prescription drug program and the revised MA 
program.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on July 15, 2008.

ADDRESSES: In commenting, please refer to file code CMS-4131-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the instructions for 
``Comment or Submission'' and enter the filecode to find the document 
accepting comments.
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-4131-P, P.O. Box 8016, Baltimore, MD 21244-8016.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-4131-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to either of the following addresses: a. 
Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    b. 7500 Security Boulevard, Baltimore, MD 21244-1850.

    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-7195 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by following the 
instructions at the end of the ``Collection of Information 
Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:
    Special Needs Plans--LaVern Baty, 410-786-5480.
    Contracts with MA Organizations--Chris McClintick, 410-786-4682.
    Medicare Medical Savings Account Plans--Anne Manley, 410-786-1096.
    Enrollment--Lynn Orlosky, 410-786-9064.
    Payment--Frank Szeflinski, 303-844-7119.
    Civil Money Penalties--Christine Reinhard, 410-786-2987.
    Reconsiderations--
     John Scott, 410-786-3636.
     Kathryn McCann Smith, 410-786-7623.
    Marketing--Elizabeth Jacob, 410-786-8658.
    Change of Ownership--Scott Nelson, 410-786-1038.
    Low-income Cost-Sharing--Christine Hinds, 410-786-4578.
    Definitions related to the Part D drug benefit. Subparts F and G--
Deondra Moseley, (410) 786-4577 or Meghan Elrington, (410) 786-8675. 
Subpart R--David Mlawsky, (410) 786-6851.

SUPPLEMENTARY INFORMATION:
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://
www.regulations.gov. Follow the search instructions on that Web site to 
view public comments.
    Comments received timely will also 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

A. Overview of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003

    The Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA) (Pub. L. 108-173) was enacted on December 8, 2003. The 
MMA established the Medicare prescription drug benefit program (Part D) 
and made revisions to the provisions in Medicare Part C, governing what 
is now called the Medicare Advantage (MA) program (formerly 
Medicare+Choice). The MMA directed that important aspects of the new 
Medicare prescription drug benefit program under Part D be similar to 
and coordinated with regulations for the MA program.
    The MMA also directed implementation of the prescription drug 
benefit and revised MA program provisions by January 1, 2006. The final 
rules for the MA and Part D prescription drug programs appeared in the 
Federal Register on January 28, 2005 (70 FR 4588 through 4741 and 70 FR 
4194 through 4585, respectively). Many of the provisions relating to 
applications, marketing, contracts, and the new bidding process, for 
the MA program, became effective on March 22, 2005, 60

[[Page 28557]]

days after publication of the rule, so that the requirements for both 
programs could be implemented by January 1, 2006. All of the provisions 
regarding the new Part D prescription drug program became effective on 
March 22, 2005.
    As we have gained more experience with the MA program and the 
prescription drug benefit program, we are proposing to revise areas of 
both programs. Many of these revisions clarify existing policies or 
codify current guidance for both programs. We believe that these 
changes would help plans understand and comply with our policies for 
both programs and aid MA organizations and Part D plan sponsors in 
implementing their health care and prescription drug benefit plans.

B. Relevant Legislative History and Overview

    The Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33) established 
a new ``Part C'' in the Medicare statute (sections 1851 through 1859 of 
the Social Security Act (the Act)) which provided for a Medicare+Choice 
(M+C) program. Under section 1851(a)(1) of the Act, every individual 
entitled to Medicare Part A and enrolled under Medicare Part B, except 
for most individuals with end-stage renal disease (ESRD), could elect 
to receive benefits either through the original Medicare program or an 
M+C plan, if one was offered where he or she lived. The primary goal of 
the M+C program was to provide Medicare beneficiaries with a wider 
range of health plan choices.
    The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 (BBRA), Public Law 106-111, amended the M+C provisions of the BBA. 
Further amendments were made to the M+C program by the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554), enacted December 21, 2000.
    As noted above, the MMA was enacted on December 8, 2003. Title I of 
the MMA added a new ``Part D'' to the Medicare statute (sections 1860D-
1 through 1860D-42) creating the Medicare Prescription Drug Benefit 
Program, the most significant change to the Medicare program since its 
inception in 1965.
    Sections 201 through 241 of Title II of the MMA made significant 
changes to the M+C program which was established by the Balanced Budget 
Act of 1997 (BBA) (Pub. L. 105-33). Title II of the MMA renamed the M+C 
program the MA program and included new payment and bidding provisions, 
new regional MA plans and special needs plans, reestablished authority 
for medical savings account (MSA) plans that had been provided in the 
BBA on a temporary basis, and other changes. Title I of the MMA created 
prescription drug benefits under Medicare Part D, and a new retiree 
drug subsidy program.
    Both the MA and prescription drug benefit regulations were 
published separately, as proposed and final rules, though their 
development and publication were closely coordinated. On August 3, 
2004, we published in the Federal Register proposed rules for the MA 
program (69 FR 46866 through 46977) and the prescription drug benefit 
program (69 FR 46632 through 46863). In response to public comments on 
the proposed rules, we made several revisions to the proposed policies 
for both programs. For further discussion of these revisions, see the 
respective final rules (70 FR 4588-4741) and (70 FR 4194-4585).

II. Provisions of the Proposed Regulations

    In the sections that follow, we discuss the proposed changes to the 
regulations in parts 422 and 423 governing the MA and prescription drug 
benefit programs. Several of the proposed revisions and clarifications 
affect both programs. In our discussion, we note when a provision would 
affect both the MA and prescription drug benefit and include in section 
II C, a table comparing the proposed Part C and D program changes by 
specifying each issue and the sections of the Code of Federal 
Regulations that we propose to revise for both programs.

A. Proposed Changes to Part 422--Medicare Advantage Program

1. Special Needs Plans
    The Congress first authorized special needs plans (SNP) to 
exclusively or disproportionately serve individuals with special needs. 
The three types of special needs individuals eligible for enrollment 
identified by the Congress include (1) institutionalized individuals 
(defined in 42 CFR 422.2 as an individual residing or expecting to 
reside for 90 days or longer in a long term care facility), (2) 
individuals entitled to medical assistance under a State plan under 
title XIX, and (3) other individuals with severe or disabling chronic 
conditions that would benefit from enrollment in a SNP.
    The number of SNPs approved as of January 2008, is 787. This figure 
includes 442 dual eligible SNPs, 256 chronic care SNPs, and 89 
institutional SNPs.
a. Ensuring Special Needs Plans Serve Primarily Special Needs 
Individuals (Sec.  422.4)
    Section 231 of the MMA authorized MA organizations to offer a 
specialized MA plan that ``exclusively,'' or ``disproportionately,'' 
``serves'' one of three categories of ``special needs'' individuals: 
Individuals dually-eligible for both Medicare and Medicaid, 
institutionalized individuals, and individuals with severe or disabling 
chronic conditions that the Secretary determines would benefit from 
enrollment in a SNP.
    As noted above, the final rule implementing the MMA changes to the 
MA program, including these SNP provisions, was issued on January 28, 
2005 (70 FR 4588). In the preamble to the proposed rule we proposed to 
interpret the term ``serves'' special needs individuals to mean markets 
to, and enrolls, special needs individuals. This was intended to permit 
an MA Plan with existing non-special needs enrollees to be designated a 
SNP if it prospectively, exclusively, or disproportionately enrolled 
special needs individuals.
    We also proposed to interpret the statutory phrase, 
``disproportionately serve[s] special needs individuals'' to refer to a 
SNP that enrolls special needs individuals in a proportion greater than 
such individuals exist in the area served by the plan (69 FR 46874). We 
asked for public comments regarding whether we should specify a 
percentage, such as 50 percent or more, as the minimum enrollment for a 
plan to be considered a SNP.
    We did not receive any comments on this proposed provision. 
Therefore, in the final rule we established the disproportionate 
percentage methodology based on the test we proposed in the proposed 
rule, that is, a comparison of the proportion of the special needs 
individuals the plan enrolls relative to non-special needs enrollees 
and the proportion of special needs individuals in the plan's service 
area. If the proportion of special needs to non-special needs 
individuals being enrolled in the plan was greater than the proportion 
in the plan's service area, the plan could be considered a 
disproportionate share SNP. Our expectation was that only a limited 
number of non-special needs individuals would be likely to enroll in a 
SNP, such as spouses or children of special needs individuals who wish 
to enroll in the same MA plan as the spouse or parent. However, such 
plans may be attractive to other non-special needs individuals because 
they may

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offer additional benefits beyond what Medicare covers. Also, 
individuals who are in the early stages of one of the chronic 
conditions covered by a disproportionate percentage, chronic care SNP 
may find the benefits or the network of participating specialists 
attractive.
    Disproportionate percentage SNPs have proliferated since the 
implementation of the Part D program, due, in part, to the fact that 
both dual eligible individuals and institutionalized individuals are 
permitted to enroll in MA plans year round, and dual eligible and 
institutional SNPs are thus permitted to market year round. CMS' 
information shows that a significant number of the dual-eligible 
disproportionate percentage SNPs may have between 25 percent and 40 
percent of their enrollment composed of non-special needs individuals. 
As a result, we are concerned that disproportionate percentage SNPs are 
enrolling significant numbers of non-special needs individuals, thus 
diluting the focus on serving those individuals with special needs.
    Therefore, in order to ensure that existing and future SNPs 
maintain a primary focus on individuals with special needs, we are 
proposing to amend our regulations at Sec.  422.4(a)(1)(iv)(B) to 
require that MA organizations offering SNPs limit new enrollment of 
non-special needs members to no more than 10 percent of new enrollees, 
and that 90 percent of new enrollees must be special needs individuals 
as defined in Sec.  422.2. We believe this threshold would continue to 
allow the small number of non-SNP eligible spouses and children to 
continue to enroll in the same MA plan as their SNP eligible spouse or 
parent while ensuring that the SNP retains its focus on serving the 
special needs individuals for which it is specifically designed.
    We understand that the majority of SNPs that currently enroll both 
special needs and non-special needs individuals have current 
enrollments of non-special needs individuals that exceed 10 percent. 
Because the new limitation only applies to new enrollees, these plans 
would be able to continue to serve their existing membership. 
Organizations offering disproportionate enrollment SNPs would not be 
permitted to enroll new non-special needs individuals, however, without 
first enrolling enough special needs individuals to ensure that the 
percentage of new non-special needs enrollees remains below 10 percent. 
Furthermore, as specified in Sec.  422.4, those enrollees deemed 
continuously eligible per Sec.  422.52(d) are considered special needs 
individuals for the purpose of determining the disproportionate 
percentage.
    On an ongoing basis plans would need to monitor their enrollment to 
ensure that the 10 percent limit on new enrollments is met. This means 
that plans would need to monitor their enrollment to ensure that they 
were enrolling nine special needs individuals for every non-special 
needs individual to keep the ratio of new enrollees who were non-
special needs individuals below 10 percent of new enrollees. MA 
organizations offering disproportionate SNPs would have to have a 
mechanism to ensure that a non-special needs individual could not 
enroll until a sufficient number of special needs individuals were 
enrolled to keep new enrollment of non-special needs individuals below 
10 percent of new enrollments. For example, if a SNP receives completed 
enrollment elections from non-special needs individuals when such an 
enrollment would push the percentage of new enrollees over 10 percent, 
it could--(1) deny the enrollment due to the onset of the limit; or (2) 
place the enrollment on a waiting list to be processed after a 
sufficient number of special needs individuals have been enrolled. The 
plan would need to ensure that once enrollments are accepted for non-
special needs individuals, that this is done on a non-discriminatory 
basis. We believe that this approach will encourage SNPs to design 
benefit packages that best serve the certain special needs populations 
for which they have been created.
    We welcome comments on the appropriateness of the 10 percent 
standard for new enrollees, as well as the most effective and least 
burdensome ways for plans to monitor the proportions of new 
enrollments.
b. Ensuring Eligibility To Elect an MA Plan for Special Needs 
Individuals (Sec.  422.52)
    In order to elect a SNP, an individual must meet the eligibility 
requirements for the specific type of SNP in which the individual 
wishes to enroll. For example, to enroll in a dual eligible SNP, the 
individual must be eligible for both Medicare and Medicaid. It is the 
responsibility of the MA organization offering the SNP to verify 
eligibility during the enrollment process.
    We are concerned that some dual eligible SNPs may not be 
appropriately verifying Medicaid eligibility of applicants for 
enrollment, and therefore may be enrolling beneficiaries who are not 
eligible for both Medicare and Medicaid. Similarly, some chronic care 
SNPs may encounter difficulties having providers verify that the 
applicants have the condition(s) established as the focus of the 
chronic care SNP.
    We propose to clarify in our regulations that MA organizations must 
establish a process to verify that potential SNP enrollees meet the 
SNP's specific eligibility requirements. While this issue is addressed, 
to some degree, in our manual guidance (section 20.11 of Chapter 2 of 
the Medicare Managed Care Manual), we believe that it is important to 
ensure that plans are aware of and meet their obligations to verify an 
applicant's eligibility prior to enrolling individuals in a SNP through 
rule making.
    Therefore, we are proposing in Sec.  422.52(g) that MA 
organizations offering SNPs for dual eligible beneficiaries establish a 
process approved by CMS to obtain information from the State about the 
applicant's Medicaid status and that this verification must be obtained 
prior to enrollment. This would likely require the SNP to enter into an 
agreement with the State to obtain this information on a routine and 
timely basis. We address the issue of a relationship with the State 
Medicaid program in the case of a dual eligible SNP in more detail in 
section II, below. Those organizations offering chronic care SNPs must 
attempt to obtain verifying information directly from the beneficiary's 
provider or the organization may use the disease-specific pre-
qualification assessment questions developed by, and available from CMS 
(model language) as an alternative methodology.
    In the 2008 MA application solicitation, we required SNPs to 
identify their processes for verifying a beneficiary's chronic 
condition before enrollment. Specifically, each applicant was required 
to contact the enrollee's physician to verify eligibility for the 
specific chronic condition SNP. We subsequently received industry 
comments that SNP staff sometimes experience significant delays in 
obtaining physician verification of the beneficiary's chronic condition 
and, as a consequence, there was delay in enrolling an eligible 
beneficiary.
    In response to this information, we developed an additional option 
to facilitate chronic condition verification. In a May 31, 2007 
memorandum, we notified chronic condition SNPs that they could develop 
a pre-enrollment qualification assessment tool to expedite verification 
that beneficiaries had the chronic condition for which they were 
enrolled (see https://32.90.191.19/hpms/upload--area/NewsArchive--

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MassEmail/000001696/CHVHPMS%20v2.pdf). We simultaneously posted an 
example of an acceptable verification tool for coronary artery disease, 
congestive heart failure, and/or cerebrovascular accident (stroke) on 
HPMS (see https://32.90.191.19/hpms/upload--area/NewsArchive--
MassEmail/000001696/Draft%20pre-
Qual%for%20chronic%20SNP%20verification%205%2007%20(2).pdf).
    The notification memorandum instructed SNPs to draft a verification 
tool, complete an attestation form asserting compliance with CMS 
conditions listed on the form, and to submit the tool to CMS for review 
and approval prior to using the tool. Concurrently, we collaborated 
with physician experts in chronic disease management to develop a 
series of questions related to several chronic conditions listed in 
HPMS as of January 2, 2007, representing potentially severe or 
disabling primary chronic conditions. Questions similar to the above 
example were developed for chronic obstructive pulmonary disease, 
diabetes mellitus, hypertension, chronic renal failure, depression, 
schizophrenia, bipolar disorder, dementia, and chronic alcohol or drug 
dependence.
    Because chronic condition SNPs request CMS approval for their 
proposed pre-enrollment qualification assessment tools, we use the 
disease-specific questions to guide the SNP in the design of an 
appropriate tool. Having the additional option of using a pre-
enrollment qualification assessment tool gives SNPs three means of 
meeting the verification requirement--written documentation from the 
beneficiary's former physician, telephonic confirmation by the 
beneficiary's former physician, or use of the verification tool 
followed by post-enrollment confirmation by any physician.
    Similarly, organizations offering a SNP for institutionalized 
individuals must verify each enrollee's institutional status with the 
facility or appropriate State agency.
c. Model of Care (422.101(f))
    As noted above, the MMA permitted MA organizations to offer care 
targeted to beneficiaries with special health care needs through SNPs. 
The MMA specified that a special needs individual was an individual who 
was ``institutionalized'' (as defined by the Secretary), is entitled to 
medical assistance under a State plan under title XIX (Medicaid), or 
``meets such requirements as the Secretary may determine would benefit 
from enrollment'' in a SNP for individuals ``with severe or disabling 
chronic conditions.'' In order to ensure that SNPs are providing care 
targeted to such special needs beneficiaries, under our authority in 
section 1856(b)(1) of the Act to establish standards by regulation, we 
are proposing that SNPs develop a model of care specific to the special 
needs population they are serving. In order to more clearly establish 
and clarify delivery of care standards for SNPs and to codify standards 
which we have included in other CMS guidance and instructions (the 2008 
and 2009 Call Letters, ``Special Needs Plan Solicitation \1\''), we 
propose to add new paragraph (f) to Sec.  422.101. Section 422.101(f) 
would specify that SNPs must have networks with clinical expertise 
specific to the special needs population of the plan; use performance 
measures to evaluate models of care; and be able to coordinate and 
deliver care targeted to the frail/disabled, and those near the end of 
life based on appropriate protocols. We believe that these measures are 
critical to providing care to the types of special needs populations 
served by SNPs.
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    \1\ The solicitation may be found at http://www.cms.hhs.gov/
SpecialNeedsPlans.
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    For example, CMS anticipates that a chronic condition SNP serving 
beneficiaries having severe or disabling diabetes mellitus would 
establish a provider network that afforded access to diabetes experts 
such as endocrinologists who consult on pharmacotherapy for the fragile 
diabetic, vitreo-retinal ophthalmologists for diabetic retinopathy 
management, nephrologists for diabetic nephropathy management, 
neurologists having diabetic neuropathy expertise, nurses having 
specialized training in diabetes education, and nutritionists with 
expertise in diabetic counseling.
    The SNP might enroll diabetic beneficiaries who develop chronic 
renal failure related to diabetic nephropathy and require dialysis. The 
SNP might choose to contract or partner with these specialized diabetes 
experts and/or dialysis facilities, but, as a special needs plan 
targeting beneficiaries with specialized diabetic needs, the SNP is 
obligated to provide services to manage the expected disease-specific 
complications of a diabetic with severe or disabling disease 
progression. We also expect that the chronic condition SNP serving 
diabetic beneficiaries would develop diabetes-specific performance 
measures to evaluate its own systems, experts, and health outcomes 
related to its diabetes management.
    The SNP's own internal quality assurance and performance 
improvement program should examine the effectiveness of its model of 
care for diabetes management. For example, if the SNPs provider network 
applied the American Diabetes Association's clinical practice guideline 
for reducing the risk of or slowing the progression of diabetic 
nephropathy by optimizing glucose control (see National Guidelines 
Clearinghouse, 2008; http://www.guideline.gov/summary/
summary.aspx?doc--id=10401), an appropriate performance measure to 
evaluate management of diabetic beneficiaries would be a process 
measure to determine the percentage of diabetics having glycosylated 
hemoglobin (Hgb A1C) measured in the last 6 months or an 
outcome measure to determine how many diabetics had an A1C 
measuring less than 7 percent (see National Quality Measures 
Clearinghouse, 2008; http://www.guideline.gov/browse/xrefnqmc.aspx).
    We recognize there is a broad range of chronic disease management 
systems and evidence-based clinical practice guidelines available to 
SNPs; consequently, we have deliberately guided SNPs toward the 
conceptual framework of a model of care without being prescriptive 
about the specific staff structure, provider network, clinical 
protocols, performance improvement, and communication systems. We also 
expect that within the target population of beneficiaries having severe 
or disabling diabetes mellitus, SNPs would have a subpopulation of 
diabetics who are frail, near the end of life, or disabled by other 
morbidities (for example, neurological disorders, mental disorders, 
etc.) that would need additional specialized benefits and services that 
should be addressed in the model of care. For example, the diabetic 
beneficiary with diabetic complications who is near the end of life 
might require assisted living or institutional services for which the 
SNP would develop different goals, expanded specialty services and 
facilities in their provider network, different performance measures, 
and additional protocols.
d. Dual Eligible SNPs and Arrangements With States (Sec.  422.107)
    CMS' review of SNPs targeting beneficiaries eligible for both 
Medicare and Medicaid (dual eligible SNPs) over the past few years 
suggests to us that for such SNPs to serve this population of 
beneficiaries, a plan should have a documented relationship with the 
State Medicaid agency in the State in which its members reside. Dual 
eligible SNPs that have not established a working relationship with the 
State may

[[Page 28560]]

encounter difficulties verifying eligibility for Medicaid prior to 
enrollment in a SNP and, thus, may inappropriately enroll members who 
are not eligible for Medicaid. Also, without an arrangement with the 
State, SNPs may not have the information necessary to guide 
beneficiaries to providers that can deliver both Medicare and Medicaid 
services. Further, Medicaid often provides additional health services 
not covered by Medicare through the SNP. Medicare Advantage 
organizations (MA organization) with no State relationship may be 
advising dual eligible members that services are not covered at all 
because they are not covered under the SNP, even though the services 
are covered through Medicaid. Consequently, if the MA organization is 
not aware of the benefits available to its members through other 
sources, such as Medicaid, it cannot ensure that the model of care it 
delivers offers adequate coordination of the essential services.
    In order to ensure that beneficiaries are able to access essential 
services that are available through Medicaid in addition to those 
benefits available through the SNP, we propose to add a new Sec.  
422.107 which would require that an MA organization seeking to offer a 
SNP to serve the dual eligible population must have, at a minimum, a 
documented relationship, such as a contract, memorandum of 
understanding (MOU), data exchange agreement, or some other agreed upon 
arrangement with the State Medicaid agency for the State in which the 
dual eligible SNP is operating, in an effort to improve Medicare and 
Medicaid integration.
    We propose in Sec.  422.107(a) that all SNPs, whether entering the 
market or already established at the time these regulations become 
effective, must have in place a dual eligibility verification 
arrangement and information sharing on Medicaid providers and benefits.
    We also propose in Sec.  422.107(b) that within 3 years of the 
effective date of these regulations, all dual eligible SNPs already 
offering contracts are required to develop additional formal 
arrangements with States, and that new SNPs offering contracts after 
these regulations are effective, are required to have formal 
arrangements by their third contract year. CMS is allowing 3 years 
because we understand that it may take this long for contractual 
arrangements between the State and an MA plan to be implemented, 
particularly if Medicaid capitation and a request for proposal (RFP) 
are involved. We believe that by providing States and MA organizations 
with the maximum amount of flexibility for having a documented 
relationship, it will encourage States to actively participate in the 
development of integrated Medicare and Medicaid products with MA 
organizations. We believe 3 years is a reasonable and sufficient amount 
of time for MA organizations to develop documented arrangements with 
their respective States. We understand that some States are not yet 
ready to engage and participate in providing health care through MA 
organizations for their Medicaid-eligible populations and, are, 
therefore, providing a 3-year window for development and 
implementation.
    Examples of additional formal arrangements range from documentation 
of a cooperative arrangement with the State to coordinate benefits to a 
contractual arrangement between the State Medicaid agency and the MA 
organization offering the SNP, under an RFP process, or under a 
Medicaid capitation arrangement.
e. Special Needs Plans and Other MA Plans With Dual Eligibles: 
Responsibility for Cost-Sharing (Sec.  422.504(g)(1))
    CMS' review of MA plans serving dual eligible beneficiaries over 
the past few years has identified that a number of providers are 
charging the beneficiaries Medicare Parts A and B cost sharing that is 
the responsibility of the State. Additionally, many dual eligible 
enrollees are unclear about the Medicare and Medicaid rules and 
benefits. Some new enrollees have experienced interruptions in 
treatment, resulting in a negative impact on their health. These 
experiences suggest that additional requirements are needed to ensure 
that both providers and beneficiaries understand Medicare and Medicaid 
rules and that beneficiaries do not pay cost-sharing for which they are 
not responsible.
    In order to protect beneficiaries and ensure that providers do not 
bill for cost-sharing that is not the beneficiary's responsibility, we 
have amended Sec.  422.504(g)(1)(i) and (g)(1)(ii) to require that all 
MA organizations, including SNPs, with enrollees who are eligible for 
both Medicare and Medicaid specify in their contracts with providers 
that enrollees will not be held liable for Medicare Parts A and B cost 
sharing when the State is liable for the cost-sharing. We are 
proposing, therefore, that contracts with providers state that the 
provider will do this by either accepting the MA plan payment in full 
(Sec.  422.504(g)(1)(iii)(A)) or by billing the appropriate State 
source (for example, Medicaid) (Sec.  422.504(g)(1)(iii)(B)). 
Additionally, we are proposing that all MA organizations with enrollees 
eligible for both Medicare and Medicaid must inform providers of the 
Medicare and Medicaid benefits and rules for enrollees eligible for 
Medicare and Medicaid (Sec.  422.504(g)(1)(iii)).
    Medicare Advantage organizations have flexibility in establishing 
arrangements with States. The arrangements could include discussing and 
identifying both the Medicare and Medicaid benefits and rules. A list 
of the services, as well as the rules applicable to enrollees eligible 
for Medicare and Medicaid could be disseminated to providers and 
updated as necessary. A contact person or liaison could be identified 
for each MA plan who could assist with questions and with the 
maintenance of current information.
2. MA MSA Transparency (Sec.  422.103(e))
    As noted above, the MMA restored authority for ``Medical Savings 
Account'' (MSA) plans that had been provided for in the BBA on a 
temporary basis, but which expired without any such plan ever being 
offered. MSA plans are MA plans under which a portion of the total MA 
capitation rate is paid to the MA organization for a high-deductible 
policy that covers Medicare covered services after the high deductible 
is met. The remainder of the amount is placed into a savings account to 
be used to cover health care costs until the deductible is met. Any 
amounts not used in a given year accumulate for use in a future year.
    As noted, under the original BBA authority, no MA organization 
chose to offer an MSA plan. We believe that this might be attributable 
in part to differences between the rules for MSA plans and the more 
popular health savings account (HSA) arrangements available for non-
Medicare beneficiaries. In order to encourage the offering of MSA 
plans, and to test whether changing some rules would be beneficial, we 
initiated an ``MSA demonstration'' under which some MSA rules were 
waived. As part of this demonstration, we required that participating 
MA organizations provide MSA plan enrollees with cost and quality 
information that they could use to make informed choices as to where 
they would get health care.
    Consistent with the best practices of HSAs and other high-
deductible health plans, we propose in new Sec.  422.103(e) to require 
that all MSA plans provide enrollees with information on the cost and 
quality of services as specified by CMS and provide information to CMS

[[Page 28561]]

on how they would provide this information to enrollees.\2\
---------------------------------------------------------------------------

    \2\ HSAs are health insurance plans with a high deductible and a 
savings account for the under 65 population and are administered by 
the U.S. Department of the Treasury. Medicare MSAs are a type of 
medical savings account, also with a high deductible and a savings 
account, designed for the Medicare population and are administered 
by the U.S. Department of Health and Human Services, Centers for 
Medicare & Medicaid Services. HSAs and MSAs are governed by 
different statutes, and while these health insurance products are 
similar in many ways, there are also important differences between 
them. For further information on HSAs, go to http://www.ustreas.gov/
offices/public-affairs/hsa/.
---------------------------------------------------------------------------

    The purpose of reporting cost/quality information to consumers, a 
practice known as ``transparency,'' is to permit plan enrollees to 
compare costs for specific services and to compare providers on cost 
and quality, with the high deductible acting as an added incentive to 
shop around. This proposal would implement a basic tenet of high-
deductible health plans, the availability of useful cost and quality 
information to support consumer shopping.
    We recognize that the Congress exempted MSA plans from the quality 
improvement program requirements in section 1852(e)(1) of the Act, and 
thus from the data collection and reporting requirements in section 
1852(e)(3) of the Act. We would not, under this requirement, be 
mandating the same level of data collection required under those 
provisions, or the reporting of quality data to CMS. Rather, we are 
presuming that MA organizations in the business of offering an MSA 
product are committed to facilitating the intended benefits of this 
model--that consumers make informed choices as to their health care 
purchases during the deductible period and beyond. We would expect that 
such organizations already have mechanisms in place, in connection with 
their commercial lines of business, for providing their beneficiaries 
with cost or quality information. Indeed, in the case of Medicare 
participating providers, such information is available from CMS through 
our own transparency initiatives.
    Our view that quality and cost information would be available, or 
reasonably accessible, to organizations in the business of offering an 
MSA plan is supported by the fact that the MA organizations 
participating in the MSA demonstration have agreed to provide the 
information to their enrollees. We invite public comments on this 
issue. We are proposing to revise the regulations to require that MA 
organizations offering MSA plans provide their enrollees with quality 
and cost information, to the extent available, concerning services in 
the plan's service area, and to report to CMS on its approach to 
providing this information. Below are examples of what a plan could be 
expected to address:
     How the organization will provide cost and quality 
information to enrollees, including screenshots for any Web-based tools 
used to meet this requirement.
     If they will use a Web-based product to meet this 
requirement, how they will provide this information to enrollees that 
do not have access to the Internet.
     How their organization will obtain information regarding 
cost and quality in the requested service area and whether this 
information will be personalized to the member.

B. Proposed Changes to Part 423--Medicare Prescription Drug Benefit 
Program

1. Passive Election for Full Benefit Dual Eligible Individuals Who Are 
Qualifying Covered Retirees (Sec.  423.34)
    Section 1860D-1(b)(1)(C) of the Act, and implementing regulations 
at 42 CFR 423.34(d), require that CMS automatically enroll a full-
benefit dual eligible (FBDE) individual who has (1) failed to enroll in 
a prescription drug plan (PDP) or MA-PD into a PDP at or below the 
premium subsidy amount, and, per the last sentence in section 1860D-
1(b)(1)(C) of the Act, (2) has not declined Part D enrollment, into a 
PDP with a premium at or below the full premium subsidy amount. 
Further, the statute requires that if there is more than one such plan 
the ``Secretary shall enroll such an individual on a random basis among 
all such plans in the PDP region.'' Our general policy in implementing 
these provisions is to notify individuals in advance about their 
pending auto-enrollment, and to include in that notice information 
about other plans available to the individual and about how to decline 
Part D coverage, and thus opt out of the default enrollment process.
    For the overwhelming majority of FBDE individuals, default 
enrollment into a PDP is a favorable outcome that ensures that they 
receive prescription drug coverage without costs for premiums and 
deductibles, and with only nominal costs for cost sharing. In many 
cases, the Part D enrollment is also beneficial for FBDE individuals 
with retiree coverage, since the Part D drug coverage may well be 
available at a lower cost than the coverage offered through the 
employer plan. However, for a significant number of FBDE individuals 
with drug coverage through an employer group plan--especially those 
with full health care coverage--automatic enrollment into a PDP can 
have serious and sometimes irreversible negative consequences, either 
for the beneficiary and/or for family members. For example, under the 
terms of a particular employer group plan, an individual may lose 
employer group retiree medical coverage upon enrollment in a Part D 
plan, or worse, an individual's automatic enrollment in a PDP can 
result not only in the individual's disenrollment from the employer 
plan, but the disenrollment of a spouse or other family member. 
Although we were aware of this possibility at the outset of the 
program, we had no information about the extent to which FBDE 
individuals might already have retiree group coverage, and we believed 
that to the extent there were individuals in this situation, the number 
would be extremely small. Thus, we did not make any special rules for 
this population.
    Since January 2006, however, we have received a relatively small, 
but steady, series of complaints about this issue. We have attempted to 
work with employers to resolve individual situations as they arose, but 
have not had complete success. A recent survey of large employers found 
that 36 percent of the firms indicated retirees would lose all retiree 
medical coverage upon enrollment in a Part D plan, and another 32 
percent specified the retirees would lose their employer group drug 
coverage only. More importantly, 82 percent of employers indicated that 
if a retiree is enrolled in a Medicare Part D plan, the spouse of that 
individual would not be allowed to keep employer sponsored coverage. 
Finally, 57 percent of the firms surveyed indicated that they would not 
allow retirees to rejoin the company's coverage in the future, should 
they decide that they would prefer the employer coverage to the Part D 
coverage in which they were automatically enrolled based on their FBDE 
status. (See December 13, 2006, Kaiser/Hewitt Survey Report of Large 
Employers at http://www.kff.org/medicare/med121306nr.cfm).
    To address those concerns, we propose to revise Sec.  423.34(d)(1), 
and add new Sec.  423.34(d)(3), to establish a process under which FBDE 
individuals who we know to be enrolled in a qualifying employer group 
plan would be deemed to decline Part D coverage if, following a notice 
of their options, they do not indicate that they wish to receive it. As 
a result, these individuals would not be part of the group that is 
subject to default auto-enrollment. In order to ensure that only 
individuals with creditable employer coverage would be

[[Page 28562]]

included in this process, we would limit the applicability of this 
process to individuals enrolled in a plan for which CMS is paying an 
employer subsidy. Under our proposal, the individuals would be notified 
in advance by CMS of their prospective auto-enrollment, and of the need 
to carefully consider the possible repercussions of such an enrollment, 
including the impact that enrollment into Medicare Part D would have on 
their retiree coverage for themselves and other family members. We 
would recommend contacting the sponsor or administrator of the retiree 
group plan to discuss the effect of enrollment in Medicare Part D on 
the retiree coverage.
    Individuals would further be informed that by taking no action, 
they will be deemed to have elected to decline enrollment into a Part D 
plan. We would further inform them that they could enroll in a Part D 
plan at any time in the future if they wish to do so, and that the 
enrollment could be made retroactive. Thus, absent a confirmation of 
the individual's desire to be auto-enrolled into a Part D plan, he or 
she would retain the employer group coverage.
    In considering whether to adopt this approach, we recognized that 
to the extent that declining Part D could possibly have any negative 
consequences for FBDE individuals who are not auto-enrolled, CMS has 
the discretionary authority to make retroactive enrollment changes that 
can address such problems. In contrast, CMS has no authority to insist 
that a retiree plan sponsor allow individuals back into its plan should 
the retirees or their family members be adversely affected by auto 
enrollment. Given that 56 percent of employers surveyed have 
specifically stated that they would not allow re-enrollment into their 
retiree plans after an individual began Part D coverage, we believe 
that our proposed change in policy would clearly be in the best 
interests of the FBDE population with retiree coverage.
2. Part D Late Enrollment Penalty (Sec.  423.46)
    Section 1860D-22(b) of the Act established a Part D late enrollment 
penalty (LEP) for beneficiaries who have a continuous period of 63 days 
or longer following the end of an individual's Part D initial 
enrollment period without creditable prescription drug coverage. This 
requirement is codified in Sec.  423.46. Although Sec.  423.46 
describes which individuals would be subject to a penalty, it does not 
specify the role of the Part D plan in the LEP determination process. 
We have subsequently outlined plan responsibilities in our existing 
guidance (Chapter 4 of the Medicare Prescription Drug Benefit Manual) 
and now propose to clarify the general responsibilities of Part D plans 
in our regulations.
    First, we would clarify under Sec.  423.46(b) that Part D plans 
must obtain information on prior creditable coverage from all enrolled 
or enrolling beneficiaries. Under this process, plans first query CMS 
systems for previous plan enrollment information, which is a standard 
part of the beneficiary enrollment process. When no previous enrollment 
information exists, however, the process for obtaining creditable 
coverage information must also include plan interaction with the 
beneficiary. This is due in large part to the limited information 
available in CMS' systems about forms of creditable coverage other than 
Part D coverage or coverage through an employer group under the retiree 
drug subsidy (RDS). Therefore, it is critical that plans obtain 
historical creditable coverage information from the beneficiary in 
order to determine the number of uncovered months, if any, and retain 
any information collected concerning that determination (as specified 
under proposed Sec.  423.46(d)).
    The related requirement that we are proposing under Sec.  423.46(b) 
is that plans must then report creditable coverage information in a 
manner specified by CMS. Specifically, that would entail reporting the 
number of uncovered months to CMS, which will then calculate the 
penalty and report the penalty back to the plan. The plan then notifies 
the beneficiary of the determination of the LEP amount and of their 
ability to request a reconsideration of this determination.
    Thus, we would also establish under Sec.  423.46(c) that, 
consistent with section 1860(D)-22(b)(6)(C) of the Act, individuals who 
are determined to have a late enrollment penalty, have the opportunity 
to ask for a reconsideration of this determination. (Note that existing 
Sec.  423.56(g) briefly references the ability to ``apply to CMS'' when 
an individual believes that he or she was not adequately informed that 
his or her prescription drug coverage was not creditable, and we would 
cross-reference that section here.) We believe that the statute clearly 
intends that individuals have an opportunity to provide CMS, or an 
independent review entity acting under CMS' authority, with additional 
information related to prior prescription drug coverage in support of a 
request for reconsideration of a late enrollment penalty determination. 
While the statute expressly provides for this opportunity only with 
respect to an argument that proper notice was not given concerning 
whether existing coverage was creditable, we believe that the same 
rationale could apply to other arguments that the penalty should not 
apply (for example, an argument that the individual is eligible for a 
waiver of the penalty under a demonstration project).
    Finally, we would specify that a beneficiary would not have the 
right to further review of the reconsideration decision of CMS, or the 
independent review entity acting under CMS' authority. CMS would, 
however, have the discretion to reopen, review, and revise such a 
decision.
3. Medicare Prescription Drug Benefit Program Definitions
    These proposed clarifications to our policies associated with the 
Medicare Prescription Drug Benefit (also known as Medicare Part D) 
include refining our definitions related to what may be included in the 
drug costs Part D sponsors use as the basis for calculating beneficiary 
cost sharing, reporting drug costs to CMS for the purposes of 
reinsurance reconciliation and risk sharing, as well as submitting bids 
to CMS. We also propose a new definition for administrative costs in 
order to further clarify costs that must not be included in Part D drug 
costs. We also propose to create corollary definitions for drug cost 
reporting for purposes of the Retiree Drug Subsidy (RDS). We propose 
that the effective date of these changes be the effective date of a 
final rule with the exception of specific changes to the Part D 
definition of ``negotiated prices'', ``gross covered prescription drug 
costs'', and ``allowable risk corridor costs'' related to the use of 
pass-through versus lock-in prices, which we propose to be effective 
for coverage year 2010. We propose that the effective date of the RDS 
definitions be the effective date of a final rule, that is, for all 
plan years beginning after the effective date of a final rule.
a. Subpart C--Benefits and Beneficiary Protections (Definitions)
i. Incurred Costs
    CMS is proposing to amend the definition of ``incurred costs'' to 
reflect our current policy that certain nominal co-payments assessed by 
manufacturer Patient Assistance Programs (PAPs) can be applied toward 
an enrollee's TrOOP balance or total drug spend (the accumulated total 
prices for covered Part D drugs paid by the plan or by or on behalf of 
the beneficiary). CMS allows PAPs to provide assistance for covered 
Part D drugs to Part D enrollees

[[Page 28563]]

outside the Part D benefit. This means that payments made by PAPs do 
not count toward enrollees' TrOOP or total drug spend balances. 
However, if a PAP requires their enrollees--including those enrolled in 
a Part D plan--to pay a nominal copayment when they fill a prescription 
for a covered Part D drug for which the PAP provides assistance, such 
amounts would count toward TrOOP if the plan is notified of the 
copayment. As explained in Appendix C of Chapter 14 (Coordination of 
Benefits) of the Prescription Drug Benefit Manual, these nominal PAP 
copayment amounts, when paid by or on behalf of a Part D enrollee, are 
applicable to the enrollee's TrOOP and total drug spend balances, 
provided the enrollee submits appropriate documentation to their Part D 
plan. We are proposing to revise the definition of incurred costs to 
clearly indicate that these nominal PAP copayments are included in 
incurred costs. This revision to the definition of ``incurred costs'' 
in Sec.  423.100 is consistent with the proposed changes to the 
definition of ``gross covered prescription drug costs'', which has also 
been revised to ensure that these nominal PAP copayments are included 
in gross covered prescription drug costs and allowable reinsurance 
costs.
ii. Negotiated Prices
    In the January 2005 final rule, CMS defined a number of terms 
related to drug prices and costs in order to identify the costs that 
should be used to calculate beneficiary cost sharing, to advance the 
beneficiary through the benefit, and to calculate final plan payments 
for reinsurance subsidies and risk sharing during payment 
reconciliation. For instance, under Sec.  423.104(d)(2)(i), beneficiary 
cost sharing under the initial coverage limit is equal to 25 percent of 
``actual cost.'' (70 FR 4535) ``Actual cost'' is defined in Sec.  
423.100 as ``the negotiated price for a covered Part D drug when the 
drug is purchased at a network pharmacy, and the usual and customary 
price when a beneficiary purchases the drug at an out-of-network 
pharmacy consistent with Sec.  423.124(a).'' (70 FR 4533) And in Sec.  
423.100, the term ``negotiated prices'' is defined as ``prices for 
covered Part D drugs that (1) are available to beneficiaries at the 
point of sale at network pharmacies; (2) are reduced by those 
discounts, direct or indirect subsidies, rebates, other price 
concessions, and direct or indirect remunerations that the Part D 
sponsor has elected to pass through to Part D enrollees at the point of 
sale; and (3) includes any dispensing fees. (70 FR 4534)
    Since that time, we have received questions over what we meant in 
this last definition when we refer to prices for covered Part D drugs 
that are available to beneficiaries at the point of sale. These 
questions are particularly important because beneficiary cost sharing 
is a function of the negotiated price, either directly as in 
coinsurance percentages of negotiated price, or indirectly, as 
copayments are ultimately tied to actuarial equivalence requirements 
based on negotiated prices. That is, for instance, the higher the 
negotiated prices, the higher the fixed copayments must be to result in 
actuarial equivalence to 25 percent in the aggregate in the initial 
coverage phase.
    The ``total drug spend'' (the accumulated total prices for covered 
Part D drugs paid at the point of sale by the plan or by or on behalf 
of the beneficiary) also is a function of the negotiated price. Because 
the total drug spend is used to determine when the beneficiary advances 
through the deductible and the initial coverage phases of the Part D 
benefit, higher negotiated drug prices would cause the beneficiary to 
more quickly advance through those various phases. Accordingly, because 
higher negotiated prices would advance the beneficiary through the 
initial coverage phase more quickly, fewer prescriptions on average 
would be subsidized by the plan through the initial coverage period. 
Also, a beneficiary enrolled in basic prescription drug coverage (as 
defined in Sec.  423.100) would reach the coverage gap more quickly, 
with the costs of covered Part D drugs purchased during the coverage 
gap phase financed entirely by the beneficiary. In addition, since 
beneficiaries must have access to the same negotiated prices during the 
coverage gap, the higher the negotiated prices, the higher the amounts 
paid by beneficiaries for drugs in the coverage gap may be. Similarly, 
higher negotiated prices would mean higher cost-sharing for 
beneficiaries who reach the catastrophic threshold. Because cost-
sharing for the catastrophic phase of the benefit generally is based on 
5 percent of the negotiated price, the higher the negotiated price, the 
higher the cost-sharing at the catastrophic level.
    For all these same reasons, higher negotiated prices would mean 
higher low-income cost sharing subsidies paid by the government. Under 
the low-income cost sharing subsidy, low-income subsidy eligible 
individuals pay reduced or no cost sharing for covered Part D drugs. 
The government subsidizes the cost sharing for these beneficiaries by 
reimbursing Part D sponsors for the difference between the cost sharing 
paid by other Part D beneficiaries and the cost sharing paid by low-
income subsidy (LIS) eligible individuals. Higher negotiated prices 
would result in higher cost sharing paid by other Part D beneficiaries 
and therefore, higher low-income cost sharing subsidies paid by the 
government to plan sponsors.
    Because higher negotiated prices (and therefore, higher total drug 
spend) will advance beneficiaries through the phases of the Part D 
benefit more quickly, a greater number of beneficiaries will reach the 
catastrophic phase of the benefit more quickly. In addition, higher 
negotiated prices generally will result in higher covered Part D drug 
costs during the catastrophic phase. As a result, the reinsurance 
subsidies paid by the government to Part D sponsors to reimburse 80 
percent of the covered Part D drug costs in the catastrophic phase of 
the benefit will be higher.
    We believe that, in a competitive market, negotiated prices would 
be minimized when such prices are fully transparent to plan sponsors 
and beneficiaries. Consequently we strove to base our guidance on the 
principle of limiting drug costs to the price paid at the pharmacy 
(meaning any pharmacy, including mail-order pharmacies). In the 
preamble to the final rule we explained that drug costs include: 
Ingredient cost, dispensing fee, and sales tax (70 FR 4307). These 
three terms refer to specific fields on the automated prescription drug 
claim transaction that unambiguously indicate the amounts paid to the 
pharmacy by the payer of the claim. Therefore, by using these terms, 
CMS intended to refer to the price paid at the pharmacy and not the 
price paid by the sponsor to the PBM. Furthermore, the preamble states 
that ``we assume that ingredient cost and dispensing fee reflect point 
of sale price concessions in accordance with purchase contracts between 
plans (or their agents, such as PBMs) and pharmacies * * *'' (70 FR 
4307), and that ingredient cost and dispensing fee reflect the drug 
price paid to the pharmacy and should reflect any point-of-sale price 
concessions from the pharmacy whether they are provided directly to the 
Part D sponsor or indirectly through a contracted PBM. Thus, we 
intended to define the term ``negotiated prices'' consistent with 
``pass-through'' prices, an industry term for the prices negotiated 
with and paid to the pharmacy (either directly by the sponsor or 
indirectly through an

[[Page 28564]]

intermediary contracting organization, such as a PBM on the sponsor's 
behalf). With ``pass-through'' prices, the price paid to the pharmacy 
is the price passed on to the beneficiary (and, in the case of LIS 
eligible individuals, to the government) at the point of sale.
    However, after publication of the final rule and issuance of 
clarifying subregulatory guidance in Spring 2006, CMS received comments 
that the notice and comment rulemaking had not made this point clearly, 
and that the regulation could be read to allow an alternative 
interpretation of the price paid at the point of sale. Specifically, 
these comments asserted that the ``lock-in'' pricing approach, a 
contract method by which a plan sponsor agrees to pay a PBM a set rate 
for a particular drug which may vary from the price that the PBM 
negotiates with each pharmacy, also met the definition of negotiated 
prices issued in the regulation.
    Under such pricing arrangements, the PBM consistently bills one 
``lock-in'' price negotiated with the sponsor for a drug (often based 
on AWP), but may pay a variety of different prices to network 
pharmacies based on varying contractual terms. On any given drug 
purchase, the PBM may pay the pharmacy a higher or lower price than it 
will bill the plan sponsor. However, we assume that the prices billed 
to the plan sponsor are generally higher than the prices paid to 
pharmacies, resulting in an overall net profit to the PBM that is 
marketed as a ``risk premium'' earned for shielding the sponsor from 
price variability. We welcome comments on this assumption. Commenters 
argued that these stable prices negotiated between the sponsor and the 
PBM also met the definition of ``negotiated prices'' in the final rule. 
(We note that when the negotiated price under the plan is the lock-in 
price, if the pharmacy price is lower than the lock-in price, the 
pharmacy will still have to collect the higher lock-in price from the 
beneficiary during the deductible or coverage gap and transfer the 
excess amount to the PBM in some manner.) On the basis of that 
alternative interpretation, some Part D sponsor applicants who held 
network contracts through PBMs based on the lock-in pricing methodology 
had based their 2006 and 2007 bids on such prices and could not 
renegotiate such contracts easily.
    Consequently, on July 20, 2006, we issued guidance to Part D 
sponsors stating that, in order to minimize disruption to plan 
operations, for 2006 and 2007, sponsors could, at their option, base 
beneficiary cost-sharing not on the price ultimately charged by the 
pharmacy for the drug, but on the ``lock-in'' price, the price the 
sponsor paid a pharmacy benefit manager (PBM) or other intermediary for 
the drug. We also stated our intent to issue a proposed rule that would 
require a single approach for calculating beneficiary cost sharing, 
based upon the price ultimately received by the pharmacy.
    Therefore, we are now proposing to amend our definition of 
negotiated prices. We previously proposed to amend this definition in 
the notice of proposed rule making, Policy and Technical Changes to the 
Medicare Prescription Drug Benefit (72 FR 29403-29423). However, we 
chose not to finalize this proposed definition in the final rule (73 FR 
20486-20509) in order to further examine the impact of this proposal 
and provide the public with an additional opportunity to comment on 
this proposed definition. We have noted below, some of the impact 
concerns for which we would like to receive additional comments. We 
will consider the comments received on this definition from the 
previous proposed rule, as well as comments received on this proposed 
rule when determining whether to finalize this policy.
    In order to resolve the confusion caused by the Prescription Drug 
Benefit final rule, we are now proposing to amend the definition of 
``negotiated prices'' (to be effective for Part D contract year 2010) 
to require that Part D sponsors base beneficiary cost sharing on the 
price ultimately received by the pharmacy or other dispensing provider. 
Specifically, we are proposing to revise Sec.  423.100 so that the 
first part of the definition of ``negotiated prices'' would state that 
negotiated prices are prices that the Part D sponsor (or other 
intermediary contracting organization) and the network dispensing 
pharmacy or other network dispensing provider have negotiated as the 
amount the network dispensing pharmacy or other network dispensing 
provider will receive, in total, for a particular drug. The term 
``intermediary contracting organization'' refers to organizations such 
as pharmacy benefit managers (PBMs) that contract with plan sponsors to 
provide one or more of a variety of administrative functions on the 
sponsor's behalf, such as negotiating pharmacy contracts, negotiating 
rebates and other price concessions from manufacturers, and/or 
providing drug utilization management or benefit adjudication services. 
The term ``intermediary contracting organization'' encompasses any 
entity that contracts with a plan sponsor to pay pharmacies and other 
dispensers for Part D drugs provided to enrollees in the Part D 
sponsor's plan, regardless of whether the intermediary contracting 
organization negotiates pharmacy contracts on behalf of the plan 
sponsor or on its own behalf. Similarly, the term ``intermediary 
contracting organization'' encompasses any entity that negotiates 
rebates or other price concessions with manufacturers for Part D drugs 
provided to enrollees in the Part D sponsor's plan, regardless of 
whether the intermediary contracting organization negotiates the rebate 
agreements explicitly on behalf of the plan sponsor or on its own 
behalf. Our proposed definition excludes any differential between the 
price paid to the pharmacy and the price paid to the PBM or other 
intermediary contracting organization, and instead treats that 
differential (or ``risk premium'') as an administrative cost paid to 
the PBM or intermediary contracting organization rather than a drug 
cost under Part D. We elaborate on our reasons for in effect proposing 
to require the reporting of ``pass-through'' versus ``lock-in'' prices 
for Part D drug costs further below, as well as solicit specific 
comments from multiple stakeholders to ensure we are aware of all of 
the ramifications of this proposed policy.
    We would also revise the definition of ``negotiated prices'' (to be 
effective upon the effective date of a final rule) to include prices 
for covered Part D drugs negotiated between the Part D sponsor (or its 
intermediary contracting organization) and other network dispensing 
providers. Part D sponsors can contract with providers other than a 
pharmacy to dispense covered Part D drugs, including them in their 
network. Therefore, we are amending the definition of negotiated prices 
to reflect the prices for covered Part D drugs that Part D sponsors (or 
their intermediary contracting organizations) negotiate with all their 
network dispensing providers.
    There are a number of reasons for our decided preference for drug 
costs at the point of sale to be based on the amount actually paid to 
the pharmacy or other dispensing provider (hereafter referred to as 
pass-through prices) as opposed to the amount paid to the PBM 
(hereafter referred to as lock-in prices). In addition to our original 
intentions discussed above, we believe that continuing to allow lock-in 
prices to be used for Part D drug cost calculations and reporting could 
have several undesirable results:
    1. Continued and probably increased cost shifting from the 
government to beneficiaries in the form of higher beneficiary out-of-
pocket costs.
    2. Interference with market competition among Part D sponsors.
    3. Beneficiary confusion over actual drug prices.

[[Page 28565]]

    4. Difficulties for pharmacies in explaining drug prices to 
customers and managing cash transfers to Part D sponsors or their 
intermediary contracting organizations contracting.
    5. Continued and possibly increased risk of government risk-sharing 
on amounts that reflect administrative costs, contrary to Congressional 
intent to exclude risk-sharing on administrative expenses.
    First, relative to pass-through prices, lock-in prices result in a 
cost shift from costs that would otherwise be fully paid by the 
government in the administrative cost portion of the basic Part D bid 
to costs that are paid in full or in part by the beneficiary. When the 
differential between the price paid to the pharmacy and the price paid 
to the PBM (sometimes referred to as ``PBM spread'' or ``risk 
premium'') is treated as a drug cost, this amount is part of the cost 
basis on which beneficiary cost sharing is calculated. This is true 
whether the beneficiary is paying the total cost of the drug in the 
deductible or coverage gap in a basic plan, or whether cost sharing is 
structured as coinsurance or fixed copayments. Again, cost sharing for 
the basic portion of a Part D plan is based on the negotiated prices 
either directly, as a coinsurance percentage of the price of the drug, 
or indirectly, as a fixed copayment derived to result in actuarial 
equivalence in the aggregate to 25 percent of drug prices in the 
initial coverage phase or to approximately 5 percent in the 
catastrophic phase. Thus, when the PBM spread is added to the 
pharmacy's price in computing cost sharing, a beneficiary who utilizes 
drugs will generally pay more in cost sharing both during covered 
benefit intervals and during deductible and coverage gap periods for 
their drugs when the negotiated price is based on lock-in prices rather 
than pass-through prices, resulting in higher out-of-pocket beneficiary 
costs.
    On the other hand, when the PBM spread is included in the 
administrative costs component of a Part D sponsor's bid, as opposed to 
being treated as a drug cost, the plan sponsor's bid would be increased 
by these amounts. Consequently, all other things being equal, the 
sponsor's bid must be higher with pass-through prices than with lock-in 
prices. While a higher bid increases premiums for the beneficiary and 
direct subsidy costs for the government, because of the formulas for 
calculating premiums and federal subsidies, the beneficiary only pays 
about 25 percent of this increase and the government pays the other 
approximately 75 percent.
    Under the pass-through approach, therefore, for the vast majority 
of beneficiaries who utilize Part D drugs, total out-of-pocket costs, 
including both monthly Part D premiums and cost-sharing, are lower 
because (1) cost sharing per script is lower, (2) the lower drug costs 
advance the beneficiary through the benefit more slowly--allowing in 
general more scripts to be subsidized in the initial coverage phase, 
and (3) increased premium costs are principally borne by the 
government. On net, beneficiaries who utilize their drug benefits pay 
less under our proposed approach with negotiated prices based on pass-
through prices because out-of-pocket costs are 100% borne by the 
beneficiary, but the beneficiary only pays about 25% of the premium.
    We believe that the beneficiary is almost always better off paying 
the lowest possible point-of-sale price. Under the lock-in pricing 
approach, the lock-in prices that some plan sponsors pay to their PBMs 
are uniform for each drug across multiple network pharmacies. However, 
the pass-through prices paid to the pharmacy may differ across network 
pharmacies. Some plan sponsors may perceive value in the use of lock-in 
prices to define negotiated prices, so that beneficiaries may pay a 
uniform price across different network pharmacies. However, we believe 
that beneficiaries receive no value from paying more for drugs in 
return for always paying a uniform stable price. Therefore, we believe 
that beneficiaries who utilize their Part D benefits are almost always 
better off paying pass-through prices under our proposed approach.
    We would acknowledge that lower premiums at the expense of higher 
out-of-pocket costs would advantage some Part D beneficiaries who are 
non- or very low utilizers of the benefit. However, from a public 
policy perspective, lowering premiums at the expense of higher cost 
sharing for those individuals who most need the benefit dilutes the 
insurance principle. The drug purchases of those beneficiaries who 
utilize their Part D benefits are subsidized in part by those who do 
not need the benefit. Shifting costs from premiums to cost sharing 
would reduce the sharing of risk and drug costs across beneficiaries by 
shifting a greater percentage of the drug costs to those beneficiaries 
who use more prescription drugs and, therefore, pay more cost sharing. 
Those beneficiaries who use fewer prescription drugs are more likely to 
enroll in those plans with lower premiums and higher cost sharing (for 
example, plans that utilize lock-in prices). Less healthy beneficiaries 
who use more prescription drugs are more likely to enroll in those 
plans with higher premiums and lower cost sharing (for example, plans 
that use pass-through prices). This would distort the risk pool for 
those plans using pass-through prices and drive their costs up as those 
enrollees who use fewer prescription drugs disenroll from these plans 
as the premiums increase to reflect the increased percentage of high 
utilizers in the plan. It is important to create and maintain the most 
robust risk pool possible under the Medicare Part D to maintain program 
stability.
    In addition, as noted in the preamble to the final rule: ``[a]s 
required under section 1860D-11(e)(2)(D)(i) of the Act and in Sec.  
423.272(b)(2), the structure of the benefit design (including cost 
sharing provisions and formulary design) must not be discriminatory; 
that is, it must not discourage enrollment by any Part D enrollee on 
the basis of health status * * *''. (70 FR 4297) We could argue that a 
business model and resulting benefit structure that by design shifts 
costs from the premium (where they would be paid by all) to cost 
sharing (where they are paid only by benefit utilizers) is per se 
discriminatory. That is, knowledgeable beneficiaries who seek to 
minimize their costs, who must utilize numerous prescription drugs due 
to their health status, and who use a tool such as the Medicare 
Prescription Drug Plan Finder, will determine that their costs are 
never minimized in a plan that bases their costs on lock-in prices--
despite the lower premiums--and they will elect not to join that plan. 
Only non- or low utilizers of drug benefits might find that this plan 
design minimizes their costs. We believe that Congress instructed CMS 
to review Part D benefits in order to prohibit just this sort of 
systematically discriminatory benefit design.
    All other things being equal then, requiring that those amounts 
paid by sponsors to PBMs (or other intermediary contracting 
organizations) that exceed the amounts paid by PBMs (or other 
intermediary contracting organizations) to pharmacies be treated as 
administrative costs will increase the basic Part D bid for any plan 
sponsor that previously based its bid on lock-in prices, shifting the 
majority of the cost to the direct subsidy paid by the government. This 
increase in direct subsidy costs will be offset somewhat by other 
payment impacts on the government. Specifically, reinsurance payments 
will be lower because (1) reinsurance payments are based on drug costs 
which generally are lower using

[[Page 28566]]

pass-through prices, and (2) fewer beneficiaries will reach 
catastrophic coverage due to being advanced through the earlier phases 
of the benefit more slowly. Similarly, the government's payments for 
low-income subsidy cost sharing are lower, as these subsidies are based 
on the negotiated price, which as previously explained is generally 
lower when based on pass-through prices. Thus, overall, a change from 
lock-in to pass-through prices will result in a cost shift from the 
beneficiaries who need the benefit most to the government--a result 
that, as we have argued above, is more consistent with the insurance 
principle.
    The second potential undesirable impact of lock-in prices being 
used for drug cost calculations and reporting under the Part D program 
is interference with market competition. Because the cost shift from 
the government to the beneficiary lowers the bid, it also causes the 
plan's bid to become relatively more competitive. In fact, utilizing 
lock-in prices would seem to provide a competitive advantage to plans 
relative to other comparable plans that use pass-through prices, since 
premium levels are tied to the relationship between the plan's bid and 
the national average bid amount. The lower the plan's bid, the lower 
the difference between the plan's bid and the national average bid 
amount, and therefore, the lower the plan's premium. Unlike sponsors 
who do not use PBMs or other intermediary contracting organizations 
and, therefore, must base their bids on pass-through prices, those 
using PBMs or other intermediary contracting organizations currently 
have the option of using either pass-through or lock-in prices as the 
basis for their bids. This greater flexibility may give the latter a 
competitive advantage over the former. For example, to the extent a 
sponsor believes a lower premium rather than lower cost-sharing makes 
its plan more marketable, a sponsor contracting with a PBM may decide 
to use lock-in prices in its bid in order to obtain a lower premium. In 
addition, a sponsor may use lock-in prices in its bid to increase the 
likelihood that its plan qualifies for auto-enrollment and facilitated 
enrollment of LIS eligible individuals. To qualify for auto-enrollment 
and facilitated enrollment, a plan's premium must be at or below the 
low-income premium subsidy amount. A sponsor that is trying to gain or 
retain enrollment of LIS eligible individuals may use lock-in prices to 
help ensure that its plan premium is below the low-income premium 
subsidy amount. Thus, CMS believes that allowing both pricing 
approaches creates an unlevel playing field among plan sponsors. We 
specifically solicit comments on the economic and public policy impacts 
of this differential and whether it does in fact create an undesirable 
unlevel playing field, as between Part D sponsors contracting with PBMs 
or other intermediary contracting organizations and those who do not. 
We also solicit comments on each of the potential undesirable results 
discussed above.
    In the discussion above we assumed that all other things were 
equal, and that the shift from one pricing methodology to the other 
only resulted in a shift in costs between the government and the 
beneficiary. That is, that overall program costs remained the same 
under either policy. However, arguments can be made that costs, both 
administrative as well as drug costs, would not remain the same under 
our proposed single approach.
    On the one hand, some proponents of the lock-in approach have 
expressed concerns that our proposal would increase drug costs over 
time by discouraging the risk premium inherent in the lock-in method. 
They assert that the resultant pressure for downward pricing from the 
Part D sponsor would create a disincentive for PBMs to enter into this 
type of payment arrangement with plan sponsors. They are concerned that 
the demise of the lock-in model would result in the PBMs' role being 
reduced to one of mere claims processing agents with less incentive to 
negotiate the lowest possible network pharmacy discounts. In contrast, 
they contend that the risk premium incentives inherent in the lock-in 
approach result in significantly lower drug costs for Part D sponsors 
than other contractual models, and that the loss of this model could 
potentially increase drug costs, bids, premiums, and Part D program 
costs.
    On the other hand, however, in response to the contention that the 
risk premium payment results in lower drug prices in the long run, we 
could argue that in a competitive market any potential increase in 
administrative fees (from transferring the spread to administrative 
costs) would be negotiated away in whole or in part with more perfect 
information in a fully transparent environment. For instance, our 
proposed changes do not prohibit Part D sponsors from contracting with 
PBMs for drug utilization management services and paying administrative 
incentive fees for reducing costs through such services. In a 
transparent environment, plans would be negotiating on lowest possible 
drug prices, as well as minimizing administrative costs, and these 
would be more clearly comparable among PBMs (or other intermediaries). 
It is not clear to us why PBMs would compete any less vigorously for 
the same level of profits included in administrative fees, or for the 
lowest possible network pharmacy negotiated prices in order to earn 
those fees. Therefore, we are more persuaded by the counterargument 
that the PBM spread is in fact an additional profit earned due to 
asymmetry in market information that might well be reduced with more 
transparency in pricing. Under these assumptions, leaving the 
additional costs in administrative costs would reduce bids, premiums, 
and total Part D program costs over time.
    Moreover, nothing in our proposed rule prohibits the payment of a 
risk premium to the PBM by the plan sponsor. Our proposed changes to 
the definition of negotiated prices do not interfere with the 
negotiations between Part D sponsors, pharmacy benefit managers, and 
pharmacies for covered Part D drugs. Rather, we propose that Part D 
sponsors would be required to use the price ultimately received by the 
pharmacy (or other dispensing provider) as the basis for calculating 
beneficiary cost sharing, total drug spend, and cost reporting to CMS. 
We do not require a Part D sponsor to use a particular pricing approach 
in its contracting agreements with PBMs. Part D sponsors may continue 
to use either the pass-through or lock-in pricing approach when 
contracting with a PBM--provided that beneficiary cost sharing, total 
drug spend, and the drug costs reported to us are based on the price 
ultimately received by the pharmacy. To the extent that Part D sponsors 
believe that the lock-in pricing contracting approach reduces their 
total costs, we expect that they will continue to use it when 
contracting with a PBM. We solicit comments on whether Part D sponsors 
and PBMs would use the lock-in pricing contracting approach in certain 
cases if the proposed policy were finalized.
    We solicit comments from plan sponsors, other industry contracting 
experts, benefit consultants, and market analysts on the impact of our 
proposed change on aggregate pricing exhibited between plans and PBMs, 
as well as on the prevalence of and trends in lock-in pricing 
arrangements between plan sponsors and PBMs. In particular, we are 
soliciting comments on whether lock-in pricing truly offers benefits to 
sponsors equal to the value of the risk premium, or whether the 
existence of the risk premium is in effect a higher

[[Page 28567]]

price exacted from sponsors without the leverage to negotiate lower 
costs or due to asymmetry in market information as between PBMs and 
sponsors. We also solicit comments on whether stakeholders consider the 
proposed definition of ``negotiated prices'' to represent strictly a 
change in reporting requirements for Part D plan sponsors. We solicit 
comments on how contractual relationships and requirements may change 
between and among Part D plan sponsors and their first-tier, 
downstream, and related entities.
    Our third concern with lock-in pricing involves the confusion that 
may be caused for beneficiaries whenever they see the difference 
between the price paid to the pharmacy and the price charged to the 
plan sponsor. While we understand that the intent is for the 
beneficiary to see the same information on drug prices on the 
pharmacy's receipt, on the Medicare Prescription Drug Plan Finder, and 
on the plan's Explanation of Benefits (EOB), this does not always 
happen. Under lock-in pricing, the EOB which the beneficiary receives 
from the plan may currently reflect the price the plan sponsor pays its 
PBM (the lock-in price) instead of the price negotiated with the 
pharmacy. We understand that pharmacies generally do not customize 
receipts for payers, and those that print total amounts paid on their 
receipts will not always be able to alter those amounts to correspond 
to the prices the plan sponsor pays its PBM. Even for cases in which 
the pharmacy does not print out total amounts received on its receipt, 
the same issues may occur in the deductible or coverage gap when the 
patient pay amount may equal the lock-in price, which could be higher 
than the price paid to the pharmacy. Whenever the pharmacy receipt does 
display the pharmacy's price, the beneficiary may see the discrepancy 
in price between the receipt and the plan's EOB. Even when receipts 
display the plan's price, the beneficiary may see discrepancies between 
the price they pay and pharmacy advertised specials or prices offered 
to a friend and believe the price they paid was wrong. Beneficiaries 
may perceive these discrepancies in drug prices as fraud and place 
complaints or inquiries. Reviewing and addressing these types of 
inquiries serves to increase administrative costs for pharmacies, plan 
sponsors, and the government. Moreover, if pharmacies were to err and 
charge pass-through prices during the coverage gap instead of the lock-
in prices, actual beneficiary true out-of-pocket (TrOOP) expenses might 
diverge from the amounts reported on the plan's EOB, possibly leading 
to an overstatement of TrOOP costs in plan (PBM) claims payment 
systems. We solicit comments, particularly from beneficiary advocates, 
on the extent to which they are hearing of beneficiary concerns around 
such discrepancies.
    The fourth potential undesirable impact concerns difficulties that 
may be caused for pharmacies in explaining apparent price discrepancies 
to customers, as well as the additional administrative burden of 
managing the resulting cash transfers between the beneficiary and the 
PBM. If a beneficiary notices an apparent price discrepancy as 
described above, the beneficiary is likely to ask the pharmacy for an 
explanation. We believe the pharmacy must then expend scarce staff 
resources on explaining the discrepancy and managing the beneficiary's 
reaction. Moreover, whenever the additional amount that exceeds the 
price negotiated between the PBM and pharmacy has been collected from 
the beneficiary, the pharmacy must have in place and manage accounting 
processes to transfer the additional amounts to the PBM and support 
ongoing reconciliations. We solicit comments from both chain and 
independent pharmacies on the extent to which these or any other 
impacts from lock-in prices have been incurred.
    We are not aware of any advantages to pharmacies from lock-in 
prices. We have heard the argument that the proposed changes would have 
a disproportionately negative impact on small independent pharmacies. 
Under the lock-in pricing approach, Part D sponsors negotiate a single 
rate with their contracted PBMs and, therefore, are generally not aware 
of the different rates paid by the PBMs to each pharmacy. This argument 
suggests that under the revised definition of negotiated prices, Part D 
sponsors would be made aware of the different rates paid to each 
pharmacy, and, in particular, Part D sponsors would become aware of 
higher-cost pharmacy providers, which are generally small independent 
pharmacies that are unable to offer the more aggressive drug prices 
provided by retail chain pharmacies. This argument presupposes that in 
their efforts to reduce drug costs, Part D sponsors would then remove 
these higher-cost pharmacies from their pharmacy networks, leading to a 
significant impact on the financial viability of these pharmacies.
    We are not persuaded by this argument at this time. First, as 
discussed above, we believe that under the revised definition of 
negotiated prices Part D sponsors may still use either the pass-through 
or lock-in pricing approach in their contracts with PBMs if sponsors 
continue to place value on being shielded from price variations. 
Moreover, even under transparent pricing arrangements, we expect that 
Part D sponsors would continue to contract with small independent 
pharmacies in order to satisfy our pharmacy access standards as 
outlined in Sec.  423.120. In order to meet these rigorous pharmacy 
access standards, Part D sponsors would have to continue to contract 
with many if not most of these independent pharmacies and include them 
in their pharmacy networks. Moreover, we expect that Part D sponsors 
likely will determine that the proportion of their utilization that 
comes through independent pharmacies with the leverage to negotiate 
significantly higher reimbursements is generally not sufficiently large 
to significantly affect aggregate drug costs. Therefore, we are unable 
to conclude at this time that these proposed changes would have any 
adverse effects on pharmacies, including small independent pharmacies, 
and we solicit comments from all pharmacies on this question.
    The final potential undesirable impact we attribute to lock-in 
prices is the continued, and possibly increased, risk of government 
risk-sharing on costs that may be better treated as administrative 
expenses. The payment of risk-sharing on those portions of ``drug 
costs'' under the lock-in methodology that are retained by the PBM or 
other intermediary appears contrary to Congressional intent. For both 
reinsurance and risk-sharing payments CMS is required to exclude 
``administrative costs'' from the calculations. In accordance with 
Sec.  1860D-15(b)(2) of the statute, and as codified at Sec.  423.308, 
``allowable reinsurance costs'' are defined as a subset of ``gross 
covered prescription drug costs.'' ``Gross covered prescription drug 
costs'' are defined as `` * * * the costs incurred under the plan, not 
including administrative costs, but including costs directly related to 
the dispensing of covered Part D drugs * * *'' (Sec.  1860D-15(b)(3)). 
Similarly, definitions of ``allowable risk corridor costs'', at Sec.  
1860D-15(e)(1)(B) of the statute and Sec.  423.308 of the regulations, 
exclude administrative costs. We believe that any ``risk premium'' paid 
to the PBM to smooth actual drug expenses should be considered an 
administrative contracting cost, or like a drug utilization management 
program cost to

[[Page 28568]]

the plan. Thus, in order to exclude those amounts from being included 
in the reinsurance and risk-sharing calculations, we believe CMS should 
treat these costs as administrative costs and not as drug costs.
    While there is no question that reinsurance costs to the government 
increase with lock-in prices (since per claim drug costs are higher and 
a greater number of beneficiaries will reach catastrophic coverage), it 
is possible that there would be no significant difference between the 
lock-in and pass-through prices with respect to government risk sharing 
under certain constraints. Very simply stated, risk sharing involves 
comparing the sum of drug costs anticipated in the plan sponsor's bid 
and paid prospectively through government and beneficiary monthly 
premiums (the ``target amount'') to the drug costs actually incurred, 
with the government then paying or recouping a portion of the 
difference. As long as the drug costs reflected in the bid are 
calculated in precisely the same way as the drug costs submitted to CMS 
as allowable costs, the target amount and the allowable costs will rise 
together. However, if a plan were to submit bids based on one level of 
PBM spread, but then submit costs to CMS reflecting a higher level of 
spread, then the difference between prospective costs and incurred 
costs would be increased. In the long run we believe lack of 
transparency could allow plans to game risk sharing and include extra 
administrative costs in the allowable drug cost reporting. If this 
would happen, and the plans used lower drug costs in the bid but 
included additional administrative costs in the allowable costs 
submitted in reconciliation, then the government risk sharing costs 
would increase. We solicit comments on the issues identified above 
concerning government risk sharing on costs that may more appropriately 
be considered administrative expenses.
b. Subpart G--Payments to Part D Plan Sponsors for Qualified 
Prescription Drug Coverage (Definitions and Terminology, Sec.  423.308)
i. Actually Paid (Sec.  423.308)
    In the April 2006 Call Letter, CMS stated that Part D sponsors must 
report 100 percent of the rebates and price concessions they receive, 
including the portion of manufacturer rebates retained by PBMs. In 
other words, in defining price concessions that must be netted from 
drug costs, CMS does not make a distinction between a price concession 
that is passed fully through to the plan sponsor by the PBM (or any 
other intermediary contracting organization) and a price concession 
that is partially passed on and partially retained by the PBM (or any 
other intermediary contracting organization). When a PBM retains rebate 
amounts associated with drugs being purchased for enrollees in a Part D 
plan with which the PBM contracts, this revenue permits the PBM to 
charge the Part D sponsor a lower amount in administrative fees and 
still make the same income on the transaction. When a rebate of x 
amount is paid to the PBM, the Part D sponsor benefits from that rebate 
whether it is passed on to the sponsor in its entirety, or it is 
available as revenue to the PBM.
    Thus, regardless of whether the PBM passes through 100% of rebates 
and the Part D sponsor in turn writes a check for 100% of 
administrative fees owed the PBM, or whether the PBM retains a portion 
of rebates and the Part D sponsor benefits from the fact that this 
revenue permits the PBM to charge a lower administrative fee for the 
transaction--the result is the same. The total amount of rebates 
received by the PBM for the Part D drugs dispensed under the Part D 
sponsor's contract must be reported as a price concession through DIR 
reporting to CMS. If we did not adopt this approach, a PBM and a Part D 
sponsor would be able to manipulate the amount reported in amounts 
actually paid simply by recasting administrative fees, which must be 
excluded, as rebates retained by the PBM that would not have to be 
reported as rebates to the PDP sponsor that benefits from the PBM's 
receipt of this revenue.
    Therefore, we are proposing to include language in the definition 
of ``actually paid'' that codifies and clarifies our previous guidance, 
and provides that direct or indirect remuneration includes discounts, 
chargebacks or rebates, cash discounts, free goods contingent on a 
purchase agreement, up-front payments, coupons, goods in kind, free or 
reduced-price services, grants, or other price concessions or similar 
benefits from manufacturers, pharmacies or similar entities obtained by 
an intermediary contracting organization with which the Part D sponsor 
has contracted for administrative services, regardless of whether the 
intermediary contracting organization retains all or a portion of the 
direct and indirect remuneration or passes the entire direct and 
indirect remuneration to the Part D sponsor. Similarly, we are 
clarifying that this definition of actually paid applies regardless of 
the terms of the contract between the plan sponsor and any intermediary 
contracting organization. We solicit comment on this proposed 
clarification.
    We believe that the above analysis has equal applicability in the 
Retiree Drug Subsidy (RDS) context, when a qualified retiree 
prescription drug plan contracts with a PBM, and the PBM retains rebate 
amounts associated with drugs obtained for a qualifying covered 
retiree. Again, the qualified retiree prescription drug plan benefits 
from the fact that revenue attributable to drugs purchased for its 
retirees is available to the PBM, because the PBM would not need to 
charge the sponsor of the qualified retiree prescription drug plan as 
much in administrative fees to make the same revenue on the 
transaction. As in the case of a Part D sponsor, if rebate amounts 
retained by a PBM were not deducted from the qualified retiree 
prescription drug plan's costs, the plan and the PBM could ensure 
higher RDS payments simply by recasting administrative costs as 
retained rebates. Therefore, as discussed below, we are proposing to 
make similar amendments to the definitions in Subpart R that apply to 
the RDS program.
ii. Administrative Costs (Sec.  423.308)
    The statute requires CMS to exclude administrative costs from the 
calculation of gross covered prescription drug costs and allowable risk 
corridor costs. However, administrative costs are not defined in either 
the statute or the January 28, 2005 final rule. Therefore, to explain 
this term and clarify which costs are included in administrative costs, 
we are proposing to add a definition for the term ``administrative 
costs''. We previously proposed to add this definition in the notice of 
proposed rule making, Policy and Technical Changes to the Medicare 
Prescription Drug Benefit (72 FR 29403 through 29423). However, we 
chose not to finalize this proposed definition in order to further 
examine the impact of this proposal and provide the public with an 
additional opportunity to comment on this proposed definition. We will 
consider the comments received on this definition from the previous 
proposed rule, as well as comments received on this proposed rule when 
finalizing this rule.
    In this definition, we propose to define ``administrative costs'' 
as the Part D sponsor's costs other than those incurred to purchase or 
reimburse the purchase of Part D drugs under the Part D plan. Included 
in the definition of administrative costs are any costs incurred by 
Part D plans on drug claims that differ from the price charged by a 
dispensing entity for covered Part D drugs. As discussed above in the 
section

[[Page 28569]]

on Negotiated Prices, any net profit (or ``risk premium'') retained by 
a PBM that is added to the prices paid to pharmacies and billed to a 
Part D sponsor would be considered an administrative cost and not a 
drug cost. As discussed above, we believe this is because such amounts 
are more appropriately considered costs the plan chooses to incur to 
mitigate its market risk around the costs of drugs, rather than the 
cost of the drugs itself, and should be viewed as analogous to the cost 
of drug utilization management programs and similar services purchased 
from PBMs to manage drug costs. In order to create a level playing 
field around the treatment of all such related costs, we propose to 
clearly categorize this ``net profit'', ``risk premium'', or ``PBM 
spread'' as an administrative cost to the Part D plan sponsor.
    The proposed policy would also refine our interpretation of the 
statutory and regulatory definitions of ``allowable reinsurance costs'' 
and ``allowable risk corridor costs,'' which in both cases exclude any 
administrative costs of the sponsor. By statute, ``allowable 
reinsurance costs'' are a subset of ``gross covered prescription drug 
costs,'' and Congress specifically defined these gross costs as ``not 
including administrative costs.'' (See sections 1860D-15(b)(2) and 
1860D-15(b)(3) of the Act.) Similarly, Congress defined ``allowable 
risk corridor costs'' as ``not including administrative costs.'' (See 
section 1860D-15(e)(1)(B) of the Act.) In the January 28, 2005 final 
rule, we adopted these definitions. (70 FR 4547.) As noted above, we 
interpret administrative costs to include any net profit (or loss) 
incurred by an intermediary contracting organization (for example, a 
pharmacy benefit manager (PBM)) as a result of lock-in pricing. 
Therefore, this net profit or loss must not be included in the 
reinsurance and risk corridor payments made by the government, as these 
payments exclude administrative fees. Thus, the Ingredient Cost, 
Dispensing Fee, Sales Tax, Gross Drug Cost below the Out of Pocket 
Threshold, and Gross Drug Cost above the Out of Pocket Threshold fields 
on Prescription Drug Event (PDE) records submitted to CMS would need to 
reflect the final amount ultimately received by the pharmacy at the 
point of sale.
    We are aware of concerns that the proposed definition of 
administrative costs would indirectly prohibit the purchase of drugs 
from certain entities such as PBMs. In addition, it has been argued 
that any costs incurred to buy drugs should be considered drug costs 
regardless of the party from whom the drug is purchased. However, the 
proposed definition for administrative costs would not directly or 
indirectly require Part D sponsors to purchase drugs from dispensing 
providers only. Part D sponsors would continue to have the option to 
contract or purchase drugs from other entities such as PBMs. However, 
to the extent that the amounts paid to a PBM for administrative 
services provided to a Part D sponsor are included in the cost of the 
drug under the lock-in pricing approach, Part D sponsors would be 
required to report this spread amount as an administrative cost. These 
administrative costs would be excluded from the Part D sponsor's 
allowable reinsurance and allowable risk corridor costs as required by 
statute.
    The proposed definition of administrative cost does not include 
administrative fees or other remuneration that a PBM receives on behalf 
of a plan from pharmaceutical manufacturers or biotechnology companies. 
CMS considers these amounts price concessions which directly or 
indirectly reduce the Part D sponsor's costs under its Part D plan. 
Therefore, Part D sponsors would continue to report these 
administrative fees as DIR to ensure that they are excluded from 
allowable reinsurance costs and allowable risk corridor costs.
    Again, this same analysis applies in the RDS context to amounts a 
PBM retains in connection with price concessions that reduce the 
qualified retiree prescription drug plan's drug costs.
iii. Gross Covered Prescription Drug Costs and Allowable Risk Corridor 
Costs (Sec.  423.308)
    Part D sponsors are required to report drug costs to CMS for the 
purposes of reconciliation and risk sharing. We are required by statute 
to calculate reinsurance payments using ``allowable reinsurance 
costs,'' a subset of ``gross covered prescription drug costs,'' which 
Congress specifically defined as ``not including administrative 
costs.'' (See sections 1860D-15(b)(2) and 1860D-15(b)(3)of the Act). 
Risk sharing payments are calculated using ``allowable risk corridor 
costs,'' which are also defined as ``not including administrative 
costs.'' (See section 1860D-15(e)(1)(B) of the Act.)
    There have been several questions regarding the appropriate drug 
costs to report, particularly when a Part D sponsor has contracted with 
a PBM. The January 28, 2005 final rule defines ``gross covered 
prescription drug costs'' as ``those actually paid costs incurred under 
a Part D plan, excluding administrative costs * * * [equal to:] (1) All 
reimbursement paid by a Part D sponsor to a pharmacy (or other 
intermediary) * * * plus (2) All amounts paid under the Part D plan by 
or on behalf of an enrollee (such as the deductible, coinsurance, cost 
sharing, or amounts between the initial coverage limit and the out-of-
pocket threshold) in order to obtain drugs covered under the Part D 
plan.'' (70 FR 4547)
    The January 28, 2005 final rule definition of ``gross covered 
prescription drug costs'' specifically recognizes that reimbursement 
may be paid by a Part D sponsor ``to a pharmacy (or other 
intermediary).'' (70 FR 4547) Many interpreted the term 
``intermediary'' to mean PBM (rather than an agent of the pharmacy or 
other dispensing provider). Using this definition, many plan sponsors 
reported as gross covered prescription drug costs the prices they 
negotiated with their PBMs, rather than the prices that were agreed 
upon as the amount to be received by the pharmacies.
    We propose rectifying these conflicting definitions to require the 
plan sponsor to include the net profit or loss retained or incurred by 
a PBM as part of lock-in pricing to be part of the administrative costs 
of the plan sponsor. This would require the amount ultimately received 
by the pharmacy (minus any other point-of-sale price concessions) to be 
used in calculating cost sharing for plan years 2010 and beyond. We 
previously proposed to amend this definition in the notice of proposed 
rule making, Policy and Technical Changes to the Medicare Prescription 
Drug Benefit (72 FR 29403-29423). However, we chose not to finalize 
this proposed definition in the final rule (73 FR 20486-20509) in order 
to further examine the impact of this proposal and provide the public 
with an additional opportunity to comment on this proposed definition. 
We will consider the comments received on this definition from the 
previous proposed rule, as well as comments received on this proposed 
rule when determining whether to finalize this policy. Specifically, we 
are proposing to amend the definition of ``gross covered prescription 
drug costs'' to eliminate the parenthetical ``or other intermediary'' 
to require that all plan sponsors report the amount ultimately received 
by the pharmacy or other dispensing provider. We propose that the 
amount ultimately received by the pharmacy or other dispensing provider 
(whether directly or indirectly) for the particular drug will be the 
basis for accumulating gross covered drug costs and reporting drug 
costs on the Prescription Drug Event (PDE) records.

[[Page 28570]]

    Similarly, we propose clarifying our definition of ``allowable risk 
corridor costs'' so that it is clear that these costs are only based 
upon the amounts received directly by the pharmacy or other dispensing 
provider. This is because we would consider any net profit (or loss) 
earned by a PBM or other entity negotiating contracts with pharmacies 
to constitute an administrative cost, and therefore, to be exempt from 
the definition of allowable risk corridor costs, as well as gross 
covered prescription drug costs. Thus, for example, if a Part D sponsor 
pays a PBM a certain amount for a particular drug, and then the PBM 
negotiates a different price with the pharmacy, any differential 
retained or lost by the PBM would be considered an administrative cost, 
and could not be reported as part of drug costs. As discussed above in 
the section on Negotiated Prices, the net profit or loss (or ``risk 
premium'') retained by a PBM that is added to the prices paid to 
pharmacies and billed to a Part D sponsor under the lock-in pricing 
approach would be considered an administrative cost. As argued above, 
such amounts are more appropriately considered costs that the plan 
chooses to incur to mitigate its market risk around the costs of drugs, 
rather than the cost of the drugs itself, and should be viewed as 
analogous to the cost of drug utilization management programs and 
similar services purchased from PBMs to manage drug costs. In order to 
create a level playing field around the treatment of all such related 
costs, we propose to clearly categorize this ``profit'', ``risk 
premium'', or ``PBM spread'' as an administrative cost to the Part D 
plan sponsor and to explicitly disallow it from gross covered 
prescription drug costs, allowable reinsurance costs (a subset of gross 
covered prescription drug costs), and allowable risk corridor costs.
    We, therefore, propose revising the definitions of ``gross covered 
prescription drug costs'' and ``allowable risk corridor costs'' to 
establish that the amount received by the dispensing pharmacy or other 
dispensing provider (whether directly or through an intermediary 
contracting organization) is the basis for drug cost that must be 
reported to CMS, and not the amount paid by the Part D sponsor to the 
PBM. Accordingly, we are revising Sec.  423.308 to incorporate these 
changes.
    We are aware of concerns that these proposed changes to the 
definitions of gross covered drug costs and allowable risk corridor 
costs may require Part D sponsors to depend heavily on information 
traditionally held exclusively by PBMs. For the sponsor's convenience, 
or for other reasons, such as to protect the privacy of beneficiary 
personal health information data, a Part D sponsor's contractor may 
submit drug cost data on the Part D sponsor's behalf to CMS directly 
rather than through the Part D sponsor. Therefore, some have argued, 
the Part D sponsor cannot attest to the validity of drug cost data it 
does not see. However, because we contract with Part D sponsors for the 
provision of the Medicare prescription drug benefit, Part D sponsors, 
and not their subcontractors, are ultimately responsible for the 
quality of data submitted to us. Part D sponsors that choose to 
contract with a PBM or any other third party administrator, therefore, 
must take reasonable steps to ensure that the data submitted to us on 
their behalf is accurate and timely. For example, the sponsor may 
engage an independent auditor to audit the data prior to its submission 
to us.
    We also propose amending the definition of ``gross covered 
prescription drug costs'' and ``allowable risk corridor costs'' to 
ensure that when entities other than pharmacies dispense Part D drugs 
and receive payment for Part D drugs, these expenditures also are 
reflected in gross covered prescription drug costs and allowable 
reinsurance costs, as well as allowable risk corridor costs. For 
instance, reimbursement for a vaccine that must be administered in a 
physician's office and reimbursement made to a third party payer in 
accordance with our coordination of benefits (COB) requirements are 
both legitimate drug costs that have been incurred through the payments 
indicated. In addition, in accordance with Sec.  423.464, the Part D 
sponsor must coordinate benefits with other Part D plans as the result 
of any reconciliation process developed by CMS under Sec.  423.464, 
such as when another Part D plan mistakenly paid for a prescription 
drug on the beneficiary's behalf based on an erroneous belief that the 
beneficiary was actually enrolled in its plan. In these cases, when the 
enrollment error is corrected, the beneficiary's true plan generally 
will reconcile payments with the original payer. The drug costs paid by 
Part D plans (as well as by the beneficiary) under these reconciliation 
processes reflect drug costs incurred by the plan's enrollees that a 
payer other than the correct Part D plan of record paid as primary. As 
drug costs paid for Part D covered drugs under Part D plans, these 
costs are included in the calculations of reinsurance costs and risk 
corridor costs. Therefore, we have amended the definition of ``gross 
covered prescription drug costs'' and ``allowable risk corridor costs'' 
in Sec.  423.308 to include all these drug costs.
    We also propose amending the definition of ``gross covered 
prescription drug costs'' to ensure that when a beneficiary is 
responsible for 100 percent of the cost for a covered Part D drug (as 
in any applicable deductible or coverage gap of a basic plan), and the 
beneficiary obtains that covered Part D drug at a network pharmacy for 
a price below the plan's negotiated price, the beneficiary's out-of-
pocket costs that are considered ``incurred costs'' for covered Part D 
drugs count toward both TrOOP and total drug spending. This is 
consistent with guidance released via Q&A 7944 (issued May 9, 2006 
http://questions.cms.hhs.gov/cgi-bin/cmshhs.cfg/php/enduser/std--
alp.php?p--sid=gIVVcxhi.) For example, when an enrollee is in an 
applicable coverage gap or deductible phase of the Part D benefit, the 
enrollee may be able to obtain a better cash price for a covered Part D 
drug at a network pharmacy than the plan offers via its negotiated 
price. The enrollee may take advantage of a special cash price or 
discount being offered to all pharmacy customers for the covered Part D 
drug or, alternatively, use a discount card. In such cases, the 
enrollee purchases a covered Part D drug without using the membership 
card for his or her Part D plan. If that purchase price is lower than 
the Part D plan's negotiated price, it will count toward TrOOP and 
total drug spend balances, provided the Part D plan finds out about the 
purchase. When the enrollee chooses not to use his/her membership card 
at a network pharmacy, that enrollee must take responsibility for 
submitting the appropriate documentation to the enrollee's Part D plan, 
consistent with plan-established processes and instructions for 
submitting that information, in order to have that amount aggregated to 
the beneficiary's TrOOP and total drug spend balances. We are aware of 
concerns that it is overly burdensome to require beneficiaries to 
submit claims for these reduced price purchases. However, we cannot 
require in-network pharmacies to submit these claims to Part D sponsors 
electronically, because at this time the HIPAA standard for claims 
submission does not accommodate the electronic transmission of this 
claim information by network pharmacies. To the extent that a future 
revision of the HIPAA standard does accommodate such transactions, we 
would support minimizing the submission of paper claims by 
beneficiaries.

[[Page 28571]]

    The applicability of beneficiary out-of-pocket expenditures made 
outside the Part D benefit to TrOOP and total drug spend also extends 
to any nominal copayments assessed by manufacturer patient assistance 
programs (PAPs) that provide assistance with covered Part D drug costs 
to Part D enrollees outside the Part D benefit. Consistent with 
guidance provided via Q&A 7942 (http://questions.cms.hhs.gov/cgi-bin/
cmshhs.cfg/php/enduser/std--alp.php?p--sid=gIVVcxhi), providing 
assistance with covered Part D drug costs to Part D enrollees outside 
the Part D benefit does not preclude a PAP sponsor from requiring its 
enrollees (including those enrolled in a Part D plan) from paying a 
nominal copayment when they fill a prescription for a covered Part D 
drug for which they provide assistance. We note that any copayments 
assessed by PAPs operating outside the Part D benefit should be 
nominal, since only nominal beneficiary cost-sharing is consistent with 
the concept of operating outside Part D. Moreover, given that 
copayments are typically assessed for purposes of minimizing drug over-
utilization, the assessment of anything but nominal cost-sharing by 
PAPs is seemingly inconsistent with the mission of a charitable 
organization structured to provide assistance with prescription drug 
costs to low-income patients.
    Although PAP payments made for covered Part D drugs outside the 
Part D benefit do not count toward enrollees' TrOOP or total drug spend 
balances, nominal PAP copayment amounts paid by affected Part D 
enrollees can be applied to their TrOOP and total drug spend balances, 
provided the enrollees submit the appropriate documentation to their 
plan consistent with plan-established processes and instructions for 
submitting the information. We are proposing to revise the definition 
of ``gross covered prescription drug costs'', as well as the definition 
of ``incurred costs'' in Sec.  423.100, to include these drug costs and 
to reflect this sub-regulatory guidance.
    We also note that Sec.  423.308 includes a definition of the term 
``target'' amount. Due to a technical formatting error, this definition 
appears to be the second paragraph of the definition of gross covered 
prescription drug costs. To clarify that the definition of ``target 
amount'' is not part or a component of the definition of gross covered 
prescription drug costs, but is a separate definition of a different 
term, we are proposing to revise the current discussion of ``target 
amount'' and are providing an amendatory instruction to add the 
definition in Sec.  423.308. We are proposing technical edits to this 
definition to ensure that the structure of the definition is similar to 
that of other definitions in this section. We are proposing no 
substantive changes to the definition.
c. Subpart R: Payments to Sponsors of Retiree Prescription Drug 
Programs (Definitions, Sec.  423.882)
    Section 423.882 codifies existing guidance. Given the similarities 
between the statutory definitions of ``gross covered prescription drug 
costs'' under section 1860D-15(b)(3) of the Act and ``gross covered 
retiree plan-related prescription drug costs'' under section 1860D-
22(a)(3)(C)(ii) of the Act, we have consistently stated our intent to 
determine gross covered retiree plan-related prescription drug costs in 
a manner corresponding to our determination of gross covered 
prescription drug costs. Additionally, given the similarities between 
the statutory definitions of ``allowable reinsurance costs'' under 
section 1860D-15(b)(2) of the Act and ``allowable retiree costs'' under 
section 1860D-22(a)(3)(C)(i) of the Act, we determine allowable retiree 
costs in a manner parallel to how we determine allowable reinsurance 
costs. For example, for terminology not specifically defined under 
Sec.  423.882, we generally utilize the relevant Part D definitions to 
the extent that they are consistent with the statutory provisions under 
section 1860D-22 of the Act. In addition, our RDS guidance related to 
the calculation of gross covered retiree plan-related prescription drug 
costs (or ``gross retiree costs'') and allowable retiree costs 
generally corresponds with the Part D guidance on the calculation of 
gross covered prescription drug costs and allowable reinsurance costs.
    In order to ensure continued consistency between the RDS program 
and Part D, and because, as noted above, we believe the same policy 
arguments in favor of the Part D definitions apply to similar 
arrangements under the RDS program, we believe that the regulatory 
definitions under Sec.  423.882 applicable to the RDS program should 
mirror the corresponding Part D definitions under Sec.  423.100 and 
Sec.  423.308. Accordingly, we propose to make the following additions 
and revisions to Sec.  423.882 to be consistent with the corresponding 
existing and proposed definitions under Sec.  423.100 and Sec.  
423.308. The proposed definitions under Sec.  423.882 include 
codification of existing CMS guidance.
     Actually Paid: We propose to add this definition to mirror 
the proposed revised definition under Sec.  423.308, with the exception 
of technical changes and clarifications to reflect its application to 
the RDS program. Specifically, we propose to define actually paid to 
mean that the costs must be actually incurred by the qualified retiree 
prescription drug plan (and/or the qualifying covered retiree) and must 
be net of any direct or indirect remuneration from any source 
(including manufacturers, pharmacies, qualifying covered retirees, or 
any other person) that would serve to decrease the costs incurred under 
the qualified retiree prescription drug plan. Similarly, we are also 
proposing to include language in this definition that provides that 
direct or indirect remuneration includes discounts, chargebacks or 
rebates, cash discounts, free goods contingent on a purchase agreement, 
up-front payments, coupons, goods in kind, free or reduced-price 
services, grants, or other price concessions or similar benefits from 
manufacturers, pharmacies or similar entities obtained by an 
intermediary contracting organization with which the sponsor of the 
qualified retiree prescription drug plan has contracted for 
administrative services, regardless of whether the intermediary 
contracting organization retains all or a portion of the direct and 
indirect remuneration or passes the entire direct and indirect 
remuneration to the sponsor of the qualified retiree prescription drug 
plan. Similarly, we are clarifying that this definition of actually 
paid applies regardless of the terms of the contract between the 
sponsor of the qualified retiree prescription drug plan and any 
intermediary contracting organization.
     Administrative costs: We propose to add this definition to 
mirror the proposed revised definition under Sec.  423.308 with the 
exception of minimal changes to reflect the RDS terminology. 
Specifically, we propose to define administrative costs to mean costs 
incurred by a qualified retiree prescription drug plan that are not 
drug costs incurred to purchase or reimburse the purchase of Part D 
drugs and that differ from the amount paid by or on behalf of the plan 
to a pharmacy or other entity that is the final dispenser of the drug. 
Similarly, we are proposing to include language in this definition that 
any profit or loss retained by the intermediary contracting 
organization (through discounts, rebates, or other direct or indirect 
price concessions) when negotiating prices with dispensing entities is 
considered an administrative cost.
     Allowable Retiree Costs: We propose to make changes to the 
existing definition to mirror the relevant portions of the existing 
definition of ``allowable reinsurance costs'' under

[[Page 28572]]

Sec.  423.308. Specifically, we propose to revise the definition of 
allowable retiree costs under Sec.  423.882 by clarifying that 
allowable retiree costs are the subset of gross covered retiree plan-
related prescription drug costs actually paid by the qualified retiree 
prescription drug plan or by or on behalf of a qualifying covered 
retiree.
     Gross covered retiree plan-related prescription drug 
costs: We propose to revise the existing definition of ``gross covered 
retiree plan-related prescription drug costs'' (or ``gross retiree 
costs'') to mirror the proposed definition of ``gross covered 
prescription drug costs'' under Sec.  423.308, with the exception of 
minimal changes to reflect the RDS terminology. Specifically, we 
propose to revise our definition of gross retiree costs to clarify that 
these costs equate to the sum of the negotiated prices (as defined in 
the proposed definition) actually paid by the qualified retiree 
prescription drug plan (and/or qualifying covered retirees) and 
received by the dispensing pharmacy (or other dispensing entity), or 
received by other entities pursuant to the plan's coordination of 
benefits (COB) activities. As with our existing definition of gross 
retiree costs, our proposed definition would exclude administrative 
costs from gross retiree costs.
     Negotiated Prices: We propose to add this definition to 
mirror the proposed definition of negotiated prices under Sec.  423.100 
with the exception of minimal changes to reflect RDS terminology. 
Specifically, we propose to define negotiated prices for Part D drugs 
as the prices that the qualified retiree prescription drug plan (or 
other intermediary contracting organization) and the network dispensing 
pharmacy or other network dispensing provider have negotiated as the 
amount such network entity will receive, in total, for a particular 
drug, net of discounts, direct or indirect subsidies, rebates, other 
price concessions, and direct or indirect remuneration that the 
qualified retiree prescription drug plan has elected to pass through to 
qualifying covered retirees at the point of sale. Similarly, we are 
proposing that negotiated prices include any dispensing fees.
    Under these proposed definitions, payments made to RDS plan 
sponsors of qualified retiree prescription drug plans (or ``RDS 
sponsors'') would be based upon ``pass-through'' prices and not ``lock-
in'' prices that the RDS plan sponsor pays to a PBM or other 
intermediary contracting organization. We elaborate on our reasons for 
requiring ``pass-through'' versus ``lock-in'' prices for RDS plan drug 
costs further below, as well as solicit specific comments from 
stakeholders to ensure we are aware of all of the ramifications of this 
proposed policy.
    The ``pass through'' vs. ``lock in'' approach is being proposed for 
RDS plan sponsors for many of the same policy considerations that, as 
discussed in section II.B.4 of this proposed rule, underlie our 
proposed modifications to the Part D definitions of ``negotiated 
prices,'' ``administrative costs,'' ``allowable risk corridor costs,'' 
and ``gross prescription drug costs'' under Sec.  423.100 and Sec.  
423.308. Specifically, the RDS payment is calculated based on allowable 
retiree costs, which in turn is a subset of gross retiree costs. (See 
sections 1860D-22(a)(3)(A),(C)(i), and (C)(ii) of the Act.) The statute 
requires CMS to exclude administrative costs from the calculation of 
gross covered retiree plan-related prescription drug costs and 
subsidizing these costs would therefore be contrary to Congressional 
intent. (See section 1860D-22(a)(3)(C)(ii) of the Act.) As explained in 
section II.B.3.a.ii of this proposed rule, discussing the proposed Part 
D definition of Negotiated Prices, we believe any net profit (or ``risk 
premium'') retained by a PBM that is added to the prices paid to 
pharmacies and billed to a Part D sponsor should be considered an 
admi